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Major Tax Issues in the 111th Congress
James M. Bickley
Specialist in Public Finance
Andrew Hanna
Presidential Management Fellow
December 11, 2009
Congressional Research Service
7-5700
www.crs.gov
R40004
CRS Report for Congress
P
repared for Members and Committees of Congress
c11173008
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Major Tax Issues in the 111th Congress
Summary
The major focus of congressional tax deliberations in early 2009 had been on an economic
stimulus package, the
American Recovery and Reinvestment Act of 2009 (P.L. 111-5; ARRA),
which was enacted with a projected cost of $787 billion over the next few years, with about 40%
of the cost reflecting tax cuts. The new law included a number of individual income tax
provisions targeted at lower and middle income families. Business provisions included
accelerated depreciation, net operating loss carrybacks for small businesses, deferral of tax on the
discharge of indebtedness, and energy provisions.
Other tax-related activity included the President’s the FY2010 budget request, proposing tax
changes estimated to cost $2.8 trillion over the next ten years. Most of the revenue losses would
arise from making most of the 2001-2003 tax cuts permanent (with the exception of certain
provisions affecting high-income individuals) and extending or making permanent other expiring
provisions including the alternative minimum tax (AMT) revision in ARRA. It also included
provisions making permanent some of the middle and lower income tax provisions in ARRA,
restricting the benefits of itemized deductions, and making a number of revisions in business
taxes, which would increase revenues.
As congressional actions continued, the budget resolutions in the House and Senate (H.Con.Res.
85, S.Con.Res. 13) provide for many of the tax proposals included in the Obama Administration’s
budget outline. Specifically, the conference agreement for S.Con.Res. 13, passed by the House
and Senate on April 29, 2009, provides for three additional years of AMT relief, without offset, a
two-year extension of certain expired and expiring tax provisions, and estate tax reform. The
legislation also supports the permanent extension of middle-income tax relief first enacted in
2001 and 2003, including extension of the child tax credit; the 10%, 25%, and 28% tax brackets;
and marriage penalty relief. Corporate tax reform, and the treatment of multi-national
corporations, is an active issue as both the Administration and Congress work to address tax
havens and other national and international issues.
In the fall of 2009, tax measures to finance health care reform have received substantive attention.
Proposals have been made in the
America’s Affordable Health Choices Act of 2009 (H.R. 3200),
which was reported out by three committees. Modifications and additions to those proposals were
added to new legislation titled the
Affordable Health Care for America Act (H.R. 3962), which
was passed in the House on November 7, 2009. In the Senate, two committees each have reported
out health care reform bills,
America’s Healthy Future Act of 2009 (S. 1796) and
Affordable
Health Choices Act (S. 1679). On November 18, 2009, Senator Reid introduced a new health care
reform measure, the
Patient Protection and Affordable Care Act, as an amendment in the nature
of a substitute for H.R. 3590, which included much of the proposals in the two Senate-reported
bills. The extension and expansion of the first-time home buyer tax credit and net operating
losses, were included in the
Worker, Homeownership, and Business Act (H.R. 3548, P.L. 111-92),
which was signed into law on November 6, 2009. On December 3, 2009, the House passed H.R.
4154, the
Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009.
On December 9, 2009, the House passed H.R. 4213,
Tax Extenders Act of 2009, which would
provide individuals and businesses with approximately $31 billion in tax relief in 2009 by
extending for one year 49 provisions that are scheduled to expire at the end of 2009.
This report, which includes contributions from Jane G. Gravelle, Mindy Levit, and Pam Jackson,
will be updated as legislative and economic events occur.
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Contents
The Economic Context................................................................................................................ 1
The State of the Economy ..................................................................................................... 2
Economic Growth ........................................................................................................... 2
The Federal Budget ............................................................................................................... 3
The Federal Tax Burden ........................................................................................................ 4
Tax Policy: Active Issues in the 111th Congress ........................................................................... 5
Tax Revenues to Finance Health Care Reform....................................................................... 5
Legislation in the House.................................................................................................. 5
Legislation in the Senate ................................................................................................. 6
Estate Tax Revenues ........................................................................................................... 10
The First-Time Homebuyer Tax Credit ................................................................................ 10
Net Operating Losses: Proposed Extension of Carryback Period.......................................... 11
The Earned Income Credit (EIC)......................................................................................... 11
“PAYGO” and Other Budget Enforcement Procedures......................................................... 12
Revenue Provisions in Budget Proposals ............................................................................. 13
The Administration’s Tax Proposals .............................................................................. 13
Provisions for Revenue in the Budget Resolution .......................................................... 14
International Taxation ......................................................................................................... 14
Economic Stimulus: New Law ............................................................................................ 16
Tax Policy: Other Issues in the 111th Congress........................................................................... 17
The Alternative Minimum Tax for Individuals ..................................................................... 17
Scheduled Expiration of the 2001 Tax Cuts ......................................................................... 19
Tax Administration: The Tax Gap and Tax Shelters.............................................................. 20
The Tax Gap ................................................................................................................. 21
Tax Shelters .................................................................................................................. 22
Prominent Tax Policy in the 110th Congress............................................................................... 23
Tax Cuts for Economic Stimulus in 2008............................................................................. 23
Business Tax Benefits ................................................................................................... 24
Economic Considerations .............................................................................................. 25
H.R. 3970, the Tax Reduction and Reform Act .................................................................... 26
Housing Tax Policy............................................................................................................. 27
Energy Taxation and Extenders ........................................................................................... 28
Tables
Table 1. Tax Provisions and Estimated Revenue Effects for H.R. 3962 and H.R. 3590 ................. 7
Contacts
Author Contact Information ...................................................................................................... 29
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s the 111th Congress convened, economic stimulus activity through new spending and tax
cuts was of primary concern. Proposals that had been mentioned included the extension
A of bonus depreciation, suspension of rules requiring withdrawals from individual
retirement accounts, an employee wage credit, and the suspension of taxes on unemployment
benefits. A number of these provisions were enacted in the February 2009 stimulus package, the
American Recovery and Reinvestment Act of 2009 (P.L. 111-5). Measures to reduce the budget
deficit—such as raising taxes on higher income individuals—were not expected to be introduced
in 2009. Instead, it is possible that the reductions of the top tax rates created in 2001 would be
allowed to expire at the start of 2011. Legislation was also adopted to increase taxes on tobacco
products to finance the Children’s Health Insurance Plan (commonly referred to as SCHIP).
One of the major initiatives in the 111th Congress and in President Obama’s Administration has
been health care reform, aimed at constraining costs and extending health insurance coverage to
the uninsured. Many proposals to finance that health care reform have been made. As passed by
the House, H.R. 3962, the Affordable Health Care for America Act of 2009, proposes a health
care surcharge on the top 1.2% of earners and delayed implementation of worldwide allocation of
interest. These provisions are accompanied by two proposals to limit tax avoidance: a limitation
on international tax treaty benefits for certain deductible payments and clarification of the
economic substance doctrine. It also disallows the use of funds in flexible spending accounts to
be spent on non-prescription drugs. These and other revenue-raising provisions were also
included in other congressional proposals (H.R. 3200, H.R. 3590, S. 1796, and S. 1679).
After a discussion of the state of the economy and the environment in which tax policy
considerations will occur, this report provides an overview of the tax issues being debated in the
111th Congress and key issues addressed in the 110th Congress.
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.
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The State of the Economy
Economic turmoil has been a source of concern for the 111th Congress. Struggling housing and
financial markets have resulted in recession. Enacting economic and fiscal policies meant to bring
a return of stability may be needed. Prior to the recent downturns, the economy performed
relatively strongly through the first half of 2007, yielding 22 consecutive quarters of real growth.
Economic Growth
Although real GDP growth was positive in the first half of 2008 after being negative in the last
quarter of 2007, it turned slightly negative in the third quarter of 2008 and significantly so in the
last quarter, with general recognition that the economy is in a serious recession. This followed a
period of relatively strong growth that existed since the last recession ended in November 2001.
Despite 10 months of recession in 2001, real gross domestic product (GDP) grew at a 0.8% rate
during that year. This rate was followed by stronger annual growth rates between 2002 and 2004.
Though growth was weaker in 2005 and 2006, relative to 2004, the economy continued to
perform well as real GDP continued to grow at roughly 3%. Into the first several quarters of 2007,
economic growth continued.1 In July 2007, Federal Reserve Chairman Ben Bernanke
characterized the economy’s performance 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
As 2007 progressed, however, signs of economic weakness surfaced in a number of areas. One
prominent area was housing, where prices stopped rising after years of growth and drops occurred
in house sales and residential investment. Second, financial markets came under strain as investor
concerns about the credit quality of mortgages (especially “subprime mortgages”) had a damping
effect on credit flows. Further, banks began reporting large losses resulting from declines in the
market value of mortgages and other assets, leading them to become more restrictive in their
lending to firms and households.3 The Federal Reserve Board responded by taking actions to ease
monetary policy beginning in the second part of 2007. Additional interest rate cuts continued in
March, April, and October 2008.
