[Analytical Perspectives]
[Federal Receipts and Collections]
[3. Federal Receipts]
[From the U.S. Government Publishing Office, www.gpo.gov]


[[Page 37]]

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                    FEDERAL RECEIPTS AND COLLECTIONS

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[[Page 39]]

 
                          3.  FEDERAL RECEIPTS

  Receipts (budget and off-budget) are taxes and other collections from 
the public that result from the exercise of the Government's sovereign 
or governmental powers. The difference between receipts and outlays 
determines the surplus or deficit.

  Growth in receipts.--Total receipts in 1998 are estimated to be 
$1,566.8 billion, an increase of $61.4 billion or 4.1 percent relative 
to 1997. This increase is largely due to assumed increases in incomes 
resulting from both real economic growth and inflation. Receipts are 
projected to grow at an average annual rate of 4.9 percent between 1998 
and 2002, rising to $1896.7 billion.
  As a share of GDP, receipts are projected to remain fairly constant, 
declining from 19.1 percent in 1998 to 19.0 percent in 2002.

                                     

                                                         Table 3-1.  RECEIPTS BY SOURCE--SUMMARY                                                        
                                                                (In billions of dollars)                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Estimate                                     
                        Source                           1996 actual -----------------------------------------------------------------------------------
                                                                          1997          1998          1999          2000          2001          2002    
--------------------------------------------------------------------------------------------------------------------------------------------------------
Individual income taxes...............................      656.4         672.7         691.2         721.6         755.6         795.2         839.8   
Corporation income taxes..............................      171.8         176.2         189.7         199.6         212.0         220.5         227.8   
Social insurance taxes and contributions..............      509.4         535.8         557.8         585.2         614.4         642.2         673.1   
  (On-budget).........................................     (141.9)       (146.9)       (152.8)       (160.0)       (167.5)       (174.5)       (183.2)  
  (Off-budget)........................................     (367.5)       (388.9)       (404.9)       (425.2)       (446.9)       (467.6)       (489.9)  
Excise taxes..........................................       54.0          57.2          61.2          64.5          64.9          66.2          67.4   
Estate and gift taxes.................................       17.2          17.6          18.8          20.0          21.4          22.9          24.6   
Customs duties........................................       18.7          17.3          18.3          18.5          19.6          20.5          22.0   
Miscellaneous receipts................................       25.5          28.6          29.8          34.0          39.4          40.8          42.0   
                                                       -------------------------------------------------------------------------------------------------
  Total receipts......................................    1,453.1       1,505.4       1,566.8       1,643.3       1,727.3       1,808.3       1,896.7   
    (On-budget).......................................   (1,085.6)     (1,116.5)     (1,161.9)     (1,218.1)    ( 1,280.4)     (1,340.7)     (1,406.8)  
    (Off-budget)......................................     (367.5)       (388.9)      ( 404.9)       (425.2)       (446.9)       (467.6)       (489.9)  
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                     

                                         Table 3-2.  CHANGES IN RECEIPTS                                        
                                            (In billions of dollars)                                            
----------------------------------------------------------------------------------------------------------------
                                                                            Estimate                            
                                               -----------------------------------------------------------------
                                                   1997       1998       1999       2000       2001       2002  
----------------------------------------------------------------------------------------------------------------
Receipts under tax rates and structure in                                                                       
 effect January 1, 1997 \1\...................    1,503.8    1,572.4    1,639.7    1,722.5    1,801.4    1,884.7
Social security (OASDI) taxable earnings base                                                                   
 increases:...................................                                                                  
  $65,400 to $68,700 on Jan. 1, 1998..........  .........        1.4        3.8        4.2        4.6        5.1
  $68,700 to $71,400 on Jan. 1, 1999..........  .........  .........        1.1        3.1        3.4        3.8
  $71,400 to $74,100 on Jan. 1, 2000..........  .........  .........  .........        1.2        3.1        3.4
  $74,100 to $76,800 on Jan. 1, 2001..........  .........  .........  .........  .........        1.2        3.2
  $76,800 to $79,800 on Jan. 1, 2002..........  .........  .........  .........  .........  .........        1.3
Proposals \2\.................................        1.6       -7.0       -1.4       -3.7       -5.5       -4.9
                                               -----------------------------------------------------------------
  Total, receipts under existing and proposed                                                                   
   legislation................................    1,505.4    1,566.8    1,643.3    1,727.3    1,808.3   1,896.7 
----------------------------------------------------------------------------------------------------------------
\1\ These estimates assume a social security taxable earnings base of $65,400 through 2002.                     
\2\ Net of income offsets.                                                                                      

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                           ENACTED LEGISLATION

  Several laws were enacted in 1996 that have an effect on governmental 
receipts. The major legislative changes affecting receipts are described 
below.

  Tax Benefits for Members of the Armed Forces Performing Peacekeeping 
Services in Bosnia and Hercegovina, Croatia, and Macedonia.--Current law 
provides various forms of tax relief to military personnel serving in 
combat zones. Under this Act that relief is extended to military 
personnel serving in and around the former republic of Yugoslavia. Such 
tax relief includes the exclusion from income of all of the military pay 
of enlisted personnel and part of the pay of officers serving in the 
former republic of Yugoslavia, and the extension of filing and payment 
deadlines. The Act also extends for three years, through September 30, 
2003, the Internal Revenue Service's (IRS') authority to charge fees for 
written responses to questions from individuals, corporations, and 
organizations relating to their tax status or the effects of particular 
transactions for tax purposes. These fees were scheduled to expire 
effective with requests made after September 30, 2000.
  Taxpayer Bill of Rights 2.--This Act contains a number of provisions 
that provide taxpayers with increased protection in their dealings with 
the IRS. Taxpayer protection provisions include the establishment of a 
taxpayer advocate within IRS; modification of installment agreement 
provisions when agreements are terminated; expansion of IRS' authority 
to abate interest, and to award costs and certain fees in taxpayer 
disputes; and relief from retroactive regulations. To offset the receipt 
losses associated with these provisions, changes are provided in the 
``failure to pay'' penalty assessed against taxpayers who fail to file a 
tax return and penalties are imposed on tax-exempt organizations under 
certain circumstances.
  Personal Responsibility and Work Opportunity Reconciliation Act.--This 
Act provides an historic opportunity to transform our broken welfare 
system in a manner that promotes work, responsibility, and dignity. The 
major provisions of the Act that affect receipts include changes 
designed to improve earned income tax credit (EITC) compliance and to 
target EITC benefits to needy working families. These provisions, which 
are generally effective for taxable years beginning after December 31, 
1995, are described below.
  Deny EITC to individuals not authorized to be employed in the United 
States.--Individuals who do not have proper documentation for employment 
purposes are not eligible to claim the EITC.
  Allow the IRS to use mathematical error procedures for certain EITC-
related errors.--The IRS is permitted to use mathematical error 
procedures to deny claims for the EITC if a correct taxpayer 
identification number is not provided. The IRS can also use mathematical 
error procedures to impose the proper amount of self-employment tax if 
it is not paid on net self-employment earnings used to claim the credit.
  Modify the definition of adjusted gross income (AGI) for phasing out 
the EITC.--The definition of AGI used for phasing out the credit is 
modified by disregarding net capital losses, net losses from trusts and 
estates, net losses from royalties, and 50 percent of net losses from 
businesses and rents.
  Expand the definition of disqualified income for purposes of 
determining eligibility for the EITC.--Under prior law, taxpayers with 
more than $2,350 in taxable investment income were disqualifed from 
claiming the EITC. This Act lowers the limit to $2,200 and expands the 
definition of investment income to include capital gain net income and 
net passive income. The threshold is indexed for inflation beginning in 
1997.

