Order Code IB10110
Issue Brief for Congress
Received through the CRS Web
Major Tax Issues in the 108th Congress
Updated April 4, 2003
David L. Brumbaugh and Don C. Richards, Coordinators
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
The Economic Context
The State of the Economy
The Federal Budget
The Federal Tax Burden
Selected Issues
Expiration of the 2001 Tax Act
Tax Cuts for Economic Stimulus
International Taxation
Other Possible Tax Issues
Fundamental Tax Reform
Business Taxation
Small Business Taxation
Family Tax Issues
Estate Tax
Individual Alternative Minimum Tax (AMT)
Expiring Tax Provisions
Energy Taxation
Pension Tax Policy
Tax Policy and Health Insurance
Internet Taxation
Internal Revenue Service (IRS) Oversight
The President’s Proposal
House Democratic Proposal
The Daschle Proposal

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Major Tax Issues in the 108th Congress
SUMMARY
Tax policy received considerable
policymakers to call for new tax cuts that
attention throughout the 107th Congress, but
would provide economic stimulus, and the
the context of the policy debate changed
House passed tax-cut bills in both October and
substantially over 2001-2002. At the outset of
December. However, the measures’ opponents
2001, the federal budget situation was
objected to the cuts’ size and composition,
favorable, with surpluses projected to occur.
and the bills were not passed by the Senate.
Politically, both chambers of Congress had
The stimulus measure that was ultimately
Republican majorities. And newly elected
enacted in March 2002 (the Job Creation and
President George W. Bush had made a
Worker Assistance Act; P.L. 107-147, H.R.
proposed large tax cut an important part of his
3090), was smaller than those initially passed
election campaign. Tax-cut supporters argued
by the House. Its principal elements were
that a part of projected budget surpluses
temporary expensing and depreciation benefits
should be returned to taxpayers as a tax cut
for business, more favorable treatment of
and would also help steer the slowing
business losses, tax incentives to develop
economy away from recession. Tax cut
areas damaged by terrorism, and extension of
opponents argued that long-run budgetary
a set of temporary tax benefits.
considerations and the looming retirement of
the baby-boom generation made a large tax
The March stimulus bill was the last
cut imprudent and maintained that the
broad tax measure approved by the 107th
particular type of tax cut that was actively
Congress, but the tax policy debate continued
considered would favor high-income
throughout the year on a number of fronts,
taxpayers.
providing a glimpse of the tax issues Congress
may address in 2003: the possibility of a new
In May 2001, Congress passed a sizeable
stimulus package; elimination of the 2001 tax
10-year tax cut as the $1.35 trillion Economic
cut’s sunset provisions; business and
Growth and Tax Relief Reconciliation Act
investment benefits; international tax reform,
(EGTRRA; P.L. 107-16, H.R. 1836). The
pension reform, and measures aimed at
Act’s principal provisions reduced individual
suppressing tax shelters. More long term
income tax rates, phased out the estate tax,
issues may include addressing the looming
provided tax cuts for married couples, and
increase in the number of persons subject to
increased the per-child tax credit. To comply
the minimum tax; long-term budget pressures;
with Senate budget rules, the tax cuts were
and the possibility of fundamental tax reform.
scheduled to expire at the end of 2010.
In January, President Bush proposed a set
By the fall of 2001, the context of the tax
of tax cuts for economic stimulus and later
debate had changed markedly. Politically,
released budget proposals containing $1.57
Democrats had assumed control of the Senate.
trillion in tax cuts over fiscal years 2003-2013,
Economically, a recession was recognized as
including the stimulus plan, some additional
having begun, and the weakened economy –
cuts, and permanent extension of the 2001 tax
along with EGTRRA’s tax cuts – diminished
cut. House Democratic leaders proposed a
budget surplus projections. The attacks of
smaller stimulus package, estimated at $100
September 11 added to uncertainty about the
billion over 10 years. Senator Daschle
economy. The new atmosphere led some
proposed a one-year, $141 billion plan.
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
Congress closed out 2002 amidst debate over whether to approve tax cuts for economic
stimulus and whether the 2001 tax cut should be allowed to expire after 10 years, as provided
in the original 2001 legislation. These same issues appear to be prominent on the
congressional tax agenda in first part of the 108th Congress. On February 3, the
Administration released a detailed set of tax cut proposals with its budget documents.
