The alternative minimum tax, a critical and highly technical policy, is like a weed in the tax code that politicians on both sides of the aisle want to whack. And yet it continues to morph and grow. By the end of 2012, Congress must pass yet another measure to ensure that the AMT applies to just a few million people, or else it will plague 31 million, a rise of more than 600 percent over the 4 million who currently qualify for it. A tax meant for the few will become one that targets the many.
"The AMT is just an old friend," Lindy Paull, a lobbyist at PricewaterhouseCoopers and a former chief of staff for the Joint Committee on Taxation, says with a sigh. "Every year, it gets more expensive to fix it, but a permanent solution has not been achievable in this environment, where you're not rewriting the tax code." Like the so-called doc fix for Medicare physicians, the alternative minimum tax gets a temporary annual patch, which staves off catastrophe for just a while longer but adds complexity to the already arcane tax system. Members of Congress will battle over policies that they agree are wrong, but they won't tackle the thankless task of fixing them.
In that way, the AMT embodies everything that's wrong with the upcoming lame-duck session, when trillions of dollars of fiscal policy are up for grabs and when Congress can once again defer tough decisions. It last expired at the end of 2011 and awaits renewal. Now, members will likely wrap it up, along with a raft of other fiscal-cliff issues, during the postelection session. After all, who needs more than six weeks after a bruising election cycle to hash out major tax and spending policies that affect millions of Americans? "It's clearly not the way we should do tax policy," says Roberton Williams, a senior fellow at the Urban Institute and former deputy assistant director for tax analysis at the Congressional Budget Office.
Congress created the alternative minimum tax in 1969, when lawmakers realized that about 155 uber-rich people did not pay any taxes because they had stashed their money in shelters. Originally, the policy tried to force wealthy people to pay the federal government a minimum amount of money. That's the same philosophy behind President Obama's "Buffett Rule," which would establish a minimum tax rate for households that earn more than $1 million each year.
But the AMT is not indexed to inflation, so over time it began to hit a different demographic. Now, its biggest targets include families with children who live in expensive states such as California and New York and who earn between $200,000 and $500,000 per year. These people are hardly destitute, but they're also not part of the 1 percent. And the effect on the middle class could be severe without a patch. In 2011, less than 0.2 percent of married couples with two or more children and adjusted gross income between $75,000 and $100,000 paid the AMT.
If Congress does not act by the end of 2012, the Tax Policy Center estimates that it will hit 90 percent of that group — a difficult idea to stomach in an election year centered squarely on the health of the economy.
So why not ditch the alternative minimum tax altogether? Because it has become too expensive to repeal. Even with the temporary patches, the AMT raised an estimated $39 billion in 2011, according to the nonpartisan Tax Policy Center. And if Congress does not address the AMT, the center predicts that it will bring in $132 billion in 2012. That's 11 percent of the entire individual income tax for this year — a huge wad of cash from the upper middle class that a revenue-starved Congress could surely use, without technically having to say it raised tax rates.
That price tag is what has kept the AMT alive for so long, even with its unintended targets. Why slaughter the golden goose? Congress fought for weeks over something as anodyne as interest rates for student loans (a $6 billion problem), so it's not surprising that members are much further from consensus on how to find the $1.4 trillion through 2022 they would need if they repealed the AMT.
Instead, the dream is that Congress will finally fix the AMT — 43 years after its enactment — as a part of a broader tax-code overhaul. "Hopefully, in the context of a broad-scale reform, the AMT can be completely rethought, eliminated, or focused more appropriately," says Edward Kleinbard, a professor at the University of Southern California Gould School of Law and a former chief of staff at the Joint Committee on Taxation. This could include repealing the AMT entirely and instead taxing wealthy people through higher marginal rates or increased taxes on dividends and capital gains, the latter two being a prime way that truly wealthy people have benefited from the current tax policy.
But reforming the tax code is like wishing upon a star. Experts hoped that the super committee would do it; now they hope that the lame duck will do it. To convey urgency, people have affixed increasingly apocalyptic descriptions to the issue — the super committee, the fiscal cliff, Taxmaggedon, the tax bomb — but, so far, none of that doomsday rhetoric has forced Congress to actually do anything.
Nevertheless, everybody expects a short-term fix, since that is the annual rite. A broad consensus among congressional aides and lobbyists holds that lawmakers will patch the AMT by the end of 2012, even if it does so at the 11th hour. But, the idea that the AMT still exists and thrives in our tax system offers a broader allegory for the lame-duck session. If no one in Washington can summon the will to fix a widely despised tax, what makes anyone think that Congress and a president can agree on substantive legislation during the lame duck to resolve our tax and spending problems — the same ones we've known about for years?