From Florida to Kabul: 2001 in review.

• Author: Desimone, Daniel C.
• Position: Federal Focus - United States government

For the United States, 2001 ended as it began--in tumult. The year began on the heels of a controversial presidential election, with control of Congress split almost evenly between the two major political parties. Republicans controlled the Senate only by virtue of the vice president's tie breaking vote and the House of Representatives by only a few seats. The record-setting economy of the 1990s appeared to be contracting, and the energy crisis gripping California seemed like a prologue to a nationwide energy crisis.

In a matter of months, Democrats gained control of the Senate, the economy officially entered recession, and the California energy crisis subsided. After the tragedy of September 11, the nation shifted its attention to the military response to international terrorism. Yet domestic issues, including the stumbling economy, contracting state and local budgets, and the balance of congressional power, shaped 2001 and the activities of the federal government every bit as much as the nation's war on terrorism.

The Year In Review

President Bush assumed office in January and, like his predecessor, emphasized domestic priorities over international concerns. The president's pledge to reduce marginal income tax rates and to reform the elementary and secondary systems of public education headlined an ambitious agenda that also included the ratification of a national energy policy and the restructuring of the Social Security system. The administration accomplished much of its agenda, with important implications for state and local governments.

The Economic Growth and Tax Relief Reconciliation Act of 2001. Marginal income tax rate reductions comprised the centerpiece of the Economic Growth and Tax Relief Reconciliation Act of 2001 and of President Bush's domestic agenda. When the president signed a $1.35 trillion dollar tax cut bill into law on June 7, he initiated a gradual reduction of these rates. Beginning July 1, 2001, the pre-EGTRRA rates of 15, 27, 30, 35, and 38.6 percent would be reduced to 15,25,28,33, and 35 percent by 2006. The new law also created a new 10 percent tax rate retroactive to January 1,2001.

When President Bush signed EGTRRA, he also enacted comprehensive pension reform legislation that significantly alters the operations and management of traditional retirement programs. The law liberalized the portability of retirement assets, allowing workers to transfer their retirement savings from one employer-sponsored plan to another or to an individual retirement account. EGTRRA also increased contribution limits for qualified plans. In doing so, Congress recognized that for 20 years it had essentially lowered the annual dollar limits in an effort to reduce the federal deficit. (1)

EGTRRA also increased the amount of governmental bonds that may be issued by governments qualifying for the "small governmental unit" arbitrage rebate exception from $5 million to $10 million. Qualifying governments may now issue up to $15 million of governmental bonds in a calendar year, provided that at least $10 million of the bonds are used to finance public school construction. Additionally, the law expanded the private activities for which tax-exempt bonds may be issued to include elementary and secondary public school facilities that are owned by private, for-profit corporations pursuant to public-private partnership agreements with state or local education agencies.

One of EGTRRA's provisions does not bode well for the states. The gradual phasing out of the estate tax credit in the federal tax code, to which most state estate tax formulas are linked, is expected to eliminate the estate tax in 40 states and significantly reduce it in the other 10. According to the National Governor's Association, the provision will cost states between $50 and $100 billion in lost estate tax revenues over the next 10 years. Most significant is the fact that the state share would be cur 50 percent in 2002. The federal estate tax sunsets in 2010.

No Child Left Behind Act of 2001. President Bush achieved his other major domestic priority, elementary and secondary education reform, when Congress re-authorized the 1965 Elementary and Secondary Education Act for six years in the closing days of 2001. The law requires states to...