Grassley Has Reservations Over Democrat AMT Plans

by Mike Godfrey, Tax-News.com, Washington

16 May 2007

Senate Finance Committee Ranking Member Chuck Grassley has warned that Democrat plans to raise the alternative minimum tax threshold could lead to a dramatic increase in the upper income tax rate to replace lost tax revenues.

Speaking on the Senate floor on Monday, Grassley, a supporter of total AMT repeal, once again appealed to his fellow lawmakers not to get blinded by the potentially huge revenue loss that would be brought about through rolling back or scrapping AMT, but instead use it as an opportunity to clip government spending and restore some transparency to the budget process.

The AMT, enacted in 1969, created a two-tier tax system to ensure that America's wealthiest taxpayers did not evade income taxes altogether through the use of tax shelters, loopholes and deductions. However, unlike federal income tax, AMT is not indexed to inflation, meaning that every year more and more US taxpayers are falling into the AMT trap.

In 2004, about 3 million taxpayers (about 2% of all taxpayers) were subject to the AMT, but without Congressional action, Grassley said that up to 23 million taxpayers will be subject to the AMT in the 2007 tax year. Taxpayers living in high tax states with three or more children will be the hardest hit because the AMT causes taxpayers to lose standard deductions for state and local tax payments and personal exemptions, including spouses and children.

Over the past 6 years, Congress has had to enact a series of patches to prevent the AMT from harming more and more middle class Americans, most recently by including an extension of AMT relief in the Tax Increase Prevention and Reconciliation Act of 2005. This provision extended the AMT exemption that was initiated in the Jobs and Growth Tax Relief Reconciliation Act of 2003 through 2006, but at a higher level. The exemption for married couples filing jointly was increased from $58,000 to $62,550.

While Grassley and Finance Committee Chairman Max Baucus have written legislative proposals to repeal the AMT, Congress has, despite the AMT's huge unpopularity, hesitated from axing the tax because of the massive amount of revenue that it is set to raise over the next decade.

House Democrats have reportedly come up with a compromise plan that would exempt everyone who earns less than $250,000 from the AMT - a plan Grassley said "might be on the right track to full repeal." However, he is far less supportive of how the Democrats propose to offset the lost revenue; one option reportedly being talked about in the House side is an increase in the top marginal income tax rates.

"We have found some shocking numbers when we examine that further," Grassley said. "In order to exempt folks who earn less than $250,000 from the AMT if you insist on raising taxes to offset it, you would have to raise the top marginal tax rate to over 46%," he added.

"Another option that may be working its way through the mill on the House side is to pay for that exemption by raising the top AMT rate. Again, with that option, the tax rate increase is staggering. The top AMT rate would go up to nearly 37%," he claimed.

Grassley continued:

"Now the folks who voted against my amendment to take that AMT revenue off the table for the tax and spenders have some real explaining to do soon. It is possible that they will do nothing on the tax side and the result is a $50 billion tax increase on families subject to the AMT in 2007. Or, they may propose some sort of exemption or relief that is paid for by other tax increases and face the music on proposing a massive tax increase on the neighbors of those who have been paying the AMT. Or, perhaps they will provide AMT relief but fiddle away the money in the budget anyway and increase the deficit."

He concluded:

"I suggest that the tax and spenders consider learning to hum a different tune and spend within their means soon or folks may just figure out that you planned to raise their tax rates all along. So, the sad reality is that while it is the new Congressional majority that needs to face the music, it is likely to be the American taxpayers that will end up singing the blues."

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