New Roadblock for AMT Reform

Make it part of Social Security talks, Paulson says

By Kaye A. Thomas
Posted February 19, 2008

Possible harbinger of greater gridlock?

In recent testimony before the House Budget Committee, Treasury Secretary Henry Paulson tied reform of the alternative minimum tax, or AMT, to the debate over the administration's proposal to divert a portion of Social Security revenues to private accounts. That proposal has generated fierce opposition from those who view it as an attempt to weaken the safety net provided by the Social Security program. His remarks may signal a tactic that creates a new obstacle for AMT reform.

Carve-out idea leads to standoff

The Bush administration's Social Security proposal would have created private accounts out of a portion of the revenues generated by the Social Security tax. A variety of investments would be available for those accounts. Proper management could result in an overall benefit that's greater than would be paid under the existing Social Security formulas — but it would also be possible for account owners to end up with a lot less. President Bush made a strong push for this proposal but public opinion soured as its implications became clear, and Republicans in control of Congress at the time shelved the proposal.

Opposition was especially adamant among congressional Democrats, who saw the private account proposal as an attempt to weaken Social Security. They took the position that private accounts could be considered as an addition to Social Security, but not as something carved out of existing benefits. Democratic leaders said they were willing to discuss Social Security reform, but only if the administration took the private account carve-out off the table.

The administration responded by continuing to propose the carve-out. Recognizing that the proposal was politically dead, Bush abandoned any genuine effort to persuade Congress to adopt it even before Democrats seized control. Yet the carve-out remains official administration policy. The result is a standoff, apparently convenient for both parties, in which Democrats refuse to talk about Social Security reform if the carve-out idea is to be part of the discussion and the administration refuses to engage in talks that don't include the carve-out idea.

New tactic on AMT?

When Congress turned to a short-term fix for AMT at the end of 2007, Republicans blocked efforts to pass a balanced bill in which revenue lost due to the "AMT patch" would be made up by eliminating certain opportunities for financial managers to avoid treating compensation as income. A key part of the argument was that the government never intended to collect the AMT revenue in the first place, so it shouldn't be necessary to replace the revenue when providing AMT relief.

There's a problem with the argument: every budget projection ever made by Congress or the White House up to that point, whether under Democrats or Republicans, has relied on the revenue projected to be raised by the AMT. The implicit assumption is that if AMT relief is to be provided, replacement revenue must be found somewhere else. Without this assumption, the budget projections are off by a huge amount, currently over a trillion dollars for the next ten-year period.

Just weeks after pushing the idea of an AMT patch with no offset, the Bush administration sent to Congress a new budget proposal that once again includes the projected AMT revenue. It's impossible to reconcile this budget proposal with the argument that the government doesn't expect to collect the AMT revenue (or at least replace it with other revenue), so Paulson needed a way to answer critics in his testimony before the House Budget Committee. The answer: he said the administration was willing to talk about AMT reform if Democrats drop their refusal to talk about a private account carve-out in the Social Security program.

It's hard to know how much significance to attach to this seeming non sequitur. Possibly it is just an attempt to deflect attention from the inconsistency between the position taken in the battle over the AMT patch and the position taken in the budget proposal. In any event, no one expects to see a serious effort at comprehensive AMT reform until after the next president is sworn in.

Yet the approach Paulson took in this testimony may signal a new tactic that could make it difficult to achieve AMT reform in the future. If Republicans become adamant that a private account carve-out from Social Security has to be part of any AMT discussion, it's hard to see how progress will be possible. Time will tell whether Paulson's remarks signal a new tightening of the gridlock surrounding this issue.

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