The $64 Billion Tax Break

NYT and Post downplay the Senate stimulus bill's upper-middle class tax break

The top stories in both The New York Times and The Washington Post today focused on the bipartisan Senate committee that’s working to cut roughly $100 billion in spending from the economic stimulus bill. The Senate’s bill is more than $80 billion more expensive than the $819 billion House package, passed last week, and both papers catalog the various programs that might get the ax, like $14 billion for education funding, or $1.5 billion to improve rural broadband access.

But why, you might ask, is the Senate package so much more expensive than the House bill?

It’s got much to do with a single $64 billion tax cut benefitting the wealthiest 20 percent of Americans—a fact that was largely buried in reporting about the squabbling over which spending programs to cut.

As the Times notes near the end of its article (emphasis mine): “The cost of the Senate measure has risen substantially above the $820 billion House-passed bill, first with the addition of a $64 billion provision to spare millions of middle class Americans from paying the alternative minimum tax in 2009….

Hold the phone.

$64 billion for the Alternative Minimum Who?

The so-called AMT is an annual headache for lawmakers. It originally was passed in 1969 to stop the super-wealthy from “hiding” their money in tax shelters by applying strict rules on deductions, and therefore ensuring high-income brackets would pay a minimum tax no matter what.

Not a bad idea for a bill, but the income brackets weren’t indexed for inflation. So while, in the swinging ‘70s, fewer than 500 people were affected by the AMT, nowadays it would apply to over 20 million upper income Americans. A political nightmare for both parties. Every year, Congress passes a bill that temporarily “patches” the AMT—the legislative equivalent of a Band-Aid—shielding most upper income bracket Americans from the bill’s reach. As a result of these “patches,” about 20 million people have not had to pay an additional couple thousand dollars each year.

So, what’s the problem with that? Well, there are several.

Most obviously, the AMT “patch” messes with Congressional budget projections. As The American Prospect’s Dean Baker noted way back in 2007: “Because the AMT is on the books but it’s never enforced, “…baseline budget projections assume tax revenues that no one expects will ever be collected.”

So budgets start to look screwier than they really are. And that’s one of the reasons why the House’s stimulus measure seemed to be $80 billion dollars cheaper than the Senate’s. It was really only about $30 billion cheaper—after you subtract the $64 billion revenue loss that happens every year when lawmakers curtail the scope of the AMT.

Billions, schmillions, right? When we’re talking about an $820 billion-plus package, why split hairs over a $70 billion revenue loss that occurs every year anyway?

For one, critics say the AMT “patch” probably won’t help stimulate the economy. The Brookings Institute gave it a D-minus—the lowest passing grade possible—on a stimulus package “report card” that rates which riders are most likely to actually jump-start the economy.

What’s more, despite the Times’s claim that the AMT exemption is aimed at the “middle class,” the “patch” primarily helps the richest fifth of Americans. Tax Policy Institute charts illustrate that it does nothing for the poorest 40 percent, and hardly anything for the folks in the middle. In a nation that’s pricked by an increasingly populist, rage that’s not the kind of thing that will sit well in Middle America.

As I write, a senatorial scrum is working to cut $100 billion from the Senate’s current spending proposal. The Post reports that they’re specifically looking to cut education programs and energy efficiency initiatives. (Check out the chopping block here.)

Increasing revenue by reversing tax cuts is not being considered at all. Reporters, and the American people, should be aware of the reasons why.

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Haley Edwards is a writer in New York.