According to Joint Committee on Taxation (JCT) estimates, the proposals would reduce
taxes by $1.57 trillion from FY2003 through FY2013. The proposals include a stimulus
package, some additional tax cuts, and permanent extension of the 2001 tax cut. On March
21, the House passed a budget resolution (H.Con.Res. 95) that incorporates revenue
reductions, amounting to $726 billion over ten years, that are consistent with the President’s
economic stimulus proposal. However, on March 26, the Senate approved a budget
resolution (S.Con.Res. 23) containing a smaller tax cut, amounting to $350 billion.
The House also passed two relatively narrow tax bills in March: H.R. 1307, Armed
Forces Tax Fairness Act, which would provide tax cuts to military personnel; and H.R. 1308,
the Tax Relief, Simplification, and Equity Act, which would provide stricter tax rules for
citizens who expatriate along with selected tax cuts for small businesses and farmers. On
March 27, the Senate considered H.R. 1307 and substituted its own version of the Armed
Forces Tax Fairness Act, S. 351.
BACKGROUND AND ANALYSIS
The Economic Context
Tax policy is frequently considered by policymakers as a tool for boosting economic
performance in various ways, and the likely economic effects of tax policy are often hotly
debated. A brief overview of the current economic context is thus a good starting point for
looking at tax issues facing the current Congress. The overview of major tax issues begins
by describing three aspects of the economic context in which the tax policy debate during the
108th Congress is likely to occur: the general state of the U.S. economy; the position of the
federal budget; and the level of taxes in the United States.

The State of the Economy
At the outset of 2001, the U.S. economy had recorded nine consecutive years of
continuous expansion. Thus, consideration of tax policy as a counter-cyclical device to
stimulate the economy out of recession had not occurred in recent years. However, in late
2000 the economy began to show signs of weakness, and fiscal stimulus was one of the
arguments the Bush Administration advanced in support of the large tax cut that was enacted
in June 2001.1 As 2001 progressed, there were increasing signs of economic weakness, and
in November, the National Bureau of Economic Research (NBER; the organization that
1 Mark Felsthenthal, “Bush Cites Economic Concerns As Justification for Tax Cut Plans,” BNA
Daily Tax Report, Dec. 18, 2000, p. G-4.
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tracks business cycles) determined that a recession had begun in March of that year.
Economic data now show that the economy contracted during the first three quarters of 2001
before registering positive growth again in the fourth quarter of that year and in all four
quarters of 2002. (See NBER’s January 13 press release, available on the NBER Web site
at [http://nber.org/cycles/recessions.html]. However, employment continues to decline and
the NBER has not yet announced an ending date for the recession. If the recession that began
in 2001 has indeed ended, it will have been of about average severity and duration for
economic recessions of the post-World War II era.2
The economy registered positive growth in all four quarters of 2002. In November
congressional testimony Federal Reserve Chairman Alan Greenspan termed the U.S.
economy “remarkably resilient” and characterized U.S. economic growth over the first part
of the year as “well maintained” and “respectable.” Nonetheless, he observed several forces
placing a drag on the economy: a long adjustment in capital spending; the “fallout” from
revelations of corporate malfeasance; declines in the stock market; and increased
“geopolitical risks.” Mr. Greenspan further stated that evidence suggested the economy had
hit what he termed a “soft patch” as a likely result of these factors. In February 2003
testimony before the Senate Committee on Banking, Housing, and Urban Affairs, Chairman
Greenspan observed that economic growth slowed markedly in the last quarter of 2002 and
termed the pattern “choppy.” (Testimony available on the Federal Reserve Web site at
[http://www.federalreserve.gov/boarddocs/testimony/2002/20021113/default.htm].) For his
part, President Bush in November 2002, stated that he is not satisfied with the economy’s
performance, and has characterized it as merely “bumping along.”3
For further reading, see CRS Report RL31237, The Current Economic Recession: How
Long, How Deep, and How Different from the Past, by Marc Labonte and Gail Makinen.
The Federal Budget
After decades of continuous deficits, the federal budget moved into a state of surplus
in fiscal years 1998 through 2001 – a development that was the result of both deliberate
deficit-reducing policies and a long period of economic growth that helped boost tax receipts.
At the outset of the 107th Congress in January 2001, the budget outlook was bright despite
mounting evidence of an economic slowdown. The Congressional Budget Office (CBO)
predicted large and growing budget surpluses for the next 10 years.4
As the 107th Congress progressed, however, the budget picture changed markedly.
