WASHINGTON — Reps. Nita Lowey, D-N.Y., and Scott Garrett, R-N.J., have introduced legislation that would permanently exempt middle-class taxpayers from the alternative minimum tax, potentially boosting market demand for private-activity bonds.
The Lowey-Garrett bill, offered in late December as the Permanent AMT Relief Act, would increase AMT exemption levels to $100,000 for married couples and $75,000 for individuals. In addition, the levels would be indexed for inflation.
“Indexing is not as powerful as an exemption from the AMT, but it will be beneficial for investors to take advantage of the tax-exempt interest,” said Chuck Samuels, a member of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC, who represents the National Association of Health and Higher Education Facilities Authorities.
The AMT is a federal income tax that’s separately calculated from the regular federal tax and aims to prevent the wealthy from taking so many tax deductions or exclusions that they pay little or no tax.
Private-activity bonds used to finance airport, water and sewer, housing and other projects are subject to the AMT and the interest income from them are included in calculations of AMT income.
Though it is tax-exempt, the interest from PABs can push taxpayers into the AMT or raise their AMT liability. As a result, investors tend to demand a higher bond yield to compensate for the risk. That means higher costs for states and localities, typically between 25 and 30 basis points higher than yields on similar bonds.
“Raising the AMT threshold would be favorable to market demand since many taxpayers will be sheltered from the AMT,” said Jerry Spector, a member of Mintz Levin and former chair of the American Bar Association’s tax-exempt financing committee. “It would also improve the pricing of AMT bonds, which are typically higher than regular bonds.”
Because the AMT has not been indexed, the income threshold at which a person falls under the tax has not risen along with increases in average incomes. As a result the AMT applies to more and more investors each year and traps millions of middle-income taxpayers.
Congress has routinely “patched” the problem and temporarily raised the tax’s levels so that it applies to fewer middle income investors. But the Lowey-Garrett bill would try to permanently fix the problem by indexing the AMT.
“Part of the reason Americans are so pessimistic about their financial future is they are uncertain how they will be taxed from one year to the next,” Garrett said in a statement. “Congress must increase the AMT exemption levels to protect millions of middle-class taxpayers from a tax burden they were never intended to shoulder.”
Michael Decker, a managing director and co-head of the municipal securities division at the Securities Industry and Financial Markets Association, said the legislation is welcome news for the municipal bond market because it would provide certainty about how the AMT would be applied going forward.
“The bill focuses on lower- and middle-income taxpayers where there is some participation in the AMT market, but the more active investors are higher income,” he said. “It wouldn’t fix the problem entirely, but it’s a good start.”
AMT bond issuance as a percentage of total municipal bond issuance is small, generally less than 10%. But for issuers, it is an important issue, Decker said.
Under the most recent patch, which expired at the end of the year, married couples were exempt from the AMT if they made less than $74,450 and individuals were exempt if they made less than $48,450. But as of Jan.1, the AMT levels dropped to $45,000 for married couples and $33,750 for individuals.
If Congress does not act, an estimated 34.4 million taxpayers would be subject to higher rates in 2012, according to Garrett and Lowey. The patch that was in place for 2010 and 2011 cut the number of people paying the AMT to four million from a potential pool of 20 million.
“If the AMT doesn’t get re-patched or fixed permanently those PAB issuers will face a constrained market when they try to issue debt,” Decker said.