  Health Insurance Portability and Accountability Act.--This Act, which 
represents an important step toward strengthening the health security of 
the American people, improves the portability of health insurance and 
makes a number of changes designed to simplify the administration of 
health insurance and to reduce waste, fraud, and abuse in health 
insurance and health care delivery. A number of tax incentives, which 
are offset by revenue increases, are also provided. The major changes 
that affect receipts are described below.
  Increase deductibility of health insurance premiums for self-employed 
individuals.--The 30-percent deduction for health insurance expenses of 
self-employed individuals and their dependents is increased to 40 
percent in 1997, 45 percent in 1998, 50 percent in 2003, 60 percent in 
2004, 70 percent in 2005 and 80 percent in 2006 and later years.
  Establish a four-year medical savings account (MSA) demonstration 
project.--Beginning January 1, 1997, MSAs are available to individuals 
who are covered by a high deductible health plan and who either are 
self-employed or are employed in a firm with 50 or fewer employees. The 
four-year demonstration project is limited to 750,000 policies for 
individuals who had health insurance and who work for a small employer 
or are self-employed. Contributions to an MSA (whether made by an 
employer, employee or self-employed individual) generally are 
deductible, up to a maximum of 65 percent of the deductible for high-
deductible individual coverage and 75 percent of the deductible for 
high-deductible family coverage. Contributions to an MSA made by an 
employer on behalf of an employee up to the same limits are excluded 
from the employee's wages for income and payroll tax purposes. Earnings 
on amounts in an MSA and distributions from an MSA for medical expenses 
are generally excluded from gross income. Distributions for non-medical 
expenses are taxed and are subject to a 15-percent additional tax unless 
made after age 65, or for reasons of death or disability. Unless 
Congress votes to expand the program, no new contributions may be made 
to MSAs after 

[[Page 41]]

December 31, 2000 except by or on behalf of individuals 
who previously had MSA contributions and individuals employed by certain 
participating employers. Self-employed individuals who made 
contributions prior to December 31, 2000 also may continue to make 
contributions after that date.
  Clarify taxation of qualified long-term care insurance premiums, 
expenses and benefits.--Effective with respect to contracts issued after 
December 31, 1996, a qualified long-term care insurance contract 
generally is treated as an accident and health insurance contract. 
Provisions include the following: (1) Amounts (other than policyholder 
dividends or premium refunds) received under a qualified long-term care 
insurance contract generally are excluded from gross income, subject to 
a cap of $175 per day, or $63,875 annually in the case of a per diem 
policy. Beginning in 1998, the per diem cap is indexed annually for 
inflation based on the medical care cost component of the consumer price 
index. (2) The cost of employer-provided qualified long-term care 
insurance generally is deductible for the employer and excluded from the 
employee's gross income. (3) Unreimbursed expenses for qualified long-
term care services are deductible as medical expenses, subject to the 
present-law floor of 7.5 percent of adjusted gross income (AGI). (4) 
Qualified long-term care insurance premiums (subject to specified dollar 
limits) are deductible as medical expenses, subject to the present-law 
floor of 7.5 percent of AGI. Beginning in 1998, the dollar limits are 
indexed annually for inflation based on the medical care cost component 
of the consumer price index. (5) Self-employed individuals are able to 
deduct the cost of qualified long-term care insurance premiums up to the 
limit for health insurance.
  Modify taxation of accelerated death benefits under life insurance 
contracts.--An exclusion from gross income is provided to an insured 
individual who is terminally or chronically ill for (1) amounts received 
under a life insurance contract and (2) amounts received for the sale or 
assignment of a life insurance contract to a qualified viatical 
settlement provider. For chronically ill individuals, the exclusion is 
limited to $175 per day or $63,875 annually, or the individual's costs 
for qualified long-term care services. The exclusion is effective with 
respect to amounts received after December 31, 1996.
  Modify taxation of State-sponsored organizations providing health 
coverage for high-risk individuals and workers' compensation 
reinsurance.--An exemption from income tax is provided to any membership 
organization that is established by a State exclusively to provide 
coverage for medical care on a nonprofit basis to certain high-risk 
individuals, provided certain criteria are satisfied. The provision 
applies to taxable years beginning after December 31, 1996. In addition, 
tax-exempt status is provided to any membership organization that is 
establised by a State before June 1, 1996 exclusively to reimburse its 
members for workers' compensation insurance losses, and that satisfies 
certain other conditions. The provision applies to taxable years ending 
after August 21, 1996.
  Extend special tax rules provided under Section 833 to certain health 
insurance organizations.--Under prior law a special deduction equal to 
25 percent of the claims and expenses incurred during the year, less the 
adjusted surplus at the beginning of the year, was provided to certain 
eligible health organizations. Eligible organizations included: (1) Blue 
Cross or Blue Shield organizations existing on August 16, 1986, which 
had not experienced a material change in structure or operation since 
that date. (2) Other organizations that met certain community-service-
related requirements and substantially all of whose activities involved 
the provision of health insurance. Effective for taxable years ending 
after December 31, 1996, these special rules are applied to any 
organization that (1) is not a Blue Cross or Blue Shield organization 
existing on August 16, 1986 and (2) otherwise meets the requirements of 
Section 833, including the requirement of no material change in 
operations or structure since August 16, 1986. An organization qualifies 
for this treatment only if it is not a health maintenance organization 
and it is organized under and governed by State laws specifically and 
exclusively applicable to not-for-profit health insurance or health 
service type organizations.
  Allow penalty-free withdrawals from individual retirement accounts 
(IRAs) for medical expenses.--Effective for taxable years beginning 
after December 31, 1996, penalty-free withdrawals are permitted from 
IRAs for medical expenses in excess of 7.5 percent of AGI. Penalty-free 
withdrawals generally are also permitted for medical insurance premiums 
(without regard to the 7.5 percent floor) of individuals unemployed for 
at least 12 consecutive weeks.
  Expand penalties provided under the Consolidated Omnibus Budget 
Reconciliation Act of 1995 (COBRA) to enforce group health plan 
portability, access, and renewability requirements.--Under COBRA, most 
employer-sponsored group health plans must offer qualified beneficiaries 
the opportunity to continue to participate for a specified period of 
time after the occurrence of certain events (such as termination of 
employment) that otherwise would have terminated such participation. A 
tax is imposed on the failure of a plan to satisfy these health care 
continuation rules. Effective for taxable years beginning after December 
31, 1996, the tax for failure to satisfy health continuation rules is 
extended to apply to failure to satisfy the expanded coverage provisions 
provided in this Act.
  Disallow the deductibility of interest on corporate owned life 
insurance (COLI) policy loans.--Generally, for interest paid or accrued 
after December 31, 1995, no deduction is allowed for interest on any 
COLI policy loan, except for ``key person policies'' that cover up to 20 
key persons. Interest with respect to key person policies is deductible 
only to the extent the rate of interest does not exceed Moody's 
Corporate Bond Yield Average-Monthly Average Corporates for each month 
interest is paid or accrued. Special phase-in rules are 

