[Congressional Record Volume 145, Number 34 (Thursday, March 4, 1999)]
[Senate]
[Pages S2307-S2310]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
By Mr. LUGAR:
S. 537. A bill to amend the Internal Revenue Code of 1986 to adjust
the exemption amounts used to calculate the individual alternative
minimum tax for inflation since 1993; to the Committee on Finance.
Indexation of Alternative Minimum Tax Exemptions
Mr. LUGAR. Mr. President, I am introducing today a bill to address
what has become an increasingly heavy burden for middle-income
taxpayers: the Alternative Minimum Tax, or AMT. My bill would
retroactively index to inflation the exemptions used to calculate an
individual taxpayer's AMT liability. The indexation would begin in
1993--the last time these exemptions were raised. The AMT is
conspicuous for its lack of indexation. Under the regular income tax,
the tax rate structure, the standard deductions, the personal
exemptions, and certain other structural components are indexed so that
taxpayers are not pushed into higher income tax brackets just because
their income has kept pace with the cost of living.
The Joint Tax Committee estimates that in 1997, 605,000 taxpayers
were subject to the AMT. According to these same estimates, which take
into account the changes in the Taxpayer Relief Act of 1997, taxpayers
subject to the AMT could total 12 million by 2007. This is an increase
of more than 1,800 percent in the number of taxpayers paying this
particular tax. According to the Joint Tax Committee, this dramatic
expansion of the AMT's reach can largely be attributed to the lack of
indexation of the AMT exemptions.
The AMT was created in 1969 after a Treasury Department study
revealed that 155 individuals who had annual incomes in excess of
$200,000 had avoided paying taxes because of loopholes in the tax code.
We can all agree that upper-income individuals should pay their fair
share of taxes. The AMT was created effectively to be a tax on the use
of incentives and preferences to reduce an individual's income tax
liability. However, since its implementation, the AMT has inadvertently
created larger tax burdens for the middle-class, who were never meant
to be subject to the AMT.
Of the more than two million taxpayers who this year will be subject
to the AMT, about half will have incomes between $30,000 and $100,000.
Some are single working parents; and some are people who make as little
as $527 a week, according to a recent article by David Cay Johnston in
the January 10, 1999 New York Times. Mr. President, I will submit this
article for the Record. Overall, the number of people affected by this
tax is expected to grow 26 percent a year for the next decade.
[[Page S2308]]
The Taxpayer Relief Act of 1997 accelerated the growth of the AMT.
Under this law, even more middle-income families may be subject to the
AMT because they cannot take the full value of their child and
education tax credits without reaching the AMT limits for deductions.
Even if Congress were to exempt the child and education tax credits
from the AMT calculation, it would only slow the spread of the AMT
slightly if the tax is not indexed for inflation, according to a study
by two Treasury Department economists, Robert Rebelein and Jerry
Tempalski. I will also submit their study for the Record.
I believe that indexing the AMT exemptions is the best way to
restrain the unintended reach of the AMT. The AMT exemptions have only
been raised once, in 1993, by 12.5 percent, from $40,000 to $45,000.
Since 1986, when the tax code was last overhauled, the cost of living
has risen 43 percent. Indexing would bring the AMT into line with the
rest of our tax structure. It would also avoid adding any complexity to
the already burdensome task of taxpaying Americans.
Let me give you a real life example of how the AMT has crept up on
middle-income taxpayers. The New York Times article provided a stark
picture of the AMT. David and Margaret Klaassen of Marquette, Kansas,
are a couple with 13 children. Mr. Klaassen works at home as a lawyer.
In 1997, Mr. Klaassen earned $89,751 and paid $5,989 in Federal income
tax. The IRS sent the Klaassens a notice in December 1998 demanding an
additional payment of $3,761 under the AMT, including a penalty. The
Klaassens' tax bill was higher because the AMT, a tax mechanism aimed
at wealthy individuals who would otherwise pay no taxes, applied to
them.
The Klaassens are subject to the AMT because medical expenses for
their 13 children, which include costs of battling their son's
leukemia, resulted in exemptions and deductions totaling more than
$45,000. Certainly the Congress did not intend for the AMT to create an
extra burden for families like the Klaassens.
