September 15,2010

Grassley: AMT Outlook is Uncertain for Taxpayers, Raises Questions About Deficit Impact of Tax Relief Under Pay-go Rules

Floor Statement of Senator Chuck Grassley
AMT: Policy, Predictability, Permanence, and Prudence
Delivered Wednesday, Sept. 15, 2010

I rise to speak about the Alternative Minimum Tax and the significant surprise impact it will have on tens of millions of Americans unless Congress acts soon.

The AMT was first enacted by Congress in 1969.  The AMT was created in reaction to some very wealthy, very high-income individuals paying no regular income tax.  These high-income individuals were able to do this because they were able to claim a huge amount of tax credits and deductions. 

Probably the sensible way to deal with this problem would have been to curtail the proliferation of tax credits, tax deductions, and tax expenditures.  Unfortunately, however, that is not the course Congress took back in 1969.  Instead, Congress created an alternative tax system.

Now with the AMT, an individual must first calculate his regular income tax.  And then, he must calculate his Alternative Minimum Tax.  The taxpayer compares the two numbers, and pays the higher number. 

As if the regular income tax all by itself isn’t complicated enough!

But it’s gotten much worse over the decades.  The AMT hasn’t merely added complexity, but has ensnared tens of millions of Americans in its clutches.  What was originally intended for less than 200 very wealthy taxpayers back in 1969 has grown to where it ensnares tens of millions of middle-class Americans. 

This is because its key provision, the exemption amount, has not been indexed to inflation.  So, Congress has increased the exemption amount, or “patched the AMT” as we often say, every year since 2001.  Congress has patched the AMT so that only 4 million taxpayers have been subject to it the past few years. 

At this point, however, the AMT is not patched for 2010.  So, unless Congress acts to patch the AMT, rather than only about 4 million Americans being subject to the AMT, more than 26 million will be.  This chart breaks down the number of families and individuals by state who are subject to the AMT.  These families and individuals should be paying the AMT right now.  So, that means there are about 22 million families and individuals who are currently scheduled for quite a surprise, come April 15, 2011.

Roughly 4 million Americans are presumably used to paying the AMT, but the additional 22 million families and individuals currently subject to it may not have realized that they are standing in a hole dug by this Congress.  Until Congress patches the AMT for 2010, then these people should be either having their wages withheld at a higher rate and/or paying estimated taxes to take this into account.  But we’d have to figure that very few of these 22 million Americans are in fact paying higher estimated taxes in anticipation of AMT.  They do not know.

The third quarterly estimated tax payment is due today.  Literally right now, taxpayers across the country are under a legal requirement to pay their estimated tax. 

They should be using the form depicted in this chart.  I hope I don’t have to give this speech again in January when the final estimated payment is due.  It is disappointing that Congress has created a situation where law-abiding citizens who might still trust in Congress to look out for them are at odds with the law, even if only temporarily.   

The betting money is that Congress will patch AMT for 2010.  But confusion reigns.  In many ways, people simply don’t know what to do about this:

  • As I said, taxpayers don’t know how much estimated tax to pay. 
  • The IRS doesn’t know what forms to be preparing for publication. 
  • Tax software firms don’t know how they should program their software. 
  • Tax professionals aren’t sure what to advise their clients. 
  • Government revenue estimators don’t know whether to count the AMT patch in or out.
  • And most importantly, our fellow Americans don’t know how to plan their financial affairs.  Can they afford the vacation or the new car?  Can they afford an additional gift to charity?  Should they contribute more or less to their 401(k)?  The answers to these questions turn, in part, on whether Congress patches the AMT.

So, what’s to be done about this?

The 2005 bipartisan tax reform panel had really two different tax reform options:  the Simplified Income Tax, and the Growth & Investment Tax. But under either option, the bipartisan tax reform panel said that Congress should simply repeal the AMT.

So, that’s what I would favor:  Complete repeal of the AMT.

If that isn’t to be done, I would favor a permanent patch of the AMT.  Given Congress’ actions in this area, it seems likely that we will patch it year to year, so wouldn’t it help with everybody’s plans to simply do that once and for all?

But allow me to address the AMT in the context of statutory pay-go.

Statutory pay-go was enacted earlier this year as part of the other side’s debt limit increase.  Some on the other side of the aisle have described statutory pay-go as the “fiscally responsible” way in which to address the 2001/2003 tax relief extensions.

Statutory pay-go provides that all the regular tax relief for taxpayers under $250,000/$200,000 is permanent.

Statutory pay-go, however, only provides for a patch to AMT for 2010 and 2011.

So, what is going to happen come 2012?  There are at least four possible options:

Option 1:  In 2012 and after, AMT will not be patched.  But I really don’t think that is an option Congress will seriously entertain.

Option 2:  In 2012 and after, AMT will be patched, and paid-for with new taxes.  That would be consistent with statutory pay-go, but does anybody think that would make sense?  Pay for tax relief with new tax burdens?

Option 3:  In 2012 and after, AMT will be patched and paid for with spending cuts.  In general, I believe that we need to use spending cuts to tackle our deficits and debt. 

But we know our friends in the Democratic leadership are allergic to spending cuts.  So, as much as we would like to reign in the record spending spree of the last 18 months, I don’t see my friends on the other side agreeing to cure their allergy to spending restraints.  They’ve rejected roughly $270 billion in spending restraints since adopting the much-ballyhooed statutory pay-go regime.

And then there’s Option 4:  In 2012 and after, AMT will be patched and unpaid for.  That’s certainly an option I am very open to, and quite possibly what Congress will ultimately do.  Money that wasn’t supposed to be collected in the first place shouldn’t be relied on as revenue and so doesn’t need to be offset.

However, if AMT is patched and unpaid for, then there is a hidden $1 trillion revenue loss in the package.

This means that the deficit impact of the so-called “fiscally responsible” package is understated by $1 trillion.  The so-called fiscally prudent statutory pay-go likely has a trillion-dollar understatement of the deficit impact.

If fiscal responsibility is understating an increase to the deficit by $1 trillion, I really wonder what fiscal irresponsibility would be!

The AMT is a serious problem.  It needs to be addressed in a comprehensive, permanent, prompt, and fiscally-prudent fashion.

I yield the floor.