[JOINT COMMITTEE PRINT] DESCRIPTION OF PROPOSALS RELATING TO MIDDLE INCOME TAX RELIEF AND ECONOMIC GROWTH Scheduled for Hearings BEFORE THE HOUSE COMMITTEE ON WAYS AND MEANS ON DECEMBER 17-18, 1991 Prepared by the Staff OF THE JOINT COMMITTEE ON TAXATION DECEMBER 10, 1991 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON 1991 JCS-17-91 : ForsalebytheU.S.Gove imenlPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice.Washington.DC 20402 ISBN 0-16-037061-2 JOINT COMMITTEE ON TAXATION 102d Congress, 1st Session HOUSE SENATE DAN ROSTENKOWSKI, Illinois LLOYD BENTSEN, Texas Chairman Vice Chairman SAM GIBBONS, Florida DANIEL PATRICK MOYNIHAN, New York J.J. PICKLE, Texas MAX BAUCUS, Montana BILL ARCHER, Texas BOB PACKWOOD. Oregon GUY VANDER JAGT, Michigan ROBERT DOLE, Kansas Harry L. Gutman, ChiefofStaff CONTENTS Page Introduction 1 I. Summary of Proposals 3 ! II. Description of Proposals 34 A. Middle Income Tax Relief and Economic Growth Proposals 34 1. H.R. 3730, "The Middle Income Tax Relief and Fairness Act of 1991" 34 2. "The Economic Growth, Investment and Job Creation Act" 38 3. H.R. 960, "Economic Growth and Jobs Cre- ation Act of 1991" 50 4. H.R. 2242, "Working Family Tax Relief Act of 1991" 58 5. H.R. 3128, "All American Savings and In- vestment Incentive Act of 1991" 62 6. H.R. 3130, "Economic Growth Act of 1991" 64 .. 7. "Family and Corporate Tax Sense Act of 1991", including H.R. 3170, "The Uniform Business Tax Act of 1991" 75 8. H.R. 3678, "Economic Growth Act of 1991" ... 80 9. H.R. 3680, "The Family Tax Relief Act of 1991" 94 10. H.R. ^44, "Economic Grow^^^ Tax Freedom Act of 1991" 95 11. S. 1921, "The Tax Fairness and Savings In- centive Act of 1991" 109 12. S. 1865, "Defense Tax Rebate Act" 112 B. Personal Exemption; Standard Deduction; Child and Earned Income Tax Credits 118 1. H.R. 1277, Increase in Personal Exemption .... 118 2. H.R. 2633, Supplemental Young Child Tax Credit 118 3. H.R. 2714, Increase in Personal Exemption .... 120 4. H.R. 3148, Increase in Personal Exemption for Certain Dependent Children; Change in Individual Income Tax Rates 120 5. H.R. 3202, "Tax Reduction and Simplification Act of 1991" 122 (III) IV Pag. 6. H.R. 3228, "Middle Class Tax Relief Act of 1991" 124 C. Capital Gains and Losses; Passive Losses; Invest- ment Incentives 128 1. H.R. 246, Indexing ofCapital Gains 128 2. H.R. 248, Capital Gains Exclusion 129 3. H.R. 1414, Treatment of Certain Real Estate Activities Under the Limitation on Losses From Passive Activities 130 4. H.R. 1445, "Rural Development Investment Zone Act of 1991" 131 5. H.R. 1721, "Capital Gains Tax Fairness Act of 1991" 136 6. H.R. 2646, "The Productive Investment In- centive Act" 138 7. H.R. 2873, "Economic Growth and Venture Capital Act of 1991" 138 8. H.R. 3514, Reduction in Capital Gains Rate and Indexing ofCapital Assets 141 9. H.R. 3652, Treatment of Certain Real Estate Activities Under the Limitation on Losses From Passive Activities; Capital Gains Ex- clusion for Individuals Based on the Period the Asset is Held 143 10. H.R. 3741, "Enterprise Capital Formation Act of 1991" 145 11. H.R. 3810, "The Investmenrincend^^^^ Recovery Act of 1991" 147 12. H.R. 3875, "Middle Income Tax Relief Act of 1991" 149 13. H.R. 3945, Recognition ofLosses on Sale ofa Principal Residence 152 14. H.R. 3979, Income Tax Credit for Payments or Contributions to Certain Cooperative Re- search Organizations 152 D. Individual Retirement Arrangements; Homebuyers' Tax Credit 156 1. H.R. 519, Penalty-Free Withdrawals From IRAs, Etc. for Purchase ofFirst Home 156 2. H.R. 1406, "Savings and Investment Incen- tive Act of 1991" 157 3. H.R. 3739, Tax Credit for the Purchase of a Principal Residence by a First-Time Home- buyer 158 E. Other Proposals 159 1. H.R. 710, "Tax-Exempt Bond Simplification Act of 1991" 159 V Page 2 H R. 951, "The Boating Industry Jobs Preser- vation Act of 1991" 163 3. H.R. 2550, "The Leading Employers into Ap- prentice Partnerships Act" 163 4 H.R. 3651, Restoring the Exclusion From Gross Income for Income From Discharge of QuaUfied Real Property Business Indebted- ness ^"^ INTRODUCTION This pamphlet,^ prepared by the staff of the Joint Committee on Taxation, provides a description of proposals relating to middle income tax relief and economic growth, scheduled for public hear- ings before the House Committee on Ways and Means on December 17-18, 1991. Part I ofthe pamphlet is a summary ofthe proposals. Part II is a description of the proposals, including present law, explanation of the provisions, and effective dates. The proposals have been categorized as follows: (A) middle income tax relief and economic growth proposals (proposals with several tax relief or incentive provisions); (B) personal exemption, standard deduction, and child and earned income tax credit propos- als; (C) capital gains, passive losses, and other investment incentive proposals; (D) individual retirement arrangement and homebuyers' tax credit proposals; and (E) other proposals. This pamphlet does not include any revenue estimates ofthe pro- posals. Chairman Rostenkowski has directed that revenue esti- mates be prepared for the proposals described in this pamphlet. However, because the Congressional Budget Office (CBO) will, within the next few weeks, announce revised macroeconomic base- line assumptions, the staff of the Joint Committee on Taxation will wait to prepare such estimates until the revised CBO baseline as- sumptions have been announced. This pamphlet does not include revenue provisions in the Presi- dent's fiscal year 1992 budget proposal, which was submitted to the Congress on February 4, 1991.