Order Code RL33768
Major Tax Issues in the 110th Congress
Updated January 10, 2007
David L. Brumbaugh
Specialist in Public Finance
Government and Finance Division

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Major Tax Issues in the 110th Congress
Summary
As 2006 came to a close, congressional leaders in the tax-writing committees
and elsewhere have provided some indications of tax issues that may be on the
congressional agenda in 2007. One issue whose urgency was reduced, however, was
the fate of a set of temporary tax benefits (the “extenders”) that generally expired at
the end of 2005: Congress approved a bill extending the provisions (the Tax Relief
and Health Care Act of 2006; P.L. 109-432) during the first week of December in its
post-election session. Nevertheless, a number of significant tax issues remain that
Congress may address in 2007.
Prominent among upcoming issues is the alternative minimum tax (AMT) for
individuals. Under current law, individuals are generally required to pay either the
AMT or the regular tax, whichever is greater. Unlike the regular tax, however,
structural components of the AMT are not indexed for inflation. Thus, given rising
prices, the growth of incomes, and enactment of tax cuts under the regular tax, a
growing portion of taxpayers are subject to the AMT each year; and its coverage has
begun to affect middle-class taxpayers (along with the upper-income individuals who
were those principally subject to the tax in prior years). In past years, Congress has
addressed the growth of the AMT by enacting temporary measures (“patches”) that
restrict its scope. Recently, however, Congressional leaders have expressed an
interest in seeking a more long-term solution to the AMT’s increased scope.
Other tax issues that Congress may address include the question of whether to
extend the broad tax cuts first enacted in 2001 — for example, the expanded child
credit, reduced individual tax rates, tax cuts for married couples, and repeal of the
estate tax. The cuts are scheduled to expire at the end of 2010, and during 2006,
Congress evinced considerable interest in making the tax cuts permanent.
Notwithstanding the results of the mid-term elections, the 110th Congress may return
to the question of extending the tax cuts in either their initial or altered form.
In the current era of federal budget deficits, a dilemma with tax-cutting
measures is their likely cost in terms of foregone tax revenue. Extending the 2001
tax cuts or repealing the AMT, for example, would reduce tax revenue by substantial
amounts. Accordingly, there has been some discussion of a number of revenue-
raising measures that would offset some or all of the cost of revenue-losing tax cuts.
Items that have been mentioned prominently include increased attention to the “tax
gap” — the difference between the taxes U.S. individuals and firms owe and what
they actually pay — as well as tax shelters, restricting tax benefits for U.S. firms that
operate abroad, and restricting tax benefits for oil companies. In addition, some in
Congress have indicated support for strengthening rules designed to restrict the
federal budget deficit.
Congress, of course, does not consider tax policy in an economic or budgetary
vacuum. This report thus provides a broad view of tax policy’s context before taking
a closer look at the particular tax issues that appear likely to arise in 2007. The report
will be updated as legislative and economic events occur.

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Contents
The Economic Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The State of the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Federal Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Federal Tax Burden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Possible Tax Issues in 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Alternative Minimum Tax for Individuals . . . . . . . . . . . . . . . . . . . . . . . 5
Energy Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Scheduled Expiration of the 2001 Tax Cuts . . . . . . . . . . . . . . . . . . . . . . . . . 8
Tax Administration: The Tax Gap and Tax Shelters . . . . . . . . . . . . . . . . . . 10
The Tax Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Tax Shelters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
International Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Budget “PAYGO” Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Recently Enacted Tax Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Tax Relief and Health Care Act of 2006 (TRHCA; P.L. 109-432) . . . . . . . 15
Tax Increase Prevention and Reconciliation Act (TIPRA; P.L. 109-222) . . 16
Economic Growth Tax and Relief Reconciliation Act of 2001
(EGTRRA; P.L. 107-16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Job Creation and Worker Assistance Act of 2002
(JCWA; P.L. 107-147) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
The Jobs and Growth Tax Relief Reconciliation Act of 2003
(JGTRRA; P.L. 108-27) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Working Families Tax Relief Act of 2004 (H.R. 1308; P.L. 108-311) . . . . 19
The American Jobs Creation Act (H.R. 4520; P.L. 108-357) . . . . . . . . . . . 20

