AMT may thwart best-laid budget plans

NEW YORK (CNNMoney.com) -- President Bush has promised to submit a five-year budget proposal to Congress that will achieve a balanced budget by 2012 and make permanent his tax cuts.

But achieving those goals may be a lot more expensive to millions of taxpayers than it appears if the president's budget does not take into account the high cost of repealing or at least reforming the alternative minimum tax (AMT).

In the past, federal budget projections have assumed that the AMT, which results in a higher tax bill, remains on the books. But since the tax, originally intended for the wealthy, now threatens to catch tens of millions of middle-income taxpayers, it's highly unlikely that politicians will leave the AMT unchanged.

But just how much they will change it and whether they can achieve a balanced budget at the same time is a big question mark. "It's a very expensive proposition and will require very hard choices in every other part of the budget," said Harry Zeeve, national field director for the Concord Coalition, a nonpartisan fiscal policy watchdog. "This is where campaign rhetoric and fiscal reality bump up against each other."

On Thursday afternoon, Senate Finance Committee Chairman Max Baucus (D-Mont.) and ranking Republican and former committee chairman Charles Grassley (R-Iowa) introduced legislation to fully repeal the AMT.

"This bill is really a bellwether for one of the Finance Committee's biggest priorities this year. This Congress intends to provide tax relief to middle-income Americans in a fiscally responsible way, and the AMT is the right place to start," Sen. Baucus said in a statement.

The Tax Policy Center estimates that repealing the AMT would cost $945 billion between now and 2017, assuming the president's tax cuts are allowed to expire. If they're extended, the projected cost over 10 years rises to $1.7 trillion.

If no further legislation is passed, the number of taxpayers nabbed by AMT will jump from 3.5 million in 2006 to 23 million for tax year 2007 and to 39 million by 2017, according the Tax Policy Center. That assumes the president's tax cuts expire as scheduled. If they don't, then 53 million taxpayers -- or about half of all taxpayers -- will pay the AMT by 2017.

Those hardest hit: married couples with kids who take a lot of the deductions and credits disallowed under AMT. The Tax Policy Center estimates that by 2010 nearly 90 percent of married couples with two or more children and an adjusted gross income between $75,000 and $100,000 will be subject to AMT.

It's no wonder then that "doing something" about the AMT garners support on both sides of the aisle. But the question is, Will it generate the political will necessary?

Doing something means either a) finding ways to replace the revenue lost if the AMT is repealed or reformed; or b) reducing spending to accommodate a smaller federal budget.

In other words, to make any meaningful change with respect to AMT in the next few years, lawmakers will have to make painful choices certain to tick off taxpayers and/or beneficiaries of entitlement programs like Social Security and Medicare.

Meanwhile, the latest deficit estimates from the bipartisan Congressional Budget Office (CBO), put the 10-year deficit at $1.76 trillion, or 1.0 percent of GDP, assuming the AMT remains on the books and the tax cuts expire as scheduled. If they're made permanent, CBO estimates the deficit would grow to 2.3 percent of GDP over the same period.

Should Congress decide to reform or repeal AMT, and raise regular income tax rates or eliminate certain deductions to make up for some of the revenue loss, that will be perceived as raising taxes. But that's not how Tax Policy Center director Len Burman sees it. "You're trading off an irrational tax for a more rational one," he said.

There are ways to repeal or reform AMT without increasing the deficit, Burman said. For instance, if Congress repealed the state and local tax deduction that alone could make up for the revenue loss, assuming the tax cuts are allowed to expire, Burman said. If the cuts are made permanent, other changes would be required as well.

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