Repair or repeal the alternative tax

Published: December 19, 2005

The Issue: Stopgap action to shield millions of taxpayers from the alternative minimum tax is unlikely to be passed before the end of the year.

Our Opinion: Instead of a stopgap action, lawmakers need to either fix the seriously flawed law or repeal it.

As many as 3.5 million families likely will face a much bigger tax bite when they file their federal income tax returns in April if U.S. lawmakers don?t take action to protect them from the ravages of the alternative minimum tax.

If no action comes by the end of next year, 19 million American families could be subjected to the tax, which was passed in 1969 to make certain that the top 1 percent of taxpayers, who were in the habit of sheltering their income to avoid taxes, would be forced to pay a fair share.

The problem is the lawmakers who wrote the measure failed to index the tax to allow for inflation. This means each year the threshold for the tax gets lower, ensnaring more and more taxpayers for whom the tax never had been intended.

Lawmakers routinely have been passing stopgap measures to shield an increasing number of taxpayers from the tax. Both the House and the Senate have passed separate measures, but Senate Majority Leader Bill Frist said time is running out for a compromise measure to be hammered out before the end of the year.

Of course, a retroactive measure could be passed next year, but the Republicans in control of Congress seems to be more interested in debating a larger, more wide-ranging reform bill than dealing with the AMT as a separate issue.

The larger debate involves nearly $100 million in tax breaks Republicans believe are necessary for economic growth.

However, the House and the Senae are not of one accord concerning tax relief. While the House wants to extend lower tax rates on investments, the Democrats and Republican moderates in the Senate have bulked at the idea.

It?s an important issue, it?s going to take time to resolve, and time is working against the taxpayers.

The AMT requires an increasing number of taxpayers to compute what they owe to the Internal Revenue Service twice: once using the traditional system, with deductions and tax credits; and again using the AMT system, which exempts a specified amount of income from taxation - $58,000 for married couples filing jointly, $40,250 for singles - and eliminates most deductions and credits, but imposes a slightly lower tax rate. Taxpayers pay whichever tax bill is higher.

According to The Wall Street Journal, 4 percent of all taxpayers will be affected by the tax when they file their 2005 tax returns in April. Unless Congress does something, that figure will rise to 20 percent for the 2006 tax returns.

And it will get worse. In a report released earlier this year, the nonpartisan Congressional Budget Office said that by 2010 two-thirds of all middle-class taxpayers with adjusted gross incomes between $50,000 and $100,000 would owe money under the alternative minimum tax.

It?s hardly surprising that lawmakers don?t seem to be in any rush to fix the tax or repeal it. It?s a moneymaker.

This year, the tax will rake in $20 billion, according to the Tax Policy Center. Next year it will soar to $53 billion. If unchanged, by 2009 the AMT will yield more revenue than the regular income tax.

As a result of the tax cuts provided by the Bush administration to the superrich - those who are supposed to be the main targets of the AMT - the middle class is assuming more and more of the tax burden.

That?s unfair and it needs to be changed. The AMT should be revised to take inflation into account, or it should be eliminated. But whichever path is taken, it needs to be taken now.