Major Tax Issues in the 111th Congress
Prepared for Members and Committees of Congress
The major focus of congressional tax deliberations in early 2008 had been on an economic
stimulus package, designed to boost what was a flagging economy. As the year ends,
congressional attention has returned to economic stimulus for the same reason. Leadership in the
House of Representatives, along with President-Elect Obama, have indicated that economic th
stimulus legislation will be a top priority early in the 111 Congress. While the 2008 economic
stimulus included a rebate for individual taxpayers and several business tax cuts estimated to cost
$151.7 billion in FY2008, a similar tax package is not anticipated for 2009. Instead, proposals
that have been mentioned target employment-related issues, such as an employee wage credit to
encourage hiring and the suspension of taxes on unemployment benefits. Other proposals
mentioned have included the extension of bonus depreciation, suspension of rules requiring
withdrawals from individual retirement accounts, and the waiver of penalties associated with
early withdrawals from individual retirement accounts.
Thus far, tax policy initiatives that have been announced for the 111th Congress unrelated to
stimulus have included health care reform and health care tax policy and what to do about
expiring tax cuts enacted during the Bush Administration. Other likely areas for congressional th
action in 2009 are suggested, in part, by items on which temporary action in the 110 Congress
was taken: energy taxes, extenders (temporary tax provisions regularly renewed), and the
alternative minimum tax.
In the 110th Congress, the most prominent congressional tax-policy action focused on small
business. In May 2007, Congress approved legislation (P.L. 110-28) increasing the federal
minimum wage and providing small-business tax cuts. Later in that year, a major focus of tax
legislation was the alternative minimum tax (AMT) for individuals, which was projected to apply
to a growing number of taxpayers. Congress has been addressing the AMT’s growth with
temporary measures that restricted its scope, with the latest scheduled to expire in 2008. One year
extensions were enacted in 2007 and 2008.
Congress addressed and took final action on tax legislation in a variety of other areas over the
course of first and second sessions, including energy taxation, tax measures related to the 2007
farm bill, and extension of a set of narrowly focused expiring tax benefits (the “extenders”).
Where the proposals involved tax cuts, a prominent issue was whether and how to offset the
revenue-losing effect of tax cuts. Congress thus considered a range of revenue-raising tax
measures over the course of the year—for example, attempting to reduce the “tax gap” between
the taxes U.S. taxpayers owe and what they pay, as well as restricting tax shelters and tax benefits
for U.S. firms that operate abroad.
This report, which includes contributions from Mindy Levit, will be updated as legislative and
economic events occur.
The Economic Context....................................................................................................................1
The State of the Economy.........................................................................................................1
The Federal Budget...................................................................................................................3
The Federal Tax Burden............................................................................................................4
Tax Issues Facing the 111th Congress..............................................................................................5
The Alternative Minimum Tax for Individuals.........................................................................5
Scheduled Expiration of the 2001 Tax Cuts..............................................................................6
Tax Administration: The Tax Gap and Tax Shelters..................................................................8
The Tax Gap........................................................................................................................8
“PAYGO” and Other Budget Enforcement Procedures...........................................................11
Prominent Tax Policy in the 110th Congress..................................................................................12
Tax Cuts for Economic Stimulus in 2008...............................................................................12
H.R. 3970, the Tax Reduction and Reform Act.......................................................................15
Housing Tax Policy.................................................................................................................16
Energy Taxation and Extenders...............................................................................................17
Author Contact Information..........................................................................................................18
s the 111th Congress convenes, economic stimulus activity through new spending and tax
cuts will likely be of primary concern. Proposals that have been mentioned include the
extension of bonus depreciation, suspension of rules requiring withdrawals from A
individual retirement accounts, an employee wage credit, and the suspension of taxes on
unemployment benefits. Measures to reduce the budget deficit—such as raising taxes on higher
income individuals—may not be introduced in 2009. Instead, it is possible that the reductions of
the top tax rates created in 2001 would be allowed to expire at the start of 2011.
Later in the 111th Congress, after any economic stimulus measures are perceived to be taking
effect, other tax policy issues may be addressed. Policies that may be addressed include the
alternative minimum tax, changes in marginal individual income tax rates, estate taxes, corporate
income tax rates, and capital gains rates; and the taxation of small business.
After a discussion of the state of the economy and the environment in which tax policy
considerations will occur, this report provides an overview of the issues likely to be debated in the th
new Congress and key issues addressed in the 110 Congress.
Tax policy is frequently considered by policymakers as a tool for boosting economic performance
in various ways, and the likely economic effects of tax policy are often hotly debated. For
example, if the economy is sluggish and unemployment is high, tax cuts are sometimes
recommended by some as a fiscal stimulus to boost demand. Or, in the longer term, tax cuts for
saving and investment are championed by some as a means of boosting long-term economic
growth. At the same time, taxes can also affect long-run growth through the federal budget—
along with spending, tax revenues determine the size of the budget surplus or deficit. And the size
and nature of the budget balance can affect long-run growth by determining the extent to which
government-borrowing needs compete for capital with private investment, thus damping long-run
Taxes also have a distributional effect. That is, the rate and manner in which taxes apply to
different activities, groups, and income levels can alter the distribution of income within the
economy. For example, taxes can affect the distribution of income across income levels (affecting
“vertical equity”) by applying at different rates to different income levels. And taxes can affect
“horizontal equity” by applying differently to different types of income.
With these broad economic effects in mind, a discussion of three aspects of the economy follows.
First is a look at the current state of the economy, both in terms of long-run growth and the short-
run state of the business cycle. Next is a review of the recent, current, and expected future state of
the federal budget. Third is a brief review of the level and distribution of the tax burden.
Recent economic turmoil will likely be a central source of concern for the next Congress.
Struggling housing and financial markets may result in the worst recession seen in several
decades. Enacting economic and fiscal policies meant to bring a return of stability may be needed
into the beginning of the next decade. Prior to the recent downturns, the economy performed
relatively strongly through the first half of 2007, yielding 22 consecutive quarters of real growth.
Real GDP growth over the last four quarters has been mixed, with two quarters of negative
growth (2007Q4 and 2008Q3) and two quarters of positive growth (2008Q1 and 2008Q2). This
follows a period of relatively strong growth that existed since the last recession ended in
Despite 10 months of recession in 2001, real gross domestic product (GDP) grew at a 0.8% rate
during that year. This rate was followed by stronger annual growth rates between 2002 and 2004.
Though growth was weaker in 2005 and 2006, relative to 2004, the economy continued to
perform well as real GDP continued to grow at roughly 3%. Into the first several quarters of 2007, 1
economic growth continued. In July 2007, Federal Reserve Chairman Ben Bernanke
characterized the economy’s performance as being “more consistent with sustainable expansion,”
after registering more rapid growth earlier in the recovery, although he also noted that weakness 2
in the housing market has placed a drag on growth.
