Order Code RS22322
Updated November 16, 2005
CRS Report for Congress
Received through the CRS Web
Taxes and Fiscal Year 2006 Budget
Reconciliation: A Brief Summary
David L. Brumbaugh
Specialist in Public Finance
Government and Finance Division
Summary
On April 28, 2005, Congress approved an FY2006 budget resolution (H.Con.Res.
95) with reconciliation instructions calling for three bills: a bill containing spending cuts
($1.5 billion in FY2006 and $34.7 billion over five years); a bill increasing the public
debt limit by $781 billion (to $8,965 billion); and a bill containing tax cuts. The
reconciliation instructions for taxes called for tax cuts of $11 billion in FY2006 and $70
billion over five years. As 2005 enters its closing months, Congress is beginning
consideration of the tax-reduction reconciliation bill. On November 15, both the House
Ways and Means Committee and the Senate Finance Committee approved separate tax-
cut proposals. An important part of both bills is the extension of numerous temporary
tax-reducing provisions that are scheduled to expire at various times over the next
several years. While most of these “extenders” are the same in each package, there are
some differences, including extension of the increased alternative minimum tax (AMT)
exemption, which is contained in the Finance proposal, but not the Ways and Means
bill; and reduced rates for capital gains and dividends, which are in the Ways and Means
measure, but not the Finance Committee plan. Aside from the extenders, the Finance
Committee proposal contains a number of additional items not contained in the Ways
and Means Committee plan, including tax incentives for development in areas affected
by recent hurricanes; tax measures related to charitable contributions; and revenue-
raising items in the area of tax shelters and elsewhere.
This report will be updated as legislative developments occur.
The figures in the budget resolution do not place an absolute limit on the tax cuts
Congress can pass for FY2006 or subsequent years — for example, the budget resolution
itself called for a total of $106 billion in tax cuts over five years — the same amount
proposed by President Bush in his FY2006 budget proposal. However, the congressional
budget resolution contains only $70 billion in its reconciliation instructions ($11 billion
for FY2006). Tax cuts specified in the reconciliation instructions are protected from
certain points of order under Senate budget consideration rules; if a point of order is
raised, a supermajority is required for passage. Thus, as a practical matter, the $70
billion five-year and $11 billion FY2006 reconciliation figures may place a constraint on
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the amount of tax cuts that are likely to be considered, and may lead to trade-offs between
specific tax cuts or the adoption of revenue-raising offsets. (In addition, Senate rules may
further limit the tax cut to around $60 billion.)
A large number of extended provisions are common to both committees’ bills; in
most (but not all) cases, the extensions carry through the end of 2006. Some of the more
prominent extensions in both bills are:
! the alternative deduction for state and local sales taxes (extended through
2006 in both measures);
! the research and experimentation tax credit (extended through 2006 in
both measures);
! the deduction for higher-education expenses (extended through 2006 in
the Ways and Means proposal and 2009 in the Finance plan);
! the 15-year depreciation recovery period for leasehold improvements and
restaurants (extended through 2006 in both proposals);
! the work opportunity and welfare-to-work tax credits (extended through
2006 in both plans);
! application of non-refundable tax credits against the AMT (extended
through 2006 in both proposals); and
! the increased ($100,000) “expensing” tax benefit for small business
investment (extended by both measures through 2009).
Two prominent extensions that differ between the two proposals are the increased
alternative minimum tax (AMT) exclusion for individuals and reduced rates for capital
gains and dividends. The Finance Committee plan extends the AMT exclusion for one
year, but does not extend the capital gains and dividend rate-reductions; the Ways and
Means bill extends the rate reductions for two years (through 2010), but does not extend
the AMT exclusion.
Due to the prominence of these two items, some background information is useful.
The temporary tax cut for capital gains and dividends was enacted by the Jobs and Growth
Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27). JGTRRA reduced the
tax rate on both capital gains and dividends to 15% (5% for income in the 15% and 10%
regular-income brackets, with complete elimination in 2008). However, the reductions
are temporary and are scheduled to expire on January 1, 2009. Absent congressional
action, the capital gains rate will revert to prior law’s 20% rate (10% for income in the
lowest brackets). Dividends will be taxed under the tax rates applicable to regular
income, which range from 10% to 35%, but which are also scheduled to revert to a 15%
to 39.6% range in 2011. According to JCT estimates, a two-year extension of the reduced
rates for capital gains and dividends would reduce revenue by an estimated $20.6 billion
over five years and $50.7 billion over 10 years.1
The context of the AMT exemption’s extension is this: individuals generally pay
either their AMT or regular tax, whichever is higher; a taxpayer’s tentative AMT is partly
dependent on a flat exemption amount specified by law. The value of the exemption is
1 A one-year extension that was dropped from the Finance Committee bill would reduce revenue
by an estimated $11.7 billion over five years and $26.2 billion over 10 years.

