Legislative Notice #37

July 31, 1997

• The Taxpayer Relief Act of 1997 (TRA) is the second of two reconciliation bills provided for in H. Con. Res. 84, the budget resolution of FY 1998. It reflects the agreement reached between Congress and President Clinton on May 2, 1997, to balance the federal budget by FY 2002 and reduce net taxes by $85 billion over five years and by $250 billion over ten years.
• The conference report provides net tax reduction of $96 billion over 1997-2002 and $282 billion over FYs 97-07. This makes it the largest tax reduction bill since President Reagan's tax reduction in 1981 and the first tax relief bill since President Reagan signed a tax reduction bill in 1986. The cost is more than offset by the economic dividend resulting from the balancing of the budget in FY 2002 -- $355 billion over ten years.
• TRA gives tax relief for taxpayers at every stage of their lives by providing a $500-per- child tax credit, education tax relief, savings and investment tax relief, retirement tax relief, and estate tax relief. And, it returns to American taxpayers over one-third of the $240 billion Clinton tax hike of 1993 -- the largest tax hike in U.S. history.
• TRA is a first step to let taxpayers keep more of what they earn and is aimed directly at the middle class. As passed by the Senate on June 27, three-quarters of its benefits in the first five years go to those making $75,000. And, taxes for a family with two kids making $30,000 would be cut by 50 percent.
• This reconciliation conference report is afforded expedited treatment under the Budget Act. When it comes to the Senate from the House, no motion to recommit and no amendments will be in order. Debate time is limited to 10 hours.
• The House passed its version of TRA on June 26, by a margin of 253-179 (with 226 GOP yea votes and 1 nay) and the Senate passed its version on June 27, by an 80-18 margin (51 GOP yeas, 4 nays).

• Additional tax relief provided: Preliminary estimates indicate that the conference report increases the amount of net tax relief -- $96 billion over 1997-2002 and $282 billion over 1997-2007 -- from the levels provided by the May 2 agreement ($85 billion and $250 billion), the House bill ($84.1 billion and $249.9 billion) and the Senate bill ($77.6 billion and $243.1 billion).
• Tax relief for families and children: A permanent $500-per-child tax credit for children under the age of 17 will take full effect in 1999 (and is $400 in 1998).
• Tax relief for education: TRA includes provisions from the Senate leadership's S. 1 (Safe and Affordable Schools Act) -- namely the education IRAs, penalty-free withdrawal from retirement IRAs for education expenses, extension of employer-provided education assistance, and student loan interest deduction -- as well as President Clinton's HOPE scholarship proposal.
• Tax relief for economic growth, savings and investment: TRA provides a reduction in the capital gains rate, expanded use of IRAs for savings, and small business tax relief.
• Tax relief for the next generation: The confiscatory estate tax is reduced by increasing the excluded amount from $600,000 to $1.3 million for family farms and small businesses in 1998 and phasing in an increase in the unified credit to $1 million in 2007.
• Revenue raisers: Provisions include an extension of the airline ticket tax.

Revenue Update

The reconciliation tax provisions are distributed in both the tax (HR 2014) and the spending bills (HR 2015 - tobacco and MSAs). The breakdown, as assessed by the Joint Committee on Taxation on July 30, is as follows:

Total Reconciliation

• Total reconciliation net tax cut: $91 billion/1997-2002 and $265.4 billion/1997-2007.
• These figures represent the revenues after "netting out" the cost of both the revenue raisers in HR 2015 (tobacco) and the refundable credit portion of the $500/child in HR 2014 -- these are outlays.
• However, even with these subtractions, total net reconciliation tax relief is above the agreement level reached between Congress and President on May 2, 1997.

Tax Bill Only -- H.R. 2014

• HR 2014 net tax cut: $96.1 billion/97-02 and $282.1 billion/97-07.
• HR 2014 total cost (including $500/child refund outlays): $100.4 billion/97-02 and $292.1 billion/97-07.
• HR 2014 revenue raisers: $51.2 billion/97-02 and $109.4 billion/97-07.

