Taxes and Fiscal Year 2006 Budget Reconciliation: A Brief Summary
CRS Report for Congress
Taxes and Fiscal Year 2006 Budget
Reconciliation: A Brief Summary
David L. Brumbaugh
Specialist in Public Finance
Government and Finance Division
Summary
On April 28, 2005, Congress approved a FY2006 budget resolution (H.Con.Res.
95) with reconciliation instructions calling for tax cuts of $11 billion in FY2006 and $70
billion over five years. Congress began consideration of the tax-reduction reconciliation
legislation as 2005 drew to a close. On November 15, the House Ways and Means
Committee and the Senate Finance Committee approved separate tax-cut proposals as
H.R. 4297 and S. 2020, respectively. The full Senate approved a slightly modified
version of S. 2020 on November 18; the House passed H.R. 4297 on December 8. On
February 2, 2006, the Senate approved H.R. 4297 after amending it by replacing the
contents of the House-passed bill with those of S. 2020. An important part of both the
House- and Senate-passed bills was the extension of numerous temporary, tax-reducing
provisions that are scheduled to expire at various times over the next several years.
Although most of these “extenders” were the same in both plans, there were some
differences, including extension of the increased alternative minimum tax (AMT)
exemption, contained in the Senate proposal but not the House bill; and reduced rates
for capital gains and dividends, which were in the House measure but not the Senate
plan. Aside from the extenders, the Senate bill contained a number of additional items
not in the House plan, including tax incentives for development in areas affected by
recent hurricanes; both tax benefits and reforms related to charitable contributions; and
revenue-raising items in the area of tax shelters and elsewhere. In addition, on
December 7 the House passed “stand alone” bills extending the increased AMT
exemption (H.R. 4096) and providing disaster-related tax benefits (H.R. 4440). The
disaster-related bill was approved by the Senate, signed by the President, and became
P.L. 109-135, but the Senate did not act on H.R. 4096. On May 9, a conference
committee reached agreement on reconciliation legislation, which it approved as the Tax
Increase Prevention and Reconciliation Act of 2005 (H.R. 4297; enacted as P.L. 109-
222). The plan extends the dividend and capital gains reductions for two years and
AMT relief for one year. Many extenders, however, were not included in the package
and are expected to be addressed in forthcoming legislation.
This report will be updated as legislative developments occur.
Congressional Research Service ˜ The Library of Congress
The figures in the budget resolution do not place an absolute limit on the tax cuts
Congress can pass for FY2006 or subsequent years — for example, the budget resolution
itself called for a total of $106 billion in tax cuts over five years — the same amount
proposed by President Bush in his FY2006 budget proposal. However, the congressional
budget resolution contains only $70 billion in its reconciliation instructions ($11 billion
for FY2006). Tax cuts specified in the reconciliation instructions are protected from
certain points of order under Senate budget consideration rules; if a point of order is
raised, a supermajority is required for passage. Thus, as a practical matter, the $70
billion five-year and $11 billion FY2006 reconciliation figures may place a constraint on
the amount of tax cuts that are likely to be considered, and may lead to trade-offs between
specific tax cuts or the adoption of revenue-raising offsets.
A large number of extended provisions were common to both the House and Senate
bills; in most (but not all) cases, the extensions carried through the end of 2006. Some
of the more prominent extensions in both bills were:
!the alternative deduction for state and local sales taxes (extended through
2006 in both measures); the research and experimentation tax credit
(extended through 2006 in both measures);
!the deduction for higher-education expenses (extended through 2006 in
the House proposal and 2009 in the Senate plan); the 15-year
depreciation recovery period for leasehold improvements and restaurants
(extended through 2006 in both proposals);
!the work opportunity and welfare-to-work tax credits (extended through
2006 in both plans); application of non-refundable tax credits against the
AMT (extended through 2006 in both proposals); and
!the increased ($100,000) “expensing” tax benefit for small business
investment (extended by both measures through 2009).
