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EXTEND THE ALTERNATIVE MINIMUM TAX PATCH THROUGH 2009

Key Points

·        The provision would raise the income levels at which the alternative minimum tax (AMT) starts to apply for one year, through 2009, preventing 26 million taxpayers from being hit by the tax.

·        Although potentially justifiable on other grounds, the provision would provide virtually no economic stimulus. Because the patch is perennially extended, it would have no effect on behavior in 2009. Almost 80 percent of the benefits would go to the richest 20 percent of households, who would be least likely to spend the additional funds and stimulate demand.

·        JCT estimates the cost of the patch at $69.8 billion over 10 years. That high cost could crowd out other tax cuts that would provide effective stimulus.

Current Law

 

Individuals must compute their taxes under both the regular tax and the alternative minimum tax. If the tentative alternative minimum tax exceeds the regular tax, taxpayers must pay the higher amount. The AMT requires taxpayers to add a number of otherwise untaxed items (including personal exemptions, state and local tax deductions and certain other deductions) to their taxable income and disallows some tax credits, but taxpayers may also claim a special AMT exemption.

Since 2001, the AMT exemption has been temporarily increased for a year or two at a time to prevent large numbers of taxpayers from becoming subject to the tax. In 2008, the exemption was $69,950 for joint returns and $46,200 for singles and heads of household. The AMT exemption is set to return in 2009, to its 2000 level—$45,000 for couples and $33,750 for singles and heads of household—which TPC projects will increase the number of taxpayers subject to the AMT from 4 million in 2008 to 30 million in 2009.

      In general, nonrefundable personal tax credits are not allowed in calculating tentative AMT.  Another “temporary” and perpetually extended provision has prevented that provision from taking affect since 1998, but that also expired at the end of 2008.  Thus, taxpayers subject to the AMT may lose part or all of the benefit of the value of tax credits for childcare and education, for example. 

Proposal

The proposal would extend for one year the so-called “patch” that protects most taxpayers from the AMT.  The 2008 thresholds would be indexed for inflation, increasing to $46,700 for individuals and to $70,950 for couples in 2009.  Personal nonrefundable tax credits would also be allowed against the AMT through 2009.

Discussion

The AMT is a complex, inefficient, and unfair levy that has little justification on tax policy grounds.  It includes enormous marriage penalties for some couples, penalizes families with children and those who live in high-tax states, and does little to advance its ostensible goal of reining in tax shelters.  (Burman 2007)  The tax discourages work and saving because affected taxpayers face higher effective marginal tax rates than they would under the regular income tax.  Although it makes the tax system more progressive overall, it leaves the very rich largely unscathed.  Those making $200,000 per year are far more likely to be affected by the tax than those earning $2 million.

      Indexing the AMT would provide virtually no economic stimulus. More than 80 percent of the benefits of this provision would go to the highest-income 20 percent of households, and more than half would go to the top 10 percent.  These households are least likely to spend any temporary tax savings.  Furthermore, because Congress has patched the AMT every year, few taxpayers who would otherwise owe AMT are aware that they would pay higher taxes without the patch. As a result, they do not pay higher estimated taxes or behave any differently.  If, in the absence of a patch, they were subjected to the AMT on their 2009 tax returns (and thus owed higher taxes), they might be affected in 2010 when they file their returns, but, even then, most of the additional tax is likely to be paid out of savings.

Congress is certain to extend the AMT patch, whether or not it is in the stimulus bill, so it is hardly a short-term measure. The revenue cost of future extensions will grow dramatically, placing added burdens on our long-term fiscal situation.  The best solution for the long-term would be to eliminate the AMT altogether and offset the revenue loss by broadening the tax base.

Grade: D-      

While extending the AMT patch might make eminent sense on policy grounds, it makes no sense as economic stimulus.  It is neither timely nor targeted.

 

 

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