As 2007 progressed, however, signs of economic weakness surfaced in a number of areas. One
prominent area was housing, where prices stopped rising after years of growth and drops occurred
in house sales and residential investment. Second, financial markets came under strain as investor
concerns about the credit quality of mortgages (especially “subprime mortgages”) had a damping
effect on credit flows. Further, banks began reporting large losses resulting from declines in the
market value of mortgages and other assets, leading them to become more restrictive in their 3
lending to firms and households. The Federal Reserve Board responded by taking actions to ease
monetary policy beginning in the second part of 2007. Additional interest rate cuts continued in
March, April, and October 2008.
The apparent worsening of the economic situation led to support for economic stimulus
legislation from the Administration, congressional leaders, and Federal Reserve Board Chairman
Ben Bernanke. Both the Administration and tax policymakers in Congress began developing a 4
stimulus package in mid-January which was enacted in February. (See “Tax Cuts for Economic
Stimulus in 2008” below.) As the crisis continued, Congress enacted additional legislation
intended to prevent economic conditions from worsening, including the Troubled Asset Relief
Program and injections of capital into certain financial and housing related institutions.
Though GDP grew in the first two quarters of 2008, with a 2.8% growth rate in the second
quarter, it fell sharply in the third quarter, to -0.3%. At the same time, the unemployment rate rose
from 4.9% in January to 6.5% in October.
1 U.S. Department of Commerce, Bureau of Economic Analysis, National Economic Accounts-Gross Domestic
Product, available at http://www.bea.gov/national/index.htm#gdp, visited November 24, 2008.
2 Ben S. Bernanke, testimony before the House Committee on Financial Services, U.S. Congress, July 18, 2007. Posted
on the Federal Reserve Board’s website, at http://www.federalreserve.gov/newsevents/testimony/
3 This view of developments is largely taken from January 17 testimony of Federal Reserve Chairman Ben Bernanke
before the House Budget Committee. The testimony is available on the Federal Reserve’s website, at
http://www.federalreserve.gov/newsevents/testimony/bernanke20080117a.htm, visited January 17, 2008.
4 Neil Irwin and Jonathan Weisman, “Fed Chairman Backs Stimulus; Bush to Announce ‘Principles’ Today; Congress
Works on Bipartisan Proposal,” The Washington Post, January 18, 2008, p. A1.
For further reading, see CRS Report RL34349, Economic Slowdown: Issues and Policies, by Jane
G. Gravelle et al.
According to the Congressional Budget Office (CBO), the federal budget registered a deficit 5
equal of 3.2% of GDP in FY2008. This deficit rose from a FY2007 deficit of 1.2% of GDP. Prior
to the increase in FY2008, the deficit had fallen for three consecutive years relative to the size of
the economy. The deficit in FY2008 marked the seventh year in a row the budget has registered a
deficit after being in surplus for the four-year period FY1998-FY2001.
The budget data indicate that the increase in the deficit was a result of both a growth in outlays
and a decline in revenues as a percentage of GDP. The decline in revenues was more pronounced,
although not by a wide margin. Revenues have declined from 20.9% of GDP in FY2000 to 17.7%
in FY2008, a drop of 3.2 percentage points. Outlays have increased by 2.5 percentage points over
the same period, to 20.9% of GDP in FY2008. The decline in revenues had four main sources: the
recession of 2001 and subsequent sluggish economic growth, enacted tax cuts, the economic
stimulus payments (tax rebates), and the current economic slowdown.
CBO’s most recent budget report (released in September 2008) projects a rise and then a gradual
decline in the deficit as percentage of GDP between FY2009 and FY2018, with deficits existing 6
throughout the period. These estimates were made prior to the most severe current economic
turbulence. This projection assumes that current policies remain in place, and if that assumption is
dropped, the outlook will change. This consideration is important given congressional interest in
extending or making permanent some or all of the 2001 and 2003 tax cuts, which are scheduled to
expire at the end of calendar year 2010. In addition, the application of the alternative minimum
tax (AMT) to an increasing number of taxpayers may exert pressure to increase the AMT’s
exemption amount. CBO estimated that extending all tax provisions scheduled to expire between 7
FY2008 and FY2018 would reduce federal revenue by $3.9 trillion over FY2009-FY2018. This 8
increase amounts to 10.7% of CBO’s projected baseline revenues for the period.
The longer-term budget situation is a concern to many policymakers, chiefly because of the
combination of rising health care costs and demographic pressures posed by an aging population
that will begin with the retirement of the “baby boom” generation. Under current law, spending
on Social Security, Medicare, and Medicaid is expected to increase substantially as a share of the
economy. CBO’s December 2007 analysis of the long-term budget outlook projected several
different scenarios for growth of the three programs. Under its “alternative baseline” projection
(which reflects likely policy), CBO estimates that spending on the programs will grow the current 9
level of 8.4% of GDP in FY2005 to 14.5% in FY2030 and 18.6% by FY2050. According to
5 U.S. Congressional Budget Office, Monthly Budget Review-Fiscal Year 2008. November 2008, p. 2.
6 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update. September 2008, p. x.
7 U.S. Congressional Budget Office, Updated Estimates for Table 4-9, “Effects of Extending Tax Provisions Scheduled
to Expire Before 2018,” in CBO’s Budget and Economic
Outlook: Fiscal Years 2008 to 2018 (January 2008), March 2008.
8 Baseline revenues are projected to be $36.6 trillion. U.S. Congressional Budget Office, The Budget and Economic
Outlook: Fiscal Years 2008-2018, p. 8.
9 U.S. Congressional Budget Office, The Long-Term Budget Outlook (Washington: GPO, 2007), p. 5.
CBO, either increases in taxes or cuts in spending will be necessary in the future if fiscal stability 10
is to be maintained.
The broadest gauge of the federal tax burden is the level of federal receipts as a percentage of
output (gross domestic product, or GDP). By this measure the federal tax burden has fluctuated
considerably over the past five years. In FY2000, federal receipts reached a post-World War II
peak as a percentage of output, at 20.9%. By FY2004, however, receipts had fallen to 16.3% of 11
GDP. In FY2008, receipts equaled 17.7% of GDP. In part, the fluctuations were a result of the
business cycle; the long economic boom of the 1990s helped push receipts to their record level in
FY2000, while the ensuing recession and sluggish recovery helped reduce the level of revenues in
subsequent years. However, policy changes, too, were responsible: significant tax cuts in 2001,
Another way to look at the tax burden is to compare it across income classes. In combination, the
various components of the federal tax system have a progressive impact on income distribution—
that is, upper-income individuals tend to pay a higher portion of their income in tax than do
lower-income persons. In isolation, however, the different components of the system have
different effects: the individual income tax is progressive, but while payroll taxes are progressive
in the lower and middle parts of the income spectrum, they become regressive as incomes
increase. The corporate income tax and estate tax are both progressive, although they impose only
a small burden; excise taxes are regressive.