Two prominent extensions that differed between the two proposals were the
increased alternative minimum tax (AMT) exclusion for individuals and reduced rates for
capital gains and dividends. The Senate bill extended the AMT exclusion for one year,
but did not extend the capital gains and dividend rate reductions. The House bill extended
the rate reductions for two years (through 2010) but did not extend the AMT exemption.
(On December 7, however, the House passed H.R. 4096, a stand-alone bill extending the
increased AMT exemption.)
Due to the prominence of these two items, some background information is useful.
The temporary tax cut for capital gains and dividends was enacted by the Jobs and Growth
Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27). JGTRRA reduced the
tax rate on both capital gains and dividends to 15% (5% for income in the 15% and 10%
regular-income brackets, with complete elimination in 2008). However, the reductions
are temporary and are scheduled to expire on January 1, 2009. Absent congressional
action, the capital gains rate will revert to prior law’s 20% rate (10% for income in the
lowest brackets). Dividends will be taxed under the tax rates applicable to regular
income, which range from 10% to 35%, but which are also scheduled to revert to a 15%
to 39.6% range in 2011. According to JCT estimates, a two-year extension of the reduced
rates for capital gains and dividends will reduce revenue by an estimated $20.4 billion
over five years and $50.8 billion over 10 years.1
The context of the AMT exemption’s extension is this: individuals generally pay
either their AMT or regular tax, whichever is higher; a taxpayer’s tentative AMT is partly
dependent on a flat exemption amount specified by law. The value of the exemption is
subject to erosion due to inflation and the growth of real income. Partly for this reason,
an increasing number of taxpayers are faced with the possibility of paying the AMT rather
than the regular tax. Beginning in 2001, Congress enacted a series of temporary increases
in the exemption. The most recent increase was provided by the Working Families Tax
Relief Act of 2004 (P.L. 108-121). Under its terms the exemption is $58,000 for couples
and $40,250 for individuals. However, the increase expires at the end of 2005, and —
absent congressional action — in 2006 the exemption will revert to prior law’s level of
$45,000 and $33,750 for couples and individuals respectively.
Aside from the extenders, the Senate bill contained a number of additional items not
in the House bill. These included a number of tax cuts for areas affected by the recent
hurricanes, a set of provisions applying to charitable contributions, and a number of
revenue-raising provisions. The disaster-related provisions were generally more in the
nature of development incentives for stricken areas than were the provisions of the
Katrina Emergency Tax Relief Act (P.L. 109-73) that Congress enacted in September.
The earlier measure generally focused more on providing direct tax relief to individuals
affected by the hurricanes, providing, for example, more generous rules for deducting
casualty losses and a set of tax benefits for charitable giving. The Senate bill would
generally have extended KETRA’s scope to include victims of Hurricanes Rita and
Wilma. In addition, it contained a package of tax benefits for development in the affected
areas, and included provisions such as bonus depreciation for investment in the Gulf area
and increased low-income housing tax credits. On December 7, the House passed a stand-
alone bill (H.R. 4440) containing a set of disaster-related tax benefits similar to those in
the Senate reconciliation package. The disaster-related bill was approved by the Senate
and signed by the President, becoming P.L. 109-135.
The charity-related items in the Senate bill included both tax benefits and revenue-
raising measures. The tax cuts included a proposal that would have allowed tax-free
withdrawals from IRAs if used for charitable purposes and a provision to allow non-
itemizers to deduct charitable contributions in certain circumstances. (The proposal,
however, would also have instituted a minimum “floor” amount below which a deduction
is not permitted for itemizers.) Revenue-raising items in the charitable area included
provisions intended to curtail the involvement of tax-exempt organizations in tax shelters
and the doubling of certain fines and penalties applicable to charitable organizations.
In terms of revenue impact, the largest of the revenue-raising items was codification
of the “economic substance” doctrine that is aimed at suppressing corporate tax shelters.
Other revenue-raisers were additional measures designed to suppress the movement of
U.S.-chartered parent corporations to low-tax countries (corporate “inversions” or
1 A one-year extension that was dropped by the Finance Committee would reduce revenue by an
estimated $11.7 billion over five years and $26.2 billion over 10 years.