Mr. President, there is agreement from both the Administration and
Congress that the AMT is a growing problem for the middle class and
that something must be done. In this new era of budget surpluses, the
time has come for us to act to restore some measure of fairness and
simplicity to our income tax code. This is why I advocate indexing the
AMT, an approach that is supported by both the Tax Foundation and
Citizens for Tax Justice.
Mr. President, I ask unanimous consent that my bill to index the AMT
exemptions for inflation as well as additional material be printed in
the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
S. 537
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. INFLATION ADJUSTMENT FOR INDIVIDUAL AMT EXEMPTION
AMOUNTS.
(a) In General.--Section 55(d) of the Internal Revenue Code
of 1986 (relating to exemption amount) is amended by adding
at the end the following:
``(4) Inflation adjustment.--
``(A) In general.--In the case of any taxable year
beginning after 1998, each of the dollar amounts contained in
paragraphs (1) and (3) shall be increased by an amount equal
to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment determined under
section 1(f)(3) for such calendar year.
``(B) Rounding.--If any increase determined under
subparagraph (A) is not a multiple of $50, such increase
shall be rounded to the nearest multiple of $50.''
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31,
1998.
____
[From the New York Times, Jan. 10, 1999]
Funny, They Don't Look Like Fat Cats
(By David Cay Johnston)
Three decades ago, Congress, embarrassed by the disclosure
that 155 wealthy Americans had paid no Federal income taxes,
enacted legislation aimed at preventing the very rich from
shielding their wealth in tax shelters.
Today, that legislation, creating the alternative minimum
tax, is instead snaring a rapidly growing number of middle-
class taxpayers, forcing them to pay additional tax or to
lose some of their tax breaks.
Of the more than two million taxpayers who will be subject
this year to the alternative minimum tax, or A.M.T., about
half have incomes of $30,000 to $100,000. Some are single
parents with jobs; some are people making as little as $527 a
week. Over all, the number of people affected by the tax is
expected to grow 26 percent a year for the next decade.
But many of the wealthy will not be among them. Even with
the A.M.T., the number of taxpayers making more than $200,000
who pay no taxes has risen to more than 2,000 each year.
How a 1969 law aimed at the tax-shy rich became a growing
burden on moderate earners illustrates how tax policy in
Washington can be a hall of mirrors.
While some Republican Congressmen favor eliminating the
tax, other lawmakers say such a move would be an expensive
tax break for the wealthy--or at least would be perceived
that way, and thus would be politically unpalatable. And any
overhaul of the system would need to compensate for the $6.6
billion that individuals now pay under the A.M.T. This year,
such payments will account for almost 1 percent of all
individual income tax revenue.
``This is a classic case of both Congress and the
Administration agreeing that the tax doesn't make much sense,
but not being able to agree on doing anything about it,''
said C. Eugene Steuerle, an economist with the Urban
Institute, a nonprofit research organization in Washington.
Mr. Steuerle was a Treasury Department tax official in
1986, when an overhaul of the tax code set the stage for
drawing the middle class into the A.M.T.
In eliminating most tax shelters for the wealthy, Congress
decided to treat exemptions for children and deductions for
medical expenses just like special credits for investors in
oil wells, if they cut too deeply into a household's taxable
income.
Congress decided that once these ``tax preferences''
exceeded certain amounts--$40,000 for a married couple, for
example--people would be moved out of the regular income tax
and into the alternative minimum tax. At the time, the
threshold was high enough to affect virtually no one but the
rich. But it has since been raised only once--by 12.5
percent, to $45,000 for a married couple--while the cost of
living has risen 43 percent. And so the limits have sneaked
up on growing numbers of taxpayers of more modest means.
``Everyone knew back then that it had problems that had to
be fixed,'' Mr. Steuerle recalled. ``They just said, `next
year.' ''
But ``next year'' has never come--and it is unlikely to
arrive in 1999, either. While tax policy experts have known
for years that the middle class would be drawn into the
A.M.T., few taxpayers have been clamoring for change.
Among those few, however, are David and Margaret Klaassen
of Marquette, Kan. Mr. Klaassen, a lawyer who lives in and
works out of a farmhouse, made $89,751.07 in 1997 and paid
$5,989 in Federal income taxes. Four weeks ago, the Internal
Revenue Service sent the Klaassens a notice demanding $3,761
more under the alternative minimum tax, including a penalty
because the I.R.S. said the Klaassens knew they owed the
A.M.T.
