The AMT tax law debate has been raging for years. The latest flare up involves a proposal to incorporate a temporary fix into President Obama's economic stimulus plan.

Lawmakers must have finally gotten the memo about the alternative minimum tax (AMT). It's more unpopular than the teacher's pet in grade school, or the odd Jell-O salad that someone always brings to a party. Thankfully, there's a proposal on Capitol Hill that would limit the AMT's impact on the middle class.

Income tax not just for the wealthy

The AMT was established in 1969 to close some loopholes that the ultra-wealthy were using to avoid paying their fair share of income taxes. Unfortunately, like many things cooked up on Capitol Hill, the original AMT tax law was slightly flawed. It had no provision for inflation, and has gradually extended its reach outside the ultra-wealthy. Now, AMT taxes can be triggered at annual income levels of about $115,000 per person.

According to Washington, D.C.'s Tax Policy Center, AMT taxes affected 20,000 taxpayers in 1970. If the AMT tax law is left alone, it could impact 39 million taxpayers by 2017.

For years, lawmakers have argued without resolution about fixing the AMT. The issue comes down to cost: the AMT is a moneymaker for the federal government, and getting rid of it will be expensive.

Stimulus plan opportunity

A contingent of powerful Democrats is now urging Congress to roll a temporary AMT fix into President Obama's massive stimulus plan. The proposal involves limiting the AMT temporarily-sparing some 20 million taxpayers from getting hit with the alternative income tax system in 2009. The measure is estimated to carry a $60 billion price tag.

As the total cost of the stimulus plan creeps towards $1 trillion, lawmakers are quickly taking sides on the issue. Proponents argue that the AMT fix will benefit middle class households directly, by noticeably reducing their income tax liabilities this year. Doing nothing with respect to the AMT would have the opposite effect; it would enforce higher income taxes on many middle class households, which works against the spirit of the stimulus plan.

Lawmakers on the other side of the fence believe that the AMT fix should have no place in President Obama's stimulus plan. Indeed, the plan is supposed to be focused on creating jobs and easing financial pressures on lower income households. The extent to which an AMT fix would serve those objectives is unknown. And, since the cost of the plan is already sky-high, legislators can't really afford to stray from the primary objective. The Washington Post recently quoted Democratic Representative Jim Cooper as saying, "I'm not sure what [the AMT] would stimulate, other than our re-election."

Clearly, Mr. Cooper has gotten the memo. But he's not willing to give in if the timing isn't right. It's uncertain at this point how many lawmakers support the Congressman's perspective and how many don't. Congress is expected to vote on the stimulus plan some time in February.

Published on March 2, 2009