Alternative Minimum Tax Fix? No Rush

WASHINGTON, D.C. – Along with its proposed 2005 budget, the Bush Administration this week produced a document–known as the “blue book” for the color of its cover–detailing its proposals for $1.24 trillion in tax cuts over the next ten years. Compared to the budget, the blue book is light reading at just 195 pages. But like this year’s budget itself, it is most remarkable for what it leaves out.

The budget numbers, for example, assume no new “supplemental” appropriations to fund defense and the war on terrorism over the next five years, even though such spending has totaled roughly $250 billion over the last four, points out the conservative Citizens for a Sound Economy. As for the blue book, it omits the at least $400-billion, ten-year cost of cleaning up the alternative minimum tax mess. Instead of a real fix, the Administration proposes a one-year, $23- billion patch.

The AMT, of course, is that fiendishly complex shadow tax system originally designed to make sure millionaires with special tax breaks for things like oil wells paid at least some tax. Largely as a result of the tax cuts of 2001 and 2003, the AMT is now poised to devour the middle class. IRS National Taxpayer Advocate Nina E. Olson recently designated it the number one problem facing individual taxpayers and described it as a “time bomb on a short fuse.”

How short? Without the proposed one-year patch, nearly 13 million families would owe AMT for 2005, up from 2.6 million for 2003 and 1 million for 1999, the Tax Policy Center estimates. Among those hit in 2005 would be 54% of families with adjusted gross income of $100,000 to $200,000 and 27% of those earning $75,000 to $100,000. Those who have children or live in high-tax states will be particularly vulnerable.

And by 2010, under current law, 33 million taxpayers, including 92% of those earning $100,000 to $200,000 and 73% of those earning $75,000 to $100,000 will pay AMT. (Even with the one-year fix, more than half of families earning $200,000 to $500,000 will owe AMT in 2005, as many of those taxpayers are just now discovering to their dismay they do for 2003 as well.)

At a briefing Monday, Assistant Treasury Secretary for Tax Policy Pamela Olson said President George W. Bush has asked the Treasury to study the AMT problem and come up with a permanent fix to be proposed in next year’s budget. “That’s our goal,” she said.

But the goalpost is moving farther away. As Olson and her Treasury economists surely know, if the tax changes Bush did propose this year are adopted, fixing the AMT will–according to Congress’ 10-budget accounting rules–become even more difficult, not less.

That’s because Bush’s top tax priority is to make permanent various provisions of the 2001 and 2003 tax cuts which are set to expire between 2005 and 2011. By the Treasury’s figuring, that will cost $990 billion through 2014. But it would cost a whole lot more if the AMT didn’t snatch back a big chunk of the “permanent” cuts, particularly from middle and upper middle income families. In 2014, 45 million taxpayers would owe AMT. The bottom line: If other tax cuts, but not AMT relief, are made permanent, fixing the AMT becomes even more expensive.

Good news, once again, for H&R Block (nyse: HRB – news – people ). As the Taxpayer Advocate notes, faced with the complexities of figuring their taxes twice, 80% of AMT taxpayers end up using paid preparers, compared to 55% of all taxpayers.