Alternative Minimum Tax (AMT) News



New Comprehensive Tax Reform Plan from Citizens for Tax Justice



| | Bookmark and Share

Citizens for Tax Justice released a detailed tax reform plan this week that accomplishes the goals we set out in an earlier report: raise revenue, enhance fairness, and reduce tax incentives for corporations to shift jobs and profits offshore.

A budget resolution approved by the House of Representatives in the spring called for a tax reform that raises no new revenue, while a budget resolution approved by the Senate called for $975 billion in new revenue over a decade. CTJ’s report on goals for tax reform explained why we need even more revenue than the Senate resolution calls for, and the plan we released this week would raise $2 trillion over a decade

Our proposal would accomplish this by ending some of the biggest breaks for wealthy individuals and corporations. The proposal includes the following reforms:

■ Repealing the special, low tax rates for capital gains and stock dividends, as well as the rule allowing accumulated capital gains to escape taxation when the owner of an asset dies.

■ Setting the top tax rate at 36 percent — which would be a significant tax increase on the wealthy because this rate would apply to the capital gains and stock dividends that mostly go to the richest Americans and which are now taxed at much lower rates.

■ Increasing the standard deduction by $2,200 for singles and twice that amount for married couples.

■ Replacing several “backdoor” taxes (like the Alternative Minimum Tax) with President Obama’s proposal to limit the tax savings of every dollar of deductions and exclusions to 28 cents.

■ Repealing several enormous corporate tax breaks, including the rule allowing American corporations to “defer” paying U.S. taxes on their offshore profits until those profits are officially brought to the U.S.

Read our tax reform reports:

Tax Reform Goals: Raise Revenue, Enhance Fairness, End Offshore Shelters
September 23, 2013

Tax Reform Details: An Example of Comprehensive Reform
October 23, 2013



Despite What You've Heard, The AMT Is Not a Middle-Class Tax



| | Bookmark and Share

If Congress departs from its annual tradition of steeply reducing the Alternative Minimum Tax (AMT), 57 percent of the tax will be paid by the richest five percent of Americans and 91 percent of the tax will be paid by the richest fifth of Americans. If Congress does reduce the AMT as usual, almost all of the tax will be paid by the richest five percent of Americans.

The AMT is one of the factors contributing to the hysteria in Washington about the so-called “fiscal cliff,” the point at which several tax cuts expire and several spending cuts go into effect at the end of this year. Lawmakers and observers often mistakenly portray the AMT as a tax that will affect middle-income Americans if it is not controlled.

The Washington Post reports that if Congress does not act, “the AMT is in line to affect about 33 million households in the 2012 tax year.” The paper also reports that as many as 60 million households could face filing delays because the IRS would have to update its forms and systems to determine who would be subject to the more expansive AMT.

But the vast bulk of actual AMT payments would come from a smaller number of very well-off Americans. CTJ’s fact sheet on the AMT shows that even if Congress fails to provide the usual AMT relief, the middle fifth of Americans would pay just one percent of the AMT. The bottom two fifths of Americans would pay virtually none of the AMT.

The AMT is a backstop tax designed to ensure that well-off Americans pay at least some minimum level of tax no matter how good they are at finding deductions, credits and loopholes that reduce their regular tax calculation. The exemptions in the AMT that keep most of us from paying it have never been indexed to rise with inflation, so Congress has increased them each year for the last several years.

More importantly, the Bush tax cuts reduced the regular income tax without making any permanent corresponding change in the AMT. In other words, most of the impact of an unrestrained AMT would be to limit the Bush tax cuts for well-off Americans. What would be so terrible about that?



Grover Norquist Becoming A Political Ball and Chain?



| | Bookmark and Share

For years, conservatives and many moderates have believed that signing Grover Norquist’s no-tax pledge was a ticket to electoral success. Maybe it was, maybe it wasn’t. But on election night 2012, it began to look like the pledge was actually a liability as signatories to it were sent packing by voters in states from New Hampshire to Ohio to California. While the results are still coming in, at least 55 House incumbents or candidates and 24 Senators or Senate hopefuls who signed the pledge lost on Election Day.  That means in the next Congress, the number of pledge-signers will be 264 at most, down from 279, and Grover’s fans could potentially become the minority in the House, with only 216 seats, according to reports from Bloomberg (link not available).

Rather than a boon, in many Senate races signing Grover’s pledge turned out to be a burden this election year. In the Ohio Senatorial race for instance, Republican State Treasurer Josh Mandel attempted to portray himself as an independent and principled thinker, but this image was tarnished by the fact that he had signed the no-tax pledge. In fact, Mandel gave a pretty limp response to his opponent, Democratic Senator Sherrod Brown (who ultimately won the race), who pointed out during a debate that signing the pledge equaled “giving away your right to think.”

Similarly in Massachusetts, tax policy became the focal point of difference between Republican Senator Scott Brown and Democratic candidate Elizabeth Warren. During a debate between the candidates, Warren warned voters that “instead of working for the people of Massa­chusetts” Brown had “taken a pledge to work for Grover Norquist.” Such criticism helped voters see that he was not as independent from conservative influence and the Republican Party as he liked to portray himself in deep blue Massachusetts.

Earlier this year, the stranglehold of the no-tax pledge on the Republican Party and candidates was already showing signs of cracking as a substantial number of Republican candidates either refused to sign the pledge or repudiated their former fealty to it. Leading the charge, Virginia Republican Representative Scott Rigell advised fellow Republicans to not sign the pledge and ran explicitly on the platform of taking a balanced approach to deficit reduction. In contrast to many of his colleagues who lost running on the no-tax pledge, Rigell was easily re-elected to his House seat.

Moving forward, we expect more lawmakers will realize that taking a dogmatic anti-tax approach is not only bad policy, but that it’s also increasingly bad politics.

Picture of Norquist in a bathtub courtesy the New Yorker magazine. 



New from CTJ: The Alternative Minimum Tax Is Not a Middle-Class Tax



| | Bookmark and Share

A new CTJ fact sheet explains that for the 2011 tax year, 97 percent of the Alternative Minimum Tax (AMT) will be paid by the richest five percent of taxpayers and 58 percent of the AMT will be paid by the richest one percent of taxpayers. Even in the (very unlikely) event that Congress fails to enact AMT relief for 2012, the tax will still largely be borne by the well-off.

Read the fact sheet.



State Fact Sheets -- President Obama Cut Taxes for 98 Percent of Working Americans



| | Bookmark and Share

A recent survey shows that fewer than one in ten Americans knows that that President Obama cut their taxes in 2009 and 2010, and many believe he actually raised them. CTJ released this report and state-by-state fact sheets before Tax Day showing that the recovery act signed into law by President Obama cut taxes for 98 percent of working Americans.

Read the report and state fact sheets.

A new report from Citizens for Tax Justice explores the tax proposals included in the federal budget outline that President Obama submitted to Congress on February 1. Like the budget he submitted last year, it is a vast improvement over the policies of the Bush years and continues to outline a progressive reform agenda.

But, also similar to last year, the President’s budget could be greatly improved with more aggressive policies to raise revenue. Over the coming decade, the President proposes to cut taxes by $3.5 trillion. We include in this figure the cost of extending most of the Bush tax cuts and relief from the Alternative Minimum Tax (AMT) as well as additional tax cuts that President Obama proposes.

His budget would offset a portion of this cost with provisions that would raise $760 billion over a decade by limiting the benefits of itemized deductions for the wealthy, reforming the U.S. international tax system and enacting other reforms and loophole-closing measures.

The report concludes that the federal government should collect at least as much revenue as the President proposes in order to avoid larger budget deficits. There are two bare minimum requirements for Congress to achieve this. First, Congress must not extend any more of the Bush tax cuts than President Obama proposes to extend. Second, Congress must raise at least as much revenue as President Obama has proposed ($760 billion over ten years) through loophole-closers and new revenue measures.

Read the full report.

 



House and Senate Approve Final Budget Resolution



| | Bookmark and Share

Approval Marks a Major Step Towards Enacting President's Agenda

On Wednesday, both the House and Senate approved a Congressional budget resolution for fiscal year 2010 that paves the way for several of the President's major initiatives. The resolution allows Congress to make new investments in education and clean energy and puts in place procedures that will make it easier for Congress to enact comprehensive health care reform. It also allows Congress to extend the Bush tax cuts for all but the richest Americans.

The budget resolution allows for about $3.5 trillion in federal spending in fiscal year 2010 and includes important tax and spending provisions related to years after that. It is not a law and is not binding, but puts in place caps on the spending that Congress appropriates each year, sets targets for tax and spending changes and includes certain procedural changes that make it more likely Congress will meet these goals.

Tax Cuts Extended for All but the Rich

For example, the budget resolution allows Congress to reduce revenues by a certain amount by extending the Bush income tax cuts. It is understood that the amount of revenue-reduction allowed would be sufficient to extend the Bush tax cuts for those with incomes below $250,000. It also allows for Congress to reduce revenues by preventing the Alternative Minimum Tax (AMT) from expanding as it is scheduled to under current law. Similarly, it allows Congress to extend the estate tax rules in effect in 2009 instead of allowing the estate tax to revert to the rules put in place during the Clinton years, before Bush's cuts in the estate tax were enacted.

The resolution allows for Congress to enact these tax cuts without finding new revenue to pay for them -- on one condition, which is that Congress enacts a statutory pay-as-you-go (PAYGO) rule that will (in theory) prevent Congress from enacting any more legislation that will increase the deficit. That means that any additional tax cuts (say, an extension of the Making Work Pay Credit that was enacted for two years as part of the economic stimulus package) would have to be combined with revenue-raising provisions to offset the costs.

Predictably, allies of former President George W. Bush have expressed horror that Democratic leaders and President Obama wish to extend the Bush tax cuts for 97.5 percent of Americans rather than 100 percent. The Democrats and the President would allow the Bush tax cuts to expire for singles with incomes over $200,000 and married couples with incomes over $250,000 (which make up roughly the richest 2.5 percent of taxpayers).

For their part, House Republicans used the budget debate to demonstrate to the public just how lopsided the tax code would be if their goals were ever realized and just how much government would have to shrink because of the revenue losses that would result. Earlier this month, the ranking Republican on the House Budget Committee presented his tax and spending plan which would cut and privatize Medicare, convert Medicaid into limited block grants to states, repeal the recently enacted economic stimulus law and deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs.

Citizens for Tax Justice published a report concluding that under this GOP plan, over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes than they would under the House Democratic plan in 2010, while the richest one percent of taxpayers would pay $75,000 less, on average.

Final Budget Leaves Out the Senate's Outrageous Estate Tax Cut

Progressives scored a victory when Democratic leaders agreed to exclude from the final budget an amendment adopted by the Senate during its budget debate on April 2 which would slash the estate tax to benefit multi-millionaires. Before the Senate approved this amendment, Majority Leader Harry Reid (D-NV) said, "It is so stunning, so outrageous that some would choose this hour of national crisis to push for an amendment to slash the estate tax for the super wealthy." His common sense view carried the day as negotiators hammered out the final resolution.

The tax cuts enacted under President Bush in 2001 scheduled a gradual repeal of the estate tax, with the amount of assets exempted from the tax gradually increasing over a decade and the tax rate on estates gradually dropping until the estate tax would disappear entirely in 2010. Like almost all of the Bush tax cuts, this cut in the estate tax expires at the end of 2010, meaning that rules scheduled under President Clinton would come back into effect in 2011.

The budget resolutions passed out of the House and Senate budget committees in March both assumed that the estate tax rules in place in 2009 would be made permanent, meaning the Bush estate tax cut would be partially made permanent but the estate tax would not disappear entirely in 2010. The Center on Budget and Policy Priorities released a report finding that about 99.7 percent of estates would be untouched by the tax under this proposal.

