It’s clearly time to tackle the AMT

Now that the Senate has disposed of the immigration reform bill, perhaps it and the House of Representatives can turn their attention to a matter at least as serious: reform or repeal of the alternative minimum tax — preferably repeal. The country does not need another last-minute adjustment to the standard deduction to minimize the number of taxpayers affected by the AMT. Last-minute adjustments are unfair because taxpayers cannot plan their tax affairs, and accountants and financial planners cannot advise their clients. Representative Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee, promised after last year’s midterm elections — which gave the Democrats a majority in both houses — that he would tackle the issue quickly. Likewise, Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, declared after the election that the “AMT cannot wait.” Still waiting We’re still waiting for any action six months after Congress resumed, and we’ve heard hardly a peep out of either of them on the subject. If action isn’t taken, an estimated 23.4 million taxpayers will have to pay the AMT — a tax originally aimed at people with million-dollar incomes who were paying no income tax — for the 2007 tax year, up from 4 million for 2006. Those 23.4 million will be thrilled to realize Congress thinks of them as millionaire tax cheats. And by 2010, half of all taxpayers will be subject to the AMT. The AMT is essentially a second tax code that takes away a number of tax deductions for people earning above a standard deduction and then imposes a 26% or a 28% rate, depending on the taxpayer’s income bracket. The problem is that the standard deduction allowed is not indexed for inflation, so more and more people become subject to it each year as inflation pushes up incomes. A more significant problem, in the eyes of Congress, is the amount of money the AMT brings in — some $40 billion to $50 billion a year. Though raising significant revenue was not the initial purpose of the AMT, Congress has become addicted to that revenue. Further, Congress tied its own hands early this year by passing a bill requiring it to offset any revenue losses, such as those that would occur from repealing the AMT, with either spending cuts or revenue enhancements (read: tax increases) elsewhere. No doubt, this has complicated the task of Mr. Rangel and Mr. Baucus. With less than 18 months to go before the next election, they would rather not be seen as raising taxes, even if it is to give 23 million taxpayers a break. The task would be simple enough if they could hit a few hundred thousand really rich people, but any tax increase that would raise $40 billion a year from such a small number would have to be so large as to cause a very large howl and lots of opposition from the afflicted parties, many of whom donate to political parties. Perhaps the reason Mr. Rangel and Mr. Baucus have been so quiet is that they still are trying to figure out how to pluck the designated geese without arousing too much hissing, scratching and pecking. Mr. Rangel has endorsed the suggested change in tax rules for private-equity firms, even though those firms are big political donors, and they operate close to his home base. But there aren’t enough feathers on those geese – plucking them won’t raise enough money. Of course, it wouldn’t occur to Mr. Rangel and Mr. Baucus to look for $40 billion in spending cuts out of a more than $2.9 trillion (that’s $2,900 billion) federal budget, or a combination of cuts and tax increases, to finance the AMT change. Nevertheless, it’s time for them to step up and keep the promises they made immediately after the election last year. They have to put in the hard work and find revenue enhancements and/or spending cuts to make a permanent solution to the AMT problem possible. The time for last-minute, one-time adjustments has passed. We’ve waited long enough, and we need time to plan.