Testimony before the House Ways and Means Subcommittee on Select Revenue Measures on March 7, 2007
Chairman Neal, Ranking Member English and other members of this subcommittee, I thank you for the opportunity to submit testimony on the Alternative Minimum Tax.
My name is Grover Norquist, and I am president of Americans for Tax Reform. I submit my comments to you today with serious concerns about the effectiveness of the Alternative Minimum Tax and the possible remedies being proposed by Congress.
More specifically, the AMT is worst case example of everything wrong with tax policy in this country. As we all know this tax was established to prevent certain Americans and corporations from using otherwise available deductions to reduce (and in some cases eliminate) their income tax liability. The individual AMT was thus intended to act as a failsafe mechanism to ensure that a small number of upper income individuals had to pay income tax.
But as with just about every other tax, the AMT has gone way beyond hitting only a wealthy few and now we are faced with the possibility of 30 million taxpayers facing this onerous burden. And as our members remind us every year around tax filing season the burden is not just the additional taxes being paid but also the time to comply with the additional paperwork. The important point from the AMT lesson is that over time taxes do not hit just the wealthy as the middle-class always creep into these higher taxes.
Just ask any household with a telephone which has been forced to pay an excise tax for over 100 years when Congress intended the tax to be a tax on the “rich” to pay for the Spanish-American War. The last time I checked America won that war but American taxpayers of all incomes continued to pay the tax. This is also the direction we are headed with the AMT and to a lesser extent the estate tax.
Identifying the Problem
For policymakers to identify the correct remedy of the AMT explosion it is important to understand the true reason this occurred. As we show below, the surge is not the result of the 2001 and 2003 tax cuts but the AMT tax increases of 1990 and 1993 and the failure to index income exemptions to inflation. By our count, 97 percent of AMT payers expected to be paying the AMT in 2016, 30 of the 31 million taxpayers, are paying because of the higher rates enacted in 1993 and the failure to index to inflation at the same time.
In talking about the Alternative Minimum Tax (AMT) a lot of blame has recently been targeted at the tax cuts enacted in 2001 and 2003. The idea behind this is that reducing taxpayers’ regular income tax liability pushed their Alternative Minimum Tax liability higher thus creating this rapid growth of AMT payers. As such, some members of Congress are proposing to eliminate the tax cuts of 2001 and 2003 to fix the AMT problem.
This is simply a race to the bottom whereby Congress’ is raising taxes on American middle class families to eliminate a different tax. A more common sense approach would be to just get rid of the AMT in the first place because the tax is not achieving its objectives.
Moreover, the idea that the recent tax cuts have something to do with the recent surge is suspect. On October 29, 1999, the Senate hurriedly inserted a provision in an $8.5 billion tax package to allow families to use certain tax breaks so that they could avoid paying the dreaded – but surprisingly little-known at the time – AMT. Senate Finance Committee Chairman William Roth (R-DE) and ranking member Sen. Daniel Patrick Moynihan (D-NY) issued a joint statement earlier in the week, declaring “If we fail to extend the AMT relief, millions of middle-income taxpayers will face an unintended and unexpected tax increase.”
So this surge of AMT payers was already occurring before the 2001 and 2003 tax cuts. In fact, the surge in the 1990’s was dramatic. According to data compiled by the Tax Foundation and analyzed by Americans for Tax Reform, 117,500 taxpayers paid the AMT in 1989 with an average tax burden of $11,500 per taxpayer (in 2006 dollars). By the time the Sens. Roth and Moynihan issued their press release in 1999 that number had increased more than ten-fold to over 1 million taxpayers. The average AMT liability was $7,700 (again in 2006 dollars) in 1999 which demonstrates the AMT was slowly creeping into the middle-class. More people were paying but as the incomes of the taxpayers affected were smaller these taxpayers were also paying smaller amounts.
AMT Bracket Creep Was Already Occurring Before 2001 & 2003 Tax Cuts
Sensing this growing problem both the House of Representatives and the Senate voted on August 5, 1999 to repeal the Alternative Minimum Tax as part of the Taxpayer Relief Act of 1999. At the time the “cost” of repeal was just $105 billion. Most of the members today complaining about the AMT problem voted against this legislation. Despite their opposition the legislation passed both Houses of Congress only to be vetoed by President Clinton with the common mantra that the legislation was a “tax cut for the rich.” We would not have this “problem” today if that legislation was signed into law by President Clinton.
So what caused this dramatic surge? In 1990 and again in 1993 Congress raised the individual income tax. Knowing this would knock off taxpayers off the higher revenue raising AMT and into the regular income tax, Congress also raised the Alternative Minimum Tax rates. This ensured all the people already paying the AMT stayed in the AMT system but also pushed more taxpayers into the AMT.
Following the 1990 AMT tax increase the number of people paying the AMT nearly doubled from 132,000 to 244,000 taxpayers in just one year. In 1993 Congress created a two rate AMT tax system raising the rates from 24 to 26 percent for taxpayers with incomes under $175,000 and a 28 percent tax rate for taxpayers with incomes over $175,000. Following the 1993 tax rate the number of taxpayers paying the AMT increased an astonishing 354 percent by the end of 2000.