Incredibly, 51 Senators voted in favor of the amendment offered by Senators Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) to cut the estate tax even more than this. The 2009 estate tax rules exempt the first $7 million of assets passed on by a married couple (as well as assets they leave to charity) and tax the rest at a rate of 45 percent. The Kyl-Lincoln amendment called for a $10 million exemption for married couples and a 35 percent rate.

Taking Steps Towards Enacting the President's Priorities

Progressives scored another victory in the area of health care. House and Senate leaders decided to include in the final budget resolution a mechanism known as "reconciliation" which will allow the Senate to enact health care reform and higher education loan changes with a simple majority vote.

The practice of filibustering legislation in the Senate has, over the years, turned into a default rule that three fifths the Senate's members must agree to pass a bill. This means that legislation supported by Senators representing a majority of Americans is often blocked. Many advocates fear that this is exactly what could happen to health care reform and many other of the President's important initiatives.

Reconciliation is a way around this obstacle. A budget resolution can include reconciliation instructions specifying that committees will pass legislation that can then pass the full House and Senate under a streamlined process. In the Senate, that streamlined process means that the bill can be passed with just 51 votes.

The particular version of reconciliation included in this budget is optional, meaning Democratic leaders will resort to using it only if bipartisan consensus proves elusive.

Several Republican Senators, and some Democratic Senators, have taken the view that majority rule is undemocratic, and have called reconciliation a partisan ploy to "ram through" the President's agenda. (The idea of the Senate moving too quickly is a little hard for any Hill observer to understand.) More importantly, enacting health care reform will require Congress to raise a great deal of revenue, and finding a large bipartisan majority for that might be a challenge.

Finally, some have complained that reconciliation is only to be used for deficit-reduction, but this is entirely unconvincing because these are largely the same members who voted in favor of reconciliation bills during the Bush years that actually increased the deficit by cutting taxes.



Budget Resolutions Approved by House and Senate



| | Bookmark and Share

The U.S. House of Representatives and the U.S. Senate both approved budget resolutions on Thursday that move Congress a step closer to enacting President Obama's agenda, without being quite as bold or explicit as the budget outline released by the President in late February. Both resolutions would spend about $3.5 trillion in 2010 and include non-binding, but important, provisions affecting spending and revenues in years after that. As lawmakers from both chambers leave Washington for their spring recess, behind-the-scenes negotiations will likely pave the way for a House-Senate conference to take place upon their return to iron out the differences between the two resolutions. On some key issues like estate tax and health care, the House has made wiser choices that will hopefully be maintained in the final budget resolution.

The basic thrust of many of the tax policies embodied in the budget resolutions mirror the President's proposals. Both assume the extension of the Bush income tax cuts for everyone except taxpayers with incomes above $200,000 (or $250,000 for married couples). Taxpayers above these thresholds are affected by the top two income tax rates, which would revert to 36 and 39.6 percent. Both resolutions would extend the "AMT patch," a measure that increases the exemptions from the Alternative Minimum Tax to ensure that most taxpayers are not affected by it. (The chambers differ on the extent to which the costs of the AMT patch will have to be offset with revenue-raising measures in the future.)

The resolutions do not follow the President's proposals on certain issues. For example, President Obama proposed that the income tax cuts aimed at working families and included in the recently-enacted stimulus bill be made permanent. The resolutions would make some of these permanent, like the expansion in the child tax credit and the American Opportunity Tax Credit for higher education.

But they would not make permanent the Making Work Pay Credit, one of Obama's signature tax policies. Neither do they include any specific language to create a "cap and trade" program to reduce greenhouse gas emissions, which, in the President's proposal, would produce the revenue needed to offset the costs of the Making Work Pay Credit and other energy initiatives.

Similarly, the resolutions do not include language laying out how Congress will pay for health care reform. (The President's budget outline included a reduction in the benefits of itemized deductions for the rich to partially fund health care reform.)

None of this means that Congress will not act on these proposals of the President's. The resolution includes language allowing for deficit-neutral legislation in these areas without specifying how money will be spent or how it will be raised.

Congress's next important test involves settling the differences between the House and Senate resolutions. When it comes to revenues raised to pay for health care or revenues raised from the estate tax, hopefully the choices made by the House will be maintained in the final budget resolution. See the following Digest articles for more.

Estate Tax: Senate Approves a Break for Millionaires that Leader Reid Calls "So Stunning, So Outrageous"

 

 

Reconciliation for Health Care Reform: House Moves to Stop Senators' Obstruction of Measures with Majority Support

 

 

House GOP's Alternative Budget: Poor Pay More, Rich Pay Less, Stimulus Repealed and Government Shrinks

 

 

 

 

 

 

 

 



New Report from Citizens for Tax Justice: President Obama's First Budget Proposal



| | Bookmark and Share

On February 26, President Obama sent to Congress the blueprint for what could be one of the most progressive federal budgets in generations. The budget calls for national health care reform, expanded education funding, a program to reduce global warming, and several improvements in human needs programs. As a new report from Citizens for Tax Justice explains, it would make the tax code considerably more progressive, and close a number of egregious tax loopholes.

There is, however, a flaw in the budget proposal: It does not raise enough revenue to pay for public services. Instead, its net effect is to cut taxes dramatically.

Opponents of the President have attempted to argue that the budget proposal calls for tax increases that could sink the economy, but this complaint is plainly unfounded. President Bush and his allies in Congress were adamant that lower taxes would lead to an explosion of prosperity, and they enacted tax cuts in 2001, 2002, 2003, 2004 and 2006. Some allies of the former President argue that Congress is now insufficiently focused on tax cuts, but this view seems bizarre and incredible given the sad economic facts all around us.

Indeed, one might reasonably conclude that we could safely allow most of the Bush tax cuts to expire at the end of 2010, as they are scheduled to under current law, without any concern about how this will impact the economy. But President Obama actually proposes to keep most of the Bush tax cuts. Obama's largest proposed tax cut is to re-enact 80 percent of the Bush tax cuts that are scheduled to expire at the end of 2010. Most of this reflects re-enacting the Bush income tax cuts for married couples with incomes below $250,000 and others with incomes below $200,000 (or put another way, for about 98 percent of taxpayers), and permanently reducing the Alternative Minimum Tax (AMT). In addition, Obama proposes to re-enact close to half of the Bush estate tax cut.

On top of re-enacting most of the Bush tax cuts, the Obama budget includes a number of additional tax cuts for families and individuals. (These would be extensions of temporary tax cuts included in the recently passed stimulus law.) It also proposes some questionable business tax cuts.

Partially offsetting its tax-cut proposals, the Obama budget proposes some significant revenue-raising provisions. These include a cap-and-trade program to reduce carbon emissions, a limit on the benefits of itemized deductions for high-bracket taxpayers, and a number of corporate and high-income loophole-closing measures.

Read the Report



President Obama's First Budget: Not Perfect, But a Massive Improvement Over the Recent Past



| | Bookmark and Share

Revised March 4, 2009

On Thursday, President Obama sent his budget blueprint to Congress. While many of the details remain to be seen, it's the most progressive budget we've seen in years. It's also a more honest budget than the last administration ever proposed. For example, it doesn't pretend that the Alternative Minimum Tax (AMT) will expand its reach to tens of millions of additional taxpayers (which Congress never allows), and it includes the cost of the Iraq and Afghanistan wars instead of pretending that they will end this year.

It goes a long way towards making the tax system fairer and more progressive. The tax portion of the budget would allow the Bush tax cuts to expire for the very rich and includes revenue-raising provisions that are progressive, environmentally friendly and which, in some cases, would make the tax code simpler.

But the budget blueprint does muddle the cost of extending the Bush tax cuts for all but the top 2 percent of individual taxpayers by using a baseline that assumes the Bush tax cuts have already been made permanent, when in reality they are scheduled to expire at the end of 2010. (In other words, the Obama administration is using a baseline that assumes John McCain won the presidential election and his allies swept both chambers of Congress and were able to enact his tax policies!)

Continuing the Bush tax breaks for 98 percent of taxpayers and providing AMT relief will cost $2.6 trillion over the 10-year budget period. That's a steep price to pay for tax cuts that have not delivered their promised benefits. As the budget moves through Congress, we hope that the goal of long-term deficit reduction will prevail and the Bush tax breaks will be reduced even more. This could mean, for example, further raising the rates on capital gains and scaling back the cut in the estate tax. These changes would help move us towards the day when the government actually collects enough revenue to pay for the services it provides.

In addition to extending a lot of the Bush tax cuts and providing AMT relief, the President's budget would also provide around $770 billion in additional tax breaks targeted to working class people, plus over $70 billion in tax cuts for business. These are offset with several revenue-raising provisions, including a "cap and trade" program to limit carbon emissions, cleaning up the international tax system and eliminating loopholes for energy companies and other corporations.

These provisions are all included in the tax portion of the budget proposal. Other parts of the proposal include other revenue-raisers. For example, the budget includes a new provision that would limit the benefit of itemized deductions so that they could not reduce taxes by more than 28 percent (instead of, say, 35 percent for people rich enough to be affected by the 35 percent income tax rate). This provision would raise revenue to offset new health care spending.

This budget may not be perfect, but it does take several steps to find revenue to invest in our future and support working class families.

Next week, CTJ will provide a more detailed analysis of the President's budget and its tax provisions.



The Coming War Over the Federal Budget



| | Bookmark and Share

The President's Fiscal Responsibility Summit

Expect to see some drama next week around the federal budget. First, on Monday, President Obama will convene a "Fiscal Responsibility Summit" with Congressional leaders and others to "to send a signal that we are serious" about the long-term deficits faced by the federal government, focusing on entitlement programs. Obama has been sending signals that he is open to any and all ideas about how to get the federal budget back under control once our economy is back on track. Which is alarming, because a lot of ideas floating around out there are incredibly bad.

For one thing, the supporters of the Bush tax cuts still fail to acknowledge that those tax cuts account for about half of the federal debt piled up by the Bush administration before the financial crisis. Pretty much all of the Republican leaders in Congress claim to be deeply concerned about the deficit, but none have waivered in their commitment to the policies that have created much of it.

Another problem is the focus on entitlements. Medicare faces a crisis, which is the crisis of exploding health care costs that we can only contain by reforming the entire health care system. Exploding health care costs are, many analysts have concluded, the single largest cause of long-term federal budget deficits.

But several right-wing policy advocates have made a cottage industry out of claiming that Social Security must be slashed in order to save America. The most notorious is Peter Peterson, the trillionaire who has set up a foundation to promote his version of "fiscal responsibility" and who apparently has been invited to the summit. CTJ director Robert McIntyre lambasted Peterson back in 1994 in a column in the American Prospect, saying, "Along with tax cuts for the rich, he explicitly endorses tax increases for the poor and the middle class as well as sharp reductions in what average families receive from the government."

McIntyre's criticism is mild compared to the assessment progressives give Peterson today. "Peterson, who made his fortune on Wall Street," writes Robert Borosage, "never raised a word about the dangers of hyper-leveraged finance houses gambling other people's money. He never expressed qualms about the leveraged buyout artists who were using debt finance to rip apart companies. He didn't fund an all-out effort to stop Bush from raiding the Social Security surplus to pay for tax cuts for the rich. But now he wants folks headed into retirement who have already prepaid a surplus of $2.5 trillion to cover their Social Security retirements to take a cut or work a few years longer to cover the money squandered on bailing out banks, wars of choice abroad and tax cuts for the few."

The President's Fiscal Year 2010 Budget Proposal

The drama won't end at the President's Fiscal Responsibility Summit. The President is also expected to release the outlines of his budget proposal next week, and it could contain some very important tax proposals. During his presidential campaign, Obama proposed to extend the Bush tax cuts (which mostly expire at the end of 2010) for all taxpayers except those with incomes above $200,000 (or $250,000 for married couples). CTJ calculated that this would essentially mean that the Bush tax cuts are extended for all but the richest 2.5 percent of taxpayers. It would also cost well over a hundred billion dollars a year, and that's before you add the cost of Obama's promised reform of the Alternative Minimum Tax or his other tax proposals. Meanwhile, he also pledged to repeal the Bush tax cut early for those taxpayers with income above the $200,000/$250,000 threshold, but he has hedged on that promise in recent months.

