Tax Activity in the 106th Congress

Order Code RL30801

CRS Report for Congress

Received through the CRS Web

Tax Activity in the 106th Congress

Updated February 27, 2001

Jane G. Gravelle

Senior Specialist in Economic Policy

Government and Finance Division

Congressional Research Service ˜ The Library of Congress

Tax Activity in the 106th Congress

Summary

A general tax cut (H.R. 2488), costing $792 billion over 10 years, was vetoed

in September 1999. The general tax cut proposal included across-the-board tax cuts,

benefits for married couples, phase-out of the alternative minimum tax, a reduction

in capital gains taxes, a phase-out of the estate tax and provisions relating to

education and health. A more narrowly focused bill (H.R. 1180), largely focused on

extending certain expiring provisions, was passed and signed by the President adopted

in December, 1999.

Several tax proposals, primarily reflecting individuals provisions of H.R. 2488,

were considered in 2000. The largest of these was marriage penalty legislation.

Other important proposals included estate and gift tax reductions, Individual

Retirement Account (IRA) and pension provisions, and deductions for health care

insurance. At the end of 2000, another limited tax bill was adopted, which included

distressed communities legislation and an extension of medical savings accounts. Two

smaller bills, a revision of the foreign sales corporation provision and a repeal of the

installment sales restriction included in the 1999 extenders bill were also adopted.

This report is an overview of legislative activity in the 106th Congress and will

not be updated.

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Contents

Miscellaneous Tax Legislation, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Marriage Tax Penalty Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Estate and Gift Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Education Tax Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Patient Protection Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Minimum Wage Bill, Pension, IRA and Small Business Provisions . . . . . . . . . . . 4

Enacted Legislation 2000: Community Renewal, Medical Savings Accounts, FSC and

Installment Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Enacted Legislation 1999: Extenders Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Overview of the 1999 General Tax Cut (H.R. 2488) . . . . . . . . . . . . . . . . . . . . . 6

Conference Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

House Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Senate Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Finance Committee Democrats Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

House Democrats Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Tax Activity in the 106th Congress

The 106th Congress was characterized by a number of tax bills that saw some

action, including several that were vetoed. In 1999, a general tax bill, H.R. 2488,

which contained a variety of tax provisions, including across-the-board tax cuts, was

adopted. This bill, with a 10-year revenue cost of $792 billion (the on-budget surplus

projected at that time) was vetoed on September 23, 1999. A much smaller bill, H.R.

1180, primarily extending expiring tax provisions, was enacted and signed by the

President in December 1999.

During 2000, however, a number of stand-alone tax bills, often identical to

individual sections of H.R. 2488, were considered by Congress. In several cases, bills

were passed and then vetoed. In a post-election session, Congress passed and the

President signed three smaller tax bills: (1) H.R. 5662, which provided community

renewal provisions and an extension of medical savings accounts, (2) H. R. 4896,

revising the foreign sales corporation (FSC) rules, and (3) H.R. 3594, restoring

installment accounting methods that were restricted in H.R. 1180.

Statements made after the election by President-Elect Bush and congressional

leaders suggest that tax cuts will be a high priority in the 107th Congress. Some of the

proposals considered may reflect legislation considered but ultimately not enacted

during the 106th Congress.

House leaders initially indicated they would consider three proposals early in

2000: marriage penalty legislation, extending education savings accounts, and

providing tax benefits for distressed communities. Several additional tax-related bills

were subsequently identified for consideration: Internet taxes, repealing the telephone

tax elimination, the estate and gift tax, and expanding Individual Retirement Accounts

(IRAs). Most, although not all, of those proposals had been elements of H.R. 2488.

On March 24, the House passed a budget agreeing to $150 billion in tax cuts

over five years with a possibility of additional cuts if certain conditions were met. The

Senate agreed on a similar tax cut in its budget resolution that passed April 7. The

final budget resolution provided for $150 billion of tax cuts and passed both houses

on April 13.

