AMT reform from Dem Congress?

With Democrats scheduled to take charge of both Houses of Congress in 2007, most of the Bush administration's top tax priorities figure to be shuttled to the legislative back burner for the next two years.But there is at least one island of common ground that has both sides of the aisle and the accounting profession clinging to hope that the next Congress may finally find the political will to resolve a looming nightmare for many Americans - the alternative minimum tax.

Sen. Max Baucus of Montana, the Democrat in line to replace Iowa Republican Charles Grassley as chair of the Senate Finance Committee, has long championed efforts to provide permanent relief from the AMT, and now other top Democrats are joining the bandwagon.

House Majority Leader-elect Rep. Steny Hoyer, D-Md., called fixing the AMT "a priority of tax policy" for the Democrats in 2007, and Rep. Charles Rangel, D-N.Y., called the issue a must for the next Congress.

Rangel, who is slated to replace Rep. Bill Thomas R-Calif., as chairman of the powerful House Ways and Means Committee, has vowed to put action on the AMT at the top of the panel's "to do" list.

The AMT was initially introduced by the Tax Reform Act of 1969, and became effective one year later. It was originally designed to target very high incomes, which were subject to many exemptions under the mainstream tax code of the time.

However, the tax did not change with inflation, and over the years began to affect a wider number of taxpayers.

Congress has taken to patching the AMT one year at a time, usually by increasing the exemption amount. According to the Joint Committee on Taxation, next year the patch will cost about $50 billion and hold the number of affected taxpayers at close to the 4 million taxpayers affected this year. Without a patch, about 23 million households would be affected by the AMT next year.

Behind the Democrats' growing interest in addressing the AMT is the recognition by party leaders that unless lawmakers take action before 2008, the cost of fixing the problem could become prohibitive.

A recent analysis by the Tax Policy Center - a joint venture of the Brookings Institution and the Urban Institute - concluded that unless the issue is resolved before the next presidential election, it will cost more to repeal the AMT than to abolish the federal income tax itself.

Politics is also playing a role in focusing Democratic attention on the AMT.

The largest proportion of American families in line to be slapped with the AMT over the next two years are in Democratic strongholds such as California and the high-income, high-tax "red states" of the Northeastern U.S.

For their part, administration officials insist that AMT relief continues to be a top reform priority for them, as well - a sign that the two camps may well be able to hammer out a deal that will correct the problem.

Other elements of the president's legislative game plan for taxes face a much bleaker future with the Democrats in control. Although Baucus, Rangel and House Speaker-elect Nancy Pelosi, D-Calif., have shown little appetite for efforts to repeal the Bush tax cuts of 2001 and 2003 before the next presidential election, the current administration's hopes for making those reductions permanent appear to have evaporated.

Although federal estate tax reform and other provisions of the Bush tax cuts are scheduled to sunset in 2010, Rangel said that he has no interest in revisiting that legislation.

Calling proposals to make permanent the expiring tax provisions "green bananas," he said that it makes no sense now to set tax policy for 2010 without knowing what the economic climate will be in that year.

The Bush administration's on-again, off-again plans for fundamental income tax reform are also likely to be shelved by congressional Democrats, and President Bush's proposal for using private accounts to reform the Social Security system is now dead in the water, according to Rangel.

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