[[Page 42]]

provided with respect to any otherwise deductible interest paid or accrued after October 13, 1995 and before January 1, 1999 with respect to debt incurred before January 1 1996. An exception from the general disallowance is also provided to interest on debt with respect to 
contracts purchased on or before June 20, 1986.
  Eliminate the interest allocation exception for certain nonfinancial 
corporations.--For foreign tax credit purposes, taxpayers generally are 
required to allocate and apportion interest expenses between U.S. and 
foreign source income based on the proportion of the taxpayer's total 
assets in each location. Such allocation and apportionment is required 
to be made for affiliated groups as a whole rather than on a subsidiary-
by-subsidiary basis. However, certain types of financial institutions 
that are members of an affiliated group are treated as members of a 
separate affiliated group for purposes of the allocation and 
apportionment of interest expense. The Tax Reform Act of 1986 included a 
targeted rule that treated certain nonfinancial corporations as 
financial institutions for this purpose. The targeted exception for 
certain nonfinancial corporations is repealed, generally effective for 
taxable years beginning after the date of enactment.
  Modify expatriation tax.--Under prior law, citizens who relinquished 
their citizenship for tax avoidance purposes were subject to special tax 
provisions for ten years after such loss of citizenship. This Act 
expands the prior law provisions in several ways, generally with respect 
to individuals who expatriate on or after February 6, 1995: (1) The 
provision subjecting U.S. citizens to tax for ten years following 
expatriation is extended to apply to certain long-term residents whose 
residency is terminated. A long-term resident generally is any 
individual who was a lawful permanent resident of the United States for 
at least eight out of the 15 taxable years ending with the year in which 
termination occurs. (2) Certain individuals are subject to the 
expatriation tax without inquiry as to their motive for losing U.S. 
citizenship or residency, but certain categories of citizens are allowed 
to show an absence of tax-avoidance motive if they request a ruling from 
the IRS as to whether the loss of citizenship had a principal purpose of 
tax avoidance. (3) The categories of income and gain that are treated as 
U.S. source (and, therefore, subject to tax) is expanded and the ability 
to engage in transactions that partially or completely circumvent the 
ten-year reach of the law is curtailed. (4) Relief from double taxation 
is provided in circumstances where another country imposes tax on items 
that would be subject to U.S. tax under the expatriation tax provisions. 
(5) Information reporting requirements are applied to U.S. citizens and 
long-term residents whose citizenship or residency is terminated.

  Small Business Job Protection Act of 1996.--This Act increases the 
minimum wage and makes numerous changes in the tax code to provide 
relief to small businesses, simplify pension plans, and extend certain 
expiring provisions. The reduction in receipts associated with these 
changes is offset by a number of revenue increases. The major provisions 
of the Act affecting receipts are described below.
  Increase expensing for small business.--The amount of depreciable 
tangible personal property that a small business can elect to expense 
each year is increased from $17,500 in 1996 to $18,000 in 1997, $18,500 
in 1998, $19,000 in 1999, $20,000 in 2000, $24,000 in 2001, and to 
$25,000 in 2003 and later years. The amount that a small business may 
elect to expense is reduced by the amount by which the cost of 
qualifying property exceeds $200,000.
  Simplify and expand pension plans.--The major provisions affecting 
pension plans include the following: (1) Effective for taxable years 
beginning after December 31, 1999, lump-sum distributions from qualified 
plans are no longer eligible for special five-year forward averaging. 
(2) The $5,000 exclusion provided employer-provided death benefits is 
repealed, effective with respect to decedents dying after the date of 
enactment. (3) The method for determining the taxable portion of 
qualified annuity payments is simplified, effective with respect to 
annuity starting dates beginning 90 days after the date of enactment. 
(4) Employees (other than 5 percent owners) who continue working after 
age 70\1/2\ can delay beginning their pensions until they actually 
retire. (5) A simplified retirement plan for small business, called the 
savings incentive match plan for employees (SIMPLE) is created. A SIMPLE 
plan can either provide an individual retirement account (IRA) for each 
employee or be part of a qualified cash or deferred arrangement (401(k) 
plan). SIMPLE plans use lower contribution limits than regular 401(k) 
plans and Salary Reduction Simplified Employee Pensions (SARSEPs), and 
specify employer contribution levels in lieu of the nondiscrimination 
and top-heavy rules that normally apply to employer retirement plans. 
All contributions to the plan are fully vested. Contributions to a 
SIMPLE plan generally are deductible by the employer and excluded from 
the employee's income. The rules regarding the availability and taxation 
of distributions from a SIMPLE IRA or SIMPLE 401(k) plan are the same as 
the rules that apply to distributions from regular IRAs or 401(k) plans, 
respectively, except that during the first two years after the 
individual first participates in any SIMPLE IRA maintained by the 
individual's employer, rollovers to regular IRAs are not available and 
the additional tax on early distributions is increased from 10 percent 
to 25 percent. SIMPLE IRA plans are subject to simplified reporting 
requirements. SIMPLE plans are available for plan years beginning after 
December 31, 1996. (6) Effective for plan years beginning after December 
31, 1996, tax-exempt organizations (including Indian tribal governments) 
are permitted to establish qualified cash or deferred arrangements. (7) 
The availability of spousal IRAs is increased by permitting deductible 
IRA contributions of up to $2,000 on behalf of each spouse if the 
combined compensation of both spouses is at least equal to the 
contributed amount. This provision is effective for taxable years 
beginning after December 31, 1996. (8) Non-

[[Page 43]]

