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231 IRET Congressional Advisory 1 (2007)

handle is hein.taxfoundation/iretcgadv0228 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. November 8, 2007 Advisory No. 231 HOUSE TO VOTE ON AMT PATCH The House of Representatives is about to act on an Alternative Minimum Tax (AMT) patch for 2007 (H.R. 3996 - Temporary Tax Relief Act on 2007). It would prevent 21 million additional taxpayers from falling under the AMT. The House would replace the additional revenue that is forecast to come from the rising AMT burden by enacting several offsets (tax hikes). The Senate will have to consider the issue after the House acts. The Senate appears to be less inclined to require offsets. Reaching an agreement between the two chambers may take until December. The tax forms for 2008 will have to be printed with instructions that follow old law, and will have to be revised once the compromise becomes law. This could lead to considerable confusion in the filing of 2007 tax returns. The House bill The House bill would raise the AMT exempt amount for a couple filing jointly to $66,250 for 2007 (from $62,550 in 2006 - an inflation adjustment from last year's patched level). If no action were taken, the exempt amount would revert to the permanent, unindexed level of $45,000, set in 1993 when the AMT underwent a major expansion. (Corresponding figures for a single filer are $44,350 for 2007, up from $42,500 in 2006 and a base amount of $33,750.) Reversion to the permanent levels would entrap about 21 million additional taxpayers in the AMT, costing them an average of about $2,000 in higher tax. The bill would also extend a number of expiring business, education, and charity-related tax provisions (labeled extenders). Some of these (such as the R&E credit) have been part of the tax code on a temporary basis for years if not decades. Minor provisions assisting some of the homeowners caught up in the subprime credit mess are also included. House Pay-Go rules require offsetting tax hikes. The House is expected to propose several tax increases to offset the revenue loss from the 2007 AMT patch and the extenders. The object is to conform the bill to the so-called Pay-Go rule that the House has adopted. Under Pay-Go, any change in tax law that results in a projected loss of revenue from current-law baseline forecasts must be offset by a rise in other taxes or a cut in entitlement spending. Preventing one tax increase by enacting another is no favor to the taxpayers. A true tax baseline would consist of tax revenues that remain roughly stable over time as a share of national income. The tax structure, rates, and rules should not drift in reaction to inflation or other trends in the economic or social environment. Unfortunately, current law contains features that will generate automatic tax increases on a rising number of taxpayers over time, and will command a rising share of national income without any further votes by the Congress. These stealth tax rate increases may please Congress, but they will harm taxpayers and damage the economy. Current law is not an honest baseline. Preventing those stealth tax increases should not be regarded as a tax reduction, and should not require an offsetting tax increase. Allowing long-time deductions and credits to expire must be felt as a tax increase by those affected. In addition, the AMT will impose tax increases year after year as far as the eye can see, about $850 billion over ten years. Again, these are tax increases, and are not needed to keep revenues or sustain spending at their current levels as a percent of GDP. e~@m kfl A * gg~ 8

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