Obama also campaigned on promises to close some tax loopholes (like the carried interest loophole and loopholes enjoyed by the oil and gas industry) and clean up other parts of the tax code. It will be interesting to see what components of his campaign promises are included in his budget proposal.

Interestingly, the administration has stated that it will not engage in the same gimmicks used by the previous administration to conceal the true size of the budget deficit. For example, the Bush administration always assumed that the Alternative Minimum Tax (AMT) would be allowed to extend its reach to tens of millions of additional taxpayers, which of course made the budget appear more balanced than it truly was, even though everyone knew that Congress would enact a "patch" every year to prevent the AMT from expanding its reach. So this budget process may be more transparent than any we've seen in years.



Non-Stimulative Tax Cuts: A Big One Is Kept in the Final Package, But Many Others Were Significantly Scaled Back



| | Bookmark and Share

On January 28, the House of Representatives approved an economic stimulus bill with an official cost of $819 billion, and $275 billion of that went to tax cuts. One alternative stimulus bill that received quite a lot of support from the House Republicans consisted entirely of tax cuts and included provisions that would clearly not provide an immediate boost to the economy (like making permanent the Bush tax cuts for capital gains and dividends, which do not even expire until the end of 2010). CTJ released state-by-state figures showing that the poorest 60% of taxpayers would receive over half of the benefits of the key tax cuts under the House Democrats' plan and less than 5% of the benefits of the House GOP plan.

House Republicans put forth another plan, this one with strong backing from their leadership, that would reduce the bottom two income tax rates from 10% and 15% to 5% and 10%, and provide more tax cuts for businesses. CTJ released state-by-state figures showing that less than a quarter of the benefits of the individual tax cuts in this House GOP plan would go to the poorest 60% of taxpayers.

The House Democrats' plan was passed without a single Republican vote. Progressives found that the House-passed bill did contain some tax cuts that were basically giveaways for business (as CTJ also argued in its reports). But overall the House-passed bill promised to be an effective boost for the economy.

The Senate took up its bill the following week and managed to lard it up with several ineffective tax cuts. Fortunately, the House-Senate conference that met to work out the differences between the two chambers significantly scaled back many -- but not all -- of the ineffective tax cuts.

Amnesty for Offshore Tax Avoidance: Rejected on Senate Floor

As the stimulus package was being debated on the Senate floor, progressives did score several defensive victories. For example, the body rejected an amendment offered by Senator Barbara Boxer (D-CA) that would provide a tax amnesty for corporations that had moved profits offshore (often only on paper to avoid taxes). Profits that were "repatriated" to the United States would be subject to an almost non-existent 5.25 percent tax rate instead of the usual 35 percent tax rate. As explained in a CTJ report on "repatriation," this idea was tried five years ago and did not lead to any of the job creation that was promised. Worse, repeating this debacle would only encourage companies to move profits offshore, since they would figure that if they waited a few years, Congress would once again be in the mood to enact a tax amnesty. Fortunately, a solid majority of senators saw that this was terrible tax policy and rejected this amendment.

The Senate's Senseless Six

But plenty of ill-advised tax cuts did make their way into the Senate-passed bill, some as provisions included in the bill reported out of the Finance Committee, and others adopted as amendments on the Senate floor. Earlier this week, CTJ ranked several tax cuts included only in the Senate bill (or taking a larger form in the Senate bill) as the "Six Worst Tax Cuts in the Senate Stimulus Bill." (Read the full report here or the two-page summary here.) The largest of those six tax cuts is included in the final package, but several others have been excluded (or mostly excluded) from the deal.

1. One-year AMT "patch": included in conference agreement.

This one-year reduction in the Alternative Minimum Tax will provide essentially no benefit to the poorest 60 percent of Americans -- and unfortunately was included in the final stimulus package. For more details, as well as state-by-state figures showing how taxpayers would be affected, see CTJ's new report on the AMT "patch."

2. Homebuyer tax credit: dramatically scaled back in conference agreement.

The House-passed bill had a version of this provision that waived the repayment requirement for the limited $7,500 first-time homebuyer credit that Congress enacted in its housing bill last year. The Senate adopted an amendment by Senator Johnny Isakson (R-GA) (who voted against the bill itself) to provide a $15,000, non-refundable tax credit with no income limits for any home purchase (not just for first-time home purchases). The Senate version would cost $35 billion more than the House version. Fortunately, this provision is scaled down in the conference agreement to something closer to the House version, with an increase in the maximum credit to $8,000, at a cost of $6.6 billion.

3. Deduction for automobile purchases: dramatically scaled back in conference agreement.

This $11 billion provision was added to the Senate bill as an amendment offered by Senator Barbara Mikulski (D-MD) as an above-the-line deduction for interest payments on an automobile purchase as well as the state and local sales taxes paid on that purchase. Apparently, members of the House-Senate conference decided that subsidizing consumer debt is not such a great idea. This provision has been reduced to a $1.7 billion provision allowing a deduction for just the sales taxes paid, but not the interest, on an automobile purchase.

4. Suspension of taxes on UI benefits: included in conference agreement.

The Senate included in its bill this provision to eliminate federal income taxes on the first $2,400 of unemployment insurance benefits in tax year 2009. The best way to target aid to those who could use some help is to target aid by income level. This provision would target aid to those whose income takes a particular form rather than those whose income is below a particular level, meaning a person whose spouse earns $300,000 a year would still get this tax break if they have unemployment benefits. This provision is included in the conference agreement.

5. Five-year carryback of net operating losses (NOLs): dramatically scaled back in conference agreement.

This provision would put money in the hands of business owners but do nothing to change their incentives to invest or create jobs. The version of this tax cut included in the House-passed bill would cost $15 billion while the Senate version would cost $19.5 billion. Fortunately, the version of this tax cut in the conference agreement is smaller than either of these, with a cost of only $1 billion (officially). The conference agreement would allow this tax cut only for companies with gross receipts under $15 million.

6. Delayed recognition of certain cancellation of debt income: included in conference agreement.

Under current law, any debt forgiveness that you enjoy is considered income subject to the federal income tax. (If it was not, then we would all want our employers to issue us loans and then forgive the debt, rather than paying us salaries.) This provision, which was included in the Senate bill and also in the conference agreement, weakens this essential rule. It allows companies that have debt cancellation income to defer taxes on that income for five years and then pay the tax in increments over the following five years.



CTJ Ranks the Six Worst Tax Cuts in the Senate Stimulus Bill



| | Bookmark and Share

The economic stimulus bill that the Senate approved today includes several tax cuts that are not in the stimulus bill approved by the House of Representatives two weeks ago and which should be excluded from the final bill that goes to the President.

The bill approved by the House of Representatives two weeks ago has a total cost of about $819 billion, while the cost of the Senate bill had grown last week to about $940 billion. A group of self-styled centrist Senators then put forth a compromise that took exactly the wrong approach to cutting down the costs: They mostly removed government spending that economists believe will stimulate the economy -- like aid to state governments, school construction, food stamps -- while they left in most of the regressive tax cuts that Senators have added to the bill.

A new report from Citizens for Tax Justice lists the six most regressive and ineffective tax cuts included in the Senate stimulus bill that are not in the House bill (or, in some cases, are much more limited in the House bill).

Legislation to kickstart the economy is badly needed. Lawmakers who are sincere in their desire to stimulate the economy in the most cost-effective manner should seek to exclude from the final bill these tax cuts, which economists believe will do little to boost consumer demand. They add $124 billion (according to official projections) to the cost of the Senate's stimulus bill compared to the House stimulus bill. The real cost of these provisions is considerably more.

Here are CTJ's worst six tax cuts in the Senate stimulus bill:

1. One-year AMT "patch"
2. Home buyers' tax credit
3. Deduction for automobile purchases
4. Suspension of taxes on UI benefits
5. Five-year carryback of net operating losses (NOLs)
6. Delayed recognition of certain cancellation of debt income

Read the CTJ Report: http://www.ctj.org/pdf/sixworsttaxcuts.pdf
Read the Summary:
http://www.ctj.org/pdf/sixworsttaxcutssummary.pdf

The report also explains that some tax cuts could actually be effective in stimuluating the economy -- if they are extremely targeted to poor and working class families. The Making Work Pay Credit and the EITC expansion that appear in both the House and Senate bills accomplish this. So do the provisions in each bill to make the Child Tax Credit more available to poor families, but the report explains that the House provision does a much better job of this than the Senate provision.

A House-Senate conference will now attempt to work out the differences between the House and Senate bills and settle on a final bill, which President Obama wants to sign by the end of this week.



New CTJ Report Compares Tax Cuts in House Stimulus Proposals -- Includes State-by-State Estimates



| | Bookmark and Share

A new report from Citizens for Tax Justice compares the tax cuts proposed as economic stimulus by the House Democrats to the tax cuts proposed by their Republican counterparts. The report includes both national and state-by-state figures showing the average tax cut and the share of total tax cuts that would be received by taxpayers in various income groups under the different proposals.

The report finds that the Democrats' proposal (H.R. 598) includes some tax cuts that are far more targeted to low- and middle-income people than any of the tax cuts included in the Republican alternatives. This is largely because H.R. 598 includes a new refundable credit (the Making Work Pay Credit) and expands two others (the Earned Income Tax Credit and the Child Tax Credit) while the Republican alternatives do not. Working people who pay federal payroll taxes but do not earn enough to owe federal income taxes will only benefit from an income tax cut if it takes the form of a refundable credit. Many economists have argued that any effective stimulus policy would have to boost demand for goods and services by causing immediate spending -- and one way to do that is to put money in the hands of low- and middle-income people who are more likely than wealthy taxpayers to spend it quickly.

The House of Representatives is expected to vote this week on the Democratic proposal, H.R. 598. Many of the provisions of this bill have wide support from progressive advocates. The Coalition on Human Needs is distributing a sign-on letter for organizations in support of the expansion in the Child Tax Credit. If you are authorized to sign on behalf on an organization in support of this provision, click here for more information.

Read the CTJ Report



House Approves Bill to Pay for AMT Relief, Close Carried Interest Loophole



| | Bookmark and Share

The U.S. House of Representatives voted mostly along party-lines Wednesday to approve H.R. 6275, which would extend relief from the Alternative Minimum Tax (AMT) for another year and offset the costs mostly by closing tax loopholes.

As explained in last week's report from Citizens for Tax Justice, it is only fair that the cost of AMT relief be offset by closing loopholes that benefit the wealthiest Americans. One of these is the much-hated loophole for "carried interest," a form of compensation paid to private equity fund managers in return for investing other people's money. Most of us who earn an income from work are subject to federal income taxes at progressive rates, starting at 10 percent and going up to 35 percent for the very wealthiest. Private equity fund managers are at the top of this wealthy group, but nevertheless pay only 15 percent -- the special low capital gains tax rate -- on their carried interest. Closing this loophole makes up about half of the $61 billion needed to offset the cost of extending AMT relief for a year.

Republican leaders in the Senate will try to block consideration of this bill, arguing that any legislation extending a tax provision that is currently in effect should not be paid for. The absurd implication of this argument is that Congress should not have to pay for tax cuts if they start out as one-year or two-year provisions and are then extended past their original expiration date. It's also a demand for an increase in the budget deficit, which seems to no longer be a concern of conservative lawmakers.

The House Ways and Means Committee approved a bill (H.R. 6275) this week that would temporarily prevent the Alternative Minimum Tax (AMT) from expanding its reach to families who are mostly well-off, but not as wealthy as those the tax was originally intended to target. Almost all lawmakers agree that this step should be taken. But President Bush and Republican leaders oppose the Ways and Means bill because it offsets the cost of AMT relief with revenue-raising provisions in order to avoid an increase in the budget deficit.

