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House to Take Up Tax Legislation

Legislation (H.R. 3) designed to reduce federal taxes was approved, 23-15, by the House Ways and Means Committee on March 1.

The mark-up followed the President’s February 27 speech before Congress, during which he promoted his budget and tax-cut plan (see related story above). Saying that some of the President’s tax proposals are reflected in H.R. 3, Committee Chair Bill Thomas (R-CA) described the bill as a starting point. “There are other tax proposals to come,” he said, adding, “Some of those bills will be based on the President’s proposals, but others will reflect proposals that members of this committee might consider important.”

The President called for adjusting the income tax schedule to make four brackets instead of five, reducing income taxes for those in the top bracket from 39.6 percent to 33 percent. Although the committee-approved bill would phase-in a four-bracket system, the changes would be made differently. The lowest bracket under the current system, the 15 percent bracket, would be reduced to 12 percent in 2001 and phased down to 10 percent by 2006. For 2001, the new rate would apply to individuals with an annual income of $6,000, head-of-household filers with an income of $10,000 or less, and joint filers with an income of $12,000 or less. Additionally, between 2002 and 2006 the five current brackets—15 percent, 28 percent, 31 percent, 36 percent, and 39.6 percent—gradually would be narrowed to four brackets: 10 percent, 15 percent, 25 percent, and 33 percent.

H.R. 3 contains other provisions related to the Alternative Minimum Tax (AMT) that were not included in the President’s plan. Originally included in the tax code as a device to prevent wealthy taxpayers from taking too many tax credits and deductions, the AMT affects many lower- and middle-income taxpayers eligible for refundable tax credits. The bill would offer relief from the AMT for those eligible for the Earned Income Tax Credit and the dependent child tax credit. Noting that the AMT affects a number of other refundable tax credits, Rep. Nancy Johnson (R-CT) said, “This relief for families is important and should move forward now, but there is no doubt we’ll have to deal with full repeal of these AMT provisions as our ultimate goal.”

The bill does not reflect the President’s call for phasing out the estate tax and addressing the marriage tax penalty over the next ten years. It also does not include his proposal for doubling the dependent child tax credit to $1,000.

It is estimated that enacting the President’s plan with retroactivity to the beginning to 2001 would reduce federal revenue by $1.6 trillion over ten years. The committee’s tax bill is predicted to reduce revenue by $363.8 billion over five years and $958.2 billion over ten years.

During the mark-up, Rep. Robert Matsui (D-CA) noted that a reduction in marginal tax rates would affect the Social Security and Medicare trust funds by decreasing overall federal revenues. While Republicans agreed this would be the case, Rep. Clay Shaw (R-FL) said, “With that approach, the only way to ensure no dip in trust funds is if you don’t give the tax cut to seniors because it’s part of their taxes that’s going to the trust funds.”

However, the committee accepted, by voice vote, an amendment offered by Rep. Charles Rangel (D-NY) to ensure that reductions in Social Security or Medicare revenues caused by H.R. 3’s changes would be replaced from the general fund. The committee defeated, by voice vote, an amendment by Rep. William Jefferson (D-LA) that would have blocked future tax cuts if Social Security and Medicare surpluses were used for any other purposes.

The full House is expected to take up H.R. 3 during the week of March 5.

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