The apparent worsening of the economic situation led to support for economic stimulus
legislation from the Administration, congressional leaders, and Federal Reserve Board Chairman
Ben Bernanke. Both the Administration and tax policymakers in Congress began developing a
stimulus package in mid-January of 2008 which was enacted in February.4 (See “Tax Cuts for
Economic Stimulus in 2008” below.) As the crisis continued, Congress enacted additional
1 U.S. Department of Commerce, Bureau of Economic Analysis, National Economic Accounts-Gross Domestic
Product, available at http://www.bea.gov/national/index.htm#gdp, visited Nov. 24, 2008.
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 This view of developments is largely taken from Jan. 17 testimony of Federal Reserve Chairman Ben Bernanke
before the House Budget Committee. The testimony is available on the Federal Reserve’s website, at
http://www.federalreserve.gov/newsevents/testimony/bernanke20080117a.htm, visited Jan. 17, 2008.
4 Neil Irwin and Jonathan Weisman, “Fed Chairman Backs Stimulus; Bush to Announce ‘Principles’ Today; Congress
Works on Bipartisan Proposal,”
The Washington Post, Jan. 18, 2008, p. A1.
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legislation intended to prevent economic conditions from worsening, including the Troubled
Asset Relief Program and injections of capital into certain financial and housing related
institutions.
Though GDP grew in the first two quarters of 2008, with a 1.5% growth rate in the second
quarter, it fell sharply in the third quarter, to -2.7%, with an even greater fall in the fourth quarter
with negative growth estimated at -5.4%. In 2009 GDP continued to decrease, with the economy
experiencing negative growth rates of -6.4% for the first quarter and -0.7% in the second quarter.
However, preliminary estimates for the third quarter of 2009 show positive growth of 3.5%.5 At
the same time, the unemployment rate rose from 4.9% in January 2008 to 9.8% in September
2009.6
For further reading, see CRS Report R40104,
Economic Stimulus: Issues and Policies, by Jane G.
Gravelle, Thomas L. Hungerford, and Marc Labonte.
The Federal Budget
According to the Congressional Budget Office (CBO), the federal budget registered a deficit
equal of 3.2% of GDP in FY2008. This deficit rose from a FY2007 deficit of 1.2% of GDP.7 Prior
to the increase in FY2008, the deficit had fallen for three consecutive years relative to the size of
the economy. The deficit in FY2008 marked the seventh year in a row the budget has registered a
deficit after being in surplus for the four-year period FY1998-FY2001.
The budget data indicate that the increase in the deficit 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,
although not by a wide margin. Revenues have declined from 20.9% of GDP in FY2000 to 17.7%
in FY2008, a drop of 3.2 percentage points. Outlays have increased by 2.5 percentage points over
the same period, to 20.9% of GDP in FY2008. The decline in revenues had four main sources: the
recession of 2001 and subsequent sluggish economic growth, enacted tax cuts, the economic
stimulus payments (tax rebates), and the current economic slowdown.
A CBO budget report (released in August 2009) projected a rise and then a gradual decline in the
deficit as percentage of GDP between FY2009 and FY2018, with deficits existing throughout the
period.8 Deficits were projected to rise to 11.2% in FY2009 and then fall to 9.6% in FY2010,
reflecting both economic contractions and policy changes.9
These projections assumed that current policies remain in place, and if those assumptions were
dropped, the outlook would change. This consideration is important given congressional interest
in extending or making permanent some or all of the 2001 and 2003 tax cuts, which are scheduled
to expire at the end of calendar year 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
5 U.S. Department of Commerce, Bureau of Economic Analysis, National Economic Accounts-Gross Domestic
Product, available at http://www.bea.gov/national/index.htm#gdp, visited Nov. 4, 2009.
6 U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey, available at http://www.bls.gov/
cps/.
7 U.S. Congressional Budget Office,
Monthly Budget Review-Fiscal Year 2008, Nov. 2008, p. 2.
8 U.S. Congressional Budget Office,
The Budget and Economic Outlook: An Update, Aug. 2009, p. 2..
9 Ibid.
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exemption amount. CBO estimated that extending all tax provisions scheduled to expire between
FY2009 and FY2019 would reduce federal revenue by $4.2 trillion over FY2010-FY2019.10 This
increase amounts to 11.8% of CBO’s projected baseline revenues of $36 trillion for the period.11
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 June 2009 analysis of the long-term budget outlook projected two different
scenarios for growth of the three programs. Under its “alternative fiscal scenario” projection
(which reflects likely policy), CBO estimated that spending on these three entitlement programs
will grow the current level of 9.9% of GDP in FY2009 to 16.0% in FY2035 and 18.4% by
FY2050.12 According to CBO, either increases in taxes or cuts in spending will be necessary in
the future if fiscal stability is to be maintained.13
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. In FY2008, receipts equaled 17.7% of GDP.14 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 20.7% in 2006.
10 U.S. Congressional Budget Office,
Statement of Douglas W. Elmemdorf on the Long-Term Budget Outlook,
Testimony before the Senate Committee on the Budget, July 16, 2009, p. 15.
11 Ibid.
12 U.S. Congressional Budget Office,
The Long-Term Budget Outlook, June 2009, p. 6.
13 Ibid., p. 2.
14 Receipts, as a percentage of GDP, were higher in FY2006 (18.5%) and FY2007 (18.8%) than in FY2008.
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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.15
For further information, see CRS Report RL33786,
Individual Tax Rates and Tax Burdens:
Changes Since 1960, by Thomas L. Hungerford; and CRS Report RL32693,
Distribution of the
Tax Burden Across Individuals: An Overview, by Jane G. Gravelle and Maxim Shvedov.
Tax Policy: Active Issues in the 111th Congress
Tax Revenues to Finance Health Care Reform
One of the major initiatives of the 111th Congress and President Obama’s Administration has been
health care reform, aimed at constraining costs and extending health insurance coverage to the
uninsured. The tax revenue sources that President Obama proposed to finance health care reform
were primarily through limits on the value of itemized deductions for high-income taxpayers to
28%. That is, a dollar increase in a deduction for a taxpayer in the 35% bracket would decrease
tax liability by 28 cents on the dollar rather than 35 cents. (If the current marginal tax rates are not
extended the top bracket will be 39.6%.) An issue of concern has been the potential impact on
charitable contributions, although research suggests that effect will be small.
President Obama’s proposals also include some tax gap provisions affecting financial institutions
and insurance companies, certain tax accounting methods, and revisions in the estate tax,
primarily limiting the amount of valuation discounts (discounts that are sometimes allowed when
the estate is left to a family partnership with no individual in control).
Legislation in the House
Health reform legislation, America’s Affordable Health Choices Act of 2009 (H.R. 3200), was
introduced on July 14, 2009, and referred to the House Committees on Energy and Commerce,
Ways and Means, Education and Labor, Oversight and Government Reform, and the Budget. The
Committees on Education and Labor and on Ways and Means each ordered reported, as amended,
their versions of H.R. 3200 on July 17, 2009. The Committee on Energy and Commerce ordered
reported, as amended, its version on July 31, 2009. The House Ways and Means Committee, in its
report on the bill, announced several revenue and tax-related provisions to fund health care
reform. Of the $583.1 billion for FY2010-FY2014 estimated by the Joint Committee on Taxation
to be raised to fund health care reform in H.R. 3200, $543.9 billion would be generated by a
surtax on individual taxpayers. This surtax is imposed on adjusted gross income (not taxable
income) and would be 1% on income from $350,000 to $500,000, 1.5% on income from
$500,000 to $1,000,000, and 5.4% on income over $1,000,000. The 1% and 1.5% rates would
double in 2013 unless a certain amount of savings occurs in health programs.
15 U.S. Congressional Budget Office,
Historical Effective Federal Tax Rates: 1979 to 2005, Dec. 2008; and
Historical
Effective Federal Tax Rates: 1979 to 2006, April 2009, available at http://www.cbo.gov/publications/collections/
taxdistribution.cfm. The percentage-point reductions in effective tax rates within the quintiles between 1979 and 2006,
from lowest to highest, are 3.7, 4.1, 4.4, 3.6, and 0.7. The overall decline in effective tax rates is 1.5, smaller than the
decline in each quintile because the higher-income quintiles have a larger share of income.
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The House proposal also includes a provision, raising $8 billion, to conform the definition of
medical expenses for health savings accounts and similar accounts to those for itemized
deductions for health care (a provision also discussed in the Senate Finance Committee’s report of
S. 1796). The plan also includes three revenue raisers related to international taxation and tax
evasion. A delay in the revised allocation of interest for the foreign tax credit (a provision that
increases the amount of allowable foreign tax credits) would raise $26.1 billion over 10 years. A
provision relating to the use of treaties to avoid U.S. tax would raise $7.5 billion, and a provision
to codify the economic substance doctrine (again to deal with tax sheltering by corporations),
which would raise $3.6 billion. The proposal also has a provision to expand the definition of
dependents for certain health-related tax purposes, which would cost $4 billion.
A comprehensive House health care reform bill, the Affordable Health Care for America Act
(H.R. 3962), was introduced on October 29, 2009. It was discharged by the Committee on Energy
and Commerce and passed in the House on November 7. Similar to the earlier version, H.R.
3200, the new House proposal includes a surtax on high-income individuals as the primary
revenue raiser for financing health care reform. H.R. 3962 would impose a 5.4% surtax on
adjusted gross income over $500,000 for individuals and $1 million for families, and the Joint
Committee on Taxation estimates that this provision would raise $460.5 billion for FY2010-
FY2019.16 The H.R. 3962 surtax differs from the earlier version in two important ways: first, the
H.R. 3962 provision no longer includes a smaller surtax on income above $280,000 for
individuals and $350,000 for couples, and second, the newly proposed surtax is not indexed for
inflation.
