Time to rein in the alternative minimum tax

US lawmakers have differing ideas on how to reduce the effect this tax has on millions of Americans.

By David R. Francis | Columnist

from the June 11, 2007 edition

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Congress has a must-do tax task ahead of them this summer: It needs to fix, permanently or temporarily, the alternative minimum tax (AMT). Otherwise, millions more upper middle-class American households will get a financial shock when they calculate their taxes this winter. They will be subject for the first time to this oddball tax and could owe Uncle Sam thousands of dollars more than they expect.

In an election year, such a tax hit on important voters is a definite political "no-no."

So far, though, the House and Senate are divided on how to fix the AMT.

The Senate appears to be drifting toward a two-year "patch" – a bill similar to those in the past few years aimed at preventing the number of taxpayers subject to the AMT from growing. An estimated 4.2 million taxpayers were caught by the AMT on their 2006 taxes. Absent a change in law regarding 2007 taxes, the AMT would strike an additional 19 million households, some earning as little as $50,000 a year. By 2010, more than 30 million taxpayers would pay the AMT, and 39 million or more in 2017.

In the House, Democratic leaders are considering altering the AMT permanently in a way that leaves 97 percent of taxpayers alone and adds a 3 to 5 percent surcharge on adjusted gross income on the prosperous remaining half million.

In effect, the measure would modestly increase the progressiveness of the tax system, making the truly well-to-do pay more, possibly cutting taxes slightly for those with lower incomes. It would be a mildly populist measure that might even include ways to help the working poor and expand the child credit for poor families.

If the Senate and House don't agree on a joint AMT measure, their representatives could do battle in a congressional conference committee to resolve differences, perhaps in September.

"They get in a room, lock the door, scream and fight," predicts Stan Collender, a budget expert with the National Journal Group, in a half-joking way. "Or maybe gentle negotiations."

The legislation that emerges would land on the desk of President Bush. If it involves a tax hike for the relatively few rich and trims taxes for millions of middle-class voters, a presidential veto could be politically embarrassing.

"It's more of a political decision than anything else," says Mr. Collender.

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