Mr. Klaassen acknowledges that he knew the I.R.S. would
assert that he was subject to the A.M.T., but he says the law
was not meant to apply to his family. ``I've never invested
in a tax shelter,'' he said. ``I don't even have municipal
bonds.''
The Klaassens do, however, have 13 children and their
attendant medical expenses--including the costs of caring for
their second son, Aaron, 17, who has battled leukemia for
years. It was those exemptions and deductions that subjected
them to the A.M.T.
``What kind of policy taxes you for spending money to save
your child's life?'' Mr. Klaassen asked.
The tax affects taxpayers in three ways. Some, like the
Klaassens, pay the tax at either a 26 percent or a 28 percent
rate because they have more than $45,000 in exemptions and
deductions. Others do not pay the A.M.T. itself, but they
cannot take the full tax breaks they would have received
under the regular income tax system without running up
against limits set by the A.M.T. The A.M.T. can also convert
tax-exempt income from certain bonds and from exercising
incentive stock options into taxable income.
It may be useful to think of the alternative minimum tax as
a parallel universe to the regular income tax system, similar
in some ways but more complex and with its own
classifications of deductions, its own rates and its own
paperwork. The idea was that taxpayers who had escaped the
regular tax universe by piling on credits and deductions
would enter this new universe to pay their fair share.
(Likewise, there is a corporate A.M.T. that parallels the
corporate income tax.)
At first, the burden of the A.M.T. fell mainly on the
shoulders of business owners and investors, said Robert S.
McIntyre, executive director of Citizens for Tax Justice, a
nonprofit group in Washington that says the tax system favors
the rich. Based on I.R.S. data, Mr. McIntyre said he found
that 37 percent of A.M.T. revenue in 1990 was a result of
business owners using losses from previous years to reduce
their regular income taxes; an additional 18 percent was
because of big deductions for state and local taxes.
But that has begun to shift, largely as a result of the
1986 changes, which eliminated most tax shelters and lowered
tax rates.
When President Reagan and Congress were overhauling the tax
code, they could not make the projected revene under the new
[[Page S2309]]
rules equal those under the old system. Huge, and growing,
budget deficits made it politically essential for the
official estimates to show that after tax reform, the same
amount of money would flow to Washington.
One solution, said Mr. Steuerle, the former Treasury
official, was to count personal and dependent exemptions and
some medical expenses as preferences to be reduced or ignored
under the A.M.T. just as special credits for petroleum
investments and other tax shelters are.
Mortgage interest and charitable gifts were not counted as
preferences, according to tax policy experts who worked on
the legislation, because they generated more money than was
needed.
But the A.M.T. has not stayed ``revenue neutral,'' in
Washington parlance.
The regular income tax was indexed for inflation in 1984,
so that taxpayers would not get pushed into higher tax
brackets simply because their income kept pace with the cost
of living.
The A.M.T. limits, however, have not been indexed. The
total allowable exemptions before the tax kicks in have been
fixed since 1993 at $45,000 for a married couple filing
jointly. For unmarried people, the total amount is now
$33,750, and for married people filing separately, it is
$22,500.
If the limit has been indexed since 1986, when the A.M.T.
was overhauled, it would be about $57,000 for married couples
filing jointly--and most middle-income households would still
be exempt.
Mr. Steuerle said he warned at the time that including
``normal, routine deductions and exemptions that everyone
takes'' in the list of preferences would eventually turn the
A.M.T. into a tax on the middle class.
That appears to be exactly what has happened.
For example, a married person who makes just $527 a week
and files her tax return separately can be subject to the
tax, said David S. Hulse, an assistant professor of
accounting at the University of Kentucky.
And the Taxpayer Relief Act of 1997, which allows a $500-a-
child tax credit as well as education credits, may make even
more middle-class families subject to the A.M.T. by reducing
the value of those credits.
Two Treasury Department economists recently calculated that
largely because of the new credits, the number of households
making $30,000 to $50,000 who must pay the alternative
minimum tax will more than triple in the coming decade. The
economists, Robert Rebelein and Jerry Tempalski, also
calculated that for households making $15,000 to $30,000
annually, A.M.T. payments will grow 25-fold, to $1.2 billion,
by 2008.
