The Individual Alternative Minimum Tax: Interaction with Marriage Penalty Relief and Other Tax Cuts

CRS Report for Congress
The Individual Alternative Minimum Tax:
Interaction with Marriage Penalty Relief and Other
Tax Cuts
Updated June 12, 2001
Jane G. Gravelle
Senior Specialist in Economic Policy
Government and Finance Division

Congressional Research Service ˜ The Library of Congress

The Individual Alternative Minimum Tax: Interaction
with Marriage Penalty Relief and Other Tax Cuts
Tax cuts have been addressed recently. Rate reductions and across the board tax
cuts were part of the H.R. 1836, the tax cut signed by the President on June7. This
bill includes the changes in standard deductions and rate brackets relating to the
marriage penalty and also included in H.R. 6, passed earlier by the House.
The Alternative Minimum Tax (AMT) provides for an alternative tax calculation,
on a broader base but with a large exemption and a two-tier rate that is below the top
tax rates in the regular tax structure. It is paid when the tax liability figured using the
AMT base and rates is higher than regular tax liability. The AMT is expected to grow
rapidly and extend further into the middle class because the exemptions in the AMT
are not indexed for inflation. In addition, the tax credits (such as the child credit)
enacted in 1997 would have caused many middle class taxpayers to be affected by the
AMT. A temporary provision allowing these credits to be taken against the AMT
was adopted last year, and was made permanent for the child credit by H.R. 1836.
The marriage penalty legislation, and other proposals for cutting taxes will be
limited in their effects for some individuals unless changes are also made in the
alternative minimum tax (AMT). Individuals who pay the AMT are not affected by
cuts in the regular tax and individuals who switch to the AMT will not receive the full
tax cut. This constraint will grow over time. For example, about 28 % of the tax cuts
over the next ten years, in a bill similar to H.R. 6 considered in the 106th Congress
would not have been received by taxpayers because of the AMT. This effect grows
over time; by 2008, 44% of the tax cut will not have been received.
Cuts in regular tax, without also addressing the AMT, would cause more and
more taxpayers to the subject to the complexities of the AMT, and also increase the
revenue costs of future measures to restrain the growth of the AMT. H.R. 1836
partially addressed this issue, by making the child credit apply against the AMT. The
bill also increased the exemptions by $2,000 for singles and $4,000 for joint returns,
but these provisions sunset in 2004.
There are a number of different policy options that might be considered in
evaluating the AMT and its interaction with the regular tax. For some, a priority has
been in making the exclusion for credits permanent, while for others indexing may be
the most important priority. Both of these approaches will be costly in the future
(about $26 billion for the credit ten years from now and about $14 billion for
indexing). Others might wish to eventually phase out the AMT, which will raise
about $37 billion by 2010. One can also make a case for expanding the coverage of
the AMT as an eventual flat tax, although in some ways the AMT does not conform
to certain design principles (such as adjusting exemptions for family size). Another
issue is how to adjust the AMT as changes in the regular tax system are made, to keep
the relative position and original purpose of the AMT intact. In the latter case, the
AMT might be adjusted when fundamental changes are made in the regular tax (rates,
bracket widths, standard deductions) but not for proposals that provide special
subsidies. This report will be updated to reflect legislative developments.

An Overview of the AMT.........................................1
Interaction Between Marriage Penalty Relief and the AMT................5
Provisions of the Recent Marriage Penalty Legislation................6
Interaction between the AMT and Marriage Penalty Legislation.........7
Lessons from the Marriage Penalty Example.......................8
Policy Options and Issues.........................................8
The 1997 Credit Interaction....................................9
Indexing the Exemptions......................................9
The AMT as the Tax of the Future...............................9
Phasing Out the AMT........................................9
Revising the AMT and Coordinating with Other Tax Revisions........10
Conclusion ................................................... 11
List of Tables
Table 1: Percentage Distribution of AMT Taxpayers by Income Class (Excluding the
Effects of Limits on Credits), Prior to H.R. 1836....................3
Table 2: Percentage Distribution of AMT Taxpayers by Income Class (Including the
Effects of Limits on Credits), Prior to H.R. 1836....................4