H.R. 3962 also includes several revenue-related provisions not included in the earlier version of
the bill. The imposition of a 2.5% ad valorem excise tax on medical devices sold for use in the
United States would raise $20 billion over 10 years. An information-reporting requirement with
respect to business payments made to a corporation, which is also included in S. 1796, is
expected to yield $17.1 billion for FY2010-FY2019.17 Another new H.R. 3962 measure also
found in S. 1796 is the proposal to increase the penalty for nonqualified distributions from health
savings accounts to 20%.
On December 9, 2009, the House passed H.R. 4213,
Tax Extenders Act of 2009, which would
provide individuals and businesses with approximately $31 billion in tax relief in 2009 by
extending for one year (through 2010) 49 provisions that are scheduled to expire at the end of
2009. Revenue offsets would involve higher taxes on carried interest and the implementation of
new enforcement tools and reporting requirements to target offshore tax havens.
Legislation in the Senate
On May 20, 2009, the Senate Finance Committee released a policy document,
Financing
Comprehensive Health Care Reform: Proposed Health System Savings and Revenue Options, that
offered a list of potential health-related revenue provisions. Among the options presented was
capping the exclusion for employer-provided health insurance through a dollar limit based on a
benchmark plan, limits related to income, a combination of both, or the reformulation of the
16 Joint Committee on Taxation,
Estimated Revenue Effects of Possible Modifications to the Revenue Provisions of H.R.
3962, The “Affordable Health Care for America Act”, Oct. 29, 2009, available at http://www.jct.gov/
publications.html?func=startdown&id=3619.
17 Ibid.
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exclusion as a deduction or as a credit.18 Other revenue provisions discussed in the options
document included a uniform alcohol excise tax, a sugar-sweetened beverage excise tax, and the
reduction or elimination of the itemized deduction for health care expenses.19
The America’s Healthy Future Act of 2009 (S. 1796) was approved by the Senate Finance
Committee on October 13, 2009, and a corresponding committee report was introduced on
October 19, 2009. The primary revenue raiser in S. 1796 is a proposed 40% excise tax on high-
premium insurance plans, which would be levied at the insurer level and apply to health insurance
coverage greater than $8,000 a year for individuals and $21,000 for families.20 The Joint
Committee on Taxation estimates that this excise tax would raise $201.4 billion for FY2010-
FY2019. Other notable revenue provisions in the bill include an annual fee on health insurance
providers estimated to generate $60.4 billion over the 10-year budget window, an annual fee on
medical device manufacturers and importers expected to yield $38.6 billion, and the enactment of
new information reporting requirements for payments to corporations estimated to raise $17.1
billion from FY2010-2019.21
On November 18, 2009, Senator Reid introduced a new health care reform measure, the Patient
Protection and Affordable Care Act, as an amendment in the nature of a substitute for H.R. 3590,
which included much of the proposals in the two Senate-reported bills S. 1796 and the Affordable
Health Choices Act (S. 1679).22
Table 1 provides a comparative list of all revenue provisions and revenue-related reform
proposals currently included in H.R. 3962 and H.R. 3590. Provisions that are the same or similar
in both pieces of legislation are in italicized font in the table.
Table 1. Tax Provisions and Estimated Revenue Effects for H.R. 3962 and H.R. 3590
(revenue is estimated in $ billions)
Included
Revenue
in
Effects of
Senate
Revenue
Senate
Included
Version
Effects of
Version
in H.R.
of H.R.
H.R.
of H.R.
Tax Provision
3962
3590
3962
3590
Impose a 5.4% Surtax on AGI in Excess of $500,000
Sec. 551
460.5
($1,000,000 for Joint Returns); Not Indexed for Inflation
Impose a 2.5% Ad Valorem Excise Tax on First Taxable Sale of
Sec. 552
20.0
Medical Devices
18 Ibid.
19 Senate Finance Committee,
Financing Comprehensive Health Care Reform: Proposed Health Savings and Revenue
Options, May 20, 2009, available at http://finance.senate.gov/sitepages/leg/LEG%202009/
051809%20Health%20Care%20Description%20of%20Policy%20Options.pdf
20 Senate Finance Committee,
Committee Report of the America’s Healthy Future Act of 2009, Oct. 19, 2009, available
at http://finance.senate.gov/press/Bpress/2009press/prb102109a.pdf.
21 Joint Committee on Taxation,
Estimated Revenue Effects Of The Revenue Provisions Contained In Title VI Of The
“America’s Healthy Future Act Of 2009,” As Amended Through Oct. 2, 2009, And Under Consideration By The
Committee On Finance, Oct. 8, 2009, available at http://www.jct.gov/publications.html?func=startdown&id=3590.
22 S. 1679 was approved by the Senate HELP Committee on July 15, 2009.
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Included
Revenue
in
Effects of
Senate
Revenue
Senate
Included
Version
Effects of
Version
in H.R.
of H.R.
H.R.
of H.R.
Tax Provision
3962
3590
3962
3590
Impose Annual Fee on Manufacturers and Importers of Certain
Sec.
9009
19.3
Medical Devices
Require Information Reporting on Payments to Corporations
Sec. 553
Sec. 9006
17.1
17.1
(Same Revenue Provision in Both Bills)
Repeal Implementation of Worldwide Interest Al ocation
Sec. 554
6.0
Limit Treaty Benefits for Certain Deductible Payments
Sec. 561
7.5
Codify Economic Substance Doctrine and Impose Penalties for
Secs. 562
5.7
Underpayments
and 563
Extend Certain Health Benefits Applicable to Spouses and
Sec. 571
-4.0
Dependents to Eligible Designated Beneficiaries
Exclusion of Unprocessed Fuels from the Cel ulosic Biofuel
Sec. 555
23.9
Producer Credit
Tax on Individual Without Acceptable Health Care Coverage
Sec. 501
29.0
Election to Satisfy Health Coverage Participation Requirements
Sec. 511
45.0
Health Care Contributions of Nonelecting Employers
Sec. 512
163.0
Credit for Smal Business Employee Health Coverage Expenses
Sec. 521
-53
Disclosures to Carry Out Health Insurance Exchange Subsidies
Sec. 541
Not
Available
Conform the Definition of Medical Expenses for Employer-Provided
Sec. 531
Sec. 9003
5.0
5.0
Health Coverage, Including Health Flexible Spending Arrangements
and Health Reimbursement Arrangements, Health Savings
Accounts, and Archer MSAs to the Definition for the Itemized
Deduction
Limit Health Flexible Spending Arrangements in Cafeteria Plans to
Sec. 532
Sec. 9005
13.3
14.6
$2,500
Increase the Penalty for Nonqualified Distributions from Health
Sec. 533
Sec. 9004
1.3
1.3
Savings Accounts to 20%
(Same Revenue Provision in Both Bills)
Eliminate Deduction for Expenses Allocable to Medicare Part D
Sec. 534
Sec. 9012
2.2
5.4
Subsidy
Exclusion from Gross Income for Indian Tribe Health Benefits
Loss of less
Loss of less
Sec. 545
Sec. 9021
than 50
than 50
(Same Revenue Provision in Both Bills)
million
million
Exclusion from Gross Income of Payments Made Under
Reinsurance Program for Retirees
Sec. 543
Not
Available
Disclosures to Facilitate Identification of Individuals Likely to
be Ineligible for Low-Income Subsidies Under the Medicare
Sec. 1801
No Effect
Prescription Drug Program to Assist Social Security
Administration’s Outreach to Eligible Individuals
Impose Fee on Insured and Self-Insured Health Plans;
Comparative Effectiveness Research Trust Fund
Sec. 1802
2.0
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Major Tax Issues in the 111th Congress
Included
Revenue
in
Effects of
Senate
Revenue
Senate
Included
Version
Effects of
Version
in H.R.
of H.R.
H.R.
of H.R.
Tax Provision
3962
3590
3962
3590
40% Excise Tax on Health Coverage in Excess of
$8,500/$23,000 Indexed for Inflation by CPI-U Plus 1% and
Sec.
9001
149.1
Increased Thresholds for Over Age 55 Retirees or Certain
High-Risk Professions; Levied at Insurer Level
Employer W-2 Reporting of Value of Health Benefits
Sec.
9002 Negligible
Effect
Additional Requirements for Section 501(c)(3) hospitals
Sec.
9007 Negligible
Effect
Impose Annual Fee on Manufacturers and Importers of
Branded Drugs
Sec.
9008
22.2
Impose Annual Fee on Health Insurance Providers
Sec. 9010
60.4
Study and Report of Effect on Veterans Health Care
Sec. 9011
No Effect
Raise 7.5% AGI Floor on Medical Expenses Deduction to 10%;
AGI Floor for Individuals Age 65 and Older (and their spouses)
Sec.
9013
15.2
Remains at 7.5% (sunset 12/31/16)
$500,000 Deduction Limitation on Taxable Year Remuneration
to Officers, Employees, directors, and Service Providers of
Sec.
9014
0.6
Covered Health Insurance Providers
Additional 0.5% Hospital Insurance Tax on Wages in Excess of
$200,000 ($250,000 joint)
Sec.
