GOP Rep. Introduces AMT Repeal, Which Could Help PABs

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WASHINGTON — Rep. Tim Huelskamp, R-Kan., has introduced legislation that would repeal the individual alternative minimum tax, potentially lowering the borrowing cost and improving the marketability of private-activity bonds.

The bill, which was introduced on Jan. 23 as the “American Freedom and Opportunity Act,” would be effective for taxable years beginning after December 31, 2010. It also would make permanent the Bush tax cuts.

Repealing the AMT would put PABs on the same footing as government bonds under the federal tax code, said Jerry Spector, a member of the Mintz Levin law firm and former chair of the American Bar Association’s tax-exempt committee.

“It’s definitely very favorable for the market because investors wouldn’t have to worry about the AMT impact,” Spector said. The market would recognize the increased value of PABs since they wouldn’t be subject to the AMT, and as a result investors would be willing to pay a lower interest rate, he said.

George Friedlander, a managing director of municipal strategy at Citi, said PABs subject to the AMT currently have yields 40 to 50 basis points higher than other bonds. If repealed, that differential would disappear, he said.

The AMT is a federal income tax that’s calculated separately from the regular federal tax and aims to prevent the wealthy from taking so many tax deductions and exclusions that they pay little or no tax.

PABs used to finance airport, water and sewer, housing and other projects are subject to the AMT and their interest is included in calculations of AMT income.

The interest from PABs can push taxpayers into the AMT. As a result, it increases borrowing costs for PAB issuers because investors tend to demand a higher bond yield to compensate for the risk.

“There are three major reasons to repeal the AMT,” Huelskamp said. “First is the need to provide some certainty. Every year the House has to patch it; this year-to-year indecision makes it impossible for people to plan. Second is the very obvious economic impact it has on many families — particularly middle class and those who run small businesses. Many taxpayers are unnecessarily and excessively burdened by the AMT. Third, when Congress passed the AMT they never indexed it for inflation, so now it is an automatic tax increase on the middle class unless Congress stops it.”

Taxpayers could see at least $4.5 trillion in higher taxes by 2020 if the legislation is not enacted, according to Huelskamp. Although he prefers an overhaul of the tax code, until that happens the legislation would end the uncertainty for businesses and families.

The AMT is not indexed to inflation, so 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 investors each year. Congress routinely “patches” it by increasing the exemption levels so it applies to fewer middle-income investors. The most recent AMT patch expired at the end of 2011.

If the AMT were not indexed, the number of taxpayers subject to it would jump from 4 million in 2011 to 30 million in 2012, according to the Congressional Budget Office.

Experts said there would be no impact on the muni market if the Bush-era tax cuts were extended because the value of tax exemption would remain the same. However, if they expire as scheduled at the end of 2012, it would increase the value of tax-exemption to individual taxpayers who would be in a higher tax bracket.

It has been referred to three committees, including Ways and Means.

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