April 30, 2007
Galle on Irrationality, Unfunded Mandates, and the AMT
Brian D. Galle (Florida State) has posted Salt in Their Wounds? Irrationality, Unfunded Mandates, and the AMT, 106 Mich. L. Rev. ___ (2007), on SSRN. Here is the abstract:
By sheer dollars alone, the largest impact of the Alternative Minimum Tax (“AMT”) lies in its denying to many taxpayers the deduction otherwise permitted to them under section 164 of the Tax Code, the deduction for the taxes they paid to their state and local governments. It is odd, then, that the debate over the fairness of the AMT largely neglects close consideration of the merits of section 164. This Article aims to remedy that oversight, offering a fine-grained analysis of the impact on the overall fairness of the tax system of repeal or, in the case of the AMT, creeping partial repeal, of section 164. The fairness of a federal deduction for state and local tax rests on the underlying fairness of the state and local tax itself. Therefore I offer, I believe for the first time, a close examination of how newly-understood limits on taxpayer mobility and rationality might affect individuals' choices of bundles of local taxes and local government services, which in turn informs our assessment of the “fairness” of those exchanges. Another original contribution here is the Article's efforts to track the reciprocal benefits and burdens that flow between state and local governments -- again, although the intergovernmental flow of billions of dollars surely impacts the overall fairness of a local government, there has been no scholarly treatment of that question. Finally, I note that section 164, and therefore the AMT, can have serious effects on federal-state relations, so that the debate over the AMT is in many ways a debate not only over fairness, but also about federalism.
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Galle's article contains a glaring error in footnote 4. He states that the two most important deductions that must be omitted in computing AMT are the state and local tax deduction and the mortgage interest deduction. In reality, the mortgage interest deduction is allowed under the AMT, except for interest on home equity loans not used to acquire, construct, or substantially improve the residence. Under Internal Revenue Code section 56(b)(1)(C) and 56(e), mortgage interest is deductible under the AMT so long as it meets the requirements set forth for regular tax purposes by section 163(h)(3) AND is incurred to acquire, construct or substantially improve the residence.
The state and local tax deduction was far and away the largest AMT preference item in 2004, accounting for 57 percent of the total. Second place went to personal exemptions (12 percent) and miscellaneous itemized deductions (10 percent).
Posted by: Alan Viard | May 1, 2007 10:18:21 AM