Congress held hearings last week on a grab-bag of tax topics, including carried interest, the effect of the Bush administration tax cuts, and the rapidly expanding reach of the alternative minimum tax, but neither of the other two issues is the ticking time bomb that the AMT presents.
With the tax set to expand its grip from 4 million taxpayers this year to 23 million next year unless Congress acts, Congress has only a few months to make changes in or repeal the AMT before next tax season starts. So far, Congress has employed a patchwork approach in trying to keep the AMT from applying to this many taxpayers. But the patchwork approach is only keeping at bay the threat and leaving taxpayers worried that in the coming year they might be the ones who end up ensnared by the tax.
Outright repeal of the AMT would force the government to fall back on other tax-raising strategies to make up for the lost revenue. In his testimony before the House Ways and Means Committee, Leonard Burman, director of the Tax Policy Center at the Urban Institute, suggested broadening the tax base, such as by eliminating the deductibility of state and local taxes. Other solutions that have been suggested include eliminating the Bush tax cuts, and raising taxes on managers of private equity firms and hedge funds, even raising overall tax rates. But all of those solutions face political obstacles. Nobody in either party wants to be blamed for raising taxes.
If the AMT were simply repealed without any offsets made, though, Burman points out that would reduce tax revenues by over $800 billion by 2017. If the Bush tax cuts were extended, the revenue loss would amount to nearly $1.6 trillion.
Clearly something needs to be done about the AMT to keep it from gobbling up the incomes of more and more taxpayers. But Congress will face challenges in getting constituents to go along with any of the solutions. In the end, it's likely that Congress will just go with a patchwork fix and pass the problem along to next year.
