Alternative Minimum Tax

Floor Speech

ALTERNATIVE MINIMUM TAX -- (Senate - September 19, 2007)

Mr. GRASSLEY. Madam President, I am here to follow through on a promise I made back on June 13. At that time, after several speeches on the alternative minimum tax, I said I was going to continue talking about the alternative minimum tax until Congress took action to protect the roughly 19 million families and individuals who will be hit by it in 2007 who did not have to pay it in 2006--19 million families now affected who weren't affected last year.

I am also here to talk about a promise Congress needs to follow through on, which is to protect these 19 million families and individuals from the alternative minimum tax for the tax year we are in right now, 2007.

In 2006, 4.2 million families and individuals were captured by the AMT. For taxable year 2006, the legislation that temporarily increased the amount of income exempt from the alternative minimum tax expired. So, right now, and for the last 9 months, under current law, we expect around 23 million families and individuals to fall victim to the alternative minimum tax if Congress doesn't act.

This chart illustrates the current situation, using the figures I have already referred to: 4.2 million people were paying the alternative minimum tax last year. But what is submerged underneath the surface there is the 19 million people who are affected because Congress has not taken action yet. Tax year 2007, then, is represented by the boat and is rapidly approaching the AMT iceberg. Right now, most of the iceberg--the part that represents the 19 million additional taxpayers who will be caught by the alternative minimum tax this year--is under water.

The full magnitude of this imminent disaster will become apparent when those 19 million families and individuals start working on their 2007 tax returns starting January 2 of next year. Actually, the situation is worse than I implied--if you can imagine that it can be any worse than that. I wish to say that many families have already fallen victim to the alternative minimum tax. Of course, I am referring to those taxpayers who have to file quarterly returns, quarterly estimated returns.

The last time I spoke to you here on the Senate floor was on the occasion of the estimated tax payments for the second quarter due. I wish to say I am also speaking to my fellow Senators, but I am not sure how many of them might be listening because between June, when I spoke last, and the 3 months since, estimated tax payments for the third quarter were due this past Monday, September 17.

Before I go further, I want to specifically address the size of the population that makes estimated tax payments. In case anyone is thinking this is a very small group of people, the statistics of the income division of the IRS state that for tax year 2004, almost 11 million families and individuals made estimated tax payments. I am not saying each of those filers would be captured this year by the alternative minimum tax, but I surely want to remind everybody of the possibility that the number of people making estimated tax payments is very large, and that those among them hit by the AMT--we have already failed them by not taking care of this before the first payments were made in January.

As I have said, I last addressed the AMT on the Senate floor 3 months ago. In that time, no progress has been made on taking care of the problem of the AMT.

The next chart actually portrays what the Senate leadership has accomplished in the past 3 months in regard to this issue. It shows a giant goose egg. I have served the people in Iowa in Congress for many years. In that time, I have learned that generally things do not happen overnight. It takes time to formulate ideas, and it takes time to build enough support to take action. That is why I am particularly unhappy with this giant goose egg.

The current leadership has indicated that they have much they wish to accomplish this year. Time is rapidly running out and a plan for dealing with the AMT has not been proposed, much less a specific solution. The prospects of the AMT swallowing huge swaths of taxpayers is not a new problem. But until now, we have been able to keep it in check and not be 3 months away from 19 million more taxpayers being hit by it.

Since 2001, the Finance Committee has produced bipartisan packages--I emphasize bipartisan--that have continually increased the amount of income that is exempt from the alternative minimum tax. This was possible thanks to the help of Senator Baucus, currently chairman of the Finance Committee. Together, Senator Baucus and I were able to minimize the damage caused by the AMT. These increases in exemptions, designed to keep pace with inflation and slow the spread of the alternative minimum tax, were never what I envisioned as a permanent solution. Rather, I consider a permanent solution to be the policies represented in a bill with the number S. 55, called the Individual Alternative Minimum Tax Repeal Act.

