The Economic Growth and Tax Relief Reconciliation Act of 2001¹ (the Act) is a massive tax reduction measure. Individuals are the principal beneficiaries of the Act's income tax rate reductions, marriage penalty relief, child tax credit increases, additional education incentives, retirement security enhancements, and wealth transfer tax reductions and ultimate repeal. Businesses receive virtually no direct tax relief. The product of an intense political debate, the Act provides $1.35 trillion of tax reductions over an 11-year period.

The following is a description of the Act's provisions. However, it is important to view these provisions in perspective. The Act is unique in the extent to which the tax reductions are "back-loaded." As more fully described below, the individual rate reductions, which account for $875 billion of the cost of the bill, do not become fully effective until 2006. While the number of taxpayers subject to wealth transfer taxes is reduced by increasing the effective exemption amount of the unified credit, the estate and generation-skipping transfer taxes are not actually repealed until 2010. Other provisions are phased in as well. Measures to alleviate the impact of the individual alternative minimum tax expire at the end of 2004.

The deferral or back-loading of the benefits was necessary to keep the cost of the Act within the limitations imposed by the Budget Resolution passed by Congress earlier this year. However, because the benefits are deferred, there is some question whether they will, in fact, take effect as scheduled -- especially if the economy in the future is not robust. In fact, due to procedural obstacles in the Senate that the proponents of the legislation were unable to overcome, the benefits provided by the Act will expire at the end of 2010 unless subsequently extended by Congress.

Tax Rates

The reduction in tax rates begins immediately, with the creation of a new 10% tax bracket retroactive to the first of the year and a half percentage point reduction in certain other rates for 2001 (equivalent to a one percentage point reduction effective July 1, 2001). Most taxpayers will receive a refund check for the benefit of the 10% bracket reduction. The Act further reduces the rates applicable to the higher brackets, but those changes occur gradually. The change becomes fully effective in 2006, when the top individual marginal rate will be reduced from 39.6% to 35%.

The Act reduces not only the stated marginal rates, but also addresses (albeit not until 2006) the hidden increases in tax rates caused by the phase out of personal exemptions and itemized deductions. On the other hand, the rate cuts are not fully insulated from the effects of the alternative minimum tax. By 2010, the number of individuals subject to the alternative minimum tax is expected to increase at a rate more than double the rate expected prior to passage of the Act.²

Other Presidential Priorities

The Act also addresses three other priorities President Bush set out in his campaign and in the Blueprint for New Beginnings: relief from the marriage penalty, doubling the size of the child credit, and repeal of the estate tax.

Marriage penalty relief primarily takes the form of gradually increasing both the upper limit of the 15% tax bracket and the standard deduction applicable to married couples filing a joint return until both of those amounts equal twice the amounts allowable for single taxpayers. Although these changes do not begin to take effect until 2005, the new 10% tax bracket for married couples filing a joint return will be twice the size of the 10% bracket for single taxpayers, effective immediately.

The repeal of the estate tax will not occur until 2010, although the estate tax rate will gradually decline, and the amount that is exempt from estate tax will gradually increase prior to that date. The gift tax will not be repealed. Once the estate tax is repealed, a modified form of carryover basis will apply to some estates that otherwise would have been subject to tax.

Other Provisions

The Act also provides a number of retirement savings incentives, including increases in the amounts that can be contributed to IRAs and other tax-advantaged retirement plans. The Act contains a number of education incentives, including an increase in the amount that can be contributed to an education savings account, the permanent extension of the exclusion from income of employer educational assistance, and an allowance for the tax-free distribution of funds from qualified tuition plans.

As this legislation moved through Congress, many other provisions -- including a permanent extension of the research credit -- were proposed but are not included in the Act.

¹Pub. L. No. 107-16, 107th Cong., 1st Sess. (June 7, 2001).

² See Joint Committee on Taxation, Estimated Budget Effects for the Conference Agreement for H.R. 1836, JCX-51-01 (May 26, 2001).