Overview of the 2004 Corporate Tax Proposals: Revenue Effects

CRS Report for Congress
Overview of the 2004 Corporate Tax
Provisions: Revenue Effects
Jane G. Gravelle
Senior Specialist in Economic Policy
Government and Finance Division
Summary
The corporate tax revisions that repealed the extraterritorial income tax (ETI) and
adopted a domestic tax reduction for manufacturing ( H.R. 4520) contained permanent
provisions that gained revenue in some cases and lost it in other cases. The bills also
contained some temporary revenue losers. The most important of the permanent
revenue gain provisions were the ETI repeal itself and some tax shelter provisions; the
most important provisions that lost revenue were the manufacturing subsidies and the
provisions reducing tax on foreign source income. There were also a number of
temporary provisions that lost revenue, and a temporary optional itemized deduction for
state and local sales taxes in lieu of state income taxes. This report summarizes the
revenue effects of the House, Senate, and conference versions. This report will not be
updated.
Legislation in response to the World Trade Organization’s finding that the
extraterritorial income tax (ETI) provision in the U.S. tax code contravenes rules
prohibiting export subsidies led to omnibus legislation.¹ In the Senate, S. 1637, the
Jumpstart Our Business Strength (JOBS) Act contained about 250 separate provisions,
but was relatively revenue neutral, losing $14.5 billion over the first five years and
gaining $2.9 billion over the first 10 years. In the House, H.R. 4520, the American Jobs
Creation Act, would lose $32.2 billion over the first six years and $35.3 billion over the
first 11 years, although $9.5 billion of those amounts involved an expenditure for revision
of the tobacco markets. The final conference version (H.R. 4520) cost $8.7 billion over
the first five years (2005-2009) and was revenue neutral over ten years. The tobacco
market revision was redesigned to pay for the expenditure with an assessment on tobacco
companies, and this report does not contain information on the tobacco market revision.²

¹ For background, see CRS Report RS20746, Export Tax Benefits and the WTO: The
Extraterritorial Income Exclusion and Foreign Sales Corporations, by David Brumbaugh.
² See CRS Report RL31790, Tobacco Quota Buyout Proposals in the 108^th Congress, by Jasper
(continued...)
Congressional Research Service ˜ The Library of Congress

The legislation contains both permanent and temporary provisions and has both
revenue losers and revenue gainers. This report compares the original proposals and the
final version, focusing on revenue effects.³ The conference adopted the Senate’s version
of the manufacturing subsidy (a deduction rather than a corporate rate cut), but with the
House’s broader definition of manufacturing.
Table 1 lists the major revenue gainers in the bill, for the year 2013, when all
provisions have been phased in. To provide some perspective, in that year the corporate
tax is estimated to raise $307 billion. The bill relies not only on corporate provisions (the
ETI and most of the tax shelter provisions are largely corporate) but also on excise
provisions. The ETI provision produces a gain in that year of close to $7 billion. The
anti-shelter provisions produced a larger revenue gain in the Senate bill than in the House
bill, for several reasons, while the final value was between the two. The provision
restricting leasing arrangements between taxable and tax-exempt entities, which is the
single largest tax shelter provision in any of the versions, appears more stringent than the⁴
one in the House bill. The Senate bill contained a provision codifying and strengthening
the economic substance doctrine and a tax on corporate inversions, while the House bill
had no economic substance doctrine provision and its earnings stripping provision aimed
at corporate inversions was not included in the final version.⁵ Inversions occur when a
U.S. firm moves its headquarters abroad to reduce U.S. tax, primarily through earnings
stripping methods that allocate interest deductions to the United States.

² (...continued)
Womach, for a discussion.
³ For a tabular comparison of many of the major provisions, see CRS Report RL32444,
Comparison of the House and Senate ETI/Foreign Investment Bills, by David Brumbaugh.
⁴ See CRS Report RL32479, Tax Implications of SILOs, QTEs, and Other Leasing Transactions
with Tax-Exempt Entities, by Maxim Shvedov.
⁵ See CRS Report RL32193, Anti-Tax-Shelter and Other Revenue-Raising Tax Proposals, by
Jane Gravelle for a discussion of anti-shelter provisions, including the economic substance
doctrine and repatriation. See also CRS Report RL32125, Tax Exemption for Repatriated
Foreign Earnings: Proposals and Analysis, by David Brumbaugh.

Table 1: Permanent Revenue Gainers, Gain in FY2013
(billions of dollars)
Provision CategorySenateHouse Conference
(S. 1637) (H.R. 4520)(HR. 4520)
Repeal ETI Provision 6.86.86.8
Tax Shelter Provisions9.94.26.8
Excise Taxes2.42.41.1
Miscellaneous Revenue Raisers0.90.00.4
^Source:^Estim^{ates b}^y^th^{e J}^oⁱⁿ^{t Co}^m^m^{ittee o}ⁿ^T^a^x^a^tioⁿ^.
Table 2 lists the major categories of permanent revenue losers. The most significant
in either bill is the provision that allows a tax rate reduction for manufacturing. The
Senate provided a 9% reduction that reduced the top 35% rate to slightly under 32%; a
deduction reduces the rates for smaller corporations and is extended to unincorporated
businesses as well. The House bill reduced the top rate to 32% and although it did not
include smaller firms, other provisions for small businesses benefitted small corporations
by reducing some of the intermediate rates. The conference bill was similar to the Senate
version. The tax rate reduction accounted the bulk of the small business provisions in the
House bill; a small part of the loss is associated with benefits for Subchapter S
corporations (corporations taxed as partnerships) which was contained in all versions.⁶
The second largest set of provisions reduced the tax burdens on income from foreign
source investments. The largest provision (common to all bills) is a provision allowing
foreign interest as well as domestic to be allocated between U.S. and foreign sources for
purposes of determining the limit on the foreign tax credit, which accounted for $2.8
billion of the total. The next largest single provision in the Senate bill is extended
carryovers and carrybacks of the foreign tax credit ($1.4 billion) and in the House bill
combining foreign tax credit baskets ($1.1 billion) — versions of both provisions (costing
$1.0 billion and $1.1 billion respectively) were included in the conference report, but⁷
other provisions were not. Both bills contain some miscellaneous provisions and the
Senate bill and conference bill contained some energy provisions.