Once again, I have to credit Chairman Baucus for his advocacy on behalf of tax fairness, as he introduced this bill with me, with Senators Crapo, Kyl, and Schumer signing on as cosponsors, and Senators Lautenberg, Roberts, and Smith also signed on as cosponsors.

In case any of our friends in the House of Representatives are paying attention, a companion bill exists in H.R. 1366, called the Individual AMT Repeal Act. It was introduced by Congressman Phil English of Pennsylvania. What these bills--the ones I introduced in the Senate and Phil English's bill--accomplish is to completely repeal the AMT without offsetting it. That is, these bills do not replace taxes no longer collected from the AMT by raising taxes someplace else. I think it is very important to ensure that revenues that the Federal Government does not collect as a result of the alternative minimum tax reform are not collected someplace else.

The alternative minimum tax was never meant to raise revenue from the middle class of America and was certainly not meant to bring in the amount of money under existing budget law and, oddly, that the Congressional Budget Office has to count. In other words, it should not be counted in the first place if you weren't intended to tax these middle-income taxpayers, but it happens because the AMT was not indexed. The AMT, then, was conceived as a way to promote basic tax fairness in response to concern about a very small number of wealthy taxpayers who were able to eliminate their entire income tax liability through legal means.

The tax created to deal with this--the AMT--was originally, back in 1969, created with the impact at that time of affecting about 1 person out of 500,000. Now, over the course of 38 years, this small salute to tax fairness has grown into a monstrosity of a revenue raiser.

The next chart is taken from the Long-Term Budget Outlook, a Congressional Budget Office publication. It was last published in December 2005. These are the latest figures I have. This illustrates how the alternative minimum tax will swallow more taxpayers as revenue is collected from the alternative minimum tax, being the green line on the chart, over a period of the next 45 years almost, or any time between now and the next 45 years. You can see how it continually grows.

That is what the CBO, through the present budget laws, has to count. But they count it from people--remember, the middle-income people who were never supposed to pay it as opposed to the superrich, a very small number of people, who would take advantage of every legal loophole--I emphasize ``legal'' loophole--and not pay a regular income tax but pay the AMT. I suppose that is out of the theory that everybody living in this country, particularly the wealthy, ought to pay a little bit of tax as a matter of fairness. You can argue whether that is a good rationale, but that was the rationale back in 1969.

So you can see that there is a massive amount of revenue projected to come in from people who were never supposed to pay it that somehow you are supposed to offset, so that that revenue that was never supposed to come in is not lost. I know that doesn't sound reasonable to the average commonsense American listening to me out there, but that is the way our budget laws are, and that is the way Congress has to respond to it, whether it makes sense or not.

Left alone, the Congressional Budget Office calculates that more than 60 percent of the families and individuals in America will fall prey to the alternative minimum tax as it absorbs more than 15 percent of the total tax liability by the year 2050.

This next chart, which is taken from the same congressional office publication, illustrates how under current law revenues collected by the Government are projected to push above their historical average and keep growing as the AMT brings in more and more money. We can see the historical average into the future for 40 years, but it follows a historical average going back 40 years before now, and because of the alternative minimum tax mostly but also for other law changes, current law, we are going to see the revenue coming in to the Federal Government growing to almost 25 percent of gross national product.

From a philosophical point of view and economic point of view, what is wrong with that? Philosophically, there is less freedom for the Americans. As we spend more of their money, they have less economic freedom. But more importantly, the economic harm that comes from 535 Members of Congress spending 25 percent of the gross national product instead of using the historical average of about 18 percent, that 7 percent difference means we are going to make decisions on how to spend it instead of the 137 million taxpayers in this country deciding how to spend it, where it will turn over the economy more times than if we spend it and do more economic good and create more jobs and have more economic freedom.

That is what is at stake in this whole debate if we do not do anything about the alternative minimum tax and it continues to grow to 15 percent of the total tax liability by the year 2050. This chart points out the increasing power of Congress through taking more money from the taxpayers without even changing the law if we do not do something about this alternative minimum tax.

