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AMT Hitting the Middle Class

by Indy, published

The per capita income in California was $33,749 in 2005, according to U.S. Census Bureau Data.

If the alternative minimum tax fix that expired in December isn't renewed, taxpayers making as little as $30,000 to $50,000 could be hit by a levy aimed 40 years ago at making sure the creative and well-heeled pay up, according to the Tax Policy Center.

Yet there are people - important people, such as the No. 3 Democrat in the U.S. House of Representatives - who insist on painting the AMT fix the Senate added to the stimulus bill as a bailout for the wealthy.

"We need to get people back to work," South Carolina Rep. Jim Clyburn told The Washington Post last month. "And you can't get people back to work giving rich people tax cuts."

He's wrong on two counts.

First, it's not a tax cut. It's a change needed to keep bills from going up an average of $2,300 a year because Congress forgot when it created the tax in 1969 to make the AMT adjust automatically for inflation every year. On top of that, most AMT victims face underpayment.

If the patch isn't approved, the number of people AMT would affect would skyrocket from 4 million in 2008 to 31 million this year, the Tax Policy Center says. The AMT exemption would fall from $69,500 for married filing jointly and $34,975 for single filers to $45,000 for marrieds and $22,500 for singles.

With exemption levels that low, it's easy to see a scenario where someone is laid off this year but still manages to earn enough to be subject to AMT when filing time rolls around in 2010. That would be an incredibly cruel joke in California, which is third in the nation in unemployment and first in foreclosures.

It looks like a tax cut on paper, though, because every year revenue projections are based on how much the AMT would bring in if the patch weren't reapproved.

Secondly, AMT hits far more people than the originally intended wealthy.

Maybe $30,000 a year is rich in South Carolina - per capita income $26,132. But it's not in the rest of the country - per capita income $31,632.

And it's even farther from rich in the states where AMT hits hardest - New Jersey, New York, Connecticut, California and the District of Columbia, according to a different Tax Policy Center analysis.

That's because it costs more to live in those states. An analysis by the Missouri Economic and Research Center shows that when it comes to affordability, the District of Columbia ranks 50th; California, 49; New Jersey, 48; Connecticut, 46; and New York 44th.

AMT also hits families hard. Left unpatched, AMT would apply to 40 percent of married couples with two children and 45 percent with three or more starting with this tax year, Tax Policy Center says. That's because there are no personal exemptions and no marriage bonus under AMT.

A whopping 61 percent of families with incomes between $75,000 and $100,000 would face AMT this year, according to that same analysis. While that's above California's median household income of $59,948, that income level's not wealthy by a long shot. Particularly not in a state where the cost of living is 29 percent higher than the national average.

It's easy to see how people such as Clyburn get confused. Yes, AMT does overwhelmingly benefit the top 20 percent of taxpayers. Every year, though, it's more of a threat to the middle class.

Some questioned not the need for the AMT patch, but the need to include it in the stimulus bill.

"It's about 9 percent of the whole (stimulus) bill, which we were going to do later this year in a tax bill," Sen. Tom Harkin told The New York Times. "Why is it in there? It has nothing to do with stimulus. It has nothing to do with recovery. This makes no sense whatsoever."

He's probably right that Congress would take care of the patch later. But can he guarantee it?

Californians will see little help from other Republican-backed additions to the stimulus bill. Offering tax credits to homebuyers will do little to spur construction here, where inventory is more bloated than it is in the rest of the country and builders are simply walking away from developments.

Income tax refunds are being delayed and the sales tax could go up a penny.

Relief guaranteed now is welcome.

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