CBO has published distributional analyses for all federal taxes for each year since 1979; the
studies use a consistent methodology, so the results can be compared to get an idea of the
direction of federal tax policy’s distributional impact over the period. According to the studies,
the overall effective federal tax rate declined from 22.2% of income in 1979 to 20.5% in 2005.
Without more detailed analysis, it is not clear whether the system has become more or less 12
progressive over the entire period; while rates in all quintiles have fallen, the pattern is mixed.
For further information, see CRS Report RL33786, Individual Tax Rates and Tax Burdens:
Changes Since 1960, by Thomas L. Hungerford; and CRS Report RL32693, Distribution of the
Tax Burden Across Individuals: An Overview, by Jane G. Gravelle and Maxim Shvedov.
10 Ibid., p. 2.
11 Receipts, as a percentage of GDP, were higher in FY2006 (18.5%) and FY2007 (18.8%) than in FY2008.
12 U.S. Congressional Budget Office, Historical Effective Federal Tax Rates, 1979 to 2005, available at
http://www.cbo.gov/ftpdocs/88xx/doc8885/12-11-HistoricalTaxRates.pdf. The percentage-point reductions in effective
tax rates within the quintiles between 1979 and 2005, from lowest to highest, are 3.7, 4.4, 4.4, 3.8, and 2.0. The overall
decline in effective tax rates is 1.7, smaller than the decline in each quintile because the higher income quintiles have a
larger share of income.
As the economy maintains a central point of focus at the close of the 110th Congress, economic
stimulus discussions continue. Current proposals have not included tax cuts as enacted in
February 2008. Instead, proposals that have been mentioned target employment-related issues,
such as an employee wage credit and the suspension of taxes on unemployment benefits. Other
proposals mentioned have included the extension of bonus depreciation, suspension of rules
requiring withdrawals from individual retirement accounts, and the waiver of penalties associated
with early withdrawals from individual retirement accounts.
The individual alternative minimum tax presents a time-sensitive issue for Congress: as each year
passes more and more individuals will be subject to the AMT rather than the regular tax.
According to one recent study, in 2001 2.4 million individual income tax returns (1.8% of the
total) contained an AMT liability; in 2004 an estimated 3.5 million returns (2.6%) had an AMT 13
liability. In 2010, an estimated 37.1 million returns (25.6%) will owe the AMT. The portion will
decline for a number of years thereafter if the tax cuts in Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA) expire occurs as scheduled (after 2010), but then will
The reason for the increase in the applicability of the AMT is its basic mechanics. The AMT
functions like a parallel income tax, with lower rates than the regular tax but with a broader
base—that is, with fewer deductions, exemptions, credits, and special tax preferences than are
allowable under the regular tax. Each year, a taxpayer pays either his or her regular tax or the
tentative AMT, whichever is higher. Taxpayers are permitted a flat exemption amount in
calculating their AMT. However, the exemption is fixed at a flat dollar amount that is not indexed
for inflation. And while the AMT only has two rate brackets (26% and 28%), the bracket dividing
point is likewise not indexed. In contrast, the structural features of the regular income tax—
personal exemptions, the standard deduction, and rate-bracket thresholds—are indexed. Thus, as
time passes and incomes grow in both real and nominal terms, the AMT exceeds the regular tax
for more taxpayers. The phenomenon was magnified by the rate reductions and tax cuts for
married couples provided by EGTRRA and the Jobs and Growth Tax Relief Reconciliation Act of
The original purpose of the AMT was to ensure that no individual with substantial income could
use tax benefits and omissions from the tax base to reduce his or her tax liability below a certain
point. There are several reasons why policymakers may be concerned with the prospect of its
increased applicability. First, taxpayers who become subject to the AMT face a higher tax liability
than they otherwise would; some taxpayers moving into AMT status may thus view the
applicability of the AMT as a tax increase. Second, taxpayers in AMT status are not able to fully
participate in tax cuts enacted under the regular tax. For example, application of the AMT
13 Daniel Feenberg and James M. Poterba, “The Alternative Minimum Tax and Effective Marginal Tax Rates,”
National Tax Journal, vol. 57 part II, June 2004, p. 412.
prevented those taxpayers subject to the AMT from fully realizing the tax cuts enacted under
EGTRRA and JGTRRA. Third, the AMT introduces complexity to the tax system, and the
amount of time spent in tax preparation increases for taxpayers in or near AMT status.
On a more conceptual level, the AMT can be viewed as balancing conflicting goals of the income
tax. On the one hand, various deductions, exemptions, credits, and other benefits under the
regular income tax are thought to be useful in promoting various activities considered to be
socially desirable or conducive to economic growth. On the other hand, it is often deemed
desirable for a tax system to achieve a certain level of fairness, both in horizontal terms (the equal
treatment of individuals with the same income but in different circumstances) and vertical terms
(the relative treatment of individuals at different income levels). Further, economists argue that
broad-based tax systems with low rates—a characteristic of the AMT—are less damaging to
economic efficiency than higher-rate systems that apply to bases laden with special benefits. With
the AMT, taxpayers can use the tax benefits available under the regular tax only up to a point,
where considerations of equity and efficiency trigger applicability of the AMT: the benefits’
economic growth and social goals are balanced with fairness and efficiency concerns. To the
extent the AMT’s growth has resulted from inflation and lack of indexation, it might be argued
that the AMT’s advance is unintended, and the balance between equity and social and economic 14
goals intended for the AMT has been upset.
A factor that substantially complicates the AMT issue is its revenue effect, which assumes
increased prominence given current federal budget deficits. For example, indexing the AMT for
inflation would eliminate much of the impetus of the tax’s increasing applicability. According to
the Congressional Budget Office (CBO), indexing the AMT would reduce federal revenues by
$569 billion over 10 years, an amount equal to 1.6% of federal revenues expected over the period.
If EGTRRA’s tax cuts are extended or made permanent, the cost of restraining the AMT would be 15
Congress has addressed the AMT on a temporary basis since 2001 by increasing the exemption
amount, thus reducing the number of taxpayers who would otherwise pay the AMT. Most
recently, for tax year 2008, the Tax Extenders and Alternative Minimum Tax Relief Act (Division
C of P.L. 110-343) increased the AMT exemption to $46,200 (singles) and $69,950 (couples). The
act also extended the allowance of nonrefundable individual income tax credits to offset AMT tax
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16)
provided a substantial tax cut that it scheduled to be phased in over the 10 years following its
enactment. However, to comply with a Senate procedural rule for legislation affecting the budget
(the “Byrd rule”), the act contained language “sunsetting” its provisions after calendar year 2010.