The following sections of this paper discuss the main topics of legislative activity

in the tax area. The first sections discuss tax proposals considered but not finally

enacted in 2000, including miscellaneous tax legislation, the marriage penalty, estate

and gift taxes, education tax incentives, the health tax provisions in the patient

protection act, and provisions relating to small business, including IRAs and pensions,

that were associated with the minimum wage and bankruptcy bills at various points.

The final enacted bills are then summarized. The next sections discuss tax activity in

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1999, including the enacted extenders bill, H.R. 1180 and the comprehensive tax bill

H.R. 2488 that was not enacted.

Miscellaneous Tax Legislation, 2000

High gasoline prices led to some consideration of a temporary cut in gasoline

taxes. Such a tax cut (S. 2285) was considered in the Senate, but put on hold April

11 after a failure to invoke cloture; the Senate rejected this measure as an amendment

to the estate tax bill, H.R. 8 . Concerns were raised about the effect of such a tax cut

on funds for highway construction.

The House marked the tax-filing week of April 10 with: H.R. 4163 (keeping

taxpayer records confidential, which passed on April 11); H.R. 4199 ( a commission

to rewrite the tax code and sunset current regulations in 2005, passed April 13), and

H. J. Res. 94, a constitutional amendment requiring a two-thirds majority vote in the

House to pass tax legislation (fell short of the required two thirds majority on April

12).

On May 10, the House approved H.R. 3709 to extend the moratorium on

Internet access taxes by five years and eliminate existing access taxes in 10 states. On

May 25, the House approved H.R. 3916, a phase-out of communications taxes

costing $19 billion over five years (immediate repeal would have cost over $50

billion).

On July 25, the House approved H.R. 4923, the bipartisan community renewal

bill that would provide tax benefits for distressed areas. On July 27, the House

approved H.R. 4865, a bill to eliminate income taxation of Social Security benefits.

On that same day, the Ways and Means Committee approved H.R. 4986, revising the

tax treatment of multinationals in a way designed to deal with the foreign sales

corporations (FSC) provisions that have been found to be illegal by the World Trade

Organization (WTO).

During the August recesss, Speaker Hastert proposed that minimum wage

legislation, with a smaller set of tax cuts (dropping estate and gift tax and pension and

IRA provisions) be considered when the House returned in September. While the

estate tax provisions were dropped, the IRA and pension provisions were kept in the

bill (as discussed below).

Marriage Tax Penalty Legislation

H.R. 2488 included provisions addressing the marriage penalty. The original

House bill included only an increase in the standard deduction for joint returns to

twice the size of the those of single returns; most of the reductions in the bill were

across-the-board rate cuts. The Senate opted for optional separate filing. The final

bill approved by both houses would have increased the standard deduction for married

couples to an amount equal to twice the standard deduction for singles, and would

also have increased the width of the 15% rate bracket for joint returns to twice that

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of single returns. The bill would also raise the income phase-out limit in the earned

income tax credit by $2,000 for joint returns.

These provisions were incorporated H.R. 6, a stand-alone marriage penalty

reduction bill, which was passed by the House in February, 2000 and cost $182.3

billion over 10 years. The Senate approved a $247.8 billion marriage penalty

reduction proposal similar to that in H.R. 6, S. 2346, although it broadened the 28%

bracket as well as the 15% bracket. It also added a provision that allowed personal

tax credits to be offset against the AMT; without such a change some families would

be pushed on to the AMT by the marriage penalty legislation. Cloture motions on S.

2346 failed in the Senate: on July 18, the Senate approved a reconciliation bill

containing these provisions. Because of procedural rules, these changes sunsetted in

2004. The House approved a reconciliation bill, H.R. 4810, containing their marriage

penalty provisions on July12. On July 20 and 21 the House and Senate approved

conference versions. The bill was vetoed August 7. The final bill included the

personal credit provision, but not expansion of the 28% bracket.