The Individual Alternative Minimum Tax:
Interaction with Marriage Penalty Relief and
Other Tax Cuts
Tax cuts have been addressed recently. Rate reductions and across the board tax
cuts were part of the H.R. 1836, the tax cut signed by the President on June7. This bill
includes the changes in standard deductions and rate brackets relating to the marriage
penalty and also included in H.R. 6, passed earlier by the House.
The marriage penalty legislation, and other proposals for cutting taxes will be
limited in their effects for some individuals unless changes are also made in the
alternative minimum tax (AMT). The AMT is paid when the tax liability figured using
AMT base and rates is higher than regular tax liability. Growing numbers of taxpayers
will, in the future, be affected by the AMT. The share of married couples with children
affected by the AMT will be particularly large. Moreover, cuts in the regular tax will
shift more individuals into the AMT. Thus, it is important in evaluating any tax cut
proposal, and especially reductions in taxes for joint returns, to evaluate the role played
by the AMT in our tax system. H.R. 1836 partially addressed this issue, by making the
child credit apply against the AMT. The bill also increased the exemptions by $2,000
for singles and $4,000 for joint returns, but these provisions sunset in 2004.
The first section of this study summarizes the fundamental cause of the AMT
interaction with other tax provisions and provides some background data on the AMT.
The second section examines the particular interaction between the marriage penalty
proposals in H.R. 6 last year and the AMT, a case for which some estimates of effects
are available and which are also relevant to the current tax cut. The final section
discusses potential policy options.
An Overview of the AMT
The AMT provides for an alternative tax calculation on a broader tax base than
the regular tax. Individuals add back a variety of provisions including not only
business provisions but certain itemized deductions (mainly state and local taxes, some
medical expenses and miscellaneous deductions), the standard deduction, and personal
exemptions. After an exemption of $45,000 for joint returns and $33,750 for single
returns, the first $175,000 is taxed at 26% and the remainder is taxed at 28%.
Exemptions are phased out. The individual compares AMT liability and regular tax
liability and pays the higher one. While the AMT base is broader than the regular tax
base, there are many provisions that are not included in its base, notably the benefits
of lower capital gains tax rates and the exclusion for tax exempt bonds, and the
itemized deduction for home mortgage interest. Indeed, the elimination of the capital
gains exclusion in 1986 caused a significant contraction in the number of taxpayers

subject to the AMT; the current rate preferences are not part of the AMT. Credits are
automatically included in the base (i.e., effectively disallowed), although under
provisions adopted as part of H.R. 1836, this rule does not apply to the most important1
credit, the child credit.
However, unlike the rest of the income tax, the AMT exemptions are not indexed
to inflation. The result has been an increase in the number of taxpayers who are2
covered by the AMT. In 1987, about 140,000 returns paid the AMT, constituting
1/10 of one percent of all returns filed. This number was below the 4/10 of a percent
of returns that paid the tax in 1984 and fell largely because the deduction for capital
gains was eliminated by the 1986 tax act and therefore automatically affected coverage
under the AMT. Inflation, however, took its toll. By 1999, the AMT covered
823,000 returns, constituting 6/10 of a percent of all returns filed, an increase in
percentage share of 600% between 1987 and 1999. This effect occurred even though
the exemptions were increased in 1990.
More growth is ahead, however. In 2009, the Joint Tax Committee projects that
over 9 million taxpayers will pay the AMT, constituting 6.3% of all tax returns filed,
an increase in percentage share of over a thousand percent from 1990 to 2009. The
AMT would probably constitute a larger share of joint returns filed, since incomes are
higher for these returns than for single returns. The AMT would also constitute a
larger portion of returns with tax liability; since typically about a quarter of returns
filed pay no tax, taxpayers on the AMT would constitute over 8% of returns with tax
payments. Another 6 million returns would have been subject to limits on tax credits,
such as the child credit and education credits enacted in 1997; this surge in the AMT
coverage would have occurred in large part in 2002, but H.R. 1836 made the most
important credit (the child credit) permanently availale under the AMT.
While the AMT will still be concentrated among higher income individuals, it will
gradually reach further down into the income distribution. This shift in the distribution
is shown in Table 1. Note that this table understates the coverage of the AMT and its
reach into the middle income classes, because it does not include those taxpayers
whose credits are still limited by the AMT (such as education tax credits). But it does
illustrate how the failure to index exemptions will substantially expand the AMT.
As this table illustrates, the shift of exposure to the AMT from the very highest
income classes to the middle and upper middle income classes is dramatic over time
even without the tax cuts in H.R. 1836. In 1998, almost half of AMT taxpayers fell
into the 1.6% of tax-filers with adjusted income over $200,000; and over three-
quarters fell into the top 8% of taxpayers who had income over $100,000. In 2008,
less than 15% of AMT taxpayers have incomes over $200,000 and about half have

