Democrats eye alternative minimum tax

WASHINGTON – Democratic leaders in Congress are vowing to make the alternative minimum tax a centerpiece of next year’s budget debate, saying the levy threatens to unfairly increase tax bills for millions of middle-class families by the end of the decade.

The exceedingly complex and expensive tax was designed to prevent the super-rich from using deductions, credits and other shelters to avoid paying the Internal Revenue Service. But because of rising incomes, the tax is expected to expand to more than 30 million taxpayers in 2010 from 3.8 million mostly well-off households in 2006.

Fixing the AMT has long been a top priority for Sen. Max Baucus, D-Mont., who is in line to head the Senate Finance Committee. Last year, Baucus co-authored a bill to repeal the tax with Senate Finance Chairman Charles Grassley, R-Iowa.

Rep. Charles Rangel, D-N.Y., the presumptive chairman of the tax-writing House Ways and Means Committee, last week put fixing the AMT at the top of his agenda, calling it far more urgent than dealing with President Bush’s request to extend the 2001 and 2003 tax cuts, which are scheduled to expire in 2010.

On Friday, House Democratic Whip Steny Hoyer, D-Md., who is campaigning to hold on to his leadership post, said Democrats will make “fixing the AMT … a priority of tax policy next year.”

The focus on the AMT is hardly surprising, given that victims of the tax have been concentrated in high-cost urban areas such as Washington, New York and San Francisco – places that tend to vote Democratic. Rangel, Hoyer and Nancy Pelosi, D-Calif., the presumptive House speaker, all represent states hit hard by the AMT, which is sometimes called the “blue-state tax.” To map states with the highest concentrations of AMT taxpayers is to draw bull’s-eyes over California and the Northeastern seaboard.

These taxpayers would owe the IRS $6,813 in additional taxes on average, according to an analysis by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution.

“Seventy percent of my friends are on the AMT. We’re the demographic,” said the center’s co-director, Leonard Burman, a senior fellow at the Urban Institute who lives in Arlington, Va., and, like many interviewed for this story, has been hit by the AMT. “If you have children, if you pay high state and local income taxes, you’re going to be subject to the AMT. That’s the professional class in the Washington and New York suburbs, and Los Angeles and San Francisco. You can see it in the data.”

In simple terms, the AMT is sort of a flat tax with two brackets, 26 percent and 28 percent, and fewer deductions. Credits for dependents, medical expenses, and state and local taxes are all disallowed. Instead, taxpayers get a single big deduction, called the AMT exemption, which is set this year at $62,550 for married couples and $42,500 for singles. Taxpayers must compute their taxes both ways and pay whichever is higher.

The impact is harshest on taxpayers with annual incomes of $100,000 to $500,000. The truly rich typically are not affected because their regular tax rates already are higher than under the AMT.

This year, the AMT is expected to ensnare 3.8 million taxpayers. Next year, the AMT exemption is scheduled to drop precipitously, causing that number to balloon to 23 million households, according to the congressional Joint Committee on Taxation.

By 2010, “the AMT will become the de facto tax system for filers in the $200,000 to $500,000 income range, 94 percent of whom will face the tax,” according to a report by the Tax Policy Center. About half of tax filers making $75,000 to $100,000 will have to pay the tax, including 89 percent of married couples in that income bracket who have at least two children.

In the past, Congress has patched the AMT one year at a time, primarily by increasing the exemption amount. Next year, to hold the number of affected taxpayers steady at about 4 million, the patch would cost about $50 billion, according to the Joint Committee on Taxation.

Getting rid of the tax altogether would be even more expensive: more than $1 trillion over the next decade, by various estimates. Budget experts doubt Democrats can do it without reneging on their promise to reduce the budget deficit or winning an agreement from Republicans to raise taxes elsewhere.

White House spokesman Tony Fratto said last week that fixing the AMT is “absolutely a priority” for the president. But for now, Fratto said, “The Democrats have an opportunity to put their ideas on the table.”

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