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PrintCongress Sends Tax Cut Bill to President
By Catherine Hubbard and Paula Cruickshank, CCH Washington Staff Writers
Congress on May 26, 2001, approved a $1.35 trillion, 10-year tax cut package that would provide retroactive tax cuts, across-the-board rate cuts, marriage penalty relief, and estate tax relief. House Ways and Means Committee Chairman William M. Thomas (R-Calif.) said the tax cuts "will put money back into the taxpayers' pockets and provide a considerable boost to our economy."
The Senate passed the bill by a vote of 58 to 33 and the House voted 240 to 154. GOP leaders said they next want to move forward with legislation to increase the minimum wage, combined with tax breaks for businesses that would be harmed the by increase.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (HR 1836) conference report would increase the standard deduction for married couples to twice that of singles, phased-in by 2010. It also would increase the annual contribution limit for tax-deferred and Roth individual retirement accounts gradually from $2,000 to $5,000, and raise contribution limits for education savings accounts from $500 to $2,000. Moreover, maximum contributions to 401(k) plans will be raised to $11,000 in 2002 and will peak at $15,000 in 2006, with catch-up contributions allowed for those over 50 years old.
The bill would provide more than $30 billion in immediate tax relief in 2001, according to Thomas. Senate Finance Committee member John B. Breaux (D-La.) said the plan is "good for all Americans." While the plan is "not perfect," he said, it will help both lower income people who need the tax dollars and upper income earners who pay the most taxes. Committee Chairman Charles E. Grassley (R-Iowa) praised both Democrats and Republicans on the committee for working closely together.
Treasury Secretary Paul O'Neill said that once the bill is enacted, Treasury "will begin the process of returning tax dollars as quickly as possible to those who paid them."
Specifically, the bill would create a new 10 percent marginal tax rate bracket, retroactive to 2001. Individuals would receive a $300 tax rebate. The new low rate would apply to the first $6,000 for single filers, the first $10,000 for heads of households, and first $12,000 for couples. For 2001, the tax cut under the new 10 percent bracket would be provided through a lump-sum refund of $300 for single taxpayers, $500 for heads of households and $600 for married taxpayers.
It is hoped that this retroactive tax cut will be a one-shot boost for the slowing U.S. economy. Starting in July and continuing in January 2002, the federal government will begin reducing the amount employers are required to withhold from employees' paychecks to reflect the first phase of the new and lower tax rates.
In addition to tax withholding adjustments, as a last-minute concession to administration officials, Congress agreed to send out rebate checks, starting in late July, to all taxpayers who file income tax returns. President George W. Bush called the tax refunds a "first installment of lasting, long-term reductions in tax rates. The check you will receive in the mail represents your benefit from the newest lowest rate, which drops from 15 percent to 10 percent," Bush noted.
Effective July 1, tax rates would phase down for the higher income brackets. For instance, the 39.6 percent top rate would phase down to 38.6 percent between 2001 and 2003, and then down to 35 percent by 2006. The 36 percent rate would phase down to 33 percent by 2006, the 31 percent bracket would phase down to 28 percent, and the 28 percent bracket would phase down to 25 percent.
The rules for certain tax credits have changed as well. The per-child tax credit would gradually increase to $1,000 (which is double the current credit), rising to $600 by 2004, $700 by 2008, $800 by 2009 and $1,000 by 2010. A last-minute concession made by GOP negotiators in order to win passage of the final bill expands the earned income tax credit for low-income married couples and makes the child credit refundable for low-income parents. Taxpayers who pay no income tax should receive a child credit to the extent they have earned income in excess of $10,000. Bush said the refundable child credit provision would provide the most benefit to those parents earning between $10,000 and $25,000 a year.
The bill also would increase the adoption credit to $10,000 for special needs (currently $6,000) and non-special needs children (currently $5,000), and increase the income phase-out range from the current $75,000 to $150,000.
Also, the bill would repeal estate and gift taxes by 2010. In the meantime, the legislation raises the estate tax exclusion amount from the current $675,000 to $1 million by 2003, then to $1.5 million by 2005, to $2 million by 2008, and to $3.5 million by 2009, before full repeal in 2010. Moreover, the top rate drops to 50 percent in 2002 and goes down to 45 percent before repeal in 2010. At that point, estates will be taxed at the individuals' highest rate.
In addition, the bill would provide a temporary alternative minimum tax exemption of $2,000 for single individuals and $4,000 for couples.
"We're able to reduce tax rates. We're able to help with the marriage penalty. We're able to give greater relief to parents with children and we're also able to help low-income families with children through the refundability of the credit," said Grassley at a press briefing following the vote. He noted that the temporary alternative minimum tax fix would give Congress three years to try to "solve the problem on a more permanent basis."
