Senate Finance Committee Pushes Alternative Minimum Tax Repeal

A bipartisan coalition of Senate Finance Committee members, including Chairman Charles Grassley (R-IA), Ranking Member Max Baucus (D-MT), Ron Wyden (D-OR) and Jon Kyl (R-AZ), introduced legislation last week to repeal the federal individual alternative minimum tax (AMT). The bipartisan "Individual Alternative Minimum Tax Repeal Act of 2005" would amend the Internal Revenue Code of 1986 to end the AMT beginning in the 2006 tax year. In contrast to the position taken by Bush administration officials, Senate Republican tax writers say they do not want to wait for a complete overhaul of the tax code to enact permanent changes to the AMT. The legislation would result in a loss to the Treasury of $611 billion through 2015, according to the Congressional Budget Office -- almost 10 times the amount of tax cuts authorized by the fiscal year 2006 budget resolution. If the 2001 and 2003 tax cuts are extended past 2010, the price tag for AMT repeal would be significantly higher at $900 billion. This bill sends a clear message that repeal of the AMT is a priority for tax writers in the Senate and will be addressed sooner rather than later. President Bush directed his tax panel to develop a solution to the AMT problem, after initially promising the Treasury Department would make recommendations to Congress at the beginning of this year. But Congress will not act on the tax panel's recommendations until early 2006 -- too long to wait for some Senators. The AMT requires taxpayers to calculate their tax bills both with and without certain deductions, then to pay the higher amount. For Americans above a specific income range, the AMT eliminates certain tax benefits such as personal exemptions, itemized deductions for state and local taxes, and deductions for children. It was originally enacted in 1969 to ensure America's wealthiest taxpayers could not make excessive use of deductions and loopholes to avoid paying taxes they owed. However, the AMT has not been indexed for inflation and now forces millions of middle-income Americans to pay higher tax bills than they should have to. The Internal Revenue Service's own National Taxpayer Advocate, Nina E. Olsen, has called it the most serious problem facing individual taxpayers today. The Senate Finance Subcommittee on Taxation and IRS Oversight, chaired by Kyl, held a hearing May 23 entitled "Blowing the Cover on the Stealth Tax: Exposing the Individual AMT." The panel heard testimony from Deputy Assistant Secretary for Tax Analysis Robert Carroll, Congressional Budget Office Director Douglas Hotlz-Eakin, National Taxpayer Advocate Nina E. Olsen, and Leonard Burman, co-director of the Urban-Brookings Tax Policy Center. Both Carroll and Hotlz-Eakin urged the subcommittee to consider a legislative fix for the AMT in context with the broader tax overhaul effort being undertaken by the President's Tax Reform Panel. Kyl said the Senate Finance panel would not consider recommendations from the tax panel before the first half of next year, and he wants to enact AMT changes before that. Finance Committee Chairman Grassley is also eager to act but acknowledged Congress might have to pass another one-year temporary fix to ensure that over 16 million new taxpayers do not get caught by the AMT in 2006. Grassley suggested the one-year fix would be included in the Senate's reconciliation tax bill at a cost of $30 billion. The temporary fix currently in place increases the AMT income exemptions, a mechanism often used to keep the tax from affecting even more Americans. This fix is set to expire at the end of 2005. According to the Congressional Research Service, the end of those exemptions would increase the number of taxpayers paying the AMT to more than 19 million next year -- up from 2.3 million in 2003. The AMT was never intended to tax such a broad segment of the population or to be relied upon as a revenue base. But full repeal of the tax now may once again have the unintended consequence of allowing a significant number of wealthy individuals to avoid paying any income tax at all. A more responsible approach would be a compromise somewhere between full repeal and one-year extensions. Senators on the Finance Committee have indicated they intend to work together to consider all possible meaningful solutions to the problems posed for middle-class taxpayers by the AMT.
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