Congress’s failure to fix tax to affect 85,000 Mainers

AUGUSTA – Tens of thousands of Mainers are going to get a nasty surprise in the mail when they open their 2007 tax forms from the Internal Revenue Service.

Because Congress has yet to amend the alternative minimum tax – enacted in 1969 to make sure wealthy Americans cannot avoid paying taxes – the forms that have been printed are based on existing law and about 85,000 Mainers – many of them middle-income – will be affected.

“The IRS told us on the Finance Committee that we had missed the deadline for printing the tax forms,” Sen. Olympia Snowe, R-Maine, said this week. “That means the forms people will receive will be based on existing law.”

Snowe said that if Congress does fix the AMT, it means many Mainers will be filling out a second set of tax forms from the IRS.

She said the number hit by the AMT in Maine will skyrocket from 12,987 in tax year 2006 to an estimated 85,000 in tax year 2007.

After it was revealed in 1969 that 155 of the nation’s “super wealthy” families were avoiding taxes, Congress passed the AMT to assure everyone paid taxes no matter how many deductions he had.

But unlike the income tax brackets that are adjusted every year for inflation, the AMT is not, and now more than 23 million Americans will find the tax applies to them unless it is modified.

Maine is particularly hard-hit, according to a Congressional Budget Office analysis, because the state has high income and property taxes. While they are deductible under the regular income tax, they are not under the AMT.

Maine ranks among the top 10 for its average deduction on federal income taxes for state and local taxes, according to the CBO.

“We have to cut taxes for people who would otherwise get hit with the AMT,” Democratic Rep. Tom Allen of Maine’s 1st District said this week. “We just have to do it. That is reaching down into the middle class in a way that is really detrimental to middle class families.”

Allen said while there has been considerable discussion on the Ways and Means Committee, the House panel that writes tax law, about ways to fix the problem, the roadblock is in the Senate, where it takes 60 votes to get a vote on an issue. He said whether a short-term fix is passed or the AMT is repealed, the cost is substantial.

“We have to act on this,” Allen said. “I think we can pass a bill in the House, but the Senate is the real issue.”

Snowe agreed that Senate rules allowing a single senator to block consideration of a measure and force a 60-vote supermajority to stop debate are part of the problem. But she said the Democratic majority in the Senate has yet to propose how it will pay for the AMT fix or repeal.

The estimated cost of the total repeal of the AMT would be about $800 billion over the next decade if the 2001 and 2003 tax cuts are not extended. If they are extended, the estimate increases to more than $1.5 trillion over 10 years.

The CBO study also indicated the tax cuts passed early in President Bush’s administration have accelerated the number of middle-income taxpayers being hit with the AMT.

Senate Majority Leader Harry Reid, D-Nev., has pledged some form of AMT fix by Christmas, but the proposal by some Democrats on the Finance Committee to raise taxes on hedge funds and private equity firms has drawn opposition from Democratic senators representing wealthy states.

While income taxes have a top rate of 35 percent, hedge funds and private equity firms pay a capital gains tax of 15 percent.

Sen. Susan Collins, R-Maine, expects there will be a temporary patch of the AMT this year, even though she supports a permanent repeal of the tax. She said a better way to assure upper-income taxpayers pay more in taxes would be to set higher rates for them instead of using the AMT.

Democratic Rep. Michael Michaud of Maine’s 2nd District said Congress should repeal the AMT, arguing that short-term fixes have not worked. He said other members of the conservative “Blue Dog” Democratic caucus agree with him that a long-term solution, despite its huge cost, is the fiscally responsible approach.

Snowe said Congress should have cut its holiday recess to just one week instead of two weeks and worked on resolving the AMT issue.