AMT failure: Congress abdicates responsibility once again


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In 1997, California increased the AMT threshold from $40,000 to $80,000, indexed the threshold for inflation, and eliminated the child credit from AMT calculations. Anti-tax Republican legislators asked me why my organization, usually a staunch opponent of tax relief for the well-off, supported this change (which came packaged with a major increase in the child credit). The obvious answer: it was about the credibility of the income tax --having middle-class taxpayers hammered by the AMT despite ordinary tax circumstances will damage the standing of the income tax in the public mind.

Since then, I have watched in amazement that, despite trillions in federal tax reductions since 2001, the AMT has not been fixed--and the recent tax extender bill continues the abdication of responsibility. There was plenty of room for all kinds of goodies, from improving the tax-sheltering opportunity offered by HSA's to accelerated depreciation for restaurant owners to drilling incentives to independent oil producers (as if they need them at these oil prices!). But, of course, Congressional scoring now assumes the exponential growth of the AMT, $40 billion for next year, which makes it harder than ever to fix.

From my left coast vantage point, the failure to fix the AMT was an intentional effort by the Republican Congress to do what we in California explicitly avoided, that is, damage the credibility of the tax system. Inside the beltway, it was also a way to pretend to pay for the Bush tax cuts--even though everyone knew it had to be fixed. Outgoing Ways and Means Chair Bill Thomas finally made a comment that confirmed that the Republicans wanted to let the system fester and damage its standing with taxpayers, so presumably we would be forced to scrap it.

The price tag in California in 1997 was $82 million, grown now to a modest $110 million--affordable for a personal income tax which pulls in $50 billion in revenue yearly. But the scoring at the federal level has assumed that the AMT would work its wrath with middle-income taxpayers, so as to hide the real net cost of the other tax cuts. Even our hometown paper, the Sacramento Bee, has excoriated the Congress for its phony accounting and failure to fix the AMT.

Fixing it is easy substantively, difficult politically. The Tax Policy Center has described the fixes which raise the threshold, index it, eliminate dependent credits and other middle-class credits, and pay for it by rolling back some of the Bush tax cuts, so that the AMT will affect only those high-income, tax-avoiding taxpayers it was designed for.

Politically, of course, the Democrats have to fact the fact that an unfortunate part of their job is going to be cleaning up the mess that the Republicans have made of fiscal policy. Facing a Presidential veto of any tax raisers, fixing the AMT is likely to be put aside. And the on-going costs and frustrations of taxpayers will continue to mount.

LennyG

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