The AMT was created to ensure that wealthy Americans pay at least some federal income taxes no matter how skillful they are at finding loopholes. It is reasonable that Congress wants to prevent it from affecting more families, but as argued in a new report from CTJ, there is no reason why the deficit should be increased to provide tax relief for those who are relatively well-off. The Ways and Means bill would offset the cost of AMT relief mainly by closing unwarranted tax loopholes, which will in turn make the tax code fairer and more economically efficient.

Republican Senate leaders did not pause to admire their success in blocking energy legislation this week. On Tuesday they went on to block a proposal by Senate Finance Chairman Max Baucus (D-MT) to extend several popular tax cuts and prevent the Alternative Minimum Tax (AMT) from affecting more taxpayers. The proposal was to be offered as a substitute for the House-passed bill, H.R. 6049. The first half of this bill (often called the "extenders") has a cost of $57 billion, which would be offset by revenue-raising provisions. The second half of the bill, enacting a "patch" to keep the AMT from affecting more taxpayers, has a cost of around $64 billion but this cost would not be offset.

The AMT became a major issue in negotiations over the fiscal year 2009 budget resolution between the House, which wanted to use procedures that would make it easier to pay for an AMT patch, and the Senate, where Democratic leaders thought they did not have the votes for such a move. As explained in the report issued by CTJ, the majority of the benefits of AMT relief goes to the richest 10 percent of taxpayers. It seems unfair that the Senate wants to pay for AMT relief by increasing the national debt, which could very likely be paid off by the middle-class in the long-run (in the form of cuts in public services or higher taxes across-the-board). The final budget resolution that the House and Senate approved last week did not include the procedural maneuvers that House Democrats had pushed for but instead included a point of order against increasing the deficit that may have little impact on how Congress addresses the AMT.

While Senator Baucus seems to have given up entirely on offsetting the cost of the AMT patch, he and the Democratic leaders in the Senate do want to offset the cost of the extenders, and this is what prompted the filibuster. Anti-tax lawmakers have argued that extending tax cuts that are currently in effect really amounts to an extension of current tax policy and therefore should not require any measures to replace the revenue lost. CTJ's recent report on the extenders bill explores the implications of this argument. Under this logic, Congress could pass any temporary, one-year tax break and then the following year make that tax break permanent without offsetting or even considering the revenue lost beyond that first year. This makes a complete mockery of the idea of fiscal responsibility.

Even Business Is Turning Against the Anti-Tax Lawmakers

Senator Baucus has touted a letter from 300 large companies in support of his approach. The companies seem to be far more worried about the loss of various tax breaks included among the "extenders" than they are about the revenue-raising provisions, which won't affect most of them. One of the revenue-raising provisions simply delays the implementation of a tax break that has not even gone into effect yet (worldwide interest allocation) while another prevents private equity fund managers from using offshore schemes to avoid taxes on deferred compensation. Baucus has told the BNA Daily Tax Report that even the private equity fund managers don't mind this so much because they are much more afraid that Congress will attempt to close their cherished loophole for "carried interest," a loophole that House Ways and Means Chairman Charlie Rangel may target again in order to help offset the costs of an AMT patch.



House GOP Pins Comeback Hopes on Social Security Privatization, Dismantling Medicare, and Slashing Public Services



| | Bookmark and Share

On Wednesday, Paul Ryan (R-WI), the ranking Republican on the House Budget Committee, presented a comprehensive tax and entitlement plan that would cut Social Security benefits, end Medicare as it's currently structured and attempt to simplify taxes by creating an optional income tax that one could choose in lieu of the current system. The plan follows a string of losses of formerly Republican-held House seats in special elections and a general sense that Republican members of Congress want to improve their message.

One part of the plan would replace Medicare benefits with a "payment of up to $9,500 - adjusted for inflation and based on income, with low-income individuals receiving greater support." Another part of the plan copies a Bush proposal to offer tax credits - $2,500 for individuals and $5,000 for families - to purchases health insurance. Perhaps most surprising is the part of the plan that essentially revives the prospect of diverting money out of Social Security to fund private accounts.

The tax reform part of the plan would go much further -- and cost much more -- than the Bush tax cuts. The estate tax would be abolished (at a cost of a trillion dollars over a decade) and the AMT would be eliminated (which would cost $1.5 trillion over a decade), and taxpayers would get to choose to file under either the current income tax or a "simplified" income tax with rates of 10% on income up to $100,000 for joint filers, and $50,000 for single filers; and 25% on taxable income above these amounts. The standard deduction and personal exemptions would be larger, totaling $39,000 for a family of four.

While many anti-tax lawmakers have suggested an optional simplified tax, it's not obvious how having two income taxes can be simpler than having just one. The most likely result is that people would calculate their taxes twice to see which system offers them less tax liability. And of course, the reason why the simplified version must be "optional" is that all lawmakers claim to support simplification but can't bring themselves to really close down the various loopholes that benefit certain pockets of voters (and campaign contributors) and which actually cause the complexity in the tax code.

Interest, capital gains and dividends would no longer be taxed. (Most of the benefits of the current capital gains and dividends tax breaks go to the richest one percent.) The corporate tax would be replaced by business consumption tax of 8.5 percent.

The plan would allegedly eliminate the federal budget deficit, in part with a provision that would require the OMB to make across-the-board reductions in discretionary and mandatory programs if spending rises above a certain percentage of GDP "but applies the reduction only to fast-growing programs, and is limited to no more than 1 percent of a program's spending." But given the magnitude of the tax cuts included in this plan, it's difficult to imagine Congress ever paying for them by reducing spending, which did not occur even when Rep. Ryan's party controlled the House, Senate and White House.



McCain's Transformation Complete: Tax Cuts for the Rich, Even if We Cannot Pay for Them



| | Bookmark and Share

Last week Senator John McCain finally completed a process that has been underway for some time now. McCain has worked his way back into his party's good graces by coming out in support of running massive budget deficits to extend the Bush tax breaks and give new tax breaks to business.

It's difficult to remember now, but Senator McCain had said back in 2000, "There's one big difference between me and the others -- I won't take every last dime of the surplus and spend it on tax cuts that mostly benefit the wealthy." He also said of the tax plan George W. Bush proposed while running for president in 2000, "Sixty percent of the benefits from his tax cuts go to the wealthiest 10% of Americans -- and that's not the kind of tax relief that Americans need."

The New John McCain

Let's compare this to the new John McCain, who fleshed out his latest ideas a bit more during a tax day speech in Pittsburgh.

McCain said he would extend the Bush tax cuts, even though over half of the benefits would go to the richest one percent and the cost would be $5 trillion over a decade. He would cut the corporate tax rate down from 35 percent to 25 percent, even though measured as a percentage of GDP, U.S. corporate taxes are among the lowest of any developed country. He would double the personal income tax exemption for dependents to $7,000, which would do the most for those families in higher income tax rates and nothing for low-income people who pay payroll taxes but who do not have taxable income (meaning a family of four with income of less than $25,000). He would abolish the Alternative Minimum Tax, even though about 9 tenths of it is paid by people with incomes over $100,000.

He would enact first-year deduction or "expensing" of "equipment and technology investments, which, along with a lower corporate tax rate, will create new opportunities for tax sheltering by the wealthy. He would ban internet and cell phone taxes permanently because he seems to believe that new technologies need to be granted a waiver from taxes that lasts forever. (If only Thomas Edison had thought to lobby for laws shielding his inventions from taxes.) He would make permanent the research and development credit because he believes innovation comes from the private sector, except not really, because apparently he also believes that no one will invent anything unless we give them a subsidy through the tax code.

And, most tantalizingly, he would offer a simplified alternative income tax that people can choose, at their option, to file. It's optional, presumably because everyone claims they want a simpler tax form but no one can agree on actually giving up the various deductions and credits that make filing ones' taxes complicated. Rather than simplifying tax filing, this will probably lead some people to calculate their tax liability under two different systems to determine which will result in lower taxes.

Massive Cuts in Public Services Would Be Necessary to Pay for McCain's Tax Plan

The Tax Policy Center has calculated that McCain's plans would cost $553 billion in 2012 alone. That's not even including the interest payments on the additional debt that will result, but let's put that aside for a second. McCain claims he can avoid increasing the national debt, at least to a degree, by cutting spending. But the cost of his plan in 2012 is about 17 percent of all projected federal spending that year according to estimates from the OMB (on page 134 for anyone interested). That's a whole lot of spending to cut. Looked at another way, it's more than all the non-defense discretionary spending that year and about equal to discretionary spending on defense.

During his Pittsburgh speech, McCain said he could get $100 billion in "savings from earmark, program review, and other budget reforms" but was not any more specific. The Senator's oft-mentioned earmarks are said to account for only around $18 billion at the most.

McCain has also said that he will obtain $30 billion in revenue by closing corporate tax loopholes. But his corporate tax cut alone is estimated to cost $143 in 2012.

Actually, You Should Just Bill My Grandkids

Then finally, on Sunday, McCain said on ABC's "This Week" that his tax cuts would take priority over balancing the budget.

To get a sense of what a huge shift this is for McCain, remember that during presidential debates he tried to explain away his opposition to President Bush's tax cuts in 2001 and 2003 by claiming that he thought cuts in federal spending should have accompanied those tax cuts to ensure that the nation's fiscal health would not deteriorate.

Of course, what he said back in 2000 also touched on the fact that the benefits of the Bush tax cuts would go mostly to the rich, but the new McCain is apparently unwilling to remind anyone about this.

On "This Week," George Stephanopoulos asked McCain, "If Congress does not give you the spending cuts you say you can get, will you hold off on signing the tax cuts?"

McCain replied, "Uh, no, of course not, because we don't want to increase people's taxes during a recession..."

It's worth pointing out that none of the candidates are actually talking about raising taxes (with the possible exception of the capital gains tax). Allowing parts of the tax cuts to expire exactly as the Republican House, Republican Senate and Republican White House wrote them to expire can hardly be called a tax increase. Further, it would be interesting to know how McCain might explain the prosperity that followed Clinton's tax increase or the economic doldrums that have followed George W. Bush's tax cuts.



Budget Debate Turns into a Tax Fight



| | Bookmark and Share

The House and Senate both passed their budget resolutions on Thursday. The Senate budget plan (S. Con. Res. 70) was approved by a vote of 51 to 44, while the House budget plan (House Con. Res. 312) was approved by a vote of 212 to 207.

All 100 Senators showed up Thursday for what is often called "vote-a-rama," an avalanche of amendments that members offer each year to the budget. These amendments generally are not binding, but they put Senators on record as supporting or opposing key tax and spending policies. Lawmakers often offer them to force the opposing party to take votes that might be politically difficult.

Slashing the Estate Tax and Other Tax Cut Promises

The budget resolutions project surpluses in fiscal years 2012 and 2013, although the math used to project these surpluses is questionable. Senator Max Baucus (D-MT) offered an amendment which was adopted by a vote of 99-1 and which shows that the Senate intends to spend this "surplus" on extending parts of the Bush tax cuts that he describes as focused on the "middle-class." While these do include keeping the lowest income tax rate at 10 percent and keeping the $1,000 child credit, they also include a cut in the estate tax to benefit families with estates worth several million dollars.

The amendment, while not binding, puts the Senate on record as supporting a change in the estate tax that is understood to involve freezing in place the estate tax rules that are scheduled to take effect in 2009 (an exemption of $3.5 million per spouse and a top estate tax rate of 45 percent). Under current law, the estate tax rules get more generous each year until the estate tax disappears entirely in 2010, and then in 2011 revert to the rules that were in place during the Clinton years.