1 For a history and more detailed discussion of the specific features of the AMT see, CRS
Report RL30149, The Alternative Minimum Tax for Individuals, by Gregg Esenwein.
2 The data in this and the following paragraph, as well as in Table 1, are taken from the Joint
Committee on Taxation’s pamphlet, JCX-39-99 Present Law And Background Relating To
The Marriage Tax Penalty, Education Tax Incentives, The Alternative Minimum Tax, And
Expiring Tax Provisions June 22, 1999

incomes of $100,000 or more. Moreover, these effects occur despite the fact that
taxpayers in these income classes are accounting for a larger share of total taxpayers
as incomes rise over time.
Table 1: Percentage Distribution of AMT Taxpayers by Income
Class (Excluding the Effects of Limits on Credits),
Prior to H.R. 1836
IncomePercent ofPercent ofPercent ofPercent ofPercent of
Class AllTotalTaxpayersTotalTaxpayers
TaxpayersAMTon AMTAMTon AMT
1998 Taxpayers 1998 Taxpayers 2008
Under $10 14.8 0.0 0.0 0.0 0.0
10 - 20 18.8 0.0 0.0 0.0 0.0
20 - 30 15.2 0.0 0.0 0.1 0.0
30 - 40 12.6 1.1 0.1 1.8 0.9
40 - 50 9.3 1.7 0.1 2.8 1.8
50 - 75 14.5 8.0 0.3 15.4 5.8
75 - 100 7.5 11.4 1.0 30.6 19.7
100 - 200 6.3 31.8 3.2 34.5 26.6
Over 200 1.6 45.8 17.9 14.8 42.7
Total 100.0 100.0 0.8 100.0 7.2
Source: Data from and CRS calculations based on data from Joint Committee on Taxation.
A comparison of the fraction of taxpayers on the AMT in each income bracket
shows a similar dramatic shift. While the shares increase in all of the middle and upper
brackets, the dramatic changes are in the middle income brackets. For example, the
share of taxpayers on the AMT at income between $75,000 and $100,000, which most
people would consider in the middle class would increase from 1% to 20%.
These effects understate the shift of the influence of the AMT toward the middle
class that is expected in the future because they do not include the interaction with the
tax credits that were adopted in 1997. Under the AMT provisions, credits are limited
to the excess of regular tax over AMT liability except for the child credit which is now
specifically excluded. For 2008, there would have been another 6 million returns that

are constrained by the tax credit; however, most of these will probably no longer be
affected because they reflect effects of the child credit.
The Treasury Department recently completed a study of the AMT that showed
a significant growth in the share of AMT taxpayers, inclusive of the effects of the
credit.3 Table 2 shows these effects for 2000, 2005. and 2010. Overall, 15.7% of
taxpayers will be covered by the AMT in 2010, and the shares rise to as much as 64%.
These numbers will be smaller after considering the effects of H.R. 1836, because of
the adjustment in the credit, but larger because of the lower rates and other tax cut
Table 2: Percentage Distribution of AMT Taxpayers by Income
Class (Including the Effects of Limits on Credits),
Prior to H.R. 1836
Income 2000 2005 2010
less than 0 a a a
0-15 0.1 b b
15-30 b 0.1 b
30-50 0.2 1.5 2.9
50-75 0.6 6.1 13.5
75-100 2.3 14.7 29.3
100-200 5.7 16.1 35.6
200-500 18.8 34.0 64.0
500-1,000 16.5 12.6 13.3
1000 and up 7.9 6.6 6.0
Total 1.3 6.2 15.7
a - greater than 75%
b - less than 0.05%
Source: Treasury Department
The cost of correcting the AMT is significant. According to data from the Joint
Committee on Taxation, indexing AMT exemptions would cost $13.9 billion by 2008.

