Opinion – Tax reform overdue

D. Mark Singletary

Tax Reform

The last time significant federal tax reform took place was 1986. Ronald Reagan was president; Tip O’Neill was speaker of the house and Robert Dole was senate majority leader.

The Tax Reform Act of 1986 is generally regarded as sweeping reform policy and the signature legislation secured by Reagan era politicians. Here are a few of its highlights:

First, and most notably, it reduced the top bracket for personal income taxpayers to 38.5 percent from 50 percent. That was more of a psychological restructuring than a fiscal adjustment. Existing tax policy dictated that all revisions to the tax code must produce revenue neutrality. That means the new law had to bring in the same revenue as the old law.

Secondly, the Tax Reform Act of 1986 changed the way IRS rules affecting depreciation were handled for taxpayers. Briefly, the rules put in place in the 1986 act lengthened the amount of time for assets to be charged against revenue, thus increasing net revenues and subsequent tax liabilities.

The third, and most significant, part of the 1986 legislation was the continuance and expansion of a provision in the tax code known as the Alternative Minimum Tax.

The AMT was initially created in 1969 to make certain that a few very wealthy taxpayers were paying their fair share of federal taxes. These individuals were following the tax law, but the tax law wasn’t working out the way the government thought it should, so the Alternative Minimum Tax was adopted to ensure certain high income earners would pay a minimum level of tax, regardless what the rules said.

The number of high-income households originally targeted by the alternative amendment to the tax code was 155. Yet it now affects millions of families each year, according to tax industry reports. One of the main reasons that so many more taxpayers have to deal with the AMT is the fact that the provisions of the act were not indexed for inflation. As incomes rose from inflationary pressure, the entry threshold for AMT remained the same. The number of taxpayers affected by the provisions increased dramatically.

There is a great deal of discussion going on in Washington right now on whether taxes paid to state and local governments should be deductions for federal income tax computations. The state and local tax (SALT) deduction provision of the AMT disproportionately affects high-income tax states and the taxpayers that live there.

The very taxpayers who are screaming loudest about losing the benefits of deducting state and local taxes likely haven’t been getting that benefit, because they’ve been paying the AMT and likely don’t know about the non-deductibility clauses it contains.

One would think the representatives from those states would be leading the charge for tax reform, but rationality doesn’t drive national political conversation. The current tax fight is a perfect example.

The proposal before Congress for tax reform repeals the AMT, according to Rep. Kevin Brady (R-Texas) chairman of the House Ways and Means Committee and author of the proposed changes to the IRS code for 2017.

The proposed law also does away with deductibility for state and local taxes paid. Common sense says that high income states’ representatives wouldn’t really care about either side of these issues. High income taxpayers in high tax states most likely haven’t been able to deduct state and local taxes for decades. New, higher personal exemptions in the proposal will mean most taxpayers won’t itemize deductions anyway, so it really shouldn’t be an issue.

But, it is.

Whether or not repeal of the AMT ultimately happens is anyone’s guess. The issue is so complicated that too few taxpayers have a clue about what it really means.

With that in mind I surveyed the Congressional delegation for Central Alabama about the AMT, their opinions about the provision and whether or not they would support the current proposals that included repealing the act.

The delegation: Michael Rogers, (R); Gary Palmer, (R); and Terri Sewell, (D) represent the 3rd, 6th and 7th Congressional districts respectively, and all three gave me the same answer when asked about the AMT and its future.

Dead silence was the response, no immediate answer to the question, no call backs. Not a single word on the subject was offered. I guess they feel our readers don’t deserve to know how they feel about the AMT and it future.

Or maybe they are just waiting on party leaders to tell them what to do.

D. Mark Singletary

General Manager