2001 Tax Cut: Description, Analysis, and Background

2001 Tax Cut: Description, Analysis, and Background

Order Code RL30973
Report for Congress
Received through the CRS Web
2001 Tax Cut:
Description, Analysis,
and Background
Updated December 9, 2002
David L. Brumbaugh, Jane G. Gravelle,
Steven Maguire, and Louis Alan Talley
Government and Finance Division
Bob Lyke
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

2001 Tax Cut: Description, Analysis, and Background
Summary
A major tax cut was enacted in June 2001 as the Economic Growth and Tax
Relief Reconciliation Act (EGTRRA; P.L. 107-16; H.R. 1836). This report
summarizes the provisions of the bill, analyzes effects, and considers the
development of the legislation. To comply with Senate procedural rules, the Act
included a “sunset” provision that rescinds its tax cuts at the end of calendar year
2010. During 2002, the House (but not the Senate) passed several bills making all
or some of EGTRRA’s tax cuts permanent. There are indications that Congress will
return to this issue in 2003.
In early 2001, tax cuts were a principal focus of policymakers. In February,
President Bush sent Congress the outlines of a proposal to cut taxes by an estimated
$1.6 trillion over 10 years; the proposal is based on a plan the President set forth
during the 2000 presidential campaign. The principal elements of the plan were a cut
in marginal individual income tax rates; a tax cut for many married couples; an
increased child credit; elimination of the estate and gift tax; a permanent research and
experimentation tax credit; a charitable contribution deduction for non-itemizers; and
several tax benefits for health care and education.
In March, tax cuts similar to the President’s proposal began moving through the
House of Representatives. On March 8, the House approved H.R. 3, containing a cut
in marginal tax rates; on March 29, the House approved H.R. 6, containing tax cuts
for married couples and an increase in the child credit; and on April 4, the House
approved H.R. 8, which would phase out the estate and gift tax. On May 2, the
House approved H.R. 10, containing tax reductions related to pensions and
retirement. On May 15, the Senate Finance Committee approved an omnibus bill
including elements of all of these proposals, plus education tax benefits. The bill was
reported as an amended version of H.R. 1836, the Economic Growth and Tax Relief
Reconciliation Act of 2001 that was passed by the House on May 16; the bill was
approved by the Senate with further amendments on May 23.
The principal differences between the House, Senate, and Administration plans
were a larger tax-rate cut in the President’s and House plans than in the Senate bill;
a retroactive component in the House and Senate bills designed to provide near-term
economic stimulus; effective dates in the Senate bill that were generally somewhat
later than those in the President’s proposal and the House bills; pension provisions
in the House and Senate plans, but not in the President’s; and health provisions in the
President’s plan but generally not in the House or Senate proposals.
On May 26, the House and Senate both approved a conference version of
EGTRRA. The bill’s reduction in marginal individual income tax rates is smaller
than proposed by the House or the President and larger than proposed by the Senate,
but is closer to the Senate bill than the other proposals. Beyond the rate cuts, the
bill’s major elements are: tax cuts for married couples, phase-out of the estate and
gift tax, an increase in the child tax credit, more generous individual retirement
account (IRA) and pension provisions, tax benefits for education, and a number of
other items. President Bush signed the tax cut bill on June 7.

Contents
Revenue Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Distributional Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Side-by-Side Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

2001 Tax Cut: Description, Analysis, and
Background
A major tax cut, the Economic Growth and Tax Relief Reconciliation Act
(EGTRRA), was enacted in June 2001. This report summarizes the provisions of the
bill, analyzes effects, and considers the development of the legislation.
The broad shape of the President’s plan and the tax cuts passed by the House,
Senate, and Conference Committee are perhaps more marked by their similarities
than their differences. The centerpiece of each plan is a cut in the statutory marginal
tax rates that apply to individuals’ taxable incomes, although the precise details vary
among the proposals. Beyond the rate cuts, each phases out the estate tax; expands
the child tax credit; and provides tax cuts for two-earner married couples.
The details of the plans, however, are far from identical, as the side-by-side
chart that follows makes apparent. Some of the major differences are:
! a larger marginal individual tax-rate cut in the President’s and House-passed
plans than in the Senate bill (in this respect, the Conference bill follows the
Senate more closely than the other two plans);
! a retroactive component in the House, Senate, and Conference bills that is
designed to provide near-term economic stimulus;
! retention of the gift tax in the Senate and Conference bills, but not the
President’s plan or House-passed measure;
! pension provisions in the House, Senate, and Conference plans, but not the
President’s; health provisions in the President’s plan but not the House,
Senate, or Conference proposals; education provisions in the Conference,
Senate and President’s plans, but not the House; and extension of expiring tax
provisions in the President’s plan, but – with some exceptions – not the
House, Senate, or Conference bills;
! effective dates, “phase-in,” and “sunset” provisions that differ among the
plans.
The tax cuts in the Conference Committee bill are scheduled to expire
(“sunset”) at the end of calendar year 2010. This provision was included to ensure
the bill’s compliance with the “Byrd rule” applying to congressional consideration
of budget legislation. During 2002, the House (but not the Senate) passed a number
of bills that would rescind EGTRRA’s sunset provisions and make its tax cuts
permanent. There are indications that Congress will take up the issue of EGTRRA’s
permanence again in 2003.

