Alternative Minimum Tax

ALTERNATIVE MINIMUM TAX -- (Senate - February 15, 2007)

Mr. GRASSLEY. Madam President, you and other Senators have seen me on the floor in the last few days in order to bring some clarity to our discussion we have every year about what to do with the alternative minimum tax. When I say ``every year,' for at least the last 3 years we have had some discussion about the alternative minimum tax. I would remind people that in 1999 we passed a repeal of the alternative minimum tax, but President Clinton vetoed it and we haven't been able to repeal it since.

Now, this alternative minimum tax was originally created in 1969 targeting wealthy taxpayers who were able to legally eliminate their entire income tax liabilities. The AMT has turned into a monster that has threatened to hurt the middle class and maybe eventually touch lower income taxpayers if we don't do something about it. Obviously, if it is a monster, that ought to indicate to my colleagues that I think it ought to be repealed.

The reason for this, as I have explained, is the failure a long time ago to index the alternative minimum tax for inflation. Thirty-eight years of inflation has allowed the alternative minimum tax to spread to literally millions of taxpayers who were never intended to pay it in the first place. Although more middle and lower income taxpayers will be hit by the alternative minimum tax, it has not decreased the percentage of high-income taxpayers who have no tax liability. So here we have the anomaly of a tax that was supposed to hit just the very wealthy.

In the year 1969, we were talking about a study which showed 155 people. Now it is hitting millions of people. This year, if we don't act, it is going to hit another 9 million or 10 million. And the anomaly is, there are people who have figured a way to even not pay the alternative minimum tax, and those people obviously are the wealthy whom it was supposed to hit in the first place.

The alternative minimum tax also takes more than the taxpayers' money; it takes an awful lot of time to figure through this when you are doing your taxes. I think it was on Tuesday of this week or Monday of this week when I said the IRS estimates that the taxpayers spend an average of 63 hours computing the alternative minimum tax liability. The alternative minimum tax is truly a very cruel way of raising revenue. While there seems to be general agreement that the AMT is a problem, there has been less agreement on the solution for that problem. Perhaps I shouldn't be surprised that there are more problems than there are solutions, but I am surprised by some of the obstacles preventing a solution to the alternative minimum tax.

There are some who make the argument that any revenue not collected in the future as a result of the alternative minimum tax repeal, or reform, ought to be offset. I explained this before, but you can't say it too many times around here: The alternative minimum tax is a phony revenue source and should not be offset. Since the alternative minimum tax collects revenues, it was never intended to collect from people who were never intended to pay it in the first place.

Although the alternative minimum tax is still with us, it is not because solutions have not been considered and proposed. Right now I will walk through some of those solutions that have been suggested. Before I begin, I wish to emphasize a point I made a couple days ago. With surprising regularity over the past 38 years, Congress has been meddling with the AMT, including the year I said we passed legislation to repeal it and President Clinton vetoed it. Since 1969, more than 20 bills have made changes to the alternative minimum tax. Sometimes the rate was adjusted. Sometimes the exemption amounts were modified. More than once, graduated rates were introduced. My point is that for 38 years, Congress has hoped to tinker with the alternative minimum tax in just the right, very right way, very perfect way, to finally get it right but not succeeded. Unless we truly believe we are the smartest Congress in 38 years, anything short of complete repeal of the AMT will probably require yet further action down the road in a few years.

I would also like to draw attention to the revenue estimates done by the Joint Committee on Taxation in 2005 that is reproduced on this chart, and these numbers are so small I am only going to talk around them and not specifically to those numbers. I ask unanimous consent that this estimate be printed in the Record.

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Mr. GRASSLEY. This is an estimate of how various proposed fixes to the alternative minimum tax will impact revenues expected to be collected under the current law. What you should note is that full repeal aside--which I suggest is about the only way to do it but not considering that--each of those proposals will still allow the alternative minimum tax to bring hundreds of billions of dollars into the Treasury. If you consider any proposal aside from full repeal, you are saying that hundreds of thousands, if not millions, of people in our country deserve to bear the burden of an alternative minimum tax that is not even, in some instances today, taxing to people who are supposed to pay the tax: the very wealthy.