Spending Bill Revenue Raisers

• $5.2 billion/97-02 and $16.7 billion/97-07.
• Total reconciliation gross tax cut: $152.7 billion/97-02 and $401.4 billion/97-07.

Major Provisions

Tax Incentives for Families with Children (Child Tax Credit: $85 billion in 1997-2002/$183.4 billion in 1997-07)

• The tax bill provides a permanent $500 tax credit for families with children under the age of 17, beginning in 1999. A $400 tax credit is available in 1998. The credit begins to phase out for single taxpayers with adjusted gross income in excess of $75,000, and for married taxpayers with AGI in excess of $110,000. There is no requirement that contributions be deposited in an education savings account. The $500/child credit would be partially refundable through an enhanced EIC mechanism devised by the Administration for those paying no income tax but who do pay some payroll taxes.
• This tax credit accounts for 56 percent of tax relief provided over 1997-02. When this credit is combined with the education provisions below, family and education tax benefits account for 82 percent of H.R. 2014's tax benefits in 1997-02.

Incentives to Meet the High Costs of Higher Education ($39.4 billion/$98.8 billion)

• TRA contains a modified Hope scholarship credit: ($31.6 billion/$76 billion)A $1,500 tax credit is available in college years 1-2 (amounting to 100% of first $1,000 of tuition and 50% of second $1,000); and a $1,000 tax credit is available in years 3-4 (amounting to 20% of up to $5,000 of tuition). The credit is phased out for singles with AGI between $40,000 and $50,000, and for couples with AGI between $80,000 and $100,000.
• State prepaid tuition plans ($533 million/$1.5 billion) are expanded and can be used for not only tuition, but room and board.
• TRA creates Education IRAs ($3.9 billion/$14.2 billion), which allow parents to contribute up to $500 per child. The earnings are tax-free, as are withdrawals if the money is used for higher education expenses. The provision begins to phase out for single taxpayers with income of $95,000 and for couples with income of $150,000.
• Penalty-free withdrawals from retirement IRAs ($812 million/$1.7 billion) that are used for education.
• Three-year extension (through May 31, 2000) of employer-provided undergraduate education assistance ($1.2 billion).

• TRA provides a $2,500 above-the-line deduction ($690 million/$2.4 billion) for student loan interest paid in the first five years of repayment. The deduction is phased out for single taxpayers between $40,000-$55,000 and for couples between $60,000-$75,000.

Tax Incentives for Savings and Investment

Individual Retirement Accounts (IRAs) ($1.8 billion/$20.2 billion)

• TRA phases in an increase in the current income limits on tax-free contribution (front-loaded) IRAs to $50,000-$60,000 for single filers and $80,000-$100,000 for joint filers. This will result in a doubling of the current-law income thresholds.
• TRA creates a new tax-free withdrawal (back-loaded) IRA if the account exists for at least five years, and account holders are at least 59 1/2. Income limits begin at $95,000 for singles and $150,000 for married couples.
• TRA allows full IRA participation for nonworking spouses. Tax-free contributions up to $2,000 could be made regardless of the working spouse's pension plan. Income limits begin at $150,000.

Reduction of the Capital Gains Tax Rate

• TRA reduces the top capital gains tax rate from 28 to 20 percent for assets held at least 18 months (12 months if the investment was sold by 7/29/97) with an 18-percent rate for assets purchased after 2000 and held at least five years. A 10-percent rate will exist in 1998 for joint filers with incomes below $41,200 (assets held at least 18 months) and 8 percent for assets purchased after 2000 and held at least five years. (This provision raises $123 million in 1997-02 and $21.2 billion in 97-07.)
• TRA excludes reporting on sales of principal residence for joint filers of $500,000 and $250,000 for single filers. Effective date: date of enactment.

