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Old Tax Places New Burdens on Politicians, Taxpayers

April 14, 2006 at 12:00 AM EST
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JUDY WOODRUFF, NewsHour Special Correspondent: It was first created in the late 1960s to make sure that a few hundred of the wealthiest citizens paid their share of taxes. But 3 1/2 decades later, the Alternative Minimum Tax is now hitting millions of Americans.

The Alternative Minimum Tax, or AMT for short, is a tax code that runs parallel to regular income tax. It offers fewer deductions and just two tax rates: 26 and 28 percent. Taxpayers who are subject to it have to calculate their regular income tax, compare that to the AMT, and pay whichever amount is larger.

More than 3.5 million Americans are expected to pay the alternative tax this year, and the number is growing rapidly. The Congressional Budget Office predicts that, by 2010, one in five taxpayers could be hit by it, including most married couples with incomes over $100,000.

To help us understand the AMT and the problem it’s created, I’m joined by Heather Bennett. She’s an editor at Tax Notes; it’s a publication put out by the nonpartisan organization Tax Analysts.

And Len Burman, he’s a senior fellow at the Urban Institute and the co-director of the Tax Policy Center.

Len Burman, to you first. This started out as what was thought of as a good thing.

LEN BURMAN, CO-Director, Tax Policy Center: Well, it was a patch on the income tax. The treasury secretary, Joseph Barr, reported that 155 high-income taxpayers hadn’t paid any tax in 1967, and he could have explained to the American public that they were doing it because of provisions that Congress had put in place, but that would have been a hard sell.

Congress could have decided to get rid of all of those loopholes, but then they would have upset those 155 high-income taxpayers. And they chose a third path, which was to patch the income tax, add on this alternative tax so that they didn’t get embarrassed when people took too much advantage of the special preferences that Congress had created.

JUDY WOODRUFF: So, Heather Bennett, it really started out as kind of a dragnet, if you will, to catch the richest taxpayers who might be avoiding paying taxes, but it’s turned into something else.

HEATHER BENNETT, Editor, Tax Analysts: Right, I think it’s become quite a problem, and most Americans don’t even understand that they might be subjected to it. You know, taxpayers have three days to file their returns. And I think a lot of them will be realizing over the weekend that, “Hey, whoa, I’m subject to this. I didn’t even know it existed.”

JUDY WOODRUFF: So how different is it, Heather Bennett, from what it originally started? I mean, what has made it what some people say an onerous thing for taxpayers to deal with?

HEATHER BENNETT: Well, it hasn’t been indexed for inflation. So what was once considered a wealthy taxpayer, a wealthy American, is no longer the case. More and more middle-income Americans are subject to the tax. And I’d say even on the lower end of that middle-income scale are subject to the tax.

JUDY WOODRUFF: So, Len Burman, what are some examples of the different way that this tax is applied than the regular income tax?

LEN BURMAN: Well, to start with, you can’t take your personal exemption. So this tax really hits big families. All of those deductions you get for your kids, you can’t get them on the AMT, so families with children are much more likely to be subject to the AMT than others.

You can’t deduct your state and local taxes. If you live in a tax with high state income taxes or if your property values have grown a lot, as they have in Washington and New York areas, those property taxes aren’t deductible either. So those are two of the biggest items that will push people onto the AMT.

JUDY WOODRUFF: And these are things that were added later, so it was done intentionally, obviously.

LEN BURMAN: Yes, it’s not clear how much of it was intentional. I mean, this is just sort of bad design. There’s somebody — maybe it was Bill Archer who once said that it would be nice if the tax system looked like it was designed on purpose. No one would design anything that looked like the AMT. I mean, you have to go through your whole tax calculations, and then you have to do it all again with a different set of rules. It makes no sense.

JUDY WOODRUFF: Bill Archer being a Republican congressman.

Heather Bennett, what would happen if — I mean, there is some talk about changing it, repealing it.

HEATHER BENNETT: Yes.

JUDY WOODRUFF: How would that work? And how much would it cost? I mean, how much money are we talking about?

HEATHER BENNETT: There has been talk of reform of the AMT and of outright repeal. Both would cost a tremendous amount of money, especially the repeal. I think there have been some estimates that say it would cost as much as $1.2 trillion over the next 10 years, and that’s probably on the high end, but that’s a pretty good guesstimate.

It’s political suicide, though, either way. Where are we going to pay for it? How are lawmakers going to figure out where they’re going to come up with this additional revenue if they repeal the AMT, because it does bring in a lot of money for the government?