discrimination rules are modified by simplifying the definitions of highly compensated employees, compensation and retirement age; changing the minimum participation 
rule; and modifying the nondiscrimination tests applicable to qualified 
cash or deferred arrangements and matching contributions. (9) Effective 
for plan years beginning after December 31, 1998, instead of applying 
nondiscrimination tests, employers may use simple safe harbors for 
certain 401(k) plans under which the employer contributes at least a 
stated minimum to each employee account. (10) The rules that apply to 
nonqualified plans for tax-exempt and governmental employers have been 
simplified and, in the case of governmental employers, the assets under 
those plans must be kept in trust. (11) The vesting period for 
multiemployer plans is reduced from ten to five years for plan years 
beginning after December 31, 1996. (12) The combined plan limit is 
repealed, effective with respect to limitation years beginning after 
December 31, 1998, and the excise tax on large distributions is 
suspended for the years 1997 through 1999. (13) The excise tax 
applicable to prohibited transactions is increased from five percent to 
ten percent. (14) Alternative nondiscrimination tests are provided to 
certain plans that allow employees to participate before they complete 
one year of service or reach age 21. These tests promote pension 
portability by encouraging employers to offer pensions to new hires.
  Simplify tax laws affecting Subchapter S (closely-held) 
corporations.--A number of changes in the tax laws affecting Subchapter 
S corporations are provided. The major changes increase the maximum 
number of shareholders in an S corporation from 35 to 75, permit S 
corporations to hold subsidiaries, allow financial institutions to 
qualify as S corporations, and permit certain tax-exempt organizations 
to be S corporation shareholders.
  Provide adoption assistance.--Effective for taxable years beginning 
after December 31, 1996, the following adoption assistance is provided: 
(1) A maximum nonrefundable tax credit of $5,000 per child ($6,000 per 
child in the case of domestic special needs adoptions) is provided for 
qualified adoption expenses paid or incurred by the taxpayer. The credit 
for adoptions other than domestic special needs adoptions expires with 
respect to expenses paid or incurred after December 31, 2001. (2) A 
maximum exclusion from income of $5,000 per child ($6,000 per child in 
the case of domestic special needs adoptions) is provided for certain 
employer-paid adoption expenses. The exclusion is repealed with respect 
to employer-paid adoption expenses provided after December 31, 2001. 
Both the credit and exclusion are phased out ratably for taxpayers with 
modified adjusted gross income above $75,000 and are fully phased out at 
$115,000 of modified adjusted gross income.
  Replace targeted jobs tax credit with a temporary work opportunity tax 
credit.--Prior to January 1, 1995, the targeted jobs tax credit was 
available on an elective basis for employers hiring individuals from one 
or more of nine targeted groups. The credit generally was equal to 40 
percent of up to $6,000 in qualified first-year wages, for a maximum 
credit of $2,400 per employee. The targeted jobs tax credit of prior law 
is replaced with the work opportunity tax credit effective for wages 
incurred or paid to a qualified individual who begins work after 
September 30, 1996 and before October 1, 1997. The new credit is 
available on an elective basis for employers hiring individuals from one 
or more of seven targeted groups and is generally equal to 35 percent of 
the first $6,000 in qualified first-year wages. No credit is allowed for 
wages paid unless the eligible individual is employed by the employer 
for at least 180 days (20 days in the case of a qualified summer youth 
employee) or 400 hours (120 hours in the case of a qualified summer 
youth employee).
  Extend exclusion for employer-provided educational assistance.--For 
taxable years beginning before January 1, 1995, certain amounts paid by 
an employer for educational assistance provided to an employee were 
excluded from the employee's gross income for income and payroll tax 
purposes. The exclusion was limited to $5,250 of educational assistance 
with respect to an individual during a calendar year and applied whether 
or not the education was job related. The exclusion is extended to apply 
to undergraduate courses beginning after December 31, 1994 and before 
mid-1997; for graduate courses, the exclusion applies to courses 
beginning after December 31, 1994 and before mid-1996.
  Extend research and experimentation tax credit with modifications.--
Under prior law, a 20 percent tax credit was provided for certain 
research and experimentation expenditures made before July 1, 1995. This 
credit is extended, with modifications, to apply to expenditures paid or 
incurred during the 11-month period July 1, 1996 through May 31, 1997.
  Extend orphan drug tax credit.--Prior to January 1, 1995, a 50-percent 
nonrefundable tax credit was provided for qualified clinical testing 
expenses paid or incurred in the testing of certain drugs for rare 
diseases or conditions (generally known as ``orphan drugs''). The credit 
is extended for 11 months to apply to qualified expenses paid or 
incurred from July 1, 1996 through May 31, 1997.
  Extend deduction for contributions of stock to private foundations.--
The deduction for a contribution to a private foundation is generally 
limited to the adjusted basis of the contributed property. However, 
under prior law, a taxpayer who contributed qualified appreciated stock 
to a private foundation before January 1, 1995 was allowed to deduct the 
full fair market value of the stock, rather than the adjusted basis of 
the contributed stock. The special rule for contributions of qualified 
appreciated stock to private foundations is extended to apply to 
contributions made during the period July 1, 1996 through May 31, 1997.
  Extend tax credit for producing fuel from a nonconventional source.--
Certain fuels produced from nonconventional sources and sold to 
unrelated parties are eligible for an income tax credit equal to $3 per 
barrel or BTU oil barrel equivalent. Qualified fuels must be 

[[Page 44]]

produced within the United States and include: (1) oil produced from shale and 
tar sands; (2) gas produced from geopressured brine, Devonian shale, 
coal seams, tight formations, or biomass; and (3) liquid, gaseous, or 
solid synthethic fuels produced from coal (including lignite). The 
credit generally is availabe only with respect to qualified fuels 
produced and sold before January 1, 2003 from wells drilled or 
facilities placed in service after December 31, 1979 and before January 
1, 1993. Under prior law, an exception allowed the credit to be claimed 
for gas from biomass and synthetic fuel from coal produced or sold 
before January 1, 2008 from facilities placed in service before January 
1, 1997, pursuant to a binding contract entered into before January 1, 
1996. This Act extends both the binding contract date and the placed in 
service date for facilities producing synthetic fuels from coal and gas 
from biomass. Specifically, synthetic fuels from coal and gas from 
biomass produced or sold before January 1, 2008 are eligible for the 
credit if produced from facilities placed in service before July 1, 
1998, pursuant to a binding contract entered into before January 1, 
1997.
  Suspend imposition of excise tax on diesel fuel used in recreational 
motorboats.--The 24.4-cents-per-gallon excise tax on diesel fuel used in 
recreational motorboats is suspended during the period beginning on 
August 27, 1996 through December 31, 1997.
  Permanently extend the Federal Unemployment Tax (FUTA) exemption for 
alien agricultural workers.--Generally, the Federal unemployment tax is 
imposed on farm operators who (1) employ 10 or more agricultural workers 
for some portion of 20 different days, each being in a different 
calendar week or (2) have a quarterly payroll for agricultural services 
of at least $20,000. Under prior law, effective for labor performed 
before January 1, 1995, an exclusion from FUTA was provided for labor 
performed by an alien admitted to the United States to perform 
agricultural labor under the Immigration and Nationality Act. The 
exemption from FUTA for alien agricultural workers is permanently 
extended, effective with respect to labor performed on or after January 
1, 1995.
  Extend Generalized System of Preferences (GSP).--Under GSP, duty-free 
access is provided to over 4,000 items from eligible developing 
countries that meet certain worker rights, intellectual property 
protection, and other criteria. This program, which had expired after 
July 31, 1995, is temporarily extended for the period August 1, 1995 
through May 31, 1997.
  Extend airport and airway excise taxes.--The excise taxes levied on 
domestic air passenger tickets, international departures, domestic air 
cargo and noncommercial aviation fuels, which had expired after December 
31, 1995 under prior law, are reinstated effective August 27, 1996 
through December 31, 1996.
  Extend and phase out the excise tax on luxury automobiles.--Under 
prior law, the ten-percent luxury excise tax levied on the retail price 
of a passenger vehicle in excess of an inflation-adjusted threshold 
($34,000 in 1996) was scheduled to expire after December 31, 1999. The 
tax is extended through December 31, 2002, at the following rates: 1996 
(effective August 28, 1996), nine percent; 1997, eight percent; 1998, 
seven percent; 1999, six percent; 2000, five percent; 2001, four 
percent; and 2002, three percent.
  Modify Puerto Rico and possessions tax credit.--Under prior law, 
domestic corporations with business operations in U.S. possessions were 
allowed to elect the Section 936 credit, which generally eliminated the 
U.S. tax on certain income related to their possession-based operations. 
Income exempt from U.S. tax under this provision fell into two broad 
categories: (1) possession business income derived from the active 
conduct of a trade or business within a possession or from the sale or 
exchange of substantially all of the assets used in such a trade or 
business; and (2) possession source investment income (QPSII) 
attributable to investment in the possession or in certain Caribbean 
Basin countries. The credit attributable to QPSII is repealed, effective 
for QPSII earned after June 30, 1996. The credit with respect to 
possession business income also generally is repealed, effective with 
respect to taxable years beginning after December 31, 1995. However, 
grandfather rules are provided under which a corporation that elected 
the credit by October 13, 1995 is eligible to claim credits with respect 
to possession business income during a transition period effective for 
taxable years beginning after December 31, 1995 and before January 1, 
2006. The credit is eliminated for taxable years beginning after 
December 31, 2005.
  Repeal 50-percent interest exclusion for financial institution loans 
to employee stock option plans (ESOPs).--Under prior law a bank, 
insurance company, regulated investment company, or a corporation 
actively engaged in the business of lending money was generally allowed 
to exclude from gross income 50 percent of interest received on an ESOP 
loan. The 50-percent exclusion generally is repealed, effective with 
respect to loans made after the date of enactment, other than loans made 
pursuant to a written binding contract in effect before June 10, 1996.
  Reform depreciation under the income forecast method.--All estimated 
income from the use of property or the sale of merchandise is to be 
taken into account in determining depreciation under the income forecast 
method. In applying this rule, income expected to be generated after the 
close of the tenth taxable year after the year the propery is placed in 
service generally need not be taken into account. In the case of a film, 
television show or similar property, such income includes, but is not 
necessarily limited to, income from foreign and domestic theatrical, 
television, and other releases and syndications; and video tape 
releases, sales, rentals, and syndications. In the case of television 
and motion picture films, the income from the property shall include 
income from the financial exploitation of characters, designs, scripts, 
scores, and other incidental income associated with such films, but only 
to the extent income is earned in connection with the ultimate use of 
such items by, or the ultimate sale of mechandise 

