Charlie Rangel's Dilemma Over the AMT

Between 1994 and 2000, a profound realignment occurred in American politics. But not the one you might expect, i.e., Republicans living as privileged elites in gated communities, sequestered from the realities of daily life while Democrats eke out a marginal existence on minimum-wage jobs and try to survive in blighted neighborhoods.

As Thomas Edsall points out in his new book, Building Red America, the realignment that began in 1994 cut in an entirely different direction. Between 1994 and 2000, 88 congressional seats shifted from Democratic to Republican control, while another 46 flipped from the Republicans to the Democrats. The demographic profile of those new Republican seats may surprise you: Incomes were below the national average in two-thirds and the percentage of those with college degrees was below the national average in three-quarters. Two-thirds of the newly Democratic seats, in contrast, report incomes above the national average.

In the recent midterm elections, this trend continued with a vengeance. In the East, where Democrats picked up the overwhelming majority of their new seats, 57% of voters in households with incomes above $100,000 and 67% of those with post-graduate degrees favored Democratic House candidates. This decisive advantage among the most “privileged” one-quarter of the electorate helps to explain Democratic gains in affluent enclaves outside New York City, Denver, Boston, Philadelphia, Palm Beach and the razor-thin victories experienced by Republicans who represent high-income suburban districts such as Representatives Chris Shays (Conn.) and Jim Gerlach (Pa.).

Little wonder, then, that the new Democratic majorities on Capitol Hill have moved reform of the Alternative Minimum Tax (AMT)—dubbed the “Blue State Tax” because it hits precisely these taxpayers in the so-called Blue States the hardest—to the top of their legislative agenda.

The AMT is a nefarious tax enacted in 1969 to prevent a small number of wealthy taxpayers from using legitimate deductions and credits to avoid paying taxes altogether. But it was never indexed to inflation. Since then, the AMT’s reach has expanded relentlessly. This year it is expected to pick $24 billion from the pockets of 3.5 million upper- and middle-income taxpayers, a far cry from the 155 super-rich taxpayers it originally caught in its net. Next year, an astonishing 23.5 million taxpayers will feel the bite. It’s set to move inexorably upward to 30 million in 2010, 40 million in 2013, and 50 million by 2016.

Blue State Democrats face the greatest pressure to keep the AMT at its current level. Next year, for example, more than 1 million additional taxpayers in New York, the home of the incoming chairman of the House Ways and Means Committee, Democratic Rep. Charles Rangel, will suddenly face AMT liability. In California, AMT rolls will bulge by an additional 1.7 million, in New Jersey by three-quarters of a million, in Massachusetts by more than half a million. And so on.

The budgetary consequences of any year-to-year “patch” are daunting. Federal budget law presumes that the explosion in AMT payments will occur. Therefore, any changes that lessen that impact count as revenue “losses.” Maintaining the AMT at its current level thus creates an enormous budgetary headache for Democrats who have pledged to reinstitute the “pay-as-you-go” budget rule that requires tax cuts to be offset with either spending cuts or tax increases. According to the Joint Committee on Taxation, holding the number of AMT-affected taxpayers steady at 3.8 million next year would require Congress to enact some combination of tax increases or cuts to entitlement programs totaling about $50 billion.

The new Ways and Means chairman will soon discover that these tax increases will be politically painful. Even the immediate repeal of all the Bush tax cuts for the “very rich” (those in the top two income-tax brackets or who report income from capital gains or dividends) would generate only $40 billion. These and whatever other tax increases are required would constitute a new and unwelcome burden on those footing the bill, unlike the millions who are simply being granted a theoretical benefit—the privilege of never having to pay a tax they have never had to endure.

Those facing these tax hikes will quickly resent them. Those on whom the benefit is bestowed are unlikely to appreciate what Washington’s new majority has done “for” them. Their tax burden, after all, stays the same.

Bottom line: This will look, smell and feel like an enormous tax increase, one that could threaten the future of our current economic prosperity.