Thus, all of EGTRRA’s tax cuts expire at the end of 2010.
14 It might be argued that the level intended by Congress is that established under the Omnibus Budget Reconciliation
Act of 1993 (P.L. 103-66), where the permanent exemption levels and bracket amounts and rates were established.
15 U.S. Congressional Budget Office, The Budget and Economic Outlook, p. 16.
The most prominent provisions EGTRRA scheduled for phase-in were
• reduction in statutory individual income tax rates;
• creation of a new 10% tax bracket;
• an increase in the per-child tax credit;
• tax cuts for married couples designed to alleviate the “marriage tax penalty”; and
• repeal of the estate tax.
In addition, EGTRRA provided for a temporary reduction in the individual alternative minimum
tax (AMT) by increasing the AMT’s exemption amount, but scheduled the AMT relief to expire at
the end of 2004.
The Jobs and Growth Tax Relief and Reconciliation Act of 2003 (JGTRRA; P.L. 108-27)
provided for the “acceleration” of most of EGTRRA’s scheduled tax cuts—that is, it moved up
the effective dates of most of the tax cuts EGTRRA had scheduled to phase-in gradually,
generally making them effective in 2003. (The phased-in repeal of the estate tax was not
accelerated by JGTRRA.) Many of JGTRRA’s accelerations, however, were themselves
temporary and were scheduled to expire at the end of 2004. Also, JGTRRA temporarily
implemented a reduction in the maximum tax rate on dividends and capital gains, reducing the
rates to 15% (5% for individuals in the 10% and 15% marginal income tax brackets). The
reduction was initially scheduled to expire at the end of 2008.
In 2004, Congress thus faced two “expiration” issues related to EGTRRA and JGTRRA. One was
a question for the longer term: the scheduled expiration of EGTRRA’s tax cuts at the end of 2010.
The second was the expiration of JGTRRA’s accelerations at the end of 2004. In September,
Congress addressed the second of these with enactment of the Working Families Tax Relief Act
(WFTRA; P.L. 108-311). WFTRA generally extended JGTRRA’s accelerations of EGTRRA’s tax
cuts through 2010—that is, up to the point at which EGTRRA’s cuts are scheduled to expire.
WFTRA also extended EGTRRA’s increased AMT exemption for one year.
In 2005, TIPRA extended JGTRRA’s dividend and capitals gains rate cuts along with its AMT
reduction. The dividend and capital gains cuts were extended through 2010; the increased AMT
exemption through 2006.
Notwithstanding the various extensions and accelerations, the issue of EGTRRA’s scheduled
expiration at the end of 2010 remains and was debated in Congress throughout 2008. The debate
over extension of the tax cuts has centered on three broad issues: its likely impact on the federal
budget deficit, its possible effect on long-term economic growth, and its results for the fairness of
the tax system. In general, opponents of an extension have argued that it would exacerbate a
budget situation already made difficult by the looming retirement of the baby-boom generation
and resulting stresses on the social security system. Those supporting extension maintain that the
tax cuts—through their positive effects on work effort and saving—will stimulate long-term
growth, a development that will ease the adverse effects of the tax cuts on the budget. (Opponents
question whether these effects will be large enough to offset the extensions’ budget effects.) With
respect to fairness, opponents of extending the measures argue that the tax cuts reduce the
progressivity of the tax system by providing larger effective tax-rate reductions for upper-income
individuals than for persons in lower income brackets. Proponents of the tax-cut extensions
emphasize that they would provide tax cuts across all income classes.
During the 2008 presidential campaign, proposals were made to allow the expiration of the
highest marginal tax rate and to extend others. To some, this modification would allow for
compromise between the need to raise revenue while also improving fairness. Some believe that a
compromise might occur with the estate tax (which is scheduled for repeal in 2010): to retain the
tax but allow higher exemptions and/or lower rates. As economic stimulus considerations
continue in December 2008, it is likely that the tax cut expirations may not be addressed in 2009,
except for the estate tax, as more pressing concerns about the economy take precedence.
Given congressional interest both in revenue-reducing measures (for example, scaling back the
AMT) and concern about the federal budget deficit, it appears likely that policymakers will also
focus attention on possible revenue-raising measures that would, in effect, help pay for tax-cuts
elsewhere. One possible area is tax administration; in the Senate Finance Committee, leaders
from both parties have expressed interest in closing the “tax gap” and in possibly restricting “tax
shelters.” Some provisions, such as credit card reporting, reporting the basis for capital gains, and
the economic substance doctrine, have been considered in legislation (as discussed above).
The “tax gap” and “tax shelter” concepts are closely related, but not synonymous, so clarification
is useful. The tax gap is a concept defined by the Internal Revenue Service for use in
administering the tax code—it is the difference between the amount of tax voluntarily and timely
paid by taxpayers and the actual tax liability of taxpayers. The tax gap thus includes both
deliberate (and illegal) tax evasion and non-payment that occurs for more innocent reasons: for
example, taxpayer error or simple inability to pay. The concept of “tax shelter” is less precisely
defined, but is generally an economic concept (though whether to make it a legal one as well is, in
fact, an issue that has been debated in Congress and elsewhere). A tax shelter is tax-planning
device that individual or corporate taxpayers use to either illegally evade or legally avoid taxes.
Tax shelters often arise from the combination of different tax rules in ways that were not intended
Recent and projected large federal budget deficits have generated congressional and executive
branch interest in raising revenue by reducing the tax gap. Other motivations for reducing the tax
gap include adverse effects on (1) public trust in the fairness of the tax system, which may
adversely affect voluntary compliance with tax laws, and (2) economic efficiency by providing an
incentive for inputs of labor and capital to shift to those sectors of the economy with lower 16
The IRS defines the gross tax gap as “the difference between the aggregate tax liability imposed
by law for a given tax year and the amount of tax that taxpayers pay voluntarily and timely for 17
that year.” And it defines the net tax gap as “the amount of the gross tax gap that remains unpaid
16 For a comprehensive review of the literature on tax compliance, see James Adreoni, Brian Erard, and Jonathan
Feinstein, “Tax Compliance,” Journal of Economic Literature, vol. 36, no. 2, June 1998, pp. 818-860. For an overview
of the economics of tax evasion, see Joel Slemrod, “Cheating Ourselves: The Economics of Tax Evasion,” Journal of
Economic Perspectives, vol. 21, no. 1, winter 2007, pp. 25-48.
