By Howard Gleckman Throughout his reelection campaign, President Bush talked about the importance of fixing the alternative minimum tax -- a parallel income tax levy that threatens to hammer as many as 30 million mostly middle-class taxpayers by the end of the decade (see BusinessWeek's cover story, 2/16/04 The Stealth Tax).
But in the budget he unveiled Feb. 7, the AMT was MIA. Since then, the White House has said nothing about how it would fix the problem and included none of the funding needed to repair the mess -- a step that would be hugely expensive.
COUNSELING PATIENCE. For example, Congress could index the tax for inflation, so millions of new middle-class families don't fall into the AMT simply because their incomes rise. But indexing the AMT would cost the U.S. Treasury an estimated $500 billion to $700 billion over the next decade.
Administration officials counsel patience, promising to address the AMT as part of a broader plan to restructure the tax code later this year. But the first hints of that proposal won't appear until next summer, when a hand-picked Presidential advisory panel makes its recommendations to the Treasury Dept.
In the meantime, Congress has patched the AMT for 2005 -- effectively freezing the number of AMT taxpayers through this year. So if you were exempt from the tax last year, you're probably safe this year as well. Singles will be able to exempt their first $40,250 in taxable income from the AMT, while couples will be able to exempt $58,000. However, that exemption starts to phase out after income tops $150,000.
UNINTENDED TARGETS. The AMT was enacted in 1969 as a way to ensure that a handful of the wealthiest Americans pay at least some tax. But for years, the levy wasn't indexed for inflation, so it began capturing many taxpayers who were never its intended targets.
Today, the tax hits some 3 million U.S. households -- mostly upper-middle class families who live in high-tax states and have lots of kids. That's because the AMT, which must be calculated separately from the regular income tax, doesn't allow personal exemptions or deductions for state and local taxes.
The AMT currently starts to bite families earning $100,000 and more. But by 2010, if it isn't indexed permanently or otherwise changed, more than one-third of families earning $50,000 to $75,000 will be hit, and more than 90% of those making between $100,000 and $500,000 will feel its pain.
NEUTRAL EFFECT. The problem will be made worse if Congress makes Bush's 2001 and 2003 tax cuts permanent. That's because you must pay the higher of the AMT tax or your regular income tax. So if your regular tax is cut, you're more likely to fall into the AMT.
And there's a larger fiscal issue: At a time when the federal deficit is so high, it won't be easy for lawmakers to come up with the dough needed to protect middle-class families from the AMT. Since the President has vowed that any reform package must be revenue-neutral -- neither raise nor lose money for the Treasury -- any AMT fix will have to be offset with tax hikes.
Bush ducked the issue in his proposed budget. But sooner or later he'll have to answer the politically explosive question: Tax hikes on whom? Gleckman is a senior correspondent in BusinessWeek's Washington bureau