3 Who pays the Individual AMT, by Robert Rebelein and Jerry Tempalski, OTA Paper 87,
June 2000.

This cost would be larger in the wake of the recent tax changes. Eliminating the credit
limit provision would cost about $1 billion currently, but would cost many billions of
dollars by 2008 or 2009. Eliminating the credit limit provision and adding standard
deductions would cost the U.S. Treasury $26 billion by 2009 and $96 billion for the
period 1999-2009.4 According to the Treasury study AMT tax liability was projected
projected to rise from $6.4 billion in 2001 to $38.2 billion in 2010 before considering
H.R. 1836, with a total amount of $182 billion over the ten year period. This number
will now be higher due to the rate reductions and marriage penalty provisions in H.R.


Clearly, the AMT will become increasingly important in the years to come, in the
number of taxpayers covered and revenue cost of altering the AMT. And any tax cut
that reduces regular tax liabilities and does not also alter the AMT will interact with
the AMT in two ways: it will increase the number of taxpayers on the AMT and the
number affected by the credit limit, and it will cause some or all of the tax cut not to
be received by certain families.
Tax provisions that are aimed at reducing taxes for joint returns may particularly
interact with the AMT because married couples have a greater number of dependents,
which increases the likelihood that taxpayers will be under the AMT. Married couples
also tend to have higher incomes and, while their AMT exemptions are also higher,
may be more likely to be affected by the AMT. The interaction is also affected by how
the tax change is distributed across the income classes, since only joint returns with
more than $45,000 of taxable income are potentially subject to the AMT. Treasury
data show that 21% of joint returns will be affected by the AMT in 2010, compared
to 15.7% for the overall taxpaying population. For joint returns with dependents, the
share affected by the AMT rises to 39%. Thus, tax cuts directed at joint returns are
particularly likely to be restricted due to the AMT.
Interaction Between Marriage Penalty Relief and the
A marriage penalty arises for some families because family income is combined
and subject to progressive tax rates. Since the standard deductions and rate brackets,
while larger than those of singles, are not twice as large, marriage can cause the loss
of standard deductions and cause some income to be taxed at higher rates. Other
couples, however, experience bonuses; this outcome tends to arise when earnings are
relatively unequal or when there is only one earner, because the exemption amounts
and rate brackets are larger for the joint returns filed by married couples than for
singles’ returns.

4 See Joint Tax Committee document JCX-55-99 for revenue estimates for the Senate version
of last year’s tax cut bill, H.R. 2488

Provisions of the Recent Marriage Penalty Legislation
H.R. 1836 proposed to address the marriage penalty for most taxpayers, granting
bonuses to many taxpayers who formerly had penalties and expanding the bonuses of
those with bonuses.5
About 60% of joint returns are in the 15% bracket and would have any penalties
that did exist eliminated (and bonuses increased) merely through increasing the
standard deduction to twice that of single returns. Under H.R. 6, a stand alone
marriage penalty bill passed earlier this year by the House, this provision was estimated
to cost $6.3 billion by 2009. Another 26% are in the 28% bracket and would have the
remainder of any penalties eliminated (and bonuses increased) through both the
standard deduction and the widening of the first bracket to twice that of single returns.
This provision would have cost $ 26.3 billion by 2009. Thus, 86% of joint returns,
ignoring the earned income tax credit and the AMT, would be covered by these
provisions. There were also some provisions for partially reducing the marriage
penalty for the earned income tax credit, costing $1.4 billion by 2009. Some individuals
whose income is taxed above the 28% bracket currently would also have had their
penalties eliminated, and since the next rate bracket is only slightly higher (31%) this
approach would have also most marriage penalties for the vast majority of married
couples (96% are in the 31% bracket or below).6
These numbers do not take into account the rate reductions and the effect of
those reductions on the AMT. H. R. 1836, which included the provisions in H.R. 6,
will have a slower phase-in and also a sunset. Because the estimates are calculated
with a significant rate reduction, the cost will be smaller, reaching about $3.1 billion
for the standard deduction and $4.7 billion for the increase in the 15% bracket. The
increase in the bracket width would shift income from a 15% bracket to a 28% bracket
under current law and to a 25% bracket with the proposed rate revisions. Adjusting
for this effect would make the cost under the new rate structure 10/13 of the cost
under the old and reduce the estimate to $20 billion, only accounting for a small part
of the difference. About one fourth of the current 15% bracket is being shifted to a
10% rate, lowering the cost of the standard deduction ($6.3 billion) to at least
0.1375/0.15 under the new system compared to the old. But this adjustment would
shift the cost to $5.7 billion not the $3.1 billion reported. The cost of the earned
income credit provisions is actually higher under H.R. 1836 than under H.R. 6. The
only remaining explanation is that large numbers of joint returns will shift into the
AMT because of the new rate schedule and will not become eligible for marriage
penalty relief.

