CRS Updates Report on Tax Cut Extensions

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 JGTRRA accelerated the implementation of certain tax reductions originally enacted as part of EGTRRA.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%. As originally enacted, these changes were effective for assets sold or exchanged on or after May 6, 2003, and before January 1, 2009.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 These expiring tax reductions were enacted under JGTRRA, which had accelerated implementation of tax reductions originally enacted in 2001 under EGTRRA.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 JGTRRA increases.) The AMT exemption for 2005 was set at $58,000 for joint returns and $40,250 for unmarried taxpayers.

The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), which was passed by Congress in May 2006, extended the dividend and capital gains tax reductions through 2010. These reductions were enacted in 2003 and originally scheduled to expire in 2008.

TIPRA also increased the basic AMT exemption to $62,550 for joint returns and to $42,500 for unmarried taxpayers. In 2007, the AMT exemption reverts to its prior law levels of $45,000 for joint returns and $33,750 for unmarried taxpayers. In addition, TIPRA extended, through 2006, the provision that allows taxpayers to apply their nonrefundable tax credits against their AMT tax liability.

These temporary increases in the basic exemption for the AMT and changes in the treatment of nonrefundable tax credits 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 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.

      Table 1. Order of Magnitude Estimates of the Revenue Costs

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, Congress is actively considering whether to extend this provision.

The Joint Committee on Taxation estimates that a one-year extension of this provision would reduce federal revenues by approximately $2.6 billion.

Legislative Initiatives in the 109^th Congress

Several bills have been introduced in the 109^th 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.

• 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.

• H.R. 2320. Introduced May 12, 2005, by Representative Jerry Weller. This bill would permanently extended the bonus depreciation enacted in 2003.

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.