Extending the 2001, 2003, and 2004 Tax Cuts

Extending the 2001, 2003, and 2004 Tax Cuts

Order Code RS21992
Updated May 10, 2006
CRS Report for Congress
Received through the CRS Web
Extending the 2001, 2003, and 2004 Tax Cuts
Gregg A. Esenwein
Specialist in Public Finance
Government and Finance Division
Summary
The Economic Growth and Tax Relief Reconciliation Act of 2001 reduced
marginal income tax rates, provided marriage tax penalty relief, provided temporary
relief from the alternative minimum tax (AMT), and increased the child tax credit. All
of the act’s provisions are scheduled to sunset (revert to prior law levels) at the end of
2010. The Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerated the
implementation of certain tax reductions originally enacted in the 2001 act. The 2003
act also reduced the tax rate on dividend and long-term capital gains income. The
dividend and capital gains tax relief is scheduled to expire after 2008. The Working
Family Tax Relief Act of 2004 extended many of the tax provisions scheduled to expire
at the end of 2004. The 2004 tax reductions, however, are still scheduled to sunset after
2010 as the original 2001 legislation required.
Since all of the tax reductions expire at some point in the future, Congress faces the
issue of whether to extend and/or make the reductions permanent. The AMT relief
expired at the end of 2005 and the capital gains/dividend tax cuts expire in 2008, and
Congress has considered the extension of these items in budget reconciliation
legislation. The conference agreement on the 2006 budget resolution, H.Con.Res. 95,
contained $106 billion in tax relief over the next five years, approximately $70 billion
of which would be protected through the reconciliation process. As part of
reconciliation, the Senate approved the Tax Relief Act of 2005 (S. 2020). This bill
would, among other things, extend AMT tax relief and the deduction for state and local
taxes through 2006. The House approved H.R. 4297 which, among other things, would
provide a one-year extension for both the deduction of state/local general sales taxes and
the treatment of nonrefundable personal tax credits under the AMT. It would also
extend the capital gains/dividend tax reductions for two years. On May 9, a conference
committee approved a plan that would extend the capital gains and dividend tax cuts for
two years (through 2010). This report will be updated to reflect legislative activity.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L.
107-16) reduced marginal income tax rates, created a new 10% income tax bracket,
provided marriage tax penalty relief, increased the child tax credit, and increased the
Congressional Research Service ˜ The Library of Congress

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alternative minimum tax (AMT) exemption. These changes were scheduled to phase in
over several years.
All of the changes in EGTRRA (including the tax rate changes) will expire (sunset)
after 2010. Congress included the sunset in EGTRRA to avoid a Byrd rule (Section 313
of the 1974 Congressional Budget Act, as amended) violation in the Senate. The Byrd
rule prohibits “extraneous matter” in reconciliation legislation. Under the rule, extraneous
matter includes, among other things, language that would cause an increase in the budget
deficit (or reduce budget surpluses) in a fiscal year beyond those covered by the
reconciliation legislation. As a result of the Byrd rule, EGTRRA contained language
providing for the expiration of all of its provisions at the end of calendar year 2010, since
the years after 2010 were outside the reconciliation budget window.
In 2003 Congress passed the Jobs and Growth Tax Relief Reconciliation Act
(JGTRRA; P.L.108-27). JGTRRA accelerated the implementation of certain tax
reductions originally enacted as part of EGTRRA. These included marriage tax penalty
relief, expansion of the 10% tax bracket, an increase in the child tax credit to $1,000, and
an increase in the AMT exemption. These changes were temporary and were scheduled
to be in effect for two years, 2003 and 2004. In addition, JGTRRA lowered the
maximum tax rate on qualified dividend income and long-term capital gain income (gains
on assets held longer than 12 months) to 5% (0% for 2008) for taxpayers in the 10% and
15% marginal income tax brackets. The maximum dividend and capital gains tax rate
was reduced to 15% for taxpayers in income tax brackets exceeding 15%. These changes
were effective for assets sold or exchanged on or after May 6, 2003, and before January
1, 2009.
In September 2004, Congress passed the Working Families Tax Relief Act of 2004
(WFTRA; P.L. 108-311). WFTRA extended several tax provisions that were scheduled
to expire at the end of 2004. These expiring tax reductions were enacted under JGTRRA,
which had accelerated implementation of tax reductions originally enacted in 2001 under
EGTRRA. WFTRA extended the $1,000 child tax credit through 2009 (for 2010, the
EGTRRA provisions apply and the child tax credit will remain at $1,000). In addition,
WFTRA accelerated, to 2004, the increase in the refundability of the child tax credit. For
2004 through 2010, the child tax credit will be refundable to 15% of a taxpayer’s earned
income in excess of the applicable threshold. The 2004 Act also contained a provision
including combat pay in earned income for purposes of computing child tax credit
refundability.1
WFTRA also extended marriage penalty relief (standard deduction and 15% tax
bracket for joint returns set at twice the level as those for single returns) through 2008.
(In 2009 and 2010, EGTRRA provisions apply which will maintain the level of the
standard deduction and 15% tax bracket for joint returns). The 2004 act also extended the
increase in the 10% income tax bracket through 2010.
WFTRA included a one-year extension in the increase in the basic exemption for the
alternative minimum tax (AMT) originally enacted under JGTRRA. (EGTRRA also
included a temporary increase in the AMT exemption which was then superseded by the
1 See CRS Report RS21860, The Child Tax Credit, by Gregg Esenwein.