There was some criticism of these bills by Democrats, including considering the

bill in isolation from other tax provisions and before the budget resolution was

developed, and providing tax cuts to couples with marriage bonuses. In the House,

Democrats proposed to increase the standard deduction, but not the rate bracket,

which would target lower income couples. It would also adjust the Alternative

Minimum Tax (AMT)to allow the full benefits of the tax cut, and allow an eventual

$2,500 increase in the phase-out of the earned income tax credit. Democrats have

also proposed optional separate filing.

Estate and Gift Taxes

On June 9, 2000, the House approved H.R.8, a bill to repeal the estate and gift

tax by 2010. This bill would cost $28 billion over the next five years, but the cost

would rise rapidly. H.R. 8 was approved by the Senate on July 19. The President

indicated that he would veto H.R. 8 (and did so on August 31) but said he might

support a less expensive relief provision; the veto was sustained in the House on

September 7.

The estate and gift tax bill (H.R. 8) would have converted the unified credit into

an exemption in 2001, and repeal tax rates in excess of 53% and the 5% surtax. In

2002 all rates in excess of 50% would be repealed. All rates would be reduced by one

percentage point a year from 2003-2006, by 1.5 percentage points per year in 2007,

and by 2 percentage points in 2009 and 2009. The tax would be repealed entirely in

2010. State death tax credits would be reduced in proportion to the estate and gift tax

reductions from 2003-2009. This proposal would cost $28.3 billion over five years,

but the Treasury Department estimated that the annual cost would be $50 billion by

2010.

A Democratic alternative would have reduced estate and gift tax rates across the

board by 20%, created a $2 million exclusion for farms and closely held businesses

and allowed any portion not used in the estate of one spouse to be allowed in the

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estate of the second spouse, and increased the exemption equivalent of the unified

credit to $1.1 million immediately and to $1.2 million in 2006.

Education Tax Provisions

S. 1134, which passed the Senate on March 2, 2000, would have increased the

annual contribution limit to tax favored savings accounts from $500 to $2,000 and

allowed accounts to be used for elementary and secondary education (including

private and home schooling), extended the exclusion for employer provided education

assistance, allowed taxpayers to use both the education savings account and the Hope

credit, allowed tax-free distributions from state-sponsored prepaid tuition plans and

expanded these plans to include private schools, eliminated the 60-month limit on the

deductibility of student loan interest, and increased the limit on the amount of school

bonds that may be issued without being subject to arbitrage requirements. These

provisions would cost $21.3 billion over the next 10 years. The House Ways and

Means Committee approved H.R. 7, which was similar to the Senate bill; H.R. 7

would cost $11.6 billion over the next 10 years.

Patient Protection Legislation

The House and Senate both included a number of tax provisions relating to

health care in their 2000 patient protection legislation (H.R. 2990 and S. 1344),

including deductions for health insurance and an expansion of medical savings

accounts (MSAs). Agreement between the Senate and House was not reached. Final

tax legislation at the end of the 106th Congress (the Community Renewal Tax Relief

Act of 2000, H.R. 5662, incorporated into H.R. 4577) included a 2-year extension of

eligibility for new medical savings accounts. Deductions for health care were

considered in other bills (see next section).

Minimum Wage Bill, Pension, IRA and Small

Business Provisions

The minimum wage bill (H.R. 3081) contained a number of tax provisions

costing $45.7 billion over five years. Some of these tax changes were targeted at

small businesses. More than half of the cost ($26.9 billion) was for estate and gift tax

reductions, including a phased in reduction of the top rate from 55% to 50% by 2002,

and an additional one percentage point reduction in all rates in each of the following

2 years. There were also provisions for pension reforms (costing $6.1 billion), and

a variety of provisions such as acceleration of the full deduction for health insurance

for the self employed, increases in the share of business meals that can be deducted

(from 50% to 60%) and the limit on equipment that can be expensed from $19,000

to $30,000. The bill would also have reinstated the installment sales treatment that

was disallowed in last year’s extender bill. There were also some provisions for

distressed communities and increases in the low income housing tax credit. The Ways

and Means Committee had earlier marked up certain provisions on November 9th,

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1999 with a resultant $30.2 billion cost. Also on November 9th, 1999 the Senate

attached the minimum wage bill including $75 billion of tax cuts (of a similar nature)

over 10 years to the bankruptcy reform bill, H.R. 833, formerly S. 625. The President

indicated he would veto the minimum wage legislation if it threatened “fiscal

discipline” because of tax cuts.