[[Page 45]]

to, persons who are not related to the taxpayer. These changes generally are effective for property placed in service after September 13, 1995.
  Modify exclusion of damages received on account of personal injury or 
sickness.--The Act specifies that the exclusion from gross income of 
damages received on account of personal injury or sickness does not 
apply to compensatory damages received on account of non-physical 
personal injury or sickness or to punitive damages received in 
connection with a personal injury or sickness. This change generally 
applies with respect to amounts received after August 20, 1996.
  Modify basis adjustment rules under Section 1033.--When a taxpayer 
acquires a controlling interest in the stock of a corporation as 
replacement property after an involuntary conversion, the corporation 
generally will reduce its adjusted bases in its assets by the same 
amount as the taxpayer is required to reduce its basis in the acquired 
stock. The corporation's adjusted bases in its assets will not be 
reduced, in the aggregate, below the taxpayer's basis in its stock. In 
addition, the basis of any individual asset will not be reduced below 
zero. This provision, which allows deferral of gain recognition, but not 
the avoidance of that gain, is generally effective with respect to 
involuntary conversions occurring after August 20, 1996.
  Allow the IRS to use mathematical error procedures to deny dependency 
exemptions.--If an individual fails to provide a correct taxpayer 
identification number (TIN) for a dependent, the IRS is allowed to use 
mathematical error procedures to deny the dependency exemption. This 
change generally is effective for tax returns for which the due date 
(without regard to extensions) is 30 days or more after August 20, 1996.
  Modify rules for taxing foreign trusts.--This Act strengthens 
information reporting and penalties related to foreign trusts, and 
tightens tax planning rules involving foreign trusts, their 
beneficiaries, and grantors.
  Repeal bad debt reserve deduction for thrift institutions.--Under 
prior law, certain thrift insitutions were allowed deductions for bad 
debts under rules more favorable than those granted to commercial banks. 
Generally effective for taxable years beginning after December 31, 1995, 
thrifts must account for bad debts in the same manner as banks.

                        ADMINISTRATION PROPOSALS

            Provide Tax Relief and Extend Expiring Provisions

  The President's plan targets tax relief to middle-income Americans 
through his Middle Class Bill of Rights. His plan also includes a 
targeted home-ownership tax cut, a new welfare-to-work incentive, a 
District of Columbia tax incentive program, estate tax relief for small 
businesses and family farms, initiatives for economically distressed 
areas, and the extension of certain expiring tax provisions.

  Middle Class Bill of Rights.--The Administration is again proposing, 
with certain modifications and enhancements, the three features of its 
Middle Class Bill of Rights designed to give middle-income families the 
tax relief they need to help them raise their children, save for the 
future and pay for postsecondary education.
  Provide tax credit for dependent children.--A nonrefundable credit 
would be allowed for each dependent child under the age of 13. The 
credit would equal $300 for 1997, 1998 and 1999, and would rise to $500 
for 2000 and subsequent years. The credit would be phased out for 
taxpayers with adjusted gross income (AGI) between $60,000 and $75,000. 
Both the credit amount and the phase-out range would be indexed for 
inflation beginning in 2001. The credit would be applied before the 
earned income tax credit but could not be used to offset alternative 
minimum tax liability.
  Expand Individual Retirement Accounts (IRAs).--Under present law, 
eligibility for deductible IRAs is phased out for single taxpayers with 
AGI between $25,000 and $35,000 and for couples filing a joint return 
with AGI between $40,000 and $50,000, if the individual (or the 
individual's spouse) is an active participant in an employer-sponsored 
retirement plan. Under the Administration's proposal, the AGI thresholds 
and phase-out ranges would be doubled over time. For 1997 through 1999, 
eligibility would be phased out for single taxpayers with AGI between 
$45,000 and $65,000, and for couples filing a joint return with AGI 
between $70,000 and $90,000. For 2000 and later years, eligibility would 
be phased out for single taxpayers with AGI between $50,000 and $70,000 
and for couples filing a joint return with AGI between $80,000 and 
$100,000. These thresholds and the present law annual contribution limit 
of $2,000 would be indexed for inflation. Withdrawals from IRAs would 
not be subject to the ten percent early withdrawal tax if the proceeds 
were used to pay post-secondary education costs, to buy or build a first 
home, or to cover living expenses if unemployed for at least 12 
consecutive weeks. (Prior versions of the Administration's proposal 
would also have permitted early withdrawal to pay catastrophic medical 
expenses (including nursing home or other costs associated with caring 
for an incapacitated parent or grandparent); this provision was enacted 
in the Health Insurance Portability and Accountability Act, effective 
for distributions after 1996.) In addition, each individual eligible for 
a deductible IRA would have the option of contributing an amount up to 
the contribution limit to a traditional deductible IRA or to a new back-
loaded special IRA. Contributions to this special IRA would not be tax 
deductible, but distributions of the contributions would be tax-free. If 
the contributions remained in the account for at least five years, 
earnings on the contributions also would be tax-free when withdrawn. 
Withdrawals of account balances from special IRAs during the five-year 
period would be subject to ordinary

