Order Code RL33768
Major Tax Issues in the 110th Congress
Updated October 29, 2007
David L. Brumbaugh
Specialist in Public Finance
Government and Finance Division

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Major Tax Issues in the 110th Congress
Summary
During the first half of 2007, the most prominent congressional tax-policy action
focused on small business. In March, Congress approved legislation increasing the
federal minimum wage and providing small business tax cuts partly designed to ease
the adverse effect the minimum-wage increase was argued to have on small
businesses. President Bush vetoed the measure because of its Iraq-related
appropriations provisions, but on May 24, Congress approved an alternative bill that
included the tax provisions, and the President signed it (P.L. 110-28).
Subsequent congressional tax policy deliberations have focused on a variety of
specialized topics — for example, energy taxation, agriculture and conservation-
related taxation, tax relief related to forgiven mortgage debt, and a tobacco-tax
increase serving as a revenue-raising offset for the State Children’s Health Insurance
Program (SCHIP). However, on October 25, Chairman Rangel of the House Ways
and Means Committee introduced a broader bill (H.R. 3970) containing a mix of tax
cuts and tax increases for both businesses and individuals.
One focus of H.R. 3970 — and a topic that Congress has debated throughout
2007 — is the alternative minimum tax (AMT) for individuals. Under current law,
individuals pay the higher of their AMT or regular tax. Unlike the regular tax, the
AMT is not indexed for inflation, and rising prices, income growth, and enactment
of tax cuts under the regular tax have subjected a growing portion of taxpayers to the
AMT. The AMT’s scope has begun to include middle-class taxpayers along with the
upper-income individuals who were previously the principal subjects of the tax. In
past years, Congress has addressed the AMT’s growth with temporary measures that
restrict its scope, but indications are it may soon consider a permanent solution.
Other tax issues that Congress may address in 2007 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, and that interest may continue in 2007.
Given existing federal budget deficits, a dilemma with tax cuts is their cost in
foregone tax revenue. Extending the 2001 tax cuts or repealing the AMT, for
example, would reduce tax revenue substantially. There has been discussion of a
number of revenue-raising measures that would offset some or all of the cost of
revenue-losing tax cuts — for example, attempting to reduce the “tax gap” between
the taxes U.S. taxpayers owe and what they actually pay as well as restricting tax
shelters and tax benefits for U.S. firms that operate abroad. Also, energy-related tax
bills considered in both the House and Senate have offset energy tax incentives with
restrictions on several tax benefits for oil companies. Some in Congress have also
supported strengthened procedural rules to restrict the budget deficit, and the House
passed H.Res. 6 on January 5, implementing new budget rules.
This report will be updated as legislative and economic events occur.

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Contents
The Economic Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The State of the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Federal Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Federal Tax Burden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Tax Issues in 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
H.R. 3970, the Tax Reduction and Reform Act of 2007 . . . . . . . . . . . . . . . . 6
Taxes in 2007 Agriculture Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Taxes in Supplemental Appropriations and Minimum Wage Legislation
(P.L. 110-28; the Small Business and Work Opportunity
Tax Act of 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Taxes in the Administration’s FY2008 Budget Proposal . . . . . . . . . . . . . . 11
The Alternative Minimum Tax for Individuals . . . . . . . . . . . . . . . . . . . . . . 12
Energy Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Scheduled Expiration of the 2001 Tax Cuts . . . . . . . . . . . . . . . . . . . . . . . . 15
Tax Administration: The Tax Gap and Tax Shelters . . . . . . . . . . . . . . . . . . 16
The Tax Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Tax Shelters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
International Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Budget “PAYGO” Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Recently Enacted Tax Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Tax Relief and Health Care Act of 2006 (TRHCA; P.L. 109-432) . . . . . . . 22
Tax Increase Prevention and Reconciliation Act (TIPRA; P.L. 109-222) . . 23
The American Jobs Creation Act of 2004 (H.R. 4520; P.L. 108-357) . . . . 24
Working Families Tax Relief Act of 2004 (H.R. 1308; P.L. 108-311) . . . . 24
The Jobs and Growth Tax Relief Reconciliation Act of 2003
(JGTRRA; P.L. 108-27) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Job Creation and Worker Assistance Act of 2002 (JCWA; P.L. 107-147) . 26
Economic Growth Tax and Relief Reconciliation Act of 2001
(EGTRRA; P.L. 107-16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

