Democrats in the House of Representatives are hoping to pass legislation by Memorial Day that will permanently reform the Alternative Minimum Tax (AMT) and prevent it from reaching millions of more taxpayers. The Bush tax cuts increased the number of people subject to it and the Republican-led Congress never permanently indexed for inflation the exemptions that keep most of us from paying the AMT. As a result, 23 million taxpayers (17 percent of taxpayers) will pay the AMT if Congress makes no change to the law. The AMT is not exactly the greatest threat right now to the average American. Even if Congress does nothing (which is extremely unlikely) more than half of the AMT would still be paid by the richest 4 percent of taxpayers.
But it's widely accepted that Congress will simply not allow a tax to begin affecting millions of people who have never even heard of it, so more responsible members of Congress have focused on how to change the AMT in a way that is fiscally sound and progressive.
There are several ways to do this. Democrats on the House Ways and Means Committee are said to be interested in exempting people with income below $250,000 from the AMT, lowering the AMT for people with incomes between $250,000 and $500,000, and and shifting the cost of the change to those with incomes above $500,000. How exactly the cost would be shifted to those taxpayers with incomes over half a million dollars is yet undetermined. This could be done through the regular income tax. The Tax Policy Center has recently shown the impact of doing this by raising the top AMT rate from 28 percent to 35 percent. Another proposal, made by Citizens for Tax Justice in December, would close the main loophole in the AMT, the lower AMT rate for capital gains and dividends, extend the exemptions and index them to inflation.
What's most important is that AMT reform should not increase the federal budget deficit and that the costs should be borne by those who were the original target of the AMT in the first place, the super-rich.