Temporary fix planned for U.S. minimum tax

Author: Donna Smith

Published: May 4, 2004

WASHINGTON (Reuters) - The Republican-led Congress is preparing to act on a one-year fix to the alternative minimum tax that critics say wipes out benefits of President Bush's tax cuts for millions of taxpayers and masks the long-term costs of those cuts.

The U.S. House of Representatives Wednesday is expected to pass the Republican-backed bill that will extend through the end of 2005, temporary relief from the alternative minimum tax in an effort to hold the line on the number of families paying the tax, promising a longer-term fix later.

The alternative minimum tax was first enacted to ensure that the wealthiest people did not take advantage of so many credits and deductions that they escaped paying any federal taxes. But it is increasingly hitting middle class families and today is being paid by about 3 million taxpayers.

Democrats accuse Republicans of avoiding a long-term reform of the tax, which is increasingly hitting middle class families, before the November elections to make Bush's tax cuts look more affordable. They plan a rival bill that limits the minimum tax to taxpayers earning more than $250,000.

Despite growing pressure to repeal the minimum tax, lawmakers have been reluctant to act because it is so expensive. The cost of repeal to the federal treasury could top $700 billion over 10 years. With the elections looming and Bush promising to cut record budget deficits in half over five years, Congressional Republicans proposed the temporary fix, putting long-term reform off until next year.

When the minimum tax was first imposed in 1969 only a few hundred wealthy individuals paid it. But as inflation boosts incomes, a growing number of taxpayers, especially those with children who live in areas with high state and local taxes, can expect to pay the minimum tax.

More taxpayers with incomes between $75,000 and $100,000 will pay the tax without congressional action, analysts say.

"By the end of the decade, virtually all couples with two or more children making as little as $75,000 per year will be hit by the minimum tax and all of the tax cuts President Bush promised to middle-income families will be on a round trip back to Washington," said Rep. Richard Neal, a Massachusetts Democrat who sits on the tax-writing House Ways and Means Committee.

A study by the Urban Institute-Brookings Institution Tax Policy Center said that by 2010 about 30 million taxpayers will pay the alternative minimum tax, compared to about 3 million currently.

If Bush and the Republican-led Congress are successful in extending the 2001 tax cut beyond the 2010 expiration date, the Tax Policy Center estimates that more than 40 million taxpayers will pay the minimum tax by 2014.

Taxpayers have to calculate their tax bill both under the regular income taxes and the minimum tax and then pay the higher of the two. Consequently, cutting regular income taxes without making changes in the alternative minimum tax structure throws more taxpayers into the minimum tax.

The Republican-backed one-year fix the House is expected to pass Wednesday would cost the federal Treasury about $17 billion, while the Democratic proposal would cost about $19 billion. Democrats are expected to propose offsetting that cost by closing corporate tax loopholes.