Democrats push for tax overhaul - Their target: A levy aimed at rich that hits middle class

Democrats push for tax overhaul - Their target: A levy aimed at rich that hits middle class
By William Neikirk
Copyright © 2007, Chicago Tribune
Published April 14, 2007

WASHINGTON -- House Democrats said Friday the alternative minimum tax has turned into a "parent penalty" weighing heavily on middle-class families and that overhauling it has become their top tax reform priority.

Rep. Rahm Emanuel (D-Ill.), chairman of the House Democratic Caucus, said in the Democrats' weekly radio address, taped for airing on Saturday, that "now is the time for a middle-class tax cut" built around reform of the controversial levy.

Emanuel's address, parts of which were released Friday by Speaker Nancy Pelosi's office, signaled a major effort by Democrats to lay claim to the tax-cut issue that has been a key part of Republican economic orthodoxy since Ronald Reagan's presidency.

In addition to ensuring that only the wealthiest Americans pay the tax, known as the AMT, Democrats are considering additional tax relief for the middle class that could involve tax simplification, a senior House Democratic aide said. About 80 million people could see lower taxes if the bill passes this year, the aide said.

It is not yet clear how Democrats would offset the cost of this middle-class tax relief, although a clear target is higher taxes on wealthier people. One idea reportedly being considered is to deny the current preferential tax rates on capital gains and dividends to taxpayers subject to the AMT. But there are other proposals as well.


Tax not adjusted for inflation

Wall Street is anxiously waiting to see if well-to-do investors would be forced to pay higher taxes, said William Beach, a scholar at the Heritage Foundation, a conservative think tank. If they have to, he said, the stock market could take a steep slide.

The alternative minimum tax, enacted in 1969 to prevent wealthy people from escaping any tax liability, is increasingly ensnaring the middle class because it was never indexed for inflation.

Over the next three years, without congressional action to stop it, the AMT would hit nearly 30 million people, Emanuel noted.

The AMT is a parallel tax. Americans must first figure out their income taxes by calculating their taxable income after claiming deductions, such as those for mortgage interest and personal exemptions. Then those who may be subject to the AMT must do taxes a second time without taking most of these deductions. There are exemptions for singles and couples, but they are not indexed for inflation.

In his radio remarks, Emanuel called it a "parent penalty" because denial of personal exemptions for dependents could force many middle-class families to owe the tax.

Emanuel said Democrats "will work with our Republican colleagues to identify bipartisan solutions that help middle-class families avoid this tax that was never intended for them. This is one thing on which Democrats and Republicans should agree."

Both parties have indicated that the AMT is a major problem. Rather than try to reform it, however, they have adopted "patches" over the years so that more Americans don't have to pay the tax, generally by raising the AMT's exemptions.

Robert Reischauer, president of the Urban Institute, predicted that Congress would not be able to pass AMT reform this year, saying the Bush administration would likely object to raising taxes on upper-income taxpayers.

Tax reform is a hot topic in Congress now as complaints about the complexity of America's tax system increase. But Beach said that while overhauling the AMT is desirable, "I don't think anyone has the political courage to do it" with lobbyists having such influence on Congress.


Reform bill to be resurrected

Emanuel plans to reintroduce a tax reform plan next week that he and Sen. Ron Wyden (D-Ore.) sponsored in 2005. Among other things, that proposal would have repealed the alternative minimum tax and reduced the number of tax brackets from six to three. It would have repealed Bush's 2003 dividend tax cut and a number of business-tax breaks.

Len Burman, a former Treasury Department official in the Clinton administration and a scholar at the Urban Institute, said many middle-class tax breaks would be popular with Democrats, such as a permanent child-care tax credit.

One of the political and economic problems with overhauling the AMT is that the taxes raise so much money -- roughly $1 trillion over 10 years. In an effort to keep the deficit under control, Democrats have pledged to offset any proposals that would increase the deficit with either spending cuts or tax increases. These offsets could be extremely unpopular.

wneikirk@tribune.com