Order Code IB10110
CRS Issue Brief for Congress
Received through the CRS Web
Major Tax Issues in the 108th Congress
Updated August 1, 2003
David L. Brumbaugh and Don C. Richards, Coordinators
Government and Finance Division
Congressional Research Service ˜ The Library of Congress
CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
The Economic Context
The State of the Economy
The Federal Budget
The Federal Tax Burden
Recent Tax Cut Legislation
The President’s Proposal
House Bill
Senate Bill
The Bill as Enacted: P.L. 108-27, the Jobs and Growth Tax Relief and Reconciliation
Act
The Policy Debate
Additional Issue: Refundable Child Tax Credit
Democratic Tax Cut Proposals
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
Charitable Contributions
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Major Tax Issues in the 108th Congress
SUMMARY
Much of tax policy debate in the first part
would provide economic stimulus, and the
of the 108th Congress has focused on tax cuts,
House passed tax-cut bills in both October and
with Congress approving major tax cut legis-
December. However, the measures’ oppo-
lation in May 2003, as the Jobs and Growth
nents objected to the cuts’ size and composi-
Tax Relief Reconciliation Act (JGTRRA; P.L.
tion, and the bills were not passed by the
108-27). And although consideration of tax
Senate. A tax cut was ultimately enacted in
cuts has occupied Congress for several years,
March 2002 (the Job Creation and Worker
the context of the policy debate has changed
Assistance Act; P.L. 107-147) but was smaller
markedly from the 107th Congress to the
than those initially passed by the House.
current setting. At the outset of 2001, sur-
pluses were projected for the federal budget.
In 2003, with Republicans again in the
Politically, both chambers of Congress had
Senate majority, the debate over a possible tax
Republican majorities. An important part of
cut resumed. President Bush’s FY2004 bud-
newly elected President Bush’s election cam-
get proposed a set of tax cuts amounting to an
paign was a proposed large tax cut. Support-
estimated $1.57 trillion over 2003-2013,
ers of the cuts argued that a part of projected
including a stimulus plan amounting to $726
budget surpluses should be returned to taxpay-
billion over ten years. A major portion of the
ers, which, they argued, would also help steer
proposal continued the policy themes of the
the slowing economy away from recession.
2001 tax cut: the President proposed to move
Tax cut opponents argued that long-run bud-
up the effective dates of (“accelerate”) several
getary considerations and the looming retire-
tax cuts that EGTRRA scheduled to be phased
ment of the baby-boom generation made a
in, including tax rate reductions, tax cuts for
large tax cut imprudent and maintained that
married couples, and an increased child tax
the proposal would favor high-income taxpay-
credit.
ers. In May 2001, Congress passed a sizeable
10-year tax cut as the $1.35 trillion Economic
On May 23, both the House and Senate
Growth and Tax Relief Reconciliation Act
approved JGTRRA, whose essential elements
(EGTRRA; P.L 107-16). The Act’s principal
incorporate in general terms much of the
provisions reduced individual income tax
economic stimulus proposal set forth in the
rates, phased out the estate tax, provided tax
President’s budget. The enacted bill contains
cuts for married couples, and increased the
an estimated $320 billion in tax cuts over 10
per-child tax credit. To comply with Senate
years and $30 billion in spending increases.
budget rules, however, the tax cuts were
The principal provisions include acceleration
scheduled to expire at the end of 2010.
of EGTRRA’s tax cuts, a reduction in tax
rates for capital gains and dividends, and
By the fall of 2001, the context of the tax
investment incentives for businesses. As 2003
debate had changed. Politically, Democrats
continues, congressional tax policy delibera-
had assumed control of the Senate. Economi-
tions appear focused on more narrow issues
cally, a recession was recognized as having
than broad tax cuts, including pension tax
begun, and the weakened economy — along
policy; international tax issues; energy taxa-
with EGTRRA’s tax cuts — diminished
tion; permanent repeal of the estate and gift
budget surplus projections. The new atmo-
tax; and expansion of JGTRRA’s child tax
sphere led some to call for new tax cuts that
credit provisions.
