A bad alternative

Published: December 6, 2005

Congress should not let millions get hit by higher taxes

This editorial contains a lot of numbers and some explanation of political maneuvering over taxes. Doze off now if you wish, but remember: If you snooze, you may lose.

Nothing angers the average taxpayer more than learning that millionaires with slick accountants pay no income taxes at all. Outrage over that led several years ago to creation of the Alternative Minimum Tax to make sure the wealthy paid at least some income taxes. But unless Congress acts to prevent it, this year the AMT will take a big bite out of the incomes of people who are by no means rich. Here's how.

In 1970, the AMT hit only 19,000 taxpayers. But Congress didn't index the tax to inflation, so incomes rose but the threshold for the AMT to kick in didn't. The result? According to the Tax Policy Center, a nonpartisan research group, the AMT will hit 3.6 million of the nation's 131 million taxpayers filing for tax year 2005, and could affect 31 million by 2010. This year 1.8 percent of married couples with two children and an adjusted gross income of $75,000 to $100,000 will be subject to AMT. Next year, AMT will hit 73.4 percent of those families -- if nothing is done.

What is Congress doing?

For several years, Congress postponed the problem by making temporary fixes to restrict the AMT's reach. But those fixes cost money. In 2006 the cost would be $27 billion or more, at a time when demands for federal money are growing and the federal deficit is skyrocketing.

This year the Senate would again avert the AMT's bite by directing nearly half its $63 billion tax cut proposal for that purpose. But in the House, a $56 billion tax cut package ignores the AMT. If it became law, the AMT would hit some 15 million new households with additional taxes averaging about $2,000 per household.

Make no mistake, neither body plans to do much for ordinary taxpayers. They differ over whether the big breaks should go to the really super-rich or the merely well-to-do.

The House bill favors the super-rich. The Tax Policy Center figures 51.3 percent of the House tax cuts would go to the top 1 percent of taxpayers -- some 1.4 million households with average annual incomes of $1.1 million. The Senate bill would direct only 12 percent of its benefits to the top taxpayers; about 23 percent would go to households with incomes below $100,000.

In a sensible world, one might ask why there should be any tax cut for the well-to-do at all. Federal Reserve Chairman Alan Greenspan recently looked at the prospect of large sustained budget deficits and warned, "The consequences for the U.S. economy of doing nothing could be severe." The price tag for Iraq will be huge; Congress hasn't figured out how to help the Gulf Coast recover from Katrina. Yet the only Americans feeling much congressional belt-tightening so far are those served by such programs as food stamps, Medicaid and student aid.

There's talk that House leaders want to first win big tax cuts for the wealthy, then in a separate bill rein in the AMT. Maybe so, but remember this: When it came to tax relief, House Republicans' top priority was the richest of the rich.