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Revenue Effects
The relative size of the respective tax cuts is difficult to gauge, for several
reasons. First, revenue estimates for the tax cuts that passed the House that are
consistent with the Senate and Conference bills and the President’s proposal are not
available; the House tax cuts were passed in several different bills, and revenue
estimates were calculated for each bill separately without taking into account the
impact of the other House-passed measures. Because the costs of the different tax
cuts interact, the estimates for the different House bills cannot be simply added and
compared with the President’s plan or the Senate bill, the estimates for which do take
into account interacting effects.
Another difficulty is posed by “phase-ins” – that is, each proposal contains
numerous provisions that become fully effective only over a number of years. Thus,
the total 10-year revenue loss estimates for the proposals differ, depending on how
rapidly the particular plan’s provisions are phased in. To illustrate, the President’s
plan is estimated to reduce revenue by $1,775.3 billion over 10 years ($1.8 trillion
after rounding), while the Senate bill’s revenue loss is estimated at $1,347.2 billion
($1.3 trillion). In part, the larger size of the President’s proposal is a result of its
more rapid phase-in of important elements such as its rate cuts and estate and gift tax
repeal.
An added issue in gauging the size of the Conference bill’s tax cut is its
scheduled expiration at the end of calendar year 2010. Because of the sunset
provision, the $1.3 trillion revenue loss estimated for the period FY2001 through
FY2011 is smaller than it would be if the tax cuts did not expire: FY2011 includes
part of calendar year 2011 when the tax cuts are scheduled to no longer apply. The
expiration provision, together with the phase in of important provisions also hampers
getting an idea of the long-run, annual impact of the bill. One important provision
of the bill – repeal of the estate tax – is not fully effective until calendar year 2010
and due to lags in filing will not be fully reflected in revenue reductions until
FY2011. A solution to this might be to rely on the revenue estimate for FY2011. At
the same time however, revenue estimates for FY2011 reflect the impact of the bill’s
general sunset provisions and are therefore smaller than will likely result from the
annual impact of permanent changes in the tax code. The side-by-side comparison
in this report presents the Joint Tax Committee’s revenue estimates after each item
for FY2010 and the FY2001-FY2011 total.
How large are the tax cuts compared to the economy? The dollar value of
economic variables 10 years in the future is extremely uncertain, as are the actual
revenue reductions that will occur from the tax cuts. However, based on economic
projections by the Congressional Budget Office and the Joint Committee on
Taxation’s revenue estimates, the estimated revenue loss from the Conference
committee bill is 1.3% of gross domestic product (GDP) or 6.3% of the revenue
collections otherwise expected to occur.

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Distributional Effects
This analysis compares the distributional effects of the proposals, using
estimates made by a private group, Citizens for Tax Justice. This is the only
organization that has provided consistent estimates or provided the underlying
information necessary to calculate the tax as a percentage of income, a relative
distribution measure, and that also includes the impact of repealing the estate tax –
an important element of the proposals.
Two types of distributional measures are shown, one absolute (indicating the
total amount of dollars received by each income group) and the other relative
(measuring the tax cut as a percentage of income).1 The absolute measure indicates
that most of the tax cut is received by the highest income classes, and that benefits
in the President’s proposal (an early version) and the House proposal are more
concentrated in the higher classes than is the Senate proposal, while the conference
proposal falls in between. This effect occurs primarily because of differences in the
rate cuts, which are largest at higher income levels in the President’s proposal and the
House bills and smallest in the Senate proposal.
The tax cut as a percentage of income – the relative measure – provides
information about the effect on progressivity. Ideally, the percentage change in after
tax income should be used to show the degree to which changes in taxes make
incomes more or less even. Using taxes as a percentage of pre-tax income reduces
the percentage change at higher income levels, but nevertheless provides a reasonable
depiction of the distributional effects. While the tax cut is relatively even handed in
the middle income classes, the highest income individuals would receive much larger
tax cuts relative to income. This effect is in part due to the estate and gift tax repeal;
about half of the tax cut for the top 1% comes from the estate tax repeal. Without
that tax cut, the percentage change in taxes as a percent of income would be 2.79%
for the President’s and House plan, 1.79% for the Senate plan, and 2.57% for the
conference plans. All four measures, therefore, increase differentials in after-tax
income. The average tax cut as a percent of income (shown in the totals row for the
last four columns) indicates that, in the long run, the conference plan is the largest,
with an average cut of 2.43% of income.
Note that some measures of distribution compare the percentage change in tax
liability. These measures do not, however, provide information about progressivity
for two reasons. First, percentage changes in tax liability can be very large if initial
tax liability is small and they will differ substantially depending on what is chosen
as the base (e.g. income taxes, or all federal taxes). A proportional cut in an already
progressive tax will reduce progressivity (in the sense that incomes are distributed
less equally). For a cut in a progressive tax to be distributionally neutral, cuts must
be smaller at the top than at the bottom, but the extent of that difference depends on
existing progressivity.
1For more information on these different measures, see CRS Report RL30779, Across the
Board Tax Cuts: Economic Issues, by Jane G. Gravelle.