At the same time Congress failed to index the AMT income exemption for inflation so as taxpayers incomes increased over time more and more taxpayers were hit with the AMT. Even with an inflation index, incomes grow faster than inflation so this would not have solved all the problems but indexing for inflation would have at least mitigated some of the problem.
For example, in 1986 the median family income was just $29,458 while the AMT exemption was $40,000. The AMT exemption was lifted to $45,000 with the 1993 tax increase but by 1997 the median family income was exactly at the AMT income amount. Following 1997, the median income was higher than AMT rate which was a key component to driving the rapid increases in AMT payers.
Failure to Index AMT to Inflation Led To Rapid Rise in AMT Payers
97 Percent of AMT Payers Are Paying Because of the 1993 AMT Tax Increase
According to estimates by the Joint Committee on Taxation (JCT), in 2016 the number of taxpayers paying the AMT will reach 30.8 million. Repealing the 1993 tax increase will remove 12.2 million taxpayers from the AMT rolls. As such 40 percent of all AMT payers are paying because of the higher AMT tax rates enacted in 1993. These higher AMT rates from 1993 will force American taxpayers to pay an additional $375 billion of taxes from 2006-2016.
The next step in our analysis was to determine the second part of the AMT problem – the fact that rates and income are not subject to inflation protections as is the regular income tax. If the AMT was indexed for inflation in 1993 most of the people paying would be off the rolls.
Recent inflation protections enacted in 2001, 2003, 2004, and 2006 has kept 17.6 million people from paying the AMT. This runs contrary to the opinion that the recent tax cuts have increased the number of people paying the AMT.
So when adding the two numbers from the higher rates coupled with the inflation protections, 29.8 million of the 30.8 million that will be forced to pay the AMT are only paying because of the Clinton tax increase and the failure to index to inflation. That would leave only 1 million people are actually paying because of high incomes and lots of deductions.
The Impact of the Tax Cuts on AMT
Recently a number of policymakers have suggested that the tax cuts enacted since 2001 has increased the number of AMT payers. This could be the case but not for the reasons suggested. As I discussed above the AMT tax rates were increased correspondingly with increases in the income tax rates. Conversely, when income tax rates were cut in 2001, and again in 2003, AMT rates were not reduced correspondingly. This created an AMT tax liability higher than the regular income tax liability for some taxpayers. As such, the solution to this is not to raise the rates, either income or AMT, but to lower the AMT rates to match the lower income tax rates.
A second reason for the rise in AMT is that the tax cuts created a number of new deductions for the regular income not available in the AMT. Most of these deductions enjoy bi-partisan support such as college tuition tax deduction. Therefore, to fix the AMT problem from the recent tax cuts is to get rid of the deductions that most members support.
The combination of these two factors coupled with the policy failure of the 1993 tax increase is not the reason currently being given as the rise of the AMT. Accordingly, the proposed policy solutions such as increasing higher income tax bracket rates or AMT rates will do nothing to fix the problem. Furthermore, as we have witnessed in the past, lifting income exemption amounts only delays the problem. As incomes grow more and more people will be hit with the tax in the future. This is a situation of a dog chasing its own tail.
- AMT Repeal. We believe given these factors the Alternative Minimum Tax should be repealed with no offsets. It is unconscionable that members of Congress who created this problem by raising tax rates and failing to index for inflation and then subsequently voting against repealing this tax six years later are now seeking to rearrange the chairs on the Titanic by forcing nearly $1 trillion of tax increases to “pay” for AMT repeal/reform. Raising taxes on small businesses to pay for an income exemption that will only sock taxpayers at a later date is a ridiculous proposal. Taxpayers should not be paying this tax today and therefore should not be forced to pay higher taxes from one pocket to reduce their burden on the other pocket.
- Repeal The Clinton AMT Tax Increase. Absent repeal without offsets, Congress should repeal the 1993 AMT tax increase to bring the AMT tax rates in line with the regular income tax. We know 40 percent of the AMT taxpayers are paying this tax solely because of the higher rates and these higher rates are generating nearly 50 percent of the revenue. This will not only remove 40 percent of the taxpayers from AMT it will also substantially reduce the amount of AMT taxes for existing taxpayers. Sen. Arlen Specter of Pennsylvania just last week introduced this legislation and I would urge a similar bill in the House and encourage all members to reverse this damaging tax increase.
- Do Not Raise Taxes Under The Guise of AMT Reform. Raising taxes to offset the “cost” will result in fewer jobs, a slower stock market, less growth, and ultimately a lower standard of living for all Americans. Any proposal to raise one set of taxes to offset the AMT is unnecessary and growth inhibiting. I urge all members to avoid this avenue.
Thank you for the opportunity to submit my written testimony and I look forward to working with you on ending the Alternative Minimum Tax.