One possible solution is to continue doing what we have been doing for the past several years. Ever since 2001, the Finance Committee has produced legislation that has kept additional taxpayers from falling prey to the alternative minimum tax because of inflation. In the tax increase prevention and reconciliation bill of 2005, we were able to extend the hold-harmless clause through December 31, just ended. That hold harmless now has expired and action will need to be taken this very year or the AMT will return to its pre-2001 exemption levels, and tens of millions of taxpayers will fall into the AMT and have to pay it this year.

Suppose we are able to continue enacting 1- or 2-year temporary patches, as we did last year. First, this strategy assumes that Congress will have the time and the inclination to spend time dealing with the alternative minimum tax every year or two. This means that whatever the issues of the day may be--Iraq, unemployment, natural disasters such as Katrina--Congress will have to stop dealing with those other problems and periodically return to holding harmless people who would be otherwise hit by the alternative minimum tax.

Is the alternative minimum tax an issue that we, as a legislative body, should revisit every year or wouldn't it be better to do away with a piece of legislation that was never intended to kill the middle class but will? Today I can show you some taxpayers who ought to be paying it who have found ways of getting around a provision that no wealthy taxpayer was supposed to get around. I hope this body would be ashamed to say that to anyone, that we would consider going down that road, but there we are.

The second point I wish to make is Congress attempts to enact or do this every year. Every time a patch is considered, there is another chance for taxpayers to be subject to a stealth tax increase. Finally, we have to remember that more than 3 million taxpayers are currently caught by the AMT, and we are putting a chart up here now that will show more than 3 million families and individuals paid this tax in 2004. This is the way it hits every State. In case the Senator who is presiding can't see this, in the case of Minnesota, there are 69,000 people in that State who paid this for the last year we know about, 2004. In my State of Iowa, if I can find Iowa on here, 17,000, and I will bet most of these people in Minnesota or Iowa who are paying it--you know, in 1969, it was never anticipated that they pay it. But they are paying it because that is the way our tax laws work, until you make some change in them, and because this wasn't indexed.

In dealing with the alternative minimum tax, are we going to tell these people we know that isn't fair and we would like to help you, but in fact you are out there on your own? Well, no taxpayer hearing me say that wants to hear that. I hope this body would be ashamed to say to anyone, much less more than 3 million families and individuals, that any extension of a patch or hold harmless will be fundamentally flawed in that it doesn't take people already hit by the AMT into account. If we are going to decide to protect people from falling into the clutches of the AMT, it would be immoral to forget about those already subject to it.

I wish to add, as someone involved in enacting the recent hold-harmless provisions, so people preparing their income tax right now, there aren't any more of them hit by the alternative minimum tax than were hit the previous year, but that is ended December 31. But as one who was involved in that, they were never intended to be a permanent solution. The patches were always ``kicking the can down the road' and letting somebody else worry about them. Well, I am still here, and I have to worry about it, so I am creating problems for myself. But I don't know how you can get people tuned in to doing away with a tax, and you can't do away with it because you have to offset it, but you are offsetting it with a bunch of phantom income that was never supposed to be paid by these people in the first place. The public listening to this are going to say: Well, what planet did these Congressmen come from?

Well, let's go on to another idea, to limit the reach of the alternative minimum tax based on income. We might decide, for instance, that anyone who makes less than $125,000 a year will not be subject to the alternative minimum tax or maybe we could set it at the amount of $200,000 or you could say $400,000. Now, in a nutshell, I have laid out a principal difficulty with setting a minimum threshold based on income. How do we set a number that would be equitable throughout the country? I am not thinking of myself so much as those who come from the so-called blue States, their taxpayers. Any Iowan who has spent any time in Washington, DC, knows right away that it generally costs more to live in those States than in other States, more rural States. It costs more to buy a house, to buy food at the grocery store. What I am trying to get at is that prices and incomes are relative. Taxpayers living in areas such as Manhattan or San Francisco could be especially hard hit by the alternative minimum tax by income. In fixing the AMT, I don't want to move problems around or reassign hardships. That is akin to reassigning the tables and chairs on the deck of the Titanic.