CTJ's recent figures on the estate tax show that it affected less than one percent of estates during 2005 and 2006. And those estates were subject to an exemption of $1.5 million per spouse. Now the exemption is $2 million and in 2009 it will be $3.5 million.

Throughout the day on Thursday, Democrats in the Senate used a strategy of countering Republican amendments to provide new deficit-financed tax breaks with very similar amendments that were equally regressive but deficit-neutral.

Alternative Minimum Tax

For example, Senator Arlen Specter (R-PA) offered an amendment that would have repealed a change in the Alternative Minimum Tax (AMT) that was enacted in 1993. The 1993 law increased the AMT for some relatively well-off taxpayers, to correspond with increases in the ordinary income tax. The Specter amendment therefore would cut the AMT from its current level for those well-off taxpayers, and this cut would be deficit-financed. Before members were allowed to vote on this, the body voted on an amendment offered by Senator Kent Conrad (D-ND) to do the exact same thing except with the costs offset. The Conrad amendment didn't specify just how those costs would be offset, and neither amendment would be binding. But apparently enough Senators felt that they would be credited with voting to "do something" about the AMT if they voted for the Conrad amendment, which was approved 53 to 46, instead of the Specter amendment, which failed, 49-50.

(The amendment by Senator Specter seems to be part of a long-term strategy by the Republicans to convince opinion leaders and the public that the expanding reach of the AMT is due to policies enacted during the Clinton administration. To find out why that is NOT the case, read the post on our blog that addressed this last year.)

More Estate Tax

A similar pattern played out in more ominous ways when the Senate turned its attention back to the estate tax. Senator Jon Kyl (R-AZ) offered an amendment that would slash the estate tax further than the Baucus amendment would. The Kyl amendment would have put the Senate on record in support of raising the estate tax exemption to $5 million, or $10 million for married couples, and lowering the top rate to 35 percent. As the Center on Budget and Policy Priorities points out, this would cost about 77 percent as much as fully repealing the estate tax. Before members were allowed to vote on this, a vote was held on an amendment offered by Senator Ken Salazar (D-CO) to make the exact same changes, but with the costs offset in some unspecified way.

Slashing the estate tax any further than it already has been would be an entirely unwarranted boon for America's richest families and is bad policy even if it is done in a deficit-neutral way. If less than one percent of estates were affected by the estate tax when the exemption was $1.5 million, as CTJ has found, it's very hard to imagine why the exemption would need to be raised to $5 million.

Disturbingly, the Salazar amendment got 13 more votes this year than an identical amendment offered by Senator Ben Nelson (D-NE) last year. While the Salazar amendment failed this year, it failed by a vote of 38 to 62, whereas last year it failed 25-74.

Even more disturbing, the Kyl amendment -- the amendment to slash the estate tax WITHOUT offsetting the costs -- nearly passed, with a vote of 50-50. This vote is a signal to organizations working on tax fairness that we must redouble our efforts to educate lawmakers and the public about the extremely regressive effects of repealing or greatly reducing the estate tax.

Social Security

As he has in the previous couple years, Senator Jim Bunning (R-KY) offered an amendment to repeal the tax increase on Social Security benefits that was enacted in 1993. Bunning decided to offset the costs in his amendment with across the board cuts in discretionary spending. His amendment failed, 47-53.

The federal government began taxing a portion of Social Security benefits in 1984, and increased the amount that can be included in taxable income to a maximum of 85 percent in 1993. The idea was to treat Social Security benefits more like other retirement income, such as pensions and IRA distributions. For most retirees, the vast majority of Social Security benefits are income that has never been taxed. Most beneficiaries still pay no federal income taxes on their benefits, but above certain income levels benefits gradually become taxable. For the best off, 85 percent of benefits must be included in taxable income.

Repealing the 1993 provision would do nothing to help the majority of Social Security beneficiaries. Nonetheless, the Democrats offered an alternative amendment that would make the same change as Bunning's amendment, but which also called for some unspecified offsets. That amendment was approved 53-46.

Meanwhile, in the House of Representatives...

Over in the House, the Republicans offered an alternative budget resolution that would make the Bush tax cuts permanent and eventually repeal the AMT. These measures would be paid for with large cuts in Medicare, Medicaid, and other programs, while increasing defense spending. This alternative failed, 157-263.

The Democrats' budget resolution in the House was approved by a vote of 212 to 207. One way the House version differs from the Senate version is the use of what is called "reconciliation." A budget resolution can include "reconciliation instructions" that instruct the relevant committees to write legislation to meet some fiscal goal, and this legislation could be passed in the Senate with only a simple majority of votes rather than the usual 60 needed to overcome a filibuster.

This year, the House plan includes reconciliation instructions to produce a couple revenue-neutral bills. One would delay a scheduled reduction in payments by Medicare to doctors while another would provide another year of relief from the Alternative Minimum Tax (AMT), without increasing the budget deficit. Negotiations that will take place in conference will determine whether reconciliation instructions will survive in the final budget resolution.

Yesterday, the House and Senate budget committees both approved their respective versions of the federal budget resolution for fiscal year 2009 on party-line votes. Just as happened last year, both versions assume that the Bush tax cuts will expire at the end of 2010 or that, if they are extended, they will be subject to pay-as-you-go (PAYGO) rules. This means that the costs of any tax cut extension would have to be offset with increased taxes elsewhere or cuts in spending, so as to avoid an increase in the federal budget deficit. The House signaled that is it more committed to PAYGO, however, by including procedural protections for legislation to offset the costs of providing another year of AMT relief.

While the budget document is not binding and merely spells out the tax and spending goals of Congress, it can provide for procedural rules that may make certain legislation affecting the nation's fiscal health easier or more difficult to pass. For example, the budget resolution could include what are called "reconciliation instructions" that would instruct the relevant committees to write legislation to meet some fiscal goal, and this legislation could be passed in the Senate with only a simple majority of votes rather than the usual 60 needed to overcome a filibuster.

Republicans demanded that the reconciliation process be used to extend the Bush tax cuts without offsetting the costs. While budget resolutions are not law and cannot, by themselves, raise taxes, Republican lawmakers have taken to claiming that the resolution includes the largest tax increase in history since it does assume an extension of the Bush tax cuts. They made this same claim last year.

Senate Ready to Cave on PAYGO and Alternative Minimum Tax; House Says 'Not So Fast'

While the Republicans want to use the reconciliation process to increase the budget deficit, the House Democrats want to use it to keep the deficit under control. Their budget plan includes reconciliation instructions to produce revenue-neutral legislation that would delay a scheduled reduction in payments by Medicare to doctors and revenue-neutral legislation that would provide another year of relief from the Alternative Minimum Tax (AMT).

Congress will surely provide another "patch" to the AMT this year, meaning a temporary extension of the increase in exemptions that keep most people from having to worry about the tax. The question is whether it will be paid for or deficit-financed, as was the patch enacted at the end of last year.

Last year the House did pass a bill that would have paid for an AMT patch mainly by closing tax loopholes that allow managers of buyout funds to pay taxes at lower rates and shelter their income in offshore tax avoidance schemes. In the Senate, that bill did get the votes of all the Democrats (except the Presidential candidates, who were campaigning) but could not overcome the filibuster by Republicans. If such a bill was offered this year under the reconciliation process to protect it from a filibuster, its chances of passage would be greatly increased.

Despite this, many Senate Democrats are insisting that they not pursue the matter. Senate Finance Committee chairman Max Baucus was quoted by Congressional Quarterly saying, "think to cut to the chase, this Congress is not going to pay for AMT. I think it's a waste of time to have AMT paid for."

Senate Budget Committee chairman Kent Conrad (D-ND) told BNA that "My strong preference would be to have it offset. That was clearly not the will of the body last year and in our soundings, it's clearly not the will of the body this year."

Senate Democrats Plan to Spend "Surplus"

The budget resolutions project surpluses in fiscal years 2012 and 2013. Whether these surpluses will actually materialize is highly debatable. The budget assumes no more expenditures on Iraq beyond the $70 billion requested by the President. Further, the budget "baseline" used by the Congressional Budget Office, which assumes that the Bush tax cuts will expire at the end of 2010 as laid out under current law, does project a surplus in 2012 and 2013, but only if the Social Security surplus is included in the calculation. The Social Security surplus was not meant to be spent on other programs. It's not remotely clear that Congress can produce a surplus that does not include Social Security.

Nevertheless, Democrats in the Senate are planning to offer an amendment much like the one adopted last year that would show that the body intends to spend that "surplus" on extending parts of the Bush tax cuts that they describe as geared towards the "middle-class." While these do include the 10 percent rate and the child credit, they also include a cut in the estate tax to benefit families with estates worth several million dollars.

President Threatens Vetoes Over Small Differences in Spending

The Senate version calls for $18 billion above what the President has requested in discretionary spending (spending that must be approved each year) while the House version calls for about $22 billion over the President's request. This difference is relatively minor since the entire amount of discretionary spending requested by the President for fiscal year 2009 is $992 billion, and discretionary spending only accounts for around a third of all government spending. Nonetheless, the White House has signaled that the President is ready to veto bills that spend more on these programs than he has proposed, as he did last year. This raises the possibility that Congress could simply rely on continuing resolutions to keep the government running until the next president takes office.



President's Veto Threat: Alternative Minimum Tax



| | Bookmark and Share

At the end of last year, Republicans in the Senate blocked attempts by Democrats to close tax loopholes and reduce offshore tax avoidance to pay for relief from the Alternative Minimum Tax. The White House had sent signals that the President would veto the Democratic bill if passed. Some Democrats in Congress are adamant that the debacle not be repeated, while some Republicans seem equally committed to increasing the federal budget deficit.

The alternative minimum tax (AMT) was originally created in the late 1960s to ensure that super-wealthy Americans pay at least some federal income taxes no matter how skillful they are at using tax loopholes. In recent years, its reach has expanded because Congress has not permanently indexed for inflation the exemptions that keep most of us from paying the AMT and, even more importantly, because the Bush tax cuts reduced ordinary income taxes without permanently changing the AMT. As more families see their ordinary income tax liability fall below their liability under the AMT, that means the AMT becomes relevant to the lives of more and more taxpayers.

Instead of permanently indexing the exemptions for inflation, Congress has been enacting "patches" to the AMT each year, measures that temporarily increase the exemptions to keep the AMT under control. A permanent fix was not included in the tax cut bills enacted when Republicans controlled Congress because that would have added to the official costs of those bills. Since the Democrats took control of Congress, they've attempted to reconcile AMT reform with their goal of avoiding any legislation that increases the federal budget deficit. Last year, Democrats in the House passed a one-year patch that would have been paid for by closing the loophole for carried interest paid to private equity fund managers and by cracking down on their use of offshore tax shelters. The administration called these provisions "tax increases" as did the Republicans in the Senate, who voted en masse to block the bill. Democratic leaders were then forced to pass an AMT patch that was not paid for, increasing the deficit by $50 billion.

This year there has been some discussion of using special budget procedures to make it easier to pass a bill that pays for AMT relief. If the budget resolution passed by Congress provides "reconciliation" instructions to change taxes or mandatory spending, a bill can be introduced later to accomplish that goal and can pass the Senate with just a bare majority of votes rather than the usual 60. House Majority Leader Steny Hoyer (D-MD) told BNA recently that he would support using the reconciliation process for an AMT patch, but some Democrats in the Senate think that might make it more difficult to pass a budget this year.



Republican Senators Follow Bush Off a Cliff



| | Bookmark and Share

Congress is hurtling toward adjournment after resolving a series of stand-offs between Democrats and Republicans and between Congress and the President. Republicans in the Senate twice successfully blocked attempts to pay for AMT relief, while the President twice successfully vetoed expanded health insurance for children. Meanwhile, an attempt to shift tax breaks from "dirty" energy to "clean" energy failed by one vote, although Congress did enact some important non-tax-related energy provisions.

