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WASHINGTON – Federal tax bills for nearly one in 10 Hoosier middle-class families will shoot up an average of $2,000 next year unless Congress makes a last-minute change in tax law.
“This is a huge tax increase that taxpayers do not deserve,” President Bush said in his radio address Saturday.
Last year, 38,000 Hoosiers paid a tax designed to prevent the super-rich from avoiding taxes. If Congress doesn’t act in the next week or two, the government estimates that 223,000 Indiana families – nearly 10 percent of the 2.8 million tax filers – will have tax bills instead of tax refunds.
According to the Tax Policy Center, a joint program of the Urban Institute and the Brookings Institution, nearly half of all taxpayers with incomes less than $100,000 will have to pay the millionaires’ tax next year unless Congress changes the law. This year, fewer than 1 percent of those taxpayers were subject to the alternative minimum tax.
The idea behind the alternative minimum tax, enacted nearly 40 years ago to prevent 155 very rich families from sheltering most of their income, was to make sure everyone paid a minimum amount.
But the alternative minimum tax was not indexed to change with inflation, so as incomes grew with inflation and two-earner families, the millionaires’ tax began to nudge up against incomes that are middle-class in the 21st century.
In recent years Congress temporarily exempted middle-class taxpayers. But that exemption expires this year, and the IRS estimates that 23 million Americans will pay the surprise tax if lawmakers don’t approve another extension or radically change the income level to which the alternative minimum tax applies. Last year, 4.1 million people paid the alternative minimum tax.
Congress has been struggling with what to do. Both the House and Senate have passed bills for a one-year “patch,” but their approaches set up a conflict. The House bill includes higher taxes for some well-off people to offset the cost of the patch because Democrats have insisted any new spending or tax cuts be paid for. The Senate version does not include offsets.
Bush said he would veto the House bill. He urged the House to adopt the Senate approach.
The House bill, which all Republicans opposed, including Reps. Mark Souder, R-3rd, Mike Pence, R-6th, and Dan Burton, R-5th, proposed paying for the AMT patch by raising the “carried interest” tax on narrow groups such as private equity managers, venture capitalists and some real estate investors from 15 percent to 35 percent.
Over the years, Souder has supported legislation to increase the AMT exemptions, but he voted against the Democrats’ version this year because of the bill’s tax increases on the high-income groups. He said a better option would be to approve the one-year patch and add the cost to the deficit.
“Raising taxes is a greater threat than small extensions of raising the debt,” he said.
Earlier this year, Congress’ Joint Committee on Taxation estimated that repealing the alternative minimum tax would cost $872.3 billion over 11 years. The calculation was based on the Bush-era tax cuts expiring in 2010 as they are scheduled to. If those tax cuts are extended, the committee said, the price tag for eliminating the AMT would almost double.
People who pay the alternative minimum tax pay more taxes because some exemptions allowed under the regular tax structure are not allowed under the AMT.
For instance, a long-form filer can take deductions for state and local taxes and personal exemptions. But those exemptions are not allowed under the AMT.
People are required to calculate their taxes both ways and then pay the higher amount.
But even if Congress reaches a swift agreement before leaving for its holiday break, there will be repercussions.
It will take the IRS 12 to 13 weeks to reprogram and test its computers and reprint tax forms, said Linda Stiff, acting IRS commissioner. A mid-December legislative change to the alternative minimum tax “would lead to major delays in our ability to issue tax refunds.”
sylviasmith@jg.net
