The panel's chairman, former senator Connie Mack of Florida, cited the AMT's "extremely negative effect" on middle-income taxpayers as the nine-member panel reached its first conclusion. "The issue is still open as to how we're going to pay for it," he said.

The panel is scheduled to issue its report in September. Its recommendations are meant to guide Bush when he proposes changes to the tax code, as he has promised. If Bush urges repeal, said panel member Bill Frenzel, a Republican former congressman from Minnesota, Congress will likely go along.

The panel did not determine how to recoup the $1.2 trillion that AMT repeal would cost in lost tax revenue over the next decade. Mack said options include raising other tax rates or eliminating various tax exemptions and deductions.

The AMT was created in 1969 after a report showed that 155 people with incomes above $200,000 -- about $1.2 million in today's dollars -- had paid no income tax in 1966. It expands the amount of income that can be taxed and excludes many tax breaks, such as those for dependent children. Over the years, it has grown into a parallel tax system with its own rates, credits and exemptions.

Bush noted in February that a growing number of Americans "have to calculate their tax burden twice, once under the regular tax rules, and once for the alternative minimum tax. And then when you're done figuring out both totals, you get to pay the higher amount."

Because it is not adjusted for inflation, the AMT threatens to affect more taxpayers each year. Action by Congress has temporarily protected millions of middle-income taxpayers since 2001. But unless Congress acts again, the number of affected taxpayers will skyrocket from an estimated 3.8 million in the current tax year to 20.5 million when taxpayers fill out their 2006 tax forms.

"The AMT has been one of the few things that ... doesn't work," said Charles Rossotti, a panel member and former IRS commissioner.

Former senator John Breaux of Louisiana, a Democrat and the panel's vice chairman, said the panel must ensure that wealthy taxpayers won't be able to evade taxation.

Congress has until early 2007, when Americans file their 2006 income taxes, to deal with the issue. Sen. Chuck Grassley, R-Iowa, chairman of the Senate Finance Committee, and other key lawmakers have called for abolishing the AMT.

The problem for the tax panel: replacing the lost revenue. "I don't think we were hired to raise rates," Frenzel said.

-- Richard Wolf