April 23, 2007 in Nation/World

Democrats want to alter alternative minimum tax

Lori Montgomery Washington Post

At a glance

The alternative minimum tax is a flat tax with two brackets, 26 percent and 28 percent, and virtually no deductions. Taxpayers must compute their returns under the regular tax rules with regular deductions, then do it again under the AMT and pay whichever amount is higher. Its impact is harshest on taxpayers who are married, have children and live in high-tax jurisdictions.

WASHINGTON – House Democrats, aiming to seize taxes from Republicans as a political issue, have come up with a plan to shift the burden of the hated alternative minimum tax onto the shoulders of the nation’s richest households.

The proposal, though still in its preliminary stages, would attempt to restore the original purpose of the parallel tax structure, which was created in 1969 to nab 155 super-rich tax filers who were using loopholes and deductions to wipe out their tax bills.

Because it was not indexed for inflation, the AMT this year delivered a significant tax increase to an estimated 3 percent of households. Unless the law is changed, it is projected to strike nearly 20 percent of taxpayers when they file returns next spring, some earning as little as $50,000 a year.

House Democrats are trying to craft legislation that would spare those families while providing relief to many current AMT payers. Under a proposal presented last week to Democrats on the tax-writing Ways and Means Committee, families making less than $250,000 a year – about 98 percent of taxpayers – would be exempt from the tax. Those earning $250,000 to about $500,000 would see lower AMT bills, according to Democratic sources.

To make up the lost revenue, families earning more than $500,000 a year would take a much harder hit from the AMT, as well as other adjustments to the tax code, the sources said. Democrats haven’t finalized that part of the proposal. But an analysis by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, suggests the nation’s wealthiest families – less than 1 percent of all taxpayers – would have to pay 5 to 13 percent more to offset the revenue lost by exempting the middle class from the AMT, with families who make more than $1 million paying an extra $52,000, on average, each year.

The final package could contain smaller measures, such as raising the standard deduction for married couples, to spread tax relief to 90 million families. That, Democrats said, would establish their credentials as tax-cutters while strongly contrasting with the Republican Party, whose tax cuts since 2001 have disproportionately benefited the wealthy and added billions of dollars to the federal debt.

“A huge number of families will receive tax relief as the result of this. It’s something like 87 million to 1 million,” said Maryland Rep. Chris Van Hollen, who chairs the campaign committee charged with electing House Democrats. “It is a great message of fiscal responsibility and economic fairness.”

Republicans, who also advocate repealing or substantially rewriting the AMT, dismiss Democratic ideas for reform as “class warfare.” Wisconsin Rep. Paul Ryan, senior Republican on the House Budget Committee, said raising taxes for the wealthiest Americans would punish small-business owners. He dubbed the idea a “job killer.”

Republicans also question the potency of the tax as a political issue, given that most of the people Democrats hope to rescue have yet to feel its bite.

Louisiana Rep. Jim McCrery, the senior Republican on the House Ways and Means Committee, said the Democratic proposal would avoid a tax increase for some, but those people “won’t see any more money in their pockets.” Meanwhile, “the people who get the tax increase certainly would feel that,” McCrery said. “So their proposal could be characterized as a tax increase, and a big one.”

For years, Congress has blunted the impact of the AMT by enacting laws that provide temporary inflation adjustments. The tax has nonetheless grown to ensnare millions of people for whom it was never intended. The most recent of those “patches” expired in December and, unless Congress acts, the number of people hit by the AMT is poised to explode.

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