Obscure Tax to Affect 36 Million

Author: Curt Anderson

Published: September 18, 2002

WASHINGTON (AP) - An obscure tax originally enacted to prevent the wealthy from escaping income taxes entirely will grow sharply until it affects 36 million increasingly middle-class taxpayers by 2010, private researchers reported Wednesday.

"It is no exaggeration to say it is on the verge of dominating our income tax system and will create major problems for the economy," said Leonard Burman, co-director of the nonpartisan Tax Policy Center. The center is a joint venture of the Urban Institute and the Brookings Institution think tanks.

The alternative minimum tax is a highly complicated parallel to the regular income tax system - a backstop - designed in 1969 to ensure 155 wealthy people paid some tax, the study found. That number is projected to grow to about 2.6 million this year and 36 million by 2010.

The study is the latest to project problems for a large segment of taxpayers during this decade. The Internal Revenue Service's taxpayer advocate and the Joint Committee on Taxation, which provides tax bill estimates for Congress, have made similar projections.

The main reasons are that the minimum tax is not indexed for inflation, meaning that it strikes more and more taxpayers as their incomes rise. In addition, last year's 10-year, $1.35 trillion tax cut reduced regular income taxes but did not make any cuts in the minimum tax rates.

The study found that by 2010, 53 percent of taxpayers earning under $100,000 will pay the minimum tax, compared with 24 percent in 2002. For 95 percent of those with incomes between $100,000 and $500,000, the alternative minimum tax will effectively become the main income tax system in 2010.

By 2010, the minimum tax also will reclaim about 36 percent of the overall income tax cut enacted last year - about 70 percent of the cut targeted at taxpayers with incomes between $100,000 and $500,000.

Families with children and those living in high-tax states would be particularly hard hit because the minimum tax system does not allow exemptions for children or deductions for state taxes.

In recent years, Congress has passed temporary fixes to prevent the tax from hitting too many middle-class taxpayers, which would have a steep political cost. Repealing the tax outright, however, could cost as much as $750 billion if it is done in the later years of this decade, according to the House Ways and Means Committee.

The Tax Policy Center study said the minimum tax could be changed so that is focuses mainly on upper-income households, or last year's income tax cuts could be frozen at 2002 levels and the alternative tax repealed - a plan that would still cost $285 billion.

Still, the study's authors say Congress will eventually have no choice but to deal with it. The IRS taxpayer advocate has also pushed for repeal, in part because of the sheer complexity of the minimum tax.

"But doing so will be expensive; by 2008, getting rid of the AMT is going to cost more than repealing the regular income tax," said William Gale of the Brookings Institution.