Recent House Legislation Extending Selected Provisions of the 2001 and 2003 Tax Cuts

CRS Report for Congress
Recent House Legislation Extending Selected
Provisions of the 2001 and 2003 Tax Cuts
Gregg Esenwein
Specialist in Public Finance
Government and Finance Division
Summary
The Economic Growth and Tax Relief Reconciliation Act of 2001 reduced
marginal income tax rates, created a new 10% income tax bracket, provided marriage
tax penalty relief, and increased the child tax credit. All of the act’s provisions,
however, are scheduled to sunset (revert to prior law levels) at the end of 2010.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerated the
implementation of certain tax reductions that were originally enacted in the 2001 Act.
Several of these provisions will expire at the end of 2004, including the expansion of the
10% tax bracket, marriage tax penalty relief, the increase in the child tax credit, and the
increase in the alternative minimum tax (AMT) exemption.
During this session, Congress faces the issue of whether to extend and/or make
permanent these expiring tax provisions. To date, the House has passed four major tax
bills; H.R. 4181 would extend and make permanent marriage tax penalty relief, H.R.
4275 would extend and make permanent the 10% tax bracket, H.R. 4359 would extend
and make permanent the increase in the child tax credit, and H.R. 4227 would extend
the increase in the AMT exemption through 2005. These changes would reduce revenue
by $568 billion over the FY2005 to FY2014 period. If the increase in the AMT
exemption were made permanent, then the total cost over the period could exceed $1
trillion. Congress is currently considering going to conference on a child tax credit
refundability bill (H.R. 1308) that was passed last year, and using the conference
agreement as a vehicle for extending these four JGTRRA tax provisions. This report
will be updated as legislative action warrants.
This report will be updated as legislative action warrants.
Among other things, the Economic Growth and Tax Relief Reconciliation Act of

2001 (EGTRRA; P.L. 107-16) reduced marginal income tax rates, created a new 10%

income tax bracket, provided marriage tax penalty relief, increased the child tax credit,
and increased the alternative minimum tax (AMT) exemption. These changes were
scheduled to phase in over a period of several years.

Congressional Research Service ˜ The Library of Congress

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.¹ 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, in response to economic conditions, Congress passed the Jobs and Growth
Tax Relief Reconciliation Act (JGTRRA; P.L.108-27). JGTRRA, among other changes,
accelerated the implementation of certain tax reductions that were 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, and an increase in the AMT exemption. These
changes were temporary and were scheduled to be in effect for two years, 2003 and 2004.
During this session, Congress faces the issue of whether to extend and/or make
permanent these expiring tax provisions. If the JGTRRA reductions are not extended,
then in 2005, many taxpayers will see an increase in their federal income tax liabilities
relative to their 2004 levels. If the EGTRRA tax reductions are not made permanent, then
in 2011, almost all taxpayers will experience an increase in their federal income tax
liabilities relative to their levels in 2010.
Counterbalancing congressional desire to provide continued tax reductions is
congressional concern over the current and projected size of the federal budget deficit.
The revenue effects of extending and making permanent the 2001 and 2003 tax reductions
are substantial. The four tax bills extending and making permanent the 2001 and 2003
tax reductions that the House has passed to date have been estimated to reduce federal
revenues by over $1 trillion between FY2005 and FY2014.²
The remainder of this report provides a brief summary of the four tax bills extending
the 2001and 2003 Acts that have, to date, passed the House.
Marriage Tax Penalty Relief — H.R. 4181
In 2001, EGTRRA increased the standard deduction and the width of the 15% tax
bracket for joint returns to twice the amount applicable to single returns. These changes
were to be phased in over the period 2005 through 2009. EGTRRA also increased the
earned income tax credit phaseout limit for joint returns with the increase phased in over
the 2001 to 2007 period. In 2003, JGTRRA increased the standard deduction and 15%
tax bracket for joint returns to twice the size applicable to single returns, effective for tax
years 2003 and 2004. In 2005, the joint standard deduction and width of the 15% tax
bracket will revert to the levels specified under EGTRRA. In 2011, they will revert to
their pre-EGTRRA levels.

¹ CRS Report RL30862, Budget Reconciliation Process: The Senate’s “Byrd Rule,” by Robert
Keith.
² Assuming the AMT exemption increase is made permanent.

