[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.
                                 ______