Key Points

• The alternative maximum tax would reduce federal revenue by $1.4 trillion over FY 2026–2035, capping eligible filers’ income tax liability at 25.5 percent of adjusted gross income above a filing-status-specific exemption amount.

• The millionaire surtax would raise $1.6 trillion over the same period, with marginal rates of 5, 10, and 12 percent at income thresholds starting at $1 million for single filers, not including economic feedback effects.

• Benefits concentrate in the second through fourth income quintiles, with average tax cuts of $465 to $1,545. The surtax falls almost entirely on households above the 99th percentile, with the top 0.1 percent facing an average tax increase of $1,187,175.

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Background

The Working Americans’ Tax Cut Act (WATCA), introduced by Senator Chris Van Hollen (D-MD), combines two provisions with opposing revenue effects. The first establishes an alternative maximum tax that reduces income tax liability for low- and middle-income filers. The second imposes a graduated surtax on high-income filers. Together, the provisions would redistribute the federal income tax burden downward while raising net revenue.

The alternative maximum tax targets filers with adjusted gross income (AGI) below specific eligibility thresholds that vary by filing status. The millionaire surtax targets filers with AGI above $1 million. The gap between these thresholds means the two provisions affect largely separate segments of the income distribution.

Alternative Maximum Tax

Under the alternative maximum tax, eligible filers compute their income tax under both the standard rate schedule and an alternative calculation, then pay whichever amount is lower. The alternative calculation sets tax liability equal to 25.5 percent of AGI above a cost-of-living exemption amount. When AGI falls at or below the exemption amount, the alternative tax is zero, meaning eligible filers with income below the exemption owe no income tax.

Eligibility is binary: only filers with AGI below 175 percent of their filing-status-specific exemption amount qualify. Filers above the threshold receive no benefit. Table 1 shows the exemption amounts and eligibility thresholds by filing status for 2026. All amounts are indexed for inflation beginning after 2026.

The provision produces a distinctive marginal rate profile. Below the exemption amount, eligible filers owe no income tax under the alternative calculation. Above the exemption amount, the flat 25.5 percent alternative rate exceeds the 10 and 12 percent statutory rates that apply in that portion of the income distribution, pushing effective marginal rates above current law. The binary eligibility threshold at 175 percent of the exemption amount creates a cliff: a filer earning just below the threshold benefits from the alternative maximum tax, while a filer earning just above it reverts entirely to the regular tax schedule.

Millionaire Surtax

WATCA would also impose a graduated surtax on high-income filers. The surtax applies three marginal rates at successively higher thresholds, with higher thresholds for married couples filing jointly. Table 2 presents the rate schedule.

The surtax base is adjusted gross income, meaning taxpayers cannot use itemized deductions or the qualified business income deduction to reduce the surtax. All thresholds take effect in 2026 and are not indexed for inflation, so the surtax will apply to a growing share of filers over time as nominal incomes rise.

Revenue Effects

Table 3 presents the estimated revenue effects of both provisions over the 10-year budget window (FY 2026–2035). The alternative maximum tax reduces federal revenue by an estimated $1,366.5 billion, reflecting the tax savings it provides to eligible low- and middle-income filers. Revenue losses grow from $12.8 billion in the first year to $167.6 billion by 2035 as the provision’s parameters are indexed for inflation while the underlying tax code’s bracket thresholds also adjust.

The millionaire surtax raises an estimated $1,630.4 billion over the same period after accounting for behavioral responses: high-income taxpayers reduce or defer long-term capital gains realizations in response to higher marginal rates. Surtax revenue grows from $70.4 billion in 2026 to $224.6 billion in 2035, reflecting both real income growth and the fact that the surtax thresholds are not indexed for inflation.

On net, the combined package increases federal revenue by $263.9 billion over the budget window. The surtax generates more than enough revenue to offset the cost of the alternative maximum tax in every year of the window.

Distributional Effects

Table 4 presents the combined distributional effects of both provisions in 2026. The alternative maximum tax delivers the largest benefits to households in the second through fourth income quintiles. The fourth quintile receives the largest average tax cut in dollar terms ($1,545), with the middle quintile close behind ($1,505). The second quintile sees an average reduction of $465. The first quintile receives no benefit because these households already have little or no taxable income under current law.

Above the fourth quintile, the alternative maximum tax provides no measurable benefit because the eligibility threshold excludes most filers at these income levels.

The millionaire surtax raises taxes at the top of the income distribution. Households in the 99th–99.9th percentile face an average tax increase of $18,260, reducing their group income by 1.1 percent. The top 0.1 percent — households with income above $4,326,435 — face an average increase of $1,187,175, reducing their group income by 9.2 percent. Households below the 95th percentile are essentially unaffected by the surtax.

This analysis was produced by Brendan Novak under the direction of Alex Arnon.