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Democrats target alternative minimum tax

Pledge changes before levy hits more Americans

WASHINGTON -- Democratic leaders in Congress are vowing to make the alternative minimum tax a centerpiece of next year's budget debate, saying the levy threatens to unfairly increase tax bills for millions of middle-class families by the end of the decade.

The exceedingly complex and expensive tax was designed to prevent the super-rich from using deductions, credits, and other shelters to avoid paying the Internal Revenue Service. But because of rising incomes, the tax is expected to expand to more than 30 million taxpayers in 2010 from 3.8 million mostly well-off households in 2006.

Fixing the tax has long been a top priority for Senator Max Baucus, Democrat of Montana, who is in line to head the Senate Finance Committee. Last year, Baucus co authored a bill to repeal the tax with Senator Charles E. Grassley, Republican of Iowa and chairman of the Finance Committee.

Representative Charles B. Rangel, Democrat of New York, the presumptive chairman of the House Ways and Means Committee, this week put fixing the alternative minimum tax at the top of his agenda, calling it far more urgent than dealing with President Bush's request to extend the 2001 and 2003 tax cuts, which are scheduled to expire in 2010.

Yesterday, the House Democratic whip, Steny H. Hoyer of Maryland, who is campaigning to hold on to his leadership post, said Democrats would make fixing the alternative minimum tax "a priority of tax policy next year."

The focus on the tax is hardly surprising, given that victims of the tax have been concentrated in high-cost urban areas such as Washington, New York, and San Francisco -- places that tend to vote Democratic.

Rangel, Hoyer, and Nancy Pelosi, Democrat of California, the minority leader, all represent states hit hard by the tax, which is sometimes called the "blue-state tax." To map states with the highest concentrations of such taxpayers is to draw bull's-eyes over California and the Northeastern seaboard.

These taxpayers would owe the IRS $6,813 in additional taxes on average, according to an analysis by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution.

"Seventy percent of my friends are on the AMT. We're the demographic," said the center's codirector, Leonard Burman, a senior fellow at the Urban Institute who lives in Arlington, Va.

"If you have children, if you pay high state and local income taxes, you're going to be subject" to the tax, he said. "That's the professional class in the Washington and New York suburbs, and Los Angeles and San Francisco. "

The alternative minimum tax is sort of a flat tax with two brackets, 26 and 28 percent, and fewer deductions. Credits for dependents, medical expenses, and state and local taxes are all disallowed. Instead, taxpayers get a single big deduction, called the alternative minimum tax exemption, which is set this year at $62,550 for married couples and $42,500 for singles. Taxpayers must compute their taxes both ways and pay whichever is higher.

The impact is harshest on taxpayers with annual incomes of $100,000 to $500,000. The truly rich typically are not affected because their regular tax rates already are higher than under the alternative minimum tax.

This year, the AMT is expected to affect 3.8 million taxpayers. Next year, the tax exemption is scheduled to drop precipitously, causing that number to balloon to 23 million households, according to the congressional Joint Committee on Taxation.

By 2010, it " will become the de facto tax system for filers in the $200,000 to $500,000 income range, 94 percent of whom will face the tax," according to a report by the Tax Policy Center. About half of tax filers making $75,000 to $100,000 will have to pay the tax, including 89 percent of married couples in that income bracket who have at least two children.

In the past, Congress has patched the tax one year at a time, primarily by increasing the exemption amount. Next year, to hold the number of affected taxpayers steady at about 4 million, the patch would cost about $50 billion, according to the Joint Committee on Taxation.

Getting rid of the tax altogether would be even more expensive: more than $1 trillion over the next decade, by various estimates. Budget specialists doubt Democrats can do it without reneging on their promise to reduce the budget deficit or winning an agreement from Republicans to raise taxes elsewhere.

Political analysts see little chance for that kind of cooperation until after 2008. Bush is heavily committed to maintaining his tax cuts, arguing that they have spurred the nation's economy.

In recent weeks, experts from both parties have called the nation's fiscal situation dire and called for a bipartisan summit to address a variety of issues set to explode soon after the 2008 presidential election, including the alternative minimum tax, Social Security, Medicaid, and Medicare.

"You cannot solve this nation's fiscal problems without increased revenue," Robert E. Rubin, the Clinton administration Treasury secretary, told the Economic Club of Washington this week.

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