Order Code RL32719
CRS Report for Congress
Received through the CRS Web
Major Tax Issues in the 109th Congress
Updated December 8, 2005
David L. Brumbaugh, Coordinator
Specialist in Public Finance
Government and Finance Division
Congressional Research Service { The Library of Congress

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Major Tax Issues in the 109th Congress
Summary
As 2005 draws to a close, congressional attention on tax policy has begun to
focus on budget reconciliation. The fiscal year (FY) 2006 budget resolution
(H.Con.Res. 95), approved by the House and Senate in April, called for net tax cuts
totaling $17.8 billion for FY2006 and $105.7 billion over five years. $11.0 billion of
the FY2006 tax cuts and $70.0 billion in cuts over five years were included in
reconciliation instructions.
On November 15, the Senate Finance Committee and the House Ways and
Means Committee approved separate versions of tax reconciliation legislation as S.
2020 and H.R. 4297, respectively. The full Senate approved S. 2020 on November
18 with slight modifications. An important element of both bills is the extension of
a number of temporary tax-reducing provisions that are scheduled to expire at various
times over the next several years. The two measures differ, however, in the precise
list of provisions that would be extended and in the exact length of several of the
extensions. Prominent extensions in both plans include the research and
experimentation tax credit and the “expensing” benefit for small business investment.
Items that differ are extension of the increased minimum tax exemption (present in
the Senate bill, but not the Ways and Means measure) and reduced rates for dividends
and capital gains (contained in the Ways and Means bill, but not the Senate plan).
Also, the Senate proposal (but not the Ways and Means bill) contains tax relief
provisions aimed at the areas affected by the recent hurricanes, tax measures related
to charitable contributions, and a number of revenue-raising items. On December 7,
however, the House passed “stand alone” bills extending minimum tax relief (H.R.
4096) and providing disaster-related tax benefits (H.R. 4440).
An additional tax issue that may receive congressional attention in what may be
the longer term is extension of temporary tax cuts Congress enacted in 2001 with the
Economic Growth and Tax Relief Recovery Act (EGTRRA; P.L. 107-16). EGTRRA
contained a variety of broad tax cuts, including tax rate reductions, tax cuts for
married couples, repeal of the estate tax, and an increased child credit. However,
because of a Senate procedural rule, EGTRRA included a “sunset” provision that
repeals its tax cuts at the end of calendar year 2010. Congress will thus likely
consider whether or not to extend EGTRRA’s tax cuts. In early April, for example,
the House passed a bill (H.R. 8) to make permanent EGTRRA’s temporary repeal of
the estate tax.
Another tax issue Congress may consider is fundamental tax reform. In January
2005, the President appointed an advisory panel to tax reform; the panel issued its
report on November 1, recommending two alternative reform plans. In Congress, a
number of tax reform plans have been introduced as legislation. The alternative
minimum tax (AMT) may likewise receive continued congressional attention.
Absent congressional action, an increasing number of persons are likely to be subject
to the AMT — a result of certain structural features of the AMT and the recent cuts
in the regular income tax.
This report will be updated as tax-related legislative activity occurs.

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Contents
The Economic Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The State of the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Federal Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Federal Tax Burden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Tax Issues in 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Taxes and Budget Reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Tax Policy and Hurricane Katrina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Scheduled Expiration of Enacted Tax Cuts . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Alternative Minimum Tax for Individuals . . . . . . . . . . . . . . . . . . . . . . 11
Tax Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
The President’s Advisory Panel on Tax Reform . . . . . . . . . . . . . . . . . 14
Taxes in the Administration’s FY2006 Budget Proposal . . . . . . . . . . . . . . . . . . 15
Major Tax Legislation, 2001-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Economic Growth and Tax Relief Reconciliation
Act of 2001 (EGTRRA; P.L. 107-16) . . . . . . . . . . . . . . . . . . . . . . . . . 16
Job Creation and Worker Assistance Act of
2002 (JCWA; P.L. 107-147) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
The Jobs and Growth Tax Relief Reconciliation
Act of 2003 (JGTRRA; P.L. 108-27) . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Working Families Tax Relief Act of 2004 (H.R. 1308; P.L. 108-311) . . . . 20
The American Jobs Creation Act (H.R. 4520; P.L. 108-357) . . . . . . . . . . . 21

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Major Tax Issues in the 109th Congress
Congress has debated a number of tax topics in 2005, although major tax
legislation has not yet been enacted. One topic is fundamental tax reform — the
Administration has indicated that consideration of a basic restructuring of the tax
system is one of its chief domestic policy priorities for its second term. Other topics
receiving congressional attention have been revision of the alternative minimum tax
and extension of tax cuts that are scheduled to expire. Each of these topics is
discussed in more detail below. (See the section entitled “Possible Tax Issues.”)
As 2005 draws to a close, congressional attention has turned to budget
reconciliation. In April, Congress approved an FY2006 budget (H.Con.Res. 95)
calling for $105.7 billion of tax cuts over five years and $17.8 billion of cuts in
FY2006. $70 billion of the tax cuts are included in reconciliation instructions over
five years, and $11 billion are included for FY2006. Under Senate rules, tax cuts not
included in reconciliation may be subject to a point of order and require a
supermajority (60 votes) for passage. (Recent press reports also indicate that Senate
rules may further limit the tax cut temporarily to around $60 billion over five years.)
On November 15, the House Ways and Means Committee and the Senate
Finance Committee passed their own versions of tax reconciliation legislation. (The
Ways and Means bill is H.R. 4297; the Finance Committee measure is S. 2020.) The
full Senate approved S. 2020 on November 18. An important part of both measures
is the extension of various expiring tax provisions, although the plans differ in the
particulars of their respective extensions. A prominent difference between the bills
is the presence in the Senate bill (but not H.R. 4297) of an extension for an increased
minimum tax exemption and the presence in H.R. 4297 (but not S. 2020) of an
extension of reduced rates for dividends and capital gains. Also, the Senate proposal
contains disaster-related tax cuts, measures aimed at charitable contributions, and a
set of revenue-raising items not contained in the Ways and Means Committee bill.
On December 7, however, the House passed “stand alone” bills extending minimum
tax relief (H.R. 4096) and providing disaster-related tax benefits (H.R. 4440).
Before looking at specific tax issues and recent developments, however, it is
useful to briefly review the economic context in which issues may be considered.
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. For example, if the economy is sluggish and unemployment
is high, tax cuts are sometimes recommended by some as a fiscal stimulus to boost
demand. Or, in the longer term, tax cuts for saving and investment are championed