Another proposal which has been suggested is to allow certain preference items in the calculation of the alternative minimum tax. This would allow taxpayers to count items, such as a personal exemption, the standard deduction, the State and local taxes, against their income for the purposes of calculating AMT liability. This approach is also fraught with difficulty and unnecessary decisions.

To implement this proposal, we would have to arbitrarily give some taxpayers an escape hatch, while others would not be able to escape the AMT.

If we allow State and local taxes to be a preferenced item, for example, we are giving an advantage to people who choose to live in high-tax jurisdictions over those who choose to live in low-tax jurisdictions. In my way of thinking, it is not fair for the Federal Government to give more favorable tax treatment to some taxpayers because of where they live. Also, it seems likely that taxpayers who pay the most in State and local taxes are going to be wealthy taxpayers whom the AMT was supposed to tax in the very first place.

If we were to give the standard deduction preferential status in calculating AMT liability, then I have concerns about the impact this might have, for instance, on charitable giving. If we only allow the standard deduction to be taken against the AMT, people may decide not to make charitable donations they might otherwise consider. On the other hand, we could allow individuals to count their total charitable contributions when calculating AMT. This approach favors those wealthy enough to make large charitable contributions.

The point I make is allowing taxpayers to consider certain preferenced items when calculating their AMT liabilities will make it necessary to favor some taxpayers and will lead to more bills making more changes in the future to the AMT as various groups or interests fight to allow a given exemption or deductibility they favor to be taken against the AMT liability.

These are all items which have been floating around as suggestions to fix this problem we have. I don't think any of them are very sound tax policy. They might help some people, but they are going to hurt others.

Before I explain how we can deal with the AMT once and for all--and I have already pointed out what I think that is, and that is repeal--I wish to explain how various proposals impact the number of taxpayers already hit by the AMT as calculated by the nonpartisan Joint Committee on Taxation.

This chart shows numbers from last year. As the blue line on this chart shows, under current law, the number of AMT filers will jump by over 20 million this year if Congress does nothing.

The red line shows what would happen if the exception applicable in 2005 was made permanent and indexed for inflation still at a higher level, hitting people who were never intended to be hit, but it would still moderate the impact for tens of millions of people. Clearly, the number of taxpayers affected is less, but still a very large number that, after dropping to a low of 1.7 million people in 2011, begins to increase again, to 2.1 million people by the year 2016.

The orange line represents the establishment of a 24-percent rate along with the 2005 exemptions made permanent and indexed for inflation. This plan just described--the orange line--follows the trend of the red line as it incurs a drop before creeping back up.

Finally, the green line on the chart shows what would happen if we took the 1985 exemption amount, which was $30,000 for individuals and $40,000 for joint returns, and indexed it for inflation. As with the other three lines, the number of taxpayers affected drops more before creeping back up once again.

Although some of these options seem to assist most taxpayers, do not be fooled by the large scale of this chart. Even the option to index by 1985 exemption leaves at least several hundred thousand taxpayers exposed to the AMT. It would be difficult to explain to these people why others deserve fair treatment and they do not.

Clearly, there is only one way, then, to fix the alternative minimum tax so that no taxpayer is subject to what has become a complete policy failure, because even some wealthy people who were supposed to pay a minimum tax for the privilege of living in America are able to get around it as well. We must completely repeal the individual alternative minimum tax. There is a bipartisan consensus that only complete repeal is an adequate solution to this problem. Chairman Baucus, with me and with Senator Crapo, Senator Kyl, Senator Roberts, Senator Schumer, and Senator Smith, last month introduced the Individual Alternative Minimum Tax Repeal Act of 2007. By the way, that is a bipartisan group of people.

