AMT Reform

The Washington Post reports that the new Democratic majority in Congress wants to focus on the Alternative Minimum Tax. The AMT is paid disproportionately by residents of Democratic states because those states tend to have high state and local taxes and the state and local tax deduction is disallowed under the AMT.

This raises the question: Is the state and local tax deduction justifiable in the first place? I think not. Suppose the residents of town A vote for high local taxes to finance, say, a municipal pool. The residents of neighboring town B keep taxes low, allowing people who so choose to join a private pool club. Because of the federal tax deduction, town A gets a federal subsidy at the expense of town B. This outcome is neither equitable (it is violates the principle of horizontal equity) nor efficient (it encourages excessive provision of goods and services by states and localities over the private sector).

So if we want to get rid of the AMT, let's combine it with eliminating the state and local tax deduction. That would be, I believe, approximately revenue neutral. I understand that this proposal would not fulfill the political goal of rewarding blue-state voters, so I am not holding my breath expecting it to happen. But I am enough of an optimistic to believe that if a change promotes both equity and efficiency, there is at least a chance it might become policy.