The AMT “Stealth Tax”.  If you don’t know what the Alternative Minimum Tax (AMT) is, you should find out, because you may be paying it and not even know it.  Introduced in 1969, AMT was originally dubbed “the millionaires tax”.  It was created to target just 155 of the highest income earners in the country that had so many tax write-offs they paid almost no federal income tax. Over forty years later, the AMT has never been adjusted for inflation, and is creeping into the pockets of middle-class Americans it was never intended to reach. Business Week has referred to the AMT as the Federal government’s “Stealth Tax”, steadily shifting the federal tax burden to middle income taxpayers in a half dozen states.

To truly understand the complex application of the AMT you should consult your accountant or make use of the research tools on this web site. But, the big picture for Californians is this: largely because of the AMT, Californian’s pay a disproportionate share of their income in Federal taxes.

Impact on California. The AMT results in the disallowance of deductions that would otherwise partially compensate for California’s higher cost of living. Californian’s pay between $50 billion and $100 billion more in federal taxes than Washington returns each year to California in the form of federal expenditures. To put this in perspective, California’s entire state budget is about $100 billion per year.

California is, by far, the country’s largest “donor state”. These excess taxes paid by Californians are distributed throughout the country to pay for government services provided to residents of other states. If Californian’s only had to pay their fair share of federal taxes, there would be enough money left over to eliminate the state budget deficit and still cut taxes in California by at least $30 billion per year.  That’s over $1,000.00 for every taxpaying California family.

Democrats and Republicans in Congress.  Both political parties have avoided dealing forthrightly with the AMT. Why? For most Democrats it has simply been a matter of wanting the revenues to pay for government sponsored programs. For most Republicans, ignoring AMT has been a clever way of promoting “tax cuts” without losing revenue. This is because almost every “tax cut” in the Bush era was not applied against the “alternative minimum tax calculation”.

Californians never seem to feel the benefits of lower federal taxes because the AMT keeps us from ever receiving them. As a result, despite a combined state and local tax burden that ranks slightly below average of other states, California taxpayers feel heavily taxed … because they are. It’s just not used to pay for things in California. The federal government, through the AMT, takes so much out of Californians’ pockets that there simply isn’t much left when state and local governments look for tax revenue to pay for schools, law enforcement, and fire protection.

Annual Minor adjustments in AMT. In each of the past few years, Congress has made incremental amendments to modestly reduce the number of taxpayers that are affected by the AMT. Despite these periodic adjustments, the AMT still applies to millions of taxpayers never intended to be included in the original “millionaires tax”.

These adjustments have been virtually meaningless in California because incomes are substantially higher here than in most of the country. At first blush this may seem reasonable; higher incomes mean higher taxes. But, the deductions essentially disallowed by the AMT are in many cases exactly those that were designed to reflect the reality that an $80,000.00 per year family income in California and in other high cost states does not produce any thing near the buying power of a similarly situated family in states like Missouri or Louisiana.

Adjusted for cost of living, California families still pay significantly higher federal taxes than a comparably situated “average American taxpayer”, even under the regular tax computation. The AMT simply piles in on top of this, forcing Californians to pay a higher tax rate by disqualifying tax exemptions for which taxpayers are otherwise eligible.