Monday, April 15, 2002
Note: The House has repeatedly voted to make tax relief permanent--most recently 229-198, April 18, 2002.
The Economic Growth and Tax Relief Reconciliation Act of 2001 should be permanent. When President Bush signed the law, June 7, 2001, it included six permanent tax relief bills approved by strong bipartisan House majorities during the previous three months.[1] However, Title IX of the Act, added by the Senate for procedural reasons, provided that no tax relief shall apply after December 31, 2010. Making last year’s tax relief permanent is an important step toward stronger economic growth and a fairer and more sensible tax system.
Helping Taxpayers by Repealing the Sunset
Current law imposes a multi-billion dollar tax increase on January 1, 2011, hitting those who can least afford it the hardest. Without Congressional action, the income tax for top earners will rise from 35% to 39.6%. The burden on lower-income taxpayers would shoot up from 10% to 15%—a 50% tax increase. The child tax credit would be halved, from $1,000 to $500. The annual contribution limit on IRAs would plunge 60%, from $5,000 to $2,000. Parents and children would lose benefits from Coverdell Education Savings Accounts and qualified tuition plans. Incentives for employer provided education assistance would disappear, while the marriage penalty would reappear. And the death tax—phased out by January 1, 2010—would return from the grave, fully re-grown to 2001 rates on January 1, 2011.
The sunset is confusing and frustrating taxpayers today. A New York Times columnist called the one-year repeal and immediate reinstatement of the death tax the “Throw Momma from the Train Act,” because the only way to create an effective estate plan is to die in 2010—the one year the death tax is repealed. Parents planning a child’s education are frustrated by tax law changes in the middle of the process. Provisions meant to improve the economy and taxpayers’ lives are instead complicating personal and government planning.
Taxpayers are enduring needless complexity as they attempt to plan their pensions, their retirement accounts, their small business succession, and their children’s education. On July 26, 2001, the House Policy Committee met with representatives of millions of taxpayers, senior citizens, small business entrepreneurs, employers, tax policy experts, and budget experts concerned about the pernicious effects of the sunset. All found it impossible to establish a logical policy rationale for making the Economic Growth Act temporary. The policy chaos caused by the sunset makes taxpayer planning more difficult and expensive.
Even those who do not pay taxes suffer from the sunset. Small businesses subject to a full-strength death tax in 2011 will be unable to protect the jobs of workers when the founder dies. Sole proprietors worried about succession planning will be reluctant to expand their businesses because unless they die before 2011, marginal rates in excess of 50% will permit the IRS to confiscate more than half of the added value. And all Americans lose because the effects of the sunset include reduced employment and investment, lower wages, limited economic growth, and therefore less federal revenue.
Boosting Economic Growth and Federal Revenue
Congress did not consider the effect of economic growth on revenue in passing the Economic Growth Act. The Staff Director of the Joint Committee on Taxation reported to the Policy Committee that the Joint Committee did not calculate the growth effect of lower tax rates in the Act—notwithstanding the clear intent of Congress manifested in the legislation’s title. Nor did the Joint Committee calculate the reduction in growth caused by making the act temporary, notwithstanding empirical evidence that higher tax rates limit growth and revenue, while lower tax rates boost growth and revenue.
Sunsets impair the growth Congress intends with economic growth legislation. In 1981, President Ronald Reagan signed the Economic Recovery Act—permanent tax relief—which reduced the maximum personal income tax from 70% to 50% and reduced the tax on savings and investment (capital gains) from 50% to 20%. Five years later, he signed legislation lowering rates again, reducing the income tax to just two brackets, 15% and 28%. In the past two decades, these lower tax rates—and resulting economic growth—helped kill record inflation and make homeownership affordable for a record number of Americans. Federal tax revenue more than tripled, financing America’s Cold War victory over the Soviet Empire and, for good measure, freeing a billion people from totalitarianism.
Repealing the current tax relief sunset and avoiding sunsets in the future will improve economic growth and opportunity for all Americans. Last year, the House Policy Committee unanimously endorsed legislation by Reps. Kenny Hulshof (R-MO) and Paul Ryan (R-WI) to strike the “sunset” provision from the Economic Growth and Tax Relief Reconciliation Act. This week, the House will act. It is the policy of the House Majority to ensure that economic growth and taxpayer fairness become permanent features of U.S. law.
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1. The six permanent tax relief bills approved by the House were:
· H.R. 3, the Economic Growth and Tax Relief Act of 2001, approved 230-198, March 8, 2001 (reducing five income tax brackets to four: 10%, 15%, 25%, and 33%)
· H.R. 6, the Marriage Penalty and Family Tax Relief Act, approved 282-144, March 29, 2001
· H.R. 8, the Death Tax Elimination Act of 2001, approved 274-154, April 4, 2001
· H.R. 10, the Comprehensive Retirement Security and Pension Reform Act, approved 407-24, May 2, 2001
· H.R. 586, the Fairness for Foster Care Families Act, approved 420-0, May 15, 2001 (treating payments from private and government foster care placement agencies equally)
· H.R. 622, the Hope for Children Act, approved 420-0, May 17, 2001 (expanding the adoption credit)
The Senate combined and amended the bills, which became Public Law 107-16.
