2001 Tax Cut: Description, Analysis, and Background

Report for Congress
2001 Tax Cut:
Description, Analysis,
and Background
Updated December 9, 2002
David L. Brumbaugh, Jane G. Gravelle,
Steven Maguire, and Louis Alan Talley
Government and Finance Division
Bob Lyke
Domestic Social Policy Division

Congressional Research Service ˜ The Library of Congress

2001 Tax Cut: Description, Analysis, and Background
A major tax cut was enacted in June 2001 as the Economic Growth and Tax
Relief Reconciliation Act (EGTRRA; P.L. 107-16; H.R. 1836). This report
summarizes the provisions of the bill, analyzes effects, and considers the
development of the legislation. To comply with Senate procedural rules, the Act
included a “sunset” provision that rescinds its tax cuts at the end of calendar year
2010. During 2002, the House (but not the Senate) passed several bills making all
or some of EGTRRA’s tax cuts permanent. There are indications that Congress will
return to this issue in 2003.
In early 2001, tax cuts were a principal focus of policymakers. In February,
President Bush sent Congress the outlines of a proposal to cut taxes by an estimated
$1.6 trillion over 10 years; the proposal is based on a plan the President set forth
during the 2000 presidential campaign. The principal elements of the plan were a cut
in marginal individual income tax rates; a tax cut for many married couples; an
increased child credit; elimination of the estate and gift tax; a permanent research and
experimentation tax credit; a charitable contribution deduction for non-itemizers; and
several tax benefits for health care and education.
In March, tax cuts similar to the President’s proposal began moving through the
House of Representatives. On March 8, the House approved H.R. 3, containing a cut
in marginal tax rates; on March 29, the House approved H.R. 6, containing tax cuts
for married couples and an increase in the child credit; and on April 4, the House
approved H.R. 8, which would phase out the estate and gift tax. On May 2, the
House approved H.R. 10, containing tax reductions related to pensions and
retirement. On May 15, the Senate Finance Committee approved an omnibus bill
including elements of all of these proposals, plus education tax benefits. The bill was
reported as an amended version of H.R. 1836, the Economic Growth and Tax Relief
Reconciliation Act of 2001 that was passed by the House on May 16; the bill was
approved by the Senate with further amendments on May 23.
The principal differences between the House, Senate, and Administration plans
were a larger tax-rate cut in the President’s and House plans than in the Senate bill;
a retroactive component in the House and Senate bills designed to provide near-term
economic stimulus; effective dates in the Senate bill that were generally somewhat
later than those in the President’s proposal and the House bills; pension provisions
in the House and Senate plans, but not in the President’s; and health provisions in the
President’s plan but generally not in the House or Senate proposals.
On May 26, the House and Senate both approved a conference version of
EGTRRA. The bill’s reduction in marginal individual income tax rates is smaller
than proposed by the House or the President and larger than proposed by the Senate,
but is closer to the Senate bill than the other proposals. Beyond the rate cuts, the
bill’s major elements are: tax cuts for married couples, phase-out of the estate and
gift tax, an increase in the child tax credit, more generous individual retirement
account (IRA) and pension provisions, tax benefits for education, and a number of
other items. President Bush signed the tax cut bill on June 7.

Revenue Effects...............................................2
Distributional Effects...........................................3
Side-by-Side Comparison.......................................4

2001 Tax Cut: Description, Analysis, and
A major tax cut, the Economic Growth and Tax Relief Reconciliation Act
(EGTRRA), was enacted in June 2001. This report summarizes the provisions of the
bill, analyzes effects, and considers the development of the legislation.
The broad shape of the President’s plan and the tax cuts passed by the House,
Senate, and Conference Committee are perhaps more marked by their similarities
than their differences. The centerpiece of each plan is a cut in the statutory marginal
tax rates that apply to individuals’ taxable incomes, although the precise details vary
among the proposals. Beyond the rate cuts, each phases out the estate tax; expands
the child tax credit; and provides tax cuts for two-earner married couples.
The details of the plans, however, are far from identical, as the side-by-side
chart that follows makes apparent. Some of the major differences are:
!a larger marginal individual tax-rate cut in the President’s and House-passed
plans than in the Senate bill (in this respect, the Conference bill follows the
Senate more closely than the other two plans);
!a retroactive component in the House, Senate, and Conference bills that is
designed to provide near-term economic stimulus;
!retention of the gift tax in the Senate and Conference bills, but not the
President’s plan or House-passed measure;
!pension provisions in the House, Senate, and Conference plans, but not the
President’s; health provisions in the President’s plan but not the House,
Senate, or Conference proposals; education provisions in the Conference,
Senate and President’s plans, but not the House; and extension of expiring tax
provisions in the President’s plan, but – with some exceptions – not the
House, Senate, or Conference bills;
!effective dates, “phase-in,” and “sunset” provisions that differ among the
The tax cuts in the Conference Committee bill are scheduled to expire
(“sunset”) at the end of calendar year 2010. This provision was included to ensure
the bill’s compliance with the “Byrd rule” applying to congressional consideration
of budget legislation. During 2002, the House (but not the Senate) passed a number
of bills that would rescind EGTRRA’s sunset provisions and make its tax cuts
permanent. There are indications that Congress will take up the issue of EGTRRA’s
permanence again in 2003.

