President Barack Obama's Democratic allies in the Senate promise to cut the deficit by almost two-thirds over the next five years, but their budget plan could threaten about 30 million people with tax increases averaging $3,700 in 2012 and after because of the alternative minimum tax.
The alternative is tax increases elsewhere in the revenue code averaging up to $100 billion a year after 2011 to continue alternative minimum tax relief and also curb taxes on people inheriting large estates.
The Democratic plan that Senate Budget Committee Chairman Kent Conrad of North Dakota released Wednesday relies on such boosts in revenues to carve the deficit from $1.4 trillion last year down to $545 billion by 2015.
The minimum tax, or AMT, was enacted four decades ago to make sure wealthy people couldn't avoid taxes altogether. But it wasn't indexed for inflation in people's incomes, so it gets "patched" every year or so in order to prevent people from being surprised by multi-thousand-dollar tax bills at tax time.
Estates larger than $7 million also would be threatened with higher taxes after 2011 if Conrad's plan is carried out.
Conrad says lawmakers will have to find revenues elsewhere in the budget to pay for AMT and estate tax relief after 2011, which could require tax increases averaging up to $100 billion a year elsewhere in the code if Congress is going to keep its promises under tough new budget rules.
Conrad says he hopes the dilemma will force Congress to overhaul the complicated and inefficient U.S. tax code. The Tax Policy Center, a joint project of the Brookings Institution and the Urban Institute, says that 33 million taxpayers would face the AMT in 2012, adding $3,700 on average to their tax liabilities.
Extending AMT and estate tax relief would cost $300 billion to $400 billion over 2012-2015, Conrad said. Many observers say it'll be virtually impossible for Congress to produce offsetting revenues to extend the tax relief. GOP Sen. Judd Gregg of New Hampshire predicted that when Congress confronts the problem in two years it will blink and simply borrow the money as it has done in the past.
The looming tax hikes result from the structure of President George W. Bush's 2001 and 2003 tax bills, whose provisions generally expire at the end of this year. Obama promises to fully extend them except for individuals earning more than $200,000 a year and couple making $250,000 a year. They include lower income tax rates, a $1,000 per-child tax credit, and tax breaks for investments and reductions in the estate tax, and their five-year cost of almost $800 billion would be covered by adding to the nation's $12.8 trillion debt.
But in the case of the AMT and estate tax, congressional Democrats have broken with Obama and promise that after two years of deficit-financed alternative minimum tax and estate tax cuts, Congress will have to come up with the money.
"If we want those things taken care of . . . they've got to be paid for," Conrad said.
That's easier said than done.
Gregg said the Democratic plan is "a budget that kicks the can down the road. More spending. More deficits. More debt. Less prosperity."
The annual congressional budget is a nonbinding blueprint for the fiscal year that begins Oct. 1 and sets the parameters for subsequent tax and spending bills. This year, that means a cut of almost $9.5 billion from domestic agency budgets and foreign aid and a freeze, on average, of those accounts for the following two years.
Conrad's plan, expected to gain budget panel approval Thursday, would permit Democrats to advance legislation on priorities such as taxes, energy, and job creation without fear of a Republican filibuster. That could boost clean energy programs and revive Obama's stalled jobs agenda.
Democrats haven't decided exactly what to include in the filibuster-proof measure, though Conrad promised it wouldn't be used to pass deeply controversial legislation to curb global warming.
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