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by some as a means of boosting long-term economic growth. At the same time, taxes
can also affect long-run growth through the federal budget — along with spending,
tax revenues determine the size of the budget surplus or deficit. And the size and
nature of the budget balance can affect long-run growth by determining the extent to
which government borrowing needs compete for capital with private investment, thus
damping long-run growth.
As well as affecting economic performance — both in the short- and long-runs
— taxes have a distributional effect. That is, the rate and manner in which taxes
apply to different activities, groups, and income levels can alter the distribution of
income within the economy. For example, the taxes can affect the distribution of
income across income levels (can affect “vertical equity”) by applying at different
rates to different income levels. And taxes can affect “horizontal equity” by applying
differently to different types of income.
With these broad economic effects in mind, a discussion of three aspects of the
economy follows. First is a look at the current state of the economy, both in terms
of long-run growth and the short-run state of the business cycle. Next is a review of
the current, recent, and expected future state of the federal budget. Third is a brief
review of the level and distribution of the tax burden.
The State of the Economy
Over the first three quarters of 2005, the economy continued its expansion and
recovery from the recession that reached its trough in November, 2001; the economy
has now registered positive real economic growth for 16 consecutive quarters. Real
growth was relatively sluggish during the first quarters of the recovery, but began to
pick up momentum in mid-2003. In 2004, real gross domestic product (GDP) grew
at a 4.4% rate, compared to 3.0% in 2003. In the first three quarters of 2005, the
economy grew at rates of 3.3%, 3.8%, and 3.8%. The favorable economic
performance is qualified, however, by relatively slow growth in employment (leading
some to characterize the current situation as a “jobless recovery”), but most
prognosticators expect economic growth to continue through 2006.
Although the current economic context of tax policy is thus one of growth, one
principal focus of the tax policy debate in recent years has been the efficacy of tax
cuts as an economic stimulus. The tax cuts of 2001, 2002, and 2003 were enacted,
in part, as a means of stimulating a still-sluggish economy, and although the
recession has ended and economic growth has picked up momentum, the debate over
the merits of tax cuts as economic stimulus continues to resonate. For example, one
subject of current debate is the extent to which tax cuts are responsible for the
economy’s rebound and the extent to which factors such as monetary policy are
responsible.1 It is thus informative to review the main outlines of economic
performance over the past few years.
1 For an analysis, see CRS Report RL32502, What Effects Have the Recent Tax Cuts Had
on the Economy? by Marc Labonte.

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The economic boom of the 1990s lasted nine consecutive years, but by late
2000, the economy began to show signs of weakness. President-elect Bush had
called for a tax cut during the election campaign for philosophical reasons and to spur
long-term growth, but as 2000 came to an end, he added that a tax cut would also be
advisable as a means of providing a near-term fiscal stimulus to the sluggish
economy. The tax cut he proposed in January 2001 ultimately became the basis for
the large reduction enacted as EGTRRA in June 2001.
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.
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.
The recession ended in November 2001, having lasted eight months. 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, but still exhibited signs of 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.” 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 possibility of
war in Iraq.
Positive economic growth continued through 2003, through all four quarters of
2004, and through the first three quarters of 2005. The performance is qualified,
however, by sluggish employment growth. Payroll employment has increased by
only a small amount from its pre-recession peak in 2001. The unemployment rate
has fluctuated between 4.9% and 5.7% since December 2003, and has remained at
a generally higher level than those registered during the boom of the 1990s.
For further reading, see CRS Report RL30329, Current Economic Conditions
and Selected Forecasts, by Gail Makinen.
The Federal Budget
In its August 2005 report, The Budget and Economic Outlook: An Update, the
Congressional Budget Office (CBO) reported that the federal budget registered a
deficit in FY2004 amounting to 3.6% of GDP after having reached 3.5% of GDP in
FY2003.3 The deficit in FY2004 marked the third year in a row the budget has
registered a deficit, with the size of the deficit growing in each successive year.
2 CRS Report RL31237, The 2001 Economic Recession: How Long, How Deep, and How
Different from the Past? by Marc Labonte and Gail Makinen.
3 U.S. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2006
to 2015 (Washington: GPO, 2005), p. 3.

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CBO’s report, however, also projected a gradual decline in the deficit as percentage
of GDP beginning with FY2005 and shrinking to a position of near-balance (a deficit
of 0.5% of GDP) by 2011. As described below, however, this projection assumes
that current policies remain in place, and if that assumption is dropped, the outlook
changes — an important consideration given congressional interest in extending or
making permanent the 2001 and 2003 tax cuts, many of which are scheduled to
expire at the end of calendar year 2010.
A broader historical perspective shows several reversals in the federal budget
situation in recent years. The budget was in deficit throughout the 1970s, 1980s, and
most of the 1990s before registering a surplus in FY1998, a result of both the
booming economy and legislation designed to enforce budget discipline. The budget
surplus grew for the next two years, reaching a peak of 2.4% of GDP in FY2000
before declining in FY2001 and moving into deficit in FY2002 and FY2003. The
difference between the surplus in FY2000 and the deficit in FY2004 amounted to
6.0% of GDP. The budget data indicate that the change was a result of both a growth
in outlays and a decline in revenues. The decline in revenues was more pronounced,
however; revenues declined from 20.6% of GDP in FY2000 to 16.4% in FY2004, a
drop of 4.2 percentage points. Outlays increased by only 1.8 percentage points over
the same period. The decline in revenues has two sources: the recession of 2001 and
subsequent sluggish economic growth, and enacted tax cuts.
The outlook, however, may change. As described elsewhere in this report, the
tax cuts enacted in 2001 by EGTRRA expire at the end of calendar year 2010; parts
of JGTRRA’s acceleration of EGTRRA (as extended by legislation in 2004) expire
at various times before 2010. Extending the tax cuts would have a substantial impact
on the budget, particularly after 2010. In addition, the application of the alternative
minimum tax (AMT) to an increasing number of taxpayers may exert pressure to
increase the AMT’s exemption amount. CBO’s January Budget and Economic
Outlook estimated that extending all tax provisions scheduled to expire between 2005
and 2015 would reduce federal revenue by $2.1 trillion over fiscal years 2006-2015,
an amount equal to 7.1% of CBO’s baseline projection of revenues for the period.4
The longer-term budget situation is a concern to many policymakers, chiefly
because of the combination of rising health care costs and demographic pressures
posed by an aging population that will begin with the retirement of the “baby boom”
generation. Under current law, spending on Social Security, Medicare, and Medicaid
is expected to increase substantially as a share of the economy. The Congressional
Budget Office has estimated that combined spending on the three programs will grow
from 8% of GDP in 2004 to over 14% in 2030 and to almost 18% by 2050.5
According to CBO, either substantial increases in taxes or cuts in spending will likely
be necessary in the future if fiscal stability is to be maintained.6
4 Ibid., p. 99.
5 U.S. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2005-
2014 (Washington: GPO, 2004), p. 8.
6 U.S. Congressional Budget Office, The Long-Term Budget Outlook (Washington: GPO,
December, 2003), p. 9.