9015
53.8
Modification of Section 833 Treatment of Certain Health
Organizations
Sec.
9016
0.4
Impose 5% Excise Tax on Cosmetic Surgery and Similar
Procedures
Sec.
9017
5.8
Simple Cafeteria Plan Nondiscrimination Safe Harbor for
Certain Smal Employers
Sec.
9022 Negligible
Effect
Qualifying Therapeutic Discovery Project Credit (Sunset
12/31/10)
Sec.
9023
-0.9
Offering of Exchange-Participating Health Benefit Plans
Through Cafeteria Plans
Sec. 542
Not
Available
CLASS Program Treated in Same Manner as Long-Term Care
Insurance
Sec. 544.
Not
Available
Certain Large or Publicly Traded Persons Made Subject to a
More Likely Than not Standard for Avoiding Tax Penalties on
Sec. 563
Not
Underpayments
Available
Sources: Affordable Health Care For America Act: Section-by-Section Analysis, Committees on Energy and Commerce,
Ways and Means, and Education and Labor, Oct. 28, 2009.
Estimated Revenue Effects of the Revenue Provisions Contained
in H.R. 3962, The “Affordable Health Care for America Act”, Scheduled For Consideration by the House of Representatives,
Nov. 6, 2009, Joint Committee on Taxation.
Preliminary Analysis of the Insurance Coverage Specifications Provided by the
House Tri-Committee Group, from the Congressional Budget Office to the Honorable Charles B. Rangel, Chairman on
Ways and Means, July 14, 2009.
Estimated Revenue Effects of the Revenue Provisions Contained in The “Patient Protection
and Affordable Care Act,” Nov. 18, 2009, Joint Committee on Taxation.
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Notes: Revenue Effects for H.R. 3962 and the Senate version of H.R. 3590 are estimated by the Joint Committee on
Taxation for FY2010 through FY2019.
For further reading see CRS Report R40648,
Tax Options for Financing Health Care Reform, by
Jane G. Gravelle and CRS Report R40518,
Charitable Contributions: The Itemized Deduction
Cap and Other FY2010 Budget Options, by Jane G. Gravelle and Donald J. Marples.
Estate Tax Revenues
Under present law, the federal government levies an estate tax on the net value of assets minus
eligible deductions transferred to other individuals upon a person’s death. Relevant provisions of
the Economic Growth and Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) specify that the
estate tax exemption level in 2009 is $3.5 million, with a full repeal of the tax scheduled for 2010.
Estate tax provisions of EGTRRA are then scheduled to expire on December 31, 2010, and unless
new legislation is enacted, the estate tax (and the related gift tax) will be governed by the law in
place prior to EGTRRA, the Taxpayer Relief Act of 1997 (TRA; P.L. 105-34). For 2011, TRA
would reinstate a unified estate and gift tax exemption of $1 million per decedent and a maximum
marginal tax rate of 55%, with an additional 5% surtax for the highest-value estates.
The Obama Administration’s FY2010 budget proposal assumes the extension of the 2009 estate
tax exemption for the first $3.5 million of inherited assets, and a marginal tax rate of 45% for
2010 and subsequent years. On November 19, 2009, Representative Earl Pomeroy introduced the
Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 (H.R.
4154), which reflected the President’s FY2010 budgetary baseline assumption in permanently
establishing the estate tax exemption level at $3.5 million per decedent, with a top marginal tax
rate of 45%. The exemption threshold for H.R. 4154 is not indexed for inflation, and is estimated
to reduce revenue by approximately $233.6 billion over 10 years.23 H.R. 4154 was passed in the
House on December 3, 2009.
In the Senate, it has been reported that Senate Finance Committee Chairman Max Baucus and
Senate Budget Committee Chairman Kent Conrad both favor the exemption level and top
marginal rates offered in H.R. 4154, but would prefer for the provisions to be indexed for
inflation.24
For additional reading see CRS Report R40615,
Estate and Gift Tax Revenues: Past and
Projected in 2009, by Nonna A. Noto.
The First-Time Homebuyer Tax Credit
In order to address concerns about excess supply in the housing market and falling home prices, a
temporary first-time homebuyer tax credit was enacted on July 30, 2008, as part of the Housing
and Economic Recovery Act of 2008 (P.L. 110-289). The American Recovery and Reinvestment
Act of 2009 (P.L. 111-5) increased the value of the tax credit for home purchases in 2009,
modified the credit’s rules, and extended the period for which the credit could be claimed.
23 Richard Rubin, “House Democrats Struggle With Unusual Circumstances of Estate Tax Vote,”
CQ Today, Dec. 1,
2009.
24 Peter Cohn, “Senators Eye Inflation-Adjusted Estate Fix,”
CongressDaily, Dec. 1, 2009.
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Under the structure of the first-time homebuyer tax credit provisions in P.L. 111-5, first-time
homebuyers in 2009 were allowed a credit against their federal income tax equal to a maximum
of 10% of the purchase price of their home, or $8,000. The first-time homebuyer tax credit under
P.L. 111-5 was refundable, which allowed households with minimal or no tax liability to receive a
tax refund valued at the size of the credit minus any outstanding tax obligation. The size of the
tax credit was reduced for individuals with modified adjusted gross income (AGI) greater than
$75,000, and for joint filers with AGI greater than $150,000. Individuals with modified AGI
greater than $95,000 and joint filers with AGI in excess of $170,000 were not eligible for the
first-time homebuyer tax credit provided in P.L. 111-5.
Most recently, the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92)
extended the tax credit through the first half of 2010 and expanded it to repeat homebuyers. In
particular, provisions under P.L. 111-92 extend the tax credit to homebuyers who enter a written
binding contract before May 1, 2010, and complete the purchase before July 1, 2010. The tax
credit for repeat buyers is capped at $6,500 and is limited to those who have owned and lived in
their current home for five of the last eight years. Other changes include an expansion of the
maximum credit income eligibility limits to $125,000 for individuals and $225,000 for married
couples, up from $75,000 and $150,000, respectively. Lastly, there exists an $800,000 limit on the
purchase price of a home.
For additional reading see CRS Report R40955,
An Economic Analysis of the Homebuyer Tax
Credit, by Mark P. Keightley
Net Operating Losses: Proposed Extension of Carryback Period
A business incurs a net operating loss (NOL) when it has negative taxable income, and NOL can
be used to obtain a refund for past taxes paid (carryback) or to mitigate future tax obligations
(carryforward). Under present law, the NOL carryback period for businesses is two years, and the
NOL carryfoward period is 20 years. In the 111th Congress, the American Recovery and
Reinvestment Act of 2009 (P.L. 111-5) provided business taxpayers with $15 million or less in
gross receipts an opportunity to extend the carryback period for up to five years for NOLs
incurred in 2008.
The Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92), enacted on
November 6, 2009, extended the carryback period to five years for all business taxpayers except
those who have received certain federal assistance relating to the financial crisis. Under this law,
a taxpayer can use the extended carryback period for an NOL incurred in 2008 or 2009, but not
both. Further, P.L. 111-92 stipulates that the amount of loss that can be carried back to the fifth
year is limited to 50% of the taxpayer’s taxable income in the fifth carryback year. This
limitation, however, does not apply to businesses with $5 million or less in gross receipts that
make a five-year carryback election after enactment of the legislation.
For additional reading see CRS Report RL34535,
Net Operating Losses: Proposed Extension of
Carryback Period, by Mark P. Keightley.
The Earned Income Credit (EIC)
Under current law low-income workers are allowed a refundable tax credit against earned
income. The tax credit is phased out as income rises. The credit is much larger for families with
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Major Tax Issues in the 111th Congress
children (34% for families with one child and 40% for families with two or more children) than
for single individuals (7.65%). H.R. 2454, the energy bill, which is largely related to climate
change, has a provision to double the rate of the earned income credit for single individuals.
For additional reading see CRS Report RL31768,
The Earned Income Tax Credit (EITC): An
Overview, by Christine Scott.
“PAYGO” and Other Budget Enforcement Procedures
The House and Senate establish the general contours of budget policy each year in the form of a
concurrent resolution on the budget.25 Policies reflected in the annual budget resolution regarding
total revenues and spending and other aspects of budget policy are enforced through various
means, including points of order under the Congressional Budget Act of 1974 and procedural
provisions in budget resolutions. In addition, each chamber may establish budget enforcement
procedures in its standing rules. These enforcement procedures generally restrict the size and
shape of revenue and spending legislation and the timing of legislative action, but may be set
aside under certain circumstances.
One of the most important enforcement procedures affecting the development and consideration
of revenue legislation is referred to as “Pay-As-You-Go” (PAYGO).26 In essence, PAYGO
requires that legislation reducing revenues or increasing mandatory spending include offsetting
revenue increases or mandatory spending decreases so that it is deficit neutral. A statutory
PAYGO requirement was established in 1990 but effectively was terminated in late 2002. The
House and Senate each have their own PAYGO rules; the House’s rule was established in 2007
and the Senate’s rule, in effect since 1993, was modified in 2007 in a manner to make it
comparable to the House rule. Both rules require deficit neutrality in revenue and direct spending
legislation over both 5- and 10-fiscal-year periods, as well as the current fiscal year. Each
chamber waived its PAYGO rules in the 110th Congress to consider, in particular, legislation
dealing with the economic decline. They also waived the rule for the economic stimulus package.
