The Corporate Alternative Minimum Tax as a State Revenue Source

T HE Federal Tax Reform Act of 1986 tivity bonds) no carryforward credit is replaced the add-on minimum tax apgenerated. plied to corporations with a new alterSome of the major AMT adjustments native minimum tax. Corporations must include depreciation deductions for propnow compute their tax liabilities under the erty subject to MACRS, which must be reordinary tax method at a 34 percent rate calculated using an alternative depreciaand under the alternative method at a 20 tion system; mining exploration and percent rate. development costs, which must be amorA number of states have followed the tized over 10 years rather than deducted Federal lead in this area and have currently and income from long-term conamended existing state minimum taxes tracts, which must be recalculated using or enacted minimum taxes which conform the percentage of completion method. to or are modelled on the Federal AMT. Perhaps the most controversial adjustCurrently, seven states (Alaska, Califorment requires the addition of 50 percent nia, Florida, Iowa, Minnesota, New York of the excess of book income over tentaand North Dakota) have AMTs keyed in tive AMT income. some manner to the Federal model. Two Major preferences include percentage other states, Maine and Pennsylvania, depletion in excess of cost basis, the exapply a special tax on certain preferences. cess of intangible drilling costs over tenIn broad outline, the Federal AMT is year straight-line recovery, tax-exempt calculated by making specific adjustinterest on certain private activity taxments to regular Federal taxable income exempt bonds, the net unrealized gain on and adding preference items to arrive at appreciated property contributed to chara tentative AMT income. Added to this is ity, and the excess of ACRS deductions 50 percent of the difference between tenover straight-line depreciation for proptative AMT income and book income. erty placed in service before 1987. Subtracted from this are AMT NOLs and Because many of the states have linked a $40,000 exemption amount which phases in some manner to the Federal model, the out at $310,000 of AMT income. Foreign policy debate at the state level is in many tax credits and a percentage of investrespects a replay of the debate over Fedment tax credits are also permitted, but eral AMT. An important question to be credits may not reduce AMT liability by answered by the states is whether the more than 90 percent. The amount of tenAMT should be used as a means to gentative minimum tax liability in excess of erate a significant increase in revenues. regular tax liability is AMT liability for The states that have adopted an AMT have the year, which is added to regular tax licome down on both sides of the issue. Deability to determine tax due. An AMT pending on design, state AMTs may be carryforward credit is permitted which described as either more or less revenue may offset regular tax liability in future driven. The Federal government anticiyears. For some, the credit mechanism pates approximately $5.4 billion in addimay make the AMT a vehicle for the actional corporate tax revenue from the AMr celeration of tax, rather than an addiin 1988. The states also anticipate additional tax liability. However, to the extional revenue, although they are genertent that AMT liability is attributed to ally less certain about the outcome in dolcertain exclusion items (such as depletion lars. and tax exempt interest from private acThe sources of this additional revenue are varied. At a minimum there will be *Coopers & Lybrand New York, NY 10020 an acceleration of revenue from corpora-