The House passed a second tax relief bill (H.R. 6) by a vote of 282-144 on March 29. Based on some of the President’s proposals, the bill is designed to address the marriage tax penalty and to expand the dependent child tax credit. The same day, the House Ways and Means Committee approved, 24-14, a third tax cut bill (H.R. 8) that would phase out the estate tax, as well as gift taxes and generation-skipping taxes, over ten years. That measure, sponsored by Rep. Jennifer Dunn (R-WA), will be considered by the House on April 4.
Speaking in support of H.R. 6, Rep. Dunn called the current tax burden on American families “intolerable.” She noted that the marriage penalty is particularly difficult for working women: “Currently, the tax code creates a disincentive for women to go to work at all, or, if they do, to earn much above the very low threshold. Women who make a salary on a par with their husbands are taxed at an extraordinary rate, a marginal rate that is higher when you combine incomes. It pushes that rate up.”
Disagreeing with the characterization of H.R. 6, Rep. Nancy Pelosi (D-CA) said, “The Republican plan, however, uses the need for marriage penalty tax relief as an excuse…to expand the 15 percent bracket and cut taxes for married couples in the 28 percent bracket. As a result, 80 percent of the marriage penalty relief in this bill goes to one-third of the wealthiest married couples.”
H.R. 6 differs from the President’s recommendations in several respects. Due to a glitch in current law, some married couples filing joint returns pay more in income taxes than they would have been required to pay as individuals. H.R. 6 would address the discrepancy by increasing the standard income tax deduction for married couples filing jointly, making it equal to twice the standard deduction for single filers. Starting in 2002, the standard deduction for married taxpayers would be $9,100, in comparison with the $7,600 deduction allowed under current law. Increasing the standard deduction has been estimated to reduce federal revenue by $60.3 billion over ten years.
The bill also would phase-in an expansion of the lowest tax bracket—the 15 percent bracket—for married filers. Between tax years 2004 and 2009, the threshold for married couples would increase to double the corresponding threshold for single filers. Currently, single filers are taxed at 15 percent on the first $27,050 of taxable income, while joint filers are taxed at 15 percent on the first $45,200. Under the bill, married couples filing jointly would be taxed at 15 percent on the first $54,100. This phase-in has been estimated to reduce federal revenue by $150 billion over ten years. The President’s proposal for marriage tax penalty relief would provide an additional tax deduction for two-earner couples filing jointly.
The estimated reduction in federal revenue from the bill’s marriage tax penalty provisions is $223.3 billion over ten years, in contrast to the $112 billion estimate for the President’s approach.
H.R. 6 would increase the current $500-per-child credit to $1,000 by tax year 2006, beginning with an increase to $600 on January 1, 2001. The bill retains the current phase-out of the tax credit, which begins at $75,000 for single filers and $110,000 for married couples. The President’s plan would phase-in the increase more slowly than H.R. 6, but the cost estimate for both is approximately $170 billion over ten years.
In addition, H.R. 6 would make several other changes to the child tax credit. Under current law, the child tax credit is refundable for taxpayers with three or more eligible dependents up to the amount their payroll taxes exceed their earned income tax credit (EITC). However, the credit is nonrefundable for taxpayers with one or two children. Beginning in 2001, H.R. 6 would make the credit refundable for all families with a qualifying child. The bill also exempts the refundable child tax credit from being reduced by the alternative minimum tax (AMT).
Originally included in the tax code as a device to prevent wealthy taxpayers from paying little or no tax, the AMT now affects many middle-income taxpayers eligible for tax credits. H.R. 6 would address this by increasing the AMT exemption for married couples filing jointly by $1,000 in 2005, $500 in 2006, and $500 in every even-numbered year thereafter until it is twice that of single filers. The current AMT exemption for married couples filing jointly is $45,000. The President’s plan does not contain any AMT-related proposals.
Like the child tax credit, H.R. 6 would exempt the EITC—a refundable tax credit that eases the tax burden on certain low-income workers—from being reduced by the AMT, beginning in 2002. Additionally, the amount of earned income that married couples filing jointly use to calculate their EITC would be increased to 110 percent of the amount used by other taxpayers. It is estimated that the EITC provisions would reduce federal revenue by $12.9 billion over ten years.
Rep. Charles Rangel (D-NY) offered a substitute amendment that would have reduced the current 15 percent tax bracket to 12 percent. The reduction would apply to the first $10,000 for single filers and the first $20,000 for married couples filing jointly. The reduction would have been phased-in over three years beginning in 2004.
The Democratic substitute also would have increased the standard deduction for married couples filing jointly to twice that of single filers, like the underlying bill. Additionally, the substitute would have repealed current law that reduces the refundable child tax credit and the EITC by the amount of the AMT, like the underlying bill. The amendment also would have increased the income eligibility for the EITC by $800, as well as increased the income level at which the credit phases-out for married couples with children by $2,500.
The cost estimate for the Democratic substitute was estimated at $585 billion over ten years. The Rangel amendment was defeated, 196-231.