Alternative Minimum Tax Reform Easy Fix in Next Congress

Conventional wisdom in Washington that Republicans like smaller government and cutting taxes while Democrats love to hike taxes and spend, spend, spend was turned on its head this year as Democrats won both chambers of Congress in part on the pledge to limit tax increases to only the richest Americans.

But now that Democrats are in the driver's seat in the 110th Congress, Party leaders have to make some serious decisions about how to fulfill that promise and others, including cutting taxes for students and middle income earners, closing loopholes for widely detested big corporations and making sure enough revenue is left to pay for all the government programs.

"Rhetoric is one thing, action is another," Matthew Beck, spokesman for Rep. Charles Rangel, D-N.Y., who will head the tax policy-writing House Ways and Means Committee, said of GOP attempts to warn against a purse-string holding Democratic majority. "The campaign is behind us. We need to work together. We need to focus on the here and now."

Editor's Note: This is the fifth in a multi-part series on legislative and ethics priorities for Democrats when they take over the congressional majority in January 2007.

Rangel has assured voters that no radical tax hikes are in the making and the 2001 and 2003 tax cuts, which aren't set to expire until 2010 anyway, are not on the chopping block. He has said, however, that everything is on the table when it comes to evaluating the logic and soundness of the U.S. tax code.

Already called into question is the alternative minimum tax, or AMT, which was designed 35 years ago to make sure wealthy people could not use loopholes to avoid paying taxes. Since then, the AMT, which was not indexed to keep up with inflation, has bumped up against the incomes of about 20 million American taxpayers and the number affected by the tax is growing each year.

"AMT is certainly a priority," said Beck. "If we don't do anything next year it will hit 23 million families."

While lawmakers on both sides of the aisle agree that the AMT is unfair to middle income wage earners, the big price tag -- an estimated $1.3 trillion in lost revenues over the next 10 years -- has made the issue of tossing the tax more complicated. So far, Congress has responded by doing annual fixes -- extending exemption levels to reduce the number of people who have to pay AMT. The latest exemptions are set to expire at the end of the current tax year.

"The [Bush] administration and Congress have taken the patch approach, kick the can down the road approach," said Beck. "Let's solve this thing. It's all in our best interest to solve this."

"The tax has outlived its usefulness," Sen. Charles Grassley, R-Iowa, has said about the AMT. "It's ridiculous to rely on revenue that was never supposed to be collected in the first place."

Grassley, the outgoing Senate Finance Committee chairman, joined Democratic Sens. Max Baucus of Montana, the incoming panel chairman, and Ron Wyden of Oregon in introducing a bill in 2005 to repeal the AMT for good. It was unsuccessful.

Some say the loss in revenue from the AMT will be a hard pill to swallow for Democrats, particularly since costly agenda items remain on their wish list and the party has embraced the "pay-go" rule prohibiting any budget increases unless the government can pay for it without deficit spending.

If Democrats are serious about doing away with AMT, they might want to put some of their more ambitious goals on the back burner and concentrate on this, said Mike Franc, congressional expert with the Heritage Foundation.

"Politically, the Democrats cannot let [AMT] get out of control," said Mike Franc, congressional expert with the Heritage Foundation. "It is mostly an exclusively blue state tax. Like it or not, this has the potential to crowd out the rest of the agenda."

One Democratic aide who did not want to be named, said Democrats are determined to reform the AMT as an early priority.

"It will be expensive, yes, but we will work to find ways to blunt the cost and be fiscally responsible about it," the aide said. "Democrats will provide the tax relief Americans deserve in a fiscally responsible way."

Other Tax Priorities

Also on the agenda, spelled out in the House Democrats' New Direction for America platform, is an increase in tax credits for college tuition to up $3,000 a year per student.

"Where I expect the Democrats will start will be the type of low-hanging fruit where they can actually get the support from the Republicans and the president," said Jason Furman, a tax expert with the Center on Budget and Policy Priorities.

But already those options were limited after a lame duck Congress, in its final act before adjourning earlier this month, agreed to extend expired tax cuts worth $38 billion over five years. That included research and development tax credits for businesses, sales tax deductions for people in states without income taxes, the tax deduction on college tuition, a tax credit for hiring welfare recipients and others facing difficulties finding jobs and tax credits for alternative energy producers and purchases of solar energy equipment by homeowners and businesses.

Rangel's office said he also plans to pursue tax code reform, a big topic on Capitol Hill since President George W. Bush's tax reform advisory panel submitted proposals over a year ago on how to get the job done. They included recommendations ranging from eliminating the AMT to reducing the marriage penalty and investment taxes and simplifying tax filing and tax brackets.

Lawmakers are also talking about finding ways to collect the billions of estimated unpaid taxes.

"There is an outside chance" for tax code reform, said Pete Sepp, spokesman for the National Taxpayers Union, noting that Wyden has reached out to conservative organizations like NTU to engage in a "Cleanse the Code" project in order to jumpstart simplification efforts.

"This is the first time that has ever happened," he noted.

"Both sides need to explore whether it will be possible to do a bipartisan tax reform," added Furman. "I think the tax reform commission last year had a lot of great ideas, and a lot of problems too."

He and others said that real reform would raise revenues and provide a legitimate way to get rid of unfair taxes like the AMT.

"I think the best way to solve it is with reform," he said, putting the odds it would happen in this Congress as "unlikely."

Beck said while reform is "going to take awhile," they plan to get started.

"We want to rebuild the trust," he said. "We're looking to be more inclusive and that involves talking to our ranking members and members from both sides, talking about what they want to get it done."