17 Alan Plumley, “Preliminary Update of the Tax Year 2001 Individual Income Tax Underreporting Gap Estimates,”
Internal Revenue Service, SOI Tax Stats-Papers-2005 IRS Research Conference, Washington, June 7-8, 2005, p. 15.
after all enforced and other late payments are made for the tax year.”18 Currently, the
measurements of these tax gap concepts exclude illegal activities because the IRS lacks adequate 19
data on these activities.
For tax year 2001, the IRS estimates a gross tax gap of $345 billion, equal to a noncompliance 20
rate of 16.3%. For the same year, IRS enforcement activities, coupled with other late payments,
recovered about $55 billion of the gross tax gap, resulting in an estimated net tax gap of $290 21
The estimated gross tax gap of $345 billion consists of underreporting of tax liability ($285 22
billion), nonfiling of tax returns ($27 billion), and underpayment of taxes ($33 billion). For
2001, the $285 billion of underreporting of tax liability had the following components: $197
billion in individual income tax, $54 billion in employment tax, $30 billion in corporate income 2324
tax, and $4 billion in estate taxes. There are no estimates of the underreporting of excise taxes.
The percentage of individual income tax that was underreported varied significantly depending on
the degree of information reporting and whether or not withholding was required. For example,
only 1.2% of the sum of wages, salaries, and tips was underreported, but 57.1% of nonfarm
proprietor income was underreported. These data suggest that increased information reporting and
withholding would reduce the tax gap. The increased revenue would have to be weighed against
higher administrative costs of the IRS and higher compliance costs of individuals.
The estimates of the gross tax gap have been heavily publicized. Perhaps as a result, some public
officials have emphasized better enforcement of tax laws to raise revenue. According to some,
enforcement alone is likely to have a limited impact on the gross tax gap. Acting on this view, the
IRS is implementing what it terms a comprehensive approach to reduce the gross tax gap.
Three factors are seen limiting the net revenue potential from increased enforcement. First, much
of the gross tax gap for individual income tax filers is due to types of unreported income that are
difficult to detect. Usually the income is not covered by third-party information returns (e.g.,
income earned by informal business proprietors who operate on a cash basis). Second, even when
the unreported income is detected, some of the resulting tax liability cannot be easily collected,
particularly from those taxpayers who are currently unable to pay. Third, many detected tax
liabilities are so small relative to enforcement costs that it is not cost effective to pursue
Available at http://www.irs.gov/taxstats/productsandpubs/article/0,,id=130103,00.html.
19 The IRS made tax gap studies for tax years 1979, 1983, and 1987. Each study used a different definition of the tax
gap. For a discussion of the changes in the concept of the tax gap, see U.S. General Accounting Office, Tax
Administration: IRS’ Tax Gap Studies, Washington, March 1988, 23 p.
20 The noncompliance rate is the percentage of the aggregate tax liability that taxpayers do not pay voluntarily and
timely for a given year.
21 U. S. Treasury, Internal Revenue Service, February 2007. Data on the tax gap are available at http://www.irs.gov/
pub/irs-utl/tax_gap_update_070212.pdf, visited November 26, 2008.
The Office of Tax Policy at the Treasury developed what it considered a comprehensive strategy 25
for reducing the tax gap, guided by the following four key principles:
• Unintentional taxpayer errors and intentional taxpayer evasion should both be
• Sources of noncompliance should be targeted with specificity.
• Enforcement activities should be combined with a commitment to taxpayer
• Policy positions and compliance proposals should be sensitive to taxpayer rights
and maintain an appropriate balance between enforcement activity and 26
imposition of taxpayer burden.
In the 109th and 110th Congresses, numerous bills were introduced concerning the tax gap, and th
many proposals were made in budgets submitted by the Bush Administration. In the 111
Congress, bills relating to the tax gap may be introduced, and President-Elect Obama may include
proposals to reduce the tax gap in his budget submissions.
In popular usage, the term “tax shelter” denotes the use of tax deductions or credits from one
activity to reduce taxes on another. In economic terms, a tax shelter can be defined as a
transaction (for example, a paper investment or sale) that reduces taxes without resulting in a 27
reduced return or increased risk for the participant. But so vague and general is the term in most
usages, that it could also be defined simply as a tax saving activity that is viewed as undesirable
by the person or agency observing the activity and using the term.
Tax shelters can be either legal (tax “avoidance”) or illegal (tax “evasion”). To the extent tax
shelters are illegal, they therefore contribute to the tax gap; to the extent that they are legal but
unintended uses of the tax law (“loopholes”), they reduce tax revenue beyond the loss caused by
the tax gap. Like the tax gap, tax shelters not only reduce tax revenue directly, but raise questions
about tax fairness among taxpayers not using shelters. In addition, while some shelters lack
economic substance (that is, have no effect on economic activity), others involve the actual
shifting of economic resources solely for the purpose of saving taxes, and may thus reduce
Congress has evinced considerable interest in tax shelters in recent years and has enacted some
restrictions into law. The American Jobs Creation Act of 2004 (AJCA; P.L. 108-357) contained a
number of provisions designed to restrict tax shelters. In part, the act’s provisions were directed at
specific tax shelters—for example, leasing activities and the acquisition of losses for tax purposes 28
(“built in” losses).
25 U.S. Department of the Treasury, Internal Revenue Service, Reducing the Federal Tax Gap, Report on Improving
Voluntary Compliance, August 2, 2007, 100 p.
26 U.S. Department of the Treasury, Office of Tax Policy, A Comprehensive Strategy for Reducing the Tax Gap, pp. 1-
27 These definitions are taken from Joseph J. Cordes and Harvey Galper, “Tax Shelter Activity: Lessons from Twenty
Years of Evidence,” National Tax Journal, vol. 38, September, 1985, pp. 305-320.
28 For a list and description, see CRS Report RL32193, Anti-Tax-Shelter and Other Revenue-Raising Tax Proposals
Clarification of the economic substance doctrine, an issue that has been raised in a number of
court decisions is also related to tax shelters. Generally, the economic substance doctrine
disallows tax deductions, credits, or similar benefits in the case of transactions determined not to
have economic substance. Codification of the economic substance doctrine has been estimated by
the Joint Tax Committee to raise significant tax revenue. Given continuing federal budget deficits
and the adoption of pay-as-you-go type rules in both chambers of Congress, Congress has
continued to consider adopting economic substance-related restrictions on tax shelters as a means 29
of providing revenue offsets for tax cuts elsewhere.
There are some indications that Congress may include the tax treatment of U.S. firms’ foreign
income in any search for additional tax revenue. For example, during the 2008 election campaign,
Democratic leaders included a call to “end tax breaks that reward companies for moving
American jobs overseas.”
