Joint Committee Report JCS-7-79: General Explanation of the Revenue Act of 1978

• A reduction in individual income tax rates, a major element of an individual income tax reduction of approximately $12.8 billion for calendar year 1979.

• A permanent tax rate reduction for corporations, amounting to $5.1 billion for calendar year 1979.

• A major expansion of the earned income tax credit for the working poor, which will amount to $1 billion in 1979. In addition, the credit is simplified and will be reflected in an employee's paychecks, rather than being paid out in one lump sum as a tax refund.

• An increase (beginning in 1979) in the zero bracket amount and the corresponding floor under itemized deductions (which had replaced the standard deduction) from $2,200 to $2,300 for single persons and heads of households, and from $3,200 to $3,400 for married couples.

• An increase in the personal exemption from $750 to $1,000 (beginning in 1979) to replace the expiring general tax credit.

• A doubling of the tax credit for political contributions and repeal of the itemized deduction for political contributions.

• Repeal of the itemized deduction for nonbusiness State and local gasoline taxes.

• A phaseout of the exclusion for unemployment compensation benefits at higher income levels.

• Changes to limit certain tax shelters.

• Rules for taxation of benefits under certain deferred compensation plans.

• An increase from 50 percent to 60 percent in the portion of long-term capital gains deductible from income.

• A once-in-a-lifetime election to exclude from taxable income the first $100,000 of gain from the sale of a principal residence by taxpayers who are age 55 or older.

• Elimination of capital gains and adjusted itemized deductions from the list of tax preferences subject to the add-on minimum tax for individuals.

• A new alternative minimum tax at rates up to 25 percent on taxable income increased by the capital gains deduction and certain adjusted itemized deductions (generally, certain itemized deductions in excess of 60 percent of adjusted gross income), which individuals will pay only if it exceeds their regular income tax. An exclusion for capital gain from the sale of a principal residence is provided.

• Repeal of the 25-percent alternative income tax on the first $50,000 of long-term capital gain.

• A capital gains tax rate reduction for corporations.

• Deferral of carryover of basis at death until 1980.

• Denial of business deductions for use of certain entertainment facilities, such as yachts and hunting lodges.

• An expansion of the WIN-welfare tax credit to encourage both business and nonbusiness employers to hire WIN registrants and welfare recipients.

• A targeted jobs tax credit, to replace the general jobs tax credit, designed to encourage people to hire needy youths and other categories of people who frequently have difficulty finding jobs.

• A permanent 10-percent investment tax credit.

• Liberalization of the investment tax credit by raising the amount of tax liability which the credit may offset from 50 percent to 90 percent by 1982, extending it to rehabilitation of existing industrial and commercial buildings, and extending the full credit to certain pollution control facilities for which 5-year amortization is elected.

• Revised subchapter S rules.

• Additional funding of $0.4 billion (a total of $2.9 billion) for social services under Title XX of the Social Security Act for fiscal year 1979.

• A Congressional policy statement regarding the rate of growth in Federal outlays for fiscal years 1979-1983, and possible further income tax reduction.

Of the new tax cuts for 1979, $12.8 billion represents cuts in individual income tax liabilities, $3.7 billion represents business income tax cuts and $2.2 billion represents reductions in capital gains taxes for individuals and corporations.¹ The remaining $2 billion in tax cuts for 1979 relate to certain excise and estate and gift tax changes.

The Act significantly expands the earned income tax credit for the working poor. Previously, the credit was 10 percent of the first $4,000 of earnings and was phased out as income rose between $4,000 and $8,000. Under the Act, the credit is 10 percent of the first $5,000 of earnings (an increase in the maximum credit from $400 to $500), and the phaseout range is increased to between $6,000 and $10,000. The credit is also simplified so that it will be easier to compute. Finally, instead of being paid out as one lump sum upon filing a tax return for the taxable year, the credit will be reflected in employees' paychecks, making it a more effective work incentive and distributing the tax relief more evenly throughout the year. The credit is treated as earned income for purposes of determining eligibility for, and benefits under, certain Federal assistance programs. The tax cut and additional outlays from the increased earned income credit will amount to $1 billion for 1979.

The Act repeals the deduction for nonbusiness State and local gasoline taxes in order to simplify preparation of individual tax returns.

In addition, the Act doubles the tax credit for political contributions to encourage wider political participation and, to simplify the income tax return, it repeals the alternative itemized deduction for political contributions.