⁶ For a discussion of the domestic manufacturing incentive, see CRS Report RL32103,
Comparison of Tax Incentives for Domestic Manufacturing in Current Legislative Proposals, by
Jane Gravelle. For a discussion of relative effects on domestic and foreign investments, see CRS
Report RL32066, Taxes, Exports, and Investment: ETI/FSC and Domestic Investment Proposals
in the 108th Congress, by David Brumbaugh.
⁷ For background, see CRS Report RL32429, Foreign Investment and Tax Incentives: Analysis
of Current Law and Legislative Proposals, by David Brumbaugh.

Table 2: Permanent Revenue Losers, Loss in FY2013
(billions of dollars)
Provision CategorySenate House Conference
(S. 1637) (H.R. 4520)(H.R. 4520)
Rate Reduction for Manufacturing -12.4 -8.7-11.5
Small and Intermediate Business -0.1 -3.1-0.1
International Provisions -6.2 -5.2-6.1
Other Business Benefits -0.8 -0.3-0.3
Energy Provisions -1.3 0.0-0.0
^Source:^J^oⁱⁿ^{t Co}^m^m^{ittee o}ⁿ^T^a^x^a^tioⁿ
Tables 3 and 4 report the temporary revenue gainer and losers. In this case, because
of the unevenness of the revenue effect, the provisions are reported as the averages over
budget horizons (e.g., the average annual cost over the first five years). The years for the
conference report are moved forward by one year, due to the lapse in time before the
proposals were finalized.
Table 3. Temporary Revenue Gainers in the House and Senate
Bills, Average Annual Cost
(billions of dollars)
P r ovision House Senat e House Senat e Conf erence Conf erence
2004- 2004- 2004- 2004- 2005-2009 2005-2014
2008 2008 2014 2013
Extension of1.41.31.61.71.51.0
Customs Duties
^Source:^J^oⁱⁿ^{t Co}^m^m^{ittee o}ⁿ^T^a^x^a^tioⁿ^.

Table 4. Temporary Revenue Losers in the House and Senate Bills,
Average Annual Cost
(billions of dollars)
House Senat e House Senat e Conf erence Conf erence
P r ovision 2004- 2004- 2004- 2004- 2005-2009 2005-2014
2008 2008 2014 2013
Extenders -2.2 -2.4 -1.3 -1.4 0.0 0.0
Small Business
Expensing -3.6 -0.0 -0.1 -0.0 -1.4 -0.1
Lower Tax On
Repatriations -0.4 -0.4 -0.3 -0.4 -2.0 -3.3
State and Local
Tax Deduction-0.5-0.3-0.5-0.3
Depreciation,
Film and
Broadcasting -0.3 -0.1 0.3 (1)
Net Operating
Loss Election-1.1-0.4
Personal Holding
Company Tax-0.2-0.1
Energy Sunsets-1.9-0.8-0.4(1)
Other Sunsets-0.5-0.4-1.8-0.5
^Source:^J^oⁱⁿ^{t Co}^m^m^{ittee o}ⁿ^T^a^x^a^tioⁿ^.
(1) Less than $50 million.
The temporary gainer is an extension of custom fees. The most significant temporary
revenue losers in the initial bills were provisions known as the “extenders” — temporary
provisions that have been in the tax law for some time, and have frequently been
extended. There are also some energy provisions among the extenders and some new⁸
energy provisions in the Senate bill. The single most important extender was the
provision extending the research and experimentation tax credit, which accounts for $1.8
billion in the first five years and $0.9 billion in the second five years in the Senate bill
($1.2 and $0.7 in the House bill).⁹ This provision was addressed in a different tax bill,
H.R. 1308, which extended some other provisions. A significant temporary provision in
the House bill and in the final conference version was the extension of the expanded limit

⁸ See CRS Report RL32439, Temporary Tax Provisions (‘Extenders’) Expiring in 2004 and CRS
Report RL32367, Temporary Tax Provisions (‘Extenders’) Expired in 2003, by Pamela Jackson;
and CRS Report RL32265, Expired and Expiring Energy Tax Incentives, by Salvatore Lazzari.
⁹ For background, see CRS Report RL31181, Research and Experimentation Tax Credit: Current
Status and Policy Issues for the 108th Congress, by Gary Guenther.

on expensing of investment in equipment.¹⁰ The House bill and conference bill also
contained a temporary provision allowing state and local sales tax deductions for
itemizers in lieu of the state income tax deduction, a provision that will primarily benefit
itemizers in the eight states with a sales tax but without a broad based state income tax.¹¹
The Senate bill also contained some other temporary provisions including energy
provisions and allowing a firm to choose to a longer period of time to carry back losses
in lieu of the bonus depreciation provisions (which allow half of investment in equipment
to be deducted when incurred). This latter provision benefits firms without current tax
liability by allowing losses to be offset against prior year income, but was not included
in the final bill.

¹⁰ See CRS Report RL31852, Small Business Expensing Allowance Under the Jobs and Growth
Tax Relief Reconciliation Act of 2003: Changes and Likely Economic Effects, by Gary Guenther.
¹¹ See CRS Report RL32455, State and Local Sales Tax Deductibility: Proposed Legislation, by
Pamela Jackson and Steven Maguire.