Faculty Notes

Published on April 9, 2009 | by LawNews

Prof. Daniel Greenwood in Newsday

Professor of Law Daniel J.H. Greenwood wrote the following article for Newsday.

Alternative Minimum Tax punishes autonomous states
By Daniel J.H. Greenwood
April 9, 2009

Taxes are due next week, and once again we’ll hear stories asserting that the reason the alternative minimum tax hits so many middle-class people, especially in high school-tax areas like Long Island, is because it isn’t indexed for inflation.

That’s just not true.

The AMT was originally intended to catch rich tax evaders. But during the Reagan administration, it shape-shifted into punishment for high-tax, high-service states – like New York. The time has come to restore it to its original purpose.

The original AMT worked by creating an additional income tax, at a lower rate, that includes income that is untaxed in tax shelters. People who don’t have tax shelters could never be affected by it, regardless of indexing or inflation.

But in 1982, the Reagan Revolution changed it into something very different. The deduction for state taxes and the deduction for dependents were suddenly classified as tax shelters. Presumably to avoid a taxpayer revolt, the radical implications of this change were concealed by adding an unindexed income floor. Thus, the new provision would come into effect only gradually and invisibly.

The 1982 changes were fundamentally dishonest. Neither children nor state taxes are a tax shelter. There’s no reason to think that rich people are avoiding taxes by having children or paying state taxes. These are real expenses that really reduce middle-class families’ ability to pay federal taxes.

Limiting the deduction for state taxes has nothing to do with limiting tax evasion by the rich. Instead, it is a simple penalty on high-tax states and their citizens – social engineering to try to force states, regardless of the views of their citizens, to adopt a low-service, low-tax model.

The intent and the effect of the “reform” was to increase the burden of state taxes, in the hope of getting high-tax states to cut their budgets. If a state chooses to tax its citizens to pay for schools, libraries, crime prevention and parks, to invest in children or infrastructure, to repair roads, or to pay for sound regulatory institutions – the Reagan-era AMT demands that its citizens pay federal taxes on income that they never received because it was withheld or paid out in state income taxes.

The only way for states to avoid such double taxation is to choose a low-tax, low-service, low-investment route – not providing the basic services that the middle class needs for a decent life and to make the next generation competitive.

Remember the famous New York Daily News headline “Ford to City: Drop Dead”? This revised AMT was essentially saying, “Die Slowly, States with Expensive Schools.”

The AMT started out as an effort to ensure that everyone – even the rich – pulls their weight in the common enterprise we call America. Since middle-class people don’t have tax shelters, in its original form, the AMT could never affect them regardless of indexing.

The 1982 amendments, however, sneakily changed the AMT into something very different – an attack on the autonomy of the states and punishment for middle-class families and voters who want their state governments to provide services and are willing to pay for it.

The solution to the AMT problem is neither repeal nor indexing. A simple change to its language would return it to its original goal: Restore the deductions for children and for state income taxes, neither of which is a tax shelter.

Then, if the advocates of low taxation and low services want to convince us to follow their low road, let them do so openly and straightforwardly.

If the great middle-class deductions are going to be repealed, the repeal should be in the open daylight. Do it in the main tax code, where the consequences will be obvious to all, or don’t do it at all. State taxes should be determined by the states, not the federal internal revenue code.

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