Indeed, the budget situation worsened with almost each successive budget report. In August,
2001, CBO reduced its surplus projections as a result of the tax cut enacted in June of that
2 CRS Report RL31237, The Current Economic Recession: How Long, How Deep, and How
Different from the Past, by Marc Labonte and Gail Makinen, p. 29.
3 Nancy Ognanovich and Brett Ferguson, “Bush Reiterates Interest in Stimulus To Address Sluggish
U.S. Economy,” BNA Daily Tax Report, Nov. 14, 2002, p. G-9.
4 U.S. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2002-2011
(Washington: GPO, 2001), p. 51.
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year and as a result of economic weakness.5 In January 2002, CBO reduced its projected 10-
year surpluses further and predicted that the federal budget would move into deficit in
FY2002 and FY2003 before returning to surplus.6 And in August, CBO again revised its
projections downwards, predicting deficits in FY2002 - FY2005 and reducing estimates of
surpluses in the out years.7 The changed projections were the result of enacted legislation,
changed economic conditions, and changes in the make-up of aggregate income. In its
January 2003 report, CBO revised its budget projections slightly downwards again.
The longer-term budget situation is a concern to many policymakers, chiefly because
of demographic pressures posed by an aging population that will begin with the retirement
of the “baby boom” generation and that will continue afterwards. Because of the expected
growing ratio of retirees to wage earners, the gap between Social Security and Medicare
revenues and outlays will increase substantially in future years under current tax and
entitlement laws. The Congressional Budget Office has estimated that beginning in 2010,
outlays under the Social Security and Medicare programs will exceed the programs’ tax
revenues and Medicare premiums. (This estimate excludes trust fund revenues consisting
of transfers from other Treasury Department accounts.) By 2040, outlays under the programs
are projected to reach 12.1% of gross domestic product (GDP) while revenues are expected
to be about 7%.8
The war in Iraq adds uncertainty to the budgetary outlook: how much will it cost and
how much will it add to the budget deficit. The war will certainly have an impact on outlays
by increasing defense expenditures, although the cost appears uncertain. The Administration
has asked Congress for $74.7 billion to finance the war. In addition, the war could affect the
budget indirectly by affecting economic performance.
For additional information, see CRS Report RL31784, The Budget for Fiscal Year 2004,
by Philip D. Winters, CRS Report RL31778, The Size and Scope of Government: Past,
Present, and Projected Government Revenues and Expenditures, by Don C. Richards, and
CRS Report RL31176: Financing Issues and Economic Effects of Past American Wars, by
Mark Labonte.
The Federal Tax Burden9
At the outset of the preceding (107th) Congress, some pointed to the historically high
aggregate level of federal taxes compared to the economy as evidence of the desirability of
5 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update (Washington:
GPO, Aug. 2001), p. ix.
6 U.S. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2003-2012
(Washington: GPO, 2002), p. xiv.
7 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update (Washington:
GPO, Aug. 2002), p. x.
8 U.S. Congressional Budget Office, The Impact of Social Security and Medicare on the Federal
Budget, (Washington: November 14, 2002). Posted on the Congressional Budget Office’s Web site
at [http://www.cbo.gov/showdoc.cfm?index=3982&sequence=0].
9 Authored by Gregg A. Esenwein, Specialist in Public Finance, Government and Finance Division.
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a tax cut. As a percentage of GDP, federal taxes were at their highest level since the end of
World War II in FY2000, at 20.8%, before falling to 19.8% in FY2001 and 18.0% in
FY2002. These levels are not a dramatic departure from the past; since the mid-1950s,
federal taxes as a percentage of GDP have remained within a range of between 17% and just
below 20% of GDP. According to CBO, the increased level of tax revenues prior to FY2002
was due to economic growth, an increase in capital gains realizations (for example, from
sales of appreciated stock) and increases in real incomes. The decline in FY2002 revenues
was due to slower economic growth, declines in capital gains realizations, and slower
growth of very high incomes.
Although there have been some fluctuations in the distribution of the federal tax burden
over the last 20 years, the fluctuations have been concentrated at the ends of the income
spectrum. During the 1980s, the federal tax burden increased for lower-income families and
decreased for upper-income families. This trend was reversed in the 1990s with tax
reductions at the lower end of the income spectrum and tax increases at the upper end of the
income spectrum. Families in the middle-income brackets, however, experienced very little
change in their federal tax burdens over this period, despite legislated tax cuts.