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Major Tax Issues in the 110th Congress
As 2006 came to a close, congressional leaders in the tax-writing committees
and elsewhere provided some indications of possible tax issues that may be on the
congressional agenda in 2007. One issue whose urgency was reduced, however, was
the fate of a set of temporary tax benefits (the “extenders”) that generally expired at
the end of 2005: Congress approved a bill extending the provisions (H.R. 6111, the
Tax Relief and Health Care Act of 2006) in its post-election session during the first
week of December. Other tax issues remain, however, that may be taken up in 2007.
Prominent among upcoming issues is the alternative minimum tax (AMT) for
individuals. As described in more detail later in this report, an increasing number of
taxpayers are subject to the AMT each year, and Democratic leaders have indicated
interest in legislation providing AMT relief. However, reducing or repealing the
AMT could result in substantial revenue losses, and some Democrats have expressed
interest in restoring budget rules that would require revenue-raising measures to
offset revenue losses. One possible source of additional revenue that has received
interest is the “tax gap” — the difference between the taxes U.S. individuals and
firms owe and those they actually pay. Recent IRS estimates place the size of the gap
at $300 billion annually. Other possible revenue-raising areas that have been
mentioned include tax shelters, restricting tax benefits for U.S. firms that operate
abroad, and restricting tax benefits of oil companies.
Another tax question that may arise before the end of the 110th Congress is the
fate of the tax cuts first enacted with the Economic Growth Tax Relief and
Reconciliation Act of 2001 (EGTRRA; P.L. 107-16). EGTRRA’s tax cuts are
distinct from the extenders in their scope — the 2001 cuts are generally broader than
the more narrowly targeted extenders and include provisions such as individual tax
rate reductions, expansion of the child tax credit, tax cuts for married couples, and
repeal of the estate tax. Like the extenders, however, EGTRRA’s tax cuts are
temporary and are scheduled to expire at the end of 2010. An issue that Congress
may debate over the course of 2007 and in the lead-up to the 2008 elections is
whether to extend or make permanent EGTRRA’s cuts, either in their initial or
modified form.
Congress does not consider tax policy in an economic or budgetary vacuum.
This report thus provides a broad view of tax policy’s context before taking a closer
look at the particular tax issues that appear likely to arise in 2007.
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

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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
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.
Taxes also 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, taxes can affect the distribution of
income across income levels (affecting “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 recent, current, 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
In 2006, 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 18 consecutive quarters. Real growth was relatively
sluggish during the first quarters of the recovery, but began to pick up momentum in
mid-2003. In 2001 (the first full year of the recovery), real gross domestic product
(GDP) grew at a 0.8% rate, followed by 1.6% in 2002, 2.5% in 2003, 3.9% in 2004,
and 3.2% in 2005. In 2006, the annualized growth rate was 5.6% in the first quarter,
but then moderated to 2.6% in the second quarter and 1.6% in the third. Federal
Reserve Chairman Ben Bernanke has characterized the economy as being in a
“transition” phase — moving from rapid growth fueled by the absorption of resources
underutilized in the last recession to a more moderate growth rate that depends on
growth in the economy’s basic productive capacity.1
The outlook for 2007 according to most prognosticators — including the
Congressional Budget Office (CBO), the Office of Management and Budget (OMB),
and private sector forecasters — is for real growth in the 3% to 3.5% range. Still, the
picture has its less sanguine side, especially in the area of employment. The
1 Ben S. Bernanke, testimony before the Committee on Banking, Housing, and Urban
Affairs, U.S. Senate, July 19, 2006. Posted on the Federal Reserve Board’s website, at
[http://www.federalreserve.gov/boarddocs/hh/2006/july/testimony.htm], visited Nov. 15,
2006.

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unemployment rate is currently 4.6% (for September 2006), compared to the low of
3.8% achieved in the last expansion.2

Although the current economic context of tax policy is thus one of growth, a
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 stimuli continues to resonate. For example, one
subject of debate is the extent to which tax cuts are responsible for the economy’s
rebound since the last recession and the extent to which factors such as monetary
policy are responsible.3 For further reading, see CRS Report RL30329, Current
Economic Conditions and Selected Forecasts, by Gail Makinen.
The Federal Budget
According to the Congressional Budget Office (CBO), the federal budget
registered a deficit equal to 1.9% of GDP in FY2006.4 This marks the second
consecutive year the deficit has fallen relative to the size of the economy; the deficit
was 2.6% of GDP in FY2005 after reaching a level of 3.6% of GDP in FY2004. The
expected deficit in FY2006 will mark the fifth year in a row the budget has registered
a deficit after being in surplus for the four-year period FY1998-FY2001. However,
CBO’s most recent budget report (released in August 2006) also projects a continued
gradual decline in the deficit as percentage of GDP, shrinking to a position of near-
balance (a deficit of 0.3% of GDP) by 2012.5 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, 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. The difference
between the surplus in FY2000 and the deficit for FY2006 is projected to amount to
4.4% 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,
though not by a wide margin. Revenues are projected to have declined from 20.9%
2 For additional information about the state of the economy, see CRS Report RL30329,
Current Economic Conditions and Selected Forecasts, by Gail E. Makinen.
3 For an analysis, see CRS Report RL32502, What Effects Have the Recent Tax Cuts Had
on the Economy?, by Marc Labonte.
4 U.S. Congressional Budget Office, Monthly Budget Review, Nov. 6, 2006, p. 1.
5 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update
(Washington: GPO, 2006), p. x.

