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Summary

During the first part of 2007, the most prominent congressional tax-policy action focused on small business. In May, Congress approved legislation (P.L. 110-28) increasing the federal minimum wage and providing small-business tax cuts. The tax cuts were partly designed to ease the adverse effect the minimum-wage increase was argued to have on small businesses. In the second part of 2007, a major focus of tax legislation was the alternative minimum tax (AMT) for individuals, which was projected to apply to a growing number of taxpayers. Under current law, individuals pay the higher of their AMT or regular tax. Unlike the regular tax, the AMT is not indexed for inflation, and rising prices, along with income growth and regular income tax cuts, have increased the AMT's scope. Congress has addressed the AMT's growth with temporary measures that restricted its scope with the latest scheduled to expire in 2007. Proposals to cut the AMT initially included other tax measures -- both unrelated tax cuts and revenue-raising provisions designed to offset the impact of tax cuts on the federal budget deficit. As deliberations progressed, however, legislation focused increasingly tightly on the AMT, with a major concern of debate being whether to provide revenue-raising offsets. On December 19, Congress enacted the Tax Increase Prevention Act of 2007 (P.L. 110-166), whose only elements were AMT cuts. Congress addressed but did not take final action on tax legislation in a variety of other areas over the course of 2007, including energy taxation, tax measures related to the 2007 farm bill, international taxation, and extension of a set of narrowly focused expiring tax benefits (the "extenders"). Where the proposals involved tax cuts, a prominent issue was whether and how to offset the revenue-losing effect of tax cuts. Congress thus considered a range of revenue-raising tax measures over the course of the year -- for example, attempting to reduce the "tax gap" between the taxes U.S. taxpayers owe and what they pay, as well as restricting tax shelters and tax benefits for U.S. firms that operate abroad. A major focus of congressional tax deliberations in early 2008 has been an economic stimulus package, designed to boost what is an apparently flagging economy. Leaders of the House of Representatives reached an agreement with the Administration on a plan containing tax cuts, including a rebate for individual taxpayers and several business tax cuts. On February 7, the House and Senate both approved a modified version of the House stimulus bill, calling for a $151.7 billion tax cut in FY2008. Both chambers are considering housing relief provisions. Other likely areas for congressional action on taxes in 2008 are suggested, in part, by items on which final action was not taken in late 2007: energy taxes, taxes in the farm bill, and the extenders. In addition, leading economic policymakers in Congress and elsewhere have suggested that indications of economic weakness be met with an economic stimulus package that might include a range of tax cuts. This report was originally written by David L. Brumbaugh and will be updated as legislative and economic events occur.

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