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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 RS21786, The Federal Budget Deficit: A
Discussion of Recent Trends, by Gregg Esenwein, Marc Labonte, and Philip Winters.
The Federal Tax Burden
The broadest gauge of the federal tax burden is the level of federal receipts as
a percentage of output (gross domestic product, or GDP). By this measure the federal
tax burden has fluctuated considerably over the past five years. In FY2000, federal
receipts reached a post-World War II peak as a percentage of output, at 20.9%. By
FY2004, however, receipts had fallen to 16.3% of GDP — their lowest level since
1959. In part, the fluctuations were a result of the business cycle; the long economic
boom of the 1990s helped push receipts to their record level in FY2000, while the
ensuing recession and sluggish recovery helped reduce the level of revenues in
subsequent years. However, policy changes, too, were responsible: significant tax
cuts in 2001, 2002, and 2003 each contributed to the decline in taxes.
Another way to look at the tax burden is to compare it across income classes.
In combination, the various components of the federal tax system have a progressive
impact on income distribution — that is, upper-income individuals tend to pay a
higher portion of their income in tax than do lower-income persons. In isolation,
however, the different components of the system have different effects: the individual
income tax is progressive, while payroll taxes are progressive in the lower and
middle parts of the income spectrum but become regressive as incomes increase. The
corporate income tax and estate tax are both progressive, although they impose only
a small burden; excise taxes are regressive.
CBO has published distributional analyses for all federal taxes for each year
since 1979; the studies use a consistent methodology, so the results can be compared
to get an idea of the direction of federal tax policy’s distributional impact over the
period. According to the studies, the overall effect federal tax rate declined from
22.2% of income in 1979 to 19.6% in 2004. Over the period, the system has
apparently become slightly less progressive. While the effective tax rate for each
quintile of households in the income scale has declined, the decline has tended to be
larger for successively higher quintiles.7
For further information, see CRS Report RS20087, The Level of Taxes in the
United States, 1940-2003, by David L. Brumbaugh and Don C. Richards, and CRS
Report RL32693, Distribution of the Tax Burden Across Individuals: An Overview,
by Jane G. Gravelle and Maxim Shvedov.
7 U.S. Congressional Budget Office, Effective Federal Tax Rates: 1997-2000 (Washington:
GPO, 2003), pp. 22-23; and Effective Federal Tax Rates Under Current Law, 2001 to 2014
(Washington: GPO, 2004), p. 10. Both reports are available on the CBO website, at
[http://www.cbo.gov/], visited Dec. 21, 2004. For the lowest to highest quintiles,
respectively, the percentage-point declines in effect tax rates between 1979 and 2004 were:
1.2; 1.9; 2.1; 2.0; and 4.2.

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Tax Issues in 2005
Taxes and Budget Reconciliation
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 call for tax cuts of $11
billion in FY2006 and $70 billion over five years. (Senate rules, however, may
temporarily limit the tax cut in the Senate to around $60 billion over five years.)8
As 2005 entered its closing months, Congress began consideration of the tax-
reduction reconciliation legislation. On November 8, Chairman Grassley of the
Senate Finance Committee released the details of a “chairman’s mark,” containing
the proposed contents of a tax reconciliation bill. On November 10, Chairman
Thomas of the House Ways and Means Committee introduced his own chairman’s
mark. On November 15, both committees approved modified versions of the
respective chairman’s marks (S. 2020 in the Finance Committee and H.R. 4297 in
the Ways and Means Committee). On November 18, the full Senate approved S.
2020, with slight modifications.
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, with only
$70 billion contained in budget reconciliation instructions. However, 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 pose a constraint on 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.
An important element of both bills is the extension of a number of previously
enacted temporary tax cuts that are scheduled to expire at various times over the next
several years. (Note that these measures are generally distinct from the relatively
broad cuts in tax rates and other areas that were enacted in 2001 with the Economic
Growth Tax Relief and Reconciliation Act, but that are scheduled to expire at the end
of 2010.) According to estimates by the Joint Committee on Taxation (JCT), the
Senate bill would reduce revenue by $57.8 billion over five years, by $37.4 billion
over 10 years, and by $11.0 billion in FY2006.9 The Ways and Means bill is
8 Jonathan Nicholson, “Senate Finance Committee to Mark Up $10 Billion Less in Tax Cuts
Than Planned,” BNA Daily Tax Report, Nov. 4, 2005, p. G-14.
9 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of the Tax
Provisions Contained in S. 2020, the “Tax Relief Act of 2005,” As Passed by the Senate on
November 18, 2005, JCX-82-05, Nov. 29, 2005, 8 pp. Available on the Joint Committee’s

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estimated to reduce revenue by $56.1 billion over five years, $80.5 billion over 10
years, and by $5.8 billion in FY2006.10
A large number of extended provisions are common to both 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; the research and experimentation tax credit; the deduction for higher-
education expenses; the 15-year depreciation recovery period for leasehold
improvements and restaurants; and the work opportunity and welfare-to-work tax
credits. Both bills would extend the increased “expensing” tax benefit for small
business investment 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 Senate 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. The Ways and Means bill does, however,
extend the applicability of non-refundable personal tax credits against the AMT, as
does the Senate bill. In addition, on December 7, the House passed a one-year
extension of the increased AMT exemption as a “stand alone” bill (H.R. 4096).
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.11
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 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
website at [http://www.house.gov/jct/x-82-05r.pdf].
10 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of H.R. 4297,
the “Tax relief Extension Reconciliation Act of 2005,” as Reported by the Committee on
Ways and Means, JCX-81-05, Nov. 18, 2005, 3 pp. Available on the Joint Committee’s
website at [http://www.house.gov/jct/x-81-05.pdf].
11 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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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), a one-year extension of the provision would result in a revenue loss
of $28.8 billion over five years.12
In addition to the differences between the “extenders,” the Senate proposal
contains several sets of items not contained in the Ways and Means bill. These
include a number of tax cuts for areas affected by the recent hurricanes and a set of
provisions applying to charitable contributions. 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 was
enacted in September. The early measure generally focused more on providing direct
tax relief to individuals affected by the hurricanes. While disaster-related provisions
are not contained in the Ways and Means reconciliation bill (H.R. 4297), on
December 7, the House passed H.R. 4440, containing disaster-related tax benefits.
The Senate bill includes several incentives to encourage charitable giving: a
non-itemizer deduction; an allowance for tax-free distributions from IRAs for
charitable purposes; an enhanced deduction for charitable contributions of food and
book inventory; a basis adjustment to the stock of S corporations13 that contribute
property for charitable purposes; and a change in the tax treatment of certain
payments to controlling exempt organizations.
While these proposals would reduce revenue, the Senate bill also includes
charity-related reforms that would raise revenue. These include provisions intended
to limit the involvement by exempt organizations in tax-shelter transactions;
doubling certain fines and penalties applicable to charitable organizations; and
implementation of certain other changes.14
The Senate proposal contains a number of additional revenue-raising measures,
which are also not present in the Ways and Means bill. The largest of these is
codification of the “economic substance” doctrine that is aimed at suppressing
corporate tax shelters. Another prominent revenue-raiser is a proposal to require
large integrated oil companies who use the Last In First Out (LIFO) method of
inventory accounting to revalue their inventories.
12 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of S. 2020, JCX-
80-05, Nov. 16, 2005, p. 3.
13 S corporations are corporations that are relatively closely held and, having met
requirements set forth in the tax code, are not subject to the corporate income tax. S
corporation shareholders are taxed on their share of S-corporation income, however, whether
it is paid as dividends or not.
14 Pamela J. Jackson contributed the sections on charitable giving.