Revenue Effects
The relative size of the respective tax cuts is difficult to gauge, for several
reasons. First, revenue estimates for the tax cuts that passed the House that are
consistent with the Senate and Conference bills and the President’s proposal are not
available; the House tax cuts were passed in several different bills, and revenue
estimates were calculated for each bill separately without taking into account the
impact of the other House-passed measures. Because the costs of the different tax
cuts interact, the estimates for the different House bills cannot be simply added and
compared with the President’s plan or the Senate bill, the estimates for which do take
into account interacting effects.
Another difficulty is posed by “phase-ins” – that is, each proposal contains
numerous provisions that become fully effective only over a number of years. Thus,
the total 10-year revenue loss estimates for the proposals differ, depending on how
rapidly the particular plan’s provisions are phased in. To illustrate, the President’s
plan is estimated to reduce revenue by $1,775.3 billion over 10 years ($1.8 trillion
after rounding), while the Senate bill’s revenue loss is estimated at $1,347.2 billion
($1.3 trillion). In part, the larger size of the President’s proposal is a result of its
more rapid phase-in of important elements such as its rate cuts and estate and gift tax
An added issue in gauging the size of the Conference bill’s tax cut is its
scheduled expiration at the end of calendar year 2010. Because of the sunset
provision, the $1.3 trillion revenue loss estimated for the period FY2001 through
FY2011 is smaller than it would be if the tax cuts did not expire: FY2011 includes
part of calendar year 2011 when the tax cuts are scheduled to no longer apply. The
expiration provision, together with the phase in of important provisions also hampers
getting an idea of the long-run, annual impact of the bill. One important provision
of the bill – repeal of the estate tax – is not fully effective until calendar year 2010
and due to lags in filing will not be fully reflected in revenue reductions until
FY2011. A solution to this might be to rely on the revenue estimate for FY2011. At
the same time however, revenue estimates for FY2011 reflect the impact of the bill’s
general sunset provisions and are therefore smaller than will likely result from the
annual impact of permanent changes in the tax code. The side-by-side comparison
in this report presents the Joint Tax Committee’s revenue estimates after each item
for FY2010 and the FY2001-FY2011 total.
How large are the tax cuts compared to the economy? The dollar value of
economic variables 10 years in the future is extremely uncertain, as are the actual
revenue reductions that will occur from the tax cuts. However, based on economic
projections by the Congressional Budget Office and the Joint Committee on
Taxation’s revenue estimates, the estimated revenue loss from the Conference
committee bill is 1.3% of gross domestic product (GDP) or 6.3% of the revenue
collections otherwise expected to occur.

Distributional Effects
This analysis compares the distributional effects of the proposals, using
estimates made by a private group, Citizens for Tax Justice. This is the only
organization that has provided consistent estimates or provided the underlying
information necessary to calculate the tax as a percentage of income, a relative
distribution measure, and that also includes the impact of repealing the estate tax –
an important element of the proposals.
Two types of distributional measures are shown, one absolute (indicating the
total amount of dollars received by each income group) and the other relative
(measuring the tax cut as a percentage of income).1 The absolute measure indicates
that most of the tax cut is received by the highest income classes, and that benefits
in the President’s proposal (an early version) and the House proposal are more
concentrated in the higher classes than is the Senate proposal, while the conference
proposal falls in between. This effect occurs primarily because of differences in the
rate cuts, which are largest at higher income levels in the President’s proposal and the
House bills and smallest in the Senate proposal.
The tax cut as a percentage of income – the relative measure – provides
information about the effect on progressivity. Ideally, the percentage change in after
tax income should be used to show the degree to which changes in taxes make
incomes more or less even. Using taxes as a percentage of pre-tax income reduces
the percentage change at higher income levels, but nevertheless provides a reasonable
depiction of the distributional effects. While the tax cut is relatively even handed in
the middle income classes, the highest income individuals would receive much larger
tax cuts relative to income. This effect is in part due to the estate and gift tax repeal;
about half of the tax cut for the top 1% comes from the estate tax repeal. Without
that tax cut, the percentage change in taxes as a percent of income would be 2.79%
for the President’s and House plan, 1.79% for the Senate plan, and 2.57% for the
conference plans. All four measures, therefore, increase differentials in after-tax
income. The average tax cut as a percent of income (shown in the totals row for the
last four columns) indicates that, in the long run, the conference plan is the largest,
with an average cut of 2.43% of income.
Note that some measures of distribution compare the percentage change in tax
liability. These measures do not, however, provide information about progressivity
for two reasons. First, percentage changes in tax liability can be very large if initial
tax liability is small and they will differ substantially depending on what is chosen
as the base (e.g. income taxes, or all federal taxes). A proportional cut in an already
progressive tax will reduce progressivity (in the sense that incomes are distributed
less equally). For a cut in a progressive tax to be distributionally neutral, cuts must
be smaller at the top than at the bottom, but the extent of that difference depends on
existing progressivity.

