Obama Hints At AMT Axe

by Mike Godfrey, Tax-News.com, Washington

25 February 2009

Revenues (or the lack of them) from the alternative minimum tax would no longer be included in the US government's fiscal projections if key budgetary reforms under consideration by President Barack Obama are accepted by Congress.

As Obama prepares to release his budget proposals to Congress on February 26, he has said that he wants to see an end to budgetary practices that amount to no more than "accounting tricks," such as the inclusion of phantom revenues and the omission of large spending items.

Obama argues that more budget transparency is needed if his administration is to achieve one of its primary goals, to both reduce the federal budget deficit and pay down America's mounting levels of debt - something of an irony given that the stimulus plan he recently signed will add substantially to both. But the President argues, probably rightly, that the US will never solve its fiscal problems unless it truly knows what it is spending and how much it is taxing.

"I refuse to leave our children with a debt that they cannot repay - and that means taking responsibility right now, in this administration, for getting our spending under control," Obama remarked at the White House Fiscal Responsibility Summit attended by members of Congress (including his campaign opponent John McCain), and representatives from business and charitable organizations, held on February 23.

"For too long, our budget process in Washington has been an exercise in deception, a series of accounting tricks to hide the extent of our spending and the shortfalls in our revenue and hope that the American people won't notice ...budgeting zero dollars for the Iraq war ...budgeting no money for natural disasters, as if we would ever go 12 months without a single flood, fire, hurricane or earthquake."

Another practice that the Bush administration routinely employed was budgeting for USD60bn in annual revenues from the notorious and unpopular alternative minimum tax (AMT) despite the fact that Congress routinely applies 'patches' to reduce the future number of taxpayers who would have had to pay it.

When it was initially introduced, about 40 years ago, the levy was aimed at preventing just 155 of the country’s wealthiest households from employing tax breaks and sheltering income to such an extent that their tax liability became negligible. However, due to a failure to index the levy to inflation, a phenomenon known as “bracket creep” has set in over the years, meaning that people who were never originally intended to be touched by the AMT, such as middle income earners and families, are sucked into the parallel system. Last year, National Taxpayer Advocate Nina Olson warned Congress that if nothing was done to check the AMT, then as many as 30 million American taxpayers would be affected by it in 2010. Lawmakers duly approved yet another patch in the American Recovery and Reinvestment Act 2009, signed earlier in February by Obama.

Despite the widely held view in Congress that it's high time the AMT was repealed altogether, previous legislative attempts to achieve this have failed, with many lawmakers worried about how the foregone 'revenue' will be replaced. Obama's remarks give some hope to supporters of the AMT axe that the administration may be thinking along the lines of repeal but he was notably silent on the issue during the 2008 election campaign, suggesting that more limited reform, or a continuation of legislative patches, are on the cards for the foreseeable future.

Obama's views on budgetary reform, and particularly the non-inclusion of AMT revenues in budget projections, have been welcomed by Senator Chuck Grassley, the ranking Republican on the Finance Committee and one of the most vocal campaigners in favor of AMT repeal in recent years.

“It’s good to see the White House and more and more Democrats finally recognize AMT revenue as the phony revenue source it is," he commented.

"I’ve sounded the drumbeat since 2001. Some Democrats agreed early on, but the House Democratic leaders held out last year as long as they could. It will be interesting to see whether they agree with the new Democratic president. I suppose the same words might sound better to them from him than me.”

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