EGTRRA and JGTRRA tax rates extended for two years in lame duck session.

• Author: Beavers, James A.
• Position: Economic Growth and Tax Relief Reconciliation Act, Jobs and Growth Tax Relief Reconciliation Act of 2003

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act of 2010), P.L. 111-312, which Congress passed on December 16 and President Barack Obama signed into law the next day, extended the ordinary income tax rates introduced in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), P.L. 107-16, in 2001 and the capital gain tax rates introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), P.L. 108-27, in 2003, reduced the estate tax, and extended a large number of expired or expiring provisions. The legislation incorporated the elements of the deal struck by congressional and Obama administration negotiators on December 6 but also included many other provisions in addition to those that were reported to be part of the original deal.

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The bill has provisions from four of the five tax areas that were considered to be important for Congress to address during its "lame duck" session: the estate tax, expiring tax cuts, expired tax provisions, and the alternative minimum tax (AMT). The bill does not address the expanded Form 1099 reporting requirements.

When Congress enacted EGTRRA and JGTRRA, it included sunset provisions, under which most of the changes in the acts would expire after 2010. These sunset provisions were included to keep the costs of the bills small enough to ensure widespread support in Congress. The Tax Relief Act of 2010 amends EGTRRA and JGTRRA to postpone the sunset of the affected provisions until after 2012.

Extension of EGTRRA and JGTRRA Provisions

EGTRRA introduced a new 10% tax bracket below the 15% bracket for individuals and reduced the other tax brackets to 25%, 28%, 33%, and 35%. Those changes were scheduled to sunset after 2010 so that in 2011 the 10% rate would disappear (with income in that bracket reverting to the 15% bracket) and the other rates would revert to 28%, 31%, 36%, and 39.6%, respectively. With the Tax Relief Act of 2010's postponement of the EGTRRA sunset, those rates will continue through 2012.

In 2003, JGTRRA also lowered the capital gain tax rate to 15% (0% for taxpayers in the 10% and 15% tax brackets). These rate changes were also scheduled to expire after 2010. The act's postponement of the JGTRRA sunset will continue the lowered capital gain tax rate through 2012.

The act also extends EGTRRA's repeal of the itemized deduction phaseout and the personal exemption phaseout for two years through 2012.

Reflections

The wisdom of leaving the tax rates at their current levels for two more years and whether they should be left at the present levels after that period will undoubtedly be a subject of great debate. Although the extension of the rates set by EGTRRA and JGTRRA are commonly referred to as extensions of "tax cuts," this terminology makes sense only if the prior rates, which were enacted during the Clinton Administration as part of the Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, are treated as a permanent baseline for tax rates. However, these rates were increases to the rates put in place by the Omnibus Budget Reconciliation Act of 1990, P.L. 101-508, which were in turn increases to the rates put in place by the Tax Reform Act of 1986, P.L. 99-514.

Payroll Tax Reduction

For 2011 only, the legislation would also reduce the rate for the Social Security portion of payroll taxes to 10.4% by reducing the employee rate from 6.2% to 4.2% (the employer's portion remains at 6.2%).

Reflections

This payroll tax reduction is a replacement for the $400 making work pay credit, which expired at the end of 2010. However, while the making work pay credit was phased out for taxpayers with adjusted gross income above $75,000 ($150,000 for married taxpayers filing joint returns), the new provision applies to all workers who pay payroll taxes, regardless of income level.

AMT Provisions

Congress has temporarily increased the AMT exemption amount several times in recent years. These successive increases are commonly referred to as the "AMT patch." The most recent increase was for 2009; for 2010 the AMT exemption amounts reverted to their...