CRS Updates Report on Effects of AMT Legislation

There are two main reasons for the increase in the number of taxpayers affected by the AMT. First, the regular income tax is indexed for inflation, but the AMT is not. Over time this has produced a reduction in the differences between regular income tax liabilities and AMT liabilities at any given nominal income level, differences that will continue to shrink in the absence of AMT indexation. The second reason is that the 2001 and 2003 reductions in the regular income tax have further narrowed the differences between regular and AMT tax liabilities. The combination of these two factors means that, absent legislative changes, there will be significant growth in the number of taxpayers affected by the AMT.²

The effects of the AMT have been temporarily mitigated through an increase in the basic exemption for the AMT. For 2005, the AMT exemption is $58,000 for joint returns and $40,250 for unmarried taxpayers. In 2006, the basic AMT exemption is scheduled to decrease to $45,000 for joint returns and $35,750 for unmarried taxpayers.³

Revenue Effects of Modifying the AMT

The fact that the AMT is poised to affect so many taxpayers in the near future has prompted calls to remedy the situation. Absent legislative action, the AMT will "take back" much of the recently enacted reductions in the regular income tax for millions of taxpayers. Because personal exemptions are not allowed against the AMT, large families will be particularly susceptible to the AMT. In addition, since deductions for state/local taxes are not allowed against the AMT, taxpayers who itemize and deduct these taxes on their regular income tax returns are also likely to be adversely affected by the AMT. However, modifications to the AMT will prove costly in terms of forgone revenue.

When discussing the long-run (beyond 2010) revenue implications of modifying the AMT, it is critical to specify whether it is assumed that the 2001/2003 tax cuts are allowed to expire after 2010 as scheduled or whether it is assumed that the tax cuts are extended beyond 2010. Allowing the 2001 tax cuts to expire as scheduled will reduce the costs of modifying the AMT. If the tax cuts are extended beyond 2010, then the costs of modifying the AMT will increase dramatically. Indeed, if the 2001/2003 tax cuts are extended, then, as a rough estimate, the cost of most options for modifying the AMT will almost double.

The revenue effects of several modifications to the AMT are shown in Table 1.

          Table 1. Revenue Costs of Modifying the AMT

CBO also estimates that allowing AMT taxpayers to take personal exemptions and either the regular standard deduction or their itemized deductions for state/local taxes would reduce revenues by $282 billion over the first five years and $530 billion over 10 years if the 2001/2003 tax cuts expire as scheduled. (A 10-year revenue estimate of this policy option that includes the interactive effects of extending the 2001/2003 tax cuts is not available.)

Repeal of the AMT would be the most expensive policy option. According to CBO, repeal of the AMT would reduce federal revenues by approximately $337 billion over five years and by $611 billion over 10 years if the tax cuts expire as scheduled. The Treasury Department estimates that if the 2001/2003 tax cuts are extended, then repealing the AMT would reduce federal revenues by over a trillion dollars between FY2006 and FY2015.⁴ In fact, the Treasury Department has estimated that by 2013, it would be less expensive to repeal the regular income tax than it would be to repeal the AMT.

Legislative Initiatives in the 109th Congress

On March 17, 2005, the House approved its FY2006 budget resolution, H. Con. Res. 95. The House resolution assumed $106 billion in tax reductions over the next five fiscal years. Also on March 17, 2005, the Senate approved its budget resolution, S. Con. Res. 18. The Senate budget resolution assumed $134 billion in tax reductions over the FY2006 to FY2010 period.

The conference agreement on the 2006 budget resolution, H.Con.Res. 95, was approved by both chambers on April 28, 2005, and contained $106 billion in tax relief over the next five years, $70 billion of which would be protected through the reconciliation process. Under reconciliation, $11 billion of tax relief is allocated for 2006. Although the budget resolution does not identify specific changes to the tax code, it does not provide enough tax relief to hold the AMT harmless over the five-year budget horizon . Holding the AMT harmless would require extension and indexation of the increased AMT exemption levels and extension of the provision allowing taxpayers to use personal tax credits against the AMT⁵.

In addition to the budget resolution, six stand-alone bills affecting the AMT have been introduced in the 109th Congress.

S. 1103. Introduced on May 23, 2005, by Senators Baucus, Grassley, Wyden, Kyl, Schumer, and Crapo. This bill would repeal the AMT for individuals effective for tax years beginning after December 31, 2005.

H.R. 206. Introduced on January 4, 2005, by Representative José Serrano. This bill would provide a business credit for the use of clean-fuel vehicles by businesses located within designated areas. The credit would be allowed against both the regular income tax and the AMT for both individuals and corporations.

H.R. 703. The Middle Class Fairness Act of 2005. Introduced February 9, 2005, by Representative Scott Garrett. This bill would repeal the AMT limitation on the use of state and local tax deductions. It would also index, beginning in 2005, the AMT exemption amount for inflation.

H.R. 1186. Alternative Minimum Tax Repeal Act of 2005. Introduced on March 9, 2005, by Representative Phil English. This bill would repeal the AMT starting in 2006.

H.R. 1538. Introduced April 8, 2005, by Representative Steve Israel. Increases the AMT exemption to $100,000 for joint returns and $75,000 for all other returns. Increases the AMT exemption phase-out threshold. Indexes the AMT exemptions and phase-out thresholds.

H.R. 1599. Introduced April 13, 2005, by Representative Jeb Bradley. Extends and indexes the increased AMT exemption amounts through 2007.

Revenue estimates for these specific legislative initiatives in the 109th Congress are not available.

Administration's Proposal

In its 2005 budget proposal, the Administration proposed a one- year extension for both the increased AMT exemption levels and the provision allowing personal credits to offset AMT tax liability. Both of these proposals were ultimately enacted as part of the Working Families Tax Relief Act of 2004. The Administration also directed the Treasury Department to study and to report back within a year, on long-term solutions to the AMT problem.

In its 2006 budget proposal, the Administration did not address the AMT issue. Subsequent statements by Secretary of the Treasury John Snow indicate that the AMT issue is to be addressed by the tax reform panel appointed by the Administration. Although the tax reform panel has not released its recommendations, it is expected that any tax reform proposals will be revenue neutral. If the reform proposal is revenue neutral, and if a long-term AMT solution is to be incorporated into the panel's reform proposal, then other taxes will have to increase by an amount at least equal to the revenue cost of holding the AMT harmless under the current system. Hence, the reform proposal will need to raise $198 to $642 billion over the next five to 10 years to cover the minimum cost of fixing the AMT.

² For more detailed information on the AMT see CRS Report RL30149, The Alternative Minimum Tax for Individuals, by Gregg Esenwein.

³ For information on the income levels of taxpayers affected by the AMT in 2006, see CRS Report RS21817, The Alternative Minimum Tax (AMT): Income Entry Points and "Take Back" Effects, by Gregg Esenwein.

⁴ These estimates do not include the additional cost that would arise through debt financing of these policy options. These additional costs would be substantial. For instance, CBO estimates that the cost of the debt service associated with maintaining the higher AMT exemption levels and indexation of the AMT would be $132 billion over a 10-year period.

⁵ Effective in 2006, certain personal tax credits (for example, the dependent care credit, the HOPE Scholarship and Lifetime Learning credit, and the D.C. homebuyer's credit) cannot be used to reduce a taxpayer's regular income tax below their AMT liability.