Demo plan would limit alternative tax
The centerpiece of the proposal, now being crafted by key Democratic lawmakers, would dramatically limit the unpopular Alternative Minimum Tax, a provision that was designed to prevent rich taxpayers from ducking taxes via deductions but is ensnaring millions of middle-income payers because it was never adjusted for inflation.
Democrats are signaling that they will seek to pay for such changes by scaling back some of the tax cuts given to the wealthiest annual earners during President Bush's first term.
"We gave tax cuts to people at the top ... and then took back the tax cuts to the people in the middle" through the AMT, said Representative Richard E. Neal, a Springfield, Mass. Democrat who is chairman of the House Ways and Means subcommittee with authority over tax proposals.
Neal's Select Revenue Measures subcommittee will hold the first of several hearings on the AMT Wednesday, and members of his committee hope to have a bill drafted by early spring.
Both parties agree that the AMT needs an overhaul. Yet while the White House has signaled a willingness to work with Democrats on reform proposals, any measure that imposes higher taxes on the wealthy is likely to spark a major battle with Republicans.
House minority leader John A. Boehner, an Ohio Republican, said Democrats seem to be looking to punish the rich with tax hikes that could stall economic growth.
"Sounds like a nice way of saying, 'We're going to raise your taxes,"' Boehner said of the early outlines of a Democratic plan. "Why would we want to risk the future growth of our economy in an effort to raise taxes on those that my colleagues across the aisle don't much like?"
The AMT was established to ensure that wealthy families pay at least some income taxes, rather than erasing their whole obligation through deductions and exemptions. But, in large part because the AMT was never indexed for inflation, middle-class taxpayers including many in wealthier states such as Massachusetts are being caught in the AMT's web and being forced to pay higher taxes than they would under the normal tax structure.
The AMT became law in 1969 to force roughly 150 wealthy individuals who were ducking taxes through deductions to pay federal income taxes. But now, if left unchanged, the AMT will force higher taxes on an estimated 23 million taxpayers when they file their 2007 returns next year; the biggest burden is due to fall on taxpayers with annual incomes of between $75,000 and $500,000 a year.
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