Oregonians Face 'Stealth Tax' Ambush

Author: Robert Landauer

Published: April 3, 2004

Thousands of Oregonians completing their income tax filings are about to stumble expensively into a parallel tax universe that most never knew existed.

This alternative tax universe is linked in startling, bizarre and costly ways to the one most Americans are used to, as indicated by an Oregon case that the U.S. Supreme Court accepted this week for review.

A 1991 Multnomah County jury found that the Bank of California had unfairly fired Sigitas Banaitis, a vice president, for refusing to reveal confidential client information to the parent company of Mitsubishi Bank, which had a controlling interest in Bank of California and in other firms that competed with Banaitis' clients.

The jury awarded Banaitis $6.3 million. The sides later settled the case for $8,728,559 including interest. Banaitis got $4,864,547, and his attorney, Charles Merten, got $3,864,012, which went straight to Merten from the bank. Both paid income taxes on their shares.

Enter the alternative minimum tax (AMT) -- called the stealth tax because it sneaks up to ambush the unwary and the unlucky.

The AMT's original purpose was to cool a firestorm that began when Treasury Secretary Joseph W. Barr reported that 155 families earning more than $200,000 in 1966 (about $1 million today) paid no income taxes. The AMT was passed to make sure that, despite tax shelters, the super rich would pay at least some income taxes.

The AMT's original and later versions stand as some of the most ineptly constructed laws passed by Congress.

Take Banaitis' tax problem, for example, triggered by a large deduction from the settlement. "He is entitled to deduct his attorney's fees under the regular income tax system," says Philip N. Jones, the Duffy Kekel law firm partner carrying the tax case to the high court. "The AMT system effectively denies the deduction. The effect is that he is taxed on funds that he never received but that went to his attorney."

That attorney, Charles J. Merten, finds it outrageous that taxes have been paid on all $8.7 million, but "the effect of the AMT and IRS approach to it is that they want Banaitis to pay taxes again for the amount that the bank sent directly to the lawyer."

This double-taxation injury is no more grotesque than wounds about to be inflicted on thousands -- and in coming years, millions -- of ordinary middle-income taxpayers. Many of the injustices are recounted in research by the Tax Policy Center of the Urban Institute and the Brookings Institution (www.taxpolicycenter.org). David Cay Johnston brilliantly describes other stealth tax absurdities in "Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich -- and Cheat Everybody Else" (Penguin Group, 2003). Some examples:

Under current law about 33 million taxpaying households -- 97 percent of married taxpayers with two or more children and incomes of $75,000 to $100,000 -- will be ensnared in the highly complicated AMT net by 2010.

By 2010, as many as one of 11 families earning $30,000-$50,000 will see their tax bills increased because of the AMT. This is far from the original purpose of catching a few hundred millionaires who were paying nothing.

The number of rich Americans escaping the AMT is increasing. The AMT recaptures more and more Bush administration tax relief from the middle classes. The money subsidizes extra relief for the very rich.

Married couples are 25-30 times more likely than singles to be hit by the AMT -- a new marriage penalty. The AMT is chillingly anti-family, particularly punishing those with several or many children. (An especially repulsive example cited by David Cay Johnston was the loss of deductibility of $2,200 of medical expenses to treat a teenager with leukemia.)

Other land mines are out there for moderate-income single-parent families, for people who win damages for age, sex, religious or racial discrimination, for family businesses that take tax credits to give jobs to the chronically unemployed, and for others.

The AMT stealth tax shows that rich political donors are effectively waging class warfare on the rest of Americans.

Reach Robert Landauer at 503-221-8157 or robertlandauer@news.oregonian.com.