JUDY WOODRUFF: And just to be clear, Len Burman, President Bush we know has pushed through income tax cuts. He has asked that those be extended. Does that have any bearing on this Alternative Minimum Tax?

LEN BURMAN: Actually, after 2010, it about doubles the cost of fixing the problem. The problem is that you calculate your tax under the regular tax rules and under the AMT rules and you pay whichever one’s higher. He cut the regular income tax rates, but he didn’t do anything about the AMT, except for this temporary fix, which expired last year.

That basically doubles the number of people on the AMT. In 2015, there will be something like 45 million American families on the AMT, if the tax cuts are extended, fewer than half that — less than half that number if the tax cuts expire.

JUDY WOODRUFF: And we are now, you know, this is tax weekend for those people who haven’t finished their returns. Is this typically something that people can figure out on their own or do they have to get help getting this done?

HEATHER BENNETT: I think most people do need help, and they get that help, but it’s still quite a surprise once you get to the end of that process, and you realize that you owe this AMT that you’ve never heard of before. And then I think people who do it the old-fashioned way, who go to the library and get a hard copy of a return, they may not even realize that they have to calculate this separate tax.

And then the IRS may come knocking on the door a few months from now, or even a year from now, saying, “Hey, you really owed the AMT.” So it’s quite confusing, and it’s a surprise for most taxpayers.

JUDY WOODRUFF: Having said all that, the United States Treasury, Len Burman, the United States government, Uncle Sam counts on this money, isn’t that right?

LEN BURMAN: Absolutely. When the president says he’s going to cut the deficit in half in five years, he’s making a number of, I think, unrealistic assumptions. One is that the AMT is going to be hitting 30 million taxpayers by the year 2010. We’re counting on that revenue, and it’s unrealistic.

This year, there will be 19 million households on the AMT, unless Congress does something. And my guess is that, in an election year, they’re going to do something.

JUDY WOODRUFF: And so what would the something be? I mean, what are the realistic choices here?

HEATHER BENNETT: I think it will be another one-year patch. They’ll extend the fix for one more year, but that’s just kicking the can down the road, which is what’s been happening since the late ’60s, so…

LEN BURMAN: My guess is that the AMT isn’t going to be fixed for good until we deal with fundamental tax reform. The president’s tax reform panel actually proposed eliminating the AMT and a number of other changes to pay for it. It was immensely unpopular, but at some point the country is going to have to realize that there are a number of ways in which our tax system just isn’t working and we need to fix it.

And even if some people are paying higher taxes in the short run, it would make sense to have a tax system that people could understand and perceive to be fair.

JUDY WOODRUFF: One of the articles I was reading this afternoon said that some people believe that the Alternative Minimum Tax system, in a way, when you compare it with the regular income tax system, is better, is more fair, despite everything we’re saying here.

HEATHER BENNETT: Well, it doesn’t allow some deductions, which does make it simpler. I don’t know that it makes it any more fair, though. I think Len would agree.

LEN BURMAN: It’s actually got humongous marriage penalties. The brackets for the AMT are exactly the same if you’re married as if you’re single. So a lot of higher income married couples, in particular, are hit by the AMT and pay much more tax than they would if they were two single people. Something like 20 times — by 2010, there will be 20 times as many married couples on the AMT as singles.

It’s not indexed for inflation, which means that every year you get an automatic tax increase, and it’s not even a particularly flat-rate tax system, because of hidden taxes built into it.

JUDY WOODRUFF: So, finally, who is in favor of it?

LEN BURMAN: Somebody once said to me that he liked the AMT because it made people hate the income tax. Only the Machiavellian tax-haters who would favor this.

HEATHER BENNETT: And some people say that the Republicans secretly like the AMT because, you know, it hides the fact that the regular income tax cuts that we all thought we were getting in 2001 and 2003, we’re not really getting because of the AMT. So it keeps revenue higher, even though people think that they’re paying lower taxes.

JUDY WOODRUFF: The Treasury Department knows this.

LEN BURMAN: And actually it has been called a blue-state tax. Only that’s going to change; everybody is going to be subject to it pretty soon.

JUDY WOODRUFF: You mean higher on the blue states, is that what you mean?

LEN BURMAN: Yes, yes.

JUDY WOODRUFF: Well, this is the weekend to talk about it, because by Monday everybody has to have those taxes in.

HEATHER BENNETT: Yes.

JUDY WOODRUFF: Heather Bennett, she’s editor-in-chief of Tax Notes, and Len Burman with the Urban Institute, thank you, both.

HEATHER BENNETT: Thank you.

LEN BURMAN: Thank you.