House Republicans introduced legislation Tuesday to prevent the Bush tax cuts from expiring.
The bill, known as the Job Protection and Recession Prevention Act of 2012, would extend for an additional year, through 2013, the tax reductions originally enacted in 2001 and 2003. The bill, H.R. 8, would extend the Bush tax cuts that lowered the marginal tax rates, provided marriage penalty relief, offered a $1,000 child credit, provided a 15 percent top rate on dividends and capital gains taxes, repealed the Personal Exemption Phase-out and the Pease limitation on itemized deductions, leave the estate tax at its 2011 and 2012 parameters (indexed for inflation), provide higher Section 179 small business expensing limits, and certain education-related benefits. In addition, the bill would provide a two-year patch for the alternative minimum tax covering 2012 and 2013.
“This bill will stop the tax hike facing every American who pays income taxes at the end of the year and give small businesses and families the certainty they need in these tough economic times,” said House Ways and means Committee Chairman Dave Camp, R-Mich., in a statement. “Despite more than three years of high unemployment, the President and Democrats who control Washington are calling for higher taxes that will eliminate more than 700,000 jobs. That is the wrong direction, and I call on President Obama and Congressional Democrats to join Republicans and abandon their pursuit of job-killing tax hikes.”
Camp introduced the bill Tuesday. According to the Joint Committee on Taxation, the proposal, as a whole, would prevent a $383.6 billion tax increase over 2013-2022. The bill is expected to come up for a vote next week.
Meanwhile, over in the Senate, Democrats plan a test vote Wednesday on a bill that would extend the tax cuts for a year only for adjusted gross income up to $250,000 for married couples and $200,000 for individuals. However, the bill is not expected to overcome the 60-vote hurdle needed to bypass the threat of a filibuster.
Under current law, various low-tax policies originally enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001, known as EGTRRA, and the Jobs and Growth Tax Relief Reconciliation Act of 2003, known as JGTRRA–and subsequently extended through 2012 as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, or TRUIRJCA– are scheduled to expire after Dec. 31, 2012.
Separately, House Democrats on the Ways and Means Committee introduced their own bill Tuesday to extend the Earned Income Tax Credit, the Child Tax Credit and the American Opportunity Tax Credit for tuition and related expenses (see House Democrats Introduce Bill to Extend EITC). House Republicans also introduced a bill to change congressional rules to make it easier to enact tax reforms next year (see House GOP Offers Bill to Expedite Tax Reform Procedures).
House Ways and Means Committee ranking Democratic member Sander Levin, D-Mich., criticized the Republican proposal for extending the tax cuts at all income levels. “Republicans made two things perfectly clear today," he said in a statement. "One, they are willing to hold the middle class hostage over their refusal to ask millionaires and billionaires to contribute one cent to deficit reduction. And two, their tax pledge does not extend to middle- and lower-income families, 25 million of whom would experience an average $1,000 tax hike under the Republican plan." He contended that the Republican proposal would give wealthy taxpayers a $74,000 tax cut "while middle-class wages stagnated and families struggle to recover from the deep recession.”
Extending 2001 and 2003 Tax Cuts
Section 1 of the House Republican bill introduced by Camp would extend for one year, through Dec. 31, 2013, the low-tax policies originally enacted in 2001 as part of EGTRRA and subsequently extended through 2012 as part of TRUIRJCA. Such policies include lower marginal tax rates. The marginal tax rates for ordinary income earned by individuals and owners of small businesses organized as pass-through entities, such as S corporations, partnerships and sole proprietorships, are scheduled to rise significantly in 2013 under current law. Under the proposal, the lower statutory rates now in effect for 2012 would be extended through 2013.
Under current law, the Tax Code contains various marriage penalties, that is, parameters or amounts for married couples filing joint returns that are less than twice the corresponding parameters or amounts applicable to single filers. EGTRRA eliminated the marriage penalty with respect to two significant features of the tax code – the standard deduction and the exit point for the 15 percent rate bracket—the threshold above which the next additional dollar of taxable income is subject to the next highest rate bracket—but those marriage penalties are scheduled to be reinstated in 2013. Under the proposal, the existing marriage penalty relief would be extended through 2013.
Under current law, a child credit in the amount of $1,000 per child under the age of 17 is available, but that amount is scheduled to revert to $500 per child in 2013. Under the proposal, the $1,000 child credit amount would be extended through 2013.
Since 2010, a provision of law known as the Personal Exemption Phase-out, or PEP, which had previously phased out the value of the personal exemptions of certain taxpayers, has been repealed. Similarly, since 2010, another provision of law known as the Pease Limitation, which had previously reduced the value of the overall itemized deductions of certain taxpayers, has been repealed. When PEP and the Pease Limitation were in effect prior to 2010, they each created additional, hidden marginal rate increases that applied to ordinary income, capital gains, and dividends, as well as significant compliance burdens. Under current law, both PEP and the Pease Limitation are scheduled to be reinstated in 2013. Under the proposal, the repeals of each of these provisions would be extended through 2013, preventing the additional, hidden marginal rate increases they create from once again taking effect.
Prior to 2001, the estate tax featured a top rate of 55 percent and an exemption amount of $1 million. Under EGTRRA, the estate tax rate was gradually phased down and the exemption amount was gradually increased over the following decade. Under TRUIRJCA, for 2011 and 2012, the top estate tax rate was set at 35 percent and the exemption amount was set at $5 million (indexed for inflation), but both of those parameters are scheduled to revert to their pre-2001 levels in 2013. Under the proposal, the parameters in effect for 2012 would be extended through 2013.
