Making Further Continuing Appropriations for the Fiscal Year 2007
MAKING FURTHER CONTINUING APPROPRIATIONS FOR THE FISCAL YEAR 2007 -- (Senate - February 14, 2007)
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ALTERNATIVE MINIMUM TAX
Mr. GRASSLEY. Mr. President, I think it was 48 hours ago I opened a discussion with my fellow Senators on the alternative minimum tax. As I pointed out at that time, it is generally recognized that the alternative minimum tax is a policy failure.
Created in 1969, in response to the discovery that 155 wealthy taxpayers--and let me emphasize that I am talking about 155 wealthy taxpayers--were able to eliminate their entire tax liabilities through legal means, the AMT has now evolved into a place where, because it wasn't indexed, it has captured more than 3 million middle-class Americans as of 2004. The AMT was never supposed to affect anyone except the very wealthy people.
I am using 2004 numbers because 2004 is the most recent year we have completed data. Three million people in that year were hit by AMT, even though since 2001 we have had in place a tax policy that no additional people should be hit by the alternative minimum tax.
At the time I was visiting with my colleagues 2 days ago, I cited the widespread observation that the most significant structural flaw afflicting the AMT is the failure to index its rates and exemptions for inflation. This failure, then--and I alluded to this a minute ago--has resulted in the gradual encroachment of the alternative minimum tax to hit middle-class taxpayers who were never intended to pay this tax.
Despite the widespread agreement that something needs to be done with the alternative minimum tax, agreement on what exactly to do is not so widespread. A major factor in the disagreement relates to the massive amount of money the alternative minimum tax brings to the Federal Government. In 2004, from these 3 million taxpayers hit by this tax, more than $12.8 billion was paid into the Federal Treasury. If we don't extend the most recent alternative minimum tax hold-harmless that actually expired at the end of 2006, the amount paid by those 3 million taxpayers is expected to balloon to a much greater amount. And, of course, when you go beyond that, into the long-term budget forecast, it is going to continue to grow and grow, with middle-class taxpayers paying a tax that was meant to be for 155 wealthy people.
When forecasters put their projections together, they are working under the assumption that the hold-harmless that was extended in last year's tax bill will not be extended because they base their assumptions on current law. This means the hold-harmless provisions ended December 31, 2006, and money being earned right now is going to hit millions more people.
People who guesstimate how much money comes into the Federal Treasury--and we have people both in the executive branch and the legislative branch who have that as their responsibility, so we can make good tax policy--take into consideration what is current law, and they are planning on these millions of middle-class taxpayers paying this alternative minimum tax, even though they were never intended to pay it. Because of this, budget planners make the assumption that revenues will be much higher than everyone who is frustrated with the AMT thinks that amount of money ought to be, as well as the number of people who are going to be paying it.
The reason for that is the alternative minimum tax tremendously balloons the revenue base, as it is projected to increase revenues as a percentage of gross domestic product. There is a great deal of evidence to support this.
On a side note, a senior, well-respected tax lawyer on the other side of the aisle in the other body took exception to my use of the term ``ballooning.' The staffer wrote an article and criticized me for that term. Well, I am not used to staff writing articles criticizing Members of Congress, so I happened to respond to that staffer's criticism through my own staff. The essence of the senior staffer's criticism was that the term ``ballooning' ignored the accounting for the interaction of bipartisan tax relief with AMT costs. As we pointed out, ballooning revenue from the AMT occurs in the outyears, whether the bipartisan tax relief is extended or made permanent. I will talk more about that in a few minutes.
The nonpartisan Congressional Budget Office has consistently forecast this ballooning year after year. This chart which I have before me now for you to look at, reproduced from the Congressional Budget Office's long-term budget outlook, was published in December 2005 and shows how Federal revenues are expected to push through the 30-year historical average and then keep going up.
You can take that historical average back 30 or 40 years for sure, and maybe longer than that, but the historical average is here and current law is actually going to bring in this much revenue, and that includes the ballooning of the alternative minimum tax.
I want to note that although the Tax Increase Prevention and Reconciliation Act of 2005 was signed into law after this analysis was published, the 2006 tax bill extended the AMT hold-harmless through December 31 last year, and this chart shows Federal revenues all the way through to the year 2050. It is important to note the long-term effects then of the alternative minimum tax on the revenue base.
There may be some doubters who hesitate to attribute this ballooning of revenues to the alternative minimum tax, but this chart illustrates the drastic expansion of the AMT under current law over the next 43 years. Over the next 43 years. This is also from the nonpartisan Congressional Budget Office. You can clearly see that the share of households subjected to the alternative minimum tax is alarmingly around 65 percent.
Let's go through that again. You can see from the new chart which I have put up here that the share of households subjected to the alternative minimum tax increases by the year 2050 to about 65 percent of taxpayers. The reason why this 65 percent--or even going back to here, or even back to here--is significant is because, as I told you 48 hours ago, and as I tell my colleagues now, this alternative minimum tax was put in the tax law to hit wealthy taxpayers, 155 at that year, who didn't pay any tax whatsoever.
It was felt that everybody, particularly wealthy people living in this country and who benefit from this country, ought to pay some sort of a tax. It was never intended to hit this percentage of taxpayers, or this percentage of taxpayers, and surely not this percentage of taxpayers. And if we do nothing, it is going to be 65 percent. I don't know what the population of this country is going to be in 43 years, but I know that 65 percent of the population in 2050 will be more, quite obviously more than the 155 taxpayers the AMT was intended to target.
