With Tax Break Expired, Middle Class Faces a Greater Burden for 2006 - New
York Times
The New York Times

April 16, 2006

With Tax Break Expired, Middle Class Faces a Greater Burden for 2006
By
DAVID CAY JOHNSTON

As millions of Americans rush to meet the Monday deadline for reporting how
much tax they owe on last year's income, a stealth tax increase has begun
eating
into the 2006 income of nearly 19 million households.

Unless Congress takes action, one in four families with children - up from
one in 22 last year - will owe up to $3,640 in additional federal income tax
come next April.

Few of them realize that their taxes have increased, because Congress has
not voted to raise taxes. Instead, Congress let a tax break expire. That
break
limited the alternative minimum tax, which takes back part of the tax cuts
sponsored by President Bush.

Mr. Bush has asked Congress to temporarily restore the tax break, known as
the A.M.T. patch. He has also asked Congress to extend another break that
lowered
the tax rate on most investment income to 15 percent.

Leading Republicans and Democrats agree that there is simply not enough
money to do both. Congress was unable to reach an agreement on tax breaks
before
adjourning for vacation earlier this month.

The expiration of the A.M.T. patch and the tax break for investment income
almost balance each other out this year, according to the Tax Policy Center,
a nonprofit organization whose computer model of the tax system has been
deemed reasonable and reliable by the Bush administration. The impact will
be
felt primarily among taxpayers of two different income levels.

The A.M.T. will cost Americans who earn $50,000 to $200,000 nearly $13
billion more next April. That is about how much people who earn more than $1
million
will save because of the break on investment income like dividends and
capital gains. Both figures were provided by the Tax Policy Center, which is
a joint
project of the Brookings Institution and the Urban Institute.

Taking action on either measure will require more government borrowing,
adding to the federal budget deficit, which is projected to reach $423
billion this
year.

The question of how to deal with the alternative minimum tax is central to
the negotiations between the House and the Senate over a $70 billion package
of tax cuts. Republicans had hoped to reach an agreement before the Easter
recess and reap some political benefit at tax time. But one of the sticking
points was the A.M.T. patch.

House negotiators proposed extending the tax break, but Senator
Charles E. Grassley,
an Iowa Republican and chairman of the Finance Committee, pushed for a more
generous plan that would also expand it and give more relief to middle-class
taxpayers. Negotiations are expected to resume when Congress returns later
this month, and Republicans say they are determined to reach a deal in this
election year.

Those favoring an extension of the investment tax break, including House
Republican leaders, say it encourages investment and leads to more jobs. Two
recent
studies by the Congressional Research Service, which examines issues for
Congress, have raised the possibility of unintended and perverse effects,
such
as reducing savings and creating more jobs offshore.

Proponents of lower tax rates on investment income also warn that ending the
break will hurt stock prices. A number of economists have cast doubt on this
assertion.

Representative Dave Camp, a Michigan Republican who was chosen by his party
to advocate for extending the investment tax break, pointed out that it
affected
more people than the increase in the alternative minimum tax. About 30
million taxpayers get dividends, while nearly 19 million are expected to pay
the
A.M.T. on 2006 income.

But many of the dividend checks are quite small. The investment tax savings
in 2006 will be heavily concentrated on about 234,000 households, generally
headed by someone 50 or older, with an average income of $2.6 million, more
than most Americans earn in a lifetime. By comparison, most of the increase
in the alternative tax is being paid by about 12 million families with
children.

Leonard Burman, a co-director of the Tax Policy Center, said he had not
noticed the similarity in the amount that the middle class will pay and that
the
rich will save until The New York Times sent him a comparison of the
separate estimates produced by the center.

Mr. Burman said the comparison "puts in context claims made by some that
this is a tug of war between" what Mr. Bush has dubbed the haves and the
have-mores.

He added that once Americans realized their taxes had increased, he expected
more pressure on Congress to restore the A.M.T. patch.

Tom Minnery, vice president of public policy for Focus on the Family, a
politically influential Christian ministry based in Colorado Springs, said
his organization
was just beginning to study the effective taxes on families.

"This is a new one on the horizon, and I am very concerned about it," Mr.
Minnery said of the A.M.T. increase, adding that "any policy that punishes
the
nuclear family is foolish."

The tax break that expired at the end of 2005 limited the alternative
minimum tax to 3.6 million taxpayers, of which 2.1 million were families
with children.

This year 18.9 million taxpayers are facing the alternative levy, with 11.8
million representing families with children. Without Congressional action,
those
affected will pay $26.6 billion more in federal income taxes for this year.
Almost the same amount, $24.1 billion, will be saved by all investors, the
Tax Policy Center estimated. Actual savings for investors are likely to be
higher if recent stock market growth continues.

The alternative tax was originally adopted in 1969 to ensure that people who
earned the equivalent of more than $1 million in today's dollars did not
live
tax free. It has not been fully adjusted for inflation and was not
integrated into the Bush tax cuts. In addition, Congress in 1986 made basic
changes
in what kind of deductions are counted in determining whether one has to pay
the alternative levy, causing it to become a tax on the middle class.

In the beginning it took away exotic breaks to high-income taxpayers who
paid little or no tax. Now it denies people exemptions for themselves and
their
children and deductions for state income taxes and local property taxes.

Just one-tenth of 1 percent of the increased alternative tax is being paid
this year by those making $1 million or more, the Tax Policy Center
estimates,
even though this is the only group affected by the original version of the
levy.

Carl Hulse contributed reporting for this article.

POsted by Miriam V