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Note also that, while the tax cuts at the top arise mostly from rate cuts, or
reductions in estate taxes, which benefit all taxpayers in those groups, most of the
middle class tax cut is directed towards particular groups: families with children and
married couples. Citizens for Tax Justice finds, for example, that in the President’s
plan, the average tax cut is $500, but the average tax cut for families with children
is $1,114, the average tax cut for single parents is $326, and the average tax cut for
singles is $283. Some of these differences reflect differences in average incomes;
however, the vast majority of single individuals with no children will receive no
more than $300 (the new 10% rate bracket), because there is no tax reduction in the
15% rate bracket, and singles do not receive benefits focused on children or joint
returns.
Table 1: Distributional Effects of the President’s Tax Plan, the House
Proposals (H.R. 3, H.R. 6, & H.R. 8), the Senate Proposal and the
Conference Proposal at 2001 Income Levels
Share of Cut
Percent of Income
Income
Class
Confer-
Confer-
President House*
Senate

President
House*
Senate
ence
ence
Lowest 20% 0.8%
0.8%
1.0%
0.9%
0.51%
0.55%
0.70%
0.71%
Second 20% 3.5
4.0
5.7
5.3
1.03
1.18
1.77
1.82
Third 20%
8.4
9.1
8.9
8.5
1.48
1.60
1.63
1.74
Fourth 20% 15.7
15.3
14.7
14.5
1.69
1.64
1.65
1.82
Next 15%
18.9
19.0
24.8
23.7
1.56
1.58
2.14
2.29
Next 4%
7.8
6.7
9.8
9.5
1.12
0.96
1.48
1.59
Top 1%
45.0
45.0
35.0
37.6
4.88
4.87
3.97
4.76
Total
100.0
100.0
100.0
100.0
2.08
2.08
2.17
2.43
Source: Citizens for Tax Justice and CRS calculations based on their data.
*Reflects H.R. 3 (rate cuts), H.R. 6 (marriage penalty and child credit) and H.R. 8 (estate and gift tax), but not
H.R. 10 (IRAs and pensions). H.R. 10 would make the size of cuts slightly larger, but would probably not
affect the distribution very much.
Side-by-Side Comparison
Table 2 presents a side-by-side comparison of the principal provisions of the
President’s proposal and the House, Senate, and conference committee versions. It
is not intended to be comprehensive but does contain the main features of each plan.
The table presents item-by-item revenue estimates prepared by the Joint Committee
on Taxation. As noted above, however, the estimates for the House bills and other
plans are not comparable. In addition, the itemized revenue estimates for the House
tax cuts cannot be aggregated.

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Table 2. Comparison of Main Provisions
Current Law
President’s Proposal
House
Senate
Conference
Individual Income Tax Rates, Personal Exemptions, and Itemized Deductions
Tax rates applicable to
Phased-in reduction in
Phased-in reduction in
Phased-in reduction of
Phased in reduction of
individuals’ taxable income
individual income tax rates
individual income tax rates
individual income tax
individual income tax
are: 15%, 28%, 31%, 36%,
over the period 2002-6.
over the period 2002-6. (H.R.
rates, generally over the
rates over the period
and 39.6%.
3)
period 2002-7.
2001-6.
Rates would be: 10%, 15%,
Rates would be: 10%, 15%,
Rates would be: 10%,
Rates are: 10%, 15%,
25%, and 33%.
25%, and 33%.
15%, 25%, 28%, 33%, and
25%, 28%, 33%, and
36%.
35%.
No retroactivity.
The initial phase-in of the
lowest rate would begin
10% rate would apply
10% rate applies
retroactively; a 12% rate
retroactively to 2001.
retroactively to Jan.,
Estimated revenue loss:
would apply in calendar years
2001. The phase in of
$118.9 billion in FY2010;
2001and 2002; 11% would
Increases the income
other rate cuts begins
$877.2 billion over 10 years.
apply in 2003-5; 10% would
threshold at which itemized
Jul. 1, 2001.
apply thereafter.
deductions begin to be
limited, effective in 2009.
Phases out the income
Estimated revenue loss:
limit on itemized
$121.7 billion in FY2010;
Repeals the phase out of
deductions over 2006-
$958.3 billion over 11 years.
personal exemptions,
10.
effective in 2009.
Phases out the
Estimated revenue loss:
restriction on personal
$104.9 billion in FY2010;
exemptions over 2006-
$842.0 billion over 11
9.
years.
Estimated revenue loss:
$118.5 in 2010; $874.9
billion over 11 years.

