What Is Responsible for the Growth of the AMT?Greg Leiserson, Jeff Rohaly The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
Under current law, the number of taxpayers affected by the alternative minimum tax (AMT) is projected to rise from about 4 million in 2006 to more than 23 million in 2007 and more than 32 million in 2010. On average, taxpayers affected by the AMT in 2010 will owe an additional $3,600 in taxes. Two primary culprits are responsible for this impending explosion: the failure to index the AMT for inflation and the 2001–2006 tax cuts. This article illustrates the growth of the AMT that would have taken place if the different incarnations of the tax that have existed since 1990 were in place today and explains the reasons for the changes in the projections under each scenario.
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Under current law, the number of taxpayers affected by the alternative minimum tax (AMT) is projected to rise from about 4 million in 2006 to more than 23 million in 2007 and more than 32 million in 2010. On average, taxpayers affected by the AMT in 2010 will owe an additional $3,600 in taxes. Two primary culprits are responsible for this impending explosion: the failure to index the AMT for inflation and the 2001–2006 tax cuts.
The Tax Reform Act of 1986 established the AMT in its current form. Subsequent changes to the AMT have altered the rates, the exemption amounts, and the credits allowed against the tax, but the basic structure has remained unchanged. The Omnibus Budget Reconciliation Act of 1990 (OBRA90) increased the single AMT rate from 21 to 24 percent. The 1993 budget reconciliation act (OBRA93) increased the AMT rate to 26 percent, added a second rate of 28 percent, and increased the exemption amounts from $40,000 to $45,000 for a joint return and from $30,000 to $33,750 for single and head of household filers. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) allowed the child credit against the AMT through 2010 and increased the AMT exemption amounts for 2001–2004. Legislation first enacted in 1998 and later extended through 2006 allowed personal nonrefundable credits against the AMT. Since 2003, the exemption has been periodically increased above EGTRRA levels in a series of short-term patches affecting tax years through 2006.
Taxpayers owe AMT when their tax calculated under the alternative rules, referred to as "tentative AMT," exceeds their tax calculated under the regular system. The amount by which their tentative AMT exceeds their regular tax is then payable as AMT liability. Because of this comparison, the number of taxpayers affected by the AMT depends on the spread between the regular tax rates and the AMT rates. Changes that increase the spread will reduce the number of AMT taxpayers and changes that decrease it will tend to increase the number of AMT taxpayers. This interdependence means that the impact of changes to the AMT on the number of AMT taxpayers cannot be meaningfully assessed without also considering changes to the regular tax rates. OBRA90 increased the top regular income tax rate from 28 to 31 percent; OBRA93 added two additional tax rates of 36 and 39.6 percent; and EGTRRA reduced the top rates from 31, 36, and 39.6 percent to 28, 33, and 35 percent.
The complete paper is available in PDF format.
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