Highlights of the 2003 Jobs and Growth Tax Relief Reconciliation Act: Economic Stimulus or Long-Term Disaster?

• Author: Susan Kalinka
• Position: Harriet S. Daggert-Francis Leggio Landry Professor of Law at Louisiana State University
• Pages: 219-274

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Harriet S. Daggert-Francis Leggio Landry Professor of Law at Louisiana State University, Paul M . Hebert Law Center.

The 2003 Jobs and Growth Tax Relief Reconciliation Act (sometimes referred to as the "JGTRRA" or the "Act")¹was signed into law by President Bush on May 28, 2003. JGTRRA was passed by Congress largely along party lines, and required a tie-breaking vote in the Senate by Vice President Cheney. ²It has been projected that JGTRRA will cost $350 billion: $330 billion in lost revenue and $20 billion in aid to the states. ³JGTRRA constitutes one of the largest tax cuts in the history of the United States.

This article highlights some of the major provisions of JGTRRA, discusses some of the few planning opportunities offered under the Act, and criticizes the complexity and the fiscal irresponsibility of the Act. JGTRRA accelerates the reduction in the individual income tax rates that were not scheduled to begin until 2006, provides marriage penalty relief, increases the child tax credit, and increases the alternative minimum tax exemption. The Act also reduces the maximum federal tax rate on certain capital gains and dividends and provides temporary aid to the states.

The JGTRRA tax cuts have raised considerable controversy. Proponents of "supply side" economics have argued that the tax cuts will create economic and job growth.⁴On the other hand, JGTRRA has been highly criticized because it adds to an already burgeoning federal deficit that may cause economic problems for generations to come and because of its complexity.⁵ The Act contains a number of sunset provisions that, in combination with the sunset and delayed effective Page 220 dates of the provisions of the Economic Growth and Tax Relief and Reconciliation Act of 2001 ("EGTRRA"),⁶ create confusion and raise difficulties for tax planners.⁷

Part I of this article discusses the major provisions of JGTRRA and some of the planning opportunities and tax traps that may be available under the Act. Part II criticizes the Act and suggests a repeal of many of its provisions.

I Highlights Of The Act

A Reduction In The Individual Income Tax Rates On Ordinary Income

JGTRRA reduces the four top marginal individual income tax rates and expands the two lower tax brackets. The Act also reduces the tax rates for married couples in such a way as to eliminate the marriage penalty created by the differential between the tax rates on income of unmarried taxpayers and the rates on income of married couples for 2003 and 2004. Thereafter, the discrepancy is reduced, but not eliminated, for 2005, 2006, and 2007, and then eliminated from 2008 until 2010.

To better understand (the word "appreciate" strikes the author as inappropriate in this context) the effect of the rate reductions under JGTRRA, it is useful to review the changes in the individual marginal income tax rates made by EGTRRA. Under federal income tax law, individuals pay taxes at progressively higher rates on increasing increments of an individual's taxable income.⁸ For example, Section 1(a) of the Internal Revenue Code provides that the taxable income of a married couple filing a joint return or a surviving spouse is taxed according to the following table:

If taxable income is: The tax is:

Not over $36,900 . . . . . . . . . . . . . . . . . 15% of taxable income

Over $36,900 but not over $89,150 . . . . $5,535, plus 28% of the excess over $36,900

Over $89,150 but not over $140,000 . . . .$20,165, plus 31% of the excess over $89,150

Over $140,000 but not over $250,000 . . .$35,928.50, plus 36% of the excess over $140,000

Over $250,000 . . . . . . . . . . . . . . . . . . .$75,528.50, plus 39.6% of the excess over $250,000.⁹

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The tables provided in Section 1(a) through (e) reflect the individual income rates that were effective from 1993¹⁰until 2001 when they were changed by EGTRRA.¹¹ Section 1 performs the calculations of tax on the increments of income (sometimes referred to as "brackets") that precede the taxpayer's highest bracket. For example, $5,535 is 15% of $36,900, and $20,165 is 15% of $36,900, plus 28% of $52,250 (the difference between $89,150 and $36,900). The amount of income in each of the tax brackets is adjusted annually for inflation¹² and varies depending on the filing status of the taxpayer.¹³