5 Penalties will still exist because of the AMT, the earned income tax credit, because of
taxpayers in very high rate brackets and because of some other minor tax provisions. The
marriage penalty discussed in this paper and addressed by legislation is the penalty relative
to single returns. There is a special head-of-household return and some penalty relative to
these returns will continue for families with children.
6 Data in this paragraph are based on Internal Revenue Service Statistics of Income,
Individual Income Tax Returns 1996.

A large part of this effect is that more individuals will be pushed into the
Alternative Minimum Tax because of the rate reductions and these individuals will not
benefit from the marriage penalty relief. As a result, many joint returns will not receive
marriage penalty reduction benefits. Marriage penalties still exist for higher income
taxpayers as well. However, the flatter rates themselves would also reduce marriage
penalties for those individuals who remain on the regular tax.
The Senate marriage penalty proposal in the 106th Congress initially proposed to
expand the 28% bracket, which would increase the coverage of high income taxpayers.
An even larger fraction of this group would ultimately fall under the AMT.
Interaction between the AMT and Marriage Penalty Legislation
The amount by which marriage penalties are reduced by the proposed legislation
will declined over time because of the AMT. If a taxpayer is on the AMT, marriage
penalty relief provisions would not have benefitted these taxpayers. Moreover, for
taxpayers subject to credit limits, a change in the regular tax would have been offset
by a loss in the credit, so the taxpayer would not have benefitted from the tax revision.
And, the tax cuts in the marriage penalty legislation were likely to substantially increase
the number of taxpayers on the AMT, a number that, as noted earlier, is already
growing rapidly.
In 2000, the Treasury Department has estimated that the marriage penalty alone
(from the stand alone provisions) would have increased the number of taxpayers on
the AMT or constrained by it via credits by 49% by 2010, raising the total number
from 17 million to 25 million. (Of the 17 million taxpayers already affected, 12.6
million are on the AMT and the remainder constrained by the credit). Since there were
91 million taxable returns in 1996, which would probably not grow much over 1% or
2% per year, 22% to 24% of taxpayers would then be on the AMT or affected by the
credit – a provision that currently affects less than one percent of taxpayers. Thus, it
is clear that the growth in the AMT coverage would have been sharply increased by
this legislation. The revenue collected by the AMT would also have increased, by
about 48%, from $38.2 billion per year to $46.5 billion. These results would have
been even larger with the rate cuts.
Treasury estimates indicate that 28% of the marriage penalty tax cuts in the 106th
Congress’s version of H.R. 6 over the next ten years are taken back by the AMT,7
making the net budget effect $67 billion smaller. This take-back rate rises rapidly and
reaches 44% by 2008. Thus, absent revisions to the AMT, about half the tax cuts in
the marriage penalty legislation would have disappeared after ten years. Eight years
after the legislation is enacted, more than 47% of couples with two children would
have been on the AMT.
These effects are mitigated by provisions that allow personal credits to be offset
against the AMT but increased by the rate reductions.