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JGTRRA increases.) The AMT exemption for 2005 was $58,000 for joint returns and
$40,250 for unmarried taxpayers. In 2006, the AMT exemption reverts to its prior law
levels of $45,000 for joint returns and $33,750 for unmarried taxpayers.
These temporary increases in the basic exemption for the AMT have been enacted
as a means of mitigating the interaction between the reductions in the regular income tax
and the AMT. Extending or otherwise modifying the AMT is probably the most pressing
individual income tax issue facing the 109th Congress. It is estimated that, if the
reductions in the individual income tax are extended beyond 2010, then the number of
taxpayers subject to the AMT will increase from about 1.8 million in 2001 to 20 million
in 2006, and then to over 41 million in 2013.2
Absent congressional action, the AMT will “take back” most of the tax relief granted
through the income tax.3 Hence, Congress faces not only the issue of whether or not to
extend and/or make permanent the reductions in the regular income tax, but more
urgently, it must face the issue of how to repair the individual AMT.4
Counterbalancing congressional desire to provide continued tax relief is concern over
the current and projected size of the federal budget deficit. The revenue effects of
extending and/or making permanent the 2001 and 2003 tax reductions are substantial.
Moreover, once the costs of fixing the AMT are included, the revenue costs associated
with maintaining the current level of tax relief increase considerably.
For instance, the following table presents some order of magnitude estimates of the
cost of extending the EGTRRA/JGTRRA tax reductions and reforming the AMT. It
should be noted that if these policy options are deficit financed (that is, there are no
offsetting tax increases or spending reductions), then there will be additional revenue
losses associated with servicing the increase in the public debt that these policy options
engender. The table presents estimates of both the direct and indirect costs of these tax
policy options.
As shown in the table, as a rough estimate, the total cost (both direct and indirect)
of extending the EGTRRA/JGTRRA tax cuts and reforming the AMT will be almost $3
trillion over the FY2007 through 2016 period. As an alternative measure, an order of
magnitude estimate indicates that the out year per annum cost (including debt servicing)
of these tax policy options will be slightly larger than 2% of gross domestic product
(GDP). The cost will increase as a percentage of GDP as time progresses.

