Congress won't address tough tax issues

By DAVID NICKLAUS
ST. LOUIS POST-DISPATCH
This year, Congress' procrastinating ways will be all too apparent to millions of Americans filling out their tax forms.
Teachers who want to take a special deduction for classroom supplies won't find a line for it on Form 1040. Nor will parents find a line for deducting college tuition. Both tax breaks exist, but Congress didn't renew them until December, after tax forms already had gone to press.
The Internal Revenue Service is telling folks how to write in the deductions -- put teacher costs on a line with medical savings accounts and lump tuition with "domestic production expenses," whatever those are -- so this may prove to be a relatively minor glitch.
Still, it's an annoying example of the short-term thinking that passes for tax policy these days. Something is always phasing out or phasing in, making long-term planning impossible.
It's not as if these tax issues take Congress by surprise. Every-one in Washington is well aware, for example, of the need to do something about the alternative minimum tax, or AMT. This levy, which was designed to make sure rich people pay at least some income tax, will hit 24 million Americans in 2007 if Congress does nothing.
Since 2003, Congress has passed a series of one-year exemptions that confined the soak-the-rich tax to about 4 million tax returns last year. The latest extension expired at the end of 2006.
If the AMT is a problem, why not abolish it? At the very least, why not pursue a long-term fix that lets middle-income taxpayers off the hook?
"The policymaking process is not working really well these days," said Leonard Burman, director of the Tax Policy Center in Washington. "There's bipartisan agreement that we need to do something about the AMT, but nobody is talking about the hard choices we need to make to close the revenue gap."
Just extending the AMT exemptions will cost 40 billion this year, and repealing the tax would cost 850 billion over a decade. Faced with such a big bill, Congress procrastinates.
The Tax Policy Center recently made several sensible suggestions for repealing the AMT.
Top income tax rate
We could raise enough money by raising the top income tax rate to 40.4 percent from 35 percent. Or we could junk the AMT, repeal the deduction for state and local taxes, and reduce tax rates across the board.
Each of those choices would create winners and losers, and you can bet that the losers would hire lobbyists. Congress doesn't want to anger anybody, so it keeps putting off the hard decisions.
Even popular business tax breaks are subject to short-term-itis. A research tax credit has been extended year by year since the 1980s. But research, by its nature, requires a long-term commitment.
"The fact that the credit is continually allowed to expire may limit its effectiveness," Burman said. "It's the worst of all worlds. It's costing the Treasury revenue, but it is not encouraging people to do more research."
Short-term thinking has been especially prevalent during George W. Bush's presidency. His popular tax cuts of 2001 and 2003 all came with phase-out dates. Many popular tax breaks, including the lower tax rate on dividend income, expire in 2010. That's also the year when the AMT stands to hit 34 million taxpayers, or more than one in five of us.
If there is to be a day of reckoning, then 2010 may be it. It would be nice to think we'll see some long-term thinking before then, but don't hold your breath.
David Nicklaus is a columnist for the St. Louis Post-Dispatch. Distributed by McClatchy-Tribune Information Services.