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Major Tax Issues in the 110th Congress
During the first half of 2007, the most prominent congressional action on tax
legislation focused on small business taxation. In the first weeks of the new
Congress, the House and Senate each approved versions of H.R. 2, a bill increasing
the minimum wage. The Senate bill contained small-business tax cuts designed to
offset the wage increase’s burden for small business, and the House subsequently
passed a stand-alone bill (H.R. 976) containing a smaller set of small-business tax
benefits. In mid-March, both chambers folded their minimum-wage and respective
tax provisions into separate versions of H.R. 1591, a supplemental appropriations
bill, and in late April, Congress approved a conference committee version of the bill.
On May 1, however, President Bush vetoed the measure because of its Iraq-related
provisions. On May 24, Congress approved an alternative spending bill (H.R. 2206)
that included the tax provisions, and the President signed the bill (P.L. 110-28).
During the summer of 2007, congressional tax-policy deliberations have turned
to a variety of narrowly targeted policies — for example, energy taxation, agriculture
and conservation-related taxation, tax relief related to forgiven mortagage debt, and
a tobacco-tax increase serving as a revenue-raising offset for the State Children’s
Health Insurance Program (SCHIP). In addition, the farm bill approved by the House
on July 27 contains a tax proposal designed to restrict the use of bilateral tax treaties
by firms resident in third countries while the Senate Finance Committee in early
October approved a tax measure containing agriculture-related provisions along with
energy and conservation tax incentives. A prominent revenue-raising item in the bill
is a proposed codification of the “economic substance” doctrine that restricts the use
of tax shelters.
A broader issue that Congress has begun to debate and consider 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. 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 possibility that has been mentioned is providing less-
generous tax treatment of “carried interest” payments received by hedge fund
managers.1
1 For more information, see CRS Report RS22689, Taxation of Hedge Fund and Private
Equity Managers, by Mark Jickling and Donald J. Marples.

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On October 25, Chairman Rangel of the House Ways and Means introduced
H.R. 3970, containing a mix of both tax increases and tax cuts for businesses and
individuals. While the bill has a wide variety of provisions, one of its chief focuses
is the individual AMT. For businesses, the bill generally proposes coupling a
substantial cut in the statutory corporate tax rate with a number of narrower — but
in some cases, substantial — revenue-raising items.
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 Congress has either already considered or
appears likely to consider in coming months.
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
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
Throughout 2006 and the first two quarters of 2007, 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 22 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, 3.2% in 2005, and 3.3% in 2006. The

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growth rate was 2.5% in the last quarter of 2006, then fell to 0.7% in the first quarter
of 2007 before rising to 3.4% in the second quarter. Federal Reserve Chairman Ben
Bernanke has characterized the economy’s performance in recent quarters as being
“more consistent with sustainable expansion” after registering more rapid growth
earlier in the recovery, although he also noted that weakness in the housing market
has placed a drag on growth.2 In addition, in September, the Federal Reserve reduced
its target federal funds rate as a means of offsetting disruptions in credit markets.
The outlook for 2007 according to most prognosticators is for real growth in the
1.8% to 2.1% range. Still, the picture has its less sanguine side, especially in the area
of employment. The unemployment rate is currently 4.5% (for June 2007), compared
to the low of 3.8% achieved in the last expansion.3

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.4
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 FY2006.5 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
deficit in FY2006 marked 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 January 2007) also projects a continued
gradual decline in the deficit as percentage of GDP, with a small budget surplus
2 Ben S. Bernanke, testimony before the House Committee on Financial Services, U.S.
Congress, July 18, 2007. Posted on the Federal Reserve Board’s website, at
[http://www.federalreserve.gov/newsevents/testimony/bernanke20070718a.htm]
3 For additional information about the state of the economy, see CRS Report RL30329,
Current Economic Conditions and Selected Forecasts, by Gail E. Makinen.
4 For an analysis, see CRS Report RL32502, What Effects Have the Recent Tax Cuts Had
on the Economy? by Marc Labonte.
5 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update, August
2007, p.12.

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(0.4% of GDP) occurring in FY2012.6 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. The surplus resulted from
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 was 4.3% of
GDP.
The budget data indicate that the change was a result of both a growth in outlays
and a decline in revenues as a percentage of GDP. The decline in revenues was more
pronounced, though not by a wide margin. Revenues have declined from 20.9% of
GDP in FY2000 to 18.4% in FY2006, a drop of 2.5 percentage points. Outlays 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 deficit in FY2006 compared to FY2005
(a decline equal to 0.7% of GDP) resulted from an increase in revenues compared to
outlays. Receipts increased by 0.8% of GDP while outlays grew by 0.1% of GDP.
The 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;
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 estimated that extending all tax provisions scheduled to expire
between 2007 and 2017 would reduce federal revenue by $3.2 trillion over FY2008-
FY2017. This amounts to 9.3% of CBO’s projected baseline revenues for the
period.7
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
6 Ibid., p. 12.
7 Ibid., p. 101. Baseline revenues are projected to be $34.5 trillion (p. 81).

