The Bush Administration has signed on to congressional Republicans' strategy to play a high-stakes game of political chicken over the alternative minimum tax. After years of reining in the AMT with stopgap measures, some GOP leaders now plan to leave the unpopular levy unchecked, threatening as many as 16 million more high-end taxpayers with a stiffer tax tab for 2006. Their hope: Increased public pressure to fix the AMT will help the GOP extract concessions from Democrats, including lower rates on capital gains and dividends. But if the gamble goes wrong, millions of corporate managers and white-collar workers could be steaming mad at both parties for playing games with their tax returns.
Spreading the Pain
Republicans are counting on help from high-income families concentrated in such blue states as New York, California, Connecticut, and New Jersey, where big deductions for state and local taxes tend to trigger the AMT. Democratic senators such as California's Dianne Feinstein and New York's Hillary Rodham Clinton and Charles Schumer have been pushing to get rid of the alternate levy. Added pressure as its reach expands could make those and other Democrats more willing to trade an AMT fix for the tax cuts the GOP wants, a top Administration official says.
The AMT is a parallel tax system that hits upper-middle-class families by limiting personal exemptions and some itemized deductions, notably state and local taxes. Since 2001, Congress has kept millions of taxpayers out of the AMT's clutches with temporary increases in the income level at which the tax kicks in. But a last-minute snag in 2005 prevented Congress from approving another patch. As a result, the number of households paying the AMT could rocket from 3.5 million last year to 20 million on 2006 returns filed in April, 2007.
In the short run, some conservatives want to use AMT relief as leverage to lock in the current low rates on capital gains and dividends, which are due to expire at the end of 2008. "A potential AMT crisis in the spring gives us an opportunity to get cap gains and dividends," says Heritage Foundation Vice-President Michael Franc. GOP leaders want to increase the pressure on Senate Democrats to cut a deal by Apr. 15, when accountants will start warning clients that the higher AMT could boost the estimated tax payments they need to make. But most of the 16 million families first facing the AMT this year won't even know they're paying more until next year, says Martin Nissenbaum, director of personal finance and taxes at Ernst & Young.
In the longer run, some Republicans believe that growing public pressure for fixing the AMT will drive efforts for fundamental tax reform. Their logic: Repealing the AMT will cost up to $1 trillion over 10 years, and the only way to pay for that is to raise other taxes by killing deductions. House Ways & Means Committee Chairman William M. Thomas (R-Calif.), along with other key lawmakers and top Administration advisers, figure that taxpayers will have to feel the AMT's sting before they'll embrace that trade-off. "Why would voters want to give up tax benefits they do have in exchange for relief from a tax they are not paying yet?" says one former top White House aide. Carrying out that strategy, however, would mean letting taxpayers feel the full brunt of the AMT for a couple of years, not just a couple of months. That may be a bigger risk than the GOP ever wants to face.
The Environmental Protection Agency's science advisory committee is about to launch an attack on the Bush Administration's proposed rules for air quality. In late December the EPA proposed to cut nearly in half the allowable short-term level of exposure to very fine particles of pollution emitted by power plants, diesel engines, and other sources. But the agency declined to reduce the limit for the average annual level of particulates in an area. That's inadequate, says Dr. Rogene Henderson, biochemist at the Lovelace Respiratory Research Institute in Albuquerque and chair of the independent science panel. The new regulations could cost thousands of lives annually, scientists estimate. The outside advisory committee is planning a Feb. 3 teleconference to discuss how to push for stricter standards.
Is paying for lawmakers to visit exotic locales an integral part of lobbying? Yes, say some K Street stalwarts. A proposed ban on privately funded travel, which House GOP leaders are considering, is overkill akin to the post-Enron corporate reform rush of 2002, many lobbyists say. "I think in some cases they go too far," says R. Bruce Josten, executive vice-president of the U.S. Chamber of Commerce. "There is some travel that is legitimate, purposeful, and advantageous." Lobbyists should make their case soon: House Speaker Dennis Hastert (R-Ill.) and Democrats already are trying to outdo each other as champions of lobbying reform.