December 18, 2006

AMT failure: Congress abdicates responsibility once again

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

3 Comments:

At 11:48 PM, Blogger Matt G said...

This issue is exactly the flip side of the ReadyReturn issue you discussed a while back. With ReadyReturn, we see a thing that good-government advocates have (sensibly) done to try and make people less mad about paying taxes.

With these perpetual "temporary" AMT fixes, on the other hand, the Republican leadership is coyly trying to make people even madder about their federal income taxes than they were to begin with. It's a cowardly, and arguably subversive, way of trying to undermine the public's confidence in its government.

 
At 4:05 PM, Anonymous NCN Staff said...

LennyG

Thanks for the in-depth coverage concerning taxes and the fiscal state of California.

This very issue has spurned the creation of the New California Network (NCN). NCN is a nonpartisan catalyst designed to modernize state government. Through sound analysis and meaningful engagement with Californians, NCN strives to improve the performance, transparency and accountability of the government to create fiscal responsibility.

visit www.newcalnet.org for more info

 
At 4:37 PM, Blogger Dan Ancona said...

I've been following ReformAMT's work on this. They got some very limited changes in the Extenders bill regarding the AMT credits specificaly pertaining to Incentive Stock Options.

But you'll be shocked to know that the "fix" as written is a nearly complete disaster. Here are some details...

http://www.fairmark.com/execcomp/credit-relief-1.htm

What did Rep. Thomas say? I'm so terribly sad to see him go.

 

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