Congress has been a pretty easy target recently, accused—rightly—of failing to get its basic work done, kicking the tax and budget can down the road, and waiting until the last minute to prevent a fiscally devastating fiscal cliff. But lawmakers deserve some credit for finally fixing a longtime problem in the tax code: the Alternative Minimum Tax.
The concept of the Alternative Minimum Tax goes back to 1969, and was intended to make sure that very wealthy individuals with access to fancy accountants could not use legal deductions to avoid paying their fair share of taxes. Under the law, taxpayers have to calculate their taxes according to the tax code, including mortgage interest and charitable donations deductions and other such items. They then are supposed to see how much the government says they should pay under the Alternative Minimum Tax, and then pay the higher amount.
The problem is that the tax was never indexed for inflation, and thus began to affect the very people it was meant to protect: the middle class. Rep. Richard E. Neal, the Massachusetts Democrat who has made the Alternative Minimum Tax a personal cause since 1998, says couples earning as little as $65,000 a year could have been hit with the Alternative Minimum Tax this tax season had it not been fixed. And finally, Neal succeeded, winning a permanent inflation adjustment in the massive tax package Congress approved over New Year's. Previous fixes had been temporary; the current adjustment protects middle class taxpayers and families from having to fight every single year to avoid being treated like fat cat earners.
"It's an onerous form of taxation," said Neal, who estimates that 28 million taxpayers—including a million in his native Massachusetts—were getting hit unfairly with the Alternative Minimum Tax. The tax had an unintended, exaggerated impact on Neal's constituents. Roman Catholics, for example, who might have larger families, were punished because the longer list of child tax deductions threw big families into the Alternative Minimum Tax zone. People who had stock options as part of their compensation (common in Massachusetts during the tech boom) were also affected. And every year, Neal, a member of the House Ways and Means Committee, fought to get the Alternative Minimum Tax adjusted for inflation just year to year. It was a hard battle, since it cost money to the federal government without giving people an immediate sense of tax relief. Millions of taxpayers would be dodging a bullet, but the impact was less visible than if middle income earners felt an actual year-to-year drop in their tax burdens.
"I lobbied Bill Clinton, George W. Bush and Barack Obama perennially on this," Neal says. Finally, Neal got the permanent fix included in the fiscal cliff avoidance deal. Middle income Americans may not know it, but "in a sense, it was tax relief," Neal says. And it's a sign that Congress is indeed capable of doing the responsible thing when it comes to tax and budget policy.