On Wednesday, August 1, 2012, the House is scheduled to consider H.R. 8, the Job Protection and Recession Prevention Act of 2012, under a rule. The bill was introduced on July 24, 2012, by Rep. Dave Camp (R-MI) and referred to the committee on Ways and Means. The rule for consideration of the bill (H. Res. 747) provides one hour of debate equally divided and controlled by the chair and ranking minority member of the Committee on Ways and Means. In addition, the rule provides for one amendment in the nature of a substitute offered by the Ranking Member of the Ways and Means Committee, which is summarized below and is debatable for 20 minutes.

H.R. 8 would provide a one year extension of all current individual tax rates, as well as the 15 percent top rate on capital gains and dividends. The proposal would also extend for one year the estate tax rates at their current levels, the $1,000 child tax credit, marriage penalty relief and certain educational tax credits. The bill would also provide higher small business expensing limits for one year and would repeal the personal exemption phase-out and the “Pease” limitations in 2013. Finally, the bill would provide a two-year AMT patch which would be adjusted for inflation. Coupled with H.R. 6169, H.R. 8 will ensure that individual tax rates will not increase while comprehensive, pro-growth tax reform is crafter under expedited procedures in 2013.

In total, the bill would prevent a tax increase of $383.6 billion, according to the Joint Committee on Taxation (JCT). A summary of the bill’s provisions follows below. For a side-by-side comparison of H.R. 8 and the Democrat substitute amendment, please see the attached document, prepared by the Ways and Means Committee staff.

Individual Income Rates: The bill would extend through December 31, 2013, the current individual income tax brackets of 10 percent, 25 percent, 28 percent, 33 percent, and 35 percent, which are set to expire at the end of calendar year 2012. The following table, prepared by the tax staff of the Ways and Means Committee, shows how tax rates would increase if H.R. 8 is not enacted.

Marriage Penalty Relief: The bill would preserve the 2001 tax relief provisions that prevented a marriage penalty by increasing the standard deduction for joint filers to twice the amount available to single filers and the exit point for the 15 percent rate tax bracket. The bill would extend marriage penalty relief through December 31, 2013.

Child Tax Credit: H.R. 8 would provide a one-year extension of the $1,000 child tax credit for children under the age of 17. The 2001 tax relief provision increased the child tax credit from $500 to $1,000. H.R. 8 would extend the $1,000 child credit through December 31, 2013.

Repeal of PEP and Pease:  H.R. 8 would repeal the personal exemption phase-out and the “Pease” limitations in 2013. Since 2010, a provision of law known as the Personal Exemption Phase-out (“PEP”), which had previously phased out the value of the personal exemptions of certain taxpayers, has been repealed. Similarly, since 2010, another provision of law known as the Pease Limitation, which had previously reduced the value of the overall itemized deductions of certain taxpayers, has been repealed. When PEP and the Pease Limitation were in effect prior to 2010, they each created additional, hidden marginal rate increases that applied to ordinary income, capital gains, and dividends, as well as significant compliance burdens. Under current law, both PEP and the Pease Limitation are scheduled to be reinstated in 2013. Under H.R. 8, each of these provisions would be extended through 2013, preventing the additional, hidden marginal rate increases they create from taking effect.

Estate Tax: Currently, the estate tax is set to increase to a tax rate of 55 percent and an exemption amount of $1 million. This bill would extend the current tax rate at 35 percent with an exemption amount of $5 million for the estate, gift, and generation skipping transfer taxes. These amounts would be indexed for inflation. The bill would extend the current estate tax levels through December 31, 2013.  

Education Tax Credits: The bill would extend certain educational tax incentives originally adopted in the 2001 tax relief bill,  including the deduction of student loan interest (maximum of $2,500) for single filers with incomes up to $75,000 and married couples of up to $150,000. H.R. 8 would also extend exclusions for certain employer-provided educational assistance and an expansion of the student loan interest deduction. The bill would extend these education tax benefits through December 31, 2013.

Capital Gains and Dividends: H.R. 8 would temporarily preserve both the capital gains and dividend tax rates at the 15 percent level through December 31, 2013. Without this legislation, capital gains would increase from 15 percent to 20 percent and dividend rates would increase from 15 percent to being taxed as ordinary income, with a top rate of 39.6 percent.