Congressional Research Service
˜ The Library of Congress
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MOST RECENT DEVELOPMENTS
The tax policy debate in the first part of 2003 focused on a range of tax cuts. In
February, the Administration included a set of tax cut proposals with its budget plan; the
entire package proposed to reduce taxes by an estimated $1.57 trillion from FY2003 through
FY2013. The President’s proposals include a stimulus package, some additional tax cuts,
and permanent extension of the 2001 tax cut. On May 9, the House approved H.R. 2, the
Jobs and Growth Tax Relief and Reconciliation Act (JGTRRA), containing an estimated
$550 billion in tax cuts over 10 years. On May 15 Senate approved its own tax cut plan as
a modified version of H.R. 2. On May 23, both chambers approved a conference agreement
containing $320 billion in tax cuts and $30 billion in spending increases. The President
signed the measure into law on May 28, P.L. 108-27. As 2003 continues, congressional tax
policy deliberations appear focused on more narrow issues than broad tax cuts, including
pension tax policy; international tax issues; energy taxation; permanent repeal of the estate
and gift tax; and expansion of JGTRRA’s child tax credit provisions.
For primers on subject specific tax legislation in the 108th Congress, see CRS Electronic
Briefing Book, Taxation, at [http://www.congress.gov/brbk/html/ebtxr1.shtml]. For details
on the legislative developments of current tax-related legislation, see CRS Report RS21386,
Fact Sheet on Congressional Tax Proposals in the 108th Congress, by Don C. Richards.
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
tracks business cycles) determined that a recession had begun in March of that year.
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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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. On July 17, 2003, the NBER announced that it had determined that
the recession ended in November 2001 and lasted eight months. (See NBER’s press release,
available on the NBER Web site at [http://nber.org/cycles/july2003.html].) The recession
was of about average severity and duration for economic recessions of the post-World War
II era.2
Following the recession, the economy registered positive growth in all four quarters of
2002, spurred by gains in consumer spending. At the same time, there were signs of
economic sluggishness. Business investment spending was weak and employment continued
to decline through 2002. Further, the pattern of growth was uneven, leading observers to
characterize the economy’s performance since the end of the recession as “choppy” and “sub-
par.” (See, for example, the testimony of Federal Reserve Chairman Greenspan in February
2003 before the Senate Committee on Banking, Housing, and Urban Affairs, available at
[http://www.federalreserve.gov/boarddocs/testimony/2002/20021113/default.htm],
the
Federal Reserve Web site.) Several factors were thought to be 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,” including the
war in Iraq. Mr. Greenspan further stated that evidence suggested the economy had hit what
he termed a “soft patch” as a likely result of these factors. For his part, President Bush, in
November 2002, stated that he was not satisfied with the economy’s performance and
characterized it as merely “bumping along.”3 And the NBER delayed pronouncement of the
2001 recession’s November 2001 end until July 2003.
At mid-year 2003, analysts appear more optimistic about the economy’s performance.
Real GDP increased to 2.4% in the second quarter of the year after growing at only 1.4% in
the first quarter of the year. Analysts generally expect further growth in the second half of
the year.
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
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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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
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
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
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,
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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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 some fluctuations in the distribution of the federal tax burden have occurred
over the last 20 years, the fluctuations have been concentrated at the opposing 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.
Recent Tax Cut Legislation
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. According to estimates by the Joint
Committee on Taxation, the revenue reduction from the “economic stimulus” elements of
the plan amounted to $726 billion over FY2003-FY2013.
The total cost of all the
components of the plan (including not only the stimulus proposals, but additional tax cut
provisions) was estimated at $1.575 trillion.
The principal tax proposals in the President’s budget were as follows:
! Acceleration of several tax cuts for individuals that were enacted by
EGTRRA in 2001 but that were scheduled to be phased in gradually. The
Administration proposed to make the reduction in tax rates fully effective
on January 1, 2003; the rate reductions were scheduled by EGTRRA to be
phased in over the period 2001-2006. The President’s plan proposed to
accelerate a broadening of the 10% rate bracket that was not scheduled to
occur until 2008. The plan also proposed to move up EGTRRA’s scheduled
tax cuts for married couples to 2003; the tax cuts were originally not
scheduled to be fully effective until 2009.
