Tax: Current Environment

Early in the 110th Congress, the new Majority has provided indications of the tax issues that are likely to be on their agenda in 2007. Prominent among the myriad issues likely to be considered is the alternative minimum tax (AMT) for individuals. Under current law, individuals are generally required to pay either the regular income tax or the stealth AMT, whichever is greater. Unlike the regular tax, however, structural components of the AMT are not indexed for inflation. Thus, given rising prices, the growth of incomes, and enactment of tax cuts under the regular income tax, a growing portion of taxpayers are subject to the AMT each year. More and more, middle-class taxpayers have been affected by the AMT (along with the upper-income individuals for whom the AMT was originally designed to capture). In past years, Congress has addressed the growth of the AMT by enacting temporary measures (“patches”) that restrict its impact on the middle class. Recently, however, Congressional leaders have expressed an interest in seeking a more long-term solution to the AMT’s increased scope.

Other tax issues that Congress may address include the question of whether to extend the broad tax cuts first enacted in 2001 — for example, the expanded child credit, tax cuts for some married couples, and reforming the estate tax. The cuts are scheduled to expire at the end of 2010. Given the results of the mid-term elections, the 110th Congress may return to the question of extending the tax cuts in either their initial or altered form. Congress will also be taking up an alternative energy tax incentive bill and may consider reforms to the tax on timber.

Given the current era of federal budget deficits, coupled with the newly enacted Pay-As-You-Go rules, Congress confronts a dilemma with tax-cutting measures: their cost in terms of foregone tax revenue. Extending the 2001 tax cuts or repealing the AMT, for example, would reduce tax revenue by substantial amounts. Accordingly, there has been some discussion of a number of revenue raising measures that would offset some or all of the cost of revenue-losing tax cuts. Items that have been mentioned prominently include increased attention to the “tax gap” — the difference between the taxes U.S. individuals and firms owe and what they actually pay — as well as tax shelters, restricting tax benefits for U.S. firms that operate abroad, and restricting tax benefits for oil companies.