It has become a regular stop on Washington’s fiscal merry-go-round: Congress patches the Alternative Minimum Tax for a year or two, but leaves future fixes for mañana. For instance, the Senate Budget Committee’s new fiscal blueprint makes room to fix the AMT for one year only and assumes money will be found from somewhere to pay for future patches. In its fiscal 2011 budget, the Obama Administration also assumes the AMT will be repaired, but buries the cost in its baseline and makes no effort to find the money to pay for the fix.
New Tax Policy Center projections show why the AMT patch will continue—and why nobody wants to think about the price tag. Last year, about 4 million households were hit by the tax, which requires unsuspecting taxpayers to redo their returns without the benefit of many common tax deductions and personal exemptions. That would jump to 28.5 million this year, except for what’s become an annual fix to the levy, which effectively holds the number of AMT victims steady.
Here’s what happens if Washington does not continue that “temporary” adjustment. If Obama gets his wish and extends nearly all of the Bush taxes, the number of households hit by the AMT would soar to more than 53 million by the end of the decade—nearly half of all taxpayers. AMT revenues—about $33 billion last year—would triple this year and reach nearly $300 billion by 2020. That is a nearly 10-fold explosion in AMT revenues.
It ain’t gonna happen. There are not many politicians willing to take responsibility for such a massive increase in both AMT taxpayers and AMT revenues. They will find a way to do what they’ve been doing for the past decade: continue to hold the nasty effects of the tax constant.
And therein lies the problem. The President can assume the AMT will be patched indefinitely, but assuming won’t pay the bills. Unless he is willing to raise other taxes or cut spending to pay for this AMT fix, he’ll have to borrow more than $1 trillion to kick the can down the road for the rest of this decade. That’s a pretty expensive can.
TPC’s new numbers are yet more evidence of just what a challenging fiscal environment we face. And why wishing it away is so dangerous.
