NEW YORK (CNN/Money) - President Bush in his budget for fiscal 2006 renewed his pledge to make permanent the massive tax cuts of his first term -- but a large and growing number of Americans aren't cheering.
One big reason: While the $1.9 trillion in tax cuts over the past four years have lowered the tax bill for millions of Americans, they also have exposed many to the alternative minimum tax. For those hit, there wasn't a tax cut at all.
"Because of the AMT, some people are not able to take advantage of the tax cuts that Bush made available," said Mark Luscombe, a principal tax analyst with CCH Incorporated, a tax and business law publisher.
The proposed budget does not address AMT reform, though Joshua Bolten, director of the Office of Management and Budget, said it would be addressed as part of overall tax reform, noting that recommendations will be made by an advisory panel at the end of July 2005.
The AMT is a much-despised parallel tax scheme that was put into place in 1969 to ensure that the uber-wealthy don't escape paying income tax. But this coming tax season, some 3 million American taxpayers – mostly upper middle income earners – will be subject to the AMT for 2004.
In dollar terms, the average AMT taxpayer will owe $6,000 more in taxes than he would under the normal tax system, according to the National Taxpayer Advocate, an agency within the Internal Revenue Service whose job is to represent taxpayer interests.
The number of people subject to AMT for last year, roughly triple that of just a few years ago, would be closer to 11 million but for temporary fixes Congress put in place. Those fixes are due to expire at the end of 2005.
If Congress doesn't act to renew them, the AMT problem will quickly escalate. The Tax Policy Center estimates that, come 2010, some 30 million – or nearly one in three taxpayers – will be required to pay AMT. That includes 97 percent of households with two or more kids and income of $75,000 to $100,000.
Critics of the AMT abound. "The AMT is untenable," said Leonard Burman, a co-director of the Tax Policy Center, a nonprofit, nonpartisan tax analysis group based in Washington, D.C.
Nina Olson, head of the IRS's National Taxpayer Advocate, has criticized the AMT as "bad policy" and "a time bomb on a short fuse." Olson, along with countless consumer groups, professional organizations and legislators, has called on Congress to address the AMT scourge.
Even with widespread support, the goal of AMT reform or outright appeal has failed repeatedly thanks to political wrangling on Capitol Hill.
Bush administration officials have singled out AMT as a problem to be fixed. In his speech Wednesday night, Bush called the federal tax code "archaic" and "incoherent," and noted his appointment last month of a bipartisan panel to examine the tax code "from top to bottom." But he but did not specifically mention the AMT.
The panel's recommendations are due this summer.
And while critics are optimistic that the AMT will be addressed as part of any tax code overhaul, they recognize at least one major obstacle: the government is more dependent than ever on the AMT to fill tax coffers.
"It's generating a huge portion of our tax revenues," said the Tax Policy Center's Burman. "Over the next 10 years there's $600 billion in total revenue that (the U.S. government) is counting on from the AMT that just isn't going to materialize" elsewhere.
Inflation is the primary problem
The AMT dates to 1969, when Congress discovered that 155 rich taxpayers had taken advantage of various loopholes to avoid paying income taxes. Among other things, the AMT eliminates many common deductions, including ones for home mortgage loans, state and local taxes, incentive stock option plans, and children, in favor of one large exemption.
There are two main criticisms of the AMT. The first is largely administrative: the only way for taxpayers to know if they are subject to AMT is to calculate their tax burden twice -- once under the traditional system and also under AMT. Under current law, a taxpayer must pay whichever tax is higher.
The second main objection has to do with the exemption amounts, which are not adjusted for inflation. As incomes rise, the result is that more middle income Americans every year qualify for the AMT.
Recognizing that tax cuts would throw more taxpayers under the AMT, Congress in 2001 and again in 2003 raised the exemption amounts -- to $40,250 for single taxpayers and $58,000 for married couples filing together.
In 2006, those exemptions are set to fall back to $33,750 for single taxpayers and $40,000 for joint filers.
Barring an AMT overhaul or more quick fixes from Congress, the Tax Policy Center estimates that nearly 15 million taxpayers will be required to pay the AMT for the 2006 tax year. The numbers are expected to rise every year thereafter, reaching some 30 million in 2010.
But William Beach, a director of the Heritage Foundation, a conservative think tank, doesn't think Congress will ever let the AMT levels balloon to such heights. The need to appeal to middle-class voters is too critical, he said.
"It's a politically powerful group of people who are crying" over the AMT, he said.