While the overall level of federal taxes has been relatively stable, its composition has
shifted. In particular, the share of federal receipts made up by corporate income taxes and
excise taxes has declined, falling from 30% and 18%, respectively, of total receipts in
FY1946 to 10.4% and 3.4% in FY2002. The share comprised of Social Security taxes has
increased over the same years from 7.9% to 36.4%, and is now the second largest source of
federal revenues after individual income taxes.
For further information, see CRS Report RS20087, The Level of Taxes in the United
States, 1940-2002, by David L. Brumbaugh and Don C. Richards.
Selected Issues
Although predicting a likely tax agenda is full of uncertainty, the following issues have
been mentioned by policymakers and analysts as likely legislative topics in 2003 tax agenda.
Expiration of the 2001 Tax Act
The Economic Growth and Tax Relief and Reconciliation Act of 2001 (EGTRRA)
provided a substantial tax cut that is scheduled to be phased in over the 10 years following
its enactment. The Act’s most prominent provisions are a reduction in individual income tax
rates, tax cuts for married couples, phase-out of the estate tax, a larger per-child tax credit,
education tax benefits, and tax cuts for Individual Retirement Accounts and pensions. The
estimated size of the scheduled tax cut is $1.35 trillion over fiscal years 2001 - 2011.
However, a Senate procedural rule – the so-called “Byrd rule”– provides that a point of
order can be raised against any provision of budget reconciliation bill that is “extraneous”
to the budget reconciliation legislation. Included among the several types of provisions the
Byrd rule defines as extraneous are those that would increase the budget deficit (or reduce
the budget surplus) for a fiscal year beyond that covered by the reconciliation measure being
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considered. To avoid application of the Byrd rule, EGTRRA contains language providing
for the expiration of its provisions at the end of calendar year 2010.
During 2002, the House passed a number of bills that would have made some or all of
EGTRRA’s tax cuts permanent. H.R. 586, approved by the House in April, would have
repealed all of EGTRRA’s sunset provisions. H.R. 2143, H.R. 4019, and H.R. 4931 were
passed in June and would have (respectively) made EGTRRA’s estate tax repeal, marriage
penalty benefits, and retirement and pension tax cuts permanent. The Senate did not adopt
the bills.
Tax Cuts for Economic Stimulus
Consideration of a tax cut designed to stimulate the economy has occupied the attention
of policymakers in Congress and elsewhere for more than a year. Following the terrorist
attacks of September 11 – and amid signs of continued economic weakness – the House
passed a tax cut bill (H.R. 3090) in October 2001, whose stated goal was economic stimulus.
The bill would have reduced revenue by an estimated $99.5 trillion in FY2002 and consisted
of a mix of business tax cuts and tax reductions for individuals. The Senate, however, did
not approve the tax cut, and the House in December passed a scaled-back version of the
proposal as H.R. 3529. The Senate again did not approve the House-passed tax cut, and in
early March 2002, both chambers adopted a stimulus tax-cut (the Job Creation and Worker
Assistance Act; P.L. 107-147) as a substantially pared-down version of H.R. 3090. The bill
was estimated to reduce tax revenue by $51 billion in FY2002 and by $94 billion over its
first 5 years. Its principal elements are an “expensing” benefit for business investment that
expires after 3 years; more favorable treatment of business losses (as measured by the tax
code; so called “net operating losses”); a package of tax incentives designed to stimulate
development in areas subject to terrorist attacks; extension of a set of temporary tax benefits;
and a 13-week extension of unemployment benefits.
A tax cut for economic stimulus appears likely to be high on the congressional tax
agenda in 2003. As described more fully below, President Bush proposed a stimulus package
in January 2003, while some Democratic members of Congress have proposed smaller,
temporary cuts. Some policymakers, however, remain skeptical of the need for a stimulative
tax cut. Federal Reserve Board chairman Alan Greenspan, in February 2003 congressional
testimony, suggested that a stimulus fiscal-policy package is not needed (BNA Daily Tax
Report, Feb. 12, 2003, p. G-8). In addition, many economists question the efficacy of
stimulative tax cuts in general, believing that time lags and adjustments in the international
economy dilute much of their impact. Opponents of tax cuts also emphasize the risk such
cuts pose to the federal budget, which (as described above) already faces severe long-term
pressures.10
Proponents of the need for additional stimulus have generally focused on the economy’s
sluggish employment performance. The Administration’s “fact sheet” on the President’s
January 2003 stimulus proposal states that “this economy is not creating enough jobs”
[http://www.whitehouse.gov/infocus/economy/index.html]. Proponents of a stimulus
10 Patti Mohr, “Policy Wonks Form Basis for Tax Cut vs. Deficit Debate,” Tax Notes, Dec. 23, 2002,
p. 1505.