On April 28, 2004, H.R. 4181, a bill sponsored by Representative Jim Gerlach, was
passed by the House on a vote of 323 to 95. The bill would extend the JGTRRA increase
in the standard deduction and 15% tax bracket for joint returns and make them permanent
for tax years beyond 2010. The bill would also make permanent the increase in the earned
income tax credit phaseout limits for joint returns. The estimated revenue effects of H.R.

4181 are shown in Table 1.

Table 1. Estimated Revenue Effects of H.R. 4181,
FY2005 Through FY2014
(billions of dollars)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005-

2014
-5.7 -5.8 -3.3 -1.6 -0.3 - -15.8 -25.2 -24.1 -22.9 -104.7
^Source:^Joiⁿ^t^C^o^m^mⁱ^t^t^{ee on}^T^a^x^a^tⁱ^oⁿ^.^JC^X^-^31-^{04. A}^p^ri^l^{28, 2004.}
Ten Percent Income Tax Bracket — H.R. 4275
In 2001, EGTRRA established a new 10% income tax bracket that was applicable
to the first $12,000 of taxable income on joint returns, the first $6,000 of taxable income
on single returns, and the first $10,000 of taxable income on head of household returns.
In 2008, the 10% bracket thresholds were scheduled to increase to $14,000 for joint
returns and $7,000 for single returns.
In 2003, JGTRRA accelerated the expansion of the threshold for the 10% tax
bracket. In 2003 and 2004, the 10% tax rate is applicable to the first $14,000 of taxable
income on joint returns and the first $7,000 of taxable income on single returns. In 2005,
the 10% tax bracket thresholds revert to the levels specified by EGTRRA. In 2011, the

10% bracket is scheduled to sunset.

On May 13, 2004, H.R. 4275, sponsored by Representative Pete Sessions, passed the
House on a vote of 344 to 76. H.R. 4275 would maintain the JGTRRA expansion of the

10% bracket thresholds and make the 10% bracket permanent for tax years beyond 2010.

The estimated revenue effects of H.R. 4275 are shown in Table 2.

Table 2. Estimated Revenue Effects of H.R. 4275,
FY2005 Through FY2014
(billions of dollars)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005-

2014
-4.2 -6.4 -6.8 -4.3 -3.2 -3.3 -36.2 -50.8 -51.2 -51.6 -218.2
^Source:^Joiⁿ^t^C^o^m^mⁱ^t^t^{ee on}^T^a^x^a^tⁱ^oⁿ^.^JC^X^-^34-^{04. May}^{14, 2004.}
The Child Tax — H.R. 4359
EGTRRA increased the child tax credit from $500 to $1,000 with the increase
phased in over the 2001 to 2010 period. EGTRRA also extended the refundability of the
child tax credit to families with fewer than three children. JGTRAA increased the child
tax credit to $1,000 for tax years 2003 and 2004.
Absent legislative action, the child tax credit will revert to its EGTRRA specified
levels in 2005, decreasing from $1,000 in 2004 to $700 in 2005 through 2008, $800 in³

2009, $1,000 in 2010, and revert to $500 for 2011 and beyond.

On May 20, 2004, H.R. 4359, sponsored by Representative Jon Porter, was passed
by the House by a vote of 271 to 139. This bill would permanently extend the $1,000
amount of the child tax credit, permanently allow the child tax credit to offset alternative
minimum tax (AMT) liability in full, increase the refundability percentage to 15% in
2004, include combat pay for purposes of calculating the refundability of the credit, and
increase the phaseout thresholds for the credit to $250,000 for joint returns ($125,000 for
unmarried taxpayers). The estimated revenue effects of H.R. 4359 are shown in Table 3.
Table 3. Estimated Revenue Effects of H.R. 4359,
FY2005 Through FY2014
(billions of dollars)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005-

2014
-9.8 -18.1 -18.5 -18.9 -18.6 -13.7 -13.3 -37.9 -39.0 -40.2 -227.9
^Source:^Joiⁿ^t^C^o^m^mⁱ^t^t^{ee on}^T^a^x^a^tⁱ^oⁿ^.^JC^X^-^37-^{04. May}^{21, 2004.}
Alternative Minimum Tax (AMT) — H.R. 4227
EGTRRA increased the AMT exemption from $45,000 to $49,000 for joint returns
and from $33,750 to $35,750 for unmarried taxpayers. These increases were effective for
tax years 2001 through 2004. JGTRRA increased the AMT exemption to $58,000 for

