Order Code RS22322
Updated December 8, 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 draws to a close, Congress has begun 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 as
H.R. 4297 and S. 2020, respectively. The full Senate approved a slightly modified
version of S. 2020 on November 18. 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 Senate 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 Senate plan. Aside from the extenders, the Senate
bill 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; both tax benefits and reforms related to charitable contributions; and
revenue-raising items in the area of tax shelters and elsewhere. In addition, on
December 7, the House passed “stand alone” bills extending the increased AMT
exemption (H.R. 4096) and providing disaster-related tax benefits (H.R. 4440).
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
Congressional Research Service { The Library of Congress

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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
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 temporarily to around $60 billion.)
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 (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 Senate 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 Senate bill 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
exemption. (On December 7, however, the House passed H.R. 4096, a stand-alone bill
extending the increased AMT exemption.)
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
1 A one-year extension that was dropped by the Finance Committee would reduce revenue by an
estimated $11.7 billion over five years and $26.2 billion over 10 years.

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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 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 $30.5 billion over five years.2
Aside from the extenders, the Senate 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, providing, for example, more generous rules for deducting
casualty losses and a set of tax benefits for charitable giving. The Senate bill would
generally extend KETRA’s scope to include victims of Hurricanes Rita and Wilma. In
addition, it contains a package of tax benefits for development in the affected areas, and
includes provisions such as bonus depreciation for investment in the Gulf area and
increased low-income housing tax credits. On December 7, the House passed a stand-
alone bill (H.R. 4440) containing a set of disaster-related tax benefits similar to those in
S. 2020.
The charity-related items in the Senate bill include both tax benefits and revenue-
raising measures. The tax cuts include a proposal that would allow tax-free withdrawals
from IRAs if used for charitable purposes and a provision to allow non-itemizers to
deduct charitable contributions in certain circumstances. (The proposal, however, would
also institute a minimum “floor” amount below which a deduction is not permitted for
itemizers.) Revenue-raising items in the charitable area include provisions intended to
curtail the involvement of tax-exempt organizations in tax shelters and the doubling of
certain fines and penalties applicable to charitable organizations.
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.
Other revenue-raisers are additional measures designed to suppress the movement of
U.S.-chartered parent corporations to low-tax countries (corporate “inversions” or
2 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 website at
[http://www.house.gov/jct/x-82-05r.pdf].

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“expatriation”) and a requirement that large oil companies that use the Last In First Out
(LIFO) method of inventory accounting revalue their inventories..
According to estimates by the Joint Committee on Taxation (JCT), the version of S.
2020 approved by the full Senate would reduce revenue by $57.8 billion over five years,
by $37.4 billion over 10 years, and $11.0 billion in FY2006.3 (The bill approved by the
full Senate differed slightly from the Finance Committee proposal.) The Ways and Means
bill is estimated to reduce revenue by $56.1 billion over five years, $80.5 billion over 10
years, and by $5.8 billion in FY2006.4
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
expire without congressional action — is important to sustain economic growth.5
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.6
3 Ibid., p. 6.
4 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].
5 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.
6 See Sen. Kent Conrad, remarks in the Senate, Congressional Record, daily edition, vol. 151,
Mar. 14, 2005, pp. S2591-S2596.

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