A proposal to relieve more than 20 million Americans of the Alternative Minimum Tax (AMT) for 2007 will be introduced next week as part of a package to permanently eliminate the tax, according to the chairman of the House Ways and Means Committee.
In a plan he dubbed the “mother of all tax reform bills,” Rep. Charles Rangel (D-NY) unveiled a two-pronged attack on the AMT: First, he introduced a bill to eliminate the tax and provide some measure of tax relief, he claims, for almost all families with income under $500,000. A proposal of this magnitude will require extensive review and hearings and couldn’t be undertaken this late in the current session of Congress.
The second part of his proposal, which he plans to introduce next week, will extend current AMT allowances and exemptions and unburden about 20 million taxpayers who otherwise would be subject to the AMT. It will also address a $50 billion gap that will be created by the move.
‘Patch’ harder this year
In prior years, enacting a one-year patch was easily accomplished since the foregone revenue was seen as a tax cut. However, the Democrats who now control Congress have reinstituted “pay as you go” rules requiring new tax cuts to be matched with spending reductions or revenue increases elsewhere in the budget. The rules were designed to enforce budgetary discipline on Congress and the president, and were widely seen as responsible for the federal budget surpluses in the 1990s.
As a result of the difficulties in identifying offsetting revenues for AMT relief, the patch that Congress will consider this year is being introduced late in the current session. Treasury Secretary Henry Paulson has indicated that any changes to next year’s tax forms would need to be made by Nov. 7 to reflect changes that Congress has yet to enact. While staying true to the intent of pay-as-you-go rules, the Democrats find themselves in a revenue bind, and the Republican minority has not missed the opportunity to pressure Democrats to enact a patch without revenue offsets.
To attract Republican support, Rangel is seeking to incorporate in the one-year tax bill a number of tax breaks popular with business that were set to expire this year.
Rangel has indicated that his broader measure, which will be considered next year, contains a 4% tax surcharge on adjusted gross income over $200,000 for married couples rising to 4.6% for those making over $500,000. Capital gains would increase for those taxpayers as well. Rangel indicated that such a move would raise $831 billion, more than sufficient by itself to cover elimination of the AMT.
In the meantime, this year’s patch has yet to be finalized and offsetting revenues identified. Unless the Democrats waive the need this year to match lost revenues, it may be tough to pass legislation that will gain Republican congressional and administration support.