Monday, April 09, 2007

Has the AMT reform process begun?

The New York Times reports today that House Democrats are moving toward a permanent fix for the Alternative Minimum Tax. Why? Because they've finally tumbled to the fact that the AMT has by far its biggest impact in the states presently controlled by Democrats!

I sometimes wonder why the Republicans are characterized as the party of the rich when the highest income states—the ones with the most valuable property—are mostly run by Democrats. Per the article, the states with maximum AMT impact include California, New York, Pennsylvania, Connecticut, Massachusetts, New Jersey, Virginia, Minnesota, Wisconsin and Michigan. In these states from 18% to 25% of taxpayers will owe AMT this year, unless Congress acts.

The Democrats' goal is simply stated: exempt those with family income of less that $200,000 from the AMT. The means are a little more difficult to articulate, because under current scoring methods that change would create an enormous revenue shortfall.

Herewith, some outside the box ideas:

1. Come up with a different scoring method.
2. End the deductibility of state and local taxes. This change would leave many more taxapayers paying the normal tax, because that's the deduction most often the trigger for AMT payments. Upside, big revenue gain even as the number of AMT filers falls dramatically. Downside, no one will give Democrats credit for a tax cut (because it won't be one).
3. Repeal the regular income tax, rename the AMT "regular income tax."
4. Offset the lost revenue by starting to tax large pools of capital that are currently tax exempt. I have in mind the endowments of the nonprofits and the interest payments from muni bonds.

None of these are likely. What I expect the Democrats to do is end the 15% tax rate on dividends and long-term capital gains, even though the preferential rates have raised far, far more revenue than projected. Increasing those tax rates will drive down stock prices and reduce realizations, but those factors are outside the scoring rubric.

Gentlemen (and ladies), watch your wallets.

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