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of GDP in FY2000 to 18.3% in FY2006, a drop of 2.6 percentage points. Outlays are
estimated to have increased by only 1.9 percentage points over the same period. The
decline in revenues had two sources: the recession of 2001 and subsequent sluggish
economic growth, and enacted tax cuts.
The decline in the relative size of the projected deficit in FY2006 resulted from
an increase in revenues; receipts are estimated to have increased by 0.8% of GDP (to
18.3%) while outlays grew by 0.2% of GDP (to 20.3%). The expected increase in
total receipts in FY2006 primarily reflects increases in individual and corporate
income tax receipts.
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 August Budget and Economic
Outlook: An Update estimated that extending all tax provisions scheduled to expire
between 2006 and 2016 (except those related to the AMT) would reduce federal
revenue by $1.9 trillion over fiscal years 2007-2016. When combined with their
implied impact on federal debt service (i.e., interest payments), the revenue
reductions would more than double the projected baseline deficit over the period.6
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. CBO’s December
2005 analysis of the long-term budget outlook projected several different scenarios
for growth of the three programs. Under its “intermediate” projection, CBO
estimates that spending on the programs will grow the current level of 8.2% of GDP
in FY2005 to 15.2% in FY2030 and 19.0% by FY2050.7 According to CBO, either
increases in taxes or cuts in spending will be necessary in the future if fiscal stability
is to be maintained.8
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
6 Ibid., p. 19.
7 U.S. Congressional Budget Office, The Long-Term Budget Outlook (Washington: GPO,
2005), p. 10.
8 Ibid., p. ix.

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1959 — before rising again to 18.3% in FY2005. 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 both 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 effective federal tax rate declined from
22.2% of income in 1979 to 19.8% in 2003, but is estimated to have risen to 21.4%
in 2005. Without more detailed analysis, it is not clear whether the system has
become more or less progressive over the entire period; while rates in all quintiles
have fallen the pattern is mixed.9 Since 2000, 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.10
For further information, see CRS Report RS20087, The Level of Taxes in the
United States, 1940-2005, by David L. Brumbaugh; and CRS Report RL32693,
Distribution of the Tax Burden Across Individuals: An Overview, by Jane G. Gravelle
and Maxim Shvedov.
Possible Tax Issues in 2007

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
9 U.S. Congressional Budget Office, Effective Federal Tax Rates Under Current Law, 2001
to 2014 (Washington: GPO, 2004), p. 10; and Historical Effective Federal Tax Rates, 1979
to 2003 (Washington: GPO, 2005). Both reports are available on the CBO website, at
[http://www.cbo.gov/]. The percentage-point declines across quintiles, from lowest to
highest, are 2.5, 2.3, 3.0, 1.6, and 1.2.
10 For the lowest to highest quintiles, respectively, the percentage-point declines in effective
tax rates between 2000 and 2005 were: 0.9, 1.0, 1.1, 0.9, and 1.7.

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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.11
The portion will decline for a number of years thereafter if EGTRRA’s expiration
occurs as scheduled, but then will resume growth. Following the November 2006
mid-term elections, Democratic leaders of the tax-writing committees indicated that
AMT relief is a high priority.12
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
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. In 2004, the
Working Families Tax Relief Act (WFTRA; P.L. 108-311) extended through 2005
an exemption amount of $58,000 for married couples and $40,250 for single filers.
In 2006 the Tax Increase Prevention and Reconciliation Act (P.L. 109-222) extended
the increased exemption for one year. Under TIPRA, the exemption amount is
$42,500 (singles) and $62,550 (couples) for 2006. Absent further action, the
exemption amounts will revert in 2007 to the pre-EGTRRA amounts 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 could use tax benefits and omissions from the tax base to reduce
his or her tax liability below a certain point. There are several 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
11 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.
12 Kurt Ritterspusch, et al., “Rangel Will Not Undo Tax Cuts for AMT; Many Optimistic on
Passing Extenders Bill,” BNA Daily Tax Report, Nov. 9, 2006, p. GG.

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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 considered to be socially desirable or conducive to economic
growth. On the other hand, it is often deemed desirable for a tax system to achieve
a certain level of fairness, both in horizontal terms (the equal treatment of individuals
with the same income but 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 the balance between equity and social and economic
goals intended for the AMT has been upset.13
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 $513 billion over 10 years, an
amount equal to 1.6% 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.14
Energy Taxation
Democratic leaders have stated that energy taxation is an issue they intend to
address early in the new Congress. Their focus appears to be two-fold: a revenue-
raising scaling-back of tax cuts for the petroleum firms that were enacted in recent
years; and enactment of a new set of incentives aimed at energy conservation and
promotion of alternative energy sources.
One of the revenue-raising items that is being considered is denial of the tax
code’s section 199 domestic production deduction to certain oil and gas related
13 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.
14 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update, p. 19.

