Fixing the AMT mess

THIS TIME NEXT YEAR, “alternative minimum tax” will either be Google’s most popular search term or a forgotten phrase from an obscure policy debate. The first option is more likely because, for it to be forgotten, Congress will not only have to hold that debate, it will have to resolve it. And that’s never a wise bet.

The AMT, as it’s known, will affect about 4 million taxpayers this year. Next year it could affect 23 million. It’s safe to say that they will not be pleased.

The AMT is a parallel tax system intended to ensure that wealthy Americans don’t avoid paying taxes by taking too many deductions. Congress established the AMT in 1969, and, in 1970, only 20,000 were wealthy enough to have to pay it. (Filers who may be affected have to figure their taxes twice: first the usual way, with deductions, and again under the AMT, which is 26% or 28%. Whichever amount is higher, they pay.)

But when Congress created the AMT, it made a major mistake: It failed to index it to inflation. So a tax designed to affect only the affluent is increasingly being paid by middle-income taxpayers, including some married households with annual incomes as low as $100,000.

Congress did make a “patch” to the AMT last year, raising its exemption levels so it wouldn’t affect so many taxpayers.

But the patch is just that: It’s not permanent. And that could actually be a good thing. Members of Congress on both sides of the aisle now say that fixing the AMT permanently is a priority. As usual, however, what that means isn’t exactly clear.

House Democrats are drafting legislation that would ensure that taxpayers who make less than $200,000 won’t have to face the AMT. In the Senate, Finance Committee Chairman Max Baucus (D-Mont.) and ranking minority member Charles E. Grassley (R-Iowa) have endorsed abolishing the tax outright.

One complicating factor is figuring out how to offset lost AMT revenue. The government would have to make up about $1 trillion over the next 10 years if the AMT is abolished and President Bush’s tax cuts are extended past 2010. Reform of the AMT probably will require raising taxes or cutting spending -- maybe both -- and neither option is especially attractive to politicians with an eye on the 2008 election.

Of course, there’s never a good time to fiddle with the tax code. So Congress may as well be brave and take this opportunity to simplify the tax code across the board, eliminating complicated tax breaks and demystifying the process for bewildered taxpayers. It is an unlikely dream. But some clarity would go a long way toward restoring faith and promote efficiency in the federal government.