Killing The AMT Tax Is W. House Priority, But Reform Elusive

Author: Jed Graham

Published: July 26, 2005

President Bush's tax-reform panel said last week it's concluded that the alternative minimum tax should be abolished.

The much-hated AMT was created to prevent tax avoidance by the wealthy, but is quickly morphing into a tax on the middle class.

Eliminating the AMT could reduce tax revenue by as much as $1.2 trillion over the next decade. But the panel hasn't decided how to pay for repeal of this parallel tax code.

Tax filers are required to pay whichever is greater - their regular income tax liability or their liability under the AMT.

They calculate their AMT liability by adding back exemptions for dependents, deductions for state and local taxes and various other itemized deductions that the AMT disallows. Without reform, more than 20 million filers could find they owe extra under the AMT in 2006.

The president has directed the panel to recommend revenue-neutral reform, meaning all tax cuts must be offset by tax increases. The White House's new projections for a shrinking budget deficit reflect that approach.

Last year's deficit of $412 billion, or 3.6% of GDP, is expected to fall to $333 billion, or 2.7% of GDP, this year and $162 billion, or 1.1%, of GDP in 2009.

Simply repealing the AMT could add about $100 billion to the 2009 deficit. But finding offsetting tax increases to pay for it could force the administration and Congress to swallow the bitter medicine of taking away deductions that taxpayers have come to expect.

"It's very sticky," said Yale University professor Michael Graetz, a tax official under President George H.W. Bush.

To find that kind of money, the panel is looking at reversing or reducing tax breaks that are "extremely popular," he said.

The president's strategy balances his legacy as a tax-cutter with a new commitment to fiscal discipline. Without AMT reform, a big chunk of the Bush tax cuts would be erased.

Reforming it without boosting the deficit would strengthen his case that the tax cuts are affordable and good for the economy.

"Nearly all AMT taxpayers will lose at least part of the benefit of the 2001 through 2004 tax cuts," Deputy Assistant Treasury Secretary Robert Carroll told the Senate Finance Committee in recent testimony.

Some "will lose all the benefit" of the Bush tax cuts, he said.

A study done by Leonard Burman of the Urban Institute and William Gale of the Brookings Institution found that the AMT, if left unreformed, will "take back" 29% of the income tax cuts.

The AMT's expanding reach is credited to two factors. The first is that the AMT exemption and rate brackets, unlike those in the regular tax code, don't rise in line with prices. So more people may become subject to the AMT even if their incomes only keep up with inflation.

The second reason is the Bush tax cuts, CBO director Douglas Holtz-Eakin told the Senate Finance Committee.

By 2010, 30 million taxpayers will have to pay more tax under the AMT. But if Bush tax cuts expired as scheduled, 16 million would be impacted in 2011, Holtz-Eakin said.

To minimize the reach of the AMT, Congress has approved short-term patches. The AMT exemption was raised to $58,000 for married couples and $40,250 for single filers at the cost of $23 billion in 2004.

But the exemptions are due to revert back to $45,000 and $33,750 at year-end.

If AMT brackets and exemptions were indexed for inflation, only 7 million taxpayers would incur a liability under the AMT in 2010, but the cost of that fix would by then reach $60 billion a year.

The White House, in its budget projections. doesn't include the cost of "any additional patching of the AMT" beyond 2005, Joshua Bolten, director of the Office of Management and Budget, said in a press briefing.

"Our policy is that the AMT does need to be reformed," Bolten said.

"It's a confusing, complicated and unfair additional imposition on taxpayers to have to figure out which tax code they're actually paying under," he said. "We think (it) can be done on a revenue-neutral basis."

Robert Bixby, executive director of the anti-deficit Concord Coalition, applauded the goal of revenue-neutral AMT reform.

"I really hope they stick to that, but it's going to be difficult because the AMT is getting to be such a significant factor in revenue projections," he said.

CBO projects that two-thirds of taxpayers with adjusted gross income of $50,000 to $100,000 will owe more tax by 2010 as a result of AMT.

That so many middle-class families have a stake in AMT reform "may give politicians the backbone they need to make some really hard decisions," Bixby said.

But with Congress providing short-term patches to shield many from the pain of the AMT, the clamor for reform has come mainly from inside the Beltway, said National Center for Policy Analysis senior fellow Bruce Bartlett, a Treasury official under the first President Bush.

By contrast, people are going to notice if their state and local tax deductions are eliminated, Bartlett said.

That's one offset the tax panel may consider, since the AMT doesn't allow deductions for state and local taxes, which save taxpayers about $50 billion a year.

While the AMT is starting to hit those in the middle class, it still packs a bigger punch for those with higher incomes. Policy-makers may face an additional challenge if they seek offsets that don't shift the current tax burden.

"It raises a big question as to whether this is doable," Bartlett said.