1For more information on these different measures, see CRS Report RL30779, Across the
Board Tax Cuts: Economic Issues, by Jane G. Gravelle.

Note also that, while the tax cuts at the top arise mostly from rate cuts, or
reductions in estate taxes, which benefit all taxpayers in those groups, most of the
middle class tax cut is directed towards particular groups: families with children and
married couples. Citizens for Tax Justice finds, for example, that in the President’s
plan, the average tax cut is $500, but the average tax cut for families with children
is $1,114, the average tax cut for single parents is $326, and the average tax cut for
singles is $283. Some of these differences reflect differences in average incomes;
however, the vast majority of single individuals with no children will receive no
more than $300 (the new 10% rate bracket), because there is no tax reduction in the
15% rate bracket, and singles do not receive benefits focused on children or joint
Table 1: Distributional Effects of the President’s Tax Plan, the House
Proposals (H.R. 3, H.R. 6, & H.R. 8), the Senate Proposal and the
Conference Proposal at 2001 Income Levels
Income Share of Cut Percent of Income Confer-Confer-
ClassPresident House*Senate encePresidentHouse*Senate ence
Lowest 20% 0.8% 0.8% 1.0% 0.9% 0.51%0.55% 0.70%0.71%
Second 20% 3.5 4.0 5.7 5.3 1.031.18 1.771.82
Third 20% 8.4 9.1 8.9 8.5 1.481.60 1.631.74
Fourth 20% 15.7 15.3 14.7 14.5 1.691.64 1.651.82
Next 15% 18.9 19.0 24.8 23.7 1.561.58 2.142.29
Next 4% 7.8 6.7 9.8 9.5 1.12 0.96 1.481.59
Top 1% 45.0 45.0 35.0 37.6 4.88 4.87 3.974.76
Total 100.0 100.0 100.0100.0 2.08 2.08 2.172.43
Source: Citizens for Tax Justice and CRS calculations based on their data.
*Reflects H.R. 3 (rate cuts), H.R. 6 (marriage penalty and child credit) and H.R. 8 (estate and gift tax), but not
H.R. 10 (IRAs and pensions). H.R. 10 would make the size of cuts slightly larger, but would probably not
affect the distribution very much.
Side-by-Side Comparison
Table 2 presents a side-by-side comparison of the principal provisions of the
President’s proposal and the House, Senate, and conference committee versions. It
is not intended to be comprehensive but does contain the main features of each plan.
The table presents item-by-item revenue estimates prepared by the Joint Committee
on Taxation. As noted above, however, the estimates for the House bills and other
plans are not comparable. In addition, the itemized revenue estimates for the House
tax cuts cannot be aggregated.

Table 2. Comparison of Main Provisions
Current LawPresident’s ProposalHouse Senate Conference
Individual Income Tax Rates, Personal Exemptions, and Itemized Deductions
Tax rates applicable toPhased-in reduction inPhased-in reduction inPhased-in reduction ofPhased in reduction of
individuals taxable incomeindividual income tax ratesindividual income tax ratesindividual income taxindividual income tax
are: 15%, 28%, 31%, 36%,over the period 2002-6. over the period 2002-6. (H.R.rates, generally over therates over the period
and 39.6%.3) period 2002-7. 2001-6.
Rates would be: 10%, 15%,Rates would be: 10%, 15%,Rates would be: 10%,Rates are: 10%, 15%,
25%, and 33%.25%, and 33%.15%, 25%, 28%, 33%, and25%, 28%, 33%, and
36%. 35%.
No retroactivity.The initial phase-in of the
lowest rate would begin10% rate would apply10% rate applies
retroactively; a 12% rateretroactively to 2001.retroactively to Jan.,
Estimated revenue loss:would apply in calendar years2001. The phase in of
$118.9 billion in FY2010;2001and 2002; 11% wouldIncreases the incomeother rate cuts begins
$877.2 billion over 10 years.apply in 2003-5; 10% wouldthreshold at which itemizedJul. 1, 2001.
iki/CRS-RL30973apply thereafter.deductions begin to be
g/wlimited, effective in 2009.Phases out the income
s.orEstimated revenue loss:$121.7 billion in FY2010;Repeals the phase out oflimit on itemizeddeductions over 2006-
leak$958.3 billion over 11 years.personal exemptions,10.
effective in 2009.
://wikiPhases out the
httpEstimated revenue loss:restriction on personal
$104.9 billion in FY2010;exemptions over 2006-
$842.0 billion over 119.
Estimated revenue loss:
$118.5 in 2010; $874.9
billion over 11 years.