Last year, many more people would have been subject to the
A.M.T. if Congress had not made a last-minute fix pushed by
Representative Richard E. Neal, Democrat of Massachusetts,
that--for 1998 only--exempted the new child and education
credits. The move came after I.R.S. officials told Congress
that the credits added enormous complexity to calculating tax
liability. Figuring out how much the A.M.T. would reduce the
credits was beyond the capacity of most taxpayers and even
many paid tax preparers, the I.R.S. officials said.
Even if Congress makes a permanent fix to the problems
created by the child and education credits, it will put only
a minor drag on the spread of the A.M.T. as long as the tax
is not indexed for inflation. The two Treasury economists
calculated that revenue from the tax would climb to $25
billion in 2008 without a fix, or to $21.9 billion with one.
In 1999, if there is no exemption for the credits, a single
parent who does not itemize deductions but who makes $50,000
and takes a credit for the costs of caring for two children
while he works, will be subject to the A.M.T. estimated
Jeffrey Pretsfelder, an editor at RIA Group, a publisher of
tax information for professionals.
If the tax laws are not changed, 8.8 million taxpayers will
have to pay the A.M.T. a decade from now, the Congressional
Joint Committee on Taxation estimated last month. Add in the
taxpayers who will not receive the full value of their
deductions because they run up against the limits set by the
A.M.T., and the total grows to 11.6 million taxpayers--92
percent of whom have incomes of less than $200,000, the two
Treasury economists estimated.
While many lawmakers and Treasury officials have criticized
the impact of the tax on middle-class taxpayers, there are
few signs of change, as Republicans and the Administration
talk past each other.
Representative Bill Archer, the Texas Republican who as the
chairman of the House Ways and Means Committee is the chief
tax writer, said the A.M.T. should be eliminated in the next
budget.
``Unfortunately, the A.M.T. tax can penalize large
families, which is part of the reason why Republicans for
years have tried to eliminate it or at least reduce it,'' Mr.
Archer said. ``Unfortunately, President Clinton blocked our
efforts each time.''
Lawrence H. Summers, the Deputy Treasury Secretary, said
the Administration was ``very concerned that the A.M.T. has a
growing impact on middle-class families, including by
diluting the child credit, education credits and other
crucial tax benefits, and we hope to address this issue in
the President's budget.
``Subject to budget constraints, we look forward to working
with Congress on this important issue,'' he continued.
That revenue concerns have thwarted exempting the middle
class runs counter to the reason Congress initially imposed
the tax.
``You need an A.M.T. because people who make a lot of money
should pay some income taxes,'' said Mr. McIntyre, of
Citizens for Tax Justice. ``If you believe, like Mr. Archer
and a lot of Republicans do, that the more you make the less
in taxes you should pay, then of course you are against the
A.M.T. But somehow I don't think most people see it that
way.''
The Klaassens, meanwhile, are challenging the A.M.T. in
Federal Court. The United States Court of Appeals for the
10th Circuit is scheduled to hear arguments in March on their
claim that the tax infringes their religious freedom. The
Klaassens, who are Presbyterians, say they believe children
``are a blessing from God, and so we do not practice birth
control,'' Mr. Klaassen said.
When Mr. Klaassen wrote to an I.R.S. official complaining
that a $1,085 bill for the A.M.T. for 1994 resulted from the
size of his family, he got back a curt letter saying that his
``analysis of the alternative minimum tax's effect on large
families was interesting but inappropriate'' and advising him
that it was medical deductions, not family size, that
subjected him to the A.M.T.
Under the regular tax system, medical expenses above 7.5
percent of adjusted gross income--the last line on the front
page of Form 1040--are deductible. Under the A.M.T., the
threshold is raised to 10 percent.
Still doubting the I.R.S.'s math, Mr. Klaassen decided to
test what would have happened had he filed the same tax
return, changing only the number of children he claimed as
dependents. He found that if he had seven or fewer children,
the A.M.T. would not have applied in 1994.
But the eighth child set off the A.M.T., at a cost of $223.
Having nine children raised the bill to $717. And 10
children, the number he had in 1994, increased that sum to
$1,085--the amount the I.R.S. said was due.