7 Al Davis. The Marriage Tax Penalty Relief Act: ‘Cheap” Tax Relief or Not. Tax Notes.
February 28, 2000, pp. 1300-1302.

Lessons from the Marriage Penalty Example
This analysis of H.R. 6 in the 106th Congress shows how a tax proposal that
affects many ordinary income taxpayers has powerful interactions with the AMT.
Depending on the nature of the legislation, the interactions can be larger or smaller.
Proposals that lower tax rates or narrow brackets across the board would also be
expected to have significant interactions with the AMT because they tend to affect
higher income taxpayers proportionally more. Taxpayers already on the AMT would
get no tax cut, and some taxpayers would be shifted to the AMT. For example, even
in the year 2000, 44% of taxpayers with incomes over $50,000 would have received
less than the full 10% tax cut in H.R. 3, an across-the-board tax cut proposal in the
106th Congress.8 Tax cuts that add to credits or other provisions disallowed by the
AMT would also interact with the AMT. Tax cuts that are directed primarily at lower
or middle income individuals would be less affected by AMT interaction, at least in the
near future. Left unchecked over a very long period of time, of course, virtually all
taxpayers will eventually fall under the AMT provisions as the exemptions erode in
There were offsetting effects in the initial Senate Finance Committee proposal for
the marriage penalty (S. 2346, S. 2839). This proposal also made the ability to offset
credits, such as the child credit, against the AMT permanent. This change would have
reduced the number of middle and upper middle income taxpayers who would have
their credits limited as a result of the marriage penalty or who would be switched to
the AMT. The expansion of the 28% rate bracket, however, would have expanded the
interaction between the marriage penalty legislation and the AMT. For tax year 2000,
the top of the 28% rate was $105,950, while twice the top of the single bracket is
$124,900. Since adjusted gross income is higher than taxable income, this change will
affect many higher income individuals.
The final proposal adopted by both houses, H.R. 4810, included the credit offsets
and not the 28% bracket expansion, so the effects of the AMT in limiting these tax cuts
would have been smaller in this legislation.
Policy Options and Issues
While the previous analysis describes the importance of AMT interaction with
proposed tax cuts, there are a variety of approaches that could be taken to dealing with
the AMT. However, one important point to note is that cutting taxes without altering
the AMT, by increasing the coverage of the AMT, makes proposals to slow or reverse
its growth in importance more costly in terms of revenue loss.

8 Al Davis. Candidate Bush’s Tax Cut Plan. Tax Notes. January 10, 2000, pp. 271-277.

The 1997 Credit Interaction
The Congress has considered the most urgent issue that of dealing with the lack
of offset of the credits adopted in 1997, which immediately catapulted many middle
class taxpayers into an interaction with the AMT that reduced their credits. Legislation
temporarily correcting that problem had already been enacted, and this provision was
made permanent in the case of child credits. Child credit provisions in H.R. 1836
eventually cost about $25 billion per year, but this number reflects both a doubling of
the credit and the AMT provision. Earlier estimates suggest eliminating the credit limit
provision would cost about $1 billion currently, but would cost many billions of dollars
by 2008 or 2009. Estimates for the Senate version of the 1999 tax cut bill, H.R. 2488,
indicated a $1 billion cost currently for both eliminating the restriction and allowing
some small additional exemption, a cost that grew to become $26 billion in the tenth
Indexing the Exemptions
According to Joint Committee data, indexing AMT exemptions would cost $13.9
billion by 2008. Indexing the exemptions is the step that would be necessary to begin
to keep the AMT more or less fixed in relative importance in the tax system, assuming
that no other changes in the regular tax structure occurred.
The AMT as the Tax of the Future
Some might see the AMT as a desirable, relatively-flat alternative tax with a wider
base, and consider the expansion of the AMT desirable. If that is the case, of course,9
then the AMT structure itself might be examined in light of general tax principles.
The exemption levels in the AMT are not adjusted for family size or for head of
household status; there are marriage penalties within the AMT structure, and tax
preferences are not uniformly included or excluded. For example, while the AMT base
disallows certain itemized deductions (mainly taxes) and business preferences, it leaves
other important preferences intact (capital gains differentials, home mortgage interest
deductions, exclusions for tax exempt interest on general obligation state and local
bonds, and exclusions for employer-paid fringe benefits). And, if there is concern
about the marriage penalty in the regular tax, there is also an issue about the marriage
penalty in the AMT.
Phasing Out the AMT
Others might see the AMT as an unnecessary and complicating feature of the
current tax system. Under this view, adjustments to limit tax preferences should be