^ ' This pamphlet may be cited as follows; Joint Committee on Taxation, Description ofPropos- alsRelating toMiddleIncome Tax ReliefandEconomic Growth (JCS-17-91), December 10, 1991. '^For a summary description of the President's revenue proposals, see Joint Committee on Taxation, Summary ofRevenue Provisions in the President's Fiscal Year 1992 Budget Proposal (JCS-1-91), February25, 1991. (1) SUMMARY OF PROPOSALS I. A. Middle Income Tax Relief and Economic Growth Proposals 1. H.R. 3730—"The Middle Income Tax Relief and Fairness Act of 1992" (Messrs. Rostenkowski, Gephardt, Pease, Downey, Rangel, Matsui, Anthony, Dorgan of North Dakota, Donnelly, Coyne, Levin of Michigan, Cardin, McDermott, and others) The bill would provide a refundable income tax credit based on an employee's social security tax liability. The bill also would create a 35-percent individual income tax bracket, mcrease the in- dividual minimum tax, and impose a surtax on iividuals with taxable income over $1,000,000. The bill would be effective for taxable years beginning after De- cember 31, 1991. 2. "The Economic Growth, Investment and Job Creation Act" (House Republican Conference) Overview The proposal would (1) allow individuals an exclusion of a per- centage of the gain realized upon the disposition of qualified cap- ital assets, (2) provide taxpayers with a capital gain deduction with respect to dispositions of qualified small business stock, (3) provide for an inflation adjustment to (i.e., indexing of) the basis of certain assets for purposes of determining gain or loss upon sale or other disposition, (4) provide that losses from the sale or exchange of a principal residence would be treated as a capital loss, (5) increase the amount that a taxpayer can expense for any taxable year in lieu of recovering such amount through depreciation deductions, (6) increase the amount of income an individual can earn before the social security earnings limit applies, (7) provide that the passive loss limitation would not apply to losses and credits from certain rental real estate activities of taxpayers engaged in the real prop- erty business, (8) specifically exempt qualified apprenticeship edu- cation organizations from taxation and allow a 20-percent income tax credit for contributions to these organizations, (9) permit indi- viduals to establish and make nondeductible contributions to IRA plus accounts, (10) permit certain individuals to receive a tax-free withdrawal of up to 25 percent of their IRA account for the pur- chase of a first home, (11) permit taxpayers with adjusted gross in- comes up to $50,000 to exclude from gross income the first $225 of interest received ($450 in the case of a joint return), and (12) repeal the excise taxes on luxury items. The specific provisions ofthe proposal are summarized below. (3) Deduction for capitalgains The proposal would allow individuals an exclusion of a percent- age of the gain realized upon the disposition of qualified capital assets. Assets held three years or more would qualify for a 30-per- cent exclusion; assets held at least two years but less than three years would qualify for a 20-percent exclusion; and assets held at least one year but less than two years would qualify for a 10-per- cent exclusion. Qualified capital assets generally would be capital assets as de- fined under present law, except that collectibles would be excluded. The capital gains exclusion would be a preference for purposes ol the alternative minimum tax. The capital gain provisions of the proposal would apply to dispo- sitions made on or after September 30, 1991. For the portion of 1991 to which the proposal would apply, a 30-percent exclusion would apply for all assets held one year or more. For 1992, the ex- clusion would be 20 percent for assets held between one and two years and 30 percent for assets held at least two years. 50-percent capital gains exclusion on venture capital investments; seed capitalgain deduction The proposal would provide taxpayers with a capital gain deduc- tion with respect to dispositions of qualified small business stock. Taxpayers who have held qualified small business stock for more than five years would be allowed a deduction equal to 50 percent of their qualified small business net capital gain. Qualified small business stock would be stock issued after Decem- ber 31, 1991, acquired at original issue for money or as compensa- tion for services. At the time of issue, the amount of money, the adjusted basis of property and the value of services received by the corporation for stock as a contribution to capital and as paid-in sur- plus, plus the accumulated earnings and profits of the corporation, could not exceed $100 million. In addition, the corporation must conduct an active business and use substantially all its assets in an active business during the 5-year period commencing with the ac- quisition ofthe stock. The qualified small business capital gain deduction would be^ treated as a preference item under the alternative minimum tax. The proposal would provide taxpayers with a seed capital gain deduction with respect to dispositions of qualified small business stock in corporations with paid-in capital and surplus not in excess of $5 million. The deduction for seed capital gain would be on a sliding scale, depending on holding period: 50 percent for five to sixi years, 60 percent for six to seven years, 70 percent for seven toi eight years, 80 percent for eight to nine years, 90 percent for nine to 10 years, and 100 percent for more than 10 years. The seed capital gain deduction would not be treated as a prefer- ence item under the alternative minimum tax. The amount of money and other property that a small business corporation under section 1244 can receive for stock as a contribu- tion to capital and as paid-in surplus would be increased from $1 million to $5 million.