Alternative Minimum Tax Relief:  The bill would provide a two year alternative minimum tax (AMT) patch, which includes the ability to claim nonrefundable personal credits against the tax. For 2011, the most recent year for which an AMT patch was in place, the exemption amount was $48,450 for singles and $74,450 for joint returns. Under current law in effect for 2012 and subsequent years, however, the AMT exemption amount reverts to its pre-2001 level of $33,750 for singles and $45,000 for joint filers, and non-refundable personal credits would no longer be taken against the AMT.  Under H.R. 8, for 2012, the AMT exemption amount would be increased to $50,600 for singles and $78,750 for joint returns; for 2013, the exemption amount would be increased to $51,150 for singles and $79,850 for joint returns. For both 2012 and 2013, non-refundable personal credits would be allowed against the AMT. According to JCT, this two year patch would prevent a $192.7 billion tax increase.

Temporary Extension of Increased Small Business Expensing: Under current law, small businesses may “expense” (immediately deduct, rather than recover over time through annual depreciation deductions) the cost of certain property in the year in which it is placed in service, up to certain limits. Under current law, the amount of qualifying property placed in service that may be expensed is limited to $125,000, with that amount reduced (but not below zero) by the amount by which the cost of such property exceeds $500,000, with both of those amounts adjusted for inflation. For 2012, those inflation-adjusted amounts are $139,000 and $560,000, respectively. However, in 2013, those parameters are scheduled to revert to $25,000 and $200,000, respectively.

Under H.R. 8, the small business expensing parameters that were originally put in place in 2003 as part tax relief legislation ($100,000 and $400,000, respectively) would be extended and adjusted for inflation through December 31, 2013. JCT estimates that, for 2013, the inflation-adjusted amounts provided under the proposal would be $127,000 and $510,000, respectively. According to JCT, the one-year extension of increased small business expensing would prevent a $0.6 billion tax increase over 2013-2022.

In total, the bill would prevent a tax increase of $383.6 billion, according to the Joint Committee on Taxation (JCT).

Amendment No. 1—Rep. Sander Levin (D-MI):This amendment in the nature of a substitute would ensure that American families, small businesses, and family farmers would see a drastic tax increase on January 1, 2013. A recent study released by the accounting firm Ernst & Young found that the tax increases contained in this Democrat substitute would destroy more than 700,000 American jobs.  In addition, the report found that average wages would fall by 1.8 percent under the Democrats proposal, further lowering workers’ standard of living. The Democrat’s proposal would further damage our fragile economy by increase taxes on small businesses during the worst jobs crisis since the Great Depression.

While temporarily extending some of the current tax rates for one year, the bill would permanently increase taxes of families and small businesses through higher individual rates and on America’s family farmers through a permanent increase in the estate tax. Specifically, the Democrat substitute would do the following:  

• Permanently raise taxes on small businesses and “high income” taxpayers, those making more than $200,000 for individuals; $225,000 for taxpayers who are filing as head of household; and $250,000 for those who are married and filing jointly, or surviving spouses. Extends current tax policy for those making less than these amounts.

• Permanently reinstate the personal exemption phaseout (PEP) and overall limitation on itemized deductions (Pease) for small businesses and high-income taxpayers.

• Permanently return gift and estate taxes to Clinton-era levels: a $1 million exemption and a top rate of 55 percent. Current policy is a $5.1 million exemption and 35 percent top rate.

• Permanently raise the capital gains and dividends rate to 20 percent for high-income taxpayers (this will become 23.8 percent with the President’s health care law’s Medicare tax. Extends current capital gains and dividend policy for taxpayers making below the threshold.

• Extends the American Opportunity Tax Credit, the expanded Child Tax Credit, and the expanded Earned Income Tax Credit. The bill also extends a provision that disregards refundable tax credits and does not count them as income when determining eligibility for other federal assistance programs.

• Extend business expensing through 2013.

• Provide a one year patch (2012 only) for the Alternative Minimum Tax (AMT).