WASHINGTON — Congressional members on both sides of the aisle are looking at using the alternative minimum tax debate to lead the way to a plan for tax simplification.
“The AMT could be the challenge that forces Congress to come around and pass a reformed tax code,” said Rep. Phil English, R-Pa., the ranking Republican member of the House Ways and Means subcommittee on select revenue measures, which is holding hearings on the AMT.
“With the AMT, there’s a way to do some cleanup and have a provision to simplify the code and keep people who are in the middle class out of harm’s way,” said Rep. John Larson, D-Conn., who also is a member of the subcommittee.
The AMT is a parallel tax system that was designed in 1969 to prevent a small number of wealthy Americans from avoiding paying taxes. But because it wasn’t indexed to inflation, the tax now hits millions of taxpayers, including many middle-income families.
In recent years, Congress has enacted a one-year fix, commonly referred to as a “patch,” that essentially keeps the number of AMT taxpayers down.
If President Bush’s proposed patch for 2007 isn’t enacted, the number of AMT taxpayers in Mr. Larson’s 600,000-person district in central Connecticut would jump to 83,000, from 12,000 today — making it the most affected district among those represented on Ways and Means, Mr. Larson said.
Eliminates loopholes
Although some advisers believe that the AMT should be repealed altogether, the prospects for tax simplification could be more important to them.
Certified financial planner Barry Korb is “delighted” that members of the committee are looking at the AMT as a way to move toward tax simplification, he said.
“What the AMT does is, it eliminates enormous numbers of deductions and loopholes,” said Mr. Korb, principal of Lighthouse Financial Planning LLC in Potomac, Md. “You could draft something so the AMT becomes the basis for a simplified tax system.”
In addition to tax simplification, Democrats are eyeing the expiration of the 2001 and 2003 tax cuts that are the centerpiece of the Bush administration’s economic policies to help pay for easing the burden of the AMT.
“It’s the tax cuts in 2001 through 2003 that supposedly provide for middle-income tax relief,” Mr. Larson said. “The administration knew full well that [the middle class] would lose those tax cuts with the alternative minimum tax.”
The tax cuts, which are popular with financial advisers, include reductions in the levies on capital gains and dividends.
“Our fear is some in the Democratic Party would like to use the AMT as a locomotive to drive a broader tax increase,” Mr. English said.
Republicans want to see the AMT repealed altogether, he said. A repeal would reduce tax revenue by about $1 trillion over the next decade, according to estimates.
The Ways and Means subcommittee began holding hearings on the AMT last month and is likely to hold more. Its chairman, Rep. Richard Neal, D-Mass., is expected to come out this year with legislation dealing with the AMT. The details of that legislation are unknown.
Although total repeal of the AMT would be difficult to enact given the costs, the basis for the tax is “bizarre,” said Drew Tignanelli, president of The Financial Consulate Inc. in Lutherville, Md.
The AMT system originally was enacted to prevent some 155 wealthy taxpayers from using tax deductions, such as real estate depreciation or oil- and gas-well depletion allow-ances, to escape paying income taxes. Today, without the annual “patches,” families of four that earn as little as $66,000 a year could be forced to pay the AMT, which prohibits such common deductions as those for state and local taxes.
“Why don’t they just get rid of the deductions if they don’t think it’s fair?” argued Mr. Tignanelli, who is a CFP and certified public accountant.
“The Democrats obviously are fighting very hard to keep the AMT from sinking into the middle class, or even the lower middle class, because that’s a natural constituency and they want to protect them,” said Milton Ezrati, partner and senior economic and market strategist for
Lord Abbett & Co. LLC, a Jersey City, N.J., mutual fund and money management company.
Although Democrats, who now control Congress, are concerned with easing the effect of the AMT on moderate-income Americans, both parties are reluctant to see most taxpayers fall under the AMT, which is more of a flat tax than the regular income tax system, he said.
“We’d all pay about 28%,” under the AMT, Mr. Ezrati added. “Congress doesn’t want that, because the way they influence behavior is through tax breaks. Effectively, they’d be giving up a great deal of their power, and we know they don’t want to do that.”