The President’s plan also
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proposed to increase the per-child tax credit to $1,000 from $600 in 2003.
The full increase was not scheduled to occur until 2010 under EGTRRA’s
initial provisions.
! The plan proposed to 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 Administration also proposed to 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 budget — aside from
making EGTRRA’s tax cuts permanent — were 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.
For additional information on the President’s tax proposal, see CRS Report RS21420,
President Bush’s 2003 Tax Cut Proposal: A Brief Overview, by David L. Brumbaugh; and
CRS Report RL31907, Tax Cut Bills in 2003: A Comparison, by David L. Brumbaugh and
Don C. Richards.
House Bill
On May 6, the House Committee on Ways and Means approved H.R. 2, the Jobs and
Growth Tax Act of 2003. The full House approved the bill on May 9. The Joint Committee
on Taxation estimated the bill would reduce revenues by $550 billion over the period
FY2003 through FY2013. The bill was similar in many respects to the economic stimulus
part of the President’s tax proposal, including the acceleration of several of the tax cuts
initially included in EGTRRA. Two principal differences between the President’s proposal
and H.R. 2 were the partial rather than full elimination of individual taxes on corporate
dividends and capital gains and the expiration of several of the bill’s tax cuts earlier in the
estimating window.
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For additional information on the House bill, see CRS Report RL31904, The Jobs and
Growth Tax Act of 2003 (H.R. 2): A Brief Overview of the House Tax-Cut Bill, by David L.
Brumbaugh, and CRS Report RL31907, Tax Cut Bills in 2003: A Comparison, by David L.
Brumbaugh and Don C. Richards.
Senate Bill
On May 15, the Senate incorporated S. 1054 into H.R. 2 and approved the package as
amended. Similar to the House version of H.R. 2 and the President’s proposal, the Senate’s
version included an acceleration of many of the 2001 tax cuts (including rates, marriage
penalties, child credits, and expansion of rate brackets) enacted in EGTRRA. One of the
major differences between the Senate’s version, the House bill, and the President’s proposal
was the taxation of dividends. The Senate legislation would have reduced the taxation of
dividends for foreign and domestic corporations by 50% in 2003 and provided a 100%
exclusion in 2004, 2005, and 2006. The Senate proposal also established a fund of $20
billion for federal aid to state and local governments.
In order to comply with the directions within the budget reconciliation (H.Con.Res. 95),
a series of revenue offsets were also included in the bill and held the total estimated impact
from FY2003 through FY2013 to $350 billion. The principal revenue-raising items included
a set of provisions aimed at restricting tax shelters generally, including a provision clarifying
the “economic substance” doctrine that courts have applied to tax shelters. (This doctrine
generally denies tax benefits with respect to transactions that do not change a taxpayer’s
economic position in a substantive way.) The bill’s largest single revenue-raising item was
a proposed repeal of the foreign earned income exclusion provided by Section 911 of the tax
code. Under current law, U.S. citizens residing abroad are permitted to exclude up to
$80,000 of income from foreign employment along with a certain amount of housing costs.
The Senate bill would have repealed the exclusion.
For additional information on the Senate bill, see CRS Report RL31907, Tax Cut Bills
in 2003: A Comparison, by David L. Brumbaugh and Don C. Richards.
The Bill as Enacted: P.L. 108-27, the Jobs and Growth
Tax Relief and Reconciliation Act
On May 23, the House and Senate agreed to the conference report for H.R. 2, the Jobs
and Growth Tax Relief and Reconciliation Act (JGTRRA; P.L. 108-27). The President
signed the bill into law on May 28. JGTRRA contained an estimated $350 billion in reduced
revenues and increased outlays from FY2003 through FY2013, including $320 billion in tax
cuts and $30 billion in outlay increases. In contrast to the Senate provision, which had the
same net cost, the conference package did not include any revenue raising measures acting
as offsets. The principal outlay provisions in the package established a $20 billion fund to
provide fiscal relief to state governments. The principal tax components of JGTRRA were:
! Acceleration to 2003 of the individual income tax cuts enacted and phased
in under EGTRRA. Specifically, income tax rates above 15%, currently
schedule to decline in 2004 and 2006, were accelerated to their 2006 levels
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in 2003. The application of the 10% tax bracket, scheduled by EGTRRA to
increase in 2008, was accelerated to 2003 and 2004.
