Alternative Minimum Tax patch in works
Posted on Wednesday, June 25, 2008
WASHINGTON — If left unchecked, the creeping Alternative Minimum Tax, which was originally designed to make sure the ultra-rich paid their fair share, would apply to millions more taxpayers this year. Today, the House is likely to pass a temporary change in the tax to shield middle-class taxpayers from its reach.
Rather than do away with the tax for good, Congress is poised to pass a one-year “patch,” in what has become a regular ritual on Capitol Hill.
There was the Economic Growth and Tax Reconciliation Act of 2001. Then came the Jobs and Growth Tax Relief Reconciliation Act of 2003. Then the Working Families Tax Relief Act of 2004. Each of these laws, and extensions passed in 2006 and 2007, increased the amount of taxpayers’ income exempt from the tax.
Congress completed its work on the tax patch late in the session in 2007, sending a bill to President Bush in December.
This year, with members wanting to return to their districts to campaign before the November elections without the distraction of a tax debate, politics will compel quick action, predicts J. D. Foster, senior fellow at the Heritage Foundation, a conservative research and advocacy group in Washington.
Congress will “follow a welltrod path,” he said, with the House passing a bill that includes tax increases to offset the loss in revenue from changes in the tax. The Senate will take out the increases, and “the House will cave,” Foster said, describing the rough outline of what happened last year.
The Alternative Minimum Tax, introduced in 1970, was created with the goal of preventing taxpayers from reducing their income-tax liability by piling up exemptions and deductions. It set an alternative rate and didn’t allow for deductions such as interest on a second mortgage, state and local taxes, tax-preparation fees and the standard deduction most taxpayers use.
It exempted an individual’s first $ 33, 750 from the tax. For married couples, the first $ 45, 000 is shielded. Income above that is taxed at either a 26 percent or 28 percent rate, depending on total income.
The problem is that the tax was never indexed to inflation, so each year, as incomes increase, more people have come under the levy.
The patch Congress passed last year raised the income exempt from the tax to $ 42, 500 for individuals and $ 62, 550 for joint filers. If it hadn’t, 23 million taxpayers, including 90, 000 Arkansans, would have been subject to the tax, according to the Library of Congress’ Congressional Research Service.
In 2007, 4. 2 million taxpayers were subject to the tax. If left alone, the tax’s reach could extend to 26 million taxpayers this year.
The Blue Dog Coalition, a group of House Democrats that bills itself as fiscally conservative, has successfully pressured House leaders to make sure the bill keeps within the contours of the chamber’s PAYGO, short for “pay-as-you-go” rule, which requires new expenditures or tax cuts to be offset by tax increases or spending cuts.
“We’ve got a commitment from our leadership that they’ll send it to the Senate paid for,” said Arkansas’ Rep. Mike Ross, a co-chairman of the group.
The largest proposed offset for the projected $ 62 billion decline in tax revenue would be treating “carried interest” as normal income. Hedge funds and private equity-fund managers now report carried interest as capital gains. The change would raise the tax rate on carried interest from 15 percent to 35 percent.
Rep. John Boozman, the sole Republican member of the Arkansas delegation, opposes the offset, warning that the economy is in a precarious position. “Now is not the time to be raising taxes,” he said.
Boozman called the carriedinterest provision a “job killer” and said it did not make sense to offset a one-year tax fix with what would be a 10-year tax increase.
He contends that there is no need to offset the $ 62 billion. That’s because Democratic budget writers, knowing that another patch would be passed, shouldn’t have included it in their fiscal plans.
“This is purely show,” he said.
Arkansas’ Rep. Marion Berry, another Blue Dog and a member of the House Budget Committee, disagrees. He said offsets were not passed when Republicans were in the majority, but “at some point we’re going to have to start paying for this stuff.” Still, Ross acknowledged that it is likely that the upper chamber will waive the budget rules requiring offsets.
“We’ve got to get more Blue Dogs in the U. S. Senate,” he said, blaming Republicans there for stripping out the tax increases last December.
Under pressure from Senate Republicans and Bush, who opposed offsets, Sen. Max Baucus of Montana, the Democratic chairman of the Senate Finance Committee, offered a substitute bill that wiped out the carriedinterest provision. Baucus’ measure was approved by a voice vote.
“PAYGO worked for small things, but it is proving to have absolutely no teeth in forcing people to make hard choices,” said Maya MacGuineas, president of the Committee for a Responsible Federal Government, a Washington group that advocates fiscal discipline.
There’s bipartisan agreement that the Alternative Minimum Tax is bad policy, said the Heritage Foundation’s Foster. But, he said, any permanent changes should be made in the context of a broader tax overhaul.
The natural starting point for that discussion, he said, will come closer to the expiration of the 2001 and 2003 tax cuts championed by Bush, beginning in 2010.
“We have a trigger to begin that debate,” he said. Until then, he said, “Congress is just going to keep kicking the can down the road.”
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