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For additional information on the budget, see CRS Report RL32812, The
Budget for Fiscal Year 2006, by Philip Winters. For more information on expiring
tax provisions, see the section below, in this report.
Tax Policy and Hurricane Katrina
On September 21, the House and Senate agreed on a package of tax cuts
designed to assist victims of Hurricane Katrina. The Joint Tax Committee estimated
that the enacted version of the bill — the Katrina Emergency Tax Relief Act
(KETRA; P.L. 109-73) — would reduce revenue by $6.1 billion over FY2006 —
FY2010, with the bulk of the revenue reduction occurring in FY2006 and FY2007.
In general, the act’s provisions were aimed at providing direct relief to Katrina’s
victims and contained provisions aimed at cash flow, employment, charitable giving,
and administration actions by the Internal Revenue Service.
The act’s principal provisions are:
! relaxed rules for Individual Retirement Account (IRA) and
retirement plan withdrawals related to Katrina;
! employment-related tax benefits, including extension of the Work
Opportunity Tax Credit to the Katrina-affected area;
! a set of tax benefits for charitable giving, including temporary
suspension of limits on qualified contributions;
! more generous rules for deducting casualty losses, including
suspension of the 10% and $100 loss thresholds; and
! an extension of the replacement period within which capital gain is
not recognized in involuntary conversions (e.g., instances where a
destroyed asset is replaced with another).
Subsequent disaster-related tax proposals have focused more on development
incentives. As described above, the budget reconciliation measure approved as S.
2020, by the Senate November 18, contains a set of additional tax benefits in
response to the recent hurricanes. Prominent among the provisions are “bonus”
depreciation deductions for investment in Gulf areas affected by Hurricanes Katrina,
Rita, and Wilma; an increase in the “expensing” benefit for equipment investment
in the affected areas; an expansion of tax-exempt private activity bonds that
governments in the affected area can issue; and an increase in the area’s low-income
housing tax-credit allocation. Along with its development incentives, S. 2020 also
generally proposes to extend KETRA’s relief provisions to victims of Hurricanes
Rita and Wilma.
On December 7, the House passed H.R. 4440, containing a set of disaster-
related benefits similar (though not identical) to those in S. 2020.
For a more comprehensive description of KETRA, see CRS Report RS22269,
H.R. 3768: the Katrina Emergency Tax Relief Act of 2005, by Erika Lunder. For an
economic analysis of the bill’s provisions, see CRS Report RL33088, Tax Policy
Options After Hurricane Katrina, by Jane G. Gravelle.

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CRS-10
Scheduled Expiration of Enacted Tax Cuts
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA;
P.L. 107-16) provided a substantial tax cut that it scheduled to be phased in over the
10 years following its enactment. However, to comply with a Senate procedural rule
(the “Byrd rule”), the act contained language “sunsetting” its provisions after
calendar year 2010. Thus, all of EGTRRA’s tax cuts expire at the end of 2010.
The most prominent provisions EGTRRA scheduled for phase-in were:
! reduction in statutory individual income tax rates;
! creation of a new 10% tax bracket;
! an increase in the per-child tax credit;
! tax cuts for married couples designed to alleviate the “marriage tax
penalty”; repeal of the estate tax; and
! tax cuts under the individual alternative minimum tax.
The Jobs and Growth Tax Relief and Reconciliation Act of 2003 (JGTRRA;
P.L. 108-27) provided for the “acceleration” of most of EGTRRA’s scheduled tax
cuts — that is, it moved up the effective dates of most the tax cuts EGTRRA had
scheduled to phase-in gradually, generally making them effective immediately. (The
phased-in repeal of the estate tax was not accelerated by JGTRRA.) Many of
JGTRRA’s accelerations, however, were themselves temporary and were scheduled
to expire at the end of 2004.
In 2004, Congress thus faced two “expiration” issues related to EGTRRA and
JGTRRA. One was a question for the longer term: the scheduled expiration of
EGTRRA’s tax cuts at the end of 2010. The second was the expiration of JGTRRA’s
accelerations at the end of 2004. In September, Congress addressed the second of
these with enactment of the Working Families Tax Relief Act (WFTRA; P.L. 108-
311). WFTRA generally extended JGTRRA’s accelerations of EGTRRA’s tax cuts
through 2010 — that is, up to the point at which EGTRRA’s cuts are scheduled to
expire.
The issue of EGTRRA’s scheduled expiration at the end of 2010 thus remains,
and policymakers in both the Administration and Congress have indicated their desire
to consider the issue during the Bush Administration’s second term. And in April,
2005, the House passed legislation (H.R. 8) that would make EGTRRA’s temporary
estate tax permanent.
Along with its accelerations of EGTRRA’s tax cuts, JGTRRA contained an
increase in the alternative minimum tax exemption-amount that was effective only
for 2004. WFTRA extended the increase, but only through 2005, thus posing an
additional time sensitive issue, as discussed more fully below in the section on the
minimum tax. Further, the tax code contains numerous other temporary tax-reducing
provisions beyond those contained in EGTRRA and JGTRRA. These provisions —
sometimes termed “extenders” — have typically been temporary from their inception,
have been scheduled to expire at various times in the past, but have been extended
by Congress. While WFTRA included an extension of many of these provisions with