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income.15 The deduction was first enacted with the American Jobs Creation Act of
2004 (P.L. 108-357) and applies to the domestic U.S. manufacturing, extractive, and
agriculture industries in general, not just to the petroleum industry. The deduction
is phased in, with a rate equal to 6% of domestic production income in 2007-2009,
and a permanent rate of 9% in 2010 and thereafter. Indications are that 2007
legislation may be patterned after H.R. 5218 (Representative McDermott) of the 109th
Congress, which would have denied the deduction to “the production, refining,
processing, transportation, or distribution” of oil or natural gas.
A second revenue-raising provision that is being considered is repeal of the five-
year amortization of geological and geophysical (G&G) costs undertaken by major
integrated oil companies. The Energy Policy Act of 2005 (EPACT05; P.L. 109-58)
initially enacted the provision, which provides a tax benefit for oil and gas
exploration and development. Economic theory indicates that, to measure income
accurately, outlays that help create oil wells and other assets having value should be
deducted only as the assets lose their worth. In the case of profitable wells, two-year
amortization therefore likely provides favorable treatment similar to accelerated
depreciation. Initially, EPCT05's treatment applied to both integrated producers (i.e.,
large companies) and independent producers. The Tax Increase Prevention and
Reconciliation Act of 2006 (TIPRA; P.L. 109-222) lengthened the amortization
period to five years for integrated producers. Democratic proposals would further
lengthen the amortization period for integrated producers.
There are indications that at least part of the revenue produced by cutting energy
tax benefits may be used to offset the revenue loss from expanded tax incentives to
develop renewable and alternative energy sources—for example, hydropower, biofuel
and ethanol, nuclear power, geothermal power, and solar energy.16
For a more detailed overview of energy tax policy, see CRS Report RL33578,
Energy Tax Policy: History and Current Issues, by Salvatore Lazzari; and CRS
Report RL33763 Oil and Gas Subsidies: Current Status and Analysis, by Salvatore
Lazzari.
Scheduled Expiration of the 2001 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
for legislation affecting the budget (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.
15 Wesley Elmore, “Democrats Outline Early Agenda for 110th Congress,” Tax Notes, Jan.
8, 2007; Kurt Ritterpusch, “Early Components in Democrats’ Oil Industry Rollback Plan
Firm Up,” BNA Daily Tax Report, Jan. 5, 2006.
16 Steven Mufson, “Democrats Hope to Take from Oil, Give to Green Energy, The
Washington Post, Jan. 4, 2007, p. A01; Kurt Ritterpusch, “Baucus Says Subcommittee on
Energy Could be Added to Finance Committee,” BNA Daily Tax Report, Jan. 8, 2007.

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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”; and
! repeal of the estate tax.
In addition, EGTRRA provided for a temporary reduction in the individual
alternative minimum tax (AMT) by increasing the AMT’s exemption amount, but
scheduled the AMT relief to expire at the end of 2004.
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 of the tax cuts EGTRRA had
scheduled to phase-in gradually, generally making them effective in 2003. (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. Also, JGTRRA temporarily implemented a reduction
in the maximum tax rate on dividends and capital gains, reducing the rates to 15%
(5% for individuals in the 10% and 15% marginal income tax brackets). The
reduction was initially scheduled to expire at the end of 2008.
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. WFTRA also extended EGTRRA’s increased AMT exemption for one year.
In 2005, TIPRA extended JGTRRA’s dividend and capitals gains rate cuts along
with its AMT reduction. The dividend and capital gains cuts were extended through
2010; the increased AMT exemption through 2006.
Notwithstanding the various extensions and accelerations, the issue of
EGTRRA’s scheduled expiration at the end of 2010 remains and was debated in
Congress throughout 2006. The debate over extension of the 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

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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.
Tax Administration: The Tax Gap and Tax Shelters
Given congressional interest both in revenue-reducing measures (for example,
scaling back the AMT) and concern about the federal budget deficit, it appears likely
that policymakers will also focus attention on possible revenue-raising measures that
would, in effect, help pay for tax-cuts elsewhere. One possible area is tax
administration; in the Senate Finance Committee, leaders from both parties have
expressed interest in closing the “tax gap” and in possibly restricting “tax shelters.”
The “tax gap” and “tax shelter” concepts are closely related, but not
synonymous, so clarification is useful. The tax gap is a concept defined by the
Internal Revenue Service for use in administering the tax code — it is the difference
between the amount of tax voluntarily and timely paid by taxpayers and the actual tax
liability of taxpayers. The tax gap thus includes both deliberate (and illegal) tax
evasion and non-payment that occurs for more innocent reasons: for example,
taxpayer error or simple inability to pay. The concept of “tax shelter” is less
precisely defined, but is generally an economic concept (though whether to make it
a legal one as well is, in fact, an issue that has been debated in congress and
elsewhere). A tax shelter is tax-planning device that individual or corporate
taxpayers use to either illegally evade or legally avoid taxes in ways that were not
intended by policymakers.
The Tax Gap. Leaders of both tax-writing committees have expressed interest
in looking for ways to reduce the tax gap. Congressional interest appears to be
especially high in the Senate Finance Committee, which conducted hearings on the
tax gap in July 2006, and where the gap has been an issue in the confirmation of Eric
Solomon to be Assistant Secretary of the Treasury for Tax Policy.17 In its most
recent report on the gap, the IRS estimated its size was $345 billion for tax year 2001
— an amount equal to 16.3% of taxes actually owed and somewhat larger than the
$260 billion federal budget deficit projected for FY2006.18
As defined by the IRS, the tax gap consists of three components: nonfiling
(failure to file a return), underreporting (understating income or overstating
deductions), and underpayment (failure to pay reported taxes owed). Of these,
underreporting is by far the largest, comprising 83% of the total gap, with
17 Allen Kenney, “Treasury Releases Tax Gap Plan; Solomon Nomination Still in Limbo,”
Tax Notes, Oct. 2, 2006, p. 10. Senator Baucus has stated that closing the tax gap “is a
passion of mine” (news release by Senator Baucus dated July 10, 2006; available at the
Finance Committee website visited Nov. 29, 2006, at [http://finance.senate.gov/
hearings/statements/071306MB.pdf].
18 U.S. Internal Revenue Service, IRS Updates Tax Gap Estimates, news release IR-2006-28,
Feb. 14, 2006. Available (along with a variety of other publications about the tax gap) on
the IRS website, at [http://www.irs.gov/newsroom/article/0,,id=158619,00.html].