Economic theory is skeptical about whether tax policy towards U.S. multinationals can have a
long-term impact on domestic employment, although short-term and localized impacts are
certainly possible. Taxes can, however, alter the extent to which firms engage in overseas
operations rather than domestic investment. Under current law, a tax benefit known as “deferral”
poses an incentive for U.S. firms to invest overseas in countries with relatively low tax rates. In
general terms, deferral permits U.S. firms to indefinitely postpone U.S. tax on their foreign
income as long as that income is reinvested abroad in foreign subsidiaries. Deferral is generally
available for active business operations abroad, but the tax code’s Subpart F provisions restrict
deferral in the case of income from passive investment. If made, proposals to restrict deferral may
consist of expansion in the range of income subject to Subpart F.
In recent years, however, the thrust of legislation has been more in the direction of expanding
deferral and cutting taxes for overseas operations than for expanding Subpart F. For example, the
American Jobs Creation Act of 2004 cut taxes on overseas operations in several ways, while in
2006, the Tax Increase Prevention and Reconciliation Act (TIPRA; P.L. 109-222) restricted
Subpart F in the case of banking and related businesses receiving “active financing” income and
in the case of the “look through” treatment overseas operations receive from other firms. Further,
several analysts have recently argued that attempts to tax overseas operations are either counter-
productive or outmoded in the modern integrated world economy. (Traditional economic analysis,
however, suggests that overseas investment that is taxed at a lower or higher rate than domestic
income impairs economic efficiency.)
The House and Senate establish the general contours of budget policy each year in the form of a 30
concurrent resolution on the budget. Policies reflected in the annual budget resolution regarding
Considered in the 108th Congress, by Jane G. Gravelle.
29 For more information and analysis of legislative proposals, see CRS Report RS22846, The Economic Substance
Doctrine: Legal Analysis of Proposed Legislation, by Carol A. Pettit.
30 For more detailed information on federal budgeting, see CRS Report 98-721, Introduction to the Federal Budget
total revenues and spending and other aspects of budget policy are enforced through various
means, including points of order under the Congressional Budget Act of 1974 and procedural
provisions in budget resolutions. In addition, each chamber may establish budget enforcement
procedures in its standing rules. These enforcement procedures generally restrict the size and
shape of revenue and spending legislation and the timing of legislative action, but may be set
aside under certain circumstances.
One of the most important enforcement procedures affecting the development and consideration 31
of revenue legislation is referred to as “Pay-As-You-Go” (PAYGO). In essence, PAYGO
requires that legislation reducing revenues or increasing mandatory spending include offsetting
revenue increases or mandatory spending decreases so that it is deficit neutral. A statutory
PAYGO requirement was established in 1990 but effectively was terminated in late 2002. The
House and Senate each have their own PAYGO rules; the House’s rule was established in 2007
and the Senate’s rule, in effect since 1993, was modified in 2007 in a manner to make it
comparable to the House rule. Both rules require deficit neutrality in revenue and direct spending
legislation over both five- and ten-fiscal-year periods, as well as the current fiscal year. Each th
chamber waived their PAYGO rules in the 110 Congress to consider, in particular, legislation
dealing with the economic decline.
The 111th Congress may consider revenue measures that could entail significant revenue loss,
including further modification to the Alternative Minimum Tax and the extension of tax cuts that
expire in 2010. The House and Senate may choose to revise PAYGO (by modifying their PAYGO
rules, restoring a statutory requirement, or both) or other budget enforcement mechanisms to
accommodate the consideration of such measures while promoting fiscal discipline over the long
As noted above (see “The State of the Economy”), developments in late 2007 led prominent
economic policymakers to call for legislation that would provide an economic stimulus. Support
for a stimulus package came from both the Administration and Congress. In addition, in
testimony before Congress, Federal Reserve Board chairman Ben Bernanke stated that legislation
providing fiscal stimulus (i.e., tax cuts or spending increases) would be helpful if implemented 32
quickly and did not compromise “fiscal discipline in the longer term.”
On February 7, both the House and Senate approved a version of the stimulus plan that had been
passed earlier in the House. The final bill’s main elements were a tax rebate in the form of a two-
part credit, and an increased expensing tax benefit and enhanced depreciation for business
investment in 2008. The bill is estimated to reduce tax revenue by $151.7 billion in FY2008 and
Process, by Robert Keith.
31 The various PAYGO mechanisms are detailed in CRS Report RL34300, Pay-As-You-Go Procedures for Budget
Enforcement, by Robert Keith.
32 Bernanke testimony, January 17, 2008.
by $134.0 billion over FY2008-FY2013. The smaller revenue loss over the five year period
compared to the first year is due to the shifting of tax deductions into the present from
The tax rebates were equal to a “basic” tax credit plus a per-child tax credit. The credits were
refundable. Under the basic credit, individuals received a tax credit equal to the greater of two
amounts that depended, respectively, on their pre-credit tax liability and their earned income.
First, a taxpayer could claim a credit equal to their income tax liability, but not to exceed $600
($1,200 for a joint return). For the earned income amount, a taxpayer could claim a $300 tax
credit ($600 for a joint return) if the individual has at least $3,000 in qualified income (generally,
income from salaries and wages, plus Social Security and veterans’ disability payments) or an
income tax liability of at least $1 and gross income exceeding the sum of the applicable standard
deduction and one personal exemption (two, for joint returns). The child tax credit was $300 for
each qualifying child.
The tax credit was ultimately based on individuals’ 2008 tax and income, and was issued from the
U.S. Treasury during the 2008 calendar year, with the Treasury basing its distributions on
individuals’ 2007 tax returns. When filing their 2008 tax returns (in 2009), individuals will
recalculate the credit based on 2008 information, and can claim an additional credit if the 2008
information increases the amount of the credit. If the 2008 credit is less than that actually
received, individuals will not be required to pay the difference. According to the Treasury 33
Department, the checks began to be issued in May, 2008.
The plan phased out the combined child and basic credit for individuals earning a threshold
amount of more than $75,000 ($150,000 for joint returns). It reduced the credit by 5% of the
individual’s income in excess of the threshold phase-out threshold.
Under current law, businesses are allowed to “expense” (i.e., deduct immediately) the acquisition
cost of a limited amount of new investment in machines and equipment rather than depreciating it
over a period of years. Expensing thus provides a postponement (deferral) of taxes which
constitutes a tax benefit because of the economic principle of discounting—the idea that a given
amount of funds is worth more, the sooner it is received. Prior to the stimulus act, for 2008 firms
were permitted to expense up to $128,000 of investment; the allowance was gradually reduced
(“phased out”) for firms whose investment exceeds a $510,000 threshold. The $128,000 amount
was a temporary increase over a permanent cap of $25,000 that is set to apply in 2011 and
thereafter. (The permanent phase-out threshold is $200,000.) The stimulus bill provided a one-
year (for 2008) additional increase in the expensing cap and threshold, to $250,000 and $800,000,
When not eligible for expensing, outlays for tangible business property—that is, machines and
equipment and commercial structures—are required to be deducted gradually (i.e. depreciated)
over a number of years. For 2008, the stimulus plan provided temporarily more generous
depreciation rules for machines and equipment under which 50% of the asset’s cost could be
deducted in its first year. Like expensing, this provision provided a tax benefit in the form of a
deferral, although it was not as large.