Provisions of H.R. 3081, the minimum wage proposal that included $45.7 billion

of tax cuts ($122.7 billion over 10 years), were adopted in the House on March 9,

2000; the tax provisions and minimum wage were in separate bills (H.R. 3832 and

H.R. 3846) which were then be combined into H.R. 3081. This legislation included

a rollback of the installment sales provision that was included in the smaller extenders

bill, H.R. 1180, passed in 1999. House Speaker Hastert has proposed to drop some

of the tax provisions (estate and gift and pension) of this bill as a compromise with the

President.

The Ways and Means Committee subsequently approved H. R. 4843, to expand

contribution limits to Individual Retirement Accounts (IRAs) and to liberalize pension

treatment; IRA provisions would have cost $10 billion over five years and $35 billion

over 10 years; pension provisions would have cost $6 billion over five years and $19

billion over 10 years. This proposal was folded into H.R. 1102 and passed by the

House on July 19, 2000.

The most recent of the bills containing these provisions was the Tax Relief Act

of 2000, originally H.R. 5542, but attached to H.R. 2614; it was passed by the House

on October 26, 2000. The bill would have cost $240 billion over 10 years. It included

a variety of provisions. Among them were deductions for individual purchase of

health insurance; increases in the benefits for pensions and IRAs, including an increase

in the limit on IRA contributions to $5,000; a number of tax benefits for small

businesses (increased deductions for business meals, allowing installment accounting

methods, increased limits on the amount of equipment that can be expensed for tax

purposes); revision of the FSC provision; and repeal of some excise taxes on alcoholic

beverages. Most of these provisions had been under consideration in other bills. The

President indicated he would veto this bill and it was not considered by the Senate in

the post-election session..

Enacted Legislation 2000: Community Renewal,

Medical Savings Accounts, FSC and Installment

Sales

Returning to its post-election session in December, Congress instead passed and

the President signed, more limited tax cut bills. The largest of these in revenue terms,

costing $31.5 billion over 10 years, was attached to H.R. 4577, an omnibus

appropriations measure. It was subsequently separated into a separate tax bill, H.R.

5662, which included several provisions aimed at community renewal, and a two-year

extension of medical savings accounts provisions. The bill is estimated to reduce

revenue by $31.5 billion over 10 years. Congress also passed (and the President

signed) two other bills, H.R. 4686, to revise FSC and H.R. 3594 to alter installment

accounting methods.

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Community renewal provisions included tax provisions for up to 40 renewal

communities; the tax benefits included wage credits, rapid depreciation of certain

assets, and forgiveness of capital gains taxes. The bill also extended and expanded tax

benefits for empowerment zones, allowed a new markets tax credit for certain equity

investments, increased the low-income housing tax credit cap, increased volume limits

on private activity bonds, extended expensing for brownfield expenditures, extended

the D.C. home buyer tax credit and extended the D.C. enterprise zone designation.

The bill also extended medical savings accounts for two years, and made a number of

technical changes.

Foreign sales corporation revisions, costing $1.5 billion over five years, were a

response to a complaint about the existing tax law brought by countries of the

European Union (EU) with the World Trade Organization (WTO).

The installment sales provision was designed to reinstate the ability to use

installment sales treatment that was changed in the 1999 tax extenders bill, which had

resulted in complaints by small businesses.

