No New Surprises as Bush Sends Formal Budget to Congress

Tuesday, April 10, 2001

Deloitte & Touche OnLine

The Bush administration April 9 released a detailed explanation of the its fiscal 2002 budget, which includes a 10-year, $1.6 trillion tax relief package. As expected, there are no major changes from the preliminary documents that the White House presented to Congress in February.

“I have sent Congress a tax plan that will accelerate our economic growth, leave more money with the people who earned it, and help ensure that our children will grow up in a country bustling with opportunities,” Bush said. “There are powerful institutions in Washington that would prefer to keep the people’s money for themselves, but I’m committed to moving forward.”

The president’s agenda for tax relief includes proposals to –

•  reduce current individual income tax rates from 15, 28, 31, 36, and 39.6 percent to 10, 15, 25, and 33 percent;

• repeal the estate, gift, and generation-skipping transfer tax by 2009;

•  permanently extend the 20 percent research and experimentation (R&E) tax credit;

• raise the cap on corporate charitable contributions to 15 percent of net income (from 10 percent);

• increase the child tax credit to $1,000 (from $500);

• reduce the marriage penalty by allowing joint filers to deduct 10 percent of the first $30,000 of the earned income of the lower-paid spouse;

• provide a charitable contribution deduction for non-itemizers;

• permit tax-free withdrawals from individual retirement accounts (IRAs) for charitable contributions; and

•  increase contribution limits to education savings accounts to $5,000 (from $500).

Extenders – The president’s budget also includes a one-year extension of tax provisions set to expire in 2001. The provisions to be extended are the Work Opportunity Tax Credit, Welfare-To-Work Tax Credit, exclusion for employer-provided educational assistance, subpart F exception for certain active financing income, suspension of net income limitation on percentage depletion from marginal oil and gas wells, authority to issue qualified zone academy bonds for public school costs, and minimum tax relief for nonrefundable personal tax credits (other than the child credit).

Other Tax Provisions – The administration’s budget also includes proposals that would, among other things –

• permanently extend favorable tax treatment of the costs of cleaning up contamination at abandoned waste sites (brownfields);

• modify tax credits for nuclear decommissioning costs;

• provide refundable tax credits for the purchase of health insurance;

• provide an above-the-line deduction for long-term care insurance premiums;

•  allow up to $500 in unused benefits in a health flexible spending arrangement to be carried forward to the next year;

• permanently extend and expand Medical Savings Accounts (MSAs);

• exclude from income the value of employer-provided computers and software; and

• exclude 50 percent of gains from the sale of property for conservation purposes.

The administration also would create new tax credits for the installation of rooftop solar equipment and extend the tax credits for fuel produced from renewable sources; allow tax-free distributions from qualified state tuition plans (QSTPs) for certain higher education expenses; allow private colleges to offer prepaid tuition plans; allow states to issue tax-exempt private activity bonds for school construction; establish tax-protected savings accounts for fishing and farming businesses; provide tax credits for developers of affordable single-family housing; establish tax-free Individual Development Accounts to encourage savings for higher education, home buying, and other specified purposes; and require the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve to recover their costs for supervision and regulation of state-chartered banks and bank holding companies.

Spending in Brief – The president’s budget proposes cuts for 10 of the 25 major federal agencies. Although it holds discretionary spending to a 4 percent increase over this fiscal year, the budget would increase overall spending by 5.6 percent over FY 2001. Education and defense spending get the biggest boosts, while the Department of Agriculture and the Department of Transportation get the biggest cuts.

What’s Next – The House on March 28 approved a budget resolution that would fully fund the president’s proposed $1.6 trillion tax cut.  The Senate budget resolution, approved on April 6, calls for a significantly smaller tax cut of approximately $1.2 trillion over the next 10 years. With the House and Senate budget resolutions in place, the stage is now set for both chambers to reconcile their positions -- taking into account all of the president’s priorities. That process will begin when lawmakers return from their spring recess later this month.

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