When Congress passed the Alternative Minimum Tax in 1969, it was pinpoint legislation, targeting 155 wealthy taxpayers who had managed to avoid paying any income tax. But about 3.8 million people had to pay the alternative tax in 2004 – and the number could rise to 20 million in 2006. Welcome to the wonderful Washington world of tax reform, where each new solution usually mutates into the next big problem.
Why is a tax once aimed at the wealthy becoming a scourge for the middle class? One reason is inflation – the tax is usually applied to income above $40,250 for single people and $58,000 a year for couples, and disregards common tax deductions like those for dependent children and state and local taxes.
Those numbers seem laughably low to define “rich” taxpayers in 2005. Yet, even they reflect some temporary fixes Congress has passed in recent years to reduce the burden of the AMT. Unless those stopgap measures are retained – at a cost of $385 billion over the next 10 years – the AMT will drop back to its original limits of $33,750 for singles and $45,000 for couples in 2006. That would bring at least 20 million taxpayers under the AMT, and the number could soar to 50 million in 2015.
Paradoxically, the Bush tax cuts passed in 2001 and 2003 also explain why so many more Americans now face the AMT. With great ballyhoo, those cuts reduced normal income taxes – but quietly the alternative tax was left alone. Taxpayers have to compute their their tax using both systems – and pay whichever levy is higher. Thus, millions of Americans found all or part of the Bush tax cuts were offset by their alternative tax liabilities.
Charles Grassley of Iowa, chairman of the Senate Finance Committee, has teamed with key Democrats to introduce a bill that would repeal the tax entirely – at a cost of $611 billion over 10 years in lost revenue. But unless offset by tax increases elsewhere, such a move would swell the river of red ink already coursing through the Bush budget, which posted a $412 billion deficit last year. Administration officials warn it might be necessary to reduce deductions for health care, state and local taxes, mortgage interest or charitable donations to offset the AMT’s repeal.
We favor reforming the AMT by scrapping Bush’s proposed abolition of the estate tax – with its $290 billion price tag – and passing an alternative to raise the exemption on the estate tax to $3.5 million per person, or $7 million for a couple. Instead of ladling extra tax breaks for the truly wealthy, Congress should worry about the growing ranks of middle-income taxpayers faced with the Alternative Minimum Tax.