Enacted Legislation 1999: Extenders Bill

The Ways and Means Committee approved H.R. 2923, a bill to extend expiring

tax provisions contained in the tax cut proposal (research and experimentation credit,

welfare-to-work credit, work opportunity credit, and exemption from Subpart F for

certain financing income). The periods of extension varied across the provisions, with

a number extended through 2004. The bill would have made permanent a provision

allowing nonrefundable tax credits to count against the alternative minimum tax. This

proposal was estimated to cost $23 billion over the next five years. On October 29,

the Senate approved the Finance Committee version of the extenders bill, which

would extend provisions through 2000 and cost $8.5 billion over 10 years. It would

also extend certain environmental subsidies and tax exclusions for employer provided

educational assistance. On November 18, the House approved tax extenders as part

of a conference report on H.R. 1180, extending the R&E credit through 2004 and

other provisions through 2001 (allowing personal credits to count against the AMT,

the work opportunity credit, the exclusion for education assistant, zone academy

bonds, tax deductions for brownfields, the Subpart F exemption for finance income,

the $5,000 DC tax credit for first time homebuyers, and the closed loop biomass tax

credit.) A number of provisions for revenue offsets were included. The bill passed

the Senate on November 19, 1999 and was signed by the President on December 17.

Overview of the 1999 General Tax Cut (H.R. 2488)

Both House Ways and Means Chairman Archer and Senate Finance Chairman

Roth proposed major tax packages in 1999. The House plan, originally estimated to

cost $864 billion over 10 years, was scaled down to $792 billion, the same as the cost

of the Senate plan. The House approved the bill on a largely party-line vote on July

22; the Senate bill was approved by a 57 to 43 vote on July 30. The conference

committee completed consideration on H.R. 2488 on August 3; the House and Senate

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approved the bill on August 5 (the Senate by a one-vote margin, the House along

party lines). The President vetoed the bill on September 23.

The conference committee compromised between the House rate cut (a 10%

across-the-board cut) and the Senate rate reduction (a reduction in the 15% rate to

14% in the lowest rate bracket and an expansion of the new 14% bracket) by reducing

taxes one percentage point across all tax rates. However, this tax cut would have

sunsetted after 2008. In the case of the marriage penalty, they included the increase

in standard deduction for joint returns in the House bill, and also increased the width

of the new 14% bracket for joint returns; the latter provision also sunsetted in 2008.

Several other provisions would also have sunsetted before the end of the budget

window.

Chairman Archer’s original proposal was passed by the Ways and Means

Committee on July 15th. A concern that the $864 billion cost was not in compliance

with the budget resolution resulted in a proposal to cut back the provisions as part of

the rule. There had been some uncertainty about whether a tax cut of this size wouldl

pass the House, given reservations by some Republicans, and a trigger provision was

added to delay the across-the-board tax cuts if interest on the public debt rose. There

were also some concerns by other Republican members that the bill did not fully

address the marriage penalty.

Senator Roth’s proposal, the Taxpayer Refund Act of 1999, S. 1429, was

approved on July 21 by the Finance Committee with minor amendments, among them

a permanent extension of the R&D tax credit. The Senate passed the plan as their

version of H. R. 2488 on July 30, with some amendments, most of them minor. One

amendment would, however, allow a deduction for the first $1,000 of capital gains.

As the result of a procedural vote relating to budget rules, the Senate tax cut would

expire in 2009.

House Democrats had offered a smaller plan and the President indicated a

willingness to support a $250 billion cut; the Treasury had projected that the cost of

the Ways and Means Committee bill would explode in the second 10 years. Senate

Finance Committee Democrats proposed a tax cut of $290 billion (which was

defeated). A bi-partisan plan costing $500 billion (Senators Breaux, Kerrey, Chafee,

Jeffords, and others) was withdrawn: this proposal would allocate $283 billion to an

increase in the standard deduction (eliminating the marriage penalty for taxpayers with

lower and moderate incomes). A plan by Senators Gramm, Lott and others which

was similar to the House bill failed to gain the 60 votes needed to set aside a

budgetary point of order. Several other proposals were also defeated on procedural

votes.

