I want to talk about an issue that I have been researching for a while. One that if not corrected could cause problems for many tax payers. The AMT tax has not been adjusted for inflation since 1969! This tax was originally designed to tax higher income earners from avoiding taxes through various shelters and other means. Most American’s income has been increasing at the rate of inflation while the AMT has been stagnant. This means that several new individuals will now qualify to be subjected to the AMT. The government seems to be doing little about the issue along with several other issues.
The House will be meeting to “discuss� the issue, but will likely do nothing more than create a temporary band aid to help keep $23 million tax payers from being at risk of paying the tax this year. Some in congress actually have it right and want a complete tax system overall.
Recent years have seen temporary “patches� applied to AMT provisions of the tax code to ensure that few new taxpayers become eligible for the AMT. Last year, about 4 million U.S. taxpayers were subject to the AMT.
Although legislation is still under development, Estimates indicate that repeal of the AMT would leave a $1.35 trillion hole in the federal budget over the next decade. Finding revenues to plug the gap is daunting and politically difficult to achieve. Some have proposed increasing tax rates on household incomes of $100k or more allowing tax cuts enacted since 2000 to expire for top earners, and other measures to ensure that any tax reform is “revenue neutral.�
Ironically, testimony before the committee by Leonard E. Burman of the Urban Institute indicated that tax cuts enacted over the last six years have actually increased the number of people who may become subject to the AMT. Burman’s well-documented research shows that, absent tax reform, more than twice as many taxpayers will be AMT eligible in 2007 than would have been the case prior to enactment of the tax cuts.
Once hearings are complete and legislation is drafted, both houses of Congress must act and the president would need to sign the bill for it to become law. The prospects for comprehensive reform at this time are doubtful. Sentiment for reform seems strongest in the House and weakest in the Senate, where the Democrats have a bare majority. The president, in any case, is unlikely to sign such a bill if it reaches his desk.
Major reform of the tax code is unlikely this year, and allowing 23 million taxpayers to become eligible next April for the AMT is politically unpalatable. It will take a substantial majority for either party in Congress and a sympathetic president to allow serious tax reform to take place.
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