[[Page 46]]

income tax and a ten-percent early withdrawal tax. However, withdrawals during the five-year period for the purposes described above (or upon death or disability of the taxpayer) would not be subject to the early withdrawal tax. Individuals whose AGI for a year fell within the eligibility thresholds would be allowed to convert an existing IRA into a special IRA, and for conversions before 1999, income inclusion would be spread over four years.
  Provide tax incentive for education and training.--The 
Administration's proposed HOPE scholarship plan would make 14 years of 
education--at least two years of college--the standard for all 
Americans. A taxpayer could claim a $1,500 per-student nonrefundable tax 
credit for tuition and required fees for enrollment of the taxpayer, the 
taxpayer's spouse or the taxpayer's dependent in a post-secondary degree 
or certificate program. The credit would be available for payments made 
during 1997 and thereafter for education commencing on or after July 1, 
1997. The amount of the credit would be reduced by any other non-taxable 
Federal educational grants received by the student. The credit could be 
claimed twice (i.e., in two different years) for a student, provided the 
credit was claimed in a year in which the student was enrolled at least 
half-time in the thirteenth or fourteenth year of post-secondary 
education. The credit would be available for a second year, however, 
only if the student had obtained a B-average for all prior post-
secondary course work. No credit would be available for a student who 
had been convicted of a drug-related felony. A deduction would be 
permitted for up to $5,000 per family in annual tuition and required 
fees for post-secondary education and job training for the taxpayer, the 
taxpayer's spouse and dependents. The maximum allowable deduction would 
increase to $10,000 effective January 1, 1999. A taxpayer could claim 
either the credit or the deduction for a student's expenses, but not 
both in the same taxable year. In addition, both the credit and 
deduction would be phased out for taxpayers filing a joint return with 
AGI (before the proposed deduction) between $80,000 and $100,000. For 
taxpayers filing a head-of-household or single return, the credit and 
deduction would be phased out for those with AGI between $50,000 and 
$70,000. The phase-out ranges would be indexed for inflation beginning 
in 2000. Education expenses qualifying for the credit and deduction 
include tuition and fees paid to institutions and programs eligible to 
participate in Federal student aid programs. No deduction or credit 
would be available for expenses for meals, lodging, books or 
transportation. In addition, to provide assistance with education-
related debt to graduates entering public service, the current exclusion 
from income for the discharge of certain student loans would be expanded 
to cover discharge of certain direct loans made by the Federal 
government and certain loans made by charitable and educational 
institutions.

  Provide targeted welfare-to-work tax credit.--The Administration 
proposes a targeted welfare-to-work credit designed to create new job 
opportunities for long-term welfare recipients. The credit would enable 
employers to claim a 50-percent credit on the first $10,000 of annual 
wages paid to long-term welfare recipients. The credit could be claimed 
for up to two years and employers would be able to treat education and 
training assistance, health care, and dependent care expenses as 
eligible wages. The credit would be available for wages paid or incurred 
effective the date of enactment through September 30, 2000. The 
Administration also proposes to expand the existing Work Opportunity Tax 
Credit to include adults age 18 to 50 who are subject to more rigorous 
work requirements for food stamps under the Administration's proposal to 
amend last year's welfare reform law.
  Provide capital gains exclusion on sale of principal residence.--Under 
current law gains on the sale of a taxpayer's principal residence are 
subject to the capital gains tax; however, taxes on the gain can be 
deferred through the purchase of a new home of equal or greater value 
within a specified period of time. Taxpayers over 55 may elect to take a 
one-time exclusion of up to $125,000 of gain from the sale of their 
home. The Administration proposes to exclude up to $500,000 of gain from 
the sale of a taxpayer's principal residence ($250,000 for a single 
taxpayer) effective for sales on or after January 1, 1997. The proposal 
would repeal the current-law exclusion for taxpayers over age 55 and the 
section 1034 deferral for purchasing a more expensive home, with 
transition relief. Gain recognition would be required on the sale of a 
principal residence to the extent of any depreciation allowable after 
December 31, 1996. The proposal would exempt over 99 percent of home 
sales from the capital gains tax and would dramatically simplify taxes 
and record keeping for over 60 million homeowners.
  Establish District of Columbia (DC) tax incentive program.--To 
encourage employment of disadvantaged DC residents and to revitalize 
those DC areas where development has been inadequate, tax incentives are 
proposed.
  Provide estate tax relief for small business.--Estate tax attributable 
to certain interests in closely held businesses may be paid in 
installments over a period of up to 14 years. A special four percent 
interest rate is provided for the tax deferred on the first $1 million 
of value. The $1 million cap has been in effect since 1976. To address 
the liquidity problems that may arise upon the death of a farmer or 
small business owner, and to adjust for inflation, the Administration 
proposes to increase the amount of property eligible for the special 
interest rate from $1 million to $2.5 million. The proposal also 
simplifies current law by eliminating distinctions based on the form of 
ownership, providing alternatives to the estate tax lien, and reducing 
the interest rate by 50 percent or more in exchange for making the 
interest payments nondeductible. The proposal would be effective for 
decedents who die after December 31, 1997.

[[Page 47]]

  Provide tax incentives for distressed areas.--The Administration is 
proposing tax incentives for the cleanup of polluted urban and rural 
areas and is proposing an expansion of the empowerment zone and 
enterprise community program, as described below.
  Provide tax incentives to clean up environmentally contaminated areas 
known as brownfields in distressed communities.--To encourage the 
cleanup of polluted urban and rural areas known as brownfields, the 
Administration proposes to allow a current deduction for certain costs 
incurred by businesses to remediate environmentally contaminated land in 
certain areas. Qualified sites generally would be limited to those 
properties located in or next to high-poverty areas, Federal empowerment 
zones and enterprise communities, and areas subject to certain 
Environmental Protection Agency (EPA) Brownfields Pilots. To claim this 
incentive, taxpayers would be required to obtain from the appropriate 
State or local agency, or the EPA in certain circumstances, verification 
that the site satisfies the geographic and contamination requirements. 
The proposal would be effective for qualified expenses incurred after 
the date of enactment.
  Expand Empowerment Zone and Enterprise Community program.--Under the 
Omnibus Budget Reconciliation Act of 1993 (OBRA 93), certain tax 
incentives were provided for nine empowerment zones and 95 enterprise 
communities. The tax incentives were a 20-percent employer wage credit, 
increased Section 179 expensing, and a new category of tax-exempt 
financing. Qualifying businesses in empowerment zones were eligible for 
all three incentives, while businesses in enterprise communities were 
eligible for the tax-exempt financing. Over 500 communities submitted 
applications for these 104 designations that were announced in December 
1994. The Administration proposes a three-part expansion of this 
program. First, the designation of two additional urban empowerment 
zones would be authorized, to be made within 180 days of enactment. 
Second, the restrictions on the tax-exempt financing would be loosened 
to make this incentive more accessible. Third, the designation of 20 
additional empowerment zones (15 urban, 5 rural) and 80 additional 
enterprise communities (50 urban, 30 rural) would be authorized. 
Businesses in the new enterprise communities would be eligible for the 
current-law tax-exempt financing, as revised, as well as the brownfields 
tax incentive described above (including an additional 1,000 acres). 
Businesses in the new empowerment zones would be eligible for the OBRA 
93 increased section 179 expensing, the brownfields tax incentive 
(including an additional 2,000 acres), and tax-exempt financing that 
would not be subject to the current-law State volume caps, but rather 
would only be subject to zone-by-zone volume caps. The current-law wage 
credit would not be applicable in these 100 new zones and communities. 
The designations of these new zones and communities would be required to 
occur before 1999, and the designations would generally be effective for 
ten years.

