April 16, 2007
Monday

Congressional Democrats are prepared to take on - or at least they're talking about taking on - a tough issue that President Bush and the Republicans ducked for the past six years, the alternative minimum tax.

The AMT is a stealth tax that unless Congress, as it usually does, patches it on a year-by-year basis, imposes higher taxes on a growing number of people. Last year, it snared 3.4 million taxpayers; this year the number is 23 million.

The AMT was enacted in 1969 in a spasm of outrage over a handful of millionaires who legally escaped paying any income tax. The AMT would ensure that every taxpayer paid at least some income tax; in that, it more than succeeded.

The problem was that the AMT was never indexed for inflation or adjusted for Bush's tax cuts. Thus, its reach keeps growing and for some tax brackets will completely gobble up the Bush cuts.

The AMT is generally described as a parallel tax code. When taxpayers reach a certain income level, they are required to fill out two income-tax forms, the AMT and the regular 1040, and pay whichever is higher, almost inevitably the AMT. The AMT disallows most exemptions and deductions and permits only limited medical deductions. It is especially punitive to large families in high tax states.

The obstacles to repeal are both practical and political.

The practical obstacle is that it brings in huge amounts of revenue. Eliminating it would cost $1 trillion over the decade, and simply postponing it this year would cost $50 billion. That loss of revenue would have to be made up somehow.

Politically, the outrage - for the moment - is confined to a relatively small percentage of taxpayers, although that will change. And most people are blissfully unaware of the AMT's existence, although that too will change.

Politics, however, may be the solution to the AMT. This year the AMT will bag 20 percent or more of taxpayers in Connecticut, Maryland, New Jersey, Massachusetts, and California, with New York not far behind. By no coincidence, these are all Democratic states.

House Democrats are talking about exempting about 97 percent of taxpayers, those earning less than $200,000, and making up at least part of the difference by eliminating deductions, exemptions and credits elsewhere in the code. To be fair to the Republicans, Sen. Charles Grassley, R-Iowa, has introduced a bill calling for outright repeal.

The politics of repeal really don't matter. Left alone, the AMT will inevitably be unfair to more than just the blue states.

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