Tax Relief for Small Business

• TRA reinstates the home-office deduction ($880 million/$2.4 billion).
• TRA gives full deductibility for health insurance to the self-employed ($383 million/$3.5 billion) in 2007 and accelerates the phase-in to 80 percent deductibility (part of last year's Kassebaum health care bill): last year's bill reached 80 percent deductibility in 2006; TRA increases deductibility: 1998 and 1999 -- 45 percent; 2000 and 2001 -- 50 percent; 2002 -- 60 percent; 2003-2005 -- 80 percent; 2006 -- 90 percent.
• Small business also receives an exemption from the Alternative Minimum Tax ($577 million/$762 million).
• Family-owned small businesses and family farms receive much needed estate tax relief ($5.9 billion/$33.1 billion). TRA increases the unified credit from $600,000 to $1 million over 10 years and provides an immediate $1.3 million exclusion for small businesses and family farms.

Miscellaneous Provisions

• TRA provides relief from the Alternative Minimum Tax by conforming depreciation lives ($6.8 billion/$18.3 billion).
• TRA continues the airline ticket tax but lowers the current 10-percent tax to 7.5 percent over three years (it will be 9 percent in 10/97) and creates a flight segment fee. It also institutes a $12 international flight arrival and departure fee and extends the current air cargo excise tax ($32.3 billion/$77.8 billion).
• TRA does not contain the tobacco tax ($5.2 billion/$16.7 billion) as was originally included in the Senate-passed bill. This was attached instead to the companion BBA.

Talking Points

Making a Difference by Fulfilling Our Promise

"Look, there wouldn't be a tax cut if it weren't for the Republicans." [Cokie Roberts, of ABC News]. "That's right." [Clarence Page, of ABC News]. "And it wouldn't have been the same kind of push behind budget cuts if it hadn't been for the Republicans." [Cokie Roberts] --This Week, ABC, June 27, 1997

The Taxpayer Relief Act guarantees that the American public will receive a share from Washington's federal revenue windfall. And it does so responsibly -- not by increasing the deficit but by achieving deficit elimination in conjunction with tax relief. That is exactly what Republicans set out to do when they assumed control of Congress in 1995. Promises made, promises kept: taxes cut and the budget balanced. To understand just how important these tax cuts are to the American people, consider where they would be without them.

• Americans would be paying $96 billion more in taxes between now and 2002 and $282 billion more up to 2007 without this bill.
• Because of Clinton's 1993 tax hike by the end of 1998, Americans already will have paid $240 billion more in taxes over the next five years -- the most they have ever had to pay over five years for a tax increase.
• However, Clinton's 1993 tax hike will continue to take money from Americans' pockets as long as his taxes stay on the books. From 1998-2002, it will amount to an even larger $359 billion and $945 billion from 1998-2007.
• TRA will let Americans keep some of what Clinton's 1993 tax hike would otherwise take from them.

Overcoming Clinton to Cut Taxes

Since 1992's campaign, President Clinton has promised to cut America's taxes. However, during the two years when Democrats controlled both Congress and the White House, they never did it. In fact, they raised them by $240 billion instead. Republicans promised a tax cut when they assumed control of Congress in 1995 and delivered it two years later. Getting tax relief for America's middle class was not easy -- it first had to overcome Clinton's opposition.

• Bill Clinton promised a tax cut when he ran for president in 1992.
• Bill Clinton raised taxes $240 billion in 1993 -- the largest hike in U.S. history.

• Bill Clinton tried to raise them again in 1994 to pay for his plan to have the government take over the nation's health care system, to the tune of $115 billion over five years ($289 billion/9 years).
• Instead of cutting taxes like he promised, Clinton vetoed a tax cut in 1995.
• Clinton never even proposed a tax cut until he sought reelection in 1996 -- and then it netted to $0 because of his offsetting increases.
• His tax cut proposal in his budget this year amounted to just $13.7 billion over five years.
• Even after agreeing to the balanced budget and tax reduction plan on May 2, he fought it. First, he sought to demagogue against the plans passed by Congress, using phony income calculations that included "imputed rent" to claim the tax cuts went to the wealthy. Second, he sought to reduce the tax cut below the agreed-upon $85 billion net five-year level and $250 billion ten-year level: according to the Joint Committee on Taxation, Clinton's last proposal amounted to just a $70.6 billion tax cut over five years and just $210.6 billion over ten years.