The 111th Congress may consider revenue measures that could entail significant revenue loss,
including further modification to the Alternative Minimum Tax and the extension of tax cuts that
expire in 2010. The House and Senate may choose to revise PAYGO (by modifying their PAYGO
rules, restoring a statutory requirement, or both) or other budget enforcement mechanisms to
accommodate the consideration of such measures while promoting fiscal discipline over the long
term.
For further reading on President Obama’s proposals see CRS Report R40623,
Tax Havens:
International Tax Avoidance and Evasion, by Jane G. Gravelle.
25 For more detailed information on federal budgeting, see CRS Report 98-721,
Introduction to the Federal Budget
Process, by Robert Keith.
26 The various PAYGO mechanisms are detailed in CRS Report RL34300,
Pay-As-You-Go Procedures for Budget
Enforcement, by Robert Keith.
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Revenue Provisions in Budget Proposals
The Administration’s Tax Proposals
President Obama proposed a series of tax provisions in his budget plan.27 They include provisions
dealing with expiring tax provisions (including the 2001-2003 tax cuts, the AMT “patch”, and the
extenders (a long-standing group of tax provisions that expire but have been continually
extended). They also propose to make some of the stimulus provisions permanent, contain some
other individual tax changes, and propose some business tax revisions. (Note that the revenue cost
of individual provisions varies, because of interactions, depending on the order in which each
provision is estimated; the estimates below report costs reflected in the budget document.)
Overall, the revenue loss is $2.8 trillion, but most of that loss arises from dealing with the
ongoing issues of expiring tax provisions.
• Over the period FY2009-FY2019, there is a $2,715.5 billion projected revenue
loss from addressing expiring tax provisions. The plan includes a permanent
AMT “patch” costing $575.9 billion. The largest cost of the provision is the
proposed extension of most of the 2001-2003 tax cuts (including the child credit,
marriage penalty provisions, capital gains and dividend provisions, rate
reductions, and other provisions). The cost of extending all of the individual tax
cuts, plus maintaining the estate tax at its current level is estimated at $2.682.3
billion. This cost is reduced by a $636.7 billion gain from limiting the income tax
rate cuts, retaining the top two higher tax rates, phase-out of the personal
exemption and itemized deductions, and setting a rate of 20% for capital gains
and dividends for those with $200,000 of income ($250,000 for joint returns).
The Research and Experimentations tax credit, one of the extenders, would be
made permanent at a cost of $74.5 billion, and other extenders would be effective
for an additional year.
• Four provisions of the 2009 economic stimulus package would be made
permanent: the Making Work Pay tax credit ($536.7 billion), the Earned income
credit ($32.8 billion), the child tax credit ($70.4 billion), and the education credit
($74.9 billion), for a total of $714.8 billion.
• Other individual provisions include one additional tax cut, a savers credit ($55
billion). The plan also includes a revenue raiser dedicated to funding health care
reform, a provision allowing itemized deductions to offset income at a maximum
rate of 28%, raising $317.7 billion. Another small revenue raiser would eliminate
the advanced earned income credit, which has been little used (saving $0.9
billion). These provisions have a net gain of $263.6 billion.
• There are two business-related tax cuts, a provision to extend net operating loss
carrybacks (costing $18.5 billion) and a provision to exempt capital gains for
small businesses (costing $7.1 billion). These provisions lose a total of $25.6
billion.
27 Office of Management and Budget,
A New Era of Responsibility: Renewing America’s Promise, U.S. Gov. Print.
Off., Washington, D.C., posted at http://www.whitehouse.gov/omb/assets/fy2010_new_era/
A_New_Era_of_Responsibility2.pdf.
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• Business-related tax provisions raise $352.2 billion in revenue. The largest set of
provisions are those for reform of tax rules affecting international income, raising
$210 billion. A provision to repeal the last-in, first out (LIFO) method of
inventory accounting would raise $61.2 billion. A series of provisions for oil and
gas provisions (including repeal of the production activities deduction, intangible
drilling costs expensing, and percentage depletion and imposing an excise tax on
Gulf of Mexico Oil), would raise $31.5 billion. Revising carried interest (taxing
capital gains of investment managers as earnings, and therefore, ordinary
income) would raise $23.9 billion. There is also an increase in superfund excise
taxes ($17.2 billion), codification of the economic substance doctrine ($4.9
billion), and requiring information reporting for rental income.
Provisions for Revenue in the Budget Resolution
After the Obama Administration released the outline of the FY2010 budget, Congress began its
consideration of the FY2010 budget in late March 2009. Largely following many of the
President’s initiatives,28 the House and Senate agreed to the Budget Resolution Conference
Report (S.Con.Res. 13) on April 29, 2009. The conference agreement includes $1.654 trillion in
on-budget revenues for 2010, and $10.500 trillion over 2010-2014.
Section 501 of the conference agreement provides for three additional years of AMT relief,
without offset, a two-year extension of certain expired and expiring tax provisions, and a new
incentive for retirement savings. Also included is expansion of eligibility for the refundable child
credit, extension of the child tax credit, extension of the research and experimentation tax credit,
the enactment of a tax credit for school construction bonds, and continuation of current estate tax
policy. Provision is also made for tax relief that supports working families, such as extending the
10%, 25%, and 28% income tax brackets along with marriage penalty relief and preferential rates
for investment income.
Sections 316 and 325 of the resolution specifically provide for deficit-neutral reserve funds for
selected tax relief policies. The resolution makes provision for the permanent extension of the
deduction for state and local sales taxes, along with the extension of incentives for enhanced
charitable giving from individual retirement accounts, including life-income gifts, and enhanced
employer-provided child care credit and the dependent care tax credit.
The conference report indicates that the cost of enacting such policies may be offset by reforms
within the Internal Revenue Code of 1986 that produce higher rates of tax compliance to close the
“tax gap” and reduce taxpayer burdens through tax simplification.
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 2008 election campaign,
Democratic leaders included a call to “end tax breaks that reward companies for moving
28 Unless expressly provided, the resolution, according to the conference report, does not assume any of the specific
revenue offset proposals provided for in the President’s budget. The report states that decisions about specific revenue
offsets are made by the House Committee on Ways and Means and the Senate Committee on Finance, which are the
tax-writing committees.
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Major Tax Issues in the 111th Congress
American jobs overseas.” President Obama included in his budget submissions $210 billion of
international tax reforms (FY2009-FY2011).
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.
The scope of Subpart F has been reduced, however, through the use of “hybrid entities” and
check-the-box regulations that allow firms to avoid taxation of inter-company passive income by,
for example, recognizing a subsidiary for foreign purposes but not for purposes of the U.S. tax
code. (As an example, a subsidiary of a U.S. parent in a low-tax country could create its own
subsidiary in a high-tax country and lend to that subsidiary, allowing deduction of interest in the
high-tax country. However, by choosing to disregard, or not recognize, that second tier subsidiary
for U.S. tax purposes the interest income would not be subject to taxation under Subpart F, as it
has been in the past.)
Firms are also able to reduce or eliminate U.S. tax on low-tax foreign-source income through
cross crediting. When income is repatriated and a U.S. tax is assessed on the foreign source
income, the firm receives a credit against U.S. taxes for foreign taxes paid, which eliminates any
U.S. tax due on income from high-tax foreign countries. The credit is limited to the U.S. tax due.
Any excess foreign taxes can, however, be used to reduce U.S. tax on income from low-tax
countries.
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 or otherwise
increasing taxes. For example, the American Jobs Creation Act of 2004 cut taxes on overseas
operations in several ways, while in 2006, the Tax Increase Prevention and Reconciliation Act
(TIPRA; P.L. 109-222) 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. 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.)
President Obama’s proposals would increase this tax burden through three major proposals and
several minor ones. These proposals include a provision that will eliminate hybrid entities and
check-the-box. This provision is estimated by the administration to raise about $87 billion over
10 years, although the Joint Committee on Taxation estimated a much smaller number of $31
billion. The second proposal would limit overhead expenses (largely interest, but excluding
research and development costs) of the parent to the share of total worldwide income reported.
Thus, if a U.S. parent firm earns half its income abroad and half in the United States, and does not
repatriate any income, it would not be able to take half of its overhead deductions. This provision
was estimated to raise about $60 billion over 10 years by the administration estimates and $51
billion by the JCT estimates. The third major provision would allow foreign taxes paid to be used
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Major Tax Issues in the 111th Congress
for credits only to the extent foreign source income is repatriated. Thus, if half of foreign source
income is repatriated only half of the foreign tax credits will be available for credits. This
provision was estimated to raise $25 billion by the administration and $45 billion by the JCT. The
proposals also included a number of smaller provisions to raise revenues.
The proposals would make investment abroad less attractive relative to domestic investment. The
interest allocation provision should also encourage repatriations, while the foreign tax credit
allocation rule would have mixed effects (discouraging repatriations from high-tax countries
relative to current rules and encouraging them from low-tax countries).
For additional reading see CRS Report R40623,
Tax Havens: International Tax Avoidance
and Evasion, by Jane G. Gravelle; CRS Report RL32749,
U.S. Taxation of Overseas Investment
and Income: Background and Issues, by Donald J. Marples; and CRS Report RL34115,
Reform of
U.S. International Taxation: Alternatives, by Jane G. Gravelle.