2 For more information see CRS Report RL30149, The Alternative Minimum Tax for Individuals,
by Gregg Esenwein.
3 For more information on the “take back” effect see CRS Report RS21817, The Alternative
Minimum Tax (AMT): Income Entry Points and “Take Back” Effects, by Gregg Esenwein.
4 See CRS Report RS22100, The Alternative Minimum Tax for Individuals: Legislative Initiatives
and Their Revenue Effects, by Gregg Esenwein.

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Table 1. Order of Magnitude Estimates of the Revenue
Costs Associated with Extension of EGTRRA/JGTRRA
and Reform of the AMT
FY2007 through FY2016
(Billions of dollars)
Extend EGTRRA/JGTRRA:
$1,606
Reform the AMT:
$865
(Extension of increased AMT exemption
and indexation of AMT exemption and
tax brackets. Assumes tax cuts extended)
Debt Service:
$441
Total:
$2,912
Source: Congressional Budget Office. The Budget and Economic Outlook: An Update. Table 1.6. August
2005. Calculations by CRS.
Dividend and Capital Gains Tax Reductions
JGTRRA reduced the tax rates on qualified dividends and long-term capital gains.
These reductions, however, are scheduled to expire at the end of 2008. At that point, tax
rates on dividends and capital gains will revert to their prior law levels. Since these
provisions expire before the bulk of the 2001/2003 tax cuts, there has been some
discussion in Congress about extending the provisions for dividends and capital gains
during this session of the 109th Congress. It has been suggested that these tax reductions
could be extended under the tax relief provisions of the 2006 budget resolution.
The conference agreement on the 2006 budget resolution, H.Con.Res. 95, was
approved by both chambers on April 28, 2005, and contained $106 billion in tax relief
over the next five years, approximately $70 billion of which would be protected through
the reconciliation process. The Congressional Budget Office (CBO) estimates that
extending the dividend and capital gains tax reductions would reduce federal revenues by
approximately $160 billion over the FY2008 through FY2015 period.5
Deduction for State and Local General Sales Taxes
The American Jobs Creation Act of 2004 contained a provision which allowed
taxpayers to take a deduction for state and local general sales taxes instead of the itemized
deduction for state and local income taxes. This provision was to be in effect for two-
years, 2004 and 2005. However, as its expiration approaches at the beginning of 2006,
Congress is considering whether to extend this provision.
5 Congressional Budget Office, Budget Options, Feb. 2005, p. 267.

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Legislative Initiatives in the 109th Congress
Several bills have been introduced in the 109th Congress that would make either all
of the 2001/2003 tax cut provisions or selected provisions permanent. In the Senate, the
following bills have been introduced:
! S. 6. Introduced January 24, 2005, by Senator Rick Santorum. This bill
would make the marriage penalty and child tax provisions permanent.
! S. 7. Introduced January 24, 2005, by Senator Jon Kyl. This bill would
make the reductions in regular tax rates and capital gains/dividends tax
rates permanent. It would also make the repeal of the estate tax
permanent.
! S. 78. Introduced January 24, 2005, by Senator Kay Bailey Hutchison.
This bill would make the marriage tax provisions permanent.
! S. 246. Introduced on February 1, 2005, by Senator Jim Bunning. This
bill would make the changes to the adoption tax credit permanent.
! S. 420. Introduced February 17, 2005, by Senator Jon Kyl. This bill
would make the repeal of the estate tax permanent.
! S. 1112. Introduced May 24, 2005, by Senator Chuck Grassley. This bill
would make the educational savings provisions permanent.
! S. 1524. Introduced July 28, 2005, by Senator Mike Crapo. This bill
would make the reduced tax rates on dividends and capital gains
permanent.
In the House, the following bills making all or part of the 2001/2003 tax cuts
permanent have been introduced:
! H.R. 8. Introduced on February 17, 2005 by Representative Kenny
Hulshof. This bill would make the repeal of the estate tax permanent.
! H.R. 183. Introduced on January 4, 2005 by Representative Joseph Pitts.
This bill would make the repeal of the estate tax permanent.
! H.R. 268. Introduced January 6, 2005, by Representative Dave Camp.
This bill would make the changes to the adoption tax credit permanent.
! H.R. 305. Introduced January 25, 2005, by Representative Joe Wilson.
This bill would make the changes to the adoption tax credit permanent.
! H.R. 347. Introduced January 25, 2005, by Representative Todd Russell
Platts. This bill would make the changes to the adoption tax credit
permanent
! H.R. 351. Introduced January 25, 2005, by Representative Todd Russell
Platts. This bill would make the changes to the dependent care tax credit
permanent and would make it refundable.
! H.R. 809. Introduced March 7, 2005, by Representative David Dreier.
This bill would make the reduced tax rates on dividend and capital gains
income permanent.
! H.R. 1388. Introduced March 17, 2005, by Representative Wally Herger.
This bill would make the increase in expensing of certain depreciable
assets permanent.
! H.R. 1500. Introduced April 6, 2005, by Representative David Dreier.
This bill would make the reduction in the capital gain tax rate permanent.