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package have also minimized the deleterious impact of larger budget deficits on the arguing,
for example, that integrated world capital market reduces the impact of the budget deficit on
interest rates.11
For further reading see CRS Report RS21126, Tax Cuts and Economic Stimulus: How
Effective Are the Alternatives?, by Jane G. Gravelle and CRS Report RL30839, Tax Cuts,
the Business Cycle, and Economic Growth: A Macroeconomic Analysis, by Marc Labonte
and Gail Makinen.
International Taxation
The U.S. economy is increasingly open, in terms of both trade and investment flows;
the openness has helped make international tax issues among the most prominent tax
questions Congress has faced in recent years. Specific international tax issues are numerous
and include whether to reform the U.S. system by moving to a “territorial” system that
exempts foreign-source income from U.S. tax; whether to adopt more incremental tax cuts
for U.S. firms in order to help them compete internationally; how to resolve the export tax
benefit controversy with the European Union (EU) over the U.S. extraterritorial income
(ETI) tax benefit for exports; whether to adopt measures designed to curb corporate
“expatriations” or “inversions” where firms reincorporate abroad to save taxes; whether and
to what extent to cooperate with foreign governments in reducing international tax evasion
and avoidance; and how the Internal Revenue Service should proceed in reducing U.S. tax
evaders that use offshore tax havens.
At least one of these issues – the ETI controversy – is time sensitive. The EU has been
authorized by the World Trade Organization (WTO) to impose retaliatory tariffs on U.S.
products. Thus, ETI will likely be considered during the 108th Congress and may be the
occasion for a broader policy debate on international taxation in general. The origins of the
ETI controversy stretch back more than 30 years to enactment in 1971 of the Domestic
International Sales Corporation (DISC) export tax benefit. European countries complained
that DISC was an export subsidy, and as such, it violated the General Agreement on Tariffs
and Trade (GATT, the WTO’s predecessor). In 1984, the United States attempted to remedy
the situation by replacing DISC with a new export tax benefit, the Foreign Sales Corporation
(FSC) provisions. However, in 1997, the European Union began proceedings against FSC
under the new WTO agreements. Several WTO panel rulings concluded that FSC – like
DISC before it – was a prohibited export subsidy. In 2000, the United States again attempted
to revamp its export tax benefit with a WTO-compatible provision – in this case, ETI.
However, WTO panels again supported the EU position, and in 2002, the WTO ruled that
the EU can impose up to $4 billion in retaliatory tariffs against U.S. products. EU officials
have stated that the tariffs will not be imposed as long as the United States is seen to be
making progress on making its export tax provisions WTO-compatible.
In July 2002, Chairman Thomas of the House Ways and Means Committee introduced
H.R. 5095, a broad international tax bill that addressed the ETI controversy by proposing
repeal of the export benefit. The bill also proposed to promote U.S. competitiveness by
cutting taxes on U.S. multinational firms in a variety of other ways. Congress did not take
11 Mohr, “Policy Wonks Form Basis for Tax Cut vs. Deficit Debate,” p. 1505.
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action on the measure before it adjourned – in part due to opposition from policymakers who
favor attempting to negotiate with the EU.
For further information, see CRS Report RS20746, Export Tax Benefits and the WTO:
Foreign Sales Corporations and the Extraterritorial Replacement Provisions, by David L.
Brumbaugh and CRS Report RL31717, U.S. Taxation of Overseas Investment and Income:
Background and Issues in 2003, by David L. Brumbaugh.
Other Possible Tax Issues
Other particular tax issues that might become prominent in the 108th Congress include
the following items.