Current LawPresident’s ProposalHouse Senate Conference
Married Couples
Tax rate brackets andProvides a tax deduction toIncreases the standardPhases in an increase in Phases in an increase in
standard deduction providetwo-earner married couplesdeduction for couples tothe standard deduction forthe standard deduction
marriagebonuses forequal to 10% of the firsttwice that of singles, effectivecouples to twice that offor couples to twice that
couples with disparate$30,000 earned by the lower-in 2002; broadens the 15%singles; phase-in wouldof singles; phase-in will
incomes and marriagepaid spouse up to a maximumrate bracket for couples tooccur over 2006-10. Phasesoccur over 2005-9.
penalties for couples withdeduction of $3,000. Phasedtwice that of singles, fullyin over 2006-10 aPhases in over 2005-8 a
similar incomes. Earnedin over 2002-2006.effective in 2009; increasesbroadening of the 15%broadening of the 15%
income tax credit (EITC) canthe EITC earned incomerate bracket for couples torate bracket for couples
result in a marriage penalty.Estimated revenue loss: $14.2amount for couples, effectivetwice that of singles. to twice that of singles.
billion in FY2010; $102.7in 2002; increases the AMTIncreases the phase-outPhases in an increase in
over 10 years. exemption amount forrange of the EITC forthe phase-out range of
couples, effective in 2006. couples, effective in 2002.the EITC over 2002-8.
Estimated revenue loss:Estimated revenue loss:Estimated revenue loss:
$36.4 billion in FY2010;$10.3 billion in FY2010;$9.2 billion in FY2010;
$223.3 billion over 10 years. $72.2 billion over 10 years.$59.8 billion over 10
g/wChild Tax Credit
s.or$500 tax credit for each childIncreases the credit to $1,000.Increases the credit to $1,000Increases the credit toIncreases the credit to
leakunder 17. Phased outIncreases the phase-outover the period 2001-2006,$1,000 over the period$1,000 over the period
beginning with incomes ofthreshold to $200,000 forbut retains current phase-out2001-2011. Makes the2001-2011. Makes the
://wiki$110,000 for couples andcouples and singles. Phasedthreshold. Extendscredit refundable to thecredit refundable to the
http$75,000 for singles. Credit isin over the period 2002-6.refundability to families withextent of 15% of earnedextent of 10% of
refundable only for familiesless than 3 children. Creditincome in excess ofincome over $10,000
with three or more children.Credit would offset the AMT;would offset the AMT;$10,000. Credit wouldfor 2001-4; 15% of
Refund reduced by AMT;refund would not be reducedrefund would not be reducedoffset the AMT; refundincome over $10,000,
after 2001 amount of creditby the AMT.by the AMT. would not be reduced byindexed for inflation,
reduced by AMT.the AMT.for 2005 and thereafter.
Estimated revenue loss: $31.9Estimated revenue loss: $23.9
billion in FY2010; $210.7billion in FY2011; $175.9Estimated revenue loss:Credit offsets the AMT;
billion over 10 years.billion over 11 years.$25.4 billion in FY2010;refund not reduced by
$193.0 billion over 11the AMT.
Estimated revenue loss:
$25.2 billion in
FY2010; $171.8 billion
over 11 years.