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! H.R. 2320. Introduced May 12, 2005, by Representative Jerry Weller.
This bill would permanently extended the bonus depreciation enacted in
2003.
Some have suggested extending the AMT tax provisions, the capital gains/dividend
tax reductions, and the deduction for state and local sales taxes under the tax reduction
provisions contained in the 2006 budget resolution. The conference agreement on the
2006 budget resolution, H.Con.Res. 95, was approved by both chambers on April 28,
2005, and contained $106 billion in tax relief over the next five years, approximately $70
billion of which would be protected through the reconciliation process.
In November 2005, as part of the reconciliation process, the Senate and the House
approved separate measures extending various expiring provisions of the 2001, 2003, and
2004 tax cuts.
The Senate legislation, the Tax Relief Act of 2005 (S. 2020), was passed by the full
Senate on November 18. This bill is estimated to cost almost $60 billion over fiscal years
2006 to 2010. Among other things, it would extend for one-year the AMT tax relief
provisions and the deduction for state and local general sales taxes. The one-year
extension of the deduction for state/local general sales taxes is estimated to cost $2.6
billion. The AMT tax relief includes both an extension of the higher exemption level and
an extension of the treatment of nonrefundable credits against the AMT. In addition, the
bill would also index the AMT exemption level for inflation. It is estimated that these
changes would reduce federal revenues by $33 billion. The bill does not extend the tax
reductions for capital gains/dividends scheduled to expire at the end of 2008.
The House legislation, H.R. 4297, would extended the capital gains/dividend tax
relief for two years. It is estimated that this two-year extension of the capital
gains/dividend tax relief would reduce federal revenues by $50 billion. The House
legislation would also extend the deduction for state and local sales taxes for one year at
an estimated cost of $2 billion. While this bill includes a provision extending the ability
to use nonrefundable personal credits against the AMT, it does not include an extension
of the higher AMT exemption amount. The provision extending the treatment of
nonrefundable credits under the AMT is estimated to cost $2.8 billion.6
On May 9, 2006, a conference committee approved a budget reconciliation bill (H.R.
4297; the Tax Increase Prevention and Reconciliation Act of 2005) that includes a one-
year extension (through 2006) of both the AMT’s personal-credit and increased-
exemption provisions. The exemption for 2006 is higher than for 2005, reflecting
indexation for inflation. For 2005, the exemption amount was $58,000 for joint returns
and $40,250 for unmarried taxpayers. The conference agreement increases the 2006
exemption to $62,550 for joint returns and $42,500 for unmarried taxpayers. According
to estimates by the Joint Committee on Taxation, the AMT measures would together
reduce tax revenues by $33.9 billion over five years (FY2006-FY2010) and also by $33.9
billion over 10 years (FY2006-FY2015). The conference agreement does not contain an
extension of the deduction for state and local sales taxes.
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6 On December 7, 2005, the House approved a stand-alone measure, H.R. 4096, extending
the higher AMT exemption for one year and indexing the exemption for inflation.