Fundamental Tax Reform. Congress actively considered fundamental tax reform
– for example, shifting from an income to a consumption tax – in the mid-1990s, but such
legislation never progressed beyond the committee level. Administration officials have
recently indicated they are considering fundamental tax reform as a proposal for long-run tax
policy, although it would be proposed apart from any stimulus package. In past Congresses,
a number of Members introduced legislation that would adopt fundamental tax reform,
suggesting congressional interest in the topic. For further information, see CRS Issue Brief
IB95060, Flat Tax Proposals and Fundamental Tax Reform: An Overview, by James
Bickley.
Business Taxation. The stimulus tax cut that Congress approved in March 2002
contained several tax cuts for business. However, these were temporary and scaled-back
from the business tax cuts passed by the House (but not the Senate) in earlier versions of the
stimulus package. In addition, participants in President Bush’s August 2002 economic
summit proposed eliminating the double-taxation of corporate dividends as a desirable
reform for business taxation, a type of reform known among tax professionals as tax
integration. It therefore is likely that Congress will address business taxation in the 108th
Congress. The issue may be debated as part of an economic stimulus package. For further
information, see CRS Report RL31597, The Taxation of Dividend Income: An Overview and
Economic Analysis of the Issues, by Gregg Esenwein and Jane Gravelle and CRS Report
RL31782, The Effect of the President’s Dividend Relief Proposal on Corporate Tax
Subsidies, by Gregg Esenwein and Jane Gravelle.
Small Business Taxation. Taxation of small business is a continuing concern to
Congress, and it is not likely that the 108th Congress will be an exception. Possible topics
for consideration may be tax simplification, reform of the Subchapter S rules for taxing
closely-held businesses, and enactment of investment incentives. For further information,
see CRS Report RL31052, Small Business Tax Relief: Selected Economic Policy Issues for
the 107th Congress, by Gary Guenther.
Family Tax Issues. Several family tax issues may be debated in the 108th Congress.
For example, the earned income tax credit for low-income families has been suggested as a
focus of simplification efforts and the individual alternative minimum tax’s impact on
families has been a focus of concern. In addition, several prominent family-oriented tax
provisions were part of the EGTRRA’s tax cut, including benefits for married couples and
the child tax credit. Thus, it appears likely that family tax issues will be an important part
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of the debate over making EGTRRA’s tax cuts permanent. For further information, see CRS
Report RS20988, The Child Tax Credit After the Economic Growth and Tax Relief
Reconciliation Act of 2001, by Gregg Esenwein.
Estate Tax. One of the largest and most debated aspects of EGTRRA was its phase-
out and repeal of the estate tax. Given the liveliness of the estate tax debate, and in view of
its place as a fundamental part of the tax structure (albeit a small one), the estate tax may
become a prominent part of the tax policy debate, apart from its place in the debate over
making EGTRRA permanent. For further information, see CRS Report RL30600, Estate
and Gift Taxes: Economic Issues, by Jane Gravelle.
Individual Alternative Minimum Tax (AMT). Under current law, an individual
pays either the regular tax or AMT, whichever is larger. (The two will ordinarily differ
because the AMT has lower rates but fewer and smaller tax benefits than the regular tax.)
The individual alternative minimum tax presents a looming tax issue because key provisions
of the AMT are not indexed for inflation, and an increasing number of individuals will find
themselves subject to the AMT. In addition, tax benefits enacted by EGTRRA and other acts
have placed an increased number of persons at or near AMT status. The March 2002
stimulus package included a provision allowing personal credits to offset a person’s AMT,
but that provision is scheduled to expire at the end of 2003, adding to the time-sensitive
nature of the AMT issue and increasing the possibility that Congress will address it as an
issue in the coming year.
Expiring Tax Provisions. The 2002 stimulus package extended a number of
temporary tax provisions but extended many of the most prominent and popular of these
“extenders” only through 2003. Some examples are the AMT treatment of personal tax
credits (see the above issue), the work incentive tax credit, the welfare to work credit, and
suspension of a limit on percentage depletion for oil wells. Given the time-sensitive nature
of these provisions, Congress may address them in 2003, although it has allowed them to
expire for brief periods in the past before retroactively extending the provisions.
Energy Taxation. In 2002, both the House and Senate passed legislation (H.R. 4)
containing tax benefits related to energy, primarily tax benefits for particular categories of
energy producers and consumers. Although a conference committee convened, the 107th
Congress adjourned without acting on the bill. S. 597, cosponsored by leaders (from both
parties) of committees having jurisdiction over energy tax policy, may offer the vehicle for
the Senate to return to this topic in the 108th Congress. For further information, see CRS
Issue Brief IB10054, Energy Tax Policy, by Salvatore Lazzari.
