For other versions of this document, see http://wikileaks.org/wiki/CRS-RL30973 ------------------------------------------------------------------------------ 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. CRS-2 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. CRS-3 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. 1 For more information on these different measures, see CRS Report RL30779, Across the Board Tax Cuts: Economic Issues, by Jane G. Gravelle. CRS-4 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. CRS-5 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. CRS-9 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. ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-RL30973