  Provide tax credit for investment in community development financial 
institutions (CDFI).--The Community Devolopment Banking and Financial 
Institutions Act of 1994 created a Federal Community Development 
Financial Institution (CDFI) Fund to provide grants, loans, and 
technical assistance to qualifying lenders. As part of its comprehensive 
strategy to increase investment in distressed communities, the 
Administration proposes to provide $100 million in nonrefundable tax 
credits to the CDFI Fund to be allocated among equity investors in 
community development banks. The allocation of credits would be 
determined by the CDFI Fund using a competitive process similar to the 
one used to allocate grants. The maximum amount of credit allocable to a 
particular investment would be 25 percent of the amount invested, though 
a lower percentage could be negotiated. The full credit would be 
available the year the investment is made. In order to ensure long-term 
investment, the credit would be recaptured if the investment were sold 
or redeemed within five years.
  Toll statute of limitations for incapacitated taxpayers.--The time 
limit within which claims for refund must be made would be extended for 
the period of time a taxpayer was subject to disability, in effect 
extending the stututory time by the period of disability. ``Disability'' 
would be defined to include judicial determinations of incompetency, 
commitment to mental institutions or hospitals, or other debilitating 
physical, mental, or psychological conditions that prevent the taxpayer 
from managing his or her financial affairs. The proposal would be 
effective for tax years ending after the date of enactment.
  Allow Foreign Sales Corporation (FSC) benefits for computer software 
licenses.--The Administration proposes to extend FSC benefits to 
licenses of computer software for reproduction abroad. The FSC 
provisions, which provide a limited exemption from U.S. tax for income 
arising in certain export transactions, currently are not available for 
most exports of intangible property, including computer software 
copyrights. Because FSC benefits are currently available for copyrights 
to ``films, tapes, records, and similar reproductions,'' the 
Administration proposes to extend benefits to a category of nearly 
indistinguishable property.
  Extend the income exclusion for employer-provided educational 
assistance and provide credit for small business.--The Administration 
proposes to extend the exclusion for employer-provided educational 
assistance from its expiration in mid-1997 through December 31, 2000. 
The proposal would also reinstate and extend through December 31, 2000 
the expired exclusion for employer-provided graduate education. In 
addition, for taxable years after December 31, 1997, small businesses 
would be allowed a ten-percent income tax credit with respect to amounts 
paid under an employer-provided educational assistance program. The 
credit would be available to employers with average annual 

[[Page 48]]

gross receipts of $10 million or less for the prior three years.
  Extend for one year the R&E tax credit.--The tax credit provided for 
certain research and experimentation expenditures, which is scheduled to 
expire after May 31, 1997, is proposed to be extended for one year 
through May 31, 1998.
  Extend for one year the orphan drug tax credit.--The 50-percent 
nonrefundable tax credit provided for qualified clinical testing 
expenses paid or incurred in the testing of certain drugs for rare 
diseases or conditions is proposed to be extended for one year through 
May 31, 1998.
  Extend for one year the work opportunity tax credit.--The work 
opportunity tax credit, generally equal to 35 percent of up to $6,000 in 
qualified first-year wages, is proposed to be extended for one year 
beyond its expiration date of September 30, 1997.
  Extend for one year the deduction provided for contributions of 
appreciated stock to private foundations.--The special rule that allows 
a taxpayer to deduct the full fair market value of qualified stock 
donated to a private foundation is proposed to be extended to apply to 
contributions made during the period June 1, 1997 through May 31, 1998. 
The current law deduction expires with respect to contributions made 
after May 31, 1997.
  Extend and modify Puerto Rico economic-activity tax credit (Section 
30A).--Although the Puerto Rico and possession tax credit generally was 
repealed in 1996, both the income-based option and the economic-activity 
option under the credit remain available for existing business 
operations through 2005, subject to base-period caps. To provide a more 
efficient and effective tax incentive for the economic development of 
Puerto Rico and to continue the shift from an income-based credit to an 
economic-activity credit that was begun in OBRA 93, the Administration 
proposes to modify the economic-activity credit for Puerto Rico by (1) 
extending it indefinitely, (2) opening it to newly established business 
operations, effective for taxable years beginning after December 31, 
1997, and (3) removing the base-period cap.

     Eliminate Unwarranted Benefits and Adopt Other Revenue Measures

  The President's plan cuts unwarranted corporate tax subsidies, closes 
tax loopholes, improves tax compliance and adopts other revenue 
measures.

  Deny interest deduction on certain debt instruments.--If an instrument 
qualifies as equity, the issuer generally does not receive a deduction 
for dividends paid. If an instrument qualifies as debt, the issuer may 
receive a deduction for accrued interest and the holder generally 
includes interest in income, subject to certain limitations. The line 
between debt and equity is uncertain and it has proven difficult to 
formulate general rules of classification. Taxpayers have exploited this 
lack of guidance by issuing instruments that have substantial equity 
features, but for which they claim interest deductions. Effective for 
instruments issued on or after the date of first committee action, the 
Administration proposes that no deduction be allowed for interest or 
original issue discount (OID) on an instrument issued by a corporation 
that has a maximum term of more than 40 years, or is payable in stock of 
the issuer or a related party. The proposal also modifies the rules for 
certain indebtedness that is reflected as equity on the issuer's 
financial statements.
  Defer original issue discount deduction on convertible debt.--If a 
debt instrument is convertible into stock of the issuer or a related 
party and provides no payment of, or adjustment for, accrued interest on 
conversion, no deduction is allowed for accrued but unpaid stated 
interest. In contrast, the accrued but unpaid discount on a convertible 
debt instrument with OID generally is deductible, even if the instrument 
is converted before the issuer pays any OID. The Administration proposal 
would defer the deduction for all interest, including OID, on 
convertible debt until payment and would be effective for convertible 
debt issued on or after the date of first committee action.
  Reduce dividends-received deduction to 50 percent and eliminate 
dividends-received deduction for certain preferred stock.--A corporate 
holder of stock generally is entitled to a deduction for dividends 
received on stock in the following amounts: 70 percent if the recipient 
owns less than 20 percent of the stock of the payor, 80 percent if the 
recipient owns 20 percent or more of the stock, and 100 percent if the 
recipient owns 80 percent or more of the stock. The Administration 
proposes to replace the 70- and 80-percent dividends-received deduction 
with a 50-percent deduction for dividends on common stock and most 
preferred stock, effective for dividends paid or accrued more than 30 
days after the date of enactment. In addition, the Administration 
proposes to eliminate the 70- and 80-percent dividends-received 
deduction for dividends on certain limited-term preferred stock, 
effective for stock issued after the date of enactment.
  Modify holding period for dividends-received deduction.--The 
dividends-received deduction is allowed to a corporate shareholder only 
if the shareholder satisfies a 46-day holding period for the dividend-
paying stock or a 91-day period for certain dividends on preferred 
stock. The 46- or 91-day holding period generally does not include any 
time in which the shareholder is protected from the risk of loss 
otherwise inherent in the ownership of an equity interest. However, the 
holding period requirement does not have to be proximate to the time the 
dividend distribution is made. Effective for dividends paid or accrued 
more than 30 days after the date of enactment, the Administration 