Economic Stimulus: New Law
In response to deteriorating economic conditions, Congress enacted a second stimulus bill in
February 2009, the American Recovery and Reinvestment Act of 2009, P.L. 111-5. This package
cost an estimated $787 billion, and included spending programs, with about 40% of the cost in tax
cuts. The elements include the following:
• Temporary income tax cuts for individuals, including $116.2 billion for a 6.2%
credit for earnings with a maximum of $400 for singles and $800 for couples,
phased out for taxpayers with incomes over $75,000 ($150,000 for joint returns);
$4.7 billion for a temporary increase in the earned income credit, $14.8 to
increase refundability of the child credit, $13.9 billion to expend tuition tax
credits and make them 40% refundable (the refundability feature accounts for
$3.9 billion). These provisions are effective for 2009 and 2010, though the
associated revenue loss extends over FY2009-FY2011. For 2009 there is also an
exclusion for $2,400 of unemployment benefits costing $4.7 billion, a sales tax
deduction for new auto purchases at $1.7 billion and an extension of the AMT
“patch”, mainly a temporary increase in the AMT exemption, at a cost of $70.1
billion. An extension and revision of the first time homebuyers credit has revenue
consequences over a longer period, costing $6.6 billion over FY2009-2019.
Overall, the individual income tax cuts were $230 billion.
• Tax provisions for business, which lose revenue in FY2009-FY2010 and gain
revenue thereafter, including $37.8 billion for extending bonus depreciation,
$12.9 billion for the deferral and exclusion of income from the discharge of
indebtedness, $4.1 billion for a temporary five year loss carryback for 2008 and
2009 for small business, and $1.1 billion for extending small business expensing.
Along with a few other minor provisions, there is a revenue gain from enacting
legislation to restrict the carryover of losses with an ownership change, reversing
a Treasury ruling from 2007. Because these are largely timing provisions the
overall revenue loss for FY2009-FY2010 is $6.2 billion.
• A series of provisions relating to tax exempt bonds aimed at aiding State and
local governments, which cost $3.8 billion for FY2009-2010, and $30.0 billion
from FY2009-FY2019. Almost half the revenue loss arises from allowing a
taxable bond options which would make bonds attractive to tax exempt investors.
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Other major provisions measured by dollar cost are qualified school construction
bonds, recovery zone bonds, and provisions allowing financial institutes more
freedom to buy tax exempt bonds.
• A one-year delay in the 3% withholding for government contractors, which costs
$5.8 billion in FY2011, gains most of the revenue in the next year, and costs $0.3
billion for FY2009-2019.
• Energy provisions, some permanent and some temporary, totaling $3.4 billion in
FY2009-FY2011 and $20.0 billion in FY2009-2019. There is also a provision
substituting grants for credits for certain energy projects which shifts benefits to
the present.
• The proposal also includes a substitution of grants for the low-income housing
credit, which shifts benefits to FY2009 ($3 billion), with a negligible effect over
the long term. The plan also includes a much smaller provision to substitute
grants for certain energy credits.
• A minor provision ($231 million for FY2009-2019) would provide incentives for
hiring unemployed veterans and disconnected youth.
Tax Policy: Other Issues in the 111th Congress
The Alternative Minimum Tax for Individuals
The individual alternative minimum tax presents a time-sensitive issue for Congress: 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.29 The portion will
decline for a number of years thereafter if the expiration of tax cuts in Economic Growth and Tax
Relief Reconciliation Act of 2001 (EGTRRA) occurs as scheduled (after 2010), but then will
resume growth.
The reason for the increase in the applicability of the AMT is its basic mechanics. The AMT
functions like a parallel income tax, with lower rates than the regular tax but with a broader
base—that is, with fewer deductions, exemptions, credits, and special tax preferences than are
allowable under the regular tax. Each year, a taxpayer pays either his or her regular tax or the
tentative AMT, whichever 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
29 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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Major Tax Issues in the 111th Congress
married couples provided by EGTRRA and the Jobs and Growth Tax Relief Reconciliation Act of
2003 (JGTRRA) as well as other tax cuts enacted in the past.
The original purpose of the AMT was to ensure that no individual with high 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.30
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
the 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 tax cuts are extended or made permanent, the cost of restraining the AMT would be
considerably larger.31
Congress has addressed the AMT on a temporary basis since 2001 by increasing the exemption
amount, thus reducing the number of taxpayers who would otherwise pay the AMT (referred to as
the AMT “patch”). For tax year 2008, the Tax Extenders and Alternative Minimum Tax Relief Act
(Division C of P.L. 110-343) increased the AMT exemption to $46,200 (singles) and $69,950
(couples). The act also extended the allowance of nonrefundable individual income tax credits to
offset AMT tax liability. The American Recovery and Reinvestment Act (P.L. 111-5) increased the
30 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.
31 U.S. Congressional Budget Office,
The Budget and Economic Outlook, p. 16.
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exemption to $46,700 ($70,950) for 2009. In his 2010 budget, President Obama proposed the
indexing for inflation of the AMT exemption from FY2009-FY2019 at a cost of $447 billion.32
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.
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.
32 CRS Report RL30149,
The Alternative Minimum Tax for Individuals, by Steven Maguire.
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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 2008. 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.
During the 2008 presidential campaign, proposals were made to allow the expiration of the
highest marginal tax rate and to extend others. To some, this modification would allow for
compromise between the need to raise revenue while also improving fairness. Some believe that a
compromise might occur with the estate tax (which is scheduled for repeal in 2010): to retain the
tax but allow higher exemptions and/or lower rates. As economic stimulus considerations
continue in December 2008, it is likely that the tax cut expirations may not be addressed in 2009,
except for the estate tax, as more pressing concerns about the economy take precedence.
President Obama proposed to make most of these tax cuts permanent, although the estate tax
would be retained at 2009 levels and some provisions affecting high-income taxpayers would not
be extended.
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, policymakers have focused attention on
possible revenue-raising measures that would, in effect, help pay for tax cuts elsewhere. One area
is tax administration; in the Senate Finance Committee, leaders from both parties have expressed
interest in closing the “tax gap” and in restricting “tax shelters.”33 Some provisions, such as credit
card reporting, reporting the basis for capital gains, and the economic substance doctrine, have
been considered in legislation (as discussed above).
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. 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. Tax shelters often arise
from the combination of different tax rules in ways that were not intended by policymakers.
33 A CRS report concerning this issue is CRS Report R40219,
Tax Gap, Tax Enforcement, and Tax Compliance
Proposals in the 111th Congress, by James M. Bickley.
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The Tax Gap
Recent and projected large federal budget deficits have generated congressional and executive
branch interest in raising revenue by reducing the tax gap. Other motivations for reducing the tax
gap include adverse effects on (1) public trust in the fairness of the tax system, which may
adversely affect voluntary compliance with tax laws, and (2) economic efficiency by providing an
incentive for inputs of labor and capital to shift to those sectors of the economy with lower
taxes.34
The IRS defines the
gross tax gap as “the difference between the aggregate tax liability imposed
by law for a given tax year and the amount of tax that taxpayers pay
voluntarily and timely for
that year.”35 And it defines the
net tax gap as “the amount of the gross tax gap that remains unpaid
after all enforced and other late payments are made for the tax year.”36 Currently, the
measurements of these tax gap concepts exclude illegal activities because the IRS lacks adequate
data on these activities.37
For tax year 2001, the IRS estimates a gross tax gap of $345 billion, equal to a noncompliance
rate of 16.3%.38 For the same year, IRS enforcement activities, coupled with other late payments,
recovered about $55 billion of the gross tax gap, resulting in an estimated net tax gap of $290
billion.39
The estimated gross tax gap of $345 billion consists of underreporting of tax liability ($285
billion), nonfiling of tax returns ($27 billion), and underpayment of taxes ($33 billion).40 For
2001, the $285 billion of underreporting of tax liability had the following components: $197
billion in individual income tax, $54 billion in employment tax, $30 billion in corporate income
tax, and $4 billion in estate taxes.41 There are no estimates of the underreporting of excise taxes.42
The percentage of individual income tax that was underreported varied significantly depending on
the degree of information reporting and whether or not withholding was required. For example,
only 1.2% of the sum of wages, salaries, and tips was underreported, but 57.1% of nonfarm
proprietor income was underreported. These data suggest that increased information reporting and
34 For a comprehensive review of the literature on tax compliance, see James Adreoni, Brian Erard, and Jonathan
Feinstein, “Tax Compliance,”
Journal of Economic Literature, vol. 36, no. 2, June 1998, pp. 818-860. For an overview
of the economics of tax evasion, see Joel Slemrod, “Cheating Ourselves: The Economics of Tax Evasion,”
Journal of
Economic Perspectives, vol. 21, no. 1, winter 2007, pp. 25-48.
35 Alan Plumley, “Preliminary Update of the Tax Year 2001 Individual Income Tax Underreporting Gap Estimates,”
Internal Revenue Service,
SOI Tax Stats-Papers-2005 IRS Research Conference, Washington, June 7-8, 2005, p. 15.
Available at http://www.irs.gov/taxstats/productsandpubs/article/0,,id=130103,00.html.