³ For more information see CRS Report RS21860, The Child Tax Credit, by Gregg Esenwein.

joint returns and $40,250 for unmarried taxpayers. These changes were effective for tax
years 2003 and 2004.
Absent legislative action, in 2005 the AMT exemption amounts will revert to their
pre-EGTRRA levels of $45,000 for joint returns and $33,750 for unmarried taxpayers.
On May 5, 2004, H.R. 4227, sponsored by Representative Rob Simmons, was passed
by the House by a vote of 333-89. The bill would extend for one year, through 2005, the
temporary JGTRRA increase in the AMT exemption amount to $58,000 for joint returns
and $40,250 for unmarried taxpayers. The bill would also index the AMT exemption in
2005 for inflation occurring in 2004. The Joint Committee on Taxation (JCT) estimated
revenue effects of H.R. 4227 are shown in Table 4.
Table 4. Estimated Revenue Effects of H.R. 4227,
FY2005 Through FY2014
(billions of dollars)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005-

2014
-7.1 -10.7 - - - - - - - - -17.8
^Source:^Joiⁿ^t^C^o^m^mⁱ^t^t^{ee on}^T^a^x^a^tⁱ^oⁿ^.^JC^X^-^32-^{04. May}^{5, 2004.}
It is important to note that the JCT revenue estimate of the AMT exemption increase
tends to understate the actual long-run revenue effects of H.R. 4227 for two reasons.
First, although the increase in the exemption is only in effect for 2005, Congress may
decide to extend the increase in the AMT exemption over the entire forecast period.
Without congressional action, the number of taxpayers subject to the AMT will jump
from around 3 million in 2004 to over 36 million in 2014 (assuming the other three tax⁴
cuts are extended). Second, the JCT estimate shows the revenue loss of extending the
AMT exemption relative to current law, which assumes that the JGTRRA marriage tax
penalty tax relief provisions and the JGTRRA increase in the 10% tax bracket will have
expired in 2005. If these provisions were extended, then the revenue cost of enacting
H.R. 4227 would be higher.
Although the JCT does not provide a revenue estimate of extending H.R. 4227, a
revenue estimate by the Brookings-Urban Tax Policy Center indicates that, if extended,
H.R. 4227 would reduce revenues by approximately $475 billion over the FY2005
through FY2014 period. This estimate assumes that the other three tax bills; H.R. 4181,
H.R. 4275, and H.R. 4359, are eventually enacted. Table 5 shows the Brookings-Urban
Tax Policy Center revenue estimate of extending H.R. 4227.

⁴ For more information see CRS Report RL30149, The Alternative Minimum Tax for Individuals,
and CRS Report RS21817, The Alternative Minimum Tax (AMT): Income Entry Points and
“Take Back” Effects, by Gregg Esenwein.

Table 5. Estimated Revenue Effects of Making H.R. 4227
Permanent, FY2005 Through FY2014
(billions of dollars)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005-

2014
-9.5 -26.1 -32.0 -39.2 -48.2 -58.3 59.6 -55.7 -66.9 -79.8 -475.3
^A^s^s^u^m^e^s^A^M^T^ex^em^ptⁱ^oⁿ^of^{$58,000 f}^o^{r j}^oⁱⁿ^t^ret^u^rn^s^,^{$40,250 f}^o^{r u}ⁿ^m^arri^e^d^t^a^x^p^ay^ers^.^Ex^em^ptⁱ^oⁿ
ⁱⁿ^dex^e^{d f}^o^{r i}ⁿ^f^l^atⁱ^oⁿ^af^t^e^{r 2004. A}^l^s^o^as^s^u^m^e^s^en^act^m^eⁿ^t^of^H^.^R^.^{4181, H}^.^R^.^{4275, an}^{d H}^.^R^.^4359.
^Source:^Urban^In^s^titu^te/B^rookⁱⁿ^g^s^In^s^tit^u^tⁱ^oⁿ^Ta^x^Po^lⁱ^c^y^C^eⁿ^t^{er, J}^uⁿ^e^{17, 2004 [h}^ttp://tax^policy^cen^ter.org^/
^pu^blⁱ^catⁱ^oⁿ^s^/^t^e^m^p^l^a^t^e^.cf^m^?^P^u^b^ID^=8907].