Can you spot the stealth tax hike?

If Congress misses another tax deadline, 27 million taxpayers face an unsuspected tax hike.

By , Guest blogger

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    In this screenshot from Stephen Spielberg's thriller, 'Jaws,' Roy Scheider and Richard Dreyfuss stare out into the sea, searching for the killer shark. Lurking below the murky waters of legislative misbehavior, another threat awaits: an Alternative Minimum Tax that could affect 27 million taxpayers, unless Congress votes for another patch.
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The alternative minimum tax, America’s favorite stealth levy, threatens to hit 27 million taxpayers this year if Congress doesn’t patch it once again. Given legislators’ apparent determination to defer any action on tax issues until after the election, an AMT fix will likely come late in the year, if at all.

A quick review of history: when Congress passed the 2001 tax cuts, it increased the AMT exemption only through 2004, mostly to avoid the huge revenue loss a 10-year patch would have caused. Since then, Congress has enacted annual patches to protect unsuspecting taxpayers from the levy. And, despite rhetorical battles over whether Congress should “pay for” the patches with offsetting spending cuts or tax increases, lawmakers never approved any offsets. Nevertheless, Congress extended the “temporary” AMT fix each year, apparently more comfortable forgoing revenue in annual $70 billion bites rather than incurring a one-time charge many times larger.

Three years ago a dawdling Congress waited almost until Christmas before boosting the AMT exemption enough to spare more than 20 million Americans from the extra tax. That 11th-hour action forced the IRS to delay processing returns for as many as 13 million affected taxpayers while programmers implemented and tested the new parameters. It wasn’t until February 15 that the IRS said that taxpayers could “… now file tax returns that include … the Alternative Minimum Tax (AMT).”

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The most recent AMT fix expired at the end of last year. As a result, 27 million taxpayers will owe the tax for 2010 unless Congress acts. But Congress once again seems paralyzed, driven this time by disagreement over how to handle the impending expiration of most of the 2001-2003 tax cuts. The result: a potential reprise of the 2007 mess. As long as Congress eventually approves the patch, few taxpayers will even notice the delay. But that’s no way to run a railroad—or a government.

The AMT is only one symptom of our dysfunctional approach to tax policy. We’ve been living with the temporary Bush-era income tax cuts for nearly a decade and no one yet knows their fate at the end of this year. Our ever-changing estate tax keeps (very wealthy) people awake nights while providing job security for estate planners.

Lawmakers can—and probably should—disagree about what tax policy America should pursue. But loading the tax code with temporary provisions and then leaving taxpayers and the IRS hanging while politicians squabble over what to do about them is the worst sort of legislative misbehavior.

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