``We love this country and we believe in paying taxes,''
Mr. Klaassen said. ``But we cannot believe that Congress ever
intended to apply this tax to our family solely because of
how many children we choose to have. And I have shown that we
are subject to the A.M.T solely because we have chosen not to
limit the size of our family.''
The I.R.S., in papers opposing the Klaassens, noted that
tax deductions are not a right but a matter of ``legislative
grace.''
Mr. Klaassen turned to the Federal courts after losing in
Tax Court. The opinion by Tax Court Judge Robert N. Armen,
Jr. was summed up this way by Tax Notes, a magazine that
critiques tax policy: ``Congress intended the alternative
minimum tax to affect large families when it made personal
exemptions a preference item.''
Several tax experts said that Mr. Klaassen had little
chance of success in the courts because the statute treating
children as tax preferences was clear. They also said that
nothing in the A.M.T. laws was specifically aimed at his
religious beliefs.
Meanwhile, for people who make $200,000 or more, the A.M.T.
will be less of a burden this year because of the Taxpayer
Relief Act of 1997, which included a provision lowering the
maximum tax rate on capital gains for both the regular tax
and the A.M.T. to 20 percent.
Mr. Rebelein and Mr. Tempalski, the Treasury Department
economists, calculated recently that people making more than
$200,000 would pay a total of 4 percent less in A.M.T. for
1998 because of the 1997 law. By 2008, their savings will be
9 percent, largely as a result of lower capital gains rates
and changed accounting rules for business owners.
``This law was passed to catch people who use tax shelters
to avoid their obligations,'' Mr. Klaassen said. ``But
instead of catching them it hits people like me. This is just
nuts.''
three ways to deal with a taxing problem
President Clinton, his tax policy advisers and the
Republicans who control the tax writing committees in
Congress all agree that the alternative minimum tax is a
growing problem for the middle class. But there is no
agreement on what to do. Here are some options that have been
discussed:
Raise the exemption--Representative Bill Archer, the Texas
Republican who is the chairman of the House Ways and Means
Committee, two years ago proposed raising the $45,000 A.M.T.
exemption for a married couple by $1,000. But that would
leave many middle-class families subject to the tax, because
it would not fully account for inflation. To do that would
require an exemption of about $57,000, followed by automatic
inflation adjustments. That is the most widely favored
approach, drawing support from people like J.D. Foster,
executive director of the Tax Foundation, a group supported
by corporations, and Robert S. McIntyre, executive director
of Citizens for Tax Justice, which is financed in part by
unions and contends that the tax system favors the rich.
Exempt child and education credits--For 1998 only, Congress
exempted the child tax credit and the education tax credits
from the A.M.T. But millions of taxpayers will lose these
credits, or get only part of them, unless Congress makes a
fix each year or permanently exempts them.
Eliminate it--Mr. Archer and other Republicans want to get
rid of the A.M.T. but have not proposed how to make up for
the lost revenue, which in a decade is expected to grow to
$25 billion annually. Recently, however, Mr. Archer has said
that in a period of
[[Page S2310]]
Federal budget surpluses, it may be time to scrap the budget
rules that require paying for tax cuts with reduced spending
or tax increases elsewhere.
[From Tax Notes, Aug. 10, 1998]
Effect of TRA '97 on the Individual AMT
(By Robert Rebelein and Jerry Tempalski)
Robert Rebelein and Jerry Tempalski are financial
economists in the Office of Tax Analysis at the Treasury
Department.
The authors believe that even without enactment of TRA '97,
the estimated number of individual AMT taxpayers would have
increased from 0.9 million in 1997 to 8.5 million in 2008 (a
23 percent annual growth rate). Primarily because of the new
child and education credits, TRA '97 increases the number of
AMT taxpayers in 2008 to 11.6 million, or 11 percent of all
individual taxpayers. They project that TRA '97 increases the
estimated amount of tax paid because of the individual AMT
from $20.8 billion in 2008 to $25 billion.
The authors are grateful to Bob Carroll, Jim Cilke, Lowell
Dworin, Joel Platt, and Karl Scholz for their comments. The
views expressed in this report are those of the authors and
do not necessarily represent the views of the U.S. Treasury
Department.
______