Alternative Minimum Tax guts California budget

It’s Tax Day already, and as might be expected, a veritable tsunami of tax-related commentary has been entering the mainstream press. Much of it relates to the Federal Stimulus Package, which takes effect this year, and carries no less than thirteen new tax increases, according to Rep. John Carter (R-TX) on the Texas Insider blog. 

And along with this bad news, Carter points out one element which ought to alarm voters – “The Alternative Minimum Tax (AMT) will decrease from $46,700 to $33,750 for single filers and from $70,950 to $45,000 for married couples filing jointly.” In other words, if you make upwards of $33,750 in 2010, then you are subject to the Alternative Minimum Tax, a tax which was originally designed to make sure that the very wealthy paid their fair share.

Unfortunately, $33,750 may only count as “very wealthy” in Puerto Rico, where the median household income was $17,741 as of 2008, according to the United States Census Bureau. In California, meanwhile, this figure is only slightly more than half the median household income. Moreover, while such a tax structure is arguably regressive, its harms potentially exceed the moral. For instance, writing in the Wall Street Journal, Mike Donahue noted the plight of a hypothetical taxpayer in this tax season, writing:

     I’m in the 32% federal and 10% state income tax brackets. I pay a 1.2% property tax on very expensive California real estate. I am subject to the Alternative Minimum Tax. I am self-employed and subject to a 15% payroll tax on the first $100,000 in income and an 8.75% state sales tax. If I have a gain from investing, I pay a minimum of 15% federal and 10% state tax but can only write off $3,000 per year if I lose. And now the government wants me to pay more?

The last question is not idle, when one considers the tradeoffs involved in Federal taxation. An increase in Federal tax rates means that States have to be much more careful about how much they tax, given the risk of decreasing their own revenue by falling on the wrong side of the Laffer curve.

Such a balancing act is all but impossible for California, given that the current budgetary woes demand almost a full commitment of revenue.  Anything less will require further budget cuts, meaning that voters will feel all the pain of both high taxes and decreased economic growth at the same time, while the Federal Government takes in potentially increased revenues, at the expense of State Governments, which cannot operate at a loss.

Combine this with the statistics on where tax revenue actually comes from, and a yet grimmer picture emerges. According to Business Insider Magazine:

     …wealthy Americans are paying a larger share of Total Federal Tax Liabilities (Yes, total, not income tax only) than ever in at least the last 30 years… the 40% highest earning American Households paid 86% of Total Federal Tax Liabilities. The 60% lowest earning households paid just 14%. The 40% highest earners have never paid such a large share of total federal tax liabilities as far back as we found tax burden data (back to 1979).

Setting aside potential issues of distributive justice involved in these figures, they are obviously symptoms of unsustainable fiscal policy, for to tax the producing classes this heavily will necessarily decrease the incentives to produce, especially in California, where the state’s revenue is largely drawn from stagnant taxation. Thus, the worst of both worlds emerges from the current fiscal policies, as high taxes without benefits or growth squeezes the life out of the economy.

Reform is imperative, a fact of which all Americans are surely cognizant now that they have felt a pinch in their wallets. Whether this pinch will translate into a politically salient response remains to be seen.