By Howard Gleckman
Millions of Americans ended their tax season on Apr. 15 confronting the ugly surprise of the individual alternative minimum tax (AMT). But are lawmakers riding to their rescue and fixing the levy? Nope. Instead, Congress is quietly moving to slash the business version of the AMT. Like its individual cousin, the corporate AMT is a needlessly complex attempt to fix fundamental problems with the tax code that pols don't want to confront.
Why is the corporate AMT being fixed while the individual levy hammers more than 3 million families (see BW, 2/16/04, "The Stealth Tax")? Business has a powerful lobby, for one thing. And cleaning up the individual version would mean tax losses of $40 billion a year for the government, but Congress can exempt 97% of businesses from the AMT for a mere $1 billion a year.
So, on Apr. 1, House leaders quietly slipped a corporate AMT change into a massive transportation bill. The House fix would exempt corporations with up to $20 million in revenue (vs. a current $7.5 million exemption level) from the tax. It would also provide new relief for companies that operate overseas and those that use past-year losses to reduce current-year taxes.
In late April or early May, the Senate is expected to tackle a less generous version buried in the bowels of a massive business tax bill. Unless you're paying very close attention, you'll never find these changes.
Stealth tactics notwithstanding, opponents of the corporate AMT have a point. It creates the worst of all tax situations. On one hand, it discourages legitimate investment by raising taxes on companies that have low profits but large capital expenses. Yet the AMT doesn't stop egregious abuses that allow companies to dodge paying taxes entirely.
A recent study by the General Accounting Office reported that nearly 40% of all large U.S. companies paid no tax in 2000, despite a booming economy at the time -- and the AMT. That's because many of the strategies companies use to avoid tax, such as parking profits overseas or engaging in outright shelters, keep money safe from the AMT as well. "There is a misperception that the AMT is a backstop to the tax system that will prevent companies from using loopholes," says University of Maryland tax economist Drew Lyon.
ONE STEP AHEAD.
The corporate AMT fails because it can't keep up with modern financial engineering. When the law was enacted in 1986, it targeted companies that borrowed money to purchase equipment, then wrote off the interest on the debt and took big depreciation deductions. That allowed many companies to not only avoid tax on those investments but to get refunds. The AMT successfully slowed those activities, generating $8.1 billion in tax revenues in 1990.
In the '90s, tax planning changed dramatically. Today, excess depreciation accounts for just 15% of the difference between book and taxable income, according to Harvard economist Mihir Desai. The rest results from stock options, the ability of companies to avoid paying U.S. tax on foreign income as long as they retain those profits overseas, and the widespread use of shelters. "Companies are much better at arranging their financial decisions to minimize taxes," says American Enterprise Institute economist Eric Engen.
None of those strategies is covered by the AMT. And also in the '90s, the alternative tax on excess depreciation was scaled back as well. Thus, by 2000, companies paid just $3.8 billion in AMT, half what they had paid 10 years before. "It's a shell," complains Robert McIntyre, director of Citizens for Tax Justice, and an advocate for the original 1986 tax.
Congress could try to capture hot new sheltering techniques in the AMT. But lawmakers would never keep up. New schemes would be invented before the ink was dry on the law. "It's a losing battle," says Engen, especially when U.S. companies face competition from foreign companies that enjoy lower tax rates.
Simply ditching the AMT would only add to the wave of corporate tax dodging. But if lawmakers would slash corporate rates and shutter loopholes, they could dump the AMT and still get business-tax abuse under control. Few doubt that the tax code needs to be cleaned up. But rather than fiddling with the corporate AMT, Congress would be better off confronting the real structural problems in the business tax. Then, this AMT could disappear, and no one would notice.
Gleckman is a senior correspondent in BusinessWeek's Washington bureau. Follow his views in Washington Watch, only on BusinessWeek Online
Edited by Patricia O'Connell