CRS-6
Current Law
President’s Proposal
House
Senate
Conference
Married Couples
Tax rate brackets and
Provides a tax deduction to
Increases the standard
Phases in an increase in
Phases in an increase in
standard deduction provide
two-earner married couples
deduction for couples to
the standard deduction for
the standard deduction
marriage “bonuses” for
equal to 10% of the first
twice that of singles, effective
couples to twice that of
for couples to twice that
couples with disparate
$30,000 earned by the lower-
in 2002; broadens the 15%
singles; phase-in would
of singles; phase-in will
incomes and marriage
paid spouse up to a maximum
rate bracket for couples to
occur over 2006-10. Phases
occur over 2005-9.
“penalties” for couples with
deduction of $3,000. Phased
twice that of singles, fully
in over 2006-10 a
Phases in over 2005-8 a
similar incomes. Earned
in over 2002-2006.
effective in 2009; increases
broadening of the 15%
broadening of the 15%
income tax credit (EITC) can
the EITC earned income
rate bracket for couples to
rate bracket for couples
result in a marriage penalty.
Estimated revenue loss: $14.2
amount for couples, effective
twice that of singles.
to twice that of singles.
billion in FY2010; $102.7
in 2002; increases the AMT
Increases the phase-out
Phases in an increase in
over 10 years.
exemption amount for
range of the EITC for
the phase-out range of
couples, effective in 2006.
couples, effective in 2002.
the EITC over 2002-8.
Estimated revenue loss:
Estimated revenue loss:
Estimated revenue loss:
$36.4 billion in FY2010;
$10.3 billion in FY2010;
$9.2 billion in FY2010;
$223.3 billion over 10 years.
$72.2 billion over 10 years.
$59.8 billion over 10
years.
Child Tax Credit
$500 tax credit for each child
Increases the credit to $1,000.
Increases the credit to $1,000
Increases the credit to
Increases the credit to
under 17. Phased out
Increases the phase-out
over the period 2001-2006,
$1,000 over the period
$1,000 over the period
beginning with incomes of
threshold to $200,000 for
but retains current phase-out
2001-2011. Makes the
2001-2011. Makes the
$110,000 for couples and
couples and singles. Phased
threshold. Extends
credit refundable to the
credit refundable to the
$75,000 for singles. Credit is
in over the period 2002-6.
refundability to families with
extent of 15% of earned
extent of 10% of
refundable only for families
less than 3 children. Credit
income in excess of
income over $10,000
with three or more children.
Credit would offset the AMT;
would offset the AMT;
$10,000. Credit would
for 2001-4; 15% of
Refund reduced by AMT;
refund would not be reduced
refund would not be reduced
offset the AMT; refund
income over $10,000,
after 2001 amount of credit
by the AMT.
by the AMT.
would not be reduced by
indexed for inflation,
reduced by AMT.
the AMT.
for 2005 and thereafter.
Estimated revenue loss: $31.9
Estimated revenue loss: $23.9
billion in FY2010; $210.7
billion in FY2011; $175.9
Estimated revenue loss:
Credit offsets the AMT;
billion over 10 years.
billion over 11 years.
$25.4 billion in FY2010;
refund not reduced by
$193.0 billion over 11
the AMT.
years.
Estimated revenue loss:
$25.2 billion in
FY2010; $171.8 billion
over 11 years.