Current LawPresident’s ProposalHouse Senate Conference
Estate and Gift Tax
Marginal tax rates rangingThe estate and gift tax wouldThe estate and gift tax wouldThe estate tax would beThe estate tax gradually
from 37% to 60% apply tobe phased out over the periodbe phased out over the periodgradually repealed over therepealed over the period
estates over 675,000; estates2002-2009. All rates are2002-2011(H.R. 8). The rateperiod 2002-2011. Estate2002-10. Rate
above the filing thresholdreduced rapidly during thereductions are not as rapid asand gift tax rates arereductions are the same
may claim a credit equal tophase out period, but notin the president’s proposal,reduced more graduallyas in the Senate bill.
the tax due on the thresholdbelow the capital gains taxand the highest rate fallsunder this proposal duringHowever, the applicable
amount. The taxablerate.below the top income taxphaseout than the other twocredit is increased more
threshold is scheduled torate. H.R. 8 would alsoproposals. However, theslowly than under the
increase to $1 million bychange the unified credit toapplicable credit isSenate bill. In addition,
2006.an exemption beginning ingradually increased to $4the gift tax is retained at
2002.million by 2010. A top giftthe top income tax rate
tax rate of 40% would beof 35%.
maintained after repeal of
the estate tax.
Same basis rules as
Assets transferred at deathThestep-up” in the basis ofSame basis rules asPresident’s proposal
receive a “stepped-up basis.assets would be limited toSame basis rules asPresident’s proposal andand House and Senate
iki/CRS-RL30973$1.3 million plus $3 millionPresident’s proposal.House bill.plans.
g/wfor assets transferred to a
s.orsurviving spouse.The federal credit for
leakEstates may also claim aThe federal credit for stateThe federal credit for statestate death taxes is
://wikicredit for state death taxesranging from .8% to 16% ofdeath taxes would be reducedin proportion to the reduction The federal credit for statedeath taxes would be reduceddeath taxes would bereduced over the 2002-reduced over the 2002-2004 period and
httpadjusted taxable estate value.in estate and gift tax rates.proportionately. 2004 period and replacedreplaced with a
with a deduction in 2005.deduction in 2005.
Estimated revenue loss:
Estimated revenue loss: Estimated revenue loss:$23.5 billion in FY2010
$73.4 billion in FY2010Estimated revenue loss: $22.6 billion in FY2010($53.9 billion in
($78.9 billion in FY2011);$35.0 billion in FY2010($27.0 billion in FY2011);FY2011); $138.0 billion
$305.9 billion over 10 years.($51.8 in FY2011); $185.6$134.4 billion over 10over 11 years.

billion over 10 years.years.

Current LawPresident’s ProposalHouse Senate Conference
Individual Retirement Accounts (IRAs) and Pensions
Individuals can contribute upNo change for IRAsThe dollar limit for IRAThe limit for IRA contrib-The limit for IRA
to $2,000 annually to IRAs. generally. See, however, thecontributions increased toutions is increased tocontributions is
Contributions are deductiblechanges for charitable$5,000 over 2002-2004 and is$5,000 over 2002-2011increased to $5,000
for persons not participatingcontributions and forindexed afterwards. and is indexed afterwards.over 2002-8 and
in employer plans; incomeeducation, below. Estimated revenue loss forEstimated revenue loss forindexed thereafter.
limits apply to deductions byIRA provision: $5.3 billion inIRA provision: $3.3 billionEstimated revenue loss
plan participants. FY2010; $34.2 billion overin FY2010; $17.7 billionfor IRA provision: $4.5
10 years.over 10 years.billion in FY2010;
$25.1 billion over 10
Pensions years.
Tax on employerNo change.Increases dollar limits onProvisions similar to theProvisions increasing
contributions to qualifiedvariety of retirement plans:House bill, but with slowerdollar limits follow the
pension plans is generallylimits on contribs. to definedphase-ins in some cases;House bill.
deferred (postponed) untilbenefit plans rise from $35Kthe limit on contributions
iki/CRS-RL30973distributed, conferring theequivalent of a taxto $40K; limits on definedbenefit payments rise fromto defined benefit planswill not increase except for401(K) and similarplans can elected to be
g/wexemption. The benefit is$140K to $160K; limits on inflation.treated as Roth IRAs);
s.orsubject to limits, restrictions,eligible compensation rise toeffective in 2006.
leakand regulations.$200K; limits on 401(k) and401(K) and similar plans
like plans rise to $15K; limitscould be treated as RothFollows the Senate in
://wikion SIMPLEs rise to $10K. IRAs (contributions notallowing a credit for
httpLimits then indexed forinflation. Other increases indeductible, payments nottaxable)IRA and 401(K)contributions,
limits would also occur.sunsetting in 2006.
Credit for contributions to
401(K) and similar plansIRAs, 401(K) and similarNumerous other
could be treated as Roth IRAsplans aimed at lowerprovisions (similar to
(contributions not deductibleincome persons; sunsets inthe House and Senate
but payments not taxable).2006.provisions) relating to
expanding portability,
There are numerous otherNumerous other provisionseasing burdens of anti-
provisions relating to(similar to the Housediscrimination rules,
expanding portability, easingprovisions) relating toand simplifying rules.
burdens of anti-expanding portability,
discrimination rules, andeasing burdens of anti-Estimated revenue loss
simplifying rules.discrimination rules, andof pension provisions:
simplifying rules.$2.2 billion in FY2010;
Estimated revenue loss of$24.5 billion over 10
pension provisions: $2.5Estimated revenue loss ofyears.

billion in FY2010; $17.4pension provisions: $2.2
billion over 10 years.billion in FY2010; $22.6
billion over 10 years.

