February 23, 2007

White House May Be Negotiating With Itself on the Alternative Minimum Tax

By now many people know that the Alternative Minimum Tax (AMT) is likely to be modified because it was meant to be a back-stop tax for the super-rich but will start affecting the more moderate-income families if the existing AMT exemptions are not extended. By now, most people in government know that "fixing" the AMT is not cheap. Continuing Congress's recent practice of applying a one-year "patch" each year will cost $250 billion over the next four years.

What nobody knows, however, is whether the President thinks AMT reform should paid for or not. Since some members of Congress, including Senate Finance Chair Max Baucus (D-MT), have proposed repealing the AMT altogether (which could cost $1.5 trillion over a decade), the possible implications for the federal budget deficit are alarming. Senate Finance Committee ranking member Charles Grassley (R-IA) is adamant that the AMT be repealed and not paid for because, he argues, it is a tax that was not expected to have the effect it will have. This logic is a little difficult to follow. Even if it was true that no one saw the AMT affecting more moderate-income families, it's rather difficult to see how this leads him to the conclusion that the super-rich, who were the intended target of the AMT in the first place, should also get a break from the AMT and that it should be deficit-financed. But anyway, it's entirely untrue that this effect of the AMT comes as a surprise. The original Bush tax break package enacted in 2001 intentionally changed the AMT only for one year, which made the projected cost of the tax break seem smaller for budget scoring purposes. By assuming that the AMT would remain unchanged (except for one year), the Congressional Budget Office had to conclude that the AMT would take back a lot of the tax cuts, therefore lowering the projected costs and allowing the administration to say that the proposal was not quite so expensive as it would otherwise appear.

But of course it was really assumed that the AMT would be changed so that it would not take everyone's tax breaks away, just as it is assumed that the AMT will be changed this year. One difference this year, however, is that more people are talking seriously about a permanent fix rather than continuing the annual practice of one-year patches. Another difference is that PAYGO rules now in place in the House prohibit, at least officially, increasing the federal budget deficit. The Wall Street Journal has noted that the White House has signaled that it is interested in some sort of budget-neutral reform without being specific. Last week White House Press Secretary Tony Snow gave a muddled response that tried to assert the President was not, in fact, in favor of any sort of tax increase but that the White House was open to suggestions for how to fix the AMT.

So essentially conservatives in the White House and in Congress pushed massive cuts in the regular income tax that would greatly reduce revenues and cause more people to be affected by the AMT, and then when more people were affected by the AMT they cried that this was unfair and unexpected and that the AMT should be cut or repealed which would cause a further loss of revenue, and that any attempt to replace the revenue lost as a result of an AMT reform would be a tax increase. Or something like that.

The current conservative thinking seems to be that not only is the President and Congress forbidden from raising taxes on Americans, they are also now forbidden from even paying for any provisions that lower taxes on the middle-class by raising revenues with other changes in the tax code. (Meanwhile, a larger and larger percentage of our tax dollars goes toward paying the interest on the national debt and the President calls for cuts in programs that have an insignificant effect on the federal budget deficit, in the name of "fiscal discipline.")

Is the President in sync with this conservative ideology or are there any signs that he may lapse temporarily into common sense and try to pay for part of his mess? Tony Snow's response to questions about paying for AMT reform were not exactly crystal clear. He said, "The President doesn't believe in tax increases," and described how the AMT was hanging over many middle-income families and kept at bay only by the one-year patches Congress has enacted, and said Congress should be able to find a solution. He said, rather melodramatically, "it's a cruel tax and it's an unacceptable tax," which is odd seeing how the President did not bother to alter it much with his tax cut package back in 2001.

When asked if the President proposed raising taxes in his health care proposal (which essentially would reduce tax breaks for health insurance for some but expand them for others) he essentially replied that it wasn't a tax hike because people could simply leave their expensive health care plans that exceeded the tax new tax subsidy and take up one that would be fully tax deductible under the President's plan. It's hard to see where this logic might end. Maybe ending the deduction for home mortgage interest payments would not be raising taxes because people could choose not to buy a home, or maybe raising the highest rate is not a tax increase because people could choose a lower-paying job.

These rhetorical acrobatics were followed by this long-winded attempt to avoid saying anything of substance, in which he begins by rejecting tax increases but ends by leaving them on the table:

Look, again, the President is not for tax increases. And so what we've said all along is, you've got 20 months to figure this out. What happens a lot of times is that people try to do preliminary negotiations through the press by characterizing what they think the President may or may not do. It's always interesting, because they never tell you what they're going to do. The fact is, both sides have an opportunity, so let's see what people have to propose.

And there have -- we have certainly been having -- we've been having conversations with people on both sides of the aisle because it is a problem. Democrats realize it, Republicans realize it, and they want to fix it. And I think we do have enough time right now where people don't have to rush and get themselves into a political fight. They've got an opportunity to try to come up with a calm and rational way to do it. We don't think it needs to involve tax increases, but we're certainly open to hearing what other people have to say.

The words "calm and rational" are perhaps more important than they appear, since the White House is probably particularly keen to avoid hysterics from conservatives who believe that actually paying for any change in the tax code is a betrayal of their principles.


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