! The child tax credit initially scheduled to be $600 for 2003 and 2004 was
increased to $1,000 for 2003 and 2004 but will revert to the levels scheduled
by EGTRRA for 2005 - 2010 ($700 in 2005 - 2008, $800 in 2009, and
$1,000 in 2010).
! For 2003 and 2004 only, the standard deduction and 15% tax bracket for
married taxpayers will become twice that of singles. Beginning in 2005,
these provisions will revert to EGTRRA’s schedule, which provides for a
phased-in increase to the levels of twice that of singles over several years.
! The alternative minimum tax exemption amount was increased by $9,000
for married couples and $4,500 for singles for 2003 and 2004.
! Maximum expensing benefit for small business investment was temporarily
increased from current law’s $25,000 to $100,00 for 2003, 2004, and 2005.
The provision’s phase-out threshold was increased from $200,000 to
$400,000 over the same time period.
! The temporary “bonus” depreciation allowance originally passed in March
of 2002 was increased and extended to allow for a 50% first year deduction
(up from 30%) for the period between May 5, 2003, and December 31,
2004.
! The conference agreement reduced the tax rate on both dividends and capital
gains to 15% for taxpayers in the higher tax brackets and 5% for those in the
lower tax brackets for 2003 through 2008. (The tax rate for those in the
lower tax brackets would be 0% in 2008.) The dividend provision applies
to both domestic and foreign corporations.
The Policy Debate. As the tax-cut measure worked its way through Congress, the
policy debate tended to focus on three broad issues: the bill’s likely revenue cost and impact
on the budget; whether a tax cut would stimulate the economy and/or promote long-run
growth; and how it would affect tax fairness. With respect to cost, opponents of the measure
— and those objecting to tax cuts larger than those ultimately adopted — generally voiced
concern about the impact of a tax cut on the federal budget. As noted above (see the section
on the federal budget), the budget has moved from surplus into deficit in recent years and
also faces long-term pressures posed by the looming retirement of baby-boomers and
succeeding generations; these pressures would be accentuated by any sizeable tax cut. In
response, the bill’s supporters generally emphasized the beneficial effect a tax cut might have
on tax receipts if it were successful in stimulating economic growth.
In the area of economic performance, the tax cut’s proponents argued that the particular
measures under consideration would benefit the economy in two ways: by providing a short-
run stimulus that would help overcome the economy’s recent sluggishness; and by increasing
long-run economic growth. Skeptics, however, have pointed out that particular tax-cut
measures most likely to increase long-run growth are not well-suited to providing short-term
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stimulus, and have questioned the beneficial impact of the measure that was adopted on the
economy. In the area of tax equity, the tax cut’s impact on the fairness of the tax system has
been criticized by some. Several analyses have indicated that the tax cut that was enacted
will likely benefit upper-income individuals more than others. In addition, the enacted tax
cut benefits some groups — for example, families with children and investors owning
corporate stock and assets producing capital gains — more than others
Additional Issue: Refundable Child Tax Credit. Shortly after the passage of
JGTRRA, the Senate approved H.R. 1308, Relief for Working Families Act, on June 5.
While the size of the child tax credit was increased under JGTRRA from $600 to $1,000, the
refundability of the credit, currently limited to 10% of earned income in excess of $10,500
was not altered. The Senate’s version of H.R. 1308 would increase the percent used to
calculate the limit from 10% to 15% in 2003, presently scheduled to increase in 2005. The
bill would also provide a uniform definition of a child for tax purposes and, in 2008,
increase the income threshold for couples at which the credit is phased down. As estimated
by the Joint Committee on Taxation, the $9.8 billion cost of the changes over 11 years would
be offset by revenue raising measures, specifically, the extension of customs user fees.
