A presidential panel said Wednesday that the alternative minimum tax, designed to snare affluent tax dodgers but now hovering over the middle class, should be abolished.
“I think we have to bite the bullet,” Bill Frenzel, a former House lawmaker who served on budget and tax writing committees, said at a meeting of the President’s Advisory Panel on Federal Tax Reform.
It’s the first decision made by the nine tax experts chosen to analyze the nation’s tax system and recommend changes to make it simpler, fairer and more economically efficient.
The consensus to repeal the alternative minimum tax means the panel must replace the $1.2 trillion that the Treasury Department expected to collect through that tax over the coming decade. The president instructed the panel to develop restructuring ideas that raise the same amount of tax revenue as current laws.
Commission Chairman Connie Mack, a former Florida senator, said the government’s tax revenue could be replaced through changes in tax rates or tax breaks in the commission’s recommendations to simplify or replace the tax system.
“The choices range from rates to expenditures,” he said. “No decision’s been made on that.”
A few commission members said the panel should be careful not to let a few wealthy taxpayers avoid paying taxes by repealing the alternative minimum tax.
“That’s not fair,” said Elizabeth Garrett, a public policy professor at the University of Southern California. Taxpayers lose confidence in the tax system when they see a few people escaping taxation, she said.
Congress invented the alternative minimum tax, or AMT, in the late 1960s after learning that a few wealthy individuals paid no income tax. It has ballooned in the decades since under the effects of inflation, and it increases taxes for more middle class families every year.
In recent years, lawmakers have enacted temporary fixes to prevent the AMT from growing as fast as anticipated. A bipartisan group of senators tried to force serious discussion about the AMT by introducing a bill to repeal it this spring.
Those affected must calculate their tax twice, under the regular tax system and then the alternative system, and pay the higher amount. Middle class families hit with the tax often have multiple children, live in high tax states or have large unreimbursed work expenses.
It affects nearly 4 million families this year but will hit nearly 21 million next year and more than 51 million in a decade, according to statistics compiled by the Treasury Department and presented to the panel.
Many commission members agreed that the corporate alternative minimum tax also posed serious problems, but the panel stopped short of recommending its repeal.
The panel has broken up into four working groups to sift through dozens of tax problems and proposals for change. The groups are studying ways to simplify tax laws, adjust current tax laws and replace the tax system in whole or in part.
Former IRS Commissioner Charles Rossotti said the working group discussing simplicity has been trying to zero in on changes that might help the most taxpayers, like streamlining family deductions and credits and savings incentives.
That group has also investigated the myriad thresholds that tell taxpayers at different income levels whether they qualify for those tax breaks.
To encourage more people to save for retirement, the panel considered recommending that employees be automatically enrolled in retirement programs unless they opt out, and expanding tax credits that help low-income families save. No final decisions were made.
Mack said he expects the working groups to develop ideas to be discussed and approved by the full panel later this year. The commission must make its final recommendations this fall.