It's way past time to kill America's worst tax
By Geoffrey Colvin

(FORTUNE Magazine) – IT IS AMERICA'S MOST HATED, INEFFECTIVE, INSIDIOUS tax--and it's just too strong to be killed. That has been the case, in any event, for at least a decade. But now it's possible--just barely possible--that this odious monster's time may have come.

We're talking, of course, about the alternative minimum tax, one of those rare taxes with absolutely no defenders. The IRS's National Taxpayer Advocate has recommended for years that it be abolished; the IRS Commissioner also hates it. The American Institute of Certified Public Accountants, whose members derive much income from the AMT's exquisite complexity, thinks it should be killed. Ditto the tax section of the American Bar Association. Liberals hate it. Conservatives hate it. At least seven bills to repeal it were introduced in the last Congress.

Obvious question: If everyone loathes this thing, how does it survive? Inevitable answer: It brings in a ton of revenue. Congress actually passed a bill to repeal the AMT in 1999, but President Clinton vetoed it because it would hit the federal budget too hard--and back then it was furnishing a measly 0.6% of federal income tax revenue. Today that proportion has more than tripled, and it's rising like a rocket.

So it seems extremely odd to think that now might be the moment when the AMT is vulnerable. But Senator Charles Grassley (R-Iowa), influential chairman of the Senate Finance Committee, along with three colleagues, has just introduced a bill to repeal the AMT. I asked him if there was some particular reason for going after it now. He replied, "Yeah--because it's getting ridiculous. It's taxing people it was never meant to tax and bringing in revenue it was never meant to bring in."

He's right. The AMT, enacted in 1969 (under a different name) to make sure that even the highest-income Americans have to pay at least some income tax, has metastasized. It has been hitting a growing number of taxpayers for years. Now, suddenly, we're at the point on the chart where the line turns a corner and heads almost straight up. About 3.8 million taxpayers had to pay the AMT on the returns they filed this April. Next year it will be just over 20 million. By 2015 it will be 51 million, or 45% of all taxpayers, and the AMT will account for more than half of all individual income tax revenue. Without anyone doing a thing, America will have changed its tax system fundamentally. And Americans will hate it.

That's because the AMT treats ordinary middle-class families like tax-dodging plutocrats. Unlike the regular income tax, the AMT was never indexed for inflation, so every year it devours another mouthful of victims who, in real terms, are poorer than last year's batch. The beast has finally chewed its way down to the vast middle range of American taxpayers. Next year a family of four with an income of $67,890, barely north of the median income for all four-person households, will find itself right at the maw of the AMT. A family of four earning $80,000 will see its income tax jump 17%, a nasty shock that will surprise tens of millions of taxpayers in the next couple of years.

Senator Grassley and his co-sponsors realize that a potentially massive tax revolt is just around the bend. They also realize that repealing the AMT would force large-scale tax reform because it is forecast to bring in more than $600 billion over the next ten years. President Bush wants to kill the AMT as part of a larger proposal from his Tax Reform Commission. "That's fine with me," says Grassley. "But I'll take a bite of the apple anywhere I can get it. And a free-standing bill will do it."

Oh, and what about the AMT's original mission of making sure every last high-income person in America pays at least some income tax? You can guess the answer. The original AMT sprang from the sensational announcement that 155 taxpayers with income over $200,000 had paid no income tax for 1966. Adjusting for inflation, it seems some 297 taxpayers with equivalent incomes paid no income tax in 2002, the most recent year for which the IRS has relevant data. That is, the AMT has not only failed completely in its mission, it has allowed matters to get nearly twice as bad.

A tax that doesn't do what it was supposed to, that everyone hates, and that is about to smack the middle class right where it hurts. A definite goner, you'd think. If only it didn't bring in so much money. Still, something has clearly got to give.

Bottom line: It's way too early to chill the champagne, but you might take the precaution of buying some. ■

GEOFFREY COLVIN, senior editor at large of FORTUNE, can be reached at Watch him on Wall $treet Week With FORTUNE, weekends on PBS.