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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 FY2050.8 According to CBO, either
increases in taxes or cuts in spending will be necessary in the future if fiscal stability
is to be maintained.9
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 — before rising again to 18.4% in FY2006. 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, but while payroll taxes are progressive in the lower and
middle parts of the income spectrum, they 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 20.0% in 2004. 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.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,
8 U.S. Congressional Budget Office, The Long-Term Budget Outlook (Washington: GPO,
2005), p. 10.
9 Ibid., p. ix.
10 U.S. Congressional Budget Office, Historical Effective Federal Tax Rates, 1979 to 2004
(Washington: GPO, 2006). The report is available on the CBO website, at
[http://www.cbo.gov/]. The percentage-point declines across quintiles, from lowest to
highest, are 1.9, 3.0, 2.7, 3.3, and 2.9. The overall decline is 3.0.

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Distribution of the Tax Burden Across Individuals: An Overview, by Jane G. Gravelle
and Maxim Shvedov.
Tax Issues in 2007
H.R. 3970, the Tax Reduction and Reform Act of 2007
On October 25, 2007, Chairman Rangel of the House Ways and Means
Committee introduced the Tax Reduction and Reform Act of 2007 (H.R. 3970), an
omnibus tax bill containing a broad array of both individual and corporate income
tax provisions. “Very preliminary” revenue estimates indicate the bill would reduce
revenue by a net total of $53.8 billion over 5 years and by $7.5 billion over 10
years.11
On the individual side, a chief focus of the bill is the individual alternative
minimum tax (AMT). As described elsewhere in this report, without legislative
action, the AMT will include an increasing portion of taxpayers in its scope. The bill
has two AMT provisions: (1) a one-year “patch” that does not completely repeal the
tax, but that extends a temporarily higher exemption level enacted in 2006; and (2)
complete repeal of the individual AMT after 2007. Beyond the AMT, however, the
bill proposes a number of general tax cuts for individuals, including an increased
standard deduction, an increased child tax credit, and expansion of the number of
taxpayers qualifying for the earned income tax credit. The bill would also extend for
one year a set of temporary individual income tax benefits (“extenders”). Among the
largest of these is the optional deduction for state and local sales taxes and the
deduction for tuition.
In addition to these tax cuts, the bill proposes a number of revenue-raising items
applicable to individuals, including a surtax on upper-income individuals (designed
to offset the cost of repealing the AMT), restoration of limits on itemized deductions
and the personal exemption, and an increase in the floor for itemized deductions. In
addition, the bill would tax the “carried interest” income of investment fund
managers as ordinary income rather than capital gains. The estimated net effect of
the bill’s individual income tax cuts and revenue-raisers would be a revenue loss of
$45.0 billion over 5 years and $6.4 billion over 10 years.
In broad outline, the proposal’s corporate income tax provisions couple a very
large tax cut provision — reduction of the highest statutory tax rate to 30.5% from
current law’s 35% — with a number of narrower (but in some cases, sizeable)
revenue-raising items. As with individuals, the bill also proposes a one-year
extension of temporary corporate tax benefits, and it also would make permanent a
temporarily increased “expensing” benefit applicable to investment in equipment by
relatively small businesses. Together, the estimated net revenue impact of the
11 U.S. Congress, House, Committee on Ways and Means, Estimated Revenue Effects of
Proposals Contained in The Tax Reduction and Reform Act of 2007, (Washington, Oct. 25,
2007). Published in the BNA TaxCore service, Oct. 26, 2007.