On June 12, the House approved its own version of H.R. 1308, which would reduce
revenues by an estimated $82 billion from FY2003 through FY2013. Similar to the Senate’s
measure, the House version would accelerate the refundability calculation to include 15%
rather than 10% in 2003. The income phase-out included in the Senate’s version would be
increased immediately in 2003. Further, the House bill would maintain the child tax credit
at $1,000, currently scheduled to decrease to $700 in 2005 before increasing gradually.
Finally, the bill incorporates tax relief for members of the armed services but unlike the
Senate version does not include any revenue offsets.
Democratic Tax Cut Proposals. On May 6, Senate Minority Leader Daschle
announced a tax cut proposal as an update to a plan he proposed in January. The anticipated
total cost of the plan is $125 billion in 2003 and $152 billion over 11 years. The proposal
included:
! an immediate $300 tax cut for each adult and up to two children per family,
! expanded standard deduction for married couples and earned income tax
credit,
! an increase in the child tax credit (an additional $100 in 2003, for a total of
$700 and another $100 in 2004, for a total of $800),
! an increase in the equipment depreciation allowance from 30% to 50% in
2003,
! an increase the amount of equipment that can be expensed for small
businesses from $25,000 to $75,000, and
! tax credits for health insurance premiums for small businesses and for
Internet infrastructure.
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In addition to these tax-related components, the plan would provide $40 billion in
assistance to state and local governments and extend unemployment benefits.
On May 7, House Democratic leaders outlined a tax cut proposal they stated would
reduce taxes by $58 billion in 2003 and 2004 and by $106 billion over 11 years.10 Some of
the components were similar to the provisions offered by Senator Daschle. Among the
plan’s principal elements were the following:
! an increase in the child tax credit to $800 per child (under current law the
child tax credit is $600 per child for 2001 through 2004);
! acceleration of the expansion of the 10% tax rate bracket and the marriage
penalty relief (expansion of the 15% rate bracket for married couples filing
jointly and an increase in the basic standard deduction amount for joint
returns);
! 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. 107-147). 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 House Democratic
proposal would increase the depreciation bonus to 50% for the next 12
months before returning to 30% for the balance of 2004;
! an increase in the expensing benefit to $75,000, from the current law’s
$25,000, for equipment investment made by small businesses through 2004.
Further, the proposal included $177 billion in revenue offsets during FY2003 through
FY2013 in order to pay for the proposed tax reductions previously outlined. Offsets
specifically include closing tax shelters and freezing the top-bracket rates, which are
currently scheduled to decline under current law.
Non-tax elements of the proposal included an extension of unemployment benefits for
26 weeks and a $44 billion package of assistance to state and local governments, $18 billion
of which is directed to address areas including Medicaid.
10 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/dem_jobs_plan_may03.pdf].
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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 remaining on the
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 were 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 FY2001-FY2011.
However, a Senate procedural rule, the “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
considered. To avoid application of the Byrd rule, EGTRRA contained language providing
for the expiration of its provisions at the end of calendar year 2010. The passage of
JGTRRA will not modify the expiration of those provisions scheduled to expire under
EGTRRA. Further, new provisions in JGTRRA such as the reduction in taxes on dividends
and capitals gains and increased depreciation deduction also include scheduled expiration
dates during the next ten years.
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. In the 108th Congress, the House on June 18 approved H.R. 8, which would make
EGTRRA’s estate tax repeal permanent.
Tax Cuts for Economic Stimulus
The possibility of tax cuts to stimulate the economy has occupied the attention of
policymakers in Congress and elsewhere for several years. In 2001, a sluggish economy was
one reason for enactment of the sizeable tax cut contained in EGTRRA. Economic data now
show that a recession was underway at the time: the economy contracted during the first three
quarters of 2001. Since then, the economy in general has returned to positive economic
growth, but remains sluggish; business spending and employment have remained weak. As
described in the preceding section, economic stimulus was one reason for enactment of P.L.
108-27.