"This is a very good tax cut. It's a very large tax cut for the American people," said committee ranking member Max Baucus (D-Mont.).
However, Ways and Means ranking member Charles B. Rangel (D-N.Y.) complained: "The tax bill is a fraud on the American people," saying it would "deprive Social Security and Medicare of needed resources." He contended that "the bill is so back-loaded that official estimates do not reflect its true permanent cost."
Senate Minority Leader Thomas A. Daschle (D-S.D.) warned at a briefing that enactment of the bill would mean "that the Social Security and Medicare trust funds are no longer viable." On NBC's Meet the Press on May 27, Daschle added: "It is disastrous long-term policy." He said the bill would cost between $4 and $5 trillion when it's fully implemented, "devastating Medicare, devastating Social Security, denying us the opportunity to invest in education and prescription drugs."
Senate Budget Committee ranking member Kent Conrad (D-N.D.) called the bill "a monument to fiscal irresponsibility," saying the cost explodes in the second 10 years. He contended that nearly 40 percent of the benefit goes to the wealthiest 1 percent.
Next, the GOP wants to act on a minimum wage increase. Senate Majority Leader Trent Lott (R-Miss.) said following the tax bill vote that a minimum wage bill "will be passed and signed into law this year." Many lawmakers want offsetting benefits for the small business people that would have to pay the increase "to make sure that they don't go out of business," he noted.
Daschle said on NBC that the cost of such a bill would have to be offset. "We've just passed probably a $4 to $5 trillion tax cut and, of course, they want that as yet another opportunity to pass more tax cuts," he said, adding that Democrats "want to find an offset." Since the budget resolution provides for $1.35 trillion in tax cuts, it "doesn't allow for any more tax cuts unless they're paid for," said Daschle. If we can pay for them, I'm more than happy to associate a good business package along with minimum wage."
President Hails Passage
Bush, at a White House event held shortly after House and Senate passage of the tax cut package on May 26, thanked those members of Congress who voted in favor of the bill as well as incoming Senate Majority Leader Thomas A. Daschle (D-S.D.) for his cooperation in scheduling a vote promptly on legislation he did not support.
"The tax relief package that was voted on today was agreed on last night, after this week's change in the balance of power in the United States Senate. And it can be a model for the work that is ahead," Bush said, calling upon federal lawmakers to provide similar bipartisan support for issues awaiting action in Congress to "improve public education, strengthen. . .retirement security, modernize Medicare, and strengthen and modernize our national defenses."
"Today, for the first time since the landmark tax relief championed 20 years ago by President Ronald Reagan, and 40 years ago by President John F. Kennedy, an American president has the wonderful honor of letting the American people know significant tax relief is on the way," Bush told a hastily arranged gathering of tax cut bill supporters and their families in the East Room of the White House on May 26.
"What is especially significant about the tax relief passed by the United States House and Senate. . .is that it cuts income taxes for everyone who pays them. . .This tax relief is straightforward and fair--if you pay income taxes, you get relief," Bush said at the White House event. No congressional members were present at the East Room event, although federal lawmakers are expected to attend the bill signing ceremony that will take place after the Memorial Day recess ends on June 5.
The bill reduces the top rate to 35 percent, a few percentage points short of the president's goal of limiting income taxes to no more than a third of a taxpayers' income. However, Lawrence B. Lindsey, President Bush's Director of National Economic Policy, noted that the tax cut bill provides further relief for taxpayers by repealing the phase-out of itemized deductions and personal exemptions in 2006.
In addition, the standard deduction for married couples will be gradually increased until it's twice the standard deduction for single taxpayers. The new 10 percent bracket for married couples will be "twice as wide" as for single people, and the 15 percent bracket will be broadened until it also is twice as wide as for single individuals, Lindsey noted.
A significant change to the plan not mentioned by Bush in his public remarks was an eleventh hour decision by negotiators to sunset all the tax cut bill provisions at the end of calendar year 2010 in order to squeeze all the components of the package into the $1.35 trillion allocated for tax relief in the budget reconciliation agreement.
"Under the rules of the Senate, unless there's a 60-vote margin to do it, all tax provisions sunset after 10 years," Lindsey told reporters during a May 25 telephone conference call. "In order to come into compliance with Senate rules, it was necessary to sunset the bill at the end of calendar 2010. The entire bill will sunset at that point. That's a requirement under the Byrd rule," Lindsey explained, in reference to the rule by Sen. Robert Byrd (D-W.Va.), requiring that all tax cuts be paid for with revenue offsets.