The House and Senate plans differed in some fundamental ways. The largest

elements in both bills were the rate cuts. The general rate reductions in the House bill

cost more than in the Senate bill and by the year 2009 the annual cost would have

been twice as large as that in the Senate bill ($112 billion versus $47 billion) if the

expansion of the 14% rate for joint returns is included and $112 billion versus $27

billion if the expansion of the bracket is excluded; the Senate version targeted a larger

share of its benefits to middle income taxpayers and to married couples. Including

rate changes for all marriage penalty relief, the House bill would have cost $117

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billion in 2009 while the Senate bill would have cost $96 billion. Revenue estimates

do not allow these distinctions for the Conference agreement, but in 2008, before the

sunset, there would have been a $57 billion revenue loss from the percentage point

rate reduction plus an increase in the 14% bracket for non-joint returns that accounted

for about $13 billion of the total. Increases in the standard deduction and the size of

the first bracket for joint returns to make them twice the size of singles would have

added $28 billion, for a total of $85 billion. The Conference agreement would have

been subject to sunset provisions which automatically sunset in 2009 due to a

procedural budget rule; in addition a number of provisions are terminated in 2008,

which is not a budget rule requirement. There was also a trigger similar to that in the

House bill.

All revenue effects reported below are for fiscal years 1999-2009 and are based

on the Joint Tax Committee’s estimates.

Conference Report

! Percentage point rate reductions (including the alternative minimum tax, or

AMT) and increasing the width of the 14% bracket, with greater increases for

married couples, and increases in the standard deduction for joint returns

would cost $399 billion; marriage penalty relief for the earned income credit

would cost $4 billion.

! The dependent care credit would be increased ($5 billion).

! The individual AMT would be modified to allow immediately the use of

personal credits, and would be phased out ($103 billion), but sunset would

occur in 2008.

! Savings incentives include a reduction in long term capital gains tax rates from

20% and 10% to 18% and 8%, and prospective inflation indexing after 2009;

this prospective indexing led to behavioral responses causing a $15 billion

temporary revenue gain in 2001, for a net cost of $32 billion. Sunset would

occur in 2008. Individual retirement contributions were increased gradually

to $5,000, with sunset in 2008, for a cost of $27 billion. Other increases led

to a total of $67 billion for savings provisions. Pension plan revisions would

cost $15 billion.

! Education provisions include expansion of education savings accounts,

increases in student loan deductions, extension of employer provided education

assistance, and tax-exempt bond provisions, for an $11 billion total.

! Health care provisions include a deduction for health insurance ($31 billion),

long term care insurance in cafeteria plans ($7 billion), more dependency

deductions for caretakers of elderly family members ($3 billion) and other

provisions (total of $43 billion), with $3 billion for expansion of the selfemployed deduction.

! The estate tax rates would be gradually eliminated, for a cost of $65 billion.

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! Business tax revisions: corporate AMT ($8 billion); increasing equipment

expensing to $30,000 ($2.5 billion), increasing business meals deductions to

60% ($4 billion), multinationals, mostly interest allocation ($31 billion).

! There are also provisions for special areas including benefits for tax exempt

organizations at $2 billion, for real estate at $7 billion, with $4 billion of that

amount an extension of the low income housing credit.

! Expiring tax credit provisions will be extended at a cost of $21 billion.

There are also some revenue offset provisions amounting to $6 billion.

House Plan

Almost half of the revenue cost ($373 billion) would come from an across-theboard 10% reduction in tax rates, which would be gradually phased in. There are

several more targeted provisions. The plan included the following provisions:

! Marriage penalty provisions would increase the standard deduction, eliminating

the marriage penalty for certain taxpayers (and increasing marriage bonuses for

others), at a cost of $45 billion. Income limits for student loan deductions and

Roth IRAs would be increased for married couples ($2 billion and $1 billion

respectively).

! The individual Alternative Minimum Tax (AMT) would be modified to allow

immediately the use of personal credits, and would be phased out ($64 billion).

! Maximum capital gains tax rates would be cut from 20% to 15% and taxpayers

in the 15% bracket would see their capital gains tax rates cut from 10% to

7.5%; this revision would cost $52 billion over 10 years. Another tax benefit

for capital income is a phased in exclusion of $400 ($200 for single taxpayers)

of dividends and interest ($20 billion). Some smaller provisions relating to

capital gains on settlement funds and owner occupied housing and other

provisions bring the total for these provisions to $73 billion. A series of

pension revisions would cost $14 billion.