EGTRRA gradually reduced the individual tax rates and added a 10% bracket.¹⁴ The 1993 individual income tax rates for each of the brackets were 15%, 28%, 31%, 36%, and 39.6%. Under EGTRRA, these rates were scheduled to be reduced to: (1) 10%, 15%, 27%, 30%, 35%, and 38.6% for 2003; (2) 10%, 15%, 26%, 29%, 34%, and 37.6% for 2004 and 2005; and (3) 10%, 15%, 25%, 28%, 33%, and 35% for 2006 through 2010. ¹⁵JGTRRA provides that the tax rates that were scheduled to apply in 2006 are effective for an individual's taxable income in 2003 and thereafter.¹⁶

All the provisions, including the reductions in the individual income tax rates under both EGTRRA and JGTRRA, will expire after December 31, 2010.¹⁷ At that time, unless Congress decides otherwise, the 1993 individual income tax rates will become effective again.

The accelerated reduction in the individual income tax rates is unlikely to affect tax planning for most taxpayers, at least until 2010, the year before the 1993 tax rates will become effective. Taxpayers may seek to accelerate taxable income to 2010 when the tax rates are low in order to avoid the higher rates on such income that will apply Page 222 in 2011 when JGTRRA expires. A taxpayer who uses the cash method of reporting income may be able to accelerate income by collecting amounts of income, such as fees for services, in 2010 that otherwise may not be paid until 2011. Alternatively, such a taxpayer may accelerate taxable income by delaying the payment of deductible expenses until 2011¹⁸ where those expenses otherwise would be payable in 2010.¹⁹ Of course, a taxpayer may accelerate even more income by accelerating receipts and delaying payments where possible. Taxpayers who are skeptical that Congress will leave the low income tax rates in place until 2010 may want to accelerate as much taxable income as possible to 2004 when they know that the rates are settled. However, the time value of money may cause deferral of income to result in better after-tax economic results than acceleration of income, even if the income will be taxed at a higher rate in a later year.²⁰

B Marriage Penalty Relief

For a long time, the federal income tax has contained a number of provisions that create marriage penalties and marriage bonuses. EGTRRA and JGTRRA provide marriage penalty relief for married couples with taxable income in the 10- and 15% income tax brackets and for married couples who claim the standard deduction, rather than itemized deductions.²¹

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The term "marriage penalty" refers to the larger amount of tax generally imposed on the income of married couples in cases where both spouses have income, as compared to the income tax liability of two unmarried taxpayers with the same amount of income. The term "marriage bonus" refers to the smaller amount of tax imposed on the income a one-earner married couple, as compared to the amount of tax imposed on the same amount of income earned by an unmarried taxpayer.

Section 1(a), which provides the 1993 federal income tax rates on the income of a married couple, was provided earlier.²² Section 1(c) provides the following rate table for determining the federal income tax liability of an unmarried taxpayer:

If taxable income is: The tax is:

Not over $22,100 . . . . . . . . . . . . . . . . . 15% of taxable income.

Over $22,100 but not over $53,500 . . . . $3,315, plus 28% of the excess over $22,100.

Over $53,500 but not over $115,000 . . . .$12,107, plus 31% of the excess over $53,500.

Over $115,000 but not over $250,000 . . .$31,172 plus 36% of the excess over $115,000.

Over $250,000 . . . . . . . . . . . . . . . . . . .$79,772, plus 39.6% of the excess over $250,000.²³

Prior to the enactment of JGTRRA, the standard deduction also included a marriage penalty. Each year, an individual generally may elect either to claim the standard deduction or else to claim itemized deductions, ²⁴such as the deductions for home loan mortgage interest;²⁵ investment interest; ²⁶state, local, and foreign property taxes;²⁷state, local, and foreign income taxes;²⁸ personal casualty and theft losses; ²⁹ charitable contributions;³⁰ and medical expenses.³¹ A taxpayer Page 224 generally will claim the standard deduction if the taxpayer's standard deduction is greater than the total amount of the taxpayer's itemized deductions.³²

Before EGTRRA was enacted, Section 63 provided that the standard deduction for married taxpayers filing joint returns and for surviving spouses was $5,000, and for unmarried taxpayers, the standard deduction was $3,000.³³ In computing taxable income, a taxpayer generally is permitted to deduct an exemption amount for the taxpayer and each of the taxpayer's dependents.³⁴ Section 151 provides that the exemption amount generally is $2,000.³⁵ The $2,000 amount is adjusted annually for inflation.³⁶ The following examples illustrate the effect of marriage penalties and bonuses under the rate structure provided in Section 1(a)...