Order Code RS21992
Updated November 8, 2005
CRS Report for Congress
Received through the CRS Web
Extending the 2001, 2003, and 2004 Tax Cuts
Gregg Esenwein
Specialist in Public Finance
Government and Finance Division
Summary
The Economic Growth and Tax Relief Reconciliation Act of 2001 reduced
marginal income tax rates, provided marriage tax penalty relief, provided temporary
relief from the alternative minimum tax (AMT), and increased the child tax credit. All
of the act’s provisions are scheduled to sunset (revert to prior law levels) at the end of
2010. The Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerated the
implementation of certain tax reductions originally enacted in the 2001 act. The 2003
act also reduced the tax rate on dividend and long-term capital gains income. The
dividend and capital gains tax relief is scheduled to expire after 2008. The Working
Family Tax Relief Act of 2004, extended many of the tax provisions scheduled to expire
at the end of 2004 (it did not, however, extended the capital gains/dividend tax
reductions). The 2004 tax reductions, however, are still scheduled to sunset after 2010
as per the original 2001 legislation required.
Since all of the tax reductions expire at some point in the future, Congress faces the
issue of whether to extend and/or make the reductions permanent. The AMT relief
expires at the end of 2006 and the capital gains/dividend tax cuts expire in 2008. Some
have suggested extending the AMT tax provisions and the capital gains/dividend tax
reductions under the tax reduction provisions contained in the 2006 budget resolution.
The conference agreement on the 2006 budget resolution, H.Con.Res. 95, was
approved by both chambers on April 28, 2005, and contained $106 billion in tax relief
over the next five years, $70 billion of which would be protected through the
reconciliation process. On November 8, 2005, Senator Charles Grassley unveiled a tax
cut reconciliation plan that would, among other things, extend AMT tax relief through
2006 and the dividend/capital gains tax reductions through 2009.
This report will be updated to reflect legislative activity.
Congressional Research Service ˜ The Library of Congress

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The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L.
107-16) reduced marginal income tax rates, created a new 10% income tax bracket,
provided marriage tax penalty relief, increased the child tax credit, and increased the
alternative minimum tax (AMT) exemption. These changes were scheduled to phase in
over a period of several years.
All of the changes in EGTRRA (including the tax rate changes) will expire (sunset)
after 2010. Congress included the sunset in EGTRRA to avoid a Byrd rule (Section 313
of the 1974 Congressional Budget Act, as amended) violation in the Senate. The Byrd
rule prohibits “extraneous matter” in reconciliation legislation.1 Under the rule,
extraneous matter includes, among other things, language that would cause an increase
in the budget deficit (or reduce budget surpluses) in a fiscal year beyond those covered
by the reconciliation legislation. As a result of the Byrd rule, EGTRRA contained
language providing for the expiration of all of its provisions at the end of calendar year
2010, since the years after 2010 were outside the reconciliation budget window.
In 2003, in an effort to stimulate the economy, Congress passed the Jobs and Growth
Tax Relief Reconciliation Act (JGTRRA; P.L.108-27). JGTRRA accelerated the
implementation of certain tax reductions originally enacted as part of EGTRRA. These
included marriage tax penalty relief, expansion of the 10% tax bracket, an increase in the
child tax credit to $1,000, and an increase in the AMT exemption. These changes were
temporary and were scheduled to be in effect for two years, 2003 and 2004.
In addition, JGTRRA lowered the maximum tax rate on qualified dividend income
and long-term capital gain income (gains on assets held longer than 12 months) to 5%
(0% for 2008) for taxpayers in the 10% and 15% marginal income tax brackets. The
maximum dividend and capital gains tax rate was reduced to 15% for taxpayers in
marginal income tax brackets exceeding 15%. These changes were effective for assets
sold or exchanged on or after May 6, 2003, and before January 1, 2009.
In September 2004, Congress passed the Working Families Tax Relief Act of 2004
(WFTRA; P.L. 108-311). WFTRA extended several tax provisions that were scheduled
to expire at the end of 2004. These expiring tax reductions were enacted under JGTRRA,
which had accelerated implementation of tax reductions originally enacted in 2001 under
EGTRRA.
WFTRA extended the $1,000 child tax credit through 2009 (for 2010, the EGTRRA
provisions apply and the child tax credit will remain at $1,000). In addition, WFTRA
accelerated, to 2004, the increase in the refundability of the child tax credit. For 2004
through 2010, the child tax credit will be refundable to 15% of a taxpayer’s earned
income in excess of the applicable threshold. The 2004 Act also contained a provision
including combat pay in earned income for purposes of computing child tax credit
refundability.2
1 CRS Report RL30862, Budget Reconciliation Process: The Senate’s “Byrd Rule,” by Robert
Keith.
2 See CRS Report RS21860, The Child Tax Credit, by Gregg Esenwein.

