Alternative maximum trouble
THE ALTERNATIVE minimum tax came about in 1969, amid popular outrage over news that some wealthy Americans were paying no federal income tax. But the fates have never stopped smiling upon those who can afford top-shelf tax planners. The
Meanwhile, millions of families of more modest means will be subject to the AMT, which in effect limits a taxpayer's ability to take deductions for dependents, state and local taxes, and other common items. The alternative minimum tax, coupled with President Bush's first-term tax cuts, have shifted the tax burden away from the wealthiest Americans and toward middle-class and upper-middle-class families.
While the AMT now applies to people up and down the salary scale, the largest number of people targeted by it have incomes between $100,000 and $200,000. These taxpayers can hardly plead pauperdom, but neither are they plutocrats. Incomes in that range are common -- and hardly plush -- for two-salary families in pricey Massachusetts.
Congress so far has avoided a mass outcry with a series of one-year patches to the AMT. But this year's patch has yet to come. The AMT is not indexed for inflation, so, unless lawmakers find a permanent solution, the tax will afflict more and more middle-income families without addressing the problem that it was supposed to fix.
Beyond its other flaws, the AMT creates regional inequities, for it bites deeply in high-income, high-tax states. Without a patch for 2007, more than 23 percent of all Massachusetts taxpayers will be subject to the AMT, according to Senator John Kerry's office. Historical data suggest New Jersey, New York, Connecticut, California, and Maryland are the only states to be hit harder. These are among the bluest of the blue states, so perhaps it's not surprising that Republicans have been unwilling to pay for reform of the AMT by taking back President Bush's tax cuts.
The ever-lengthening shadow of the AMT conceals the true fiscal impact of those cuts. The administration estimates that extending them through the next decade would cost $1.7 trillion, but the liberal Center for Budget and Policy Priorities says this assumes a massive growth in revenue from the AMT. Preserving the cuts while reforming the AMT would cost the Treasury $3.5 trillion, the group projects.
Yikes. The better option is to let lapse the Bush tax cuts for the richest, set a minimum income standard for the AMT, index it for inflation, and then tighten up the exemptions that let some wealthy Americans avoid taxes even under the AMT. As it stands, the alternative minimum isn't keeping them from exploiting a plethora of tax shelters, but it is squeezing far less affluent Americans.
