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Assumptions make AMT reform costlier
Revenue assumptions will influence the estimated value of a change in any reform plan.
October 31, 2005: 4:53 PM EST
By Jeanne Sahadi, CNN/Money senior writer

NEW YORK (CNN/Money) When the president's tax advisory panel releases its final report on Tuesday, lawmakers, academics and average taxpayers will find much to love, hate or dismiss as politically unviable.

And underlying all the panel's suggestions will be a set of assumptions open to debate.

Take "revenue neutrality." The panel was charged with coming up with reform ideas that would raise the same amount of revenue as the current system. But they also were told to assume President Bush's tax cuts would be made permanent -- they are set to expire in 2010.

That affects the calculations of how much revenue needs to be recovered if the alternative minimum tax (AMT) were eliminated, something the panel has said it is likely to propose.

The AMT was originally designed to ensure that wealthy taxpayers pay their fair share of tax by removing some of the deductions and other breaks they'd enjoy under the regular tax system. But because of the way it is set up, the AMT threatens to ensnare over 30 million taxpayers by 2010, most of them middle-income families.

Making the tax cuts permanent greatly increases the number of taxpayers subject to AMT -- and hence the amount of revenue the AMT is projected to generate, according to the Urban-Brookings Tax Policy Center. The Center estimates the AMT would generate $500 billion more revenue over a 10-year period than if the tax cuts were allowed to expire.

In part to help pay for the AMT elimination, the panel has said it would recommend downsizing two popular tax breaks -- the home-mortgage deduction and the tax-free status of employer-provided health insurance.

Members of the panel also said they were considering proposing the elimination of the federal deduction for state and local income taxes.

They cited other reasons for proposing that such breaks be curtailed and those reasons are consistent with their mission to make the tax code fairer and more growth-oriented. For instance, the home deduction disproportionately benefits upper-income taxpayers, and offers greater incentives to invest in homes than in other, more productive capital assets, which are more heavily taxed.

To the extent that the panel has raised the question about preferences in the tax system and has tackled the problem of eliminating the AMT, which politicians have avoided, "they deserve a lot of credit," said Eric Toder, a senior fellow at the Urban-Brookings Tax Policy Center, who testified before the panel at one of its public meetings.

What the panel's experience shows us is "how difficult it is to get to revenue neutrality and eliminate the AMT without touching the tax cuts. If you keep all the tax cuts, you've got to take pain somewhere else," said Yale law professor and federal tax expert Michael Graetz, who also testified before the panel in one of its public meetings.

Should any of the tax reform panel's proposals make it to the floor of Congress for debate -- and there's no guarantee they will -- lawmakers will not be bound to assume the tax cuts are here to stay. Instead, they will use calculations from the Congressional Budget Office that would be based on existing law, which currently does not assume tax-cut permanency.  Top of page

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