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corporate provisions would be to reduce revenue by $8.7 billion over 5 years and by
$1.0 billion over 10 years.
Taxes in 2007 Agriculture Legislation
On July 27, 2007, the House passed H.R. 2419, an authorization bill related to
agriculture (the 2007 “farm bill”).12 The bill’s spending provisions are estimated to
increase federal spending on agriculture policy above the level allowed by the
FY2008 budget resolution; and to comply with House pay-as-you-go budget rules,
the bill included $4 billion in revenue-raising provisions, the bulk of which would
be produced by a proposal designed to curb the use of tax-treaty benefits by firms not
actually resident in the treaty country. On October 4, the Senate Finance Committee
approved a bill that contains a number of agriculture-related provisions, but also
contains energy and conservation measures along with a revenue-raising proposal
designed to curtail tax shelters (codification of the “economic substance” doctrine).
The House bill’s treaty provision is designed to curb what is sometimes termed
“treaty shopping” — situations where a foreign firm with a U.S. subsidiary routes
payments from its U.S. subsidiary through a subsidiary in another country so as to
take advantage of tax-treaty benefits. While the United States permits U.S.
subsidiaries of foreign companies to deduct interest, royalties, and similar payments
made to their foreign parents, it also imposes a “withholding tax” on such payments
at a nominal rate of 30%. Like most developed countries, however, the United States
is signatory to a network of bilateral tax treaties that, among other provisions,
frequently provide for the reciprocal reduction or elimination of withholding taxes.
Accordingly, a foreign firm whose home country does not have a treaty that
substantially reduces the withholding tax may be able to save U.S. withholding tax
by routing interest or royalty payments through a subsidiary firm chartered in a
country that does have a U.S. treaty that reduces taxes. H.R. 2419’s proposal would
apply where a foreign-owned U.S. subsidiary makes payments to a foreign subsidiary
with a parent in another foreign country, and the withholding-tax rate would be
higher if the payment were made directly to the common foreign parent. In such
cases, H.R. 2419 would apply the higher of the two withholding tax rates. The Joint
Tax Committee has estimated that the revenue gain from the provision would be $3.2
billion over 5 years and $7.5 billion over 10 years.
Supporters of the provision have argued that it will close what they characterize
as a “loophole” that permits foreign firms to unfairly avoid U.S. taxes. The
provision’s opponents have argued that the measure would abrogate U.S. treaties and
reduce employment-creating foreign investment in the United States; the
administration has threatened to veto the measure.13 Also, members of the
12 For additional information on the farm bill, see CRS Report RL33934, Farm Bill
Proposals and Legislative Action in the 110th Congress, by Renee Johnson et al.
13 Brett Ferguson, “House Votes to Repeal Treaty Advantages for U.S. Subsidiaries as Part
of Farm Bill,” BNA Daily Tax Report, Jul. 30, 2007, p. GG-1.

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congressional tax-writing committees have expressed concern about the tax
committees’ being relied upon to provide budget offsets for other committees.14
On October 4, 2007, the Senate Finance Committee approved a bill (the
Heartland, Habitat, Harvest, and Horticulture Act) containing a set of tax provisions
related to energy, conservation, and agriculture. The bill contains both revenue-
losing and revenue-raising provisions, but revenue estimates published by the
Finance Committee indicate it would be approximately revenue neutral over both 5-
and 10-year periods. Indications are that the Finance Committee measure may be
considered together with a Senate version of a farm bill, and the Finance bill contains
a conservation tax credit that may increase the amount of new outlays that could fit
into the Senate’s non-tax farm bill by $3 billion.15
Taken alone, the committee bill’s tax cut provisions would reduce revenue by
an estimated $12.7 billion over 5 years and $13.8 billion over 10 years.16 The bill’s
tax cuts consist of four groups, respectively containing provisions for an agriculture
disaster reserve fund, conservation, energy, and agriculture. The conservation
provisions are generally tax incentives for various activities conserving forests,
wetlands, wildlife, and endangered species. The bill’s energy provisions are a group
of tax incentives designed to promote domestic fuel security, in many cases by
promoting the production and use of alternative fuels. The agriculture measures are
a set of tax benefits related to farming businesses — for example, more generous
depreciation rules for farm machinery and equipment.
The bill’s revenue raising provisions would together increase revenue by an
estimated $13.0 billion over 5 years and $14.3 billion over 10 years. The single
largest item is a provision designed to curtail the use of tax shelters: a codification
of the judicial “economic substance” doctrine that has developed in court cases
related to tax shelters. In general terms, the doctrine denies the use of tax-reducing
items — e.g., tax deductions and credits — generated by transactions that do not
result in a meaningful change in the taxpayer’s economic position.17 In general, the
14 Brett Ferguson, “Doggett Proposes Closing Loopholes in Treaties to Raise Offset for
Farm Measure,” BNA Daily Tax Report, Jul. 25, 2007, p. G-12. See also Meg Shrive,
“Grassed WANS Against Violating Tax Treaties with Farm Bill Tax Provision,” Tax Notes,
Aug. 20, 2007, p. 627.
15 Noelle Straus, “Baucus at Center of Fight over Farm Bill Details,” Helena Independent
Record, Oct. 13, 2007. Available on line at [http://www.helenair.com/articles/2007/
10/13/montana/a011013_05.txt]. Visited Oct. 16, 2007.
16 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of the
Chairman’s Mark, As Modified, of the “Heartland, Habitat, Harvest and Horticulture Act
of 2007,” Scheudled for Markup by the Committee on Finance on October 4, 2007, JCX-97-
07, Oct. 4, 2007.
17 For a description of the economic substance doctrine as well as the Finance Committee’s
proposal, see U.S. Congress, Senate, Committee on Finance, Baucus/Grassed Economic
Substance Amendment, Oct. 4, 2007. Posted on the committee’s website, at
[http://finance.senate.gov/sitepages/leg/LEG%202007/Leg%20110%20100407agamend
ment.pdf ]. Visited Oct. 17, 2007. For additional information on the economic substance
(continued...)

