A tax designed to soak millionaires gets millions of middle-class Americans wet.
Saturday, April 14, 2007 12:01 a.m. EDT
It's almost tax day--but cheer up, things could get worse, and probably will.
This year more than three million taxpayers will be hit by the Alternative Minimum Tax on their 2006 income. But next year that number could rise to 23 million unless Democrats in Congress come up with a way to halt the juggernaut that is the AMT. The fixes that have been put in place the past few years have expired, and if nothing is done nearly one in five filers will be caught short by a tax that was created in 1969 to target 21--yes, 21--millionaires who had managed to avoid paying any taxes at all.
AMT Headliners
States with the highest combined state and local tax burden
Vermont 14.1%
Maine 14.0%
New York 13.8%
Rhode Island 12.7%
Ohio 12.4%
Hawaii 12.4%
Wisconsin 12.3%
Connecticut 12.2%
Nebraska 11.9%
New Jersey 11.6%
Minnesota 11.5%
California 11.5%
Arkansas 11.3%
Michigan 11.2%
Kansas 11.2%
Source: Tax Foundation
Who are those 23 million? If you live in one of the high-tax states listed in the nearby chart, have a family with children, and make even $75,000 a year, you would probably be one of them.
The Democrats say they don't want this soak-the-rich tax to hit the middle class. But the AMT's relentless growth is largely of their making. Liberals created the AMT to punish those 21 millionaires but failed to index it for inflation. And Democrats raised the AMT tax rate in 1993--to 26% and 28% from a single rate of 24% as part of Bill Clinton's tax increase of 1993. According to the Joint Committee on Taxation, the AMT would have hit "only" 2.6 million Americans next year if not for that tax hike.
So nearly 90% of this problem was created the last time Democrats ran the government. And those who voted for it included Speaker Nancy Pelosi and Ways and Means Chairman Charlie Rangel, as well as Senators Barbara Boxer, Dianne Feinstein, Chuck Schumer (then in the House), Joe Lieberman and Chris Dodd.
To be fair, all but five Democratic Senators and 41 Democratic House Members voted for the bill. And of the five Senate dissenters, only New Jersey's Frank Lautenberg is still there. We single out the Democratic delegations from California, New York and Connecticut because they are the high-tax states likely to have the largest numbers of AMT victims if the tax isn't fixed or repealed. Taxpayers can deduct state and local taxes under the normal IRS code, but not under the AMT. So, in another liberal irony, Democratic Governors are now demanding that Congress pass AMT relief so they can keep their high state tax rates.
Now, Democrats like to blame the ever-encroaching AMT on the Bush tax cuts. The Orwellian logic of this argument is that the 2001 and 2003 tax cuts lowered the bill for almost everyone who pays taxes, but it didn't lower their bill as figured by the AMT (except temporarily). So by lowering taxpayers' "normal" taxes, President Bush is said to have made the AMT a bigger problem. However, you pay the AMT because of the Bush tax cuts only if those tax cuts lowered your bill in the first place--you're still paying less than you would have.
Democrats have compounded their AMT dilemma this year by adopting "pay as you go" budget rules that say any tax cut (such as AMT relief) must be offset either by other tax increases or entitlement spending cuts. Democrats aren't about to cut any spending, so now they're confronted with the problem of how to pay for AMT relief. Even a one- or two-year fix could "cost" tens of billions under Democratic revenue estimates, and full repeal would cost $1 trillion over a decade.
So what to do? Of course, raise taxes on "the rich"! Word around Washington is that Democrats may try to combine AMT relief with a measure to repeal some of the Bush tax cuts. But no one should be fooled by this class-war fakery. The AMT was itself supposed to be a soak-the-rich scheme. Like most such schemes, it's now hitting millions of the non-rich, with millions more on deck for a soaking. The same would go eventually for whatever new taxes Democrats claim would also only apply to the rich.
The easiest exit from this box canyon would be for Democrats to cut the AMT rate back to its pre-Clinton levels, and then cut some spending if they want to stick with their crazy "pay-go" rules. Better yet, they could start thinking about larger tax reform that would eliminate the AMT, lower rates for everyone, and close loopholes and needless deductions. We can dream, can't we?
opinionjournal.com |