This chart also shows how the AMT will consume a greater and greater share of the total individual income tax liability. The Congressional Budget Office report states:
By 2050, roughly 15 percent of the individual income tax liability would be generated by the alternative minimum tax compared with about 2 percent today.
This is what will happen if we don't do anything. This is going to happen. The analysis done by the Congressional Budget Office clearly shows an upcoming ballooning of Federal revenues, accompanied by a corresponding bloating of the share of households and the share of total liability attributed to a tax that was only intended to hit 155 people 39 years ago.
A particularly wrongheaded argument that has been advocated is that the Bush tax cuts are responsible for increases in the number of people hit by the alternative minimum tax. Some think the Bush tax cuts are increasing some people's income so much that they are subject to the alternative minimum tax and that making the tax cuts permanent will only make those problems worse.
This sort of reasoning is deceptive and could not be more wrong. First, the analysis that I presented--done by the Congressional Budget Office--looks forward all the way to 2050, and the Bush tax cuts under current law sunset in 2010. As I previously said, the AMT's greatest flaw is that it is not indexed for inflation, and inflation is going to continue whether the Bush tax cuts are extended or not. Inflation is going to be there.
This next chart from the Congressional Budget Office illustrates how the alternative minimum tax will continue to be a money machine, regardless of any other factors. The bottom line illustrates individual income tax liabilities if the Bush tax cuts are made permanent and the AMT is modified, the middle line illustrates current law with the permanence of the Bush tax cuts, and the very top line--current law. If the Bush tax cuts are allowed to sunset and the AMT is allowed to grow and consume our middle class, the AMT will still balloon revenues anyway. Any argument that making the Bush tax cuts permanent will worsen our AMT problem is completely false, and this chart proves that. The AMT is a problem all by itself.
As I said earlier, the problem with all of the projections showing the AMT ballooning revenues is that these projections are used to put together budgets. This means the central problem in dealing with the AMT is money. There are some people who say we can only solve the AMT problem if offsetting revenue can be found to replace the money that the AMT is currently forecast to collect. Anyone who says this sees the forecasts showing revenue being pushed up as a percentage of GDP--and they are high-tax people and yet higher tax people to satisfy them--and they want to keep it there. These arguments are especially ridiculous when one considers that the alternative minimum tax was never meant to collect so much revenue and collect it from the people who are going to end up paying it, the middle class people, if we don't do something about it.
As a policy instrument, the alternative minimum tax has been and continues to be a complete failure, as I discussed 48 hours ago. The alternative minimum tax was originally conceived as a means to ensure that extremely wealthy taxpayers were not able to game the system and to avoid their entire tax liability. In 1969, the alternative minimum tax was calculated to hit only one out of a half a million people. There is absolutely no way anyone can call the AMT anything close to a success. The alternative minimum tax has even failed in its objective: to ensure that no citizen, regardless of how wealthy, was able to completely avoid paying at least a little bit of Federal income tax because we have this anomaly.
In 2004, the Commissioner of the Internal Revenue Service, Mark Everson, informed the Finance Committee that the same number of taxpayers, as a percentage of the tax-filing population at large, continues to pay no Federal income tax.
So even to hit the people who were supposed to be hit, there are people in a tax situation, legally, able to avoid not only the regular income tax but to avoid the alternative minimum tax. So it is a failure by its own reason for existence.
According to an IRS analysis of the tax year 2003 data, we had 2,366 taxpayers with incomes above $200,000 or more who did not use the medical or dental expense deduction and had no income tax.
The AMT has failed in every way except for the ability to raise very large sums of money, and it was never intended to be a tax-producing machine. It was only intended to hit people who were not going to pay any income tax and ought to pay a little bit for the privilege of living in America. While it may be hard for some to turn down taxpayers' money, whether we are supposed to collect it or not, no one seems to have trouble spending it. This means that some want the taxpayer to pay the price for a tax that was designed poorly and through the comedy of errors was allowed to flourish.
It is simply unfair to expect taxpayers to pay a tax they were never intended to pay--and that means middle class America. And it is even more unfair to expect them to continue paying for that tax once we get rid of it. The reform or repeal of the AMT should not be offset because it is money we were never supposed to collect in the first place.
The way to solve this problem is to look on the other side of the ledger, the spending side. Budget planners need to take off their rose-colored glasses when looking at long-term revenue projections that include a tax by middle class people who were never intended to pay that tax, the alternative minimum tax, and to read the fine print. In general, it is a good idea to spend money within your means. That is true in this case as well. If we start trying to spend revenues we expect to collect in the future because of the AMT, from people who were never expected to pay it, it was never supposed to come in the first place, we will be living beyond our means. We need to stop assuming that record levels of revenue are available to be spent and to recognize that the AMT is a phony revenue source.
As we consider how to deal with the AMT, we must first remember that we do not have the option of not dealing with it unless we want to kill the middle class. The problems will only get worse every year and make any solutions more difficult. We must also be clear that the revenue the AMT would not collect as a result of repeal or reform should not be offset as a condition for repeal or reform. We should not call it lost revenue because it is revenue that the middle class was never expected to pay. Making the offsetting of the AMT's ill-gotten gains a condition of the AMT fix is to punish the American taxpayers for an ill-conceived and poorly executed policy that has been a total failure.
Aside from not increasing the proportion of wealthy taxpayers who pay income taxes, the AMT is projected to balloon Federal revenues over historical averages and to become a greater source of revenue than even the regular income tax. Budget forecasters need to recognize that the AMT is not a legitimate source of revenue, and Congress needs to be disciplined enough to show restraint on spending so that an AMT solution doesn't boil down to the replacement of one misguided policy by another misguided policy.
I yield the floor.
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