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subject to erosion due to inflation and the growth of real income. Partly for this reason,
an increasing number of taxpayers are faced with the possibility of paying the AMT rather
than the regular tax. Beginning in 2001, Congress enacted a series of temporary increases
in the exemption. The most recent increase was provided by the Working Families Tax
Relief Act of 2004 (P.L. 108-121). Under its terms the exemption is $58,000 for couples
and $40,250 for individuals. However, the increase expires at the end of 2005, and —
absent congressional action — in 2006 the exemption will revert to prior law’s level of
$45,000 and $33,750 for couples and individuals respectively. According to estimates
by the Joint Committee on Taxation (JCT), extension of the provision would result in a
revenue loss of $27.2 billion over five years.2
Aside from the extenders, the Finance Committee bill contains a number of
additional items not in the Ways and Means bill. These include a number of tax cuts for
areas affected by the recent hurricanes, a set of provisions applying to charitable
contributions, and a number of revenue-raising provisions. The disaster-related
provisions are generally more in the nature of development incentives for stricken areas
than were the provisions of the Katrina Emergency Tax Relief Act (P.L. 109-73) that
Congress enacted in September. The earlier measure generally focused more on
providing direct tax relief to individuals affected by the hurricanes.
In terms of revenue impact, the largest of the revenue-raising items is codification
of the “economic substance” doctrine that is aimed at suppressing corporate tax shelters.
Prominent among these are full implementation of the economic substance doctrine aimed
at suppressing corporate tax shelters, and additional measures designed to suppress the
movement of U.S.-chartered parent corporations to low-tax countries (corporate
“inversions” or “expatriation”).
According to estimates by the Joint Committee on Taxation (JCT), a version of
Finance Committee Chairman Grassley’s mark that was only sightly modified before
approval by the full committee would reduce revenue by $59.6 billion over five years, by
$40.4 billion over 10 years, and $11.0 billion in FY2006.3 According to press reports, the
Ways and Means bill is estimated to reduce revenue by $56.6 billion over five years.
There is little doubt that debate over reconciliation legislation will, in part, focus on
its specific provisions, their fairness, and their likely economic impact. Supporters of the
tax cuts in general, however, have in some cases cited philosophical reasons: a belief in
low tax burdens. In addition, supporters link the economy’s recovery from the 2001
recession to the tax cuts enacted in EGTRRA, JGTRRA, and elsewhere, arguing that the
stimulus from the tax cuts helped make the slump shorter and less severe than it otherwise
would have been. It is argued that continuation of those cuts — many of which will
2 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of the Chairman’s
Mark of the “Tax Relief Act of 2005” Scheduled for Markup by the Committee on Finance on
November 10, 2005, JCX-72-05, Nov. 8, 2005. Posted on the committee’s website at
[http://www.house.gov/jct/x-72-05.pdf].
3 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of the Chairman’s
Modification to the “Tax Relief Act of 2005,” Scheduled for Markup by the Committee on
Finance on November 15, 2005, JCX-78-05, Nov. 14, 2005, 7 pp. Available on the Joint
Committee’s website at [http://www.house.gov/jct/x-78-05.pdf].

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expire without congressional action — is important to sustain economic growth.4
Opponents of the tax cuts have generally questioned the prudence of enacting tax cuts in
a time of budget deficits, and also tend to be skeptical of the tax cuts’ beneficial economic
effects.5
4 See, for example, the statement of Sen. Gregg, Chairman of the Senate Budget Committee,
remarks in the Senate, Congressional Record, daily edition, vol. 151, Mar. 14, 2005, pp. S2588-
S2591, and the introductory language in the report of the House budget committee, U.S.
Congress, House, Committee on the Budget, Concurrent Resolution on the Budget — Fiscal Year
2006, report to accompany H.Con.Res. 95, 109th Cong., 1st sess., H.Rept. 109-17 (Washington:
GPO, 2005), p. 7.
5 See Sen. Kent Conrad, remarks in the Senate, Congressional Record, daily edition, vol. 151,
Mar. 14, 2005, pp. S2591-S2596.

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