EGTRRA provided various education-related tax benefits—including an exclusion for certain employer-provided educational assistance and an expansion of the student loan interest deduction—as well as various other tax benefits, such as a non-refundable adoption credit. Under current law, these education-related and other tax benefits originally enacted in 2001 as part of EGTRRA are scheduled to expire after Dec. 31, 2012. Under the proposal, these benefits would be extended through 2013.
Capital Gains and Dividend Taxes
Section 2 of the bill would also extend for one year, through Dec. 31, 2013, the lower tax rate structure on long-term capital gains and qualified dividends that was originally enacted in 2003 as part of JGTRRA and subsequently extended through 2012 as part of TRUIRJCA. Under current law in effect for 2012, the top statutory rate on long-term capital gains is 15 percent (with a special zero rate for capital gains that would otherwise be taxed at 10 percent or 15 percent), but that top statutory rate is scheduled to rise to 20 percent (10 percent for capital gains that would otherwise be taxed at 15 percent) in 2013.
Also under current law in effect for 2012, the top statutory rate on qualified dividends is 15 percent (with a special zero rate for dividends that would otherwise be taxed at 10 percent or 15 percent), but that top statutory rate is scheduled to rise to 39.6 percent in 2013, when dividends will once again be taxed at ordinary income tax rates (and no special zero rate will apply).
In addition to these scheduled statutory rate increases, the scheduled re-imposition of PEP and the Pease Limitation, would create additional, hidden marginal rate increases applicable to capital gains and dividends in 2013. Independent of the JGTRRA rate structure, PEP, and the Pease Limitation, a new 3.8 percent surtax on net investment income—including capital gains and dividends—will apply to taxpayers with incomes above $200,000 (singles) and $250,000 (joint returns) in 2013 under current law.
Under the proposal, the 0-percent/15-percent rate structure for long-term capital gains and qualified dividends originally established under JGTRRA would be extended through 2013. Under a separate provision, the additional, hidden marginal rate increases on capital gains and dividends attributable to the scheduled re-imposition of PEP and the Pease Limitation would also be prevented from taking effect. The 3.8 percent surtax on net investment income that is scheduled to take effect in 2013 under current law would be repealed, along with the rest of the 2010 health care law, under two separate pieces of legislation—H.R. 2 and H.R. 6079—that have already passed the House.
According to Congress’s Joint Committee on Taxation, the one-year extension of all the EGTRRA and JGTRRA tax relief policies covered in Section 2 of the bill would, taken together, prevent a $190.271 billion tax increase over 2013-2022.
Small Business Expensing
Section 3 of the bill would extend the increase in small business expensing. Under Section 179 of the Tax Code, small businesses may immediately deduct, rather than recover over time through annual depreciation deductions, the cost of certain property in the year in which it is placed in service, up to certain limits. Under current law, the amount of qualifying property placed in service that may be expensed is limited to $125,000, with that amount reduced (but not below zero) by the amount by which the cost of such property exceeds $500,000, with both of those amounts adjusted for inflation. For 2012, those inflation-adjusted amounts are $139,000 and $560,000, respectively. However, in 2013, those parameters are scheduled to revert to $25,000 and $200,000, respectively.
Under the proposal, the small business expensing parameters that were originally put in place in 2003 as part of JGTRRA—$100,000 and $400,000, respectively—would be extended (and adjusted for inflation) through 2013. These amounts represent the maximum amounts for which an adjustment to the allocations and aggregates of the House’s fiscal year 2013 budget resolution may be made under House budget rules. The Joint Committee on Taxation estimates that, for 2013, the inflation-adjusted amounts provided under the proposal would be $127,000 and $510,000, respectively. According to the JCT, the one-year extension of increased small business expensing would prevent a $0.6 billion tax increase over 2013-2022.
Section 4 of the bill would extend alternative minimum tax relief for individuals. Under the law in effect in recent years through 2011, an annual AMT “patch”—which increases the AMT exemption amount and extends a provision permitting certain non-refundable personal credits to be taken against the AMT—has been put in place to hold the number of AMT-affected taxpayers constant at approximately 4 million. For 2011, the most recent year for which an AMT patch was in place, the exemption amount was $48,450 for singles and $74,450 for joint returns. Under current law in effect for 2012 and subsequent years, however, the AMT exemption amount reverts to its pre-2001 level—$33,750 for singles and $45,000 for joint filers—and non-refundable personal credits may no longer be taken against the AMT. Without an AMT patch for 2012, the JCT estimates that approximately 31 million taxpayers will be liable for AMT on their 2012 returns (generally filed in early 2013), including millions of middle-class taxpayers who will pay the AMT for the first time.
Under the proposal, a two-year AMT patch is provided, covering both 2012 and 2013, coordinating the AMT patch with the proposal’s overall extension of the 2001 and 2003 tax relief through 2013. This patch is designed to hold the number of AMT-affected taxpayers constant at 3.9 million, the same target used for the two-year AMT patch, covering 2010 and 2011, enacted as part of TRUIRJCA. For 2012, the AMT exemption amount would be increased to $50,600 for singles and $78,750 for joint returns; for 2013, the exemption amount would be increased to $51,150 for singles and $79,850 for joint returns. For both 2012 and 2013, non-refundable personal credits would be allowed against the AMT. According to the JCT, this two-year AMT patch—together with certain interactive effects between the AMT patch and the extension of the 2001 and 2003 tax relief provisions described above—would prevent a $192.7 billion tax increase over 2013-2022. Section 5 of proposal provides for the bill’s treatment for PAYGO purposes.