Will the tax cut improve economic performance, as intended? Economic analysis
generally approaches such questions by distinguishing between a tax cut’s possible effects
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on long-term growth and its efficacy as a short-term economic stimulus. In the long run,
according to economic theory, tax cuts can conceivably growth by increasing basic economic
elements that contribute to long-run growth: specifically, labor supply and saving (the supply
of capital). In principle, a cut in the tax rates applicable to labor income and/or saving might
encourage individuals to save more or supply more labor. Economic analysis, however, also
suggests several reasons to be skeptical. To begin, economic theory is uncertain as to
whether a tax cut actually increases private saving or labor supply because of two offsetting
effects. In the case of saving, for example, a tax cut might induce individuals to increase
their saving because the after-tax return it produces is higher; on the other hand, if a saver’s
goal is accumulate a particular sum, a tax cut will enable him to do so at a lower level of
saving. Theory predicts similar conflicting effects on labor supply. Economic theory, in
short, is agnostic on whether tax cuts increase or reduce saving and labor supply. Given the
ambiguity of theory, a firm conclusion necessarily relies on empirical evidence. Most
evidence does not suggest a large savings response from a tax cut.
But whether a tax cut increases private saving or labor supply may be moot because of
a revenue reduction’s budgetary effects. A tax cut that is not matched by reductions in
government spending increases the government’s budget deficit above what would otherwise
occur, and thus boosts the government’s borrowing requirements. As a consequence, real
interest rates faced by private investors may increase, “crowd out” private investment and
more than offset any increase in investment resulting from an increase in private saving.
Another way of looking at this effect is to recognize that total, national saving consists of
private saving minus government borrowing. A tax cut will thus probably reduce national
saving and may therefore reduce long-run growth.
Shifting to short-run considerations, would a tax cut similar to those considered
stimulate the economy out of its sluggish performance? In recent decades, economists have
grown more doubtful of the efficacy of tax cuts as a short-run stimulative tool, especially
compared to monetary policy, its counter-cyclical alternative. There are several reasons for
this skepticism. First, the modern world economy has become more open, and — via
mechanisms such as capital flows and exchange rate adjustments — much of the stimulative
force of tax cuts is thought by economists to be dissipated in the larger world economy.
Beyond this consideration, monetary policy is thought to have an advantage over fiscal policy
because changes in monetary policy can be implemented with more alacrity than those of
fiscal policy; monetary authorities can recognize the need for stimulus and implement
money-supply changes more quickly than tax-cut or spending legislation can work its way
through Congress. Given that the tax cut at hand has been passed, the implications of this
point for the current bill is not clear. However, it might raise the question of whether
additional economic stimulus is, at this time, necessary, given the recent tax cuts and interest-
rate reductions by the Federal Reserve. For example, Federal Reserve Board chairman Alan
Greenspan, in April 2003 congressional testimony, suggested that a stimulus fiscal-policy
package was not needed.
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.
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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 the 107th Congress, 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 action on the measure before it adjourned, in part due to opposition
from policymakers who favor attempting to negotiate with the EU. In 2003, Representative
Crane introduced H.R. 1769, which would phase out ETI while phasing in a tax deduction
for firms’ domestic production. On July 25, Representative Thomas introduced H.R. 2896,
a modified version of the proposal he had introduced in the 107th Congress.
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.
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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. Against this background, JGTRRA contained an increase and extension for
“bonus” depreciation, making certain property eligible for a 50% immediate deduction. 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. Among the investment
incentives adopted in 2003 tax-cut legislation was an increase in the “expensing” allowance
for small business investment. 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
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
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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. Both the House and Senate have returned to
the issue of energy taxation 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, the House has approved H.R. 1000, the
Pension Security Act of 2003, 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.
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.
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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.
Charitable Contributions.
As a component of President Bush’s faith based
initiative, the House passed H.R. 7 in the 107th Congress. This legislation would have
expanded benefits for charitable giving and charities. In the 108th Congress, similar
legislation has already been revisited. Key tax-related issues are likely to include providing
charitable deductions for nonitemizers, allowing tax-free distributions from individual
retirement accounts for charitable purposes, and extending the deduction for food inventory
to all businesses. For further information, see the CRS Electronic Briefing Book, Taxation,
“Charitable Contributions” by Jane G. Gravelle, available online only from the CRS Web site
at [http://www.congress.gov/brbk/html/ebtxr80.html].
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