9 For a discussion of alternative views of the AMT discussed here and in the following
sections, see Michael J. Graetz and Emil M. Sunley, Minimum Taxes and Comprehensive Tax
Reform, in Uneasy Compromise: Problems of a Hybrid Income-Consumption Tax,
Washington, D.C., Brookings Institute, 1988, pp.385-418. See also comments of discussants
Jane G. Gravelle and Donald C. Lubick, pp. 419-429. Also, see David Weiner, Alternative
Minimum Tax, In The Encyclopedia of Taxation and Tax Policy, ed. Joseph J. Cordes,
Robert D. Ebel, and Jane G. Gravelle, Washington, D.C.: Urban Institute, 1999.

directed at the preferences themselves and not some overall restrictions on their use
as embodied in the AMT approach. These individuals might like to see not only
corrections to allow the 1997 credits to be used against the AMT and indexation of the
AMT exemption levels, but also steps to eventually eliminate the AMT. Some steps
in this direction were already taken for the corporate AMT in 1997, where depreciation
rules were brought more in line with regular depreciation.
Revising the AMT and Coordinating with Other Tax Revisions
Others want to see the AMT continue as a general back-up mechanism to keep
tax preferences from being overused, but limited to a small fraction of the population.
For them, several issues arise. While the indexation for price inflation of the exemption
levels is clearly appropriate to maintain the relative importance of the AMT, other
questions are not as easily answered. They include questions as to whether the current
base of the AMT is appropriate to its purpose, and how to adjust the AMT in tandem
with regular tax changes to ensure that it fulfills its role.
The preferences taken away by the AMT are selective. They include, for
example, itemized deductions for state and local taxes, but not for mortgage interest,
even though a case might be made that the former is not a preference, while almost
everyone agrees that the latter is a preference. They do not include the major
investment subsidies (capital gains preferences and tax exempt bond interest), although
they include a variety of business related preferences. They include personal
exemptions and standard deductions, although the rationale for this inclusion is that the
AMT flat exemption is much larger than the sum of the standard deductions and
personal exemptions.
How the AMT should be altered as regular tax changes are made is also unclear.
For example, if the principal purpose of the AMT is to limit the use of preferences,
there is no apparent reason why changes in the basic structure of the tax system (wider
brackets, lower rates, larger standard deductions) should trigger additional coverage
under the AMT. It would be appropriate to simultaneously adjust the AMT
deductions, brackets and rates to conform to the rate changes. In that case, if the
standard deduction increases by $500, the AMT exemption should increase by that
same amount.
However, the adjustments in the AMT are limited and imperfect. For example,
there is no adjustment for family size and no adjustment for head of household status.
There are only two rate brackets and the width of the first bracket does not bear a
close relationship to the width of the regular income brackets. The exemption is phased
out at high income levels. Thus, in the marriage penalty proposal, while it might make
sense to increase the AMT exemption by the increase in the standard deduction, it is
not clear what, if any, conforming change the expansion of the 15% rate bracket
should induce. Thus, it is not clear that changes of these nature should trigger
conforming changes in the AMT.
Also, under this view of the AMT there appears no clear reason to allow credits
under the AMT although there is a reason to adjust the AMT for the expansion of the
standard deduction in the marriage penalty legislation. A case might be made for an
adjustment in the child credits, on the grounds that these credits are the equivalent of

increasing personal exemptions and that such credits should be allowed against the
AMT. There is less of a justification for other types of credits, and the case for the
child credits is complex because only some taxpayers receive those credits, but the
AMT exemption is uniform (distinguishing only between single and joint returns).
The growth in the AMT has been considered a potential problem for some time,
and its importance increases with tax cuts, such as those passed in 1997 and 2001.
Because of the AMT, not all taxpayers receive the full amount, or even any, tax cut.
Moreover, every reduction in the regular tax that is not accompanied by adjustments
in the AMT increases the number of taxpayers who pay the AMT and the
complications for those taxpayers in filing their tax return. The marriage penalty
legislation, as well as the rate reductions, cause a significant expansion of the fraction
of the fraction of families. And each time this issue is not addressed, the higher the
cost grows for doing so at some future time.