The alternative minimum tax was originally conceived as a means to ensure that the Tax Code was equitable and more progressive. Ironically, the only equitable thing to do is to completely banish the individual AMT from the Tax Code. Any other solution will entail we treat taxpayers in similar situations differently or that we arbitrarily choose winners and losers.

As I have said many times, the alternative minimum tax has been a complete and absolute failure. The alternative minimum tax was only supposed to hit a very small number of wealthy taxpayers who were able to legally eliminate their entire income tax liability. In reality, the AMT is gradually consuming our middle class and is projected to absorb more revenue coming in from the alternative minimum tax than the regular income tax in just a little while. Furthermore, the alternative minimum tax does not even prevent wealthy taxpayers from eliminating their tax liabilities. If Members have heard me say that four times, I say it to impress that the original intent of the alternative minimum tax is not even being met.

For the tax years 2003, the IRS calculated that there are 2,366 taxpayers with incomes of over $200,000 a year or more who did not pay any income tax. These 2,366 taxpayers did not use medical or dental expense deductions to limit their tax liability.

We must repeal the AMT. We must do it without offsetting any revenue the AMT is expected to collect in the next few years because it was never intended in 1969 that these people pay the alternative minimum tax. I have made this point before but cannot make it too many times: The AMT was never intended to be a significant source of revenue. It was supposed to be making a point that when some of the very wealthiest use every legal means they can--and I stress ``legal' because these are not criminals--every legal means to avoid paying income tax, they ought to pay a little bit for the privilege of being in America. Not that they don't pay in other ways--it is a matter of progressivity as much as it is the privilege of living in America, to be a matter of principle. It was never meant to be a significant source of income.

Despite this, we will see the alternative minimum tax ballooning Federal revenues to historically high levels if something is not done. This chart which I used a couple of days ago shows how revenues are projected to exceed the 30-year historical average. This historical average is actually about a 50-year historical average, somewhere between 17 percent and 19 percent. We are at the historical average right now. Even though we were a little bit below after the income tax cut of 2001, we are back up to 18.4 or 18.6 of GNP. If we do not do something about this alternative tax and we also continue to collect it from people who were never intended to pay it, this is where we end up--with income coming into the Federal Treasury way above the historical average.

I emphasize historical average, not that it is sacrosanct, but I come to the conclusion that over a period of 50 years, if we have a tax policy falling between 17 percent and 19 percent--and this is whether there were 93 percent marginal tax rates that President Kennedy did away with or as low as 28 percent marginal tax rates that we had in the tax year of 1986 under Reagan--if we overlap all of the marginal tax rates on top of the GNP portion the Federal Government takes, we still average 17 percent to 19 percent, which shows that it does not matter how wealthy you are, some people come to the conclusion that they will only work so hard and pay so much tax regardless of how high the marginal tax rate is, and you get the same amount of money coming in.

So try to tax the wealthy, raise the marginal tax rate, you get less revenue. If you want to soak the rich, lower the marginal tax rate because they are people who will take their money out of leisure, they will take it out of nonproductive investments such as antique and gold and put it into productive investments because probably they are greedy and they want to make more if it is worth working to make more.

Regardless of where we set it, 17 percent to 19 percent seems to work because, at least in my judgment, a very commonsense judgment, it is a level of taxation that there has not been a revolt against. It is a level of taxation that 50 years of our country shows has increased the standard of living for the American people very dramatically.

If we consider the AMT to be fundamentally an unfair tax, any tax that would replace it would be equally unfair. Anyone who wants equity to be a fundamental value represented by our Tax Code or who wants fair treatment for this country's taxpayers must support complete repeal of the alternative minimum tax and should support the Baucus-Grassley bill, which is the Individual Alternative Minimum Tax Repeal Act of 2007, a bipartisan bill.

I yield the floor, and I suggest the absence of a quorum.

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