36 Ibid.
37 The IRS made tax gap studies for tax years 1979, 1983, and 1987. Each study used a different definition of the tax
gap. For a discussion of the changes in the concept of the tax gap, see U.S. General Accounting Office,
Tax
Administration: IRS’ Tax Gap Studies, Washington, March 1988, 23 p.
38 The noncompliance rate is the percentage of the aggregate tax liability that taxpayers do not pay voluntarily and
timely for a given year.
39 U. S. Treasury, Internal Revenue Service, Feb. 2007. Data on the tax gap are available at http://www.irs.gov/pub/irs-
utl/tax_gap_update_070212.pdf, visited Nov. 26, 2008.
40 Ibid.
41 Ibid.
42 Ibid.
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withholding would reduce the tax gap. The increased revenue would have to be weighed against
higher administrative costs of the IRS and higher compliance costs of individuals.
The estimates of the gross tax gap have been heavily publicized. Perhaps as a result, some public
officials have emphasized better enforcement of tax laws to raise revenue. According to some,
enforcement alone is likely to have a limited impact on the gross tax gap. Acting on this view, the
IRS is implementing what it terms a comprehensive approach to reduce the gross tax gap.
Three factors are seen limiting the net revenue potential from increased enforcement. First, much
of the gross tax gap for individual income tax filers is due to types of unreported income that are
difficult to detect. Usually the income is not covered by third-party information returns (e.g.,
income earned by informal business proprietors who operate on a cash basis). Second, even when
the unreported income is detected, some of the resulting tax liability cannot be easily collected,
particularly from those taxpayers who are currently unable to pay. Third, many detected tax
liabilities are so small relative to enforcement costs that it is not cost effective to pursue
collection.
The Office of Tax Policy at the Treasury developed what it considered a comprehensive strategy
for reducing the tax gap, guided by the following four key principles:43
• Unintentional taxpayer errors and intentional taxpayer evasion should both be
addressed.
• Sources of noncompliance should be targeted with specificity.
• Enforcement activities should be combined with a commitment to taxpayer
service.
• Policy positions and compliance proposals should be sensitive to taxpayer rights
and maintain an appropriate balance between enforcement activity and
imposition of taxpayer burden.44
In the 111th Congress, bills relating to the tax gap have been introduced, and President Obama
included proposals to reduce the tax gap in his budget submissions (the economic substance
doctrine, reporting of rental income, and international tax reforms not specified).
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.45 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.
43 U.S. Department of the Treasury, Internal Revenue Service,
Reducing the Federal Tax Gap, Report on Improving
Voluntary Compliance, Aug. 2, 2007, 100 p.
44 U.S. Department of the Treasury, Office of Tax Policy,
A Comprehensive Strategy for Reducing the Tax Gap,
pp. 1-2.
45 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.
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Major Tax Issues in the 111th Congress
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 (that is, have no effect on economic activity), 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).46
Clarification of the economic substance doctrine, an issue that has been raised in a number of
court decisions is also 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. 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.47
Prominent Tax Policy in the 110th Congress
Tax Cuts for Economic Stimulus in 2008
As noted above (see “The State of the Economy”), developments in late 2007 led prominent
economic policymakers to call for legislation that would provide an economic stimulus. Support
for a stimulus package came from both the Administration and Congress. In addition, in
testimony before Congress, Federal Reserve Board chairman Ben Bernanke stated that legislation
providing fiscal stimulus (i.e., tax cuts or spending increases) would be helpful if implemented
quickly and did not compromise “fiscal discipline in the longer term.”48
On February 7, both the House and Senate approved a version of the stimulus plan that had been
passed earlier in the House. The final bill’s main elements were a tax rebate in the form of a two-
part credit, and an increased expensing tax benefit and enhanced depreciation for business
investment in 2008. The bill is estimated to reduce tax revenue by $151.7 billion in FY2008 and
by $134.0 billion over FY2008-FY2013. The smaller revenue loss over the five-year period
46 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.
47 For more information and analysis of legislative proposals, see CRS Report RS22846,
The Economic Substance
Doctrine: Legal Analysis of Proposed Legislation, by Carol A. Pettit.
48 Bernanke testimony, Jan. 17, 2008.
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compared to the first year is due to the shifting of tax deductions into the present from
depreciation.
The tax rebates were equal to a “basic” tax credit plus a per-child tax credit. The credits were
refundable. Under the basic credit, individuals received a tax credit equal to the greater of two
amounts that depended, respectively, on their pre-credit tax liability and their earned income.
First, a taxpayer could claim a credit equal to their income tax liability, but not to exceed $600
($1,200 for a joint return). For the earned income amount, a taxpayer could claim a $300 tax
credit ($600 for a joint return) if the individual has at least $3,000 in qualified income (generally,
income from salaries and wages, plus Social Security and veterans’ disability payments) or an
income tax liability of at least $1 and gross income exceeding the sum of the applicable standard
deduction and one personal exemption (two, for joint returns). The child tax credit was $300 for
each qualifying child.
The tax credit was ultimately based on individuals’ 2008 tax and income, and was issued from the
U.S. Treasury during the 2008 calendar year, with the Treasury basing its distributions on
individuals’ 2007 tax returns. When filing their 2008 tax returns (in 2009), individuals will
recalculate the credit based on 2008 information, and can claim an additional credit if the 2008
information increases the amount of the credit. If the 2008 credit is less than that actually
received, individuals will not be required to pay the difference. According to the Treasury
Department, the checks began to be issued in May 2008.49
The plan phased out the combined child and basic credit for individuals earning a threshold
amount of more than $75,000 ($150,000 for joint returns). It reduced the credit by 5% of the
individual’s income in excess of the threshold phase-out threshold.
Business Tax Benefits
Under current law, businesses are allowed to “expense” (i.e., deduct immediately) the acquisition
cost of a limited amount of new investment in machines and equipment rather than depreciating it
over a period of years. Expensing thus provides a postponement (deferral) of taxes which
constitutes a tax benefit because of the economic principle of discounting—the idea that a given
amount of funds is worth more, the sooner it is received. Prior to the stimulus act, for 2008 firms
were permitted to expense up to $128,000 of investment; the allowance was gradually reduced
(“phased out”) for firms whose investment exceeds a $510,000 threshold. The $128,000 amount
was a temporary increase over a permanent cap of $25,000 that is set to apply in 2011 and
thereafter. (The permanent phase-out threshold is $200,000.) The stimulus bill provided a one-
year (for 2008) additional increase in the expensing cap and threshold, to $250,000 and $800,000,
respectively.
When not eligible for expensing, outlays for tangible business property—that is, machines and
equipment and commercial structures—are required to be deducted gradually (i.e. depreciated)
over a number of years. For 2008, the stimulus plan provided temporarily more generous
depreciation rules for machines and equipment under which 50% of the asset’s cost could be
deducted in its first year. Like expensing, this provision provided a tax benefit in the form of a
deferral, although it was not as large.
49 Brett Ferguson, “Congress Passes $152 Billion Stimulus Plan,” BNA
Daily Tax Report, Feb. 8, 2008, p. GG-2.
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Economic Considerations50
According to economic theory, the purpose of fiscal stimulus is generally to boost the demand
side of the economy in the short run when aggregate demand is thought to be temporarily
insufficient to ensure full employment of the economy’s resources. In designing a fiscal stimulus,
one consideration is therefore whether the chosen approach is effective in injecting funds into the
economy. Individuals may save rather spend part of a tax cut or transfers from the government,
and different stimulus tools may have different effects on saving. A second consideration is
timing. (See, for example, the above statement by Chairman Bernanke.) Stimulus measures
address short-term, temporary slackness in aggregate demand, and if a stimulus is mis-timed, it
may occur when the economy has resumed positive growth and thus contribute to inflationary
pressures. Further, at least part of a fiscal stimulus is spent on imported goods, which means that
its impact is partly diluted.
Finally, fiscal stimulus can potentially reduce long-run economic growth. Counter-cyclical fiscal
policy works by increasing the federal budget deficit, and herein is a quandary: while a tax cut or
spending increase might boost demand in the short run, its effect on the budget deficit can reduce
long-term economic growth by reducing the amount of national saving available for investment.
Because of these considerations, a fiscal stimulus package is frequently thought to be effective if
it quickly and effectively injects funds into the economy, but does not reduce long-term growth
by permanently increasing the federal budget deficit.51
Temporary or one-time-only tax cuts or spending increases have sometimes been proposed as a
way to provide short-run stimulus without permanently reducing long-run growth. In addition,
another specific design question facing policymakers is the appropriate mix of tax cuts and
spending tools. From a strictly economic perspective, the answer depends on the particular tax cut
or spending increase that is chosen. For example, an increase in government spending can consist
of either increased transfers to individuals (for example, increased payments under the various
government income-support programs) or an increase of government purchases. Here, an increase
in purchases would increase aggregate demand more than either an increase in transfers or a tax
cut of identical size because it is likely that at least part of the latter will be saved rather than
spent.52 A drawback to some types of government purchases, however, is that the government
may not be able to put them into place quickly.