Anyone who maintains that the alternative minimum tax reform or repeal needs to be offset is not actually doing anything about the problem these charts illustrate. The problems the alternative minimum tax is responsible for are the ballooning Federal revenues above historical levels and a burden on middle-class taxpayers that keeps increasing over time. Offsetting the alternative minimum tax revenue does absolutely nothing to address these issues, and it seems to me to be an attempt to pretend to solve a real problem by actually trying to hide that problem.

Aside from the long-term problems with the alternative minimum tax that we can solve by repealing it, the alternative minimum tax poses a short-term problem to the taxpayers who will fall into its clutches this year if Congress does not act.

Putting aside the legitimacy of keeping this tax, it is not doing what it was intended to do. Putting aside the long-term solution, we are going to end up right now with 19 million more families and individuals being caught by the AMT this year. That 19 million will probably include many taxpayers making estimated tax payments. Some of these families and individuals may not be taking the AMT into account as they make their quarterly payments simply because they do not realize they ought to take this into consideration.

Additionally, there may be some taxpayers who are required to make estimated tax payments when subject to the alternative minimum tax but are not required to make the estimated payments under the regular income tax system. At the end of this tax year, not only could those well-meaning filers find themselves subject to the alternative minimum tax, but they could also face the increased insult of being fined by the IRS for unintentionally miscalculating their estimated tax payments.

I do not believe these well-intentioned taxpayers ought to be penalized because Congress has not come through on its promise to at least keep the AMT from running wild--in other words, going beyond those 4.5 million taxpayers who are already hit by it and not including the 19 million who are otherwise being hit because of inaction so far.

That is why, on July 23, I dealt with this penalty issue by introducing S. 1855, called the AMT Penalty Protection Act. This legislation protects individuals from a penalty for failing to pay estimated taxes on amounts attributable to the AMT in cases where the taxpayers were not subject to the AMT last year. This is not a giveaway meant to compensate for the AMT, as it does not protect taxpayers who paid the AMT last year. Rather, this bill protects the families and individuals who do not yet appreciate the horrible impact our failure to act is going to have on them.

I am not the only one who thinks this legislation is a good idea. We have these Senators--Senators Allard, Brownback, Collins, Hutchison, Smith, and SNOWE--agreeing to cosponsor the legislation.

In addition, I have received letters from the Committee on Personal Income Taxation, the New York City Bar, as well as the National Association of Enrolled Agents in support of the provisions of this safe harbor bill so that the IRS cannot apply interest and penalties resulting from the failure to pay estimated taxes on amounts resulting from the AMT in cases where the taxpayers were not liable for the AMT last year.

I ask unanimous consent to have printed in the Record these letters to which I just referred.

BREAK IN TRANSCRIPT

Mr. GRASSLEY. Mr. President, I would like to believe this legislation is not necessary because we are going to prevent the AMT from swallowing 19 million taxpayers in 2000, but I am not optimistic considering the fact we have not acted yet.

In closing, I encourage--and it is meant to encourage--the Democratic leadership to keep our promise with the American taxpayers and at least modify the exemption amounts for 2007. Of course, the best option is to completely repeal the AMT, and I am going to raise this issue with the Finance Committee members, and I am going to raise the issue with Members outside the committee. We ought to just get rid of it. It is stupid to be saying we are going to collect revenue from people who were never intended to pay, but we are counting that revenue. It is a big shell game. So I will be talking with my colleagues about the sensibility of just getting rid of something.

I will tell my colleagues another reason for getting rid of the AMT. It is supposed to hit the super-rich. We are told by the IRS right now that there are about 2,500 of these super-rich who ought to be paying the alternative minimum tax--we would expect them to pay the alternative minimum tax--but they have found ways legally of even avoiding the alternative minimum tax. So we ought to just get rid of it. But for the time being, the only thing the taxpayers can rely on is the same goose egg we have been sitting on all year.

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