CRS-7
Current Law
President’s Proposal
House
Senate
Conference
Estate and Gift Tax
Marginal tax rates ranging
The estate and gift tax would
The estate and gift tax would
The estate tax would be
The estate tax gradually
from 37% to 60% apply to
be phased out over the period
be phased out over the period
gradually repealed over the
repealed over the period
estates over 675,000; estates
2002-2009. All rates are
2002-2011(H.R. 8). The rate
period 2002-2011. Estate
2002-10. Rate
above the filing threshold
reduced rapidly during the
reductions are not as rapid as
and gift tax rates are
reductions are the same
may claim a credit equal to
phase out period, but not
in the president’s proposal,
reduced more gradually
as in the Senate bill.
the tax due on the threshold
below the capital gains tax
and the highest rate falls
under this proposal during
However, the applicable
amount. The taxable
rate.
below the top income tax
phaseout than the other two
credit is increased more
threshold is scheduled to
rate. H.R. 8 would also
proposals. However, the
slowly than under the
increase to $1 million by
change the unified credit to
applicable credit is
Senate bill. In addition,
2006.
an exemption beginning in
gradually increased to $4
the gift tax is retained at
2002.
million by 2010. A top gift
the top income tax rate
tax rate of 40% would be
of 35%.
maintained after repeal of
the estate tax.
Same basis rules as
Assets transferred at death
The “step-up” in the basis of
Same basis rules as
President’s proposal
receive a “stepped-up” basis.
assets would be limited to
Same basis rules as
President’s proposal and
and House and Senate
$1.3 million plus $3 million
President’s proposal.
House bill.
plans.
for assets transferred to a
surviving spouse.
The federal credit for
Estates may also claim a
The federal credit for state
The federal credit for state
state death taxes is
credit for state death taxes
death taxes would be reduced
The federal credit for state
death taxes would be
reduced over the 2002-
ranging from .8% to 16% of
in proportion to the reduction
death taxes would be reduced
reduced over the 2002-
2004 period and
adjusted taxable estate value.
in estate and gift tax rates.
proportionately.
2004 period and replaced
replaced with a
with a deduction in 2005.
deduction in 2005.
Estimated revenue loss:
Estimated revenue loss:
Estimated revenue loss:
$23.5 billion in FY2010
$73.4 billion in FY2010
Estimated revenue loss:
$22.6 billion in FY2010
($53.9 billion in
($78.9 billion in FY2011);
$35.0 billion in FY2010
($27.0 billion in FY2011);
FY2011); $138.0 billion
$305.9 billion over 10 years.
($51.8 in FY2011); $185.6
$134.4 billion over 10
over 11 years.
billion over 10 years.
years.

CRS-8
Current Law
President’s Proposal
House
Senate
Conference
Individual Retirement Accounts (IRAs) and Pensions
IRAs
Individuals can contribute up
No change for IRAs
The dollar limit for IRA
The limit for IRA contrib-
The limit for IRA
to $2,000 annually to IRAs.
generally. See, however, the
contributions increased to
utions is increased to
contributions is
Contributions are deductible
changes for charitable
$5,000 over 2002-2004 and is
$5,000 over 2002-2011
increased to $5,000
for persons not participating
contributions and for
indexed afterwards.
and is indexed afterwards.
over 2002-8 and
in employer plans; income
education, below.
Estimated revenue loss for
Estimated revenue loss for
indexed thereafter.
limits apply to deductions by
IRA provision: $5.3 billion in
IRA provision: $3.3 billion
Estimated revenue loss
plan participants.
FY2010; $34.2 billion over
in FY2010; $17.7 billion
for IRA provision: $4.5
10 years.
over 10 years.
billion in FY2010;
$25.1 billion over 10
Pensions
years.
Tax on employer
No change.
Increases dollar limits on
Provisions similar to the
Provisions increasing
contributions to qualified
variety of retirement plans:
House bill, but with slower
dollar limits follow the
pension plans is generally
limits on contribs. to defined
phase-ins in some cases;
House bill.
deferred (postponed) until
benefit plans rise from $35K
the limit on contributions
distributed, conferring the
to $40K; limits on defined
to defined benefit plans
401(K) and similar
equivalent of a tax
benefit payments rise from
will not increase except for
plans can elected to be
exemption. The benefit is
$140K to $160K; limits on
inflation.
treated as Roth IRAs);
subject to limits, restrictions,
eligible compensation rise to
effective in 2006.
and regulations.
$200K; limits on 401(k) and
401(K) and similar plans
like plans rise to $15K; limits
could be treated as Roth
Follows the Senate in
on SIMPLEs rise to $10K.
IRAs (contributions not
allowing a credit for
Limits then indexed for
deductible, payments not
IRA and 401(K)
inflation. Other increases in
taxable)
contributions,
limits would also occur.
sunsetting in 2006.
Credit for contributions to
401(K) and similar plans
IRAs, 401(K) and similar
Numerous other
could be treated as Roth IRAs
plans aimed at lower
provisions (similar to
(contributions not deductible
income persons; sunsets in
the House and Senate
but payments not taxable).
2006.
provisions) relating to
expanding portability,
There are numerous other
Numerous other provisions
easing burdens of anti-
provisions relating to
(similar to the House
discrimination rules,
expanding portability, easing
provisions) relating to
and simplifying rules.
burdens of anti-
expanding portability,
discrimination rules, and
easing burdens of anti-
Estimated revenue loss
simplifying rules.
discrimination rules, and
of pension provisions:
simplifying rules.
$2.2 billion in FY2010;
Estimated revenue loss of
$24.5 billion over 10
pension provisions: $2.5
Estimated revenue loss of
years.
billion in FY2010; $17.4
pension provisions: $2.2
billion over 10 years.
billion in FY2010; $22.6
billion over 10 years.

