Tax law could hurt Mainers Levy aimed at wealthy might hit middle class

AUGUSTA – An arcane portion of the tax code that is not on the list of proposed changes by President Bush could end up increasing taxes for Mainers with household incomes as low as $75,000 a year. It’s an issue that has Maine’s congressional delegation united, but has the parties at the national level on unexpected sides.

The Alternative Minimum Tax was passed 30 years ago to make sure wealthy individuals and rich corporations pay at least some income taxes. It is a separate tax calculation designed to make sure the very well-to-do cannot claim so many deductions, exclusions and tax credits that they pay little or no taxes.

The problem is that the AMT has not been adjusted for inflation since 1986, meaning it is based on income and deduction levels nearly a generation old. Most parts of the tax law, like tax brackets and the standard deduction, have been adjusted over the years to take inflation into account.

Because Mainers pay more in local and state taxes, they can deduct more off their federal taxes. And that’s the catch. Because they are deducting more, the AMT will start to affect them sooner.

“We are working on that,” Sen. Olympia Snowe said Saturday. “It is among many tax issues we will be taking up as we work on the various tax proposals next week.”

Snowe is a member of the Senate Finance Committee, and the panel is scheduled to start work on Bush’s tax proposals by midweek. She said the AMT is of particular concern to high-tax states like Maine.

“We will work to try and draw the lines to help the middle-income taxpayers,” she said, “because if nothing is done, that group will be hurt.”

Nationwide, an estimated 1.3 percent of all taxpayers had to pay the AMT on returns filed last month. The Treasury estimates that will grow to 16 percent by 2010.

“In Maine, the impact will be felt if the alternative minimum tax is not changed,” 1st District Rep. Tom Allen said last week. “In five years, households with incomes of just $75,000 a year will be paying the tax. And it will get worse if we don’t address it and the president does not in his tax proposal.”

Allen has been critical of the Bush tax cut plan. He said the overall proposal is too large and is not targeted to gain the most impact to help the slumping economy. Allen said the tax cut measure should also be a tax reform bill that addresses a number of issues, like the AMT.

“When we start work on Tuesday or Wednesday, we will be looking at a lot of areas in the tax code, not just the rates,” Snowe said. “I think the committee is concerned with the middle-income taxpayer and will work to see any cuts help them.”

Rep. John Baldacci said the Bush plan is not tax reform. And he said the way the cuts are structured, too much of the benefit will go to the very wealthy.

“I hope the Senate does come up with a better plan,” the 2nd District congressman said. “The president’s plan is just not fair and does not have my support.”

And Sen. Susan Collins said the AMT needs to be addressed as part of any tax legislation. She said it is just one example of where Congress needs to remember any changes made at the federal level will have an impact on many states.

“Maine’s tax code piggybacks on the federal tax code, as do many other states,” she said. “And with Maine generally tied so closely to the federal tax code, there is more of an impact than in states where they do not have tax laws so closely tied.”

Collins said the AMT should be retained to make sure everyone does pay some income taxes. But she said it should not be retained unchanged as Bush has proposed.

While Maine’s two Republican senators and two Democratic representatives are in agreement on the issue, at the national level the traditional sympathies of the parties seem reversed. Most Republicans appear to be happy with keeping the tax as is, meaning higher taxes. Most Democrats want a change to lower the taxes on the more well-to-do.

“I think the differences are often more geographic than political,” Collins said.

It certainly appears that way on the AMT issue. Many of the most affected states are in the Northeast. And of the 10 high-tax states that would be most affected by leaving the AMT unchanged, 16 of the 20 senators representing those states are Democrats.

Snowe points out that even though $1.25 trillion is a lot of tax relief over 10 years, there are many ways to distribute that relief and not all can be adopted. For example, fully adjusting the AMT for inflation would cost a projected $250 billion over the next decade.

“I would think we would have to do something less,” she said. “It’s really a question of to what extent we can go. You know, maybe for those who earn less than a $100,000 [a year] we can be making an adjustment.”

Snowe said the panel has a whole range of tax changes to consider. Some members want to address the impact of payroll taxes. Eighty percent of workers pay more in payroll taxes than income taxes. Another major area is the marriage penalty, which affects more than 100,000 Maine households.