July 10, 2007

No AMT Solution This Year?

The New York Times reports that Democratic leaders in Congress will likely duck a permanent fix for the individual Alternative Minimum Tax (AMT) this year, and will instead most likely enact another temporary "patch" to keep middle-income families from owing AMT liability.

The stakes are clear: as CTJ has estimated in the past, close to a fifth of all taxpayers will pay the AMT in 2007 if Congress does nothing this year. And in states like Connecticut and Maryland, that number will approach 25 percent.

And, as CTJ has also noted, there's a terrific option available for fixing the AMT problem: increase the AMT exemptions, and pay for it by eliminating a capital gains tax break that now dilutes the AMT's fairness. The result would be a much fairer tax system at virtually no cost to the US Treasury.

But in their wisdom, neither house of Congress has chosen this approach to AMT reform. Democrats want to increase the regular income tax rates for a small number of the wealthiest Americans and use the revenue to pay for a permanent AMT exemption increase (as well as various progressive tax cuts for lower-income working families). Senate leaders (by which we mean Finance Chairman Max Baucus) want to do a temporary AMT exemption increase, paid for by "closing loopholes."

Baucus' more cautious approach is politically grounded:
[Under the Baucus plan] Democrats wouldn't have to go into next year's election after having tried -- and likely failed -- to raise income taxes on wealthy taxpayers -- those making $500,000 or more -- back to almost what they were before President Bush took office... the tax-writing Finance Committee's chairman, Sen. Max Baucus, D-Mont., is up for re-election next year in a state whose voters overwhelmingly favored Bush in 2004...Many Democrats, including party leaders,
appear comfortable with Baucus's temporary fix rather than forcing a politically
risky vote to raise taxes when the idea isn't going anywhere in the Senate.
''If you have anything close to a marginal district, I wouldn't touch it with a 10-foot pole,'' said Rep. Paul Ryan, R-Wis.
The sad thing is that the real deal-breaker for Baucus and his ilk-- hiking the top marginal tax rate on the wealthiest Americans back near where it was pre-Bush--isn't even necessary to pay for the needed AMT fix. CTJ's plan demonstrates that simply eliminating one gaping loophole in the AMT, the lower tax rate for capital gains, would be almost sufficient to pay for a permanent AMT fix. No red-flag hikes in the marginal tax rate needed.

Of course, hiking taxes on capital gains will raise some red flags too. But from both a political and policy perspective, paying for AMT reform by eliminating a single huge tax loophole for the wealthiest Americans makes a lot more sense than simply jacking up the top income tax rate. This approach seems (to these non-politically-savvy eyes) more palatable to both House and Senate tax writers than the current "reform" options.


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