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Current Law
President’s Proposal
House
Senate
Conference
Charitable Contributions
Taxpayers who itemize their
Permits non-itemizers to
No House-passed provision.
Taxpayers can deduct the
No provisions.
deductions can deduct
deduct charitable
fair market value of self-
charitable contributions
contributions. (Phased in over
created artworks.
subject to a limitation of 50%
2002-2006).
of adjusted gross income.
Effective upon enactment.
Non-itemizers are not
permitted an additional
Allows corporations
deduction for charitable
additional deduction
contributions.
(generally equal to one-half
ordinary income that would
Withdrawals from IRAs are
Allows persons over 59 ½
have been recognized from
generally included in taxable
tax-free withdrawals from
sale) for contributions of
income. Withdrawals before
IRAs for charitable
book inventory to schools,
59 ½ are subject to an
contributions, beginning in
libraries, and literacy
additional 10% tax.
2002.
programs.
Corporations are permitted to
deduct charitable
Increases the corporate
Effective upon enactment.
contributions, subject to a
contribution limitation to
limit of 10% of net income.
15% of taxable income,
beginning in 2002.
For contributions of property,
taxpayers may deduct the fair
Estimated revenue loss: $15.7
market value of capital gain
billion in FY2011; $90.0
property but for ordinary
billion over 10 years.
income property – including
self-created artworks – can
generally only deduct their
basis in the property.

CRS-10
Current Law
President’s Proposal
House
Senate
Conference
Education
Education IRAs
Authorizes tax-exempt
Allows accounts also to be
No provision.
Allows accounts also to be
Same as the Senate
savings accounts for qualified
used for qualified elementary
used for qualified
amendment with several
higher education expenses.
and secondary education
elementary and secondary
modifications. Does
Distributions are excluded
expenses, including for
education expenses,
not include exclusion
from income of beneficiary
private and religious schools
including private and
for employer
student.
(effective after 2001).
religious schools.
contributions.
Raises annual contribution
Limits annual contributions
limit to $1,000 in 2002,
Raises annual contribution
to $500 per beneficiary
$2,000 in 2003, $3,000 in
limit to $2,000.
2004, $4,000 in 2005, and
$5,000 in 2006 and
(Effective after 2001)
thereafter.
Extends exclusion to
employer contribution to
education IRA of
employee, spouse, or lineal
descendent, limited to $500
per beneficiary.
Qualified Tuition Savings
Plans
Allows distributions from
No provision.
Allows distributions from
Same as the Senate
Allows qualified tuition
accounts to be excluded from
accounts to be excluded
amendment with several
savings plans to be tax-
income of beneficiary
from income of beneficiary
modifications. Imposes
exempt. Distributions from
student, subject to lifetime
student.
10% penalty tax on
accounts are taxable to
limit.
distributions not used
student under annuity rules.
Allows private higher
for qualified higher
Allows private higher
educational institutions to
education expenses.
Plans must be established by
educational institutions to
establish prepaid tuition
state governments.
establish prepaid tuition
savings plans under same
savings plans under same
rules.
rules.
(Effective after 2001
(Effective after 2001)
except for exclusion of
distributions from private
institution plans, after
2003)

CRS-11
Current Law
President’s Proposal
House
Senate
Conference
Employer Education
Assistance
Extends current law through
No provision.
Extends limited exclusion
Same as Senate
Allows limited exclusion
Dec. 31, 2002.
to graduate level courses
amendment.
even if education is not job-
(effective after 2001).
related or prepares for new
career.
Makes exclusion
Does not cover graduate-level
permanent.
courses.
Expires Dec. 31, 2001.
Interest on Higher Education
Loans
Allows limited above-the-line
No provision.
No provision.
Repeals restriction on
Same as Senate
deduction for first 60 months
number of months on
amendment except does
of interest payments.
interest payments.
not include optional tax
credit.
Raises income phase-out
ranges for eligibility.
(Both effective after 2001)
Allows optional tax credit
of up to $500 for first 60
months of interest
payments (effective after
2008).

CRS-12
Current Law
President’s Proposal
House
Senate
Conference
Bonds for School Facilities
Interest on state or local
No provision.
Increases the arbitrage
Same as Senate
governmental bonds is tax-
rebate exception for small
amendment.
exempt. Issuers must rebate
issuers by $5 million
arbitrage earnings, with some
(effective after 2001)
exceptions.
Interest on private activity
Allows bonds issued by for-
Allows bonds issued by
bonds is taxable with some
profit entity pursuant to
for-profit entity pursuant to
exceptions, among them
partnership agreement with
partnership agreement with
exempt facility bonds.
public schools to be classified
public schools to be
as exempt facility bonds
classified as exempt facility

(effective after 2001).
bonds (effective after
2001)
Deduction for Higher
Education Expenses
Not allowed except as
No provision.
No provision.
Allows optional above-the-
Same as Senate
business or professional
line deduction for tuition
amendment except
expense
and fees. Limited to
deduction limited to
$3,000 in 2002 and 2003
$4,000 in 2004 and
Allows tax credits for tuition
and to $5,000 in 2004 and
2005.
and fees: Hope Scholarship
2005.
(up to $1,500) and Lifetime
Learning (up to $1,000;
Allows higher income
$2,000 after 2002).
phase-out ranges for
eligibility than would
either tax credit.
(Effective after 2001 and
before 2006).