Alternative Minimum Tax: Congress Passes "Patch" But Doesn't Pay for It

On Wednesday, the House of Representatives approved a Senate-passed bill to "patch" the Alternative Minimum Tax (AMT). The "patch" is basically a one-year measure that extends through 2007 the exemptions that keep most of us from paying the AMT, which is a sort of backstop tax that ensures the wealthy pay at least some minimum amount of income tax regardless of how many deductions and credits they claim.

The AMT was originally intended to target only the very wealthy. Over time its reach expanded because the exemptions were never indexed to inflation, and the Bush tax cuts caused the AMT to expand much more. Since the AMT is in fact an alternative tax, if regular income taxes are cut without corresponding cuts in the AMT, more people pay the AMT.

In 2001, the President chose not to include corresponding adjustments to the AMT in his tax cut plan, although he surely assumed Congress would prevent the AMT from taking back a large portion of the tax cuts for moderately well-off families. And that's exactly what Congress has done, albeit through temporary patches passed periodically rather than a permanent fix. The cost of these patches was never included in the cost estimates of the Bush tax cuts that were presented to the public when they were being debated, effectively masking the true costs of those cuts.

This obviated the need for even a pretense of offsetting those additional costs. Today Congress is still not offsetting those costs.

Republicans Block Two Fiscally Responsible AMT Bills

The Republicans in the Senate were able to block two attempts to pay for the AMT patch in the last two weeks, both of them approved by Democratic majorities in the House. The first bill (H.R. 3996) would have replaced the revenue, partially by closing the loophole for "carried interest" paid to managers of buyout funds and other types of funds which allows these super-wealthy individuals to pay taxes at a lower rate than middle-income people.

Every Democrat in the Senate voted to act on this version (minus the Presidential candidates who almost certainly would have voted for it if they had been present) and every Republican who voted voted against. In the Senate, 60 votes are required to consider most legislation, so the bill could not be acted on despite the support of every member of the majority party. Senate Democrats were then forced to approve the $50 billion patch without any offsets, violating their pledge to adhere to newly reinstated pay-as-you-go (PAYGO) rules.

The House passed another version of the AMT patch with offsets (H.R. 4351), this time focusing more on cracking down on offshore tax avoidance by fund managers. The pattern repeated itself in the Senate, as the Republican minority was able to block the bill, choosing to protect wealthy tax evaders who use offshore shell companies rather than paying for AMT relief.

On Wednesday the House of Representatives voted to approve the Senate-passed AMT patch without offsets. Ways and Means Chairman Charlie Rangel said that it would be pointless to oppose AMT relief since it is very unlikely that the public would understand why a tax no one had ever heard of was suddenly affecting some families who were fairly well-off but not rich.

Media Neglects Role of GOP Obstruction

The press has focused unfairly on the "failures" of the Democrats to meet all of their goals.

This is unfair partly because the goals were extremely ambitious in retrospect. Democrats promised to provide $50 billion worth of AMT relief and also promised not to increase the deficit. This was while the Republicans in Congress and the President took an extreme stance on tax matters. Closing any tax loophole, even the most blatantly unfair tax loophole, represents a tax increase that will wreck the economy according to the President and his allies in Congress. They even equate stopping offshore tax evasion with tax increases that will discourage investment. In hindsight, it's clear that lawmakers taking this extremist position on taxes were ready to follow their President off a fiscal cliff by obstructing common sense measures.

It's also unfair to say the Democrats "caved" on PAYGO, as some media accounts have it, given that every Democrat in the Senate voted to pay for the AMT relief as did all-Democratic majorities in the House. Thanks to the 60-vote threshold to pass legislation in the Senate, the minority party was able to block the fiscally responsible legislation. Why the press has largely failed to note that Republican obstruction is the root cause of the AMT-PAYGO debacle is entirely unclear.



Republican Senators Vow to Choose Offshore Tax Avoidance by Wealthy Elite Over AMT Relief for 23 Million



| | Bookmark and Share

On Wednesday, December 12, the U.S. House of Representatives passed a bill, H.R. 4351, that would extend the exemptions that keep the Alternative Minimum Tax (AMT) from affecting most Americans and would replace the revenue the AMT is projected to otherwise collect. One provision would help replace the AMT revenue by restricting offshore tax avoidance schemes by wealthy individuals. Another provision would delay the implementation of an unnecessary tax break for multinational businesses which hasn't even gone into effect yet.

Dropped from this bill is a provision that would end the tax subsidy for "carried interest," a type of compensation paid to wealthy fund managers. Carried interest is currently taxed at a special, low 15 percent rate, lower than the tax rate paid by many middle-class families. Last week, Republicans in the Senate blocked a similar House-passed bill that would have ended this tax subsidy because they were committed to defending this break for millionaire fund managers. So, in the spirit of compromise, the House passed H.R. 4351 on Wednesday without the carried interest provision.

Incredibly, Republican leaders in the Senate are insisting that they will block this new bill even though it lacks the "controversial" carried interest provision. They seem to believe that H.R. 4351 includes "tax increases" that will hurt the economy. By this logic, the economy literally depends on the ability of rich individuals to avoid taxes by using offshore shell companies. Also by this logic, the economy depends on a tax break for multinational companies that has not even gone into effect yet.

Meanwhile, 17 Democratic members of the House, mostly members of the Progressive Caucus, signed a letter sent to House Speak Nancy Pelosi demanding that the cost of AMT relief be fully offset. The letter argues, quoting Citizens for Tax Justice, that "AMT relief, by itself, would not be particularly progressive ... Most of the benefits would go to the richest fifth of taxpayers, and if it's deficit financed, the cost could be borne in the future by middle-income Americans in the form of cuts in public services or higher taxes. But AMT relief can be progressive if the costs are offset with revenue-raising provisions that target the very wealthiest Americans, those who have benefited the most from the Bush tax cuts." The leadership of the 48-member Blue Dog Coalition of Democrats in the House also has stated repeatedly that any AMT relief that is not paid for will be unacceptable.

For more information about the House bill and how it offsets the cost of AMT relief, see the new short paper from Citizens for Tax Justice describing the legislation.



Republican Senators Block Bill to Pay for AMT Relief; Force Senate to Turn to Borrowing $50 Billion



| | Bookmark and Share

New Paper from CTJ Criticizes Turn to Borrowing

On Thursday, December 6, Republicans in the Senate voted en masse against consideration of a bill (H.R. 3996) passed last month by the House of Representatives to provide relief from the Alternative Minimum Tax (AMT) and offset the cost by closing loopholes for extremely wealthy financial managers. Instead, Republican leaders demanded that the federal government borrow the $50 billion. They got their way later in the evening, when the chamber passed a bill simply extending AMT relief without paying for it.

This sets the stage for a standoff with the House, where Democratic leaders are adamant that no laws be enacted to increase the federal deficit, in keeping with the pay-as-you-go (PAYGO) rules that were reinstated when the Democrats took control of Congress earlier this year. But in the Senate, because 60 votes are needed to pass most legislation, the Republicans were able to block the fiscally responsible approach even though it was supported by every member of the majority party.

Citizens for Tax Justice released a two-page paper today with figures explaining why this is a bad deal for middle-income Americans.

"I'm willing to accept a tax cut for people making upwards of $100,000 a year, if we send the bill to people making millions," said CTJ director Robert S. McIntyre. "But I can't support cutting taxes for such well-off people and sending the bill to people who make $50,000. Yet sadly, it's exactly those ordinary taxpayers who will likely bear the cost of the increased debt -- through higher taxes or reduced public services in the future."

Republicans Manage to Preserve Loophole for "Carried Interest" -- for Now

In the AMT relief bill passed by the House last month, one of the revenue-raising provisions to offset the cost would have closed the loophole for "carried interest," a type of compensation paid to buyout fund managers. Republican leaders have demanded that this loophole allowing wealthy fund managers to pay taxes at a lower rate than middle-income families be preserved. They appear to have gotten their way for now, as House Ways and Means Committee Chairman Charles Rangel has said he would drop the carried interest provision and replace it with some potentially more palatable revenue-raising provision.

But the battle over carried interest is far from over. In September, CTJ sent to the House and Senate a letter signed by around 300 organizations from every state urging that the loophole be closed. Lobbyists for the industry have acknowledged that the issue is likely to come up again in the next couple of years as Congress considers broader tax reform.

CTJ would like to thank all those who helped begin the fight to close the carried interest loophole. As a result of these efforts, the majority party in both chambers has, after some initial hesitation, completely adopted the position that the loophole should be eliminated. We will continue to build on these efforts as Congress turns to broader tax reform.

President Bush Relied on Expanding Reach of AMT to Mask Cost of His Tax Cuts

Republican congressional leaders claim that Congress should eliminate the AMT without paying for it because no one ever intended to collect the AMT's revenues. But that's not true.

When George W. Bush proposed his tax cut plan, he and his tax advisors were well aware that, since the AMT is an alternative tax, lowering the regular tax rates without adjusting the AMT would push tens of millions of people into the AMT. But they needed the added AMT revenues to significantly reduce the projected cost of Bush's tax cut program. In fact, Bush's chief economic advisor was adamant that Bush's plan contemplated a huge increase in the AMT.

"Having created most of the AMT problem, Bush and his congressional allies are now trying to rewrite history so they can get away with loading even more debt on our children," said McIntyre. "They shouldn't be allowed to get away with it."



Tax Fairness Wins in the House of Representatives; Battle Ahead in the Senate



| | Bookmark and Share

On Friday, the U.S. House of Representatives voted 216-193 to pass H.R. 3996, a bill to extend relief from the Alternative Minimum Tax and other tax breaks for one year and offset the costs by reducing tax loopholes for private equity fund managers and others. All but eight Democrats present voted for the bill, while all the Republicans present voted against it.

The AMT provision is known as a "patch" because it prevents the AMT from reaching millions of more taxpayers (as the AMT is scheduled to do under current law) for a year but does not permanently address this problem. A larger bill (H.R. 3970) was introduced by Ways and Means Chairman Charles Rangel (D-NY) on October 25 to repeal the AMT entirely and offset the costs, mostly with a surtax that would reduce the Bush tax cuts for those families with incomes above half a million dollars a year. This bill is a major tax reform that would make the tax code simpler and more progressive without making the fiscal situation worse than it already is.

But because Republicans seem sure to block any provision that would reduce tax breaks even for the richest Americans, Rangel introduced the smaller bill (H.R. 3996) to patch the AMT for just one year, giving Congress more time to consider his more comprehensive tax reform. H.R 3996 borrows many of the good ideas from the larger bill, like closing the loophole for "carried interest" and a loophole that allows private equity fund managers to set up deferred compensation arrangements in offshore tax havens to avoid taxes. H.R. 3996 would also extend some business tax breaks (such as the research credit) for one year. Smaller provisions in the bill would make the Child Tax Credit more accessible for poor families and would create an additional standard deduction for property taxes for those who do not itemize their tax deductions.

Surprising Amount of Focus on "Carried Interest"

The Republicans chose the counter-intuitive strategy of rallying around one of the most offensive and blatantly unfair loopholes in the tax code, the loophole for "carried interest," which is a form of compensation paid to certain types of fund managers. This loophole essentially allows these fund managers to earn hundreds of millions of dollars and yet pay taxes at a lower rate than their middle-income receptionists.

Citizens for Tax Justice sent members of Congress a new fact sheet explaining that the loophole is a subsidy paid to millionaires, through the tax code, and funded by the rest of us who are paying income taxes at ordinary rates. The loophole is enjoyed by those who manage other people's money but are allowed to pretend that they're investing their own money -- which entitles them to the low, 15 percent rate for capital gains. Contrary to the confusion sowed by fund managers, the capital gains rate for those who actually invest would not be altered.

