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Why the Senate Brought Back This Hated Tax

By Dan Caplinger - Dec 4, 2017 at 8:57AM

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Learn how funding issues forced lawmakers' hands.

Republican lawmakers in the Senate successfully voted in favor of tax reform, with a 51-49 tally seeing the defection of just a single member of the party. Yet for those who were familiar with the plan planks that the Senate originally had in its tax-reform bill, the reality of what got passed on Dec. 1 reflected both the typical legislative process as well as the fiscal pressures on lawmakers to balance tax breaks with keeping the resulting deficits under control.

One surprising move that the Senate made to ensure passage was to restore the alternative minimum tax. The House version of tax reform had sought to eliminate the AMT entirely, and the Senate's last-minute move to bring back this much-hated tax could make many lawmakers on the other side of Capitol Hill unhappy.

Keyboard with blue tax button.

Image source: Getty Images.

What is the AMT?

The alternative minimum tax has existed since before the last major tax reform efforts in the mid-1980s. The laws governing the AMT essentially create a separate system of taxation that uses different rules for calculating income, applying deductions, and charging tax. The goal of the AMT was to ensure that those who in some lawmakers' eyes took too much advantage of deductions and credits would have to pay at least some tax to the federal government.

Early in its history, high exemption amounts and relatively low AMT rates compared to the regular tax system meant that only the wealthiest taxpayers typically paid the alternative minimum tax. Over time, the failure of key AMT provisions to adjust for inflation meant that a growing number of taxpayers were subject to the tax. Recent measures helped to reduce some of the pressure on upper-middle class taxpayers, but even now, some of the people who pay the AMT aren't those who policymakers think were intended to have to pay it.

That background explains much of why the House suggested that tax reform should eliminate the AMT. Moreover, the Senate initially was in favor of doing so as well.

What the Senate did, and why

Yet the problem with repealing the AMT is that it's costly. Under the scoring for the House tax bill, the Congressional Budget Office said that repealing the AMT for individuals would reduce revenue by $696 billion over the next decade. With the rules under which Republicans are trying to pass tax reform allowing only a total of $1.5 trillion in lost tax revenue, the AMT was one of the more expensive measures in the bill.

Congress found itself under more pressure when some senators wanted additional tax breaks. Increases in deductions for pass-through businesses and the restoration of a deduction of up to $10,000 for state and local property taxes left lawmakers scurrying to find ways to pay for the added provisions.

Accordingly, the Senate chose to rein in revenue loss by restoring the AMT. Lawmakers returned the business side of the AMT to its full current impact, but they made concessions on the provisions that affect individual taxpayers. Although individuals still have to pay the AMT, the Senate bill would raise the exemption amounts that apply to the tax by roughly 40%, to about $70,000 for single filers and almost $110,000 for joint filers. Although the increase will provide some relief, it wouldn't take away the impact of the AMT entirely for many of those who currently pay it.

Is AMT repeal off the table?

For those who oppose the AMT, there's still hope. The House and Senate are expected to meet to try to reconcile their two bills and come to a consensus. If Congress can find ways to reduce total cost elsewhere in the tax reform package, then they might agree to restore full AMT repeal.

For now, though, the threat that the alternative minimum tax will survive tax reform is a real possibility. As lawmakers compete to preserve their favorite tax breaks, the repeal of the AMT might not be a high enough priority to make it through the legislative process.

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