Roth Conversions as Revenue Raisers: Smoke and Mirrors

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The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA; P.L. 109-222), signed last week by President Bush, will extend the low tax rates on capital gains and dividends through 2010, grant temporary relief from the individual alternative minimum tax through 2006, and extend several expiring business tax breaks. Under the Senate’s budget rules, the package could reduce federal tax revenues by no more than $70 billion over the 10-year budget window to be protected from a point of order or filibuster that would have required 60 votes to override. To meet that revenue target while still including all of the tax cuts that congressional leaders wanted, several tax increase provisions were also included in the package. One of the largest is the provision allowing taxpayers to convert traditional IRA balances into Roth IRAs. The Joint Committee on Taxation estimates that this provision would raise $6.4 billion in revenues over the 10-year budget window (JCX-18-06, Doc 2006-9029, 2006 TNT 90-6). However, it will reduce federal revenues over the long term by much more than it raises in the short run. The Tax Policy Center estimates that on balance the provision will reduce net long-term federal revenues by at least $14 billion in present value terms (that is, after accounting for the time value of money).

Note: This report is available in its entirety in the Portable Document Format (PDF).

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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