! Education provisions include tax breaks to assist with higher education,

expanding tax-favored savings accounts to cover primary and secondary

education, and changes in federal tax-exempt bond rules ($7 billion).

! Health and long term care provisions include a phased-in 100% deduction for

health insurance where the taxpayer pays at least half the cost ($34 billion) and

deductions for long term care insurance ($8 billion): an additional deduction

for taxpayers caring for elderly relatives ($3 billion); inclusion of long-term

care insurance in employee benefits plans; an expansion of medical savings

accounts; and provisions relating to orphan drug tax credits and vaccine

insurance, for a total of $51 billion. The 100% deduction for health insurance

for self-employed individuals would be accelerated, at a cost of $3 billion.

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! The estate and gift tax would be phased out over 10 years ($65 billion); a

small amount ($85 million) of this total relates to generation skipping trusts.

! Several business tax reductions are included. For corporations in general,

capital gains taxes would be reduced ($7 billion) and the corporate alternative

minimum tax would be revised and eventually repealed ($10 billion). Small

businesses would receive an increase in the limits for expensing equipment

investment ($2.5 billion). The deduction for 80% of business meals and

entertainment would be restored ($8 billion.) There are a series of tax

provisions for multinational corporations amounting to $35 billion, the most

important of which is a change in the formula for allocating interest deductions

worldwide ($25 billion).

! There are also provisions that involve smaller costs. The low income tax credit

would be increased at a cost of $3.8 billion, and there are relatively small costs

relating to tax -exempt organizations (less than $200 million) and other real

estate ($670 million). A variety of miscellaneous provisions totals to $6

billion; almost half of this total is due to accelerated increases in private activity

tax exempt bond caps.

! Expiring tax provisions would be extended ($20 billion).

There were about $5 billion of revenue offsets, the most important one being an

adjustment in installment sales.

The final proposal was almost the same as the original proposal by Chairman

Archer. The proposal was modified by the Chairman on July 14 prior to being

submitted to the full committee; most of the modifications were quite minor, but there

was a provision to allow deduction for prescription drug coverage under Medicare in

the event this legislation is approved.

During committee markup further modifications were made including a slow

down in the phase-down of the corporate capital gains tax rate, along with additional

benefits for low income housing, the oil and gas industry, further extensions of

certain expiring provisions, and timber. The overall size of the tax cut is about the

same. Amendments offered by Democrats to scale back the tax cuts were rejected;

President Clinton indicated that he would veto the bill.

Chairman Archer proposed narrowing the corporate capital gains tax rate to

save $7 billion, and delaying the phase-in of several provisions: the individual AMT

(saving $18 billion), the corporate AMT (saving $2 billion), the broad based tax cuts

(saving $32 billion), the small savers provisions (saving $4 billion) and the estate tax

(saving $10 billion). These provisions, approved in the Rules Committee, brought

the cost to $792 billion. Certain provisions relating to the Employee Retirement

Income Security Act (ERISA) were also removed from the bill.

Senate Plan

Chairman Roth’s proposal, the Taxpayer Refund Act of 1999, was approved by

the Senate on July 30. It would cut the 15% tax rate to 14%, which would be the

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largest element of the proposal (in its effects on revenues), costing $216 billion. The

new 14% bracket would also be widened at a cost of $67 billion. These two

provisions would total $282 billion. Other provisions of the proposal included:

! Elimination of the marriage penalty by allowing optional filing of married

couples as singles ($112 billion), increasing the standard deduction for married

couples ($20 billion) and marriage penalty relief for the earned income tax

credit ($6 billion), for a total of $138 billion.

! Modifying the dependent care credit (credit for child care and other care of

family members), at a cost of $10 billion. Other minor family related

provisions include exclusion from income of certain foster care payments and

a tax credit for employer-provided child care.

! Relief from the individual Alternative Minimum Tax (AMT), costing $87

billion.