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CRS-11
its extension of JGTRRA’s accelerations, the extensions were generally only through
2005, and the 109th Congress may thus consider their extension.
Debate over extension of the EGTRRA tax cuts has centered on three broad
issues: its likely impact on the federal budget deficit; its possible effect on long-term
economic growth; and its results for the fairness of the tax system. In general,
opponents of an extension have argued that it would exacerbate a budget situation
already made difficult by the looming retirement of the baby-boom generation and
resulting stresses on the social security system. Those supporting extension maintain
that the tax cuts — through their positive effects on work effort and saving — will
stimulate long-term growth, a development that will ease the adverse effects of the
tax cuts on the budget. (Opponents question whether these effects will be large
enough to offset the extensions’ budget effects.) With respect to fairness, opponents
of extending the measures argue that the tax cuts reduce the progressivity of the tax
system by providing larger effective tax-rate reductions for upper-income individuals
than for persons in lower income brackets. Proponents of the tax-cut extensions
emphasize that they would provide tax cuts across all income classes.
For additional information on the expiring provisions of EGTRRA and
JGTRRA, see CRS Report RS21863, Recent House Legislation Extending Selected
Provisions of the 2001 and 2003 Tax Cuts, by Gregg Esenwein. For information on
the extenders, see CRS Report RS21830, List of Temporary Tax Provisions:
‘Extenders’ Expiring in 2004, by Pamela J. Jackson. For a comprehensive list of
temporary tax code provisions and their scheduled expiration date, see U.S.
Congress, Joint Committee on Taxation, List of Expiring Federal Tax Provisions,
2004-2014 (Washington: December 23, 2004), 16 pp. (available on the Joint
Committee’s website at [http://www.house.gov/jct/x-71-04.pdf], visited December
28, 2004).
The Alternative Minimum Tax for Individuals
While EGTRRA’s expiration presents a timing issue focused on a specific date,
the individual AMT is an issue for which time is a critical element but in a less
specific way: absent legislative action, as each year passes more and more individuals
will be subject to the AMT rather than the regular tax. According to one recent
study, in 2001 2.4 million individual income tax returns (1.8% of the total) contained
an AMT liability; in 2004 an estimated 3.5 million returns (2.6%) had an AMT
liability. In 2010, an estimated 37.1 million returns (25.6%) will owe the AMT.15
The portion will decline for a number of years thereafter if EGTRRA’s expiration
occurs as scheduled, but then will resume growth.
The reason for the increase in the applicability of the AMT is its basic
mechanics. The AMT functions like a parallel income tax, with lower rates than the
regular tax but with a broader base — that is, with fewer deductions, exemptions,
credits, and special tax preferences than are allowable under the regular tax. Each
year, a taxpayer pays either his or her regular tax or the tentative AMT, whichever
15 Daniel Feenberg and James M. Poterba, “The Alternative Minimum Tax and Effective
Marginal Tax Rates,” National Tax Journal, vol. 57 part II, June 2004, p. 412.

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CRS-12
is higher. Taxpayers are permitted a flat exemption amount in calculating their
AMT. However, the exemption is fixed at a flat dollar amount that is not indexed for
inflation. And while the AMT only has two rate brackets (26% and 28%), the
bracket dividing point is likewise not indexed. In contrast, the structural features of
the regular income tax — personal exemptions, the standard deduction, and rate-
bracket thresholds — are indexed. Thus, as time passes and incomes grow in both
real and nominal terms, the AMT exceeds the regular tax for more taxpayers. The
phenomenon was magnified by the rate reductions and tax cuts for married couples
provided by EGTRRA and JGTRRA as well as other tax cuts enacted in the past. As
described above, Congress addressed the AMT on a temporary basis in 2001 and
2003 under EGTRRA and JGTRRA by increasing the exemption amount, thus
reducing the number of taxpayers who would otherwise pay the AMT. Most
recently, WFTRA extended through 2005 an exemption amount of $58,000 for
married couples and $40,250 for single filers. However, WFTRA’s provision expires
at the end of 2005 and without additional legislative action the exemption amount
will revert to its pre-EGTRRA levels of $45,000 and $33,750 for couples and singles,
respectively.
The original purpose of the AMT was to ensure that no individual with
substantial income measured in economic terms could use tax benefits and omissions
from the tax base to reduce his or her tax liability below a certain point. There are
a number of reasons why policymakers may be concerned with the prospect of its
increased applicability. First, taxpayers who become subject to the AMT face a
higher tax liability than they otherwise would; some taxpayers moving into AMT
status may thus view the applicability of the AMT as a tax increase. Second,
taxpayers in AMT status are not able to fully participate in tax cuts enacted under the
regular tax. For example, application of the AMT prevented those taxpayers subject
to the AMT from fully realizing the tax cuts enacted under EGTRRA and JGTRRA.
Third, the AMT introduces complexity to the tax system, and the amount of time
spent in tax preparation increases for taxpayers in or near AMT status.
On a more conceptual level, the AMT can be viewed as balancing conflicting
goals of the income tax. On the one hand, various deductions, exemptions, credits,
and other benefits under the regular income tax are thought to be useful in promoting
various activities thought to be socially desirable or conducive to economic growth.
On the other hand, it is often thought desirable for a tax system to achieve a certain
level of fairness, both in horizontal terms (the equal treatment of individuals in
different circumstances) and vertical terms (the relative treatment of individuals at
different income levels). Further, economists argue that broad-based tax systems
with low rates — a characteristic of the AMT — are less damaging to economic
efficiency than higher-rate systems that apply to bases laden with special benefits.
With the AMT, taxpayers can use the tax benefits available under the regular tax only
up to a point, where considerations of equity and efficiency trigger applicability of
the AMT: the benefits’ economic growth and social goals are balanced with fairness
and efficiency concerns. To the extent the AMT’s growth has resulted from inflation
and lack of indexation, it might be argued that the AMT’s advance is unintended, and

