The House Ways and Means Committee began hearings on reforming the Alternative Minimum Tax (AMT). Although the committee chairman said he’s looking for a major tax overhaul, it’s more likely that another short-term patch will be enacted to spare an estimated 23 million more taxpayers from being subjected to the AMT this year.
Bondholders are paying close attention because the interest on private activity bonds, issued as tax exempt for private corporations, is subject to taxable treatment under the AMT.
Rep. Charles Rangel (D-NY), chairman of the committee, indicated that he favored landmark reform of the tax code to solve the AMT dilemma as well as other inequities. Recent years have seen temporary “patches” applied to AMT provisions of the tax code to ensure that few new taxpayers become eligible for the AMT. Last year, about 4 million U.S. taxpayers were subject to the AMT.
Although legislation is still under development, Rangel indicated that repeal of the AMT would leave a $1.35 trillion hole in the federal budget over the next decade. Finding revenues to plug the gap is daunting and politically difficult to achieve. Rangel suggested that he will look to raising rates on people in the highest income category, allowing tax cuts enacted since 2000 to expire for top earners, and other measures to ensure that any tax reform is “revenue neutral.” Additionally, Rangel is seeking to introduce reforms such as a more liberal child tax credit, and increases in the earned income tax credit and the standard deduction.
Ironically, testimony before the committee by Leonard E. Burman of the Urban Institute indicated that tax cuts enacted over the last six years have actually increased the number of people who may become subject to the AMT. Burman’s well-documented research shows that, absent tax reform, more than twice as many taxpayers will be AMT eligible in 2007 than would have been the case prior to enactment of the tax cuts.
Once hearings are complete and the Rangel legislation is drafted, both houses of Congress must act and the president would need to sign the bill for it to become law. The prospects for comprehensive reform at this time are doubtful. Sentiment for reform seems strongest in the House and weakest in the Senate, where the Democrats have a bare majority. The president, in any case, is unlikely to sign such a bill if it reaches his desk.
Despite Rangel’s protestations that he is not interested in another annual patch for the AMT, it is likely that as year-end approaches, that is what he will get. Major reform of the tax code is unlikely this year, and allowing 23 million taxpayers to become eligible next April for the AMT is politically unpalatable. It will take a substantial majority for either party in Congress and a sympathetic president to allow serious tax reform to take place. Such was the case in 1986, when a Republican Congress and president Reagan were last able to achieve meaningful tax overhaul.