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WFTRA also extended marriage penalty relief (standard deduction and 15% tax
bracket for joint returns set at twice the level as those for single returns) through 2008.
(In 2009 and 2010, EGTRRA provisions apply which will maintain the level of the
standard deduction and 15% tax bracket for joint returns). The 2004 act also extended the
increase in the 10% income tax bracket through 2010.
WFTRA included a one-year extension in the increase in the basic exemption for the
alternative minimum tax (AMT) originally enacted under JGTRRA. (EGTRRA also
included a temporary increase in the AMT exemption which was then superseded by the
JGTRRA increases.) The AMT exemption for 2005 will be $58,000 for joint returns and
$40,250 for unmarried taxpayers. In 2006, the AMT exemption would revert to its prior
law levels of $45,000 for joint returns and $33,750 for unmarried taxpayers.
These temporary increases in the basic exemption for the AMT have been enacted
as a means of mitigating the interaction between the reductions in the regular income tax
and the AMT. Extending or otherwise modifying the AMT is probably the most pressing
individual income tax issue facing the 109th Congress. It is estimated that, if the
reductions in the individual income tax are extended beyond 2010, then the number of
taxpayers subject to the AMT will increase from about 1.8 million in 2001 to over 18
million in 2006, and then to over 41 million in 2013.3
Absent congressional action, the AMT will “take back” most of the tax relief granted
through the income tax.4 Hence, Congress faces not only the issue of whether or not to
extend and/or make permanent the reductions in the regular income tax, but more
urgently, it must face the issue of how to repair the individual AMT.5
Counterbalancing congressional desire to provide continued tax relief is concern over
the current and projected size of the federal budget deficit. The revenue effects of
extending and/or making permanent the 2001 and 2003 tax reductions are substantial.
Moreover, once the costs of fixing the AMT are included, the revenue costs associated
with maintaining the current level of tax relief increase considerably.
For instance, the following table presents some order of magnitude estimates of the
cost of extending the EGTRRA/JGTRRA tax reductions and reforming the AMT. It
should be noted that if these policy options are deficit financed (that is, there are no
offsetting tax increases or spending reductions), then there will be additional revenue
losses associated with servicing the increase in the public debt that these policy options
engender. The table presents estimates of both the direct and indirect costs of these tax
policy options.
As shown in the table, as a rough estimate, the total cost (both direct and indirect)
of extending the EGTRRA/JGTRRA tax cuts and reforming the AMT will be more than
3 For more information see CRS Report RL30149, The Alternative Minimum Tax for Individuals,
by Gregg Esenwein.
4 For more information on the “take back” effect see CRS Report RS21817, The Alternative
Minimum Tax (AMT): Income Entry Points and “Take Back” Effects, by Gregg Esenwein.
5 See CRS Report RS22100, The Alternative Minimum Tax for Individuals: Legislative Initiatives
and Their Revenue Effects, by Gregg Esenwein.

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$2 trillion over the FY2006 through 2015 period. As an alternative measure, an order of
magnitude estimate indicates that the out year per annum cost (including debt servicing)
of these tax policy options will be slightly larger than 2% of gross domestic product
(GDP). The cost will increase as a percentage of GDP as time progresses.