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CRS-13
the balance between equity and social and economic goals intended for the AMT has
been upset.16
A factor that substantially complicates the AMT issue is its revenue effect,
which assumes increased prominence given current federal budget deficits. For
example, indexing the AMT for inflation would eliminate much of the impetus of the
tax’s increasing applicability. According to Congressional Budget Office (CBO)
indexing the AMT would reduce federal revenues by $385 billion over ten years, an
amount equal to 1.3% of federal revenues expected over the period. If EGTRRA’s
tax cuts are extended or made permanent, the cost of restraining the AMT would be
considerably larger, reducing revenue by $642 billion, or 2.1% of revenue.
For further information, see CRS Report RL30149, The Alternative Minimum
Tax for Individuals, by Gregg A. Esenwein and CRS Report RS22100, The
Alternative Minimum Tax for Individuals: Legislative Initiatives and Their Revenue
Effect, by Gregg A. Esenwein.
Tax Reform
There are indications that tax reform — either incremental changes to the
current system or a more fundamental reform — may begin to be actively considered
by Congress before the end of 2005. President Bush, in his September, 2004, speech
accepting the Republican nomination for President, called for reform whose goals
would be simplification, fairness, and economic growth. In January, 2005, the
President appointed an advisory panel to study the topic and report to the Secretary
of the Treasury. The panel issued its report on November 1 (see below).
Numerous tax reform bills were introduced in the 108th Congress and a number
of measures have been proposed thus far in the 109th Congress. In the 109th
Congress, the content of the proposals ranges from plans for a flat-rate consumption
tax (S. 1099) to a proposed national retail sales tax (H.R. 25/S. 25), to a bill that
requires the Secretary of the Treasury to conduct an analysis of a transactions tax.
More generally, proposals for the general reform of the tax system have taken
one of two conceptual forms: a tax on a comprehensive measure of income; or a tax
on consumption. Both types of reform proposals typically involve broadening the tax
base while reducing the tax rates that apply to the base. A comprehensive income tax
would apply at the same rate to all income, regardless of its use or its source, thus
eliminating many of the special deductions and credits contained in the current
system. A consumption tax would only apply to that portion of income that is spent
on consumption and would not apply to saving. Both types of reform are generally
championed on grounds of economic efficiency — because they apply more evenly
across different types of income, broad-based taxes are less distorting of economic
decisions and thus permit a more smoothly working economy. Because consumption
taxes do not apply to saving, their adherents argue that they better promote saving
16 It might be argued that the level intended by Congress is that established under the
Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66), where the permanent exemption
levels and bracket amounts and rates were established.

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CRS-14
and investment and thus economic growth. Critics, however, are skeptical of how
responsive savers actually are to the presence or absence of taxes and point to the
greater difficulty in establishing progressivity under a consumption tax. Each type
of tax reform is also frequently supported on grounds of simplicity; the substantial
(and apparently growing) complexity of the current tax system is often cited as a
primary reason for tax reform. Skeptics, however, point out that the three goals of
most tax reform plans — economic performance, equity, and efficiency — are
frequently at odds, so that even the most carefully-designed reform plan cannot
achieve perfection in all three areas.
Like any thorough rearrangement of economic relationships, fundamental tax
reform would produce complex transition effects and there would be both winners
and losers across economic actors and taxpayers. For example, broadening of the
base would necessarily entail elimination of a variety of deductions and credits
favoring particular activities, investments, or types of income, and there are doubtless
some who would lose more from the elimination of such preferences than they would
gain from a reduction in statutory tax rates. And, in the case of a switch to a
consumption tax, owners of existing capital — for example, owners of corporate
stock — would register a windfall loss as a transition effect. These changes could
also lead to inflation and recession, which could be serious for certain types of
consumption taxes.
The complexity and magnitude of the transition effects suggest that if Congress
does adopt fundamental tax reform, the path would be arduous and debate would be
heated. To illustrate, Congress in the mid-1990s actively considered fundamental tax
reform without adopting it: numerous reform bills were introduced and hearings were
held by the tax-writing committees.17 And even when tax reform has been achieved,
it has eroded over time: the Tax Reform Act of 1986 (P.L. 99-514) was a substantial
movement toward a reformed tax on comprehensive income. Over the past two
decades, however, the grand compromise the act embodied — lower rates exchanged
for fewer special tax benefits — has come unwound, suggesting the difficulty of
crafting an enduring version of tax reform.
The President’s Advisory Panel on Tax Reform. The advisory panel
formed by President Bush in January 2005 conducted public hearings as well as
closed meetings over the spring, summer, and fall of 2005. After several delays, the
panel submitted its recommendations to the Secretary of the Treasury on the first day
of November.
The panel proposed two alternative tax systems — what it termed the Simplified
Income Tax Plan (SITP) and the Growth and Investment Tax Plan (GITP). Both
systems, the panel stated, were designed to be roughly “revenue neutral” — raising
as much added tax revenue as they would lose. Both systems would broaden the tax
base by ending some individual income tax deductions — for example, the deduction
for state and local income taxes — but would also retain revamped tax benefits in
17 See, for example, U.S. Congress, House Committee on Ways and Means, Replacing the
Federal Income Tax, 104th Cong., 1st sess., June 6, 7, and 8, 1995 (Washington: GPO, 1995),
1,055 pp.

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CRS-15
other areas — for example, for home ownership. Under both plans, personal
exemptions, the standard deduction, and the child tax credit would be replaced with
a new Family Credit that would vary in size, depending on filing status. Both
systems would repeal the alternative minimum tax and would reduce statutory tax
rates.
The two plans differ primarily in their treatment of business income and income
from capital investment and saving. The SITP would retain the corporate income tax
rate, but at a reduced rate and with a simplified method of accelerated depreciation.
Also, income from U.S. firms’ overseas operations would not be taxed, thus
implementing a “territorial” tax system. Corporations would still be able to deduct
interest. While the corporate-level tax would be retained, shareholders would not be
taxed on dividends and would exclude 75% of capital gains from tax, while interest
would still be taxed to individuals at regular tax rates. The system would thus move
towards eliminating double-taxation of corporate-source income, moving towards a
“full integration” system.
The GITP would retain the corporate income tax, but in altered form: it would
permit firms to fully deduct (“expense”) capital investment in the year of acquisition.
Expensing is the mathematical equivalent of an exemption for income from new
investment. Thus, the GITP would effectively do away with business tax on new
investment; income from existing investment, however, would continue to be taxed.
Interest would no longer be deductible at the corporate level. A destination-based
“border tax adjustment” would be implemented similar to those used with value-
added taxes: the tax on exports would be rebated but tax would be imposed on
imports. Shareholders and corporate creditors would continue to be taxed on
dividends and interest, albeit at a reduced (15%) rate. GITP thus partly removes
current law’s double-taxation of corporate-source income.
For additional information on tax reform in general, see CRS Issue Brief
IB95060, Flat Tax Proposals and Fundamental Tax Reform: An Overview, by James
M. Bickley, and CRS Report RL32603, The Flat Tax, Value-Added Tax, and
National Retail Sales Tax: Overview of the Issues, by Gregg Esenwein and Jane G.
Gravelle. The details of the Tax Reform Advisory Panel’s proposals are online at the
panel’s website, at [http://www.taxreformpanel.gov/final-report/].
Taxes in the Administration’s
FY2006 Budget Proposal
On February 7, 2005, the Administration released documents containing its
budget proposals for FY2006, including its proposals for taxes.18 In broad terms, the
Administration proposes tax cuts that it estimates would amount to $1,294 billion
over ten years. The principal tax cuts would be:
18 The documents are available on line at [http://www.gpoaccess.gov/usbudget/] (visited
Feb. 7, 2005).

