Beware of Politicans Bearing Gifts: AMT and SS Tax

The end of 2006 brought a frantic effort by Congress to restore expired tax breaks, including the Research and Development Credit, which is very important for business, along with other popular individual breaks, like the deduction for tuition expenses. In a previous post, I highlighted how the political wrangling over taxes late last year would potentially harm tax administration. In part, this was based on concerns about the need to have a lead time for preparing relevant tax forms (See Time to Fish or Cut Bait: More on Tax Delays found here
http://economictrends.blogspot.com/2006/09/time-to-fish-or-cut-bait-more-on-tax.html)

As the New Year unfolds, it appears that AMT and social security insolvency are going to be hot-button issues with Democrats. (See, e.g., a January 3 story in the BNA Daily Tax Report). AMT was left out of the last 2006 tax bill, and that issue is a concern for Democrats, especially those with constituents in jurisdictions with high state and local taxes and high living costs, which end up boosting incomes of what they consider “middle-income” taxpayers.

The Democrats may find themselves on the horns of a dilemma, however, as they seek to reconcile AMT tax relief for these folks and one path toward social security solvency: raising the tax base to include more “middle income” earners (read: with incomes greater than $97,500 in 2007) in an expanded tax base.

Senate Finance Chairman Baucus, joined my now-minority Senator Grassley responded to the AMT issue with a bill to repeal the personal AMT altogether. But future tax costs are significant - $1 trillion by some estimates. Query whether this bill will have any legs at all in the budget-conscious environment. Outright repeal of the personal AMT would also solve some other issues, like the problems with stock options and attorney fees, which have received only partial fixes yet still generate tax injustices.

As Ernie has pointed out earlier this month, and as I have written about several times in earlier posts in this blog, the social security base issue is a serious one that merits watching. What the government may give through AMT relief, it may take away with the social security tax. So, beware of politicians bearing gifts.

In the meantime, let’s also watch and see if Congressman Rangel keeps his post-election promise that he would not seek to roll-back the Bush tax cuts. (This promise is referenced in the 1/5/05 BNA Daily Tax Report.) However, they will expire in 2010, resulting in a huge tax increase. But that will happen on someone else’s watch.

EAM