Table 1. Order of Magnitude Estimates of the Revenue
Costs Associated with Extension of EGTRRA/JGTRRA
and Reform of the AMT
FY2006 through FY2015
(Billions of dollars)
Extend EGTRRA/JGTRRA:
$1,318
Reform the AMT:
$642
(Extension of increased AMT exemption
and indexation of AMT exemption and
tax brackets.)
Debt Service:
$326
Total:
$2,286
Source: Congressional Budget Office. The Budget and Economic Outlook: An Update. Table 1.6. August
2005. Calculations by CRS.
Dividend and Capital Gains Tax Reductions
JGTRRA reduced the tax rates on qualified dividends and long-term capital gains.
These reductions, however, are scheduled to expire at the end of 2008. At that point, tax
rates on dividends and capital gains will revert to their prior law levels.
Since these provisions expire before the bulk of the 2001/2003 tax cuts, there has
been some discussion in Congress about extending the provisions for dividends and
capital gains during this session of the 109th Congress. It has been suggested that these
tax reductions could be extended under the tax relief provisions of the 2006 budget
resolution.
The conference agreement on the 2006 budget resolution, H.Con.Res. 95, was
approved by both chambers on April 28, 2005, and contained $106 billion in tax relief
over the next five years, $70 billion of which would be protected through the
reconciliation process.
The Congressional Budget Office (CBO) estimates that extending the dividend and
capital gains tax reductions would reduce federal revenues by approximately $160 billion
over the FY2008 through FY2015 period.6
6 Congressional Budget Office, Budget Options, Feb. 2005, p. 267.

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Legislative Initiatives in the 109th Congress
Several bills have been introduced in the 109th Congress that would make either all
of the 2001/2003 tax cut provisions or selected provisions permanent. In the Senate, the
following bills have been introduced:
! S. 6. Introduced January 24, 2005, by Senator Rick Santorum. This bill
would make the marriage penalty and child tax provisions permanent.
! S. 7. Introduced January 24, 2005, by Senator Jon Kyl. This bill would
make the reductions in regular tax rates and capital gains/dividends tax
rates permanent. It would also make the repeal of the estate tax
permanent.
! S. 78. Introduced January 24, 2005, by Senator Kay Bailey Hutchison.
This bill would make the marriage tax provisions permanent.
! S. 246. Introduced on February 1, 2005, by Senator Jim Bunning. This
bill would make the changes to the adoption tax credit permanent.
! S. 420. Introduced February 17, 2005, by Senator Jon Kyl. This bill
would make the repeal of the estate tax permanent.
! S. 1112. Introduced May 24, 2005, by Senator Chuck Grassley. This bill
would make the educational savings provisions permanent.
! S. 1524. Introduced July 28, 2005, by Senator Mike Crapo. This bill
would make the reduced tax rates on dividends and capital gains
permanent.
In the House, the following bills making all or part of the 2001/2003 tax cuts
permanent have been introduced:
! H.R. 8. Introduced on February 17, 2005 by Representative Kenny
Hulshof. This bill would make the repeal of the estate tax permanent.
! H.R. 183. Introduced on January 4, 2005 by Representative Joseph Pitts.
This bill would make the repeal of the estate tax permanent.
! H.R. 268. Introduced January 6, 2005, by Representative Dave Camp.
This bill would make the changes to the adoption tax credit permanent.
! H.R. 305. Introduced January 25, 2005, by Representative Joe Wilson.
This bill would make the changes to the adoption tax credit permanent.
! H.R. 347. Introduced January 25, 2005, by Representative Todd Russell
Platts. This bill would make the changes to the adoption tax credit
permanent
! H.R. 351. Introduced January 25, 2005, by Representative Todd Russell
Platts. This bill would make the changes to the dependent care tax credit
permanent and would make it refundable.
! H.R. 809. Introduced March 7, 2005, by Representative David Dreier.
This bill would make the reduced tax rates on dividend and capital gains
income permanent.
! H.R. 1388. Introduced March 17, 2005, by Representative Wally Herger.
This bill would make the increase in expensing of certain depreciable
assets permanent.
! H.R. 1500. Introduced April 6, 2005, by Representative David Dreier.
This bill would make the reduction in the capital gain tax rate permanent.
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! H.R. 2320. Introduced May 12, 2005, by Representative Jerry Weller.
This bill would permanently extended the bonus depreciation enacted in
2003.
In addition, on November 8, 2005, Senator Charles Grassley unveiled a tax cut
reconciliation plan that would, among other things, extend the AMT tax relief through
2006 and the dividend/capital gains tax reductions through 2009.

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