“expatriation”) and a requirement that large oil companies that use the Last In First Out
(LIFO) method of inventory accounting revalue their inventories.
According to estimates by the Joint Committee on Taxation (JCT), the version of
H.R. 4297 approved by the full Senate on February 2 would have reduced revenue by
$69.4 billion over five years, by $49.5 billion over 10 years, and $983 million in FY2006.2
(The bill approved by the full Senate differed slightly from the Finance Committee
proposal.) The House bill was estimated to reduce revenue by $55.6 billion over five
years, $80.1 billion over 10 years, and by $4.9 billion in FY2006.3
Debate over reconciliation legislation focused, in part, on its specific provisions,
their fairness, and their likely economic impact. Supporters of the tax cuts in general,
however, in some cases cited philosophical reasons: a belief in low tax burdens. In
addition, supporters linked the economy’s recovery from the 2001 recession to the tax
cuts enacted in EGTRRA, JGTRRA, and elsewhere, arguing that the stimulus from the
tax cuts helped make the slump shorter and less severe than it otherwise would have been.
It was argued that continuation of those cuts — many of which will expire without
congressional action — is important to sustain economic growth.4 Opponents of the tax
cuts generally questioned the prudence of enacting tax cuts in a time of budget deficits,
and also tend to be skeptical of the tax cuts’ beneficial economic effects.5
The Conference Agreement
On May 9, a conference committee approved a budget reconciliation tax bill. (H.R.
4297, the Tax Increase Prevention and Reconciliation Act of 2005. The President signed
the bill on May 17; it became P.L. 109-222.) The measure extends both the dividend and
capital gains reduction (for two years) and AMT relief (for one year), and also extends the
increased business expensing allowance. The conference agreement, however, does not
include most other extensions contained in the House and Senate bills. (According to
press reports, the extensions not contained in H.R. 4297 will likely be addressed by
subsequent legislation not included in the budget reconciliation process.6) In addition, the
conference agreement does not contain the bulk of the revenue-raising items contained
2 Ibid., p. 7.
3 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of H.R. 4297, the “Tax
Relief Extension Reconciliation Act of 2005,” as Reported by the Committee on Ways and Means,
JCX-81-05, Nov. 18, 2005, 3 pp. Available on the Joint Committee’s website at
[http://www.house.gov/ j c t/x-81-05.pdf].
4 See, for example, the statement of Sen. Gregg, Chairman of the Senate Budget Committee,
remarks in the Senate, Congressional Record, daily edition, vol. 151, Mar. 14, 2005, pp. S2588-
S2591, and the introductory language in the report of the House budget committee, U.S.
Congress, House, Committee on the Budget, Concurrent Resolution on the Budget — Fiscal Yearthst
GPO, 2005), p. 7.
5 See Sen. Kent Conrad, remarks in the Senate, Congressional Record, daily edition, vol. 151,
Mar. 14, 2005, pp. S2591-S2596.
6 Kurt Ritterpusch, “Conferees Reach Reconciliation Accord, Strip Some FSC Benefits to Offset
Cost,” BNA Daily Tax Report, May 10, 2006, p. GG-1.
in the Senate bill. It does not include, for example, either modifications to the economic
substance doctrine or accounting changes for oil companies. Joint Committee on
Taxation estimates indicate the conference agreement will reduce revenue by a net
amount of $70 billion over five years and by $10.8 billion in FY2006.7
The conference agreement’s one-year extension of AMT provisions applies to 2006,
and includes both the applicability of personal tax credits against the AMT that was
contained in both the House and Senate bills (though for different periods) and the
increased exemption amount. The increased exemption is higher than those applicable
to 2005, reflecting indexation for inflation. The exemption amount is $62,550 for joint
returns and $42,500 for single returns.
The extended dividend/capital gains tax cut applies to 2009 and 2010. The increased
expensing provision is extended for two years, for 2008 and 2009.
7 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of the Conference
Agreement for the “Tax Increase Prevention and Reconciliation Act of 2005,” JCX-18 — 06,
May 9, 2006, p. 3. Available on the committee’s website, at [http://www.house.gov/jct/x-18-