NCPA - National Center for Policy Analysis

OVERHAULING THE TAX CODE

August 3, 2005

If the President's tax reform commission makes an isolated recommendation to abolish the Alternative Minimum Tax (AMT), its report will be less comprehensive than previously thought, says Bruce Bartlett, a senior fellow with the National Center for Policy Analysis. After all, if the commission were to recommend, say, a flat tax system, there would be no need for a separate recommendation to abolish the AMT. It would be eliminated automatically.

Unfortunately, says Bartlett, the commission is under a mandate to makes its recommendations "revenue-neutral." This means that the package must raise the same revenue as currently projected by the current tax system -- no more, no less.

It is certain, therefore, that the vast bulk of the public attention will be on the revenue raisers, says Bartlett:

  • For example, people are already assuming that AMT repeal will be paid for by abolishing the deduction for state and local taxes.
  • Naturally, this has high-tax states like New York and California up in arms. In 1986, New York Gov. Mario Cuomo, a Democrat, virtually killed this idea single-handedly.
  • This time it could be California Governor Arnold Schwarzenegger, a Republican.

High tax states like the federal deduction because it lowers the net state tax burden. If one itemizes and is in the 33 percent federal tax bracket, this is like getting a one-third discount on your state and local taxes. Elimination of the deduction, therefore, would constitute a significant tax increase for many people even if they no longer have to pay the AMT, says Bartlett.

Source: Bruce Bartlett, "Overhauling the Tax Code," National Center for Policy Analysis, August 3, 2005.

 

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