Major Tax Issues in the 108th Congress

Publication Date: October 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

As 2004 progresses, the congressional tax policy debate continues to focus on several issues it considered in 2003. One such focus is the broad tax cuts Congress enacted in May 2003, as the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA; P.L. 108-27). At issue in 2004 is whether to extend a number of JGTRRA’s tax reductions that are scheduled to expire at the end of the current year. A second prominent issue is the controversy over the extraterritorial income (ETI) tax benefit for U.S. exports, which was found to be impermissible by the World Trade Organization (WTO); both the House and Senate tax-writing committees passed legislation repealing ETI in late 2003. The legislation also contains broader provisions affecting U.S. and overseas investment, and Congress continued to debate the bills through the first months of 2004. Other tax issues that Congress has addressed in the first part of 2004 include pension reform legislation, extension of a moratorium on internet taxation, and taxes related to highway funding.

The principal tax cuts contained in JGTRRA were actually “accelerations” of reductions previously enacted in 2001 with the Economic Growth and Tax Relief Reconciliation Act (EGTRRA; P.L. 107-16). EGTRRA provided a gradual phase in of a variety of tax cuts, including reduction of individual income tax rates and tax cuts for married couples and families. JGTRRA moved the effective date of EGTRRA’s gradual tax cuts forward to 2003. However, several of JGTRRA’s accelerations are scheduled to expire at the end of 2004, including an increase in the child tax credit, tax cuts for married couples, reduction of the alternative minimum tax, and tax incentives for business. (EGTRRA’s tax cuts are themselves scheduled to expire at the end of 2010). During the first half of 2004, the House passed a number of bills that would extend or make permanent large parts of the EGTRRA and JGTRRA tax cuts, including the tax cuts for married couples, the 10% tax bracket, the increased child tax credit, and the increased alternative minimum tax exemption. In early fall 2004, H.R. 1308, a bill relating to refundability of the child tax credit, became a vehicle for consideration of extending the expiring measures. On September 23, the House and Senate approved a conference agreement on the bill.

The ETI controversy is a long-simmering dispute between the European Union (EU) and the United States, with the EU lodging complaints with the WTO about current law’s ETI benefit, as well as its statutory predecessors, the Foreign Sales Corporation (FSC) and Domestic International Sales Corporation (DISC) provisions. In late spring 2004, the House and Senate each passed bills (H.R. 4520 and S. 1637, respectively. The Senate subsequently approved its measure as an amended version of H.R. 4520.) that would both repeal the contentious ETI provisions and implement different mixes of benefits for domestic and foreign investment. On October 6, a conference committee approved a version of the bill. For its part, the EU received permission from the WTO to impose retaliatory tariffs on imports from the United States and began to phase in the tariffs on March 1.

In February 2004, President Bush delivered his FY2005 budget proposal. It includes a proposed net tax cut of $1.2 trillion over 10 years. The largest component is a proposal to make EGTRRA’s tax cuts permanent. The proposal would also make JGTRRA’s acceleration of EGTRRA permanent.