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committee proposal integrates portions of the doctrine into the Internal Revenue
Code. The committee’s provisions would not apply unless a court determines the
economic substance doctrine to be relevant, but when such a determination is made
it would apply a two-part (“conjunctive”) test to a transaction, requiring that 1) the
transaction change the taxpayer’s economic position in a meaningful way (an
“objective” test); and 2) the taxpayer has a substantial non-federal-tax purpose for
engaging in the transaction. In addition, the proposal would apply a 30% penalty for
tax understatements where economic substance is lacking.
Other prominent revenue-raising measures in the bill are a change in the effect
date for existing restrictions on sale/lease back arrangements with foreign entities and
a set of revenue-raising items applying to agriculture.
Taxes in Supplemental Appropriations and Minimum Wage
Legislation (P.L. 110-28; the Small Business and Work
Opportunity Tax Act of 2007)
Tax treatment of small business is a continuing focus of congressional attention,
and the first months of the 110th Congress were no exception; consideration of small-
business taxation occurred in conjunction with deliberations on the federal minimum
wage. The President and others argued that an increase in the federal minimum wage
— an issue debated early in the 110th Congress — should be coupled with
consideration of tax cuts for small business. The tax cuts were viewed by their
proponents as a means of offsetting the extra burden a higher minimum wage may
place on small businesses.
On January 10, the House passed H.R. 2, a minimum wage bill containing no
tax provisions. On February 1, however, the Senate approved its own minimum
wage bill (also H.R. 2) that included a package of tax benefits for small business and
others, along with a set of revenue-raising measures designed to offset part of the
revenue loss estimated to result from the benefits. On February 16, the House
approved a stand-alone tax bill (H.R. 976) containing a set of small-business tax
benefits more modest in size than the Senate’s.
The two tax measures had not moved to conference by mid-March, and the
House attached the tax and minimum wage provisions of H.R. 976 to a
supplemental appropriations bill — H.R. 1591 — that it approved on March 23. On
March 29, the Senate likewise attached its tax and minimum wage provisions to its
version of H.R. 1591, and both chambers approved a conference agreement on the
bill in early April. Along with minimum wage and appropriations provisions, the bill
contained a tax package on intermediate grounds between the House and Senate
bills. A key issue with H.R. 1591, however, was not taxes, but its provisions
regarding Iraq, and on May 1 President Bush vetoed the bill because of its Iraq-
related provisions. On May 24, both the House and Senate approved a modified
appropriations bill (H.R. 2206) that included the previous bill’s tax provisions, but
17 (...continued)
doctrine, see CRS Report RS22586, The Economic Substance Doctrine: Recent Significant
Legal Decisions, by Erika Lunder.

