San Diego Union Tribune

March 31, 2005

IRS commissioner suggests scuttling alternative minimum tax

By Finlay Lewis
COPLEY NEWS SERVICE

WASHINGTON – The head of the Internal Revenue Service said yesterday that he favors junking a provision of the tax law that is looming as a growing threat to the wallets of middle-income Americans, including a disproportionate number of Californians.

IRS Commissioner Mark W. Everson told reporters that the alternative minimum tax is "sort of horrific" because of the unpleasant surprise that it offers many unwary taxpayers when they complete their federal returns.

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Saying that his main concern is increasing taxpayer compliance with the Internal Revenue Code, Everson said the alternative minimum tax, often called the AMT, simply adds to taxpayer frustration.

"Nobody can make a straight-faced argument that says that (the AMT) helps people feel better about paying their taxes, so I agree with all of those who call for a way to get rid of this two-track system," he said.

Many taxpayers must recalculate their federal taxes after completing most of the steps under the regular tax law to see whether the alternative minimum tax applies. As mandated by the alternative minimum tax law, they must omit from their recalculations certain popular deductions such as those for state and local taxes and also their personal exemptions. They then owe the federal government the higher of the two amounts.

Studies have shown that California is fourth among all the states in terms of the percentage of its taxpayers who are affected by the tax, which hits high-income states hardest.

Congress enacted the alternative minimum tax in 1969 as a way of making sure that wealthy taxpayers would not be able to avoid any federal tax liability by exploiting tax shelters and other loopholes.

But unlike the regular federal tax brackets, the AMT was never indexed for inflation. Over time, that has meant that increasing numbers of taxpayers of more modest means have had their taxes raised by the alternative minimum tax. Meanwhile, the tax cuts enacted during President Bush's first term, by reducing many taxpayers' regular tax liability, have forced them to pay the alternative minimum tax.

"It seems to me it's sort of horrific that somebody could try to navigate the whole system and get down to the bottom and then we say, 'Just kidding. You really have to pay $2,000 more because of the AMT,' " Everson said.

In a recent study, the nonpartisan Congressional Budget Office found that about two-thirds of all middle-class taxpayers with adjusted gross incomes between $50,000 and $100,000 will owe money under the alternative minimum tax by 2010.

Everson said that fixing or abolishing the alternative minimum tax was his top issue when he testified recently before an advisory commission appointed by the president to study changes in the tax law. The panel is to present the White House with its recommendations by midsummer.

His recommendations may meet resistance. Eliminating the AMT would cost the government between $500 billion and $600 billion in lost revenue over the next decade, according to Congressional Budget Office estimates.

In addition, some Republican strategists say they are not inclined to assign a high priority to dealing with the AMT since the states most heavily affected by the tax are mainly those that vote for Democratic candidates.

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