This report provides a brief description of the amendment to the Tobacco Settlement bill, which is intended to provide marriage penalty tax relief for low to middle income taxpayers and discusses some associate issues

Esenwein, Gregg A.

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Congressional Research Service  ̃The Library of CongressCRS Report for CongressReceived through the CRS Web98-522 EJune 5, 1998Marriage Penalty Tax Relief:The Gramm AmendmentGregg A. EsenweinSpecialist in Public FinanceEconomics DivisionSummaryOn May 21, 1998, Senator Phil Gramm introduced an amendment to the TobaccoSettlement bill (S. 1415), which is intended to provide marriage penalty tax relief forlow to middle income taxpayers.  The amendment would create a new above-the-linededuction for taxpayers filing joint returns whose modified adjusted gross incomes fallbelow $50,000 in 1999.This report, which will be updated if legislative action warrants, provides a briefdescription of the amendment and discusses some associated issues.  For more detailedinformation on the federal income tax and marriage see: U.S. Library of Congress.Congressional Research Service.  The Federal Income Tax and Marriage Neutrality.CRS Report 97-190E, by Gregg A. Esenwein.  January 1997.  For information on thetobacco settlement see: U.S. Library of Congress.  Congressional Research Service.  TheTobacco Settlement: Issues.  CRS Issue Brief 98022, by C. Stephen Redhead.  Updatedperiodically.  The Gramm AmendmentOn May 21, 1998, Senator Phil Gramm introduced  Amendment 2436 to the TobaccoSettlement bill (S. 1415).  The amendment is intended to provide marriage penalty taxrelief for low to moderate income households.  The amendment is effective for tax yearsbeginning in 1999.  Specifically, the amendment creates a new above-the-line deductionfor taxpayers filing joint returns whose modified adjusted gross incomes fall below$50,000 in 1999.In any given tax year, the flat deduction would be equal to the amount by which thesum of the standard deduction for single returns and head of  household returns exceedsthe regular standard deduction for joint returns.  For example, if the amendment were ineffect in tax year 1998, then the above the line deduction would be $3,400 (the $4,250standard deduction for single returns plus the $6,250 standard deduction for head ofCRS-2household returns, less the $7,100 standard deduction for joint returns).  Since this newdeduction is only available to taxpayers in the 15% tax bracket the maximum taxreduction (if the deduction went into effect  in 1998) would be $510.Because standard deductions are indexed for inflation the amount of the above-the-line marital deduction for 1999 is not known at this time.  The amendment would indexthe $50,000 income level at which the marital deduction ends for inflation occurring aftertax year 1999.Furthermore, the amendment contains provisions which would adjust the earnedincome tax credit (EITC) phaseout threshold to reflect the new deduction.  Basically,these provisions would reduce, by the amount of the marriage penalty deduction claimed,the  taxpayer’s income for purposes of the earned income tax credit phaseout.  This hasthe effect of increasing the earned income tax credit for households in the phaseout range.Analysis Under the current income tax system, single individuals, heads of households, andmarried couples are subject to different standard deductions and tax rate schedules.  TheEITC amounts and phaseout ranges also vary according to filing status.  These differencesmean that some married couples pay more income tax filing joint returns than they wouldfiling as two singles (a marriage tax penalty) while some married couples would pay lessincome tax (a marriage tax bonus).In general, the division of income determines whether a married couple has amarriage tax bonus or penalty.  The largest marriage tax bonuses occur when one spouseearns 100% of the income.  The largest marriage tax penalties occur when each spouseearns half of the income.While the amendment provides marriage-penalty tax relief, it does not achievemarriage neutrality because it reduces taxes for all married couples regardless of whetherthey actually incur a marriage tax penalty or bonus.  Hence, while it reduces or eliminatesmarriage tax penalties for some couples, it also increases marriage tax bonuses for othercouples.  In addition, for low income families with children a significant factor inproducing marriage tax penalties is the differences in EITC phaseout ranges and amounts.This issue is not addressed by the Gramm amendment.  It should also be noted that bysetting a specific income level at which the new deduction ends, the amendment createsa serious notch effect.  For example, married couples with modified adjusted grossincomes of $49,999 could pay $510 dollars less in taxes than married couples withmodified adjusted gross incomes of $50,001. Some might argue that this amendment could also provide a means of reducing theregressivity of any tobacco tax increase.  However,  it provides only an imprecise  meansof offsetting the regressivity of a possible increase in tobacco taxes.  The amendmentwould provide income tax reductions based on marital status, not on the use of  tobaccoproducts.  Hence, non-smoking married couples would get the same tax relief as marriedcouples who use tobacco products, while single individuals who use tobacco productswould get no income tax reductions as an offset to a possible tobacco tax increase.

Marriage Penalty Tax Relief: The Gramm Amendment

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Marriage Penalty Tax Relief: The Gramm Amendment

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