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CRS-10
with the addition of several relatively narrow measures applying to pensions. The
President signed the measure, and it became P.L. 110-28.
The Act’s Provisions. As enacted, the Small Business and Work Opportunity
Tax Act provided for tax cuts amounting to an estimated $7.1 billion over 5 years and
$4.8 billion over 10 years. The cuts were partly offset by revenue-raising items
amounting to $7.0 billion over 5 years and $4.4 billion over 10 years, for a net
revenue gain of $71 million over 5 years and $55 million over 10 years — a net effect
near to revenue neutrality.18 Taken alone, the revenue-losing and revenue-gaining
measures in the conference agreement fell between the House and Senate bills, in
terms of their size. The Senate version of the bill provided both for larger tax cuts
and revenue offsets than did the House bill.
The final act’s tax cuts were generally, though not exclusively, targeted at small
business. A prominent provision was an extension of the “expensing” tax benefit
for business investment in machines and equipment — a tax benefit provided by
Section 179 of the tax code. The provision is linked to small business because it
applies only to firms undertaking less than a certain level of investment. The
provision is a tax benefit in that it permits firms to deduct in the first year of service
(“expense”) a capped amount of investment outlays rather than requiring the outlays
to be deducted gradually in the form of depreciation, as is required with most tangible
assets. Permanent provisions of the Internal Revenue Code cap the expensing
allowance at $25,000 per year and begin a phase-out of the allowance when a firm’s
investment exceeds $200,000.19 However, temporary rules initially enacted in 2003
and extended on several occasions increased the annual cap and threshold to
$100,000 and $400,000, respectively. The increased amounts are indexed for
inflation occurring after 2003; the amounts for 2007 are $112,000 and $450,000. The
most recent extension was provided by TIPRA in 2006 and extended the increased
allowance and threshold through 2009. P.L. 110-28 extended the increased
expensing allowance and also increased the allowance to $125,000 and the phase-out
threshold to $500,000.
Another temporary tax benefit the act addressed was the work opportunity tax
credit (WOTC). In general, WOTC permits employers to claim a tax credit equal
to a specified percentage paid in first-year wages to members of certain targeted
groups, including families receiving Temporary Assistance for Needy Families
(TANF) support, qualified veterans, high-risk youth, and others. Under prior law,
WOTC was scheduled to expire at the end of 2007; P.L. 110-28 extended the credit
through August 2011 and made several modifications in qualification criteria for the
targeted groups.
18 Revenue estimates are by the Joint Committee on Taxation, and are taken from: U.S.
Congress, Joint Committee on Taxation, Estimated Revenue Effects of Revenue Provisions
Contained in the Conference Agreement for H.R. 1591, JCX-25-07, April 24, 2007.
Available at the committee’s website, at [http://www.house.gov/jct/pubs07.html].
19 The cap is reduced on a dollar-for-dollar basis by each dollar of investment exceeding
$200,000. Thus, firms undertaking investment in excess of $225,000 cannot claim the
allowance under the permanent rules.

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CRS-11
The act modified the tax credit employers can claim against social security
(FICA) taxes paid for employees who receive tips. The modification was designed
to keep the new, higher minimum wage from having the effect of reducing the credit.
Under both the act and prior law, the credit is equal to the employer’s FICA tax on
tips in excess of those meeting the minimum wage requirement. Arithmetic thus
dictates that if the minimum wage is increased and no other changes are made (and
tips do not increase), the tax credit will be reduced: an increase in the minimum wage
reduces the amount by which tips exceed the minimum wage.
P.L. 110-28 increased the minimum wage to $7.25 from prior law’s $5.15 and
would thus have reduced the tax credit, absent other changes. However, the act
provides that the credit will continue to be calculated based on prior law’s minimum
wage. The act also provided that both the FICA credit and WOTC can offset a
taxpayer’s alternative minimum tax.
The act contained two principal revenue-raising provisions. One increased the
scope of the “kiddie tax” — a provision that taxes children under the age of 18 at
their parents’ tax rate on unearned income exceeding a certain threshold. The act
increased the applicable age by one year (i.e., under age 19), or under 24, if full-time
students. The second revenue-raising provision lengthens the period after which
interest and penalties are suspended for unpaid taxes in cases where the taxpayer
has not received a notice from the IRS.
Taxes in the Administration’s FY2008 Budget Proposal
On February 5, the Bush Administration released the details of its FY2008
budget proposal, including its tax components. In broad outline, the
Administration’s tax plan calls for a net tax cut, consisting of tax reductions in a
number of areas along with more modest revenue-raising proposals, chiefly in the
area of compliance. The Administration’s budget documents state that the tax
proposals’ goal is to make the tax system more “simple, fair, and pro-growth.”20 The
principal proposed reductions are
! permanent status for the tax cuts enacted in 2001 and 2003 that are
scheduled to expire at the end of 2010;
! targeted tax incentives designed to promote saving, investment,
health care, charitable giving, education, and the environment; and
! extension of several temporary tax benefits (“extenders”), including
the work opportunity tax credit and minimum tax relief for
individuals. The plan would make the research and experimentation
tax credit permanent.
20 U.S. Executive Office of the President, Office of Management and Budget, Budget of the
United States Government, Fiscal Year 2008, Analytical Perspectives (Washington: GPO),
p. 2.