! Additional savings incentives, including (1) increasing the contribution limits

for Individual Retirement Accounts (IRAs) from $2,000 to $5,000 and

increasing and eliminating income limits, (2) increasing contribution limits on

401(k), 403(b) and other retirement plans, generally by 50%, (3) creating

retirement plans like Roth IRAs, which do not allow up-front deductions but

exempt income from tax, (4) increasing the amount those 50 and over can

contribute to plans, and (5) revising pension plans in general. These provisions

cost $66 billion. There is also a $1000 annual capital gains exclusion ($8

billion).

! Additional benefits for tuition savings plans, increases in deductions for student

loans, permanent extension of employer provided education assistance, and

other education provisions costing $14 billion.

! Health care benefits including accelerating the full deductibility of individually

purchased health care; making long term health care insurance deductible and

allowing it as part of employer cafeteria plans, and allowing extra tax

exemptions for those who care for elderly family members ($52 billion). The

100% deduction for health insurance for the self-employed would also be

accelerated ($3 billion), and a tax credit would be allowed for small businesses

to insure low wage workers ($1 billion).

! Reduction in estate taxes and increases in the exclusion, along with some

minor revisions, costing $62 billion.

! Business tax reductions including an increase in the limits for expensing

equipment ($2.5 billion) and other minor provisions, tax benefits for

multinational corporations primarily through a change in the allocation of

interest ($11 billion); relief from the corporation alternative minimum tax or

AMT (at $5 billion), along with some other minor revisions.

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! Provisions benefitting certain industries and activities including tax exempt

organizations and charitable contributions ($10 billion), and housing and real

estate ($8 billion),and small benefits for the oil and gas and timber industries.

! Extension of expired and expiring provisions ($39 billion).

! Other minor miscellaneous provisions amounting to about $2 billion.

! Revenue offsets primarily aimed at corporate tax shelters, raising $9 billion.

Several changes were made during markup, including a provision to make the

R&D tax credit permanent, costing an additional $17 billion. Other amendments

included some small provisions for energy and environmental subsidies, a provision

to allow leasehold improvements to be depreciated over 15 years ($2.7 billion),

extending tax benefits for the District of Columbia and a temporary exemption from

the airline ticket tax for seaplanes.

Several amendments were adopted on the Senate floor; these amendments were

in general minor or involved timing changes. However, the proposal to allow a

deduction for up to $1000 of capital gains was approved, along with a proposal to

increase the standard deduction for joint returns.

Finance Committee Democrats Plan

Finance Committee Democrats, led by Senator Moynihan proposed a $290

billion tax cut. About half of the cost, $169 billion, resulted from raising the standard

deduction for all taxpayers, with the proportional increases largest for joint returns.

Other provisions would :

! Allow a second earner deduction for married couples who itemize ($26

billion).

! Provide a deduction for health insurance for the self employed and a 30%

credit for those without employer provided health insurance ($27 billion).

! Relief from the alternative minimum tax or AMT ($11 billion).

! Estate tax relief ($10 billion).

! Permanent extension of the R&D credit and benefits for low income housing

($31 billion).

! Education tax benefits ($17 billion).

! Small business tax credit for pensions and pension portability ($9 billion),

benefits for energy and environmental conservation ($5 billion), benefits for

agriculture ($5 billion). Small business provisions including health insurance

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and pension credits already listed along with an increase in expensing of

equipment would be $11 billion.

There were also a number of revenue raisers amounting to $27 billion, including

corporate tax shelter revisions, modifications for Real Estate Investment Trusts

(REITs) and the largest one, reinstatement of superfund taxes.

House Democrats Plan

House Democrats offered a $250 billion alternative plan that was defeated.

These tax cuts were made contingent on solvency of Social Security and Medicare.

Among other provisions, their proposal increased the standard deduction for joint

returns to twice that of singles, permanently extended expiring tax provisions,

including the R&D tax credit, and provided tax benefits for school construction.

Their plan also included some revenue raisers in the President’s budget and measures

in H.R. 2255 concerning corporate tax shelters.