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CRS-16
! permanent extension of the tax cuts enacted in 2001 and 2003;
! expansion of tax-favored savings mechanisms;
! tax benefits for health care;
! tax benefits for charitable giving;
! tax benefits related to energy;
! extension of various temporary tax benefits, including permanent
status for the research and experimentation tax credit.
The 2001 tax cuts the budget proposes to make permanent were enacted by the
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), but, as
described above (see the section entitled “Scheduled Expiration of Enacted Tax
Cuts,” on page 10) expire at the end of 2010. The Administration also proposes to
make permanent several provisions enacted under the Jobs and Growth Tax Relief
Reconciliation Act of 2003 (JGTRRA), but that are scheduled to expire at the end of
2008: the reduced tax rate for dividends and capital gains; and an increase to
$100,000 in the “expensing” benefit for small business investment. (The expensing
benefit was actually scheduled to expire after 2006 under JGTRRA’s original
provisions, but increased limit was extended for an additional two years by the
American Jobs Creation Act of 2004 (P.L. 108-357).
The Administration’s expanded tax incentives for savings include establishment
of new tax-favored savings vehicles termed “individual development accounts” for
low-income individuals; the accounts could be used to finance first-time home
purchases, business start-up costs, and higher education. The budget’s health-care
benefits include a refundable tax credit for the purchase of health insurance. Its
proposals for charitable contributions include tax-free IRA withdrawals for charitable
contributions. The Administration’s energy-related proposals include extension and
revision of the tax credit for purchase of hybrid and fuel-cell vehicles.
In addition to its tax cut proposals, the Administration’s budget calls for
examining options for reforming the federal system. Although the budget does not
specify the particular type of reform the Administration favors, the budget documents
do call for reform that will promote simplicity, fairness, and economic growth. (For
further discussion, see the section above entitled “Tax Reform.”)
Major Tax Legislation, 2001-2004
The Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA; P.L. 107-16)
On February 8, 2001, President Bush sent the outlines of a tax plan to Congress
that was the same in its essentials to the tax proposal he advanced during the
presidential campaign. According to Administration estimates, the tax cuts would
reduce revenue by $1.6 trillion over 10 years. In the House, tax cuts similar to the
President’s proposals were passed in March, April, and early May as components of
several different bills. The Senate passed a somewhat different tax cut plan in May,
and on May 26, the House and Senate both approved a conference agreement on the
bill, entitled the Economic Growth and Tax Relief Reconciliation Act of 2001.

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CRS-17
Although the congressional bill contained some differences from the President’s
plan, the President signed the measure on June 7; it became P.L. 107-16.
Timing was an important element of P.L. 107-16 in several ways. First, many
of the act’s most important provisions are “phased in”; that is, they become fully
effective only gradually, over a number of years. Second, the act contained language
providing for the expiration (“sunset”) of its provisions after 2010. The provision
was included because of Senate procedural rules on budget reconciliation. As noted
elsewhere in this report, both Act’s phase-in and sunset provisions have been a focus
of congressional attention since EGTRRA’s enactment. As enacted, EGTRRA was
estimated to reduce revenue by $1.35 trillion over the period 2001-2011.
As with the President’s plan, EGTRRA’s centerpiece was a reduction in the
individual income tax rates that apply to taxable income. Prior to the act, the tax
code’s rates were 15%, 28%, 31%, 36%, and 39.6%; the act reduces these to 10%,
15%, 25%, 31%, and 35%. In addition, the act eliminates the overall limit on
itemized deductions and phases out the tax code’s restriction on personal exemptions.
Under EGTRRA’s phase-in schedule, the rate reductions were not scheduled to
be fully effective until 2006. At the same time, the act’s application of a 10% rate
to the lowest part of the lowest bracket is retroactive to January 1, 2001 — a
provision designed to provide an economic stimulus. Beginning in July, 2001, the
Treasury Department issued checks based on the rate reduction.
The act increased the tax code’s per-child tax credit from prior law’s $500 to
a new level of $1,000, phased in over the period 2001-2010. Also, under prior law,
the child tax credit is refundable only for families with three or more children. The
act extends refundability to smaller families, subject to certain limitations. The act
also provided that the refundable child credit would not be reduced by a taxpayer’s
alternative minimum tax (AMT), and that the credit would offset both a taxpayer’s
AMT and regular tax.
EGTRRA provided tax reductions for married couples. Under prior law,
certain structural features of the income tax could result in a married couple paying
either more or less in tax than they would as two singles — incurring a “marriage
penalty” or “marriage bonus,” in tax parlance. Features responsible for the uneven
treatment of marital status included the standard deduction, tax-bracket widths, and
the earned income tax credit (EITC). EGTRRA addressed the marriage penalty by
increasing the standard deduction for couples, widening the income bracket to which
the 15% tax rate applies, and altering the EITC. As with the tax-rate reductions, the
tax cuts for married couples were scheduled to be gradually phased in.
EGTRRA phased out the federal estate tax over the period 2002-2010. The
phase-out consisted of a gradual reduction in estate tax rates over the phase-out
period, as well as an increase in the effective exemption delivered by the estate and
gift tax unified credit.
The act provided a temporary reduction in the individual alternative minimum
tax by increasing its exemption by $2,000 in the case of single returns and $4,000

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CRS-18
for joint returns for the years 2001 through 2004. The exemptions under prior law
were $33,750 and $45,000, respectively.
Other provisions of the act included:
! several tax benefits for education, including more generous rules for
education IRAs and tax-favored tuition savings plans; permanent
extension of the exclusion for employer-provided education
assistance; more generous rules for deductibility of student-loan
interest; and a temporary deduction for qualified education expenses
tax cuts for IRAs and pensions,
! more generous rules for the adoption tax credit,
! provision of a 25% tax credit for employer-provided child care;
and
! an increase in the dependent care tax credit.
For further information, see CRS Report RL30973, 2001 Tax Cut: Description,
Analysis, and Background, by David L. Brumbaugh, Jane G. Gravelle, Steven
Maguire, Louis Alan Talley. and Bob Lyke.
Job Creation and Worker Assistance Act of 2002 (JCWA; P.L.
107-147)
The final version of the Job Creation and Worker Assistance Act was approved
by Congress and signed into law in March, 2002, but the act grew out of tax
proposals that began moving through both chambers in late 2001 — proposals
designed to provide economic stimulus in the wake of the September, 2001, terrorist
attacks. The enacted version of JCWA was considerably smaller than EGTRRA; the
Joint Tax Committee estimated that it would reduce revenue by an estimated $12.9
billion over 10 years. Also in contrast to EGTRRA, the enacted version of JCWA
focused more on business tax cuts than tax cuts for individuals.
The act’s principal components were:
! A “bonus” depreciation allowance under which firms could deduct
an additional 30% of the cost of property in its first year of service.
The provision was temporary and limited to property placed in
service before 2005.
! An extension of the net operating loss “carryback” period (the years
in the past from whose income a firm can deduct losses) to five years
from two years. The provision only applied to losses in 2001 and
2002. A set of business tax benefits targeted at areas of New York
City.
! Extension of a set of expiring tax benefits (e.g., the work opportunity
tax credit, the welfare-to-work tax credit, and extension of
nonrefundable credits to the alternative minimum tax), generally
through 2003.

