More than 30 million households could be hit with the Alternative Minimum Tax (AMT) if Congress doesn’t take action after the election, adding another pressure point to talks on the “fiscal cliff.”
Democrats and Republicans agree that Tuesday’s election will go a long way toward determining which party has leverage in the post-election negotiations on taxes and spending.
But congressional aides and tax lobbyists say fixing the AMT could be a rare area of agreement between the parties, regardless of how the election shakes out.
“An AMT patch simply has to get done by the beginning of January, and both sides know it,” said one Democratic aide on the Hill.
The task at hand could be complicated, however, by the bitter debate over the Bush-era tax rates. Democrats only want to extend those rates for family incomes up to $250,000, while Republicans want to continue them for all taxpayers.
If lawmakers deadlock on the Bush-era rates, action on the AMT could be delayed into 2013 — a scenario that tax experts say could cause bedlam for the IRS as millions of taxpayers file amended returns.
That’s a big part of the reason that tax lobbyists believe that, even if lawmakers do little else after the election, they will act to limit the reach of the AMT.
“Taxpayers begin to file their returns in January,” a K Street hand told The Hill. “It would be a tax administration nightmare if Congress waited until 2013 to address the 2012 AMT patch.”
Lawmakers first put a minimum tax into place more than four decades ago as a response to dozens of wealthy people who had legally avoided paying taxes.
But the AMT is not indexed for inflation. As a result, Congress has had to regularly “patch” it to ensure the minimum tax doesn’t hit more middle-class families.
The last patch enacted by Congress expired at the end of 2011, and another legislative fix would mean that only around four million households would be ensnared in the AMT during 2012.
The GOP-led House included an AMT patch for both 2012 and 2013 this summer as part of a bill to extend all Bush-era tax rates for another year.
On the other side of the Rotunda, Senate Democrats pushed through a bill to extend the Bush-era rates for family incomes up to $250,000, a measure that included an AMT fix for 2012.
The Senate Finance Committee also cleared a patch for both this year and next as part of a broader package of expired and expiring tax provisions.
“The AMT patch ensures that Congress must come back and do something, but I'm not certain that addressing the patch gives one side or the other any leverage regarding the other major ‘cliff’ issues,” the tax lobbyist said.
But with chatter that the Obama administration and Congress might push decisions on the larger fiscal issues into next year, aides on the Hill also cautioned that recent history does not suggest that Congress would deal with the AMT as part of a pared-down package.
A GOP aide, for instance, noted that the last time Congress enacted the AMT patch it was as part of the lame-duck deal in 2010 that extended all the current tax rates — “ensuring that no taxpayer got hit with a tax increase,” the aide said.
Republicans have also long called the AMT more of a blue-state problem, given that families living in places that generally vote Democratic — like California, New York and New Jersey — are most likely to be affected by it.
The Congressional Research Service has estimated that, without a legislative fix, more than a third of households who owe the AMT for 2012 would be concentrated in just those three states.
But tax observers off Capitol Hill doubt that the GOP would be able to use the AMT as leverage in the lame-duck negotiations.
“Because Congress has routinely patched this — sometimes paid for, sometimes not — I just don’t see it as a big driver of legislative behavior,” said Ed Kleinbard, a former chief of staff to the nonpartisan Joint Committee on Taxation.
Kleinbard, now a law professor at the University of Southern California, noted that not fixing the AMT would hit upper-middle class taxpayers in every state — not the sort of voters that either party would want to alienate.
“This is one of those things where if you really want to use it for leverage, you have to be willing to shoot the hostage,” said Ken Kies, a top GOP tax lobbyist. “And there’s no way they’re going to shoot the hostage.”