Congress to stop spread of reviled Alternative Minimum Tax

If it doesn't, 22 million may have to pay more than $2,000 under the AMT.

The "fix" of the Alternative Minimum Tax is becoming as established a ritual on Capitol Hill as the annual lighting of the Christmas tree. But this year, the fix didn't arrive before the fir.

That's because it's caught up in a high-stakes battle over whether the $50 billion needed to pay for a year's reprieve of the AMT must be offset by tax increases.

If the tax code isn't fixed before Congress leaves town this month, some 22 million taxpayers will be subject to the AMT in the 2007 tax season, up from 3.5 million in 2006. For the average taxpayer, that means owing $2,000 more in federal income tax.

That won't happen, because the fix is on the way, say congressional leaders. On Nov. 7, the House passed an AMT patch, which amends the tax code to increase the AMT exemption to $44,350 for single taxpayers and $66,250 for married couples. It's paid for with $82.5 billion in tax increases, including raising the tax rate on some investment fund managers.

Last week, the Senate passed its version with no tax increases. "We will take up the AMT again this week, with offsets, to give the Senate another chance to do the right thing," says a House Democratic leadership aide.

Delays in completing the fix are already disrupting the filing season. The IRS has started printing 2007 tax forms, without the proposed fix. IRS officials say they will need at least seven weeks to rewrite computer programs in line with changes in the AMT. Private-sector tax prep companies say they can do it in five to seven business days.

"We are watching the debate unfold very closely," says Julie Miller, a spokeswoman for TurboTax in San Diego, in a phone interview. "The IRS is prohibited by law from making changes until Congress acts, but we have the resources to do contingency planning and prepare multiple scenarios. When the final legislation is passed, we don't have to start from scratch."

But the problem of processing electronic returns persists. Even if the patch were passed tomorrow, the Treasury Department says there still could be delays in refunds of up to 10 weeks for some 50 million taxpayers.

Congress passed the AMT in 1969, after reports that 155 people earning more than $200,000 a year, including 21 millionaires, had paid no federal income tax in 1967. "We face now the possibility of a taxpayer revolt if we do not soon make major reforms in our income taxes," Treasury Secretary Joseph Barr told the Joint Economic Committee on Jan. 17, 1969.

Deluged with hundreds of thousands of letters from angry constituents, lawmakers soon after added a minimum tax to the tax code, but neglected to index the new tax to inflation. Over time, more and more taxpayers were subject to the AMT.

Last year, 4.2 million taxpayers paid the tax, up from 20,000 in 1970. This year, up to 23 million taxpayers could be subject to the AMT, according to a Dec. 6 report by the Congressional Research Service. Congress began tweaking the law in 1971 and has "fixed" it 14 times since, according to the CRS.

Current provisions to mitigate the effects of the AMT expire this month. But the cost of annual fixes is getting more expensive. An outright repeal of the AMT would cost from $806 billion to more than $1.4 trillion from 2007 through 2016, according to the CRS.

On Dec. 6, the Senate voted 88 to 5 to pay for a fix for the AMT for 2007. In doing so, most Senate Democrats abandoned their party's pay-as-you-go pledge, which requires finding offsets for all tax cuts or new spending.

"I would acknowledge it makes absolutely no sense to tax these people with the alternative minimum tax. It was never adjusted for inflation. That would not be a fair outcome. But it ought to be paid for. The revenue ought to be replaced, either by spending cuts or by other revenue," says Sen. Kent Conrad (D) of North Dakota, who chairs the Senate Budget Committee and voted against the AMT fix.

Senate Republicans held out for a fix without offsets – and had enough votes to swing the outcome. "We have finally reached an agreement to prevent a middle-class tax hike on 25 million Americans, and we did so without permanently raising taxes elsewhere," said GOP Senate leader Mitch McConnell, in a statement after the vote.

"Now that the Senate has passed an AMT fix without tax hikes, the House must do the same or explain to taxpayers why they will further delay tax refunds for millions of Americans," he added. President Bush asked Congress for a "clean" AMT patch, without tax offsets.

Now the battle over the AMT moves to the House where Democratic leaders are saying that pay-as-you-go principles are too vital to abandon, even under pressure to find an AMT fix.

Conservative activists are predicting a "huge win." "It took 11 months, but we broke the Democrats' line in the sand [PAY-GO] that they would never cut taxes. The Republicans hung together and Democrats realized that the tax increase coming because of the AMT would be their responsibility and people would hate them for it," says Grover Norquist, president of Americans for Tax Reform, an antitax group.

But policy analysts note that the AMT patch is still not paid for. "The question is: Are we paying for it now with the offsets the House provided or later in the form of some unspecified program cuts or tax increases? At the end of the day, there's no free lunch," says Aviva Aron-Dine, a policy analyst at the Center on Budget and Policy Priorities.