Modifying the Alternative Minimum Tax (AMT): Revenue Costs and Potential Revenue Offsets

Publication Date: March 2007

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

Congress enacted the precursor to the current individual alternative minimum tax (AMT) in the Tax Reform Act of 1969 to ensure that all taxpayers, especially high-income taxpayers, paid a minimum of federal taxes. Initially, the minimum tax applied to fewer than 20,000 taxpayers; in 2006 it applied to 3.5 million. Moreover, absent legislative action, the AMT will affect significantly more middle- to uppermiddle-income taxpayers: by 2007, up to 23 million taxpayers could be subject to the AMT.

The AMT's expanded coverage will occur because temporary increases in the basic AMT exemptions and provisions allowing taxpayers to apply certain tax credits against the AMT have expired. To keep the AMT from affecting more taxpayers in the future would, at a minimum, require (1) that the higher AMT exemption levels be maintained and that they be indexed for inflation, and (2) that all personal tax credits be allowed against the AMT. This "patch" is estimated to cost almost $60 billion in its first full year.

If the recent reductions in the regular income tax expire at the end of 2010, then the patch would cost $279 billion over the FY2008 through FY2012 period and $569 billion over FY2008 through FY2017. If the reductions in the regular income tax are extended past 2010, then the cost of the AMT patch rises to $1 trillion dollars over the same 10-year period. Repealing the AMT would be even more expensive.

While offsetting the costs of AMT relief may prove difficult, several approaches are being discussed. One approach would shift AMT taxes from middle-income to high-income taxpayers by some combination of higher AMT rates and taxing capital gains and dividends at the AMT rates. Proponents argue that including capital gains preferences in the AMT would be consistent with the original purpose of the minimum tax.

In other proposals, AMT relief would be financed by raising regular income tax rates; for example, raising the top three rates by 24%. Another approach might be to repeal or restrict some of the preference items under the regular income tax. However, income tax base broadening may be difficult because many of these provisions are both longstanding and popular.

Another approach to financing AMT relief might be to focus on reducing the tax gap. Although the tax gap is estimated to be in the neighborhood of $300 billion, the revenue yield from proposals to reduce the gap appears to fall far short of the amount needed to address the AMT.

This report will be updated to reflect legislative developments.