What Washington Has in Store
Another year of the AMT. (Sigh.) Then a pitched battle over how to get rid of it.
(MONEY Magazine) – Remember "political capital"? A year ago, George W. Bush had a hugely ambitious economic agenda. He'd already won deep tax cuts. Now he promised to fix the Social Security system once and for all and also deliver a simpler tax code. Well, the first part of that plan is all but dead. But tax reform still has a fighting chance.
• WHY? The Band-Aid holding the system together is peeling off. Here's a scary (if theoretical) statistic: The notorious alternative minimum tax, originally designed to stop the rich from exploiting loopholes, could snag 21% of taxpayers in 2006, according to the Tax Policy Center.
• NOW RELAX A BIT In recent years, Congress has passed temporary provisions to keep the number of AMT payers from skyrocketing, and David Brunori of the nonprofit Tax Analysts says it will likely do so again for 2006. Still, lawmakers can't kick this can down the road forever.
In November a Bush-appointed commission on tax reform recommended scrapping the AMT and lowering rates, making up the revenue by eliminating some deductions and putting new limits on other tax breaks, including those for home mortgage interest and health insurance.
The plan faces tough odds. Liberals complain that it locks in Bush's tax cuts, which they think favor the rich. Conservatives wanted radical changes like a national sales tax. And politicians in both parties won't like toying with the mortgage tax break. "It's kind of like coming out against apple pie," says Mark Luscombe of the tax law publisher CCH.
But at least the tax reform panel has gotten the debate off to a reality-based start. It's simple: You can't kill even a bad tax without raising taxes somewhere else. And though the devil is in the details, setting caps on some breaks may not hurt the middle class the way you'd think. The mortgage interest deduction is supposed to encourage home ownership, but it's been especially valuable to affluent people who'd certainly buy houses anyway. Likewise, Gene Steuerle, a tax expert at the Urban Institute, has argued that putting limits on tax-free employer health insurance would temper the rise in medical costs so more people could afford insurance.
The next likely step is for Bush to outline his own plan in the State of the Union address early next year. And that's when, with luck, the real bargaining begins.