The Alternative Minimum Tax doesn’t seem like an environmental issue. But it is. The AMT has become a secret tax on cities.
Cities are more energy efficient and contribute to global warming less than suburbs. Any solution to our oil addiction and our excessive dependence on greenhouse gas producing fuels will require more mass transit and denser communities.
We should, in short, be encouraging people to move to cities, not charging them extra to do so.
Yet, families with a professional salary living in high-cost urban areas are likely to discover that they are subject to the AMT, and that under the AMT, state income and property taxes are not deductible. Not only is the cost of taxes higher to live in high-service cities, but the AMT demands also that you pay federal taxes on money you’ve already paid in state taxes.
Tax time is coming around, and once again we will be inundated with stories confidently asserting that the reason the AMT hits so many middle-class people is because it isn’t indexed for inflation. That’s just not true.
The AMT was originally intended to catch rich tax evaders. The time has come to restore it to its original purpose.
The original AMT worked by creating an additional income tax, at a lower rate, that includes income that is untaxed in tax shelters. People who don’t have tax shelters could never be affected by it, regardless of indexing or inflation.
But in 1982, at the peak of the Reagan Revolution, advocates of "limited" government changed it into something very different. With little discussion, the deduction for state taxes and the deduction for dependents were suddenly classified as tax preferences – meaning that the deductions were no longer allowed in calculating the AMT. Then, the radical implications of this change were concealed by adding an (unindexed) income floor to make sure that the new provision came into effect only gradually and invisibly.
The 1982 changes were fundamentally dishonest. Neither children nor state taxes are a tax shelter. There is no reason to think that rich people are avoiding taxes by having children or paying state taxes. Indeed, for the really rich, these deductions are too small to be a significant issue. The real impact is on the middle class. These are real expenses that really reduce middle class families’ ability to pay federal taxes.
Limiting the deduction for state taxes has nothing to do with limiting tax evasion by the rich. Instead, it is a simple penalty on high tax states and their citizens – social engineering to try to force states, regardless of the views of their citizens, to adopt a low-service, low-tax model.
The main intent and the effect of the "reform" was to increase the burden of state taxes, in the hope of getting other states to follow in California’s Prop 13 "tax revolution" footsteps. If a state chooses to tax its citizens in order to pay for schools and universities, crime prevention, garbage collection and parks, to invest in their children or their infrastructure, or to pay for sound regulatory institutions or to keep up their highways, dikes and earthquake monitors, the Reagan-era AMT demands that their citizens pay federal taxes on income that they never received.
The only way to avoid double taxation is for the state to choose a low-tax, low-service, low-investment route, not providing the basic services that the middle class needs for a decent life and to make the next generation competitive.
The AMT started out as an effort to ensure that everyone – even the rich – pulls their weight in the common enterprise we call America. Since middle class people don’t have tax shelters, in its original form it could never affect them regardless of indexing.
The 1982 Amendments, however, sneakily change the AMT into something very different: an attack on the autonomy of the states and punishment for middle class families and voters who want their state governments to provide services and are willing to pay for it. Not coincidentally, projections of future AMT proceeds – when the unindexed floor would allow the tax to hit the middle class – also concealed the long-term budgetary implications of the several tax cuts for the really wealthy enacted in the years since 1982.
The solution to the AMT problem is neither repeal nor indexing. A simple change to its language would return it to its original goal: restore the deductions for children and for state income taxes, neither of which is a tax shelter.
Then, if the advocates of low taxation, low services want to convince us to follow their low road, let them do so openly and straightforwardly. If the great middle class deductions are going to be repealed, the repeal should be in the open daylight. Do it in the main tax code, where its consequences will be obvious to all, or don’t do it at all. State taxes should be determined by the states, not the federal internal revenue code.