Citizens for Tax Justice also issued a statement responding to the claim that the real estate industry would be damaged if the carried interest loophole is closed. The vast majority of people who are affected by what goes on in the real estate industry -- realtors, construction workers and home-buyers -- pay income taxes at ordinary rates like everyone else, meaning that they are paying for this loophole rather than benefiting from it.

Most important, however, was the willingness of hundreds of state and local organizations from around the country to tell Congress that this loophole is simply unfair to ordinary taxpayers in their states. Thanks to all the organizations that joined the sign-on letter urging Congress to close the loophole.

Battle Ahead in the Senate

Several in the Senate have suggested that it will be difficult to secure the 60 votes needed to avoid a filibuster in their chamber and approve this bill. Many Republican Senators, including the ranking Republican on the Finance Committee, Charles Grassley (R-IA) have made clear that they would rather increase the federal budget deficit than pay for AMT relief. We would suggest that any anti-tax conservative in the Senate who wants to take responsibility for filibustering AMT relief for millions of taxpayers should go ahead and do so to make his or her position clear to the public.



Ways and Means Committee Approves Bill to Fix AMT for another Year and End Unfair Tax Breaks for Private Equity



| | Bookmark and Share

By a party-line vote, the House Ways and Means Committee on Thursday approved legislation (H.R. 3996) that would prevent the Alternative Minimum Tax (AMT) from expanding its reach to millions of more families for one year. Ways and Means Chairman Charles Rangel (D-NY) had hoped earlier this year to pass his larger plan to address the AMT permanently, as discussed above, but some lawmakers oppose his provisions to pay for AMT reform and would rather increase the budget deficit. As a result, Chairman Rangel introduced this smaller bill, which includes a "patch" of the AMT for one year at a cost of about $50 billion, and hopes the larger plan will be acted on sometime in the next couple years.

The smaller bill approved Thursday also includes one-year extensions of some special interest tax breaks that are technically temporary but whose extension by Congress has become so routine that Hill insiders refer to them as the "extenders." The extenders cost about $21 billion.

Help for Low-Income Included

Also included is a change in the Child Tax Credit rules to make it easier for poor families to benefit from the credit, as well as a small additional standard deduction for middle-income homeowners. These two provisions combined cost about $4 billion over ten years.

Rangel Stands Firm -- Tax Cuts Will Be Paid For By Closing Carried Interest Loophole, Among Others

The smaller bill borrows some very good ideas from the larger plan in order to pay for the one-year AMT relief and the extenders. One of these provisions would eliminate the "carried interest" loophole for private equity fund managers, which would raise about $26 billion over ten years. Another provision would limit the ability of private equity fund managers to set up deferred compensation arrangements in offshore tax havens to avoid taxes, and would raise about $24 billion over ten years.

Another provision would delay the implementation of a tax break that was passed in 2004 but is not yet in effect. The 2004 tax break essentially expands a loophole allowing multinational corporations to take U.S. tax deductions for interest payments that are really foreign expenses. The provision delays this tax break several years and raises $25 billion over ten years.

Republicans Say Their Own Tax Laws Will Lead to the Biggest Tax Increase in History

Republicans members of the committee were hostile to the offsets and argued during the markup of the bill that the AMT should be repealed and the revenue should not be replaced because it was never intended to be collected. This ignores the fact that the Bush Administration intentionally decided not to permanently fix the AMT when it enacted tax cuts in order to mask the true cost of those tax cuts. It also ignores the fact that the Bush Administration, like Congress during both Republican and Democratic control, has budget plans that assume the expanded AMT revenue (based on current law under which the AMT will expand its reach) will be collected.

Congressman Earl Blumenauer (D-OR) pointed out the irony of the minority party's argument. Republicans at the hearing seemed to say that the expiration of the Bush tax cuts -- which was written into the laws enacted by President Bush and the Republican Congress, along with the scheduled expansion of the AMT that was intentionally left in place when Republicans controlled Congress and the White House -- would lead to the "biggest tax increase in history." Even if we believed that allowing the tax laws to exist as they're currently written could constitute a tax increase, it would be hard to understand why the complaints are coming from the party that held power and passed a major tax bill every year for six years.

Meanwhile, even the conservative Washington Times has editorialized that "it seems disingenuous" for the GOP to call Rangel's plan a tax hike.



Chair of House Tax-Writing Committee Proposes Comprehensive Tax Reform



| | Bookmark and Share

Congressman Rangel's Tax Bill Would Make the Tax Code Simpler, More Progressive, and the Changes Are All Paid For

House Ways and Means Chairman Charles Rangel introduced his proposal Thursday to address the Alternative Minimum Tax and simplify the tax code without increasing the federal budget deficit. One title of the bill would address the income tax for individuals, including the AMT reform which would be paid for by reducing the Bush tax cuts for the wealthiest Americans and closing some unfair loopholes that benefit the very richest taxpayers. The other title of the bill would simplify the corporate tax by trading a lower corporate tax rate for the elimination of some inefficient loopholes. Lawmakers may take some of the provisions, such as a one-year fix for the AMT, and pass them more quickly as a separate, smaller bill.

Individual Income Taxes Would Be Simpler and More Progressive

Several Republican lawmakers demand that Congress repeal the AMT without replacing the revenue because it was never "intended" to be collected. This is nonsense, because the Bush Administration very intentionally declined to address the AMT when it passed tax cuts. The President's most recent budget assumes that the AMT will, in fact, expand its reach to millions of families after 2007.

Congressman Rangel's bill includes a "patch" for the AMT for this year and then repeals it altogether. The revenue is replaced largely with a surtax on families with incomes over $200,000. These families have benefited the most from the Bush tax cuts. Nearly half of the benefits from the Bush tax cuts flow to the richest five percent of taxpayers, whose income is above $170,000. In 2010 well over half of the benefits will flow to this group if the Bush tax breaks are not repealed. So Congressman Rangel's bill would reduce the bonanza of tax cuts enjoyed by this elite group of families to help pay for AMT relief for families who are somewhat more likely to be middle-class.

In addition, the bill would eliminate the loophole for "carried interest" as many advocates have urged because it allows wealthy fund managers to pay a lower tax rate than middle-income people.

Congressman Rangel's bill also includes important improvements in the Child Tax Credit and the EITC for childless workers. The Child Tax Credit is currently structured so that the poorest families cannot benefit from it, while the EITC for childless workers is currently so low that childless workers can live in poverty and still pay federal income taxes, in addition to federal payroll taxes.

Corporate Taxes Would Be Simpler and More Efficient

The bill reduces the corporate rate from the current 35 percent to 30.5 percent and replaces the revenue lost from this change by eliminating certain loopholes. Corporations should consider themselves lucky to be offered this lower rate. CTJ has argued recently that Congress should close corporate tax loopholes and not lower the corporate rate but instead use the new revenue for deficit-reduction or to address the many needs this country faces right now.

It's often said that the U.S. corporate tax rate of 35 percent is among the highest in the world, but really the effective rate is much lower because of the loopholes that corporations use to lower their taxes. The United States collects less in corporate taxes as a percentage of GDP than all but two OECD countries. In other words, corporations should be thankful they're being offered any tax breaks at all.

Wisely, the bill includes changes to offset the costs of the rate reduction. These include eliminating several existing tax provisions, including a tax subsidy for manufacturers, an accounting method that allows oil companies to understate their profits, and another provision that encourages companies to move operations offshore.

Republicans Defend Government Interference in the Economy Through the Tax Code, Defend Complexity in the Tax Code

Republicans in Congress have placed themselves in the strange position of defending a system that taxes some millionaires at lower rates than middle-class families, defending a tax system that provides subsidies to certain businesses at the expense of the rest of the taxpayers, and defending the complexity in a tax code that causes business decisions to be made for tax reasons rather than economic ones. Treasury Secretary Henry Paulson went so far as to say (subscription required) "The corporate proposals will hurt the ability of our businesses and workers to compete in a global economy." This is despite the fact that closing loopholes to pay for a lower tax rate is an idea that he and others in the Bush administration proposed during the summer.



DON'T DO IT! Some Senators Consider Borrowing Billions Instead of Paying for AMT Reform



| | Bookmark and Share

It has been reported in several news outlets that Senate Finance Chairman Max Baucus (D-MT) was unable to get a majority of his committee's members to agree, at a meeting Wednesday, on how to pay for a temporary fix for the Alternative Minimum Tax (AMT). As a result, some Senators have suggested that they should waive the pay-as-you-go (PAYGO) rules that were reinstated at the start of this session and which are supposed to prevent Congress from expanding the national debt.

The Bush tax cuts increased the number of people subject to the AMT and the Republican-led Congress never permanently indexed for inflation the exemptions that keep most of us from having to pay it. As a result, 23 million taxpayers (17 percent of all taxpayers) will pay the AMT for 2007 if Congress makes no change to the law.

Not Worth Breaking the Bank

But the AMT is not exactly the greatest threat right now to the average American. Even if Congress does nothing (which is extremely unlikely) around 60 percent of the AMT would still be paid by the richest 5 percent of taxpayers. In other words, if there was ever a good reason to borrow billions of dollars and have to pay it back with interest, this is not it.

Several Measures Would Be Good Policy AND Could Pay for AMT

That is especially true because there are plenty of options that Congress can pursue to offset the cost of temporarily or permanently fixing the AMT. For starters, Congress could scale back the Bush tax cuts for the wealthiest people, who are reaping most of the benefits.

Congress could also close the loophole for "carried interest" paid to billionaires who run investment funds, and who are currently allowed to pay a lower tax rate than their secretaries. Several hundred organizations signed a letter in early September urging Congress to close this loophole. Congress could also crack down on tax avoidance associated with offshore schemes, stock options and misreporting of business income, and limit tax breaks for the deferred compensation of millionaire executives.

Early this year CTJ pointed out that one simple solution would be to close the loopholes within the AMT itself for capital gains and dividend income.

It's expected that a bill to "patch" the AMT for one year will be introduced in the House by Ways and Means Chairman Charles Rangel in the coming weeks and will likely include some combination of revenue-raising provisions to offset the cost. Rangel has, however, said members of the House may also disagree over how to do so. (Rangel also plans to introduce a larger bill to repeal the AMT entirely, and offset the costs, but that may not be acted upon until next year.)

Deficits Are Not a Progressive Solution

Congress should not waive PAYGO. The more money we borrow, the more we have to pay to make interest payments. Currently nine cents of every dollar we send to Washington goes just to interest payments -- just to pay for the privilege of borrowing. Besides that, budget deficits can endanger vulnerable families since the public services they depend on are often targets of cuts whenever conservative politicians decide it's time for "deficit-reduction" measures.



Battle Only Beginning Over the "Carried Interest" Tax Loophole for Billionaire Fund Managers



| | Bookmark and Share

On Tuesday, the Washington Post created a great deal of confusion by reporting that Senate Majority Leader Harry Reid (D-NV) has told lawmakers and lobbyists that the Senate will not have time this year to consider legislation eliminating the "carried interest" loophole, which allows billionaire fund managers to pay a lower tax rate than their middle-income receptionists. This was seen in some quarters as an indication that the issue is dead for this year, provoking several editorials blasting the Senate Democrats for choosing campaign contributions from lobbyists over tax fairness. The reality is that whether the Senate addresses the carried interest issue is largely up to the Senate Finance Committee, not Senator Reid.

Carried Interest Issue Wound Up in Debate Over Alternative Minimum Tax

Whether or not the Senate is unduly influenced by lobbyists is certainly a question worthy of debate, but some clarification is in order. It's true that the Senate is not likely to consider a stand-alone bill that does nothing but close the carried interest loophole. But every member of Congress already knows that. No one in Congress is talking about a stand-alone bill. The question everyone is considering is whether or not a provision to close the loophole should be used to offset the cost of other legislation Congress wants to pass. For example, Congress needs to pass a bill to keep the Alternative Minimum Tax (AMT) from affecting more taxpayers.

