Consensus Elusive on Alternative Minimum Tax

WASHINGTON — Nobody on Capitol Hill seems to like the "alternative minimum tax," but few can agree on how to get rid of it.

Led in part by Senator Schumer and Rep. Charles Rangel of Harlem, Democrats swept into power earlier this year promising to fix the AMT, a levy originally designed to ensure that the wealthiest Americans would not skirt paying taxes, which is increasingly raising the burden on middle-income earners. But six months later, there is no consensus on a plan.

As new proposals for repealing or reducing the AMT circulate on Capitol Hill, a key point of division that has emerged among leaders of the effort is how to pay for it, or whether it even needs to be paid for at all.

Congress's Joint Committee on Taxation estimates that eliminating the AMT would slash revenue by $872 billion over the next decade, a staggering sum that has lawmakers and analysts looking for ways to find the money elsewhere in the federal tax code. If President Bush's tax cuts are extended, that total could spike to more than $1.5 trillion.

The cost is large principally because the AMT is affecting more and more taxpayers. When Congress enacted the levy in 1969, it was intended to create a minimum tax burden for the 155 wealthiest Americans. But because the AMT has not been adjusted for inflation, it could affect more than 23 million in 2007.

One think tank, the Tax Policy Center of the Urban Institute, is advocating a 4% "surtax" on couples making more than $200,000 and individuals making more than $100,000; the proposal, supporters argue, would keep the AMT's intended focus on high earners, but it is sure to face opposition as a tax hike.

Last month, another policy institute, the Tax Foundation, released a report calling for an AMT fix that would combine reduced marginal tax rates with an elimination of state and local deductions. Taxation experts like that idea, but the report's author, Gerald Prante, conceded in an interview yesterday that the proposal is politically unpalatable in Congress, where lawmakers representing large, wealthier states — such as New York and California — consider deductions popular. "They see it as a giant tax cut," Mr. Prante said, referring to the deductions. "Unfortunately, they don't see that it encourages big government at a local level."

Mr. Schumer in January joined a bipartisan bloc of senators in sponsoring legislation that would repeal the AMT. He has been silent, however, on the latest proposals, and there is disagreement within the group over a solution. The leading Republican advocate of killing the AMT, Senator Grassley of Iowa, says the cost of a repeal should not be an obstacle. "Revenues projected to be collected by the alternative minimum tax are revenues the tax was never meant to collect," he said in a Senate floor speech last month. Some tax analysts acknowledge that may be true, but they say it is not practical. "I do believe we should make up the lost revenue," the director of the Tax Policy Center, Leonard Burman, said. "There are huge demands on the federal government, and we've been counting on it all along."

Mr. Grassley's suggestion faces other obstacles. The chairman of the Senate Finance Committee, Max Baucus of Montana, has also signed on to the repeal bill, but he is pushing for a solution that is "as fiscally responsible as possible" and includes a revenue offset, a spokeswoman, Carol Guthrie, said yesterday.

In the House, new "pay as you go" rules approved in January when the Democrats took control require that tax cuts be offset in the budget. Mr. Rangel, the chairman of the tax-writing House Ways and Means Committee, supports a revenue neutral plan, an aide said. But there is no specific proposal or legislation yet on the table, and the committee is not expected to debate the AMT until the fall.

Mr. Schumer's office did not return calls yesterday. In February, at a news conference in Washington, he said changes to the AMT and other middle-class tax relief should be paid for by raising tax rates on families making more than $400,000 a year and repealing tax breaks for oil companies. He also cited a Democratic effort to step up enforcement of uncollected taxes, but the Bush administration has disputed estimates of how much that would yield.

The most likely scenario, several sources said yesterday, is that Congress will resort to the method it has used in past years — enacting a last-minute, one- or two-year exemption to save millions of Americans from qualifying for the tax for the first time. The Bush administration is supporting a one-year exemption, while Mr. Schumer and other Democrats want it for two years, pushing it past the 2008 election.