Pension Tax Policy. Both the House and Senate passed pension bills in 2002, but
legislation was not enacted. In the 108th Congress, H.R. 1000, the Pension Security Act of
2003 was introduced, which – in the wake of the Enron controversy – proposes to mandate
employee diversification rights in 401(k) plans. Additional pension issues that could be
considered include a revision of tax rules to protect employee pensions from abuse and
relaxation of rules relating to taxation of IRA withdrawals after retirement. For further
information, see CRS Report RS20629, Pension Reform: The Economic Growth and Tax
Relief Reconciliation Act of 2001, by Patrick Purcell.
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Tax Policy and Health Insurance. The 107th Congress evinced interest in enacting
additional tax benefits related to health insurance. For example, the House passed a patients’
protection bill (H.R. 2563) that included provisions making tax-favored Medical Savings
Accounts a permanent rather than temporary part of the tax code, a tax credit for small
employers, and expansion of tax benefits for the self-employed. The 108th Congress may
take up health tax policy again. For further information, see CRS Issue Brief IB98037, Tax
Benefits for Health Insurance: Current Legislation, by Bob Lyke and Christopher Sroka.
Internet Taxation. The growth of the Internet has placed pressure on the states’ sales
and use tax systems, raising questions such as: How should use of the Internet be taxed? and
How should commerce conducted via the Internet be taxed? The federal government has a
role in regulating Internet taxation by virtue of the Constitution’s Commerce Clause, and in
2001 a moratorium was enacted prohibiting new taxes on Internet access and multiple or
discriminatory taxes on Internet commerce. The moratorium, however, expires on November
1, 2003, suggesting that Congress may take up the issue of Internet taxation again in 2003.
For further information, see CRS Report RL31177, Extending the Internet Tax Moratorium
and Related Issues, by Nonna Noto.
Internal Revenue Service (IRS) Oversight. Oversight of the IRS may be an issue
Congress addresses in 2003. The IRS Restructuring and Reform Act of 1998 mandated
significant changes in the way the IRS operates along with a change in its “culture”;
Congress may examine the extent to which the IRS has accomplished the Act’s goals. In
addition, the apparent growth of tax shelters has been of increasing concern to some
policymakers; an issue before Congress may be the effectiveness of IRS efforts to restrain
abusive tax shelters.
Major Tax Cut Proposals
The President’s Proposal
On January 7, 2003, President Bush announced the details of a new tax cut proposal
intended to provide a stimulus to the economy ([http://www.treas.gov/press/taxes.html]).
According to estimates prepared by the JCT, the stimulus portion of the plan would reduce
revenues by an estimated $726 billion from FY2003-FY2013 and $114 billion in the first full
fiscal year (FY2004). On February 3, the Administration released FY2004 budget documents
containing a more detailed explanation of the stimulus package, a set of additional tax cut
proposals characterized as “tax incentives,” and a proposal to make the expiring provisions
of the 2001 tax cut permanent [http://www.whitehouse.gov/omb/budget/fy2004/index.html].
According to JCT estimates, the total revenue reduction from the combined elements of the
plan would be $1.575 trillion for FY2003-FY2013 and $118 billion for FY2004, its first full
year. Based on CBO baseline budget projections of revenues, this amounts to a reduction
in revenues of about 5.3% over that period. However, the revenue losses estimated for last
few years in the “estimating window” under the Administration’s current proposal are
substantially larger than for the first few years – a reflection of the impact of making
EGTRRA permanent instead of allowing it to expire after 2010. The tax cut over the last
five years of the “estimating window” (i.e., over FY2009-FY2013) would be an estimated
$1.046 trillion, or 6.5% of anticipated revenue.
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The principal tax proposals in the President’s budget are:
! acceleration of several tax cuts for individuals that were enacted by
EGTRRA in 2001 but that were scheduled to be phased in gradually.
Specifically, the proposals would make the reduction in statutory tax rates
for individuals fully effective on January 1, 2003; the rate reductions were
initially scheduled to be phased in over the period 2001-2006. The proposal
would also accelerate a broadening of the 10% rate bracket that is currently
not scheduled to occur until 2008. Another part of the proposal would move
up EGTRRA’s scheduled tax cuts for married couples to 2003; under
current law, the tax cuts are not scheduled to be fully effective until 2009.
