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27 million in US to see tax bill rise

Mass. residents will be hit hard by formula

WASHINGTON — Nearly 27 million more Americans are slated to pay higher federal income taxes over the next six years as they become subject to a tax provision usually aimed only at the wealthiest Americans, with Massachusetts residents paying at a greater rate than all but four other states, Treasury officials and economists said yesterday.

The provision, called the Alternative Minimum Tax, currently applies to 3 million Americans — most of them earning more than $200,000. But without substantial changes to the formula that determines who is required to pay higher taxes, it will strike 30 million taxpayers by 2010, including many earning less than $100,000, according to calculations by the Treasury Department.

Massachusetts residents will be especially hard hit because the state’s relatively high incomes, and high deductions for state and local taxes will trigger the formula more often than the national average.

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President Bush has told Treasury officials he wants to eliminate the Alternative Minimum Tax, because it stands to raise the taxes of so many people. But his administration is searching for ways to make up $1 trillion in lost revenue. One idea being discussed in the administration and Congress — eliminating $900 billion worth of deductions for state and local taxes — also would hit Massachusetts particularly hard, given the state’s relatively high state taxes and property levies.

The Treasury Department is establishing a panel to address the issue.

The alternative minimum ‘‘is unfair, probably, certainly unintended, and certainly, I would say, random,’’ Greg Jenner, the Treasury Department’s acting assistant secretary for tax policy, said yesterday. ‘‘It is probably a correct assumption that Massachusetts, New York, and California will bear more of a burden under the AMT because the biggest factor [in triggering the formula] is the state and local tax deduction.’’

The Alternative Minimum Tax was first applied in 1969 and updated on numerous occasions. Intended to assure that wealthy taxpayers can’t escape liability by seeking tax shelters and deductions, it sets a formula that applies a new system of levies on those with relatively high incomes and relatively low tax bills.

But several factors have resulted in the alternative minimum hitting more taxpayers than just the wealthiest Americans. The AMT lacks an inflation index, which means that even if incomes grow only by the rate of inflation more people make enough money to owe the tax.

In addition, the Bush tax cuts have reduced rates for some families enough to throw them into the alternate minimum, thus wiping out some of the benefits of the tax cuts. As a result, a family that takes deductions for children and state and local taxes is becoming more likely to be affected by the minimum tax.

‘‘If this is not fixed, virtually every four-person family in Massachusetts making $75,000 a year will have its taxes automatically increased by the AMT,’’ said Representative Martin Meehan, a Lowell Democrat.

Overall, the number of Massachusetts taxpayers subject to the higher tax is slated to grow from 3.2 percent this year to 26 percent in 2010, compared with a national average of 21 percent.

The alternative minimum already is being levied at a rapidly increasing rate in Massachusetts. Larry Carlton, a certified public accountant in Bedford, Mass., said as many as 15 percent of his clients were subject to the tax in 2003, compared with 1 percent two years earlier. Under the alternative minimum tax, families often have to pay thousands of dollars more in taxes. Yesterday, he said, he told one family it would have to pay $6,500 more because it was now subject to the minimum tax.

Earlier this month, Gregory Mankiw, chairman of President Bush’s Council of Economic Advisers, signaled that Bush wants to try to kill or modify the tax, noting that ‘‘it is only a matter of time before the AMT hits many tens of millions of taxpayers, far more than it was ever intended to affect.’’

Governor Mitt Romney, asked through a spokesman whether he has concerns about the high numbers of Massachusetts families paying the minimum tax, declined to respond because he has not focused enough on the matter, according to an aide.

‘‘It’s not an issue that we have studied closely enough to be able to have an opinion on at this time,’’ the spokesman, Shawn Feddeman, said via e-mail.

Some Republicans have suggested leaving the minimum tax in place because those hardest hit tend to be in states that did not support Bush, including Massachusetts, California, and New York. ‘‘It is a tax of people living in ‘blue’ states,’’ said Grover Norquist, the conservative activist who heads Americans for Tax Reform.

He said the tax was originally conceived by liberal Democrats as a way of imposing higher taxes mostly on wealthier Republicans, and he suggested that it be used as a bargaining chip by the White House when Bush tries to enact his tax agenda. The minimum tax should be repealed only when Democrats ‘‘say they are sorry and offer to give us something in return,’’ Norquist said.

The 10 states with the highest percentage of people paying the minimum tax all voted for Senator John F. Kerry of Massachusetts for president last month, according to an analysis by Citizens for Tax Justice. But the state with the 11th highest percentage was Ohio, the state that went narrowly for Bush and decided the election.

Tom Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants, said there appears to be wide agreement about the need to get rid of the tax but the challenge will be making up for lost revenue. ‘‘The politics are all in the direction of getting rid of it,’’ he said. ‘‘ But if they do get rid of it, they have an enormous revenue issue.’’

One possibility being discussed within the administration and Congress is to drop the minimum tax at the same time as ending the deduction for state and local taxes. The loss of the AMT revenue would cost $1 trillion over 10 years, while the addition of revenue for ending the deduction for state and local taxes would bring in about $900 billion over the same period, according to Jenner.

Jenner said that while he has heard that some Republicans have suggested that the AMT mostly affects people living in ‘‘blue’’ Democratic states, ‘‘Nobody has ever made that statement to me as an advocate. Our goal is to have a fair and uniform tax system, and I don’t think you can call the AMT either fair or uniform.’’ 

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