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underpayment making up 10% and nonfiling 8%. Among the different tax
categories, the largest component of the gap was, by far, the individual income tax,
accounting for 71% ($245 billion) of the total, followed by employment taxes (17%,
or $59 billion), corporate income tax (9%, or $32 billion), and estate taxes (2%, or
$8 billion). Within the individual income tax category, the largest component
consisted of underreported business income (55%, or $109 billion).19
Proposals to reduce the tax gap have included both changes in the tax law and
changes in IRS tax administration. Congress may thus address the issue either
through its oversight or legislative functions. Legislatively, the staff of the Joint
Committee on Taxation (JCT) has issued two reports outlining numerous legislative
approaches for reducing the tax gap.20 The reports contain proposals aimed at
restricting tax shelters and closing perceived “loopholes,” as well as measures that
would address non-compliance by other means, including simplification and/or
clarification of tax laws, increased withholding, and increased information reporting.
A number of the reports’ proposals were included as revenue-raising measures in the
Tax Increase Prevention and Reconciliation Act of 2006; it thus appears likely that
if additional legislation is considered to address the tax gap, it may include items
from the JCT report.
In September 2006, the Department of the Treasury’s Office of Tax Policy
issued a report outlining a strategy for reducing the tax gap.21 Although the report
was lacking in specifics and contained only preliminary information in some areas,
it listed a number of different ways in which the IRS might attempt to reduce the tax
gap, including strengthening reporting requirements, making efforts to enhance
access to data, enhancing examination and collection authority, revising penalties,
issuing addition regulations and guidance for taxpayers, increasing research,
improving information technology, and establishing more efficient compliance
activities.
The report also, however, argued that a component of reducing the tax gap
should be reduction in tax-code complexity, which, in the words of the report,
“makes the tax law too difficult for taxpayers to understand and for the IRS to
administer.” It also stated that “enforcement activities should be combined with a
commitment to taxpayer service,” and that compliance proposals “should be sensitive
19 The figures reported here are from the IRS website, at [http://www.irs.gov/pub/irs-
news/tax_gap_figures.pdf], visited Nov. 29, 2006.
20 The first report was U.S. Congress, Joint Committee on Taxation, Options to Improve Tax
Compliance and Reform Tax Expenditures, JCS-02-05, Jan. 27, 2005. Available on the
Committee’s website, at [http://www.house.gov/jct/pubs05.html]. The second was the Joint
Committee’s Additional Options to Improve Compliance, Aug. 3, 2006, and is available as
a Tax Core feature of BNA’s Daily Tax Report for Oct. 20, 2006.
21 U.S. Department of the Treasury, Office of Tax Policy, A Comprehensive Strategy for
Reducing the Tax Gap (Washington, Sept. 26, 2006). The report is available on the Office
of Tax Policy’s website, at [http://www.treas.gov/offices/tax-policy/] (visited Nov. 30,
2006). The report had been requested by Senator Baucus in February, 2006. See Martin A.
Sullivan, “Lessons for Congress on Closing Loopholes,” Tax Notes, Mar. 6, 2006, p. 1024.