The President’s proposal would also increase the per-child tax credit to
$1,000 from $600 in 2003. The full increase is not scheduled to occur until
2010 under EGTRRA’s initial provisions.
! The proposal would move towards “integration” of the taxation of
corporate-source income by eliminating individual income taxes on
dividends and by permitting a “step up in basis” for capital gains resulting
from retained earnings.
! The proposal would increase the so-called “expensing” allowance for
business investment in equipment to $75,000 from current law’s $25,000
and would index the amount for inflation.
Each of these proposals were included in the stimulus package the President outlined in
January. Prominent among the additional tax cuts proposed with the February budget – aside
from making EGTRRA’s tax cut’s permanent – are the following items:

! two new tax-favored savings vehicles that would replace Individual
Retirement Accounts (IRAs) and that would have less binding restrictions
than current law’s IRAs;

! a set of new tax incentives for charitable giving, including a deduction for
non-itemizers;

! a number of tax benefits related to health care, including a long-term care
insurance deduction for non-itemizers;

! a set of tax benefits related to energy production and conservation; and

! permanent extension of current law’s temporary research
and
experimentation tax credit.
According to JCT estimates, the acceleration of EGTRRA’s tax cuts would reduce
revenue by $263.9 billion over FY2003-FY2013, accounting for 17% of the total estimated
tax cut over that period. The estimated revenue loss from the tax exclusion for dividends is
$395.8 billion, or 25% of the total tax cut. The estimated revenue loss from rescinding
EGTRRA’s expiration is $624.2 billion, or 40% of the total.
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On February 27, legislation was introduced in Congress containing the economic
stimulus parts of the President’s tax plan, but not the tax incentives or rescission of the
EGTRRA’s sunset provisions. The bills are H.R. 2 (Representative Thomas) and S. 2
(Senator Nickles).
House Democratic Proposal
On January 6, House Democratic leaders outlined a tax cut proposal they stated would
reduce taxes by $87 billion in 2003 and by $59 billion over 10 years.12 The plan’s principal
elements are:
! a refundable tax rebate in 2003 of $300 per person ($600 for couples) for
individuals with earned income;
! an increase in the depreciation “bonus” provided by the tax stimulus
package enacted in March 2002 with the Job Creation and Worker
Assistance Act of 2002 (P.L. 107-16). Under the 2002 Act, firms can claim
a first-year depreciation deduction equal to 30% of the cost of new
equipment investments made in 2002-2004. The Democratic proposal
would increase the depreciation bonus to 50% for 2003 but would reduce the
bonus to 10% in 2004.
! For equipment investment made in 2003, the proposal would increase the
expensing benefit to $50,000 from current law’s $25,000.
Non-tax elements of the proposal included a retroactive extension of unemployment
benefits for 26 weeks and a $31 billion package of assistance to state and local governments.
The total amount of spending increases and tax reductions would be an estimated $136
billion in 2003 and $100 billion over 2003 - 2013.
The Daschle Proposal
On January 24, Senate Minority Leader Thomas Daschle outlined a one-year economic
stimulus proposal containing tax-cut and spending elements that would total an estimated
$141 billion over the year it is in effect.13 For the year the plan is in effect, the tax cut
elements of the plan are as follows:
! a $300 tax credit for each adult taxpayer and an additional $300 for up to
two children;
! an increase in the depreciation bonus to 50%;
12 The proposal is described on the Democrat’s side of the House Budget Committee’s Web site:
[http://www.house.gov/budget_democrats/analyses/econ_stimulus/house_dem_stimulus_plan.pdf].
The estimated revenue loss over 10 years is smaller than the projected loss in 2003, and is likely the
result of the plan’s depreciation component, which shifts deductions to 2003 from future years.
13 The proposal is described on Senator Daschle’s Web site, available at
[http://daschle.senate.gov/pdf/democraticplan.pdf].
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! an increase in the expensing allowance for business investment to $75,000
from current law’s $25,000;
! a tax credit for health insurance outlays of small businesses; and
! a 20% credit for business investment in broadband internet infrastructure.
The non-tax elements of the plan would include an extension of unemployment benefits
and aid to state and local governments.
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