Quick Fix for the Alternative Minimum Tax
May 5, 2004
Today, the House of Representatives is expected to pass the Republican-backed bill that will extend temporary relief from the alternative minimum tax through the end of 2005. The measure will hold the line on the number of families paying the tax, but a long-term fix will be needed.
The Alternative Minimum Tax (AMT) was first imposed by the Tax Reform Act of 1969, after the fact was publicized that 155 wealthy taxpayers had avoided paying any federal income taxes in 1967 because of legal tax avoidance techniques. In 1986, largely at the behest of Democrats, the AMT was broadened into the form it is now. Taxpayers calculate their taxes under the ordinary income tax and again under the AMT and pay whichever yields the higher tax.
Under the AMT, many deductions that are legal under the ordinary income tax are disallowed. One of the most important is the deduction for state and local taxes. As a consequence, the AMT tends to heavily hit people who live in high tax states like New York. Indeed, some analysts have taken to calling the AMT the "Blue-State Tax," since most of the states hit hardest by the AMT are those where the Democratic Party is strongest -- that is, those that voted for Al Gore in 2000.
The real problem with the AMT is that its income thresholds are not indexed to inflation or real income growth. Thus, many of those who were considered rich in 1986 are simply middle class today. By 2013, according to the Treasury Department, the AMT will raise more revenue than the regular income tax.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, "Meant for the Rich, this Tax Will Soon Gouge Middle Class," Washington Times, May 5, 2004.
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