Current LawPresident’s ProposalHouse Senate Conference
Charitable Contributions
Taxpayers who itemize theirPermits non-itemizers toNo House-passed provision.Taxpayers can deduct theNo provisions.

deductions can deductdeduct charitablefair market value of self-
charitable contributionscontributions. (Phased in overcreated artworks.
subject to a limitation of 50%2002-2006).
of adjusted gross income. Effective upon enactment.
Non-itemizers are not
permitted an additionalAllows corporations
deduction for charitableadditional deduction
contributions.(generally equal to one-half
ordinary income that would
Withdrawals from IRAs areAllows persons over 59 ½have been recognized from
generally included in taxabletax-free withdrawals fromsale) for contributions of
income. Withdrawals beforeIRAs for charitablebook inventory to schools,
59 ½ are subject to ancontributions, beginning inlibraries, and literacy
additional 10% tax.2002.programs.
Corporations are permitted to
iki/CRS-RL30973deduct charitableIncreases the corporateEffective upon enactment.
g/wcontributions, subject to acontribution limitation to
s.orlimit of 10% of net income.15% of taxable income,beginning in 2002.
leakFor contributions of property,
://wikitaxpayers may deduct the fairmarket value of capital gainEstimated revenue loss: $15.7billion in FY2011; $90.0
httpproperty but for ordinarybillion over 10 years.
income property – including
self-created artworks – can
generally only deduct their
basis in the property.

Current LawPresident’s ProposalHouse Senate Conference
E duc at i o n
Education IRAs
Authorizes tax-exemptAllows accounts also to beNo provision.Allows accounts also to beSame as the Senate
savings accounts for qualifiedused for qualified elementaryused for qualifiedamendment with several
higher education expenses. and secondary educationelementary and secondarymodifications. Does
Distributions are excludedexpenses, including foreducation expenses,not include exclusion
from income of beneficiaryprivate and religious schoolsincluding private andfor employer
student.(effective after 2001).religious schools.contributions.
Raises annual contribution
Limits annual contributionslimit to $1,000 in 2002,Raises annual contribution
to $500 per beneficiary$2,000 in 2003, $3,000 inlimit to $2,000.
2004, $4,000 in 2005, and
$5,000 in 2006 and(Effective after 2001)
t h ereaft er.
Extends exclusion to
employer contribution to
iki/CRS-RL30973education IRA ofemployee, spouse, or lineal
g/wdescendent, limited to $500
s.orper beneficiary.
Qualified Tuition Savings
://wikiPlansAllows distributions fromNo provision.Allows distributions fromSame as the Senate
httpAllows qualified tuitionaccounts to be excluded fromaccounts to be excludedamendment with several
savings plans to be tax-income of beneficiaryfrom income of beneficiarymodifications. Imposes
exempt. Distributions fromstudent, subject to lifetimestudent. 10% penalty tax on
accounts are taxable tolimit.distributions not used
student under annuity rules. Allows private higherfor qualified higher
Allows private highereducational institutions toeducation expenses.

Plans must be established byeducational institutions toestablish prepaid tuition
state governments.establish prepaid tuitionsavings plans under same
savings plans under samerules.
ru les.
(Effective after 2001
(Effective after 2001)except for exclusion of
distributions from private
institution plans, after

Current LawPresident’s ProposalHouse Senate Conference
Employer Education
Assista n ce
Extends current law throughNo provision.Extends limited exclusionSame as Senate
Allows limited exclusionDec. 31, 2002.to graduate level coursesamendment.
even if education is not job-(effective after 2001).
related or prepares for new
Makes exclusion
Does not cover graduate-levelpermanent.
co u r ses.
Expires Dec. 31, 2001.
Interest on Higher Education
Allows limited above-the-lineNo provision.No provision.Repeals restriction onSame as Senate
deduction for first 60 monthsnumber of months onamendment except does
of interest payments.interest payments.not include optional tax
iki/CRS-RL30973Raises income phase-outcredit.

g/wranges for eligibility.
leak(Both effective after 2001)
://wikiAllows optional tax credit
httpof up to $500 for first 60months of interest
payments (effective after

Current LawPresident’s ProposalHouse Senate Conference
Bonds for School Facilities
Interest on state or localNo provision.Increases the arbitrageSame as Senate
governmental bonds is tax-rebate exception for smallamendment.
exempt. Issuers must rebateissuers by $5 million
arbitrage earnings, with some(effective after 2001)
excep t i o n s .
Interest on private activityAllows bonds issued by for-Allows bonds issued by
bonds is taxable with someprofit entity pursuant tofor-profit entity pursuant to
exceptions, among thempartnership agreement withpartnership agreement with
exempt facility bonds.public schools to be classifiedpublic schools to be
as exempt facility bondsclassified as exempt facility
(effective after 2001).bonds (effective after
Deduction for Higher
Education Expenses
iki/CRS-RL30973Not allowed except asbusiness or professionalNo provision.No provision.Allows optional above-the-line deduction for tuitionSame as Senateamendment except
g/wexpenseand fees. Limited todeduction limited to
s.or$3,000 in 2002 and 2003$4,000 in 2004 and
leakAllows tax credits for tuitionand to $5,000 in 2004 and2005.

and fees: Hope Scholarship2005.
://wiki(up to $1,500) and Lifetime
httpLearning (up to $1,000;$2,000 after 2002).Allows higher incomephase-out ranges for
eligibility than would
either tax credit.
(Effective after 2001 and
before 2006).