CRS-13
Current Law
President’s Proposal
House
Senate
Conference
Deduction for Classroom and
Training Expenses
Allows deduction for
Allows “above-the-line”
No provision.
Allows above-the-line
No provision.
unreimbursed employee
deduction for non-itemizers
deduction up to $500 for
expenses, limited to taxpayers
up to $400 for elementary
elementary and secondary
who itemize and subject to
and secondary school
school teachers and other
2% adjusted gross income
teachers and other personnel
personnel who incur
floor. Some training
who have classroom and
professional development
expenses may qualify for the
training expenses (effective
expenses related to their
Lifetime Learning Credit.
after 2001).
subject area.
Allows tax credit for 50%
of classroom material
expenses; limited to $250
each year.
Estimated reduction in
Estimated reduction in
Estimated reduction in
revenue of all education
revenue of all education
revenue of all education
provisions: $1.6 billion in
provisions: $3.6 billion in
provision: $3.1 billion
FY2010; $10.7 billion over
FY2010; $35.5 billion over
in FY2010; $29.4
10 years.
ten years.
billion over ten years.

CRS-14
Current Law
President’s Proposal
House
Senate
Conference
Health and Long-Term Care
Tax Credit for Health
Insurance
Allows refundable tax credit
No provision.
No provision
No provision.
Allows deduction for
for purchase of health
unreimbursed medical
insurance for individuals not
expenses (including health
participating in employer-
insurance premiums), limited
sponsored or public
to taxpayers who itemize and
programs. Credit limited to
subject to
$1,000 per individual ($2,000
7 ½ % adjusted gross income
per family) up to 90% of
floor.
premium (effective after
2001; phased-in before
2003).
Flexible Spending Accounts
Allows FSAs to be funded on
Allows up to $500 in unused
No provision.
No provision.
No provision.
pre-tax basis. Balances
balances to be carried over to
unused at end of year are
next year, rolled over into
forfeited to employer.
qualified retirement plan or
medical savings account, or
distributed to employee
(effective after 2001).
Archer Medical Savings
Accounts
Allows tax-exempt MSAs for
Repeals termination date for
No provision.
No provision.
No provision.
self-employed or employees
new enrollees and cap on
of small employers with high
number of participants.
deductible insurance. New
Makes accounts generally
enrollments generally
available to anyone with high
prohibited after 2002.
deductible insurance and
increases contribution limits
(effective after 2001).
Personal Exemption for
Family Caregiver
Allows exemption if
Allows additional personal
No provision.
No provision.
No provision.
individual qualifies as a
exemption for family
dependent.
members needing long-term
care (effective after 2001).

CRS-15
Current Law
President’s Proposal
House
Senate
Conference
Deduction for Long-term
Care Insurance
Allows deduction for
Allows above-the line
No provision.
No provision.
No provision.
unreimbursed medical
deduction for long-term care
expenses (including long-
insurance premiums
term care insurance
(effective after 2001 but
premiums), limited to
phased-in before 2007).
taxpayers who itemize and
subject to 7 ½ % adjusted
Estimated reduction in
gross income floor.
revenue: $13.5 billion in
FY2011; $100.4 billion over
10 years.
Health Insurance Deduction
for Self-Employed
If a taxpayer is not eligible to
No provision.
No provision.
Allows 100% deduction
No provision.
participate in an employer-
for health insurance
subsidized health plan, a
premium even if taxpayer
deduction is allowed for 60%
is eligible to participate
of premiums in 2001, 70% in
(but does not) in employer-
2002, and 100% in 2003 and
subsidized health plan.
thereafter.
Effective after 2001.
Estimated revenue cost:
$0.9 billion over 10 years.
Research and Experimentation (R&E) Tax Credit
A 20% tax credit applies to
The R&E credit would be
No provision.
The R&E credit would be
No provision.
qualified research expenses
made permanent; no change
made permanent. The
above a base amount linked
in rates.
alternative rates would be
to a firm’s research in the
increased to a range of 3%
past. An alternative, three-
Estimated revenue cost: $8.2
to 5%.
tiered credit is available with
billion in FY2010; $47.3
lower rates ranging from
billion over 10 years.
Estimated revenue cost:
2.65% to 3.75%. The credit
$8.3 billion in FY 2010;
is scheduled to expire after
$47.8 billion over 10 years.
June 30, 2004.

