Republicans target AMT for repeal
In 1992, Texas Utilities earned a $1 billion profit and paid $19.6 million – 2 percent of its gross income – in taxes. While that may not seem like much, the fact is the company would have received an $18 million tax rebate if Congress did not impose a minimum tax or alternative minimum tax (AMT).
The most profitable companies pay a 35 percent tax on their profits, less any allowable deductions. Those deductions, however, mean that some companies will have a minimal net income and, therefore, will not pay much, if anything, in taxes. In fact, a 1986 survey of 250 of the nation’s most profitable companies by the Washington-based Citizens for Tax Justice found that 130 of them paid no federal income tax in at least one year between 1981 and 1985.
By comparison, the group found that from 1987 to 1992, after the AMT had been reauthorized, total corporate income tax payments increased by $21.6 billion. That is still only 3.8 percent of the total taxes that corporations paid during that period – hardly a burden, says Robert McIntyre, director of the tax group.
But many Republicans say the AMT not only hurts corporate competiveness, it also damages state and local government because the tax-free interest saved from buying municipal and private activity bonds – bonds used to finance airports, for instance – is added back if a company triggers the AMT. Thus, the incentive to purchase those bonds is diminished for corporations, tax opponents argue.
“As a result of the corporate AMT, corporate investors limit their purchases of bonds issued by state and local governments to finance public investment,” says John Vogt, senior vice president for the New York-based Public Securities Association, which represents securities firms participating in the bond market.
To attract investment, state and local governments must pay higher rates, adds Cathy Spain, director of the Government Finance Officers Association in Washington. Repeal of the AMT would therefore “contribute significantly to lowering state and local government borrowing costs.”
Opponents of the AMT may have their prayers answered. The House has passed a Republican-led proposal to phase out the AMT by the year 2000. The current provision applying the AMT to tax-exempt interest would be removed immediately.
While the administration and its Democratic backers say the AMT could be simplified, they are averse to outright repeal, arguing that simple fairness precludes them from allowing companies with substantial income to avoid taxes.
If the Republican bill is enacted, the Treasury Department says about 76,000 companies currently paying taxes would be able to avoid such responsibility.
And furthermore, some Democrats claim that the tax-exempt interest inclusion in the AMT calculation is necessary to minimize tax avoidance, as well as to provide a level playing field for those entities offering taxable securities.
The Senate is unlikely to go as far as the House and vote to repeal the AMT. Finance Committee Chairman Bob Packwood (R – Ore.), who will control the measure’s immediate fate in the Senate, helped reinstitute the tax in 1986 when Republicans controlled the Senate. “The ability of highly profitable corporations to pay little or no tax undermines respect for the entire tax system, said Packwood in 1986. It is a sentiment he still espouses.
Because the AMT is part of the large, controversial 1996 budget expected to be voted on in October, its future is uncertain. In any event, if bills now pending to scrap the current tax system altogether reach fruition, the whole discussion could be moot.
Kenneth Silverstein is the Washington correspondent for American City & County.