Current LawPresident’s ProposalHouse Senate Conference
Deduction for Classroom and
Training Expenses
Allows deduction forAllowsabove-the-lineNo provision.Allows above-the-lineNo provision.
unreimbursed employeededuction for non-itemizersdeduction up to $500 for
expenses, limited to taxpayersup to $400 for elementaryelementary and secondary
who itemize and subject toand secondary schoolschool teachers and other
2% adjusted gross incometeachers and other personnelpersonnel who incur
floor. Some trainingwho have classroom andprofessional development
expenses may qualify for thetraining expenses (effectiveexpenses related to their
Lifetime Learning Credit.after 2001).subject area.
Allows tax credit for 50%
of classroom material
expenses; limited to $250
each year.
Estimated reduction inEstimated reduction inEstimated reduction in
revenue of all educationrevenue of all educationrevenue of all education
iki/CRS-RL30973provisions: $1.6 billion inFY2010; $10.7 billion overprovisions: $3.6 billion inFY2010; $35.5 billion overprovision: $3.1 billionin FY2010; $29.4
g/w10 years.ten years.billion over ten years.


Current LawPresident’s ProposalHouse Senate Conference
Health and Long-Term Care
Tax Credit for Health
In su ra n ce
Allows refundable tax creditNo provision.No provisionNo provision.
Allows deduction forfor purchase of health
unreimbursed medicalinsurance for individuals not
expenses (including healthparticipating in employer-
insurance premiums), limitedsponsored or public
to taxpayers who itemize andprograms. Credit limited to
subject to$1,000 per individual ($2,000
7 ½ % adjusted gross incomeper family) up to 90% of
floor.premium (effective after
2001; phased-in before
Flexible Spending Accounts
Allows FSAs to be funded onAllows up to $500 in unusedNo provision.No provision.No provision.
iki/CRS-RL30973pre-tax basis. Balancesunused at end of year arebalances to be carried over tonext year, rolled over into
g/wforfeited to employer.qualified retirement plan or
s.ormedical savings account, or
leakdistributed to employee
(effective after 2001).
://wikiArcher Medical Savings
Allows tax-exempt MSAs forRepeals termination date forNo provision.No provision.No provision.
self-employed or employeesnew enrollees and cap on
of small employers with highnumber of participants.
deductible insurance. NewMakes accounts generally
enrollments generallyavailable to anyone with high
prohibited after 2002.deductible insurance and
increases contribution limits
(effective after 2001).
Personal Exemption for
Family Caregiver
Allows exemption ifAllows additional personalNo provision.No provision.No provision.

individual qualifies as aexemption for family
dependent.members needing long-term
care (effective after 2001).

Current LawPresident’s ProposalHouse Senate Conference
Deduction for Long-term
Care Insurance
Allows deduction forAllows above-the lineNo provision.No provision.No provision.
unreimbursed medicaldeduction for long-term care
expenses (including long-insurance premiums
term care insurance(effective after 2001 but
premiums), limited tophased-in before 2007).
taxpayers who itemize and
subject to 7 ½ % adjustedEstimated reduction in
gross income floor.revenue: $13.5 billion in
FY2011; $100.4 billion over
10 years.
Health Insurance Deduction
for Self-Employed
If a taxpayer is not eligible toNo provision.No provision.Allows 100% deductionNo provision.
participate in an employer-for health insurance
iki/CRS-RL30973subsidized health plan, adeduction is allowed for 60%premium even if taxpayeris eligible to participate
g/wof premiums in 2001, 70% in(but does not) in employer-
s.or2002, and 100% in 2003 andsubsidized health plan.
leakthereafter. Effective after 2001.
Estimated revenue cost:
://wiki$0.9 billion over 10 years.
httpResearch and Experimentation (R&E) Tax Credit
A 20% tax credit applies toThe R&E credit would beNo provision.The R&E credit would beNo provision.

qualified research expensesmade permanent; no changemade permanent. The
above a base amount linkedin rates.alternative rates would be
to a firm’s research in theincreased to a range of 3%
past. An alternative, three-Estimated revenue cost: $8.2to 5%.
tiered credit is available withbillion in FY2010; $47.3
lower rates ranging frombillion over 10 years.Estimated revenue cost:
2.65% to 3.75%. The credit$8.3 billion in FY 2010;
is scheduled to expire after$47.8 billion over 10 years.
June 30, 2004.

