Recessions and the Social Safety Net: The Alternative Minimum Tax as a Countercyclical Fiscal Stabilizer
Galle, Brian, Klick, Jonathan, Stanford Law Review
INTRODUCTION I. MICRO-FOUNDATIONS OF THE AMT's STABILIZATION EFFECT II. WEAKNESS OF STATE STABILIZATION TOOLS A. Tax Rate Increases B. Borrowing 1. Exit pressures on local borrowing 2. Political economy of local debt 3. Legal limits on local debt C. Rainy Day Funds III. FEDERAL INTERVENTIONS A. Federalize Social Insurance B. Subsidies and Tax Exporting IV. THE ALTERNATIVE MINIMUM TAX AS AN AUTOMATIC STABILIZER A. Tax Mechanics of the AMT 1. General features of the AMT 2. State and local taxes 3. Other provisions B. AMT Liability Is Increasing in Income at the Jurisdictional Level V. EMPIRICAL EVIDENCE OF STABILIZATION EFFECT A. State Spending B. Local Spending C. Revenue Effects VI. TWEAKING STATE AND FEDERAL TAX TO IMPROVE STABILITY A. Problems Translating Federal Subsidies to State Revenues 1. Voter ignorance of AMT liability 2. Taxpayers anticipate later tax increases 3. Timing of the residual benefits of the AMT B. Some Policy Possibilities 1. Tax the middle class ... and the very rich 2. Exploit the natural salience of filing season 3. Accelerate rebates 4. Guarantee deductibility 5. Target state education efforts CONCLUSION
Economic downturns make for tough fiscal times for state and local governments. State fiscal belt-tightening has the potential to drive up unemployment and drive down consumer demand, further slowing the economy. (1) Throughout the recent recession, a steady stream of headlines warned that state budget cuts threatened to delay economic recovery. (2) The crisis underscores that any sensible strategy for managing the ups and downs of the business cycle should include some provision for ensuring that state revenues will ease the pain of recessions and slowdowns, rather than compounding it. (3)
In this Article, we argue that states are poorly situated to make such plans for themselves, and that many conventional forms of federal subsidy would risk worsening the problems that states face. However, the path to a well-designed subsidy already has been laid in a surprising place: the federal alternative minimum tax (AMT). (4) We investigate empirically the impact of the AMT, and suggest some modest alterations that would make it a more effective stabilizer for unsteady state economies.
The Article makes three key contributions to the literature, as well as some smaller ones. First, we show for the first time empirically that the AMT affects state spending and that this effect is countercyclical. Second, we add to a minute legal literature exploring stabilization policy at the state level and consider the impact state policy has on the cycles of national economic health. (5) And, third, we attempt to remedy the neglect, in the legal literature and elsewhere, of how to design a federal policy that would mitigate the negative business cycle effects of state budgeting. (6)
Turning to the substance of our argument, the standard goal of macroeconomic policy in general is to be "countercyclical," stabilizing the economy by moderating both booms and busts. (7) Extremes in either direction can lead to unwanted effects, whether they be job loss or excessive inflation. (8) During downturns, this means that government may have a role to play in stimulating the economy, such as through increased spending, tax cuts, or expansionary monetary policy. (9) Traditional microeconomic theory also offers similar prescriptions, counseling that transfers of wealth from richer periods (booms) to poorer periods (busts) increase overall social welfare. (10)
States are in a difficult bind when it comes to stabilization policy, however. Their revenues are tied to the business cycle, so that budgets get tighter just when the need for countercyclical spending increases. …