CRS-16
Current Law
President’s Proposal
House
Senate
Conference
Adoption Tax Credit and Employer Adoption Assistance Programs
Taxpayers are allowed a tax
Provides that the adoption tax
Increases the adoption tax
Provides a $10,000 tax
The provisions of the
credit for qualified adoption
credit for children without
credit to $10,000 for children
credit for taxpayers who
House and Senate bills
expenses. Adopted children
special needs is to be made
with or without special needs.
adopt a child with special
were similar and
must be under age 18 or
permanent (the special needs
Increases the phase-out for
needs. A credit up to
generally retained. The
physically or mentally
adoption provision is already
either the adoption credit or
$10,000 is provided for
$10,000
incapable of caring for
a permanent part of the IRC).
amounts received from an
qualified adoption
credit/exclusion for
themselves. There is no limit
Increases the credit to $8,500
employer adoption assistance
expenses for all other
special needs children
on the number of children
for children with special
program from $75,000 to
adoptions. Employer
without regard to
that may be adopted. The
needs and to $7,500 for
$150,000. The adoption
adoption assistance
qualified adoption
credit is $6,000 for domestic
adoptions of non-special
credit would be allowed
programs may provide up
expenses (under the
special needs children (and a
needs children.
against the alternative
to $10,000 to employees
Senate amendment) was
permanent part of the IRC).
minimum tax. Both the credit
who adopt special needs
retained but is not
The credit amount is $5,000
for non-special needs
children and may
effective until 2003.
for all other adoptions (and
children and the employer
reimburse adoption
These amounts are not
will expire after December
adoption program would be
expenses for all other
available until the
31, 2001). The credit may be
made a permanent part of the
children up to $10,000.
adoption is finalized.
carried forward 5 years. A
tax code. Qualified expenses
Amounts received under an
Further, the agreement
phase-out of benefits occurs
paid or incurred in taxable
employer program are not
provides a cost of living
for taxpayers with incomes
years beginning on or before
includable in the
adjustment for inflation.
over $75,000. The credit will
December 31, 2001, would
employee’s gross income.
The adoption tax credit
be subject to the alternative
remain subject to current law
The phase-out for both the
and employer adoption
minimum tax limitations after
dollar limits.
adoption credit or for
assistance program
2001. Employers may offer
amounts from employer
provisions are made a
an adoption assistance
programs is raised from
permanent part of the
program to employees that
$75,000 to $150,000. An
Internal Revenue Code
provides reimbursements in a
adjustment for inflation is
(note, however, the year
like amount available under
provided for both the credit
2010 sunset provisions
the tax credit program. The
and employer
as described in the body
employer adoption assistance
reimbursement for future
of this report).
program expires after
years. The credit would be
December 31, 2001.
allowed against the
Estimated revenue loss:
alternative minimum tax..
$432 million in
FY2010; $3.135 billion
Estimated revenue cost:
over 11 years.
$432 million in FY2010;
$3.1 billion over 11 years.

CRS-17
Current Law
President’s Proposal
House
Senate
Conference
Dependent Care Credit
A tax credit is allowed that is
No provision.
No provision.
The maximum credit rate is
Same as Senate
generally equal to 30% of
increased to 40% and the
amendment except
qualified employment-related
income threshold above
maximum credit is 35%
expenses for the care of a
which the credit is reduced
and income threshold
dependent. The rate is
is increased to $20,000.
above which there is
reduced (but not below 20%)
The limit on qualified
reduction is $15,000.
for increments of income
expenses is increased to
above $10,000. The amount
$3,000 for 1 dependent and
of qualified expenses may not
to $6,000 for 2 or more
exceed $2,400 for 1
dependents. The changes
dependent and $4,800 for 2
would be effective
Estimated revenue cost:
or more dependents.
beginning in 2003.
$0.9 billion in FY2010;
$7.6 billion over 10
Estimated revenue cost:
years.
$0.5 billion in FY2010;
$5.4 billion over 10 years.
Employer Child Care Tax Credit
Allows a deduction for
No provision.
No provision.
Allows a tax credit equal to
Same as Senate
ordinary and necessary
25% of expenditures for
provision.
business expenses of assisting
child care facilities and
employees obtain child care.
operating or contract costs
Estimated revenue cost:
Expenditures for child care
of child care programs
$0.2 billion in FY2010;
facilities are capitalized and
(10% for resource and
$1.4 billion over 10
recovered over time through
referral expenditures),
years.
deduction for depreciation.
limited to $150,000 a year.
Estimated revenue cost:
$0.2 billion in FY2010;
$1.5 billion over 10 years.