WASHINGTON — Democrats next week will propose a "patch" to ensure that the Alternative Minimum Tax, or AMT, doesn't ensnare at least 19 million more Americans next year, the top House of Representatives tax writer said Wednesday.
The patch, from House Ways and Means Chairman Charles Rangel, D-N.Y., will be part of comprehensive legislation designed to repeal the AMT, a creeping parallel tax that was intended to close tax shelters for the ultra-wealthy. The AMT wasn't indexed for inflation, so over time middle-class Americans have been exposed to this stealth tax.
Rangel's lofty goal of eliminating the AMT may prove difficult because it has contributed more and more to federal coffers. Tax experts say that the AMT, absent a patch, would claw back as much as 20 percent of President Bush's 2001 and 2003 tax cuts. With each passing year, it becomes harder to replace the revenue that repealing the AMT would require.
Providing for a one-year patch would force the Democrats to find $65 billion in spending cuts or revenue increases to make up for the projected lost tax dollars and to keep the number of Americans hit by the AMT about 4.5 million. Otherwise, the tax would snare 23 million to 25 million Americans.
The delay on Rangel's AMT patch has made it difficult for some taxpayers, who aren't sure whether certain tax credits or exemptions will be extended next year. It also prevents the IRS from printing many forms.
"This is the second year in the row where people have been kept on pins and needles, and it's not only taxpayers but the IRS itself," said Pete Sepp, the spokesman for the National Taxpayers Union, a tax policy research group in Alexandria, Va. "This is no way to make tax policy. The obsession with just limping along year after year ... is leaving millions of taxpayers up in the air."
How the Democrats plan to pay for the $65 billion patch is unclear. Rangel said he'd discuss that next week. In an Oct. 11 op-ed piece in the Wall Street Journal, the top Republican on the tax-writing Senate Finance Committee, Iowa's Charles Grassley, alleged that Democrats "want to raise some marginal tax rates to pay for it."
Rangel confirmed that his "patch" would fall within so-called "paygo" rules that the Democrats adopted. The rules require that any loss of revenue to the Treasury be offset by cuts in spending elsewhere or by tax hikes.
"We'll pay for it with great difficulty," Rangel said.
Grassley on Tuesday called on the Treasury Department to analyze the economic impact on taxpayers of delaying an AMT "patch." He also offered a mea culpa for a similar AMT delay last year by the GOP-led Congress.
"At this time last year, Congress was stalled on extending some tax provisions, like the college tuition deduction and teachers' deduction of classroom expenses," Grassley said in a statement. "That caused problems for taxpayers. This time, many more taxpayers are involved. Last year's problems will look puny in comparison."
Grassley wants Democrats to waive the "paygo" rules to get an AMT patch through Congress quickly, a move Rangel said he'd oppose in his committee. But Rangel was circumspect on whether he would support such an effort later in the legislative process.