It’s no surprise that the bait and switch tactics of the newly Democratic controlled Congress have encumbered what has become one of the most important and divisive economic debates of the 110th Congress: the future of the Alternative Minimum Tax (AMT). This inaction is unacceptable and it is time to simply repeal the AMT, as I have proposed this Congress.
Despite bold but vague promises of reform, Congressional Democrats have failed to opt to protect middle class families from the AMT while using its revenue in their budget to prop up spending. Now, nine months deep into the Congress, this is the longest we have gone without even patching the AMT. Even more disturbing, with only 31 legislative days remaining on the calendar, Congress’s lack of action could leave the AMT to run wild and further creep into the pocketbooks of tens of millions more working families come April of next year.
Married with kids?
The AMT is coming to get you.
Living in a high-tax state?
April 15, 2008 is your doomsday.
For me, the AMT has always been like something out of science fiction, a monstrosity that never dies: returning year after year, bigger and more complex, haunting both taxpayers and policymakers alike. What was originally intended to prevent 155 wealthy taxpayers from dodging income tax obligations now looms over 25 million American families. The liberals are taking Halloween a little too seriously. Unfortunately, the trick is on the taxpayer.
The current problems with the system stem from the early 1990s when the Democratic controlled Congress jacked up the AMT rates without indexing them for inflation. In 1999, President Clinton kept the monster alive when he vetoed Republican backed legislation to abolish the AMT. (Had we phased-out the AMT when we had the chance, Washington would have spent $81.5 billion over a period of 10 years.) Eight years later, Republicans have tamed the beast through the enactment of annual patches. But of course, as the AMT monster grows, the price just keeps rising. A one year patch for 2008 will cost the federal budget $47 billion, for two years, $110 billion. That is real money, even in Washington. And by 2013 the cost of repealing the AMT will exceed the cost of repealing the regular income tax.
Although the House Democratic Leadership has claimed that they stand ready to reform or even repeal the AMT, protecting middle class Americans from onerous taxes is clearly not a part of their agenda. Touting a budget resolution that not only includes the second largest tax increase in American history, but fails to set aside a single dime to fix the AMT, the Democrats are laying the ground work to use the AMT as a locomotive to drive a much broader tax increase.
For years, the Democrats have promoted the strange argument that the AMT is falling on more families because of the tax cuts enacted in 2001 and 2003. As a result of reduced income tax rates relative to the AMT this argument contends, more taxpayers are subject to the AMT. Conversely, this logic maintains if income taxes are increased, less people would be subject to the AMT. It is an odd reform that raises taxes and abandons the facts: the AMT is growing so significantly because the tax brackets were never indexed for inflation. No American is worse off under recent tax relief and many taxpayers subject to the AMT pay less taxes overall than they otherwise would have as a result of that tax relief.
But beware, because if the Democrats have it their way, they will rob working families of the very incentives that have helped them to make ends meet. In repealing the 2001 and 2003 tax cuts, the Democrats will reduce the Child Tax Credit by half, increase the lowest tax bracket from 10 to 15 percent, restore the marriage penalty, and eliminate incentives for higher education like increased student loan interest deduction.
The bottom line is, whether it is rolling back tax cuts, hitting households with the good old millionaires’ tax, except this time for families earning just $200,000, dramatically increasing the top income rates to nearly 45 percent and expanding the bracket to more taxpayers, or a thinly veiled assault on all capital income under the banner of closing the carried interest loophole, the Democrats are effectively holding 23 million taxpayers hostage, leaving the payoff to be tax hikes.
As founder of the Congressional Zero AMT Caucus, I have been arguing for full repeal of the AMT. It will put an end to an era of trying to fix the unfixable and shield middle class Americans from what is clearly an ill-designed tax system. To those who question how the revenue will be replaced, there is no need. The AMT was never intended to generate this revenue and it is utter nonsense for Washington to even assume that we are entitled to it.
While past patches have kept the AMT’s growing reach at bay, Washington is going to have to wake up and put an end to this nearly 40 year-old nightmare. And, I believe that there is no better time than now.