Current LawPresident’s ProposalHouse Senate Conference
Adoption Tax Credit and Employer Adoption Assistance Programs
Taxpayers are allowed a taxProvides that the adoption taxIncreases the adoption taxProvides a $10,000 taxThe provisions of the
credit for qualified adoptioncredit for children withoutcredit to $10,000 for childrencredit for taxpayers whoHouse and Senate bills
expenses. Adopted childrenspecial needs is to be madewith or without special needs. adopt a child with specialwere similar and
must be under age 18 orpermanent (the special needsIncreases the phase-out forneeds. A credit up togenerally retained. The
physically or mentallyadoption provision is alreadyeither the adoption credit or$10,000 is provided for$10,000
incapable of caring fora permanent part of the IRC). amounts received from anqualified adoptioncredit/exclusion for
themselves. There is no limitIncreases the credit to $8,500employer adoption assistanceexpenses for all otherspecial needs children
on the number of childrenfor children with specialprogram from $75,000 toadoptions. Employerwithout regard to
that may be adopted. Theneeds and to $7,500 for$150,000. The adoptionadoption assistancequalified adoption
credit is $6,000 for domesticadoptions of non-specialcredit would be allowedprograms may provide upexpenses (under the
special needs children (and aneeds children.against the alternativeto $10,000 to employeesSenate amendment) was
permanent part of the IRC). minimum tax. Both the creditwho adopt special needsretained but is not
The credit amount is $5,000for non-special needschildren and mayeffective until 2003.
for all other adoptions (andchildren and the employerreimburse adoptionThese amounts are not
will expire after Decemberadoption program would beexpenses for all otheravailable until the
31, 2001). The credit may bemade a permanent part of thechildren up to $10,000. adoption is finalized.
carried forward 5 years. Atax code. Qualified expensesAmounts received under anFurther, the agreement
iki/CRS-RL30973phase-out of benefits occursfor taxpayers with incomespaid or incurred in taxableyears beginning on or beforeemployer program are notincludable in theprovides a cost of livingadjustment for inflation.
g/wover $75,000. The credit willDecember 31, 2001, wouldemployee’s gross income. The adoption tax credit
s.orbe subject to the alternativeremain subject to current lawThe phase-out for both theand employer adoption
leakminimum tax limitations afterdollar limits.adoption credit or forassistance program
2001. Employers may offeramounts from employerprovisions are made a
://wikian adoption assistanceprograms is raised frompermanent part of the
httpprogram to employees thatprovides reimbursements in a$75,000 to $150,000. Anadjustment for inflation isInternal Revenue Code(note, however, the year
like amount available underprovided for both the credit2010 sunset provisions
the tax credit program. Theand employeras described in the body
employer adoption assistancereimbursement for futureof this report).
program expires afteryears. The credit would be
December 31, 2001.allowed against theEstimated revenue loss:
alternative minimum tax..$432 million in
FY2010; $3.135 billion
Estimated revenue cost:over 11 years.

$432 million in FY2010;
$3.1 billion over 11 years.

Current LawPresident’s ProposalHouse Senate Conference
Dependent Care Credit
A tax credit is allowed that isNo provision.No provision.The maximum credit rate isSame as Senate
generally equal to 30% ofincreased to 40% and theamendment except
qualified employment-relatedincome threshold abovemaximum credit is 35%
expenses for the care of awhich the credit is reducedand income threshold
dependent. The rate isis increased to $20,000. above which there is
reduced (but not below 20%)The limit on qualifiedreduction is $15,000.
for increments of incomeexpenses is increased to
above $10,000. The amount$3,000 for 1 dependent and
of qualified expenses may notto $6,000 for 2 or more
exceed $2,400 for 1dependents. The changes
dependent and $4,800 for 2would be effectiveEstimated revenue cost:
or more dependents. beginning in 2003.$0.9 billion in FY2010;
$7.6 billion over 10
Estimated revenue cost:years.
$0.5 billion in FY2010;
$5.4 billion over 10 years.
s.orEmployer Child Care Tax Credit
Allows a deduction forNo provision.No provision.Allows a tax credit equal toSame as Senate
://wikiordinary and necessarybusiness expenses of assisting25% of expenditures forchild care facilities andprovision.
httpemployees obtain child care. operating or contract costsEstimated revenue cost:
Expenditures for child careof child care programs$0.2 billion in FY2010;
facilities are capitalized and(10% for resource and$1.4 billion over 10
recovered over time throughreferral expenditures),years.

deduction for depreciation.limited to $150,000 a year.
Estimated revenue cost:
$0.2 billion in FY2010;
$1.5 billion over 10 years.