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to taxpayer rights and maintain an appropriate balance between enforcement activity
and imposition of taxpayer burden.”22
The Treasury Department’s qualifications illustrate what is probably the chief
policy issue related to the tax gap — the question of how vigorously to address it.
There are few policymakers or tax analysts who object — in principle — to the idea
of reducing the tax gap. In broad terms, non-compliance not only reduces federal
revenues directly (and can thus be viewed as contributing to the budget deficit), the
gap also damages the perceived fairness of the tax system on the part of taxpayers
who are compliant. Beyond the agreement in principle, however, there are
disagreements over the extent to which concerns about taxpayer rights and the overall
level of tax burdens should mitigate efforts to shrink the tax gap.
Tax Shelters. In popular usage, the term “tax shelter” denotes the use of tax
deductions or credits from one activity to reduce taxes on another. In economic
terms, a tax shelter can be defined as a transaction (for example, a paper investment
or sale) that reduces taxes without resulting in a reduced return or increased risk for
the participant.23 But so vague and general is the term in most usages, that it could
also be defined simply as a tax saving activity that is viewed as undesirable by the
person or agency observing the activity and using the term.
Tax shelters can be either legal (tax “avoidance”) or illegal (tax “evasion”). To
the extent tax shelters are illegal, they therefore contribute to the tax gap; to the
extent that they are legal but unintended uses of the tax law (“loopholes”), they
reduce tax revenue beyond the loss caused by the tax gap. Like the tax gap, tax
shelters not only reduce tax revenue directly, but raise questions about tax fairness
among taxpayers not using shelters. In addition, while some shelters lack economic
substance, others involve the actual shifting of economic resources solely for the
purpose of saving taxes, and may thus reduce economic efficiency.
Congress has evinced considerable interest in tax shelters in recent years and has
enacted some restrictions into law. The American Jobs Creation Act of 2004 (AJCA;
P.L. 108-357) contained a number of provisions designed to restrict tax shelters. In
part, the act’s provisions were directed at specific tax shelters — for example, leasing
activities and the acquisition of losses for tax purposes (“built in” losses). In
addition, the act included provisions — for example, revised penalties and reporting
requirements — designed to restrict sheltering activity in general.24 In 2006, the
Senate version of TIPRA contained a number of tax shelter restrictions, but the
provisions were not included in the conference committee bill. Prominent among the
provisions was what the bill termed a “clarification” of the economic substance
doctrine that has been followed in a number of court decisions related to tax shelters.
22 U.S. Treasury, Office of Tax Policy, A Comprehensive Strategy for Reducing the Tax
Gap, p. 2.
23 These definitions are taken from Joseph J. Cordes and Harvey Galper, “Tax Shelter
Activity: Lessons from Twenty Years of Evidence,” National Tax Journal, vol. 38, Sept.,
1985, pp. 305-320.
24 For a list and description, see CRS Report RL32193, Anti-Tax-Shelter and Other
Revenue-Raising Tax Proposals Considered in the 108th Congress, by Jane G. Gravelle.

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CRS-13
Generally, the economic substance doctrine disallows tax deductions, credits, or
similar benefits in the case of transactions determined not to have economic
substance. The Senate version of TIPRA would have integrated aspects of the
doctrine into the tax code itself. A similar measure was contained in the Senate
version of the AJCA, but was not adopted, and given the relatively large revenue
estimates associated with the measure — the Joint Tax Committee estimated that the
Senate’s 2006 provision would increase revenue by $15.8 billion over 10 years — it
is possible that the economic substance doctrine will again receive congressional
attention in the 110th Congress.
International Taxation
There are some indications that Congress may include the tax treatment of U.S.
firms’ foreign income in any search for additional tax revenue. For example, during
the summer of 2006, Democratic leaders included a call to “end tax breaks that
reward companies for moving American jobs overseas” in the general policy agenda
they outlined in the lead-up to the mid-term elections.
Economic theory is skeptical about whether tax policy towards U.S.
multinationals can have a long-term impact on domestic employment, although
short-term and localized impacts are certainly possible. Taxes can, however, alter
the extent to which firms engage in overseas operations rather than domestic
investment. Under current law, a tax benefit known as “deferral” poses an incentive
for U.S. firms to invest overseas in countries with relatively low tax rates. In general
terms, deferral permits U.S. firms to indefinitely postpone U.S. tax on their foreign
income as long as that income is reinvested abroad in foreign subsidiaries. Deferral
is generally available for active business operations abroad, but the tax code’s
Subpart F provisions restrict deferral in the case of income from passive investment.
If made, proposals to restrict deferral may consist of expansion in the range of
income subject to Subpart F.
In recent years, however, the thrust of legislation has been more in the direction
of expanding deferral and cutting taxes for overseas operations than for expanding
Subpart F. For example, the American Jobs Creation Act of 2004 cut taxes on
overseas operations in several ways, while in 2006, TIPRA restricted Subpart F in the
case of banking and related businesses receiving “active financing” income and in the
case of the “look through” treatment overseas operations receive from other firms
(see also the discussion of TIPRA, below). Further, several analysts have recently
argued that attempts to tax overseas operations are either counter-productive or
outmoded in the modern integrated world economy. (Traditional economic analysis,
however, suggests that overseas investment that is taxed at a lower or higher rate than
domestic income impairs economic efficiency.)
Budget “PAYGO” Rules
There is some interest in Congress in adopting budget rules that would place
new limits on tax cuts and direct spending outlays that increase the federal budget

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CRS-14
deficit, and the House took action on such rules in the first week of the new session.25
Such action, while not directly altering tax policy, has the potential of altering the
context in which tax policy is considered and could alter both the size and content of
tax legislation.
According to some observers, “pay-as-you-go” (PAYGO) budget rules (now
lapsed) that were enacted in 1990 made an important contribution to the federal
budget surpluses that occurred in FY1998-FY2001 after decades of deficits.26 (The
rules were provided by the Budget Enforcement Act: BEA, Title XIII of P.L. 101-
508, the Omnibus Budget Reconciliation Act of 1990.) Under the PAYGO rules, if
legislation enacted over the course of a session were to result in a net increase in the
budget deficit, across-the-board spending cuts (sequestration) by the President would
be triggered to offset the increased deficit. The initial rules were temporary, but
were extended in 1993 and 1997 before terminating in December 2002.

