So far this year, the House and Senate have done a good job complying with their Pay-As-You-Go (PAYGO) budget rules, offsetting the cost of legislative priorities ranging from an expansion of the State Children’s Health Insurance Program to increases in Pell Grants to funding for renewable energy to implementation of the 9/11 Commission recommendations.
What would it mean if, after offsetting the cost of these other high-priority policies, Congress were now to waive PAYGO for the AMT patch? It would send the message that Congress applies fiscal discipline to policies that help low and moderate-income families, but not to policies that benefit upper, middle, and high-income households.
While the AMT patch is often described as a “middle-class
The point here isn’t that the AMT shouldn’t be patched. It’s that those who rationalize waiving PAYGO for the patch by pointing to whom the patch helps are implicitly saying: we prioritize policies that help middle and upper-income households above those that help low and moderate-income children and families.
One other rationale for waiving PAYGO for the AMT patch is worth noting: the claim that AMT relief shouldn’t have to be paid for because the AMT’s explosive growth was unintended. Even if this were true, it wouldn’t be relevant. That policymakers failed to anticipate a particular problem doesn’t mean it’s okay for them to take actions that pile onto the national debt and add to the burden on future generations.
But the claim that the AMT’s growth was unanticipated also is just not true. Lawmakers not only anticipated the AMT’s growth, they counted on it to mask the true costs of the 2001 tax cut. In fact, congressional leaders knowingly used the AMT as a gimmick that let them pack far more tax cuts into the 2001 tax bill than would have otherwise fit within the budget limits Congress had set for itself.
Here’s how it worked. Taxpayers owe the AMT when their tax liability is higher as calculated under the AMT than as calculated under the regular income tax. So when the 2001 tax cut lowered households’ regular income tax bills but didn’t reduce their AMT liabilities, it pushed millions more taxpayers onto the AMT. The Joint Committee on Taxation explicitly brought this issue to Congress’s attention in the spring of 2001, when it provided lawmakers with estimates of how the tax cuts under consideration would dramatically increase the number of taxpayers hit by the AMT.
Congressional leaders could have acted on the information the Joint Tax Committee provided and used some of the $1.35 trillion available for the 2001 tax bill to modify the AMT. Instead, they chose to take advantage of the fact that, without a permanent AMT fix, the Joint Tax Committee would be required to estimate the cost of the 2001 tax bill based on the assumption that millions of households would be pushed onto the AMT and would lose the benefits of the new tax cuts. This assumption made the bill look much cheaper, allowing more tax cuts to be squeezed in.
Designers of the 2001 tax cut were confident that Congress would come back in future years and enact AMT relief without paying for it. That is, they anticipated that they would get a tax cut costing far more than $1.35 trillion over ten years, but they would have to acknowledge only part of its cost up front. Waiving PAYGO for the AMT patch on the grounds that the AMT’s growth was unanticipated would reward this strategy, and the budget gimmickry that went with it.