33 Brett Ferguson, “Congress Passes $152 Billion Stimulus Plan,” BNA Daily Tax Report, February 8, 2008, p. GG-2.
According to economic theory, the purpose of fiscal stimulus is generally to boost the demand
side of the economy in the short run when aggregate demand is thought to be temporarily
insufficient to ensure full employment of the economy’s resources. In designing a fiscal stimulus,
one consideration is therefore whether the chosen approach is effective in injecting funds into the
economy. Individuals may save rather spend part of a tax cut or transfers from the government,
and different stimulus tools may have different effects on saving. A second consideration is
timing. (See, for example, the above statement by Chairman Bernanke.) Stimulus measures
address short-term, temporary slackness in aggregate demand, and if a stimulus is mis-timed, it
may occur when the economy has resumed positive growth and thus contribute to inflationary
pressures. Further, at least part of a fiscal stimulus is spent on imported goods, which means that
its impact is partly diluted.
Finally, fiscal stimulus can potentially reduce long-run economic growth. Counter-cyclical fiscal
policy works by increasing the federal budget deficit, and herein is a quandary: while a tax cut or
spending increase might boost demand in the short run, its effect on the budget deficit can reduce
long-term economic growth by reducing the amount of national saving available for investment.
Because of these considerations, a fiscal stimulus package is frequently thought to be effective if
it quickly and effectively injects funds into the economy, but does not reduce long-term growth 35
by permanently increasing the federal budget deficit.
Temporary or one-time-only tax cuts or spending increases have sometimes been proposed as a
way to provide short-run stimulus without permanently reducing long-run growth. In addition,
another specific design question facing policymakers is the appropriate mix of tax cuts and
spending tools. From a strictly economic perspective, the answer depends on the particular tax cut
or spending increase that is chosen. For example, an increase in government spending can consist
of either increased transfers to individuals (for example, increased payments under the various
government income-support programs) or an increase of government purchases. Here, an increase
in purchases would increase aggregate demand more than either an increase in transfers or a tax
cut of identical size because it is likely that at least part of the latter will be saved rather than 36
spent. A drawback to some types of government purchases, however, is that the government
may not be able to put them into place quickly.
Different types of tax cuts are also thought to vary in their effectiveness of injecting funds into the
economy. On the business side, for example, investment incentives are generally thought to
provide more stimulus per dollar of revenue loss than a cut in corporate tax rates because firms
may spend part of the benefit from a rate cut on increases in dividends rather than on investment,
and dividend recipients may save rather than spend part of the former. For individuals, there is
empirical evidence suggesting that lower-income individuals are more likely to spend more of a
tax cut or transfer payment than are higher-income persons. In the case of both business and
34 For a detailed analysis of the stimulus proposal, see CRS Report RL34349, Economic Slowdown: Issues and
Policies, by Jane G. Gravelle et al. For more detail on the specific tax provisions, see CRS Report RS22850, Tax
Provisions of the Economic Stimulus Package, by Jane G. Gravelle.
35 For a detailed discussion of the economic impact of alternative fiscal policy tools, see CRS Report RS21136,
Government Spending or Tax Reduction: Which Might Add More Stimulus to the Economy?, by Marc Labonte.
36 For detailed economic analysis of alternative tax-cut stimulus measures, see CRS Report RS21126, Tax Cuts and
Economic Stimulus: How Effective Are the Alternatives?, by Jane G. Gravelle, and CRS Report RL31134, Using
Business Tax Cuts to Stimulate the Economy, by Jane G. Gravelle.
individual tax cuts, temporary measures would have a less deleterious impact on the budget
deficit in the long run.
Congress has enacted tax cuts in the recent past partly to provide a fiscal stimulus. The Economic
Growth and Tax Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) was enacted partly as a
means of boosting an economy that entered recession in March 2001. EGTRRA contained a
broad range of tax cuts, but was designed partly to deliver an immediate stimulus, and thus
included a rate-reduction tax credit that was mailed to individuals in 2001 as checks from the U.S. 37
Following the September 11, 2001, attacks and in the midst of increased certainty that the
economy was in recession, Congress considered additional fiscal stimulus proposals that initially
included a tax rebate for individuals. The final stimulus package that was adopted (the Job
Creation and Worker Assistance Act of 2002; P.L. 107-147), however, did not contain a rebate.
The act did include temporary “bonus” accelerated depreciation that was aimed at boosting
business investment as well as a temporary extension of net operating loss (NOL) carrybacks for
Prominent fiscal stimulus measures adopted in past decades were the Revenue Act of 1964 (the
“Kennedy” tax cut of 1964; P.L. 88-272) and the Tax Reduction Act of 1975 (P.L. 94-12). The
tax credit for businesses. The 1975 measure included a tax rebate.
One of the broadest tax proposals considered by Congress in 2007 was H.R. 3970, the Tax
Reduction and Reform Act, introduced by Chairman Charles Rangel of the House Ways and
Means Committee on October 25. The bill was an omnibus tax package containing a variety of
both individual and corporate income tax provisions. “Very preliminary” revenue estimates
indicate the bill would reduce revenue by a net total of $53.8 billion over 5 years and by $7.5 39
billion over 10 years.
On the individual side, a chief focus of the bill was the individual alternative minimum tax
(AMT). As described elsewhere in this report, without legislative action, the AMT will include an
increasing portion of taxpayers in its scope. The bill had two AMT provisions: (1) a one-year
“patch” that did not repeal the tax, but that extended a temporarily higher exemption level and
allowed nonrefundable regular-tax credits to offset the AMT; and (2) complete repeal of the
individual AMT after 2007. Ultimately, a temporary reduction in the scope of the AMT for 2007
and 2008 was enacted.
37 U.S. Congress, Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 107th Congress,
committee print, 107th Cong., 2nd sess. (Washington: GPO, 2003), p. 8. For an explanation of the credit, see CRS
Report RS21171, The Rate Reduction Tax Credit - "The Tax Rebate" - in the Economic Growth and Tax Relief
Reconciliation Act of 2001: A Brief Explanation, by Steven Maguire.
