Tax Realty Consultant

Nineteen million middle-class American households will get socked with very costly bills April 15 unless Congress acts soon.

But presidential contenders in both parties would rather not talk about this tax time bomb called the alternative minimum tax – a parallel income tax system meant to ensure that rich people pay at least a little something to Uncle Sam.

The rules never took inflation into account. So although the AMT hit 4 million taxpayers this year, it will hit 23 million next spring, including thousands of Texans, particularly in Collin and Denton counties. Families with kids, six-figure incomes and relatively high property taxes are most at risk, though the formulas are so quirky it’s hard to generalize.

That’s a lot of potentially angry voters.

While presidential contenders in both parties denounce the AMT, few offer even a cursory explanation of how they would pay to scrap it or keep it from spreading. And that’s the rub, because federal budget projections rely on bulging AMT revenues. Without spending cuts or new taxes, freezing the AMT at current levels would trigger a $50 billion shortfall next year, and bigger problems later.

“They will run, they will dance, they will shuck, they will jive, they will do the old Texas two-step. Whatever they can to avoid talking specifics and tax. Because the minute you do, you just point a bulls-eye on your chest,” said Dallas accountant James Smith, who is watching the issue closely as chairman of the Texas Society of CPAs. “I thought the president was supposed to come with specific initiatives.”

Many political strategists see tax policy emerging as a central issue in the 2008 campaign. The Democrats generally favor scaling back the tax cuts enacted under President Bush. The Republicans want to extend them.

But when it comes to the impending AMT explosion, the candidates demur, leaving the hard choices to Congress, where the chief tax-writer, House Ways and Means Committee Chairman Charles Rangel, D-N.Y., has proposed abolishing it and recouping lost revenue by raising taxes on Wall Street investment managers and other high-income taxpayers.

No agreement

House Republicans and senators in both parties resist the idea, and Congress left town for Thanksgiving without reaching any agreement. The IRS has warned that millions of tax refunds could be delayed next spring if the stalemate persists much longer, because the AMT is so complex, the agency can’t easily reprogram its computers and redo tax forms.

On the campaign trail, GOP candidates all reject the Rangel plan as a tax hike. The Democrats have kept it at arm’s length.

“They’re going to have to solve it, but mostly what I’ve seen out of these candidates is not a whole lot of specificity when it comes to their tax plans,” said Chris Bergin, president and publisher of Tax Notes. “I would urge people of this country to pay attention because there is good tax reform and bad tax reform.”

Just one major campaign made a top policy adviser available to discuss the AMT. Many didn’t respond at all to requests for the candidates’ plans.

“Congress should be allowed to do its job,” said James Bognet, policy development director to Republican Mitt Romney. The former Massachusetts governor wants to ensure the AMT doesn’t spread and supports finding a temporary fix, though Mr. Bognet made clear that he defers to Congress on the nitty-gritty. “The easiest way to patch it is to index for inflation. … The governor doesn’t support raising taxes on other folks to offset the AMT.”

Sen. Hillary Rodham Clinton has said she welcomes Mr. Rangel’s “leadership” on the issue but neither endorsed nor rejected his ideas outright. Spokesman Isaac Baker said that as president, “she would work to enact long-term AMT reform” but declined to provide specifics.

Among the candidates who do state a preference how to address the looming AMT problem, indexing for inflation is the most popular, albeit temporary, approach.

Republican Rudy Giuliani supports that sort of patch, his economic adviser Michael Boskin told the National Association of Business Economists at a recent forum in Washington.

Sen. John McCain’s economic adviser, Douglas Holtz-Eekin, said at the same forum that the Arizona Republican is “committed to getting rid of the AMT” and derided the idea of having parallel tax systems, but offered no details.

The campaigns of Republicans Ron Paul and Mike Huckabee and Democrats Barack Obama, Joe Biden and Bill Richardson didn’t respond to inquiries about their AMT stance.

An aide to former Sen. John Edwards said he wants to protect middle-class taxpayers and to restore the AMT to its initial purpose, but offered no explanation of what to do about it for now.

Former Tennessee Sen. Fred Thompson’s campaign offered a sound bite from a Michigan Republican debate Oct. 9:

“The AMT was designed to target the rich guy and when Democrats target the rich guy you ought to start running,” Mr. Thompson said. “It ought to be phased out,” he said, but until federal spending is cut, it should be indexed for inflation to fix it for another year.

How would he fix it? The campaign wouldn’t say.

In 1969, Congress created the alternative minimum tax to ensure that no one fully escapes taxes.

At the time, roughly 155 high-income Americans managed to skirt income taxes entirely by moving income into various tax shelters. For people with incomes equal to at least $1 million in today’s dollars, the AMT was a replacement tax for the income they were avoiding. The first year’s catch was about 19,000 taxpayers.

No peg for inflation

But the income threshold wasn’t pegged to inflation. By 2000, 1.3 million taxpayers were covered. Congress has been patching the system with higher temporary exemptions since 1998.

The prototypical AMT taxpayer now has family income between $100,000 and $500,000, with three or more kids, in a state with relatively high state and local taxes. The tax hits hardest in places like New York, California, Illinois and Massachusetts – states with lots of high-income taxpayers who claim lots of deductions.

But too many deductions drives down the tax liability. That’s when the AMT kicks in.

In one New Jersey county, 14 of every 100 taxpayers paid the AMT in 2005, according to one study. In New York City, 12 percent of Manhattan residents paid an average of $10,700 in extra taxes under the AMT.

Texas’ lack of a state income tax has blunted the impact. Only about 2 percent of Texans paid the AMT last year, about half the national average. Collin County ranked tops, with 4 percent – 127th out of the nation’s 3,141 counties. That added about $3,000 to the average tax bill.

“These people may have six-figure incomes, but six figures isn’t what it used to be. In Collin, you have a lot of people who are house-poor, which means high property taxes,” said Mr. Smith, the Dallas CPA.

And relatively high consumption. Congress added sales tax deductibility in 2004, under pressure from Texas lawmakers and others from the handful of other states without an income tax. That’s saved many taxpayers lots of money. But as the AMT bubble grows, it puts more of them at risk, too. Add the sales tax on a $40,000 car to the property tax on a McMansion, Mr. Smith said, and a taxpayer could reach the AMT tipping point.

But the formulas are so complex that even experts can’t easily say who will get zapped –and that has kept pressure off candidates to address the issue.

“The AMT is an incredibly hard tax to predict,” Mr. Smith said. “They don’t want to talk about it. First of all, they don’t really know the answer and secondly, they know whatever they do is going to make somebody angry. … These candidates spend hours in front of their consultants getting trained on how to dodge that question.”

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