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CRS-19
The Jobs and Growth Tax Relief Reconciliation Act of 2003
(JGTRRA; P.L. 108-27)
On January 7, 2003, President Bush announced the details of a new tax cut
proposal intended to provide a stimulus to the economy and to provide tax incentives
in selected areas. According to the Joint Committee on Taxation, the revenue
reduction from the plan was estimated at $1.575 trillion over FY2003-FY2013.
The President’s proposal consisted of an economic stimulus component and a
set of more narrow, targeted tax cuts. The stimulus portion consisted primarily of
acceleration of several tax cuts for individuals that were enacted by EGTRRA in
2001 but that were scheduled to be phased in only gradually (see the preceding
section on EGTRRA). The Administration proposed to make the reductions effective
for 2003 rather than the scheduled phase-in dates. The proposed accelerations
included tax rate reductions, tax cuts for married couples, and an increased child tax
credit. Another prominent part of the President’s 2003 plan was a proposal to move
toward “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 “expensing” allowance for small business investment in equipment to
$75,000 from current law’s $25,000.
Prominent among the more targeted tax cuts proposed with the budget were two
new tax-favored savings vehicles that would replace Individual Retirement Accounts
(IRA) 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.
On May 23, 2003, 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). In broad outline, the act contained the principal elements of the stimulus part
of the President’s tax-cut proposal. The President signed the bill into law on May 28.
JGTRRA’s conference agreement 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. 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
scheduled for phase-in under EGTRRA. EGTRRA had scheduled a
gradual increase in the child tax credit from prior law’s $500 to a
level of $1,000 by 2010. JGTRRA provided for the $1,000 to be
effective in 2003 and 2004, but its acceleration was temporary and
provided for the credit to revert in 2005 to the lower, phase-in
schedule provided by EGTRRA ($700 in 2005 - 2008, $800 in 2009,
and $1,000 in 2010).

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CRS-20
! For 2003 and 2004 only, the standard deduction and 15% tax
brackets for married taxpayers were made twice those for singles.
In a manner similar to the child credit, these provisions were
scheduled to revert to EGTRRA’s schedule beginning in 2005. The
alternative minimum tax exemption amount was increased by $9,000
for married couples and $4,500 for singles for 2003 and 2004.
! The maximum expensing benefit for small business investment was
temporarily increased from prior law’s $25,000 to $100,000 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 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 was applied to both domestic and foreign
corporations.
For additional information, see CRS Report RL31907, The 2003 Tax Cut:
Proposals and Issues, by David L. Brumbaugh and Don C. Richards.
Working Families Tax Relief Act of 2004 (H.R. 1308; P.L. 108-
311)
The Economic Growth and Tax Relief and Reconciliation Act of 2001
(EGTRRA) provided a number of substantial tax cuts that were scheduled to be
phased in gradually over the 10 years following EGTRRA’s enactment. As discussed
more fully above (see the section on “Scheduled Expiration of Tax Cuts”) the tax
cuts are generally scheduled to expire at the end of 2010. In 2003, the Jobs and
Growth Tax Relief Reconciliation Act (JGTRRA) accelerated a number of
EGTRRA’s phased-in tax cuts, including reduction of individual income tax rates
and tax cuts for married couples and families, making EGTRRA’s cuts fully effective
in 2003. However, JGTRRA’s accelerations were themselves scheduled to expire
at the end of 2004. A principal thrust of the Working Families Tax Relief Act
(WFTRA) was to extend JGTRRA’s tax cuts to the particular year in which
EGTRRA’s phased-in provisions are fully effective. The measure was approved by
Congress on September 23, 2004, and was signed into law on October 4. According
to Joint Tax Committee revenue estimates, WFTRA will reduce revenue by $132.8
billion over five years and $146.9 billion over 10 years.
WFTRA’s provisions:
! extended the increased ($1,000) child tax credit;
! extended tax cuts for married couples;
! extended the widened 10% tax-rate bracket;

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! extended the increased alternative minimum tax exclusion through
2005 and accelerated the refundability of the child tax credit to 2004;
and
! included combat pay in income that qualifies for the refundable child
tax credit and the earned income tax credit.
In addition to the expiring provisions of EGTRRA and JGTRRA, the tax code
has long contained a set of additional temporary tax benefits that are generally
designed to promote various types of investments and activities thought to be
beneficial. Prominent examples include the research and experimentation tax credit,
the work opportunities tax credit, and the welfare to work tax credit. WFTRA
extended a number of these so-called “extenders,” generally through 2005.
The American Jobs Creation Act (H.R. 4520; P.L. 108-357)
Congress passed the American Jobs Creation Act (AJCA) in October, 2004.
The principal concern of the bill was business taxation. The bill began as a remedy
to a long-running dispute between the United States and the European Union over the
U.S. extraterritorial income exclusion (ETI) tax benefit for exporters. The scope of
the enacted bill, however, was considerably broader. In general outline, the act
repealed ETI while implementing a mix of tax cuts for both domestic and
multinational U.S. businesses. The act achieved estimated revenue neutrality with
a set of provisions generally in the area of corporate tax compliance.
AJCA provisions are numerous and apply to a broad array of tax code sections.
In general terms however, the act’s most important provisions are:
! a repeal of the ETI export tax benefit;
! a variety of tax cuts generally favoring domestic (as opposed to
foreign) investment (chief among these was a new 9% deduction
limited to domestic production) and several tax cuts for
multinational firms, including more generous foreign tax credit rules
for the treatment of interest expense and a consolidation of the
several separate foreign tax credit limitations that existed under prior
law; and
! a set of revenue raisers (in addition to ETI’s repeal) including
provisions aimed at restricting corporate tax shelters, provisions
designed to improve fuel tax compliance, and a provision restricting
tax benefits available from lease transactions involving tax-
indifferent entities.
For additional information on AJCA, see CRS Report RL32652, The 2004
Corporate Tax and FSC/ETI Bill: The American Jobs Creation Act of 2004, by
David L. Brumbaugh.

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