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CRS-12
In the area of compliance, the largest single revenue-raising item is expanded
information reporting requirements. According to the Administration’s budget
documents, the plan as a whole would reduce revenue by an estimated net amount of
$599 billion over 5 years (FY2008-FY2012) and by $1,854 billion over 10 years
(FY2008-FY2017). Of the tax cut proposals, the largest, by far, is that to make the
2001 and 2003 tax cuts permanent, which would reduce revenue by an estimated
$373.9 billion over the plan’s first 5 years and $1,617.2 billion over 10 years.
On May 17, 2007, Congress approved a conference committee version of the
FY2008 budget resolution (S.Con.Res. 21). It provides for a one-year reduction in
the individual alternative minimum tax (AMT) as well as extension of EGTRRA’s
tax cuts that are scheduled to expire in 2010.
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.21
The portion will decline for a number of years thereafter if EGTRRA’s expiration
occurs as scheduled, but then will resume growth. Congress has debated the AMT
over much of 2007, and on October 25, Chairman Rangel of the House Ways and
Means Committee introduced an omnibus tax bill that has AMT reduction and repeal
as one chief focus.

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
21 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-13
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
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.22
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 $569 billion over 10 years, an
amount equal to 1.6% of federal revenues expected over the period. If EGTRRA’s
22 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
tax cuts are extended or made permanent, the cost of restraining the AMT would be
considerably larger.23
Energy Taxation
Democratic leaders have stated that energy taxation is an issue they intend to
address in 2007. Their focus appears to be two-fold: a revenue-raising scaling-back
of tax cuts for 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. Those goals were addressed, in part, in an energy bill (H.R. 6) the
House passed in January, 2007. The bill restricted several tax benefits as they apply
to oil and gas production, and provided that the resulting tax revenues were to be
used to fund a reserve for energy efficiency and renewable energy.
In June, the Senate began consideration of its own, amended, version of H.R.
6, which included a wide-ranging non-tax (“policy”) component. While the Senate
Finance Committee approved a tax package of revenue-raising items and provisions
to promote conservation and alternative energy sources, the tax plan was not added
to the policy component of H.R. 6 because of opposition to its revenue-raising
provisions — especially a tax on oil and gas from the Gulf of Mexico and restrictions
on leasing transactions involving foreign property.24
In the House, on June 20 the Ways and Means Committee approved a bill
restricted to energy tax provisions (H.R. 2776) that, like the earlier Finance
Committee measure, contains a mix of revenue raisers and tax benefits. The bill was
approved by the House on August 4.
In broad outline, the two committee bills are similar, with their conservation and
alternative fuels measures partly offset by revenue-raising items. They differ,
however, in the exact make-up of the respective components and in the magnitude
of their revenue effects. Specifically, the Finance Committee bill contains revenue-
losing items estimated to reduce revenue by a total of $32 billion over 10 years, and
revenue-raisers expected to increase revenues by the same amount, thus achieving
approximate revenue neutrality on a net basis. The Ways and Means bill is likewise
estimated to achieve revenue neutrality, but the expected magnitude of its respective
revenue raisers and revenue-losing provisions is smaller, totaling $15 billion over 10
years in each case.
Prominent among the tax benefits in both bills is extension and modification of
the tax credit for production of energy from renewable sources provided by Section
45 of the tax code, although the Finance Committee’s version would result in a larger
revenue loss. The remaining revenue-losing items in the two bills differ
considerably.
23 U.S. Congressional Budget Office, The Budget and Economic Outlook, p. 16.
24 Heather M. Rothman, “Senate Energy Tax Package Could Be Doomed in House,” BNA
Daily Tax Report, June 26, 2007, p. G-1.

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CRS-15
A large revenue-raising item common to both bills is denial of the tax code’s
Section 199 domestic production deduction to certain oil- and gas-related income.25
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. The Ways and Means bill would deny
the deduction to all domestic production of oil and gas; the Finance Committee
would deny the deduction to integrated oil companies.
In October, the Finance Committee returned to deliberations on energy tax
policy, folding a part of its June energy provisions into a bill containing farm and
conservation-related tax provisions. The included energy provisions were the bulk
of the earlier measure’s tax benefits aimed at domestic fuel security, but not the tax
credit for production from renewable sources. A prominent revenue-raising measure
was a proposed codification of the economic substance doctrine aimed at restricting
tax shelters.

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.
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.
25 Wesley Elmore, “Democrats Outline Early Agenda for 110th Congress,” Tax Notes,
January 8, 2007; Kurt Ritterpusch, “Early Components in Democrats’ Oil Industry Rollback
Plan Firm Up,” BNA Daily Tax Report, January 5, 2006.

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CRS-16
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
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.”