38 CRS Report 92-20 E, Tax Cuts and Rebates for Economic Stimulus: The Historical Record, by Donald W. Kiefer
39 U.S. Congress, House, Committee on Ways and Means, Estimated Revenue Effects of Proposals Contained in The
Tax Reduction and Reform Act of 2007, (Washington, October 25, 2007). Published in the BNA TaxCore service,
October 26, 2007. For additional discussion of the proposal, see CRS Report RL34249, The Tax Reduction and Reform
Act of 2007: An Overview, by Jane G. Gravelle.
Beyond the AMT, however, H.R. 3970 proposed a number of general tax cuts for individuals,
including an increased standard deduction, an increased child tax credit, and expansion of the
number of taxpayers qualifying for the earned income tax credit. The bill would have extended
for one year a set of temporary individual income tax benefits (“extenders”). Among the largest of
these was the optional deduction for state and local sales taxes and the deduction for tuition. In
the fall of 2008, legislation was enacted (the Tax Extenders and Alternative Minimum Tax Relief
Act of 2008, P.L. 110-343) to extend the temporary tax benefits through the end of 2009.
In addition to these tax cuts, the bill proposed a number of revenue-raising items applicable to
individuals, including a surtax on upper-income individuals (designed to offset the cost of
repealing the AMT), restoration of limits on itemized deductions and the personal exemption, and
an increase in the floor for itemized deductions. In addition, the bill would have taxed the “carried
interest” income of investment fund managers as ordinary income rather than capital gains. The
estimated net effect of the bill’s individual income tax cuts and revenue-raisers was a revenue loss
of $45.0 billion over 5 years and $6.4 billion over 10 years.
In broad outline, the proposal’s corporate income tax provisions coupled a very large tax cut
provision—reduction of the highest statutory tax rate to 30.5% from current law’s 35%—with a
number of narrower (but in some cases, sizeable) revenue-raising items. As with individuals, the
bill also proposed a one-year extension of temporary corporate tax benefits, and it also would
have made permanent a temporarily increased “expensing” benefit applicable to investment in
equipment by relatively small businesses. Prominent among the bill’s revenue-raising measures
was a repeal of the tax deduction for domestic production and a deferral of deductions attributable
to tax-deferred foreign-source income. Together, the estimated net revenue impact of the
corporate provisions would have been to reduce revenue by $8.7 billion over 5 years and by $1.0
billion over 10 years.
The Emergency Economic Stabilization Act of 2008 (P.L. 110-343), often characterized as the
“rescue bill” enacted in response to financial market crises, included tax provisions. The first one
allows the Secretary of the Treasury to apply ordinary gain or loss treatment to certain sales of
preferred stock in Fannie Mae or Freddie Mac. The second tax provision denies certain employers
whose assets have been purchased under the Troubled Asset Relief Program (TARP) a tax
deduction for compensation or other benefits in excess of $500,000 made to their executives or
other highly compensated employees and makes tax penalties for excess parachute payments
applicable to employers who participate in Troubled Asset Relief Program and their executives.
The Foreclosure Prevention Act of 2008, originally introduced as S. 2636 was largely targeted at
the housing sector. It included some regulatory and direct spending provisions; in the latter case,
primarily a $4 billion authorization for state and local governments to redevelop abandoned and
foreclosed homes. The legislation ultimately became the Housing and Economic Recovery Act of
2008 (H.R. 3221, P.L. 110-289). It also included some tax reductions. In particular, the bill
included liberalization of tax exempt mortgage revenue bonds, a tax credit for buyers of homes in
foreclosure, a temporary deduction for property taxes by homeowners who do not itemize
(capped at $500 for single and $1000 for couples), and an election to refund certain corporate 40
credits in lieu of other business provisions.
Other housing tax legislation in the 110th Congress included the Mortgage Forgiveness Debt
Relief Act of 2007 (P.L. 110-142) which excludes discharged qualified residential debt from gross
income. Qualified indebtedness is defined as debt, limited to $2 million ($1 million if married
filing separately), incurred in acquiring, constructing, or substantially improving the taxpayer’s
principal residence that is secured by such debt. It also includes refinancing of this debt, to the
extent that the refinancing does not exceed the principal amount of indebtedness. The provision
applied to debt discharges made on or after January 1, 2007 and before January 1, 2010. On
October 3, 2008, a provision included in the Emergency Economic Stabilization Act of 2008 (P.L.
Energy taxation was an additional focus of tax legislation in the 110th Congress. Proposed
legislation was generally centered on two areas: revenue-raising scaling-back of tax cuts for
petroleum firms that were enacted in recent years; and enactment of a new set of incentives aimed
at energy conservation and promotion of alternative energy sources. Those goals were addressed,
in part, in an energy bill (H.R. 6; P.L. 110-140). The bill restricted several tax benefits as they
apply to oil and gas production, and provided that the resulting tax revenues were to be used to
fund a reserve for energy efficiency and renewable energy.
Other energy tax policy was enacted in P.L. 110-343, Division B, the Energy Improvement and
Extension Act of 2008. Several temporary energy production incentives were extended, including
tax credits for producing electricity from wind and refined coal facilities and for other facilities,
including closed and open-loop biomass, solar energy, small irrigation power, landfill gas, trash
combustion, and hydropower. Along with an extension of the energy tax credit for solar energy,
fuel cell, and microturbine property and for residential energy efficient property, the law allows a
new energy tax credit for combined heat and power system property and a 30% investment tax
credit rate for advanced coal-based generation technology projects.
For a more detailed overview of energy tax policy, see CRS Report RL33578, Energy Tax Policy:
History and Current Issues, by Salvatore Lazzari; and CRS Report RL33763, Oil and Gas Tax
Subsidies: Current Status and Analysis, by Salvatore Lazzari.
Several temporary tax provisions that had expired in 2007 were retroactively extended through
2009 in Division C of P.L. 110-343, the Tax Extenders and Alternative Minimum Tax Relief Act
of 2008. Often referred to as “extenders,” these provisions were originally enacted with
expiration dates that have subsequently been extended, in some cases numerous times. The
temporary tax provisions include, among others, the tax deduction for state and local sales taxes
in lieu of state and local income taxes; the tax deduction for qualified tuition and related
expenses; the tax deduction for certain expenses of elementary and secondary school teachers; the
additional standard tax deduction from gross income for real property taxes; tax-free distributions
from individual retirement plans for charitable purposes; the tax credit for increasing research
activities; the new markets tax credit; accelerated depreciation for qualified leasehold and
40 For more information about the new law, see CRS Report RL34623, Housing and Economic Recovery Act of 2008,
by N. Eric Weiss et al.
restaurant improvements and for certain improvements to retail space; and a few charitable giving
For a full discussion of the extenders, see CRS Report RL32367, Certain Temporary Tax
Provisions ("Extenders") Expired in 2007, by Pamela J. Jackson and Jennifer Teefy.
Jane G. Gravelle
Senior Specialist in Economic Policy