A procedural rule similar to the statutory PAYGO requirement aimed at
restricting budget deficits has continued to apply in the Senate. Under the Senate
rule, consideration of tax and direct spending legislation is prohibited if the measure
would increase the budget deficit during several specified periods (the first fiscal
year, the first five fiscal years, and the following five fiscal years). However, tax cuts
and spending increases assumed in the budget resolution are exempt from the
requirement.
Proposals have been made to either reinstate the lapsed PAYGO rules that were
enforced by sequestration, to remove the exemption for budget policies assumed in
the budget resolution from the current Senate PAYGO rule, or to apply a rule similar
to the current Senate rule in the House.27 On January 5, 2007, the House approved
H.Res. 6, which—among other provisions—implemented PAYGO rules for the
House. Along with spending restrictions, the rules provide that it is not in order to
consider tax legislation that would either increase the budget deficit or reduce a
budget surplus over specified periods, including the current fiscal year, the first five
fiscal years, or the first 10 fiscal years. In contrast to the current Senate rule, the
House PAYGO rule does not exclude tax cuts assumed in the budget resolution.
For additional information, see CRS Report RL32835, PAYGO Rules for Budget
Enforcement in the House and Senate, by Robert Keith and Bill Heniff, Jr.
25 Steven T. Dennis, “Democrats’ First 100 Hours: Costly AMT Rewrite an Opening
Challenge to Anti-Deficit Goals,” CQ Weekly, Nov. 20, 2006, p. 3107.
26 Rudolph G. Penner, “Can Congress Use Budget Rules to Improve Tax Policy?” Tax Notes,
Oct. 23, 2006, p. 377.
27 Former Congressional Budget Office director Rudolph Panner has pointed out that while
the sequestration rules were effective, they never required deficit reduction — they only
applied to increases in the budget deficit. However, because the alternative minimum tax
may gradually increase tax liabilities, PAYGO rules would block AMT relief if it were not
accompanied by offsets. In that instance, PAYGO rules would act to actually reduce the
budget deficit below what would otherwise occur — an effect that Penner believes would
be more painful than occurred in the past under the expired PAYGO rules. Ibid., p. 377.

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Recently Enacted Tax Legislation

Tax Relief and Health Care Act of 2006 (TRHCA; P.L. 109-432)

Separately from the broad tax cuts enacted under EGTRRA and JGTRRA, the
tax code contains numerous tax provisions — almost exclusively tax benefits — that
were initially enacted on a temporary basis, with specific expiration dates. The
provisions (“extenders”) tend to be relatively narrow and are generally designed to
promote specific types of activity or investment. They have tended to be grouped and
considered together with each other, but separately from the more generally
applicable tax cuts enacted under EGTRRA and JGTRRA.
The specific areas of economic activity covered by the extenders vary widely,
and each presents its own unique policy issues. At the same time, however, the basic
economic issues presented by almost all the extenders are similar. Economic theory
holds that the economy functions most efficiently when taxes or other factors do not
distort the allocation of resources by favoring one activity over another. Only in
unusual cases, where there is a failure of the market to function properly, is economic
efficiency held to be improved by introducing tax distortions. The extenders each
present the question of whether the particular benefit they provide corrects a market
failure. (Absent such a failure, however, the particular benefit may be supported by
a belief in the social benefit of the activity that is promoted.)
In 2006, Congress considered the extenders as part of reconciliation legislation,
but did not include them in the reconciliation bill that was enacted (The Tax Increase
Prevention and Reconciliation Bill of 2005; see the discussion in the next section).
However, Congress returned to the extenders in its post-election session. On
December 9 the Senate approved an extenders bill (H.R. 6111) that had been passed
by the House on December 8. The bill was estimated to reduce tax revenue by $38.1
billion over five years and $45.1 billion over 10 years. It was signed into law as the
Tax Relief and Health Care Act of 2006 (P.L. 109-432).

