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AMT issue a sleeping giant
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By President Bush's definition, allowing a tax cut to lapse is effectively a tax increase. Thus, by the president's definition, his administration, through inaction, is hitting the taxpayers with a large and fast-expanding tax increase.
It is called the Alternative Minimum Tax, and although it's not a big political issue now, just wait. Unchecked, the AMT will render Bush's prized tax cuts moot for many taxpayers by the time he leaves office.
Congress passed the AMT in a fit of political pique in 1969 to recover at least some taxes from 155 rich people who paid no taxes in 1966. The tax was never indexed, so the AMT has snared more and more people. It has become, in effect, a parallel, steeper income tax.
This year, 3 million taxpayers will pay more — about $3,000 each on average — under the AMT, Form 6521, than the ordinary income tax, Form 1040. Most of these taxpayers earn between $100,000 and $500,000, income levels unlikely to engender much sympathy. But next year it will bag 20 million taxpayers, and a few years after that it will hit one in three taxpayers, some making as little as $50,000.
AMT payers have to calculate both it and the ordinary income tax and pay whichever is higher — which is inevitably the AMT, because it disallows deductions for state and local taxes, the $3,100-per-child exemption and assorted other breaks like deductions for the interest on home equity loans. Large families in high-tax states especially get hammered. Soon, the AMT will cover almost all families with three or more children.
But the dirty secret is that the AMT hauls in a lot of cash — an estimated $20 billion this year and $53 billion next — enabling the president and Congress to crow about their tax cuts even as the AMT negates them.
And fixing the AMT would cost $600 billion to $700 billion over 10 years.
(Making the president's tax cuts permanent would cost about $1.1 trillion over 10 years.) The White House has left fixing the AMT out of Bush's budgets because of what those numbers would do to deficit forecasts.
The administration has promised to fix the AMT, but the details have been left to his tax-reform commission. While Congress might enact a stand-alone fix if the president proposed it, and enough people start screaming, the lawmakers are as likely to be as resistant to sweeping tax reform as they have to sweeping Social Security reform.
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