Specifically, the Act increases the percentage of long-term capital gains deductible from gross income from 50 percent to 60 percent, effective for sales after October 31, 1978. To ensure that this tax cut does not result in high-income individuals paying very low effective rates of tax, the Act imposes an alternative minimum tax on taxable income increased by the capital gains deduction and certain adjusted itemized deductions, with rates up to 25 percent. Individuals will pay this alternative minimum tax only if it exceeds their tax computed the regular way. The l5-percent add-on minimum tax is continued from prior law except that it does not apply to capital gains deductions or adjusted itemized deductions. Neither the add-on nor alternative minimum tax applies with respect to a capital gain from the sale of a principal residence. Another significant capital gains tax change under the Act will allow an individual, who is at least age 55, to elect to exclude from income up to $100,000 of any gain realized on the sale of his or her principal residence. However, this exclusion may be elected only once in a lifetime. The present rollover provision for gains on a principal residence where the proceeds of the sale are reinvested in another principal residence remains in effect.

The Act also removes capital gains from the tax preferences which reduce the amount of personal service income eligible for the 50-percent maximum tax.

The 50-percent maximum tax on personal service income is also liberalized by expanding the definition of earned income for businesses in which both capital and labor are used to produce income.

The Act also reduces the alternative corporate capital gains tax rate from 30 to 28 percent.

The application of the provision for carryover of basis at death, enacted in 1976, is deferred through the end of 1979.

Under the Act, participants in nondiscriminatory "cafeteria" plans will not have taxable income to the extent they elect to receive nontaxable benefits. ("Cafeteria plans" are employee fringe benefit plans permitting participants to choose among fringe benefits they want purchased with employer contributions.)

Also, the Act provides rules under which participants in "cash or deferred" profit sharing plans can defer tax on amounts paid by their employers into the plan.

The Act provides for simplified pension plans.

The Act provides favorable treatment for a sale of an annuity contract by a life insurance company to a public employee retirement plan.

Under the Act, self-insured medical and accident reimbursement plans will be required not to discriminate in favor of officers, shareholders or highly compensated employees in order for those participants to obtain favorable tax treatment. In addition, if certain requirements are met, the value of educational assistance provided by employers under a nondiscriminatory plan would be excluded from an employee's income.

The Act imposes civil penalties for failure to file and late filing of partnership tax returns. In addition, partners of partnerships subject to the registration and reporting requirements of the Securities and Exchange Commission will now be subject to a four-year statute of limitations with respect to partnership income, deductions and credits flowed through to the partners.

The Act provides a deficiency dividend procedure for mutual funds similar to that provided for real estate investment trusts.

Under the Act, contributions in aid of construction to regulated gas and electric utilities are treated as nontaxable contributions to capital (the same treatment previously given to water and sewer utilities).

Current law regarding employer reporting of tip income is extended.

The 4-percent excise tax on in investment income of private foundations is reduced to 2 percent. The existing excise tax credit for State taxes paid on coin operated slot machines is increased from 80 percent to 95 percent for 1979 and 1980, and the Federal tax is repealed entirely thereafter.

The Act extends the exclusion for amounts received by participants in the Armed Forces health professions scholarship program and the Public Health Service/National Health Service Corps scholarship program, pending a study of these issues.

Also, the Act extends through 1982 the moratorium on taxation of certain student loan cancellations.

The Act postpones for two years the effective date of the rules adopted in the Tax Reform Act of 1976 relating to trafficking in net operating loss carryovers.

The Act extends for 3 years the 5-year amortization of expenditures for rehabilitation of low-income housing.

The Act provides relief through 1979 for taxpayers involved in controversies with the IRS about employment tax status reclassifications of workers whom the taxpayers had not considered to be their employees.

It expands the exception to the source rules for interest on deposits in foreign branches of U.S commercial banks to interest on deposits with Puerto Rican branches of U.S. savings and loan associations.

The Act provides a safe harbor rule for real estate investment trusts from the tax on prohibited transactions.

The Act extends the family corporation exception to the rules requiring the accrual method of accounting and capitalization of pre-productive period expenses by farm corporations to certain two- and three-family corporations. In addition, there are changes in accounting rules for sod farms, florists, nurseries and certain other farmers.

The estate tax rules are changed to exclude a portion of the value of jointly owned property from a decedent's gross estate in recognition of the participation by a surviving spouse in the joint operation of a farm or other business.

There is an exemption from time investment credit recapture rules for the bankrupt railroads which transferred property to ConRail and there are changes in the net operating loss carryover rules as they apply to transferors of property to ConRail.

The Act provides for Treasury Department studies of the tax treatment of foreign owners of U.S. real estate, of the appropriate depreciation or amortization of equipment required by occupational health and safety (OSHA) or mine safety (MSHA) regulations, and of simplification of income tax returns for individuals.

The Act also expands the volunteer income tax assistance program of the Internal Revenue Service by authorizing the IRS to enter into training and technical assistance agreements with nonprofit agencies to prepare volunteers to provide tax counseling to elderly individuals.

Further, the Act includes various technical, clerical, and conforming amendments to the Tax Reform Act of 1976.

The net effect of this provision is to raise the ceiling on Federal funding for title XX social services to $2.9 billion for fiscal year 1979. After fiscal year 1979, the ceiling will revert to its permanent level of $2.5 billion in the absence of further legislation.