Another Middle-Class Tax? How the Federal AMT Hits New Yorkers
By E. J. McMahon, Director, Empire Center for New York State Policy
Empire Center Special Report 01-05
April 12, 2005
Federal income tax cuts enacted during the past four years have been particularly benefcial to New York, saving Empire State residents a total of $36 billion through 2004. However, as documented in this report, New Yorkers are also being hit harder than most Americans by what's been called "the most serious problem faced by federal taxpayers"1 -- the Alternative Minimum Tax (AMT).
Created 36 years ago as a way to curb tax avoidance by the wealthiest Americans, the AMT now threatens to become Another Middle-class Tax. Its recent spread has been concentrated among married couples with children in New York and other places with high living costs and heavy state and local tax burdens. The Manhattan Institute's tax model supports these findings about AMT incidence and liability in the Empire State:
- The AMT will boost the 20042 tax bills of affected New York state residents by $2.6 billion, roughly 15 percent of the estimated U.S. total. More than half the state's AMT payments were owed by residents of New York City.
- 332,000 New York taxpayers had to pay the AMT in 2004, nearly double the number affected in 2000. This included roughly 144,000 tax filers in New York City.
- With less than 7 percent of the nation's individual taxpayers, New York State was home to about 12 percent of all AMT filers.
- Additional AMT liability effectively stole away 38 percent of the recent tax cut savings for New York households earning between $150,000 and $500,000.3
- Although the AMT currently affects only 4 percent of all New York State taxpayers, the proportion rises to roughly one-third of all New York families with incomes above $100,000. Given the AMT's design quirks, those affected consist predominantly of families with children, especially in New York City and its suburbs.
- In 2006, if federal law remains unchanged, the number of AMT payers in will expand sixfold nationally and approach 1.6 million New York filers -- including nearly half of all households earning between $50,000 and $200,000.
- By 2010, again assuming no change in current law, the AMT will hit fully one-quarter of all New York taxpayers and most of the state's middle-class families.
Once a technical issue appreciated mainly by tax preparers and policy experts, the AMT problem is receiving increasing public attention as the President's Advisory Panel on Federal Tax Reform hears testimony on necessary changes in the tax code. But given the huge budget impact, there is no guarantee that the problem will be resolved permanently, or at all.
Given the current AMT over-reach in New York, this report underscores that preserving the status quo is not good enough. Only the limitation or radical revision of the AMT will ensure that taxpayers in New York and other states will be treated fairly.