With an estimated $2 trillion at stake, several proposals are taking shape to reform the Alternative Minimum Tax (AMT), but none has emerged so far from Congress’ tax-writing committees.
Tax-free bond investors are watching developments closely since interest earned on bonds known as “private activity bonds” is subject to the AMT.
The AMT was originally designed in 1969 after it was found that a few wealthy families were able to use legal tax breaks to avoid paying taxes altogether. The original law did not index for inflation, so the number of middle-income people subjected to the tax increased dramatically over time. More than 3 million people were subject to the AMT last year, while the number is expected to spike to over 23 million this year.
The major deterrent to reform so far has been the massive amount of revenue that would be lost if the AMT were abolished. The cost of repeal over 10 years has been estimated to be as much as $1.8 trillion. Democrats want the AMT reduction to fall under “pay as you go” rules, while Republicans do not.
‘Pay as you go’
Under “pay as you go” budget rules adopted by the new congressional Democratic majorities, new spending must be matched by either a newly identified revenue source or a spending decrease for some other program. Similarly, a revenue decrease would require a similarly sized spending decrease elsewhere in the budget. When “pay as you go” rules existed in the 1990s, they were credited with bringing the federal budget into balance.
Major business groups, such as the National Association of Manufacturers, U.S. Chamber of Commerce and the Business Roundtable, have been lobbying the Senate Finance Committee to not subject the AMT repeal to “pay as you go.” These groups worry that the House tax writers are seeking to raise business taxes to counter the AMT revenue loss. According to The Hill, a newspaper specializing in Congress, House Ways and Means Committee Chairman Charles Rangel (D-NY) is seeking to make any reform of the AMT “revenue neutral,” keeping the budget in balance.
An AMT alternative that is gaining attention was recently proposed by Len Burman and Greg Leiserson of the Tax Policy Center. They would repeal the AMT and replace it with an add-on tax of 4% of adjusted gross income (AGI) above $100,000 for singles and $200,000 for couples. They would index the add-on for inflation. They see the benefit of the add-on as achieving the original purpose of the AMT: ensuring that wealthy people pay at least a minimum tax.
Further, the authors estimate the tax to be revenue neutral over 10 years, although it would reduce revenues by $92 billion over the first five years, before increasing them over the next five. The Tax Policy Center is a joint venture of two highly respected Washington think tanks: The Urban Institute and The Brookings Institution.
The timing of a preliminary bill emerging from the House Ways and Means Committee could be as soon as July. Should agreement not be reached this year on this contentious issue, look for a stopgap measure to keep more Americans from falling under the AMT. One such measure was proposed this week by Sen. Charles Grassley (R-Iowa). Under Grassley’s proposal, taxpayers who weren’t subject to the AMT last year, but who would qualify this year, would be allowed to disregard it. If this or other temporary measures are approved, it is likely that major reform would wait past next year’s congressional elections.
