Summary of 2001 Tax Bill

SUMMARY OF 2001 TAX BILL

June 15, 2001

The President signed a tax bill into law on June 7. The final bill (H.R. 1836) did not give the President everything he had wanted, but it came close. The various tax reductions it contained totaled $1.35 trillion over ten years, and the measure included major reductions in tax rates.

Interestingly, though, the final bill included a sunset clause that will terminate all of the bill's provisions at the end of 2010 unless Congress and the President agree before that time to extend them. If past history is any guide, many of the bill's provisions in any case will be altered many times over before the end of 2010 rolls around.

The legislation came together in the following manner:

A bipartisan compromise bill that Senate Finance chairman Charles Grassley (R-IA) and ranking member Max Baucus (D-MT) had announced on May 11 was marked up by the Finance Committee on May 15. The vote to report was 14-6, with 4 Democrats joining all of the panel's Republicans in supporting the measure.

Before it reported the bill, the Committee defeated all Democratic amendments except one that authorized the creation of a disaster response office in the Internal Revenue Service. A few amendments were adopted in committee, including one that would sunset all the bill's tax cuts on September 30, 2011. This move was necessary to bring the measure into compliance with budget rules.

The only adopted committee amendment that related to higher education was one by chairman Grassley that would, starting in 2009, give student loan borrowers the option of either deducting their loan interest or taking a tax credit for it. The tax credit would be up to $500, and it would only be available during the first 60 months in which interest payments are required. Deduction of loan interest would not be subject to the 60-month limit.

The House May 16 adopted a new tax bill (H.R. 1836) that simply served as a vehicle for formally bringing to conference the various tax proposals the House had already passed. The measure was approved by a vote of 230-197.

The full Senate began debating the Grassley-Baucus bill, now numbered S. 896, on May 17. Even though the bill had been brought to the floor under reconciliation rules that limited debate to a maximum of 20 hours, floor action on the measure dragged on and on because Democrats held up passage by offering a constant stream of amendments. (The Democrats were able to do so because reconciliation rules permit unlimited motions and amendments to be considered after 20 hours, as long as there is no debate on them.) The only major amendment that was adopted on the floor was a manager's amendment by Grassley that included a permanent extension of the research and experimentation tax credit.

The Senate finally passed the measure on May 23 by a vote of 62-38. In the end, 12 Democrats joined all 50 Republicans in voting for the measure.

The House-Senate conference on the tax legislation began the evening of May 23 and finally concluded the evening of May 25. Both chambers passed the conference report in a rare Saturday session on May 26. The vote in the House was 240-154, with 28 Democrats and one independent joining 211 Republicans in supporting the measure. The vote in the Senate was 58-33, with 12 Democrats supporting the measure and 2 Republicans opposing it.

One of the main sticking points in the conference had been the top tax rate, which currently stands at 39.6 percent. The conferees finally agreed to lower that rate to 35 percent, which was a smaller reduction than the President had proposed but more than the Senate had approved. In a surprise move, the conferees also agreed to sunset language that will terminate all of the bill's provisions on December 31, 2010, unless Congress and the President agree before that time to extend them.

The full text of the conference report (the Economic Growth and Tax Relief Reconciliation Act of 2001; H.Rept. 107-84) is available on the House Rules Committee website at www.house.gov/rules/1836cr.pdf and a Joint Tax Committee summary is available at www.house.gov/jct/x-50-01.pdf. The American Council on Education has estimated that the final version of the tax bill will provide some $30 billion in tax benefits to higher education over the next ten years. The bill provisions of greatest interest to higher education are the following:

Internal Revenue Code Section 127, which enables employers to provide tax-free education benefits, is permanently extended and made available for graduate as well as undergraduate study, beginning after December 31, 2001.

Private institutions of higher education are allowed to offer prepaid tuition plans under the same terms as state institutions under Internal Revenue Code Section 529.

The annual limit on contributions to Education IRAs is increased from $500 to $2,000 and the phase-out range in which married taxpayers may no longer make deductible Education IRA contributions is increased. Elementary and secondary school expenses are also made eligible for tax-free withdrawals from Education IRAs.

The current 60-month limit on the amount of time for deducting student loan interest is eliminated. And the income phase-out ranges for deducting student loan interest are increased for both single and married taxpayers.

Up to $3,000 of higher education expenses are made deductible for single taxpayers with adjusted gross income up to $65,000 and married taxpayers filing joint returns with adjusted gross income up to $130,000. The amount of the deduction is increased to $4,000 in 2004 and 2005.

The measure also phases out the estate tax and repeals it altogether in the year 2010. However, since the entire bill sunsets on December 31, 2010, the estate tax will reappear in 2011 if the repeal is not extended or made permanent before that time. The measure will not allow tax-free withdrawals from IRAs for charitable contributions, which was a top priority for the higher education community. It also does not include a proposal to allow nonitemizers to take deductions for charitable giving.