Senator Grassley targets the Alternative Minimum Tax in new stimulus debate

The recent debate over further economic stimulus in the US Senate has produced a predictable round of new infighting over budgetary philosophy from both the Democrats and Republicans, albeit one with special relevance for California’s people. 

At least one GOP member plans to make an issue of the Alternative Minimum Tax (AMT), a tax which penalizes residents of high-income states, and hits California’s vulnerable economy especially hard, given the level of taxation already employed. 

The contrast between bills being offered by the Democratic and Republican leadership is a familiar one.  The Republican bill proposes to slice tax rates, especially on earnings and investment, while reducing many of the tax subsidies procured by the Recovery and Reinvestment Act of 2009 (known better as the “stimulus bill”).

By contrast, the Democrats propose extending the subsidy program, while reducing its subsidy rate over time in order to allow for more fiscal discipline as needed. Republicans have already made hay of the fact that the Democratic bill allows the Bush-era tax cuts to expire, and have also complained that it leaves the so-called “death tax” intact. But Sen. Chuck Grassley has a more specific argument about what should be done, which by now will be familiar to most longtime readers of this site. 

This Tuesday, Grassley released a statement on the AMT, suggesting that his main fiscal priority regarding future legislation will be the eventual repeal of the tax. 

     “Over the past few years, I’m sure many have noticed that the AMT is frequently a subject of my speeches. Some of you may be wondering how long I intend to keep talking about it. The simple answer is that I intend to keep talking about the AMT until this Congress actually takes action on reforming the AMT,” Grassley said.

     “Instead of taking action, Congress this session has done absolutely nothing and the problem continues to get worse for at least 26 million American families who will be caught by the AMT, and are now being caught. “ 

Grassley’s figures on the tax are alarming, and worth a look by any Californian concerned with the budget process.  According to Grassley, while the tax hit 4 million people in 2009, it is slated to hit an additional 22 million people in 2010, due to its antiquated method of assessment (the bill taxes people on the basis of whether they pass a certain income level, without indexing that level to inflation, or adjusting it depending on shifting economic demographics). 

“The AMT was originally created with just 155 taxpayers in mind,” Grassley argues.

     “Today, at least 26 million middle class families are in the AMT’s cross hairs. That’s quite a change from 155 rich people… if we offset revenues not collected as the result of AMT repeal or reform, total federal revenues, over the long-term, are projected to push through the 30-year historical average and then keep going. The AMT is a completely failed policy that is projected to bring in future revenues that it was never designed to collect.” 

The extent of this newly forceful tax’s effects on California probably won’t be seen for a while, but one thing that voters should be wary of is the potential for Californians to migrate to less-taxed states, thus once more whittling down the state’s potential sources of revenue.

As much as California’s tax policy can be criticized, this effect would not necessarily be any fault of the Californian system itself, nor of the political process generally, at least insofar as most politicians – President Obama included – oppose the tax in its present form, and thus laying partisan blame will be more difficult than usual. 

That doesn’t mean it won’t be laid. If the GOP doesn’t get the bill it wants, voters should look for substantial recriminations on the subject of the AMT, especially if Barbara Boxer flusters the reform effort in any way. These recriminations may or may not be fair, but the AMT should be a live issue, and Californians can expect it to be.