Different types of tax cuts are also thought to vary in their effectiveness of injecting funds into the
economy. On the business side, for example, investment incentives are generally thought to
provide more stimulus per dollar of revenue loss than a cut in corporate tax rates because firms
may spend part of the benefit from a rate cut on increases in dividends rather than on investment,
and dividend recipients may save rather than spend part of the former. For individuals, there is
empirical evidence suggesting that lower-income individuals are more likely to spend more of a
tax cut or transfer payment than are higher-income persons. In the case of both business and
50 For a detailed analysis of the stimulus proposal, see CRS Report RL34349,
Economic Slowdown: Issues and
Policies, by Jane G. Gravelle et al.. For more detail on the specific tax provisions, see CRS Report RS22850,
Tax
Provisions of the 2008 Economic Stimulus Package, by Jane G. Gravelle.
51 For a detailed discussion of the economic impact of alternative fiscal policy tools, see CRS Report RS21136,
Government Spending or Tax Reduction: Which Might Add More Stimulus to the Economy?, by Marc Labonte.
52 For detailed economic analysis of alternative tax-cut stimulus measures, see CRS Report RS21126,
Tax Cuts and
Economic Stimulus: How Effective Are the Alternatives?, by Jane G. Gravelle, and CRS Report RL31134,
Using
Business Tax Cuts to Stimulate the Economy, by Jane G. Gravelle.
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individual tax cuts, temporary measures would have a less deleterious impact on the budget
deficit in the long run.
Congress has enacted tax cuts in the recent past partly to provide a fiscal stimulus. The Economic
Growth and Tax Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) was enacted partly as a
means of boosting an economy that entered recession in March 2001. EGTRRA contained a
broad range of tax cuts, but was designed partly to deliver an immediate stimulus, and thus
included a rate-reduction tax credit that was mailed to individuals in 2001 as checks from the U.S.
Treasury.53
Following the September 11, 2001, attacks and in the midst of increased certainty that the
economy was in recession, Congress considered additional fiscal stimulus proposals that initially
included a tax rebate for individuals. The final stimulus package that was adopted (the Job
Creation and Worker Assistance Act of 2002; P.L. 107-147), however, did not contain a rebate.
The act did include temporary “bonus” accelerated depreciation that was aimed at boosting
business investment as well as a temporary extension of net operating loss (NOL) carrybacks for
businesses.
Prominent fiscal stimulus measures adopted in past decades were the Revenue Act of 1964 (the
“Kennedy” tax cut of 1964; P.L. 88-272) and the Tax Reduction Act of 1975 (P.L. 94-12). The
1964 act reduced both individual and corporate tax rates and augmented the existing investment
tax credit for businesses. The 1975 measure included a tax rebate.54
H.R. 3970, the Tax Reduction and Reform Act
One of the broadest tax proposals considered by Congress in 2007 was H.R. 3970, the Tax
Reduction and Reform Act, introduced by Chairman Charles Rangel of the House Ways and
Means Committee on October 25. The bill was an omnibus tax package containing a variety 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 five years and by $7.5
billion over 10 years.55
On the individual side, a chief focus of the bill was 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 had two AMT provisions: (1) a one-year
“patch” that did not repeal the tax, but that extended a temporarily higher exemption level and
allowed nonrefundable regular-tax credits to offset the AMT; and (2) complete repeal of the
individual AMT after 2007. Ultimately, a temporary reduction in the scope of the AMT for 2007
and 2008 was enacted.
53 U.S. Congress, Joint Committee on Taxation,
General Explanation of Tax Legislation Enacted in the 107th Congress, committee print, 107th Cong., 2nd sess. (Washington: GPO, 2003), p. 8. For an explanation of the credit, see CRS
Report RS21171,
The Rate Reduction Tax Credit - “The Tax Rebate” - in the Economic Growth and Tax Relief
Reconciliation Act of 2001: A Brief Explanation, by Steven Maguire.
54 CRS Report 92-20 E,
Tax Cuts and Rebates for Economic Stimulus: The Historical Record, by Donald W. Kiefer
(archived).
55 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. For additional discussion of the proposal, see CRS Report RL34249,
The Tax Reduction and Reform Act of 2007:
An Overview, by Jane G. Gravelle.
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Beyond the AMT, however, H.R. 3970 proposed 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 have extended
for one year a set of temporary individual income tax benefits (“extenders”). Among the largest of
these was the optional deduction for state and local sales taxes and the deduction for tuition. In
the fall of 2008, legislation was enacted (the Tax Extenders and Alternative Minimum Tax Relief
Act of 2008, P.L. 110-343) to extend the temporary tax benefits through the end of 2009.
In addition to these tax cuts, the bill proposed 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 have taxed 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 was a revenue loss
of $45.0 billion over five years and $6.4 billion over 10 years.
In broad outline, the proposal’s corporate income tax provisions coupled 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 proposed a one-year extension of temporary corporate tax benefits, and it also would
have made permanent a temporarily increased “expensing” benefit applicable to investment in
equipment by relatively small businesses. Prominent among the bill’s revenue-raising measures
was a repeal of the tax deduction for domestic production and a deferral of deductions attributable
to tax-deferred foreign-source income. Together, the estimated net revenue impact of the
corporate provisions would have been to reduce revenue by $8.7 billion over five years and by
$1.0 billion over 10 years.
Housing Tax Policy
The Emergency Economic Stabilization Act of 2008 (P.L. 110-343), often characterized as the
“rescue bill” enacted in response to financial market crises, included tax provisions. The first one
allows the Secretary of the Treasury to apply ordinary gain or loss treatment to certain sales of
preferred stock in Fannie Mae or Freddie Mac. The second tax provision denies certain employers
whose assets have been purchased under the Troubled Asset Relief Program (TARP) a tax
deduction for compensation or other benefits in excess of $500,000 made to their executives or
other highly compensated employees and makes tax penalties for excess parachute payments
applicable to employers who participate in Troubled Asset Relief Program and their executives.
The Foreclosure Prevention Act of 2008, originally introduced as S. 2636 was largely targeted at
the housing sector. It included some regulatory and direct spending provisions; in the latter case,
primarily a $4 billion authorization for state and local governments to redevelop abandoned and
foreclosed homes. The legislation ultimately became the Housing and Economic Recovery Act of
2008 (H.R. 3221, P.L. 110-289). It also included some tax reductions. In particular, the bill
included liberalization of tax exempt mortgage revenue bonds, a tax credit for buyers of homes in
foreclosure, a temporary deduction for property taxes by homeowners who do not itemize
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Major Tax Issues in the 111th Congress
(capped at $500 for single and $1000 for couples), and an election to refund certain corporate
credits in lieu of other business provisions.56
Other housing tax legislation in the 110th Congress included the Mortgage Forgiveness Debt
Relief Act of 2007 (P.L. 110-142) which excludes discharged qualified residential debt from gross
income. Qualified indebtedness is defined as debt, limited to $2 million ($1 million if married
filing separately), incurred in acquiring, constructing, or substantially improving the taxpayer’s
principal residence that is secured by such debt. It also includes refinancing of this debt, to the
extent that the refinancing does not exceed the principal amount of indebtedness. The provision
applied to debt discharges made on or after January 1, 2007, and before January 1, 2010. On
October 3, 2008, a provision included in the Emergency Economic Stabilization Act of 2008 (P.L.
110-343) extended the exclusion through the end of 2012.
Energy Taxation and Extenders
Energy taxation was an additional focus of tax legislation in the 110th Congress. Proposed
legislation was generally centered on two areas: 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; P.L. 110-140). 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.
Other energy tax policy was enacted in P.L. 110-343, Division B, the Energy Improvement and
Extension Act of 2008. Several temporary energy production incentives were extended, including
tax credits for producing electricity from wind and refined coal facilities and for other facilities,
including closed and open-loop biomass, solar energy, small irrigation power, landfill gas, trash
combustion, and hydropower. Along with an extension of the energy tax credit for solar energy,
fuel cell, and microturbine property and for residential energy efficient property, the law allows a
new energy tax credit for combined heat and power system property and a 30% investment tax
credit rate for advanced coal-based generation technology projects.
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 Tax
Subsidies: Current Status and Analysis, by Salvatore Lazzari.
Several temporary tax provisions that had expired in 2007 were retroactively extended through
2009 in Division C of P.L. 110-343, the Tax Extenders and Alternative Minimum Tax Relief Act
of 2008. Often referred to as “extenders,” these provisions were originally enacted with
expiration dates that have subsequently been extended, in some cases numerous times. The
temporary tax provisions include, among others, the tax deduction for state and local sales taxes
in lieu of state and local income taxes; the tax deduction for qualified tuition and related
expenses; the tax deduction for certain expenses of elementary and secondary school teachers; the
additional standard tax deduction from gross income for real property taxes; tax-free distributions
from individual retirement plans for charitable purposes; the tax credit for increasing research
activities; the new markets tax credit; accelerated depreciation for qualified leasehold and
56 For more information about the new law, see CRS Report RL34623,
Housing and Economic Recovery Act of 2008,
coordinated by N. Eric Weiss.
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Major Tax Issues in the 111th Congress
restaurant improvements and for certain improvements to retail space; and a few charitable giving
provisions.
For a full discussion of the extenders, see CRS Report RL32367,
Certain Temporary Tax
Provisions Expiring in 2009 (“Extenders”), by Pamela J. Jackson and Jennifer Teefy.
Author Contact Information
James M. Bickley
Andrew Hanna
Specialist in Public Finance
Presidential Management Fellow
jbickley@crs.loc.gov, 7-7794
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