Tuesday, April 17, 2007

Happy Tax Day

Due to peculiarities in this year’s calendar – April 15 is a Sunday and April 16 is a legal holiday in the District of Columbia – federal income taxes are due on April 17 this year. Most Americans are now filing electronically. Hopefully your taxes are already done, and you are not bothered by any last minute worries in this area. However, there are still plenty of worries ahead as Congress wrestles with future tax issues.

One important area is the AMT, which has been discussed at length in various prior columns. This tax which started in 1969 to keep a few millionaires from not paying federal income taxes has ballooned into a leviathan of sorts. According to a piece in today’s BNA Daily Tax Report, this tax hit 3 million taxpayers in 2006, and it will grow to hit 23 million in 2007 unless Congress passes another one-year patch, as it did for 2006. Longer-term fixes are probably going to be hard to come by, as revenue estimates for this tax are based on its current, bloated and convoluted form. One estimate shows 800 billion through 2017, and nearly 1.5 trillion assuming that the current tax rates are continued in 2010. Those are big dollar values to address through other tax changes. In effect, the current approach locks us in to the status quo.

Though Democrats are not known as the party for cutting taxes, the AMT is a significant area of interest for them. Their constituents in Northeastern states are particularly vulnerable, since they pay high state tax rates. If they itemize and deduct those taxes, it creates a preference item for the AMT, making that those taxpayers likely candidates for the AMT to "make up" for the tax benefits they are getting. Democratic Congressman Rahm Emanuel of Illinois has also recently referred to the AMT as a “Parent Penalty,” as it does hit parents because of the child credit. (See also the BNA Daily Tax Report for this story, by Kurt Ritterpush). So this becomes a way to reach out to working families - often with two incomes -- who are earning just enough to be above the AMT exemption but not enough to be phasing out those child credits (that phaseout starts at $110K).

In what could be called political rhetoric for the "bizarro world" (a bone to the Seinfeld fans out there) , Emanuel blames the impact on parents because of “misplaced priorities of the GOP”. I think he means that last year, the party of the Elephant required an AMT fix to be included along with an extension of tax rates from the Bush tax cuts until 2010, instead of allowing them to expire in 2008. That battle of expiring tax rates will be fought again -- as we figure out how to avoid a very significant tax increase in the future. In all fairness, I think both parties have allowed this tax to grow into what it has become, and I don’t see partisan blame here.

But even more bizarre rhetorical positions by Democrats were reported last week in an editorial piece in lthe Wall Street Journal, where the party of the donkey blamed the Bush Administration for causing the AMT problem by enacting the 2003 tax cuts. Their logic: if you kept the regular income tax high enough, there would not be an AMT problem.

The rhetoric of tax reform is rich. Watch for more to come as Congress tries to address some of these issues. I don’t see much change on the AMT beyond another one-year patch, but I hope my cynicism is proven wrong.


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