The number of people affected by the AMT will increase from around four million last year to 23 million this year if Congress does not act, and just fixing the AMT for this year alone would cost over $50 billion since Congress and the administration have always assumed that this revenue would be collected. A provision closing the carried interest loophole would raise some revenue (although an official estimate has not yet been made) and could therefore be used to offset part of the cost of dealing with the AMT. Over in the House, Ways and Means Chairman Charles Rangel (D-NY) has long said that he will likely try to close the loophole to help offset the cost of fixing the AMT.

Ball Is in the Finance Committee's Court

What types of "offsets" are attached to an AMT bill in the Senate is not decided by Senator Reid. It's decided by the Senate Finance Committee, and Finance Chairman Max Baucus (D-MT) has not yet said whether or not he'll include a provision to close the carried interest loophole. But he and ranking member Charles Grassley (R-IA) have both shown interest. An AMT bill needs to include offsets now that Congress operates under pay-as-you-go (PAYGO) rules that prevent it from increasing the budget deficit. Once the Finance Committee approves an AMT bill and sends it to the full Senate, Senator Reid will make time for a floor vote, since it will shield over 20 million families with voting members from an increase in their Alternative Minimum Tax.

Carried Interest Issue Won't Die Regardless of What Happens This Year

Regardless of what happens this year, there's enough public anger over the carried interest loophole to keep the issue alive for some time. Presidential candidates Hillary Clinton, John Edwards and Barack Obama have come out in favor of eliminating the loophole. Edwards and Obama even made a point of expressing their outrage that the issue hasn't been resolved by now. Even a chief lobbyist for the private equity industry said Wednesday that "It's not over; it's only just beginning."

For now, all eyes should be on the members of the Senate Finance Committee, particularly its chairman, Max Baucus.



Republicans Call for Replacing Alternative Minimum Tax with Alternative Maximum Tax



| | Bookmark and Share

House Republicans have called for replacing the complicated Alternative Minimum Tax with a potentially even more complicated Alternative Maximum Tax. The plan, which also proposes permanent extension of the Bush tax cuts, would add more than $5 trillion to the national debt over the 2011-20 period.

Under the GOP plan, taxpayers could choose to continue to pay taxes under the current tax code -- but with no Alternative Minimum Tax and with all of the Bush tax cuts permanently extended. Or they could switch to the new Alternative Maximum Tax, with lower rates than current law and no credits or deductions except for a large standard deduction and personal exemptions similar to those under current law.

Because the plan would repeal refundable tax credits now available to low-income working families, it would be of no benefit to the poorest one-third of Americans. Wealthy families, however, would get huge tax reductions.

To maintain or enhance complexity, the plan would allow couples to switch between the two tax systems annually by divorcing or remarrying. Single taxpayers would be allowed only one lifetime switch between the two systems after their initial choice, unless they get married.

The bill's lead sponsor, Rep. Paul Ryan (R-Wisc.) calls his plan "The Taxpayer Choice Act." But budget-deficit hawks have condemned it as "The Bankrupt America Act," while others have dubbed it "The Divorce Lawyers' Relief Act."



Crunch Time for Congress



| | Bookmark and Share

Among those items pushed back to September is the Alternative Minimum Tax reform plan being developed by the House Ways and Means Committee. While no actual bill has been released, it is known that the House Democrats want to exclude families with incomes of up to $250,000 a year (or $125,000 for singles) from the AMT, reduce the AMT for those between $250,000 and $500,000, and pay for the reform with a surtax on those with incomes above $500,000. Anti-poverty advocates are excited that the plan would also include improvements in the child tax credit and Earned Income Tax Credit.

While there is some question of whether or not the President would sign such a bill, it's possible the White House would find it risky to veto a bill that saves millions of middle-income taxpayers from the AMT (which is scheduled to expand its reach from about 4 million to 23 million this year if Congress does not act) in order to protect the very wealthiest Americans, who have received most of the Bush tax cuts.

The Senate Finance Committee is said to be interested in simply passing a one-year or two-year "patch," or temporary extension of the exemption that keeps most people from paying the AMT. This would cost around $50 billion just for one year. Finance Chairman Max Baucus (D-MT) has implied that he might increase the federal budget deficit by this amount rather than find revenue to pay for it. The Finance Committee has not tried to introduce a bill before the August recess.


House Democrats' Goal: Alternative Minimum Tax Reform by Memorial Day



| | Bookmark and Share

Democrats in the House of Representatives are hoping to pass legislation by Memorial Day that will permanently reform the Alternative Minimum Tax (AMT) and prevent it from reaching millions of more taxpayers. The Bush tax cuts increased the number of people subject to it and the Republican-led Congress never permanently indexed for inflation the exemptions that keep most of us from paying the AMT. As a result, 23 million taxpayers (17 percent of taxpayers) will pay the AMT if Congress makes no change to the law. The AMT is not exactly the greatest threat right now to the average American. Even if Congress does nothing (which is extremely unlikely) more than half of the AMT would still be paid by the richest 4 percent of taxpayers.

But it's widely accepted that Congress will simply not allow a tax to begin affecting millions of people who have never even heard of it, so more responsible members of Congress have focused on how to change the AMT in a way that is fiscally sound and progressive.

There are several ways to do this. Democrats on the House Ways and Means Committee are said to be interested in exempting people with income below $250,000 from the AMT, lowering the AMT for people with incomes between $250,000 and $500,000, and and shifting the cost of the change to those with incomes above $500,000. How exactly the cost would be shifted to those taxpayers with incomes over half a million dollars is yet undetermined. This could be done through the regular income tax. The Tax Policy Center has recently shown the impact of doing this by raising the top AMT rate from 28 percent to 35 percent. Another proposal, made by Citizens for Tax Justice in December, would close the main loophole in the AMT, the lower AMT rate for capital gains and dividends, extend the exemptions and index them to inflation.

What's most important is that AMT reform should not increase the federal budget deficit and that the costs should be borne by those who were the original target of the AMT in the first place, the super-rich.



Congress Begins to Consider Reform of the AMT



| | Bookmark and Share

Earlier this week, the House Ways and Means Subcommittee on Special Revenue Measures held its first hearing this year on the Alternative Minimum Tax (AMT), which is supposed to ensure that extremely wealthy people pay some minimal amount of taxes regardless of what loopholes they enjoy. But unless Congress acts, the AMT will soon affect some households who are upper-middle income but not super-rich. This is because the exemptions that shield most people from the AMT have never been permanently indexed for inflation, and because the Bush tax breaks changed the regular income tax calculation but not the AMT.

Congress has enacted temporary "patches" in recent years that extended the exemptions and increased them to keep up with inflation, but continuing this process would cost over $250 billion over the next four years. This cost would have to be offset if Congress is to stay within the PAYGO rules revived by the Democrats in the House shortly after they took control of Congress. The problem is that Republicans are responding to the situation by proposing to repeal the AMT entirely without paying for it, which could cost well over a trillion dollars over a decade.

Fingers Crossed for a Progressive, Budget-Neutral AMT Reform

Subcommittee Chairman Richard Neal (D-MA) indicated that a permanent reform will be proposed by the Democrats in a few weeks. It is not yet clear what that will look like, but Ways and Means chairman Charlie Rangel (D-NY) has hinted that a bill shielding more moderate-income families from the AMT could be paid for by redirecting some tax breaks away from the wealthiest taxpayers. Citizens for Tax Justice has proposed an AMT plan along those lines that would not change anything in the normal income tax rules, but other proposals have been suggested that would use new or higher regular income taxes on the wealthiest to pay for AMT reform.

Six Years Wasn't Long Enough for the Republicans to Fix the AMT

The subcommittee's ranking member, Phil English (R-PA), took the opportunity to argue that the AMT problem was the Democrats' fault. He pointed out that President Clinton vetoed an AMT repeal bill passed by the Republican Congress (that proposal would have repealed the AMT without offsetting the cost at a time when the administration was trying to balance the budget). Representative English did not explain how the Republicans managed to control every branch of government for six years without enacting a permanent solution in any of their six major tax bills. He also did not respond to the explanation that the Bush administration in 2001 intentionally chose to leave the AMT in place so as to make the cost of its first tax break appear less than it would really be after accounting for the AMT patches that Congress would inevitably enact.

The AMT essentially threatens to take the Bush tax breaks away from many Americans but leave them in place for the very richest (who, ironically, are not as likely to be affected by the AMT). Nonetheless, Representative English argued that any plan that would close loopholes used by the wealthy or raise taxes on the wealthy to pay for AMT reform would be "class warfare" and would be opposed by the Republicans.



White House May Be Negotiating With Itself on the Alternative Minimum Tax



| | Bookmark and Share

By now many people know that the Alternative Minimum Tax (AMT) is likely to be modified because it was meant to be a back-stop tax for the super-rich but will start affecting the more moderate-income families if the existing AMT exemptions are not extended. By now, most people in government know that "fixing" the AMT is not cheap. Continuing Congress's recent practice of applying a one-year "patch" each year will cost $250 billion over the next four years.

What nobody knows, however, is whether the President thinks AMT reform should paid for or not. Since some members of Congress have proposed repealing the AMT altogether (which could cost $1.5 trillion over a decade), the possible implications for the federal budget deficit are alarming. Tony Snow's recent response to questions about paying for AMT reform were not exactly crystal clear. In a long explanation of the White House position that clarified little, he said that "the President is not for tax increases," but later said "We don't think it needs to involve tax increases, but we're certainly open to hearing what other people have to say." The CTJ Talking Taxes Blog has more.



Analysis from CTJ Shows AMT Can Be "Fixed" in a Progressive, Revenue-Neutral Way



| | Bookmark and Share

The alternative minimum tax (AMT), which was originally intended to ensure that the wealthiest Americans pay at least some tax regardless of how many tax breaks they could otherwise claim, will affect 17 percent of taxpayers in 2007, rising to 23 percent of taxpayers in 2010. This is partially because President Bush's tax cuts were not accompanied by adjustments to the AMT and also partially because the exemptions that keep the AMT from applying to most people have not kept pace with inflation. A new analysis from Citizens for Tax Justice shows that there is a way to adjust the AMT -- without increasing deficits -- to ensure that the majority of it is paid by the richest one percent of taxpayers.

Many Democrats have expressed an interest in changing the AMT in the next Congress. Several lawmakers have expressed alarm that a significant number of voters will suddenly have to pay a tax that never applied to them before if Congress does not act. The problem is that the AMT is expected to bring in $250 billion in revenue in the next four years, so repealing it altogether would be outrageously irresponsible. The solution offered by CTJ allows for the same amount of AMT to be collected and also ensures that the tax will serve its original purpose -- to guarantee that the very wealthiest pay their fair share.

Senate Finance Committee Leaders Propose Repealing the AMT at a Cost of Hundreds of Billions

It would be comforting to believe that the Democrats who are now running Congress don't need to be convinced to support tax fairness. It would be comforting, but not entirely right. Senator Max Baucus (D-MT), the new chairman of the Senate Finance Committee, has joined forces with the now-ranking member Charles Grassley (R-IA) to again propose fully repealing the Alternative Minimum Tax (AMT). The Center on Budget and Policy Priorities finds that full repeal, if not offset by other revenue, could cost $790 billion over ten years and even more if the Bush tax cuts are extended past their expiration date in 2011.

It's true that if Congress doesn't do something, the AMT, which was originally intended to ensure that the wealthiest Americans pay at least some tax, will start applying to people it was never intended to affect. This is partially because President Bush's tax cuts were not accompanied by adjustments to the AMT and also partially because the exemptions that keep the AMT from applying to most people have not kept pace with inflation. But the solution to this problem is to reform the AMT in a way that is budget-neutral and concentrates the costs among the very wealthiest households, who were the targets of the AMT in the first place. Citizens for Tax Justice has proposed such a solution (see above), which is both budget-neutral and progressive.

Archives

Categories