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The following are the temporary provisions extended by H.R. 6111. The
extensions are retroactive, and are generally for two years (through 2007).
! Deduction of tuition
! Leasehold depreciation
! New markets tax credit
! Rum excise cover-over to
! Deduction of state & local
Puerto Rico and Virgin
sales taxes
Islands
! Research and
! Parity in application of
experimentation tax credit
mental health benefits
! Work opportunity and
! Charitable contributions of
welfare-to-work tax credits
scientific and computer
(combined)
property
! Earned income tax credit
! Medical savings accounts
treatment of combat pay
! Suspended limit on
! Qualified zone academy
percentage depletion
bonds
! Economic development
! Deduction of teacher
credit for American Samoa
expenses
! Gulf Opportunity Zone
! Expensing of brownfields
depreciation
costs
! Authority for undercover
! DC investment incentives
operations
! Indian employment credit
! Disclosures of certain tax
! Depreciation on Indian
return information
reservations
Tax Increase Prevention and Reconciliation Act
(TIPRA; P.L. 109-222)

In terms of its revenue impact and scope, the largest tax bill enacted during 2006 was
the Tax Increase Prevention and Reconciliation Act (TIPRA; P.L. 109-222). The final
version of the bill was estimated to reduce taxes by $70 billion over 10 years — a reduction
whose size was modest compared to a number of other tax bills enacted in 2001, 2003, and
2004.
The chief elements of TIPRA were extension of two temporary provisions contained
in earlier tax-cut bills: reduced rates for capital gains and dividends, and an increased AMT
exemption. As described above, the Jobs and Growth Tax Relief Reconciliation Act of
2003 (JGTRRA) reduced the tax rate on both capital gains and dividends to 15% (5% for
income in the 15% and 10% regular-income brackets), but scheduled its reductions to
expire at the end of 2008. Absent an extension, the capital gains rate would have reverted
to prior law’s 20% rate (10% for income in the lowest brackets) and dividends would have
been subject to the tax rates applicable to regular income, which range from 10% to 35%.
TIPRA extended the reduced dividend and capital gains rates for two years, through 2010.
As described above, Congress enacted temporary increases in the AMT exemption in
2001 and 2003 under EGTRRA, and JGTRRA, respectively. In 2004, WFTRA extended
through 2005 an exemption amount of $58,000 for married couples and $40,250 for single
filers. TIPRA extended the increased exemption for one year. Under its provisions, the
exemption amount is $42,500 (singles) and $62,550 (couples) for 2006. Absent further

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action, the exemption amounts will revert in 2007 to the pre-EGTRRA amounts of $45,000
and $33,750 for couples and singles, respectively.
TIPRA also extended for two years (through 2009) an increased “expensing”
allowance for small business investment in machines and equipment; under TIPRA, the
maximum expensing allowance is $100,000. (Absent its extension the allowance would
have reverted to $25,000.) In addition, TIPRA extended for two years (through 2008) more
generous rules for the “active financing income” of U.S. multinational firms. The act also
contained a number of revenue-raising items. Among the most prominent was a scaling-
back of the exclusions for foreign earned income and housing (provided by section 911 of
the tax code) and a new requirement for withholding by payments made by state and local
government entities to contractors.
The conference agreement on TIPRA differed in important respects from both the
House and Senate bills. The House bill, but not the Senate bill, contained the extended
capital gains and dividend rates; the Senate bill, but not the House bill, contained extension
of the increased AMT exemption. As described above, TIPRA contained both. At the
same time, however, both the House and Senate bills contained extension of numerous
expiring tax provisions (“extenders”) beyond the several measures that were ultimately
enacted; the bulk of the extenders were dropped from the conference bill. (For more on
the extenders, the section above, on page 7.)
Economic Growth Tax and Relief Reconciliation
Act of 2001 (EGTRRA; P.L. 107-16)
EGTRRA was the first and largest of the several tax cuts enacted during the Bush
Administration. It was signed into law on June 7, 2001, and has been estimated to have
reduced revenue by an average of 0.71% of GDP per year over its first four years, and by
3.6% of revenues that would otherwise have been collected. In general, its tax cuts were
chiefly in individual income taxes and estate taxes, and the reductions tended to be
relatively broad in scope rather than tightly targeted to particular activities or investments.
The chief reductions were:
! a phased-in reduction in statutory individual income tax rates;
! an increase in the per-child tax credit;
! several tax reductions for married couples;
! phase-out of the estate tax; and
! temporary reduction of the individual alternative minimum tax (AMT).
As discussed elsewhere in this report, to conform to a Senate procedural rule,
EGTRRA’s tax cuts were scheduled (under the act’s own terms) to expire at the end of
2010.
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 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

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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.

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 new 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 10 years. The stimulus portion of the proposal 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). Another prominent part of the President’s 2003 plan was a proposal to
move toward “integration” of the taxation of corporate-source income by cutting taxes on
dividends and capital gains. The Administration also proposed to increase the “expensing”
allowance for small business investment in equipment. Prominent among the more
targeted tax cuts proposed with the budget were two new tax-favored savings vehicles that
would replace Individual Retirement Accounts (IRAs) and that would have less binding
restrictions than current law’s IRAs as well as a set of new tax incentives for charitable
giving.
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.

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! 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).
! For 2003 and 2004 only, the standard deduction and 15% tax bracket 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 for varying lengths
of time. 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 through 2009;

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CRS-20
! extended tax cuts for married couples through 2008;
! extended the widened 10% tax-rate bracket through 2010;
! extended the increased alternative minimum tax exclusion through 2005;
! 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. (See the
above section on the “extenders.”)
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 were:
! 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.)
! 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.
! 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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