While Congress is considering numerous changes to the Tax Code, the 800 pound gorilla in tax policy these days is the projected growth of the Alternative Minimum Tax (AMT) and what exactly Congress plans to do about it. A couple of news items this week do an excellent job of setting the table for what might happen.

According to the New York Times,

      Between now and the end of May, House Democratic leaders hope to draft a permanent overhaul of the tax that would effectively exclude anyone who earns less than about $200,000 a year – about 97 percent of taxpayers. But that plan would leave a $1 trillion hole in the federal budget over the next decade, which Democrats would have to replace with revenues from other places or with spending cuts, under new “pay as you go” budget rules. Just postponing the expansion of the tax for one more year would reduce revenues by about $50 billion, according to Congressional budget projections.

To pay for permanent tax relief, Congress would have difficulty avoiding two basic choices: impose a substantial tax hit on the remaining 3 percent of taxpayers at the very top, or scale back tax breaks, like the deduction for state and local taxes, that benefit people in many tax brackets.

While the House leadership is pressing for a permanent fix, the Senate leadership appears to be content with something less than permanent. Here’s the breakdown:

  • House leadership wants to do a permanent fix of the AMT
  • The House budget only calls for a one-year “patch.”
  • Senate leadership appears content to enact a two year “patch.”
  • The Senate-passed budget also includes a two-year “patch.”

Why does the new Democratic leadership in Congress — especially those in the House — appear to care more about the AMT than Republicans? A new analysis from Citizens for Tax Justice (CFTJ) answers that question. According to the CFTJ, the states with the highest percentage of projected AMT payers are:

Connecticut 25%
Maryland 25%
New Jersey 25%
Massachusetts 24%
California 20%
Minnesota 19%
New York 19%
Virginia 19%

Of these states, only Virginia could be described as Republican. The rest are Democratic strongholds.

What does your S Corp Association think? While the House is serious about taking on a permanent fix to the AMT, it also is serious about fully offsetting the cost of that fix. That means the Ways and Means tax writers will have to come up with upwards of a trillion dollars in revenue raisers to balance out the lower receipts from a reformed AMT. A trillion dollar tax increase — however structured — is highly unlikely to garner the necessary 60 votes in the Senate. In fact, Senate leadership may be reluctant to bring it up for a vote at all.

That leaves another “patch” as the most likely option, and even that option is expensive. Extending the current patch for two years would reduce revenues by more than $110 billion. To put into perspective, that’s about ten times the revenue impact of the small business tax relief package currently waiting for conference. Where will the Congress come up with $110 billion in revenue offsets? America’s small business community should be on alert.