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CRS-17
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.26 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 FY2006.27
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
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).28
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
26 Allen Kenney, “Treasury Releases Tax Gap Plan; Solomon Nomination Still in Limbo,”
Tax Notes, October 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 November 29, 2006, at [http://finance.senate.gov/
hearings/statements/071306MB.pdf].
27 U.S. Internal Revenue Service, IRS Updates Tax Gap Estimates, news release IR-2006-28,
February 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].
28 The figures reported here are from the IRS website, at [http://www.irs.gov/pub/irs-
news/tax_gap_figures.pdf], visited November 29, 2006.

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CRS-18
approaches for reducing the tax gap.29 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.30 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
to taxpayer rights and maintain an appropriate balance between enforcement activity
and imposition of taxpayer burden.”31
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
29 The first report was U.S. Congress, Joint Committee on Taxation, Options to Improve Tax
Compliance and Reform Tax Expenditures, JCS-02-05, January 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, August 3, 2006, and is available
as a Tax Core feature of BNA’s Daily Tax Report for October 20, 2006.
30 U.S. Department of the Treasury, Office of Tax Policy, A Comprehensive Strategy for
Reducing the Tax Gap (Washington, September 26, 2006). The report is available on the
Office of Tax Policy’s website, at [http://www.treas.gov/offices/tax-policy/] (visited
November 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, March
6, 2006, p. 1024.
31 U.S. Treasury, Office of Tax Policy, A Comprehensive Strategy for Reducing the Tax
Gap, p. 2.

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CRS-19
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.32 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.33 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.
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.
Codification of the economic substance doctrine has been estimated by the Joint
Tax Committee to raise significant tax revenue. Given continuing federal budget
deficits and the adoption of pay-as-you-go type rules in both chambers of Congress,
Congress has continued to consider adopting economic substance-related restrictions
on tax shelters as a means of providing revenue offsets for tax cuts elsewhere. In
October 2007, for example, the Senate Finance Committee approved economic-
32 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,
September, 1985, pp. 305-320.
33 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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substance related provisions as part of a package containing energy, conservation,
and agriculture tax benefits. (See the preceding section entitled “Taxes in 2007
Agriculture Legislation.”) Codification of the economic substance doctrine is also a
revenue raising item in the omnibus tax bill (H.R. 3970) introduced by Chairman
Rangel of the House Ways and Means Committee.
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
deficit, and the House took action on such rules in the first week of the 2007
session.34 Such action, while not directly altering tax policy, has the potential of
34 Steven T. Dennis, “Democrats’ First 100 Hours: Costly AMT Rewrite an Opening
Challenge to Anti-Deficit Goals,” CQ Weekly, November 20, 2006, p. 3107.

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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.35 (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.36 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 5
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.
35 Rudolph G. Penner, “Can Congress Use Budget Rules to Improve Tax Policy?” Tax Notes,
October 23, 2006, p. 377.
36 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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CRS-22
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 5 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).
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
! New markets tax credit
! Deduction of state & local sales taxes
! Research and experimentation tax credit
! Work opportunity and welfare-to-work tax credits (combined)
! Earned income tax credit treatment of combat pay
! Qualified zone academy bonds
! Deduction of teacher expenses
! Expensing of brownfields costs
! DC investment incentives
! Indian employment credit
! Depreciation on Indian reservations
! Leasehold depreciation
! Rum excise cover-over to Puerto Rico and Virgin Islands

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CRS-23
! Parity in application of mental health benefits
! Charitable contributions of scientific and computer property
! Medical savings accounts
! Suspended limit on percentage depletion
! Economic development credit for American Samoa
! Gulf Opportunity Zone depreciation
! Authority for undercover operations
! Disclosures of certain tax return information
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 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.

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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.)
The American Jobs Creation Act of 2004
(H.R. 4520; P.L. 108-357)
Congress passed the American Jobs Creation Act (AJCA) (H.R. 4520; P.L. 108-
357) 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.
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) (H.R. 1308; P.L. 108-311) provided a number of substantial tax cuts that
were scheduled to be phased in gradually over the 10 years following EGTRRA’s

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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 5 years and $146.9 billion over 10 years.
WFTRA’s provisions
! extended the increased ($1,000) child tax credit through 2009;
! 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 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-

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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 as follows:
! 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).
! 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.
Job Creation and Worker Assistance Act of 2002
(JCWA; P.L. 107-147)
The final version of the Job Creation and Worker Assistance Act (P.L. 107-147)
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 the September 2001 terrorist attacks. The enacted
version of JCWA was considerably smaller than EGTRRA; the Joint Tax Committee

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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 as follows:
! 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.
Economic Growth Tax and Relief Reconciliation
Act of 2001 (EGTRRA; P.L. 107-16)
EGTRRA (P.L. 107-16) 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.

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