WASHINGTON - Lawmakers have been building temporary dams to hold back the alternative minimum tax. Now, a bipartisan group of senators wants to eliminate the levy, originally aimed at wealthy tax dodgers, before it rushes into the middle class.
Four senators - two Republicans and two Democrats, including the leaders of the Senate Finance Committee - hope to force serious discussion about altering or abolishing the levy by introducing a $611 billion bill to repeal it.
"We're saying, in our bill, is that this ought to be at the top of the list in terms of tax reform," said Sen. Ron Wyden, D-Ore.
He is joined by Sens. Charles Grassley, R-Iowa; Max Baucus, D-Mont.; and Jon Kyl, R-Ariz. Grassley chairs the Finance Committee, and Baucus is the panel's top Democrat. They begin examining the tax at a hearing Monday.
Congress invented the alternative minimum tax, or AMT, in 1969 after discovering that 155 wealthy individuals had paid not a penny in taxes. At the time, lawmakers estimated the tax would affect one in 500,000 taxpayers.
The problem with the AMT now is its spread into places that lawmakers never expected, affecting taxpayers with many children or taxpayers who live in states with high income and property taxes. The growth of incentive stock options subjected another unexpected category of taxpayers to its clutches.
"The alternative minimum tax isn't so alternative any more. It's become mainstream," Grassley said.
The AMT forces some taxpayers to calculate their taxes twice, once under the regular tax system and then the alternative, and pay the higher amount. The tax penalizes those who pay it with higher rates and fewer tax breaks.
"This is clearly wrong and an 'alternative' tax that no one in their right mind would devise," Baucus said. Wyden called it a "tax dragnet" that is trapping more middle-class people every year.
Congress has responded to the extending reach of the AMT each of the past few years by enacting temporary measures to stave off its attack on middle-income families. In 2005, about 3.6 million individuals and families can expect to pay the alternative minimum tax. With no action, that will grow to 29 million in 2010, according to the Joint Committee on Taxation.
Keeping the temporary fix in place is an expensive solution, estimated to cost $385 billion if lawmakers keep it up for the next decade.
That's almost 60 percent of the cost of repealing the tax entirely. The Joint Committee on Taxation estimates that the bill introduced by the four senators, which would repeal the tax at the end of the decade, would cost $611 billion over 10 years.
An analysis by the Congressional Budget Office last year said lawmakers could instead try to free many families from the AMT's grip by eliminating some of its unintended consequences. Congress did not mean for families to pay more tax because they had more children or paid higher state income and property taxes.
About one-fifth of taxpayers could be freed from the AMT in 2010 if children were treated the same under the regular tax system and the minimum tax. About one-third could be dropped if state and local taxes paid on income and property were similarly changed.
Combining those two options could eliminate 18 million taxpayers from the AMT in 2010 at a cost of $440 billion over a decade, the budget office estimated.
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