[[Page 49]]

proposes that for a dividend to be eligible for the dividends-received 
deduction, the holding period requirement must be satisfied with respect 
to that dividend over a period immediately before or immediately after 
the taxpayer becomes entitled to receive the dividend.
  Extend pro rata disallowance of tax-exempt interest expense to all 
corporations.--No income tax deduction is allowed for interest on debt 
used directly or indirectly to acquire or hold investments the income on 
which is tax-exempt. The determination of whether debt is used to 
acquire or hold tax-exempt investments depends on the holder of the 
instrument. For financial institutions and dealers in tax-exempt 
investments, debt generally is treated as financing all of the 
taxpayer's assets proportionately. For corporations, other than 
financial institutions and dealers, and for individuals, deductions are 
disallowed only when indebtedness is incurred or continued for the 
purpose of purchasing or carrying tax-exempt investments. These 
corporations are therefore able to reduce their tax liabilities 
inappropriately through the double Federal tax benefits of interest 
expense deductions and tax-exempt interest income. Effective for taxable 
years beginning after the date of enactment, with respect to obligations 
acquired on or after the date of first committee action, the 
Administration proposes that all corporations other than insurance 
companies be treated the same as financial institutions are treated 
under current law with regard to deductions for interest on debt used 
directly or indirectly to acquire or hold tax-exempt obligations. The 
proposal also would expressly apply these rules to related parties, by 
treating all members of a consolidated group (other than members that 
are insurance companies) as a single entity and by tracing debt and tax-
exempt holdings among other related parties.
  Require average-cost basis for stocks, securities, etc.--A taxpayer 
who sells stock or other securities is allowed to account for the 
transaction by specifically identifying the stock or securities or by 
using an accounting system such as first-in, first-out or last-in, 
first-out. The Administration proposes to require taxpayers to determine 
their basis in substantially identical securities using the average of 
all their holdings in the securities. Holding period would be determined 
on a first-in, first-out basis. The method of determining basis and 
holding period would apply to all securities, including stocks, notes, 
bonds, and derivative financial instruments. The proposal would be 
effective 30 days after the date of enactment.
  Require recognition of gain on certain stocks, indebtedness and 
partnership interests.--Gain and loss are generally taken into account 
for tax purposes when realized. Gain or loss is usually realized with 
respect to a capital asset at the time the asset is sold or exchanged. 
Many transactions designed to reduce or eliminate risk of loss and 
opportunity for gain on financial assets generally do not cause 
realization. For example, taxpayers may lock in gain on securities by 
entering into a ``short sale against the box,'' that is, the taxpayer 
owns securities that are the same as or substantially identical to the 
securities borrowed and sold short. It is inappropriate for taxpayers to 
be able to dispose of the economic risks and rewards of owning 
appreciated property without realizing income for tax purposes. 
Therefore, the Administration proposes to require a taxpayer to 
recognize gain (but not loss) upon entering into a constructive sale of 
any appreciated position in stock, a debt instrument, or a partnership 
interest. A taxpayer would be treated as making a constructive sale of 
an appreciated position when the taxpayer (or in certain limited 
circumstances, a person related to the taxpayer) substantially 
eliminates risk of loss and opportunity for gain by entering into one or 
more positions with respect to the same or substantially identical 
property. The proposal would generally be effective for constructive 
sales entered into after the date of enactment.
  Change the treatment of gains and losses on extinguishment.--The tax 
law distinguishes between the sale of a right or obligation to a third 
party and the extinguishment or retirement of the right or obligation. A 
sale to a third party can give rise to capital treatment while an 
extinguishment is ordinary. Extinguishment treatment has been eliminated 
for all debt instruments except those issued by natural persons and for 
most options and other positions in actively traded property. The 
application of the extinguishment doctrine in other contexts is unclear. 
The extinguishment doctrine allows taxpayers to control whether gain or 
loss is capital or ordinary by deciding whether to sell or extinguish a 
contract. The Administration proposes to eliminate the remaining 
portions of the extinguishment doctrine so that gain or loss 
attributable to the cancellation, lapse, expiration, or other 
termination of any right or obligation with respect to property that is 
or would be a capital asset in the hands of the taxpayer would be 
treated as gain or loss from the sale or exchange of a capital asset. In 
addition, the proposal would repeal the natural person exception for 
debt instruments. The proposal would be effective 30 days after the date 
of enactment.
  Require reasonable payment assumptions for interest accruals on 
certain debt instruments.--The original issue discount (OID) rules do 
not measure income appropriately for certain debt instruments that are 
prepayable without interest or at reduced interest rates. If the 
instruments are held in large pools, it can be statistically predicted 
that a certain portion will prepay. Prepayment assumptions are used to 
account for certain debt instruments with payments based on mortgages, 
but the OID rules otherwise ignore these probabilities. The proposal 
would require taxpayers that hold prepayable debt instruments in large 
pools to use prepayment assumptions similar to the rules that apply for 
debt instruments with payments based on mortgages. The proposal would be 
effective for taxable years beginning after the date of enactment.

[[Page 50]]

  Require gain recognition for certain extraordinary dividends.--A 
corporate shareholder is generally allowed to deduct a percentage of 
dividends received from another domestic corporation. Certain dividends 
and dividend equivalent transactions are treated as ``extraordinary'' 
dividends. If a corporate shareholder receives an extraordinary 
dividend, the corporate shareholder must reduce the basis of the stock 
to which the distribution relates by the amount of the nontaxed portion 
of the dividend (generally the amount of the dividend that was 
deducted). If the nontaxed portion of the dividend exceeds the basis of 
the stock, the excess is deferred and recognized on a later disposition 
of the stock. If a shareholder's stock is redeemed, the redemption may 
be treated as a dividend if the shareholder's interest in the 
corporation has not been meaningfully reduced. In determining if a 
shareholder's interest has been meaningfully reduced, the ownership of 
options to purchase stock may be treated as actual stock ownership. The 
exclusion of a substantial portion of the amount received by a corporate 
shareholder on the redemption of its stock is inappropriate in certain 
cases when options are used to create stock ownership. Also, it is 
inappropriate to defer gain recognition when the portion of the 
distribution that is excluded due to the dividends received deduction 
exceeds the basis of the stock with respect to which the extraordinary 
dividend is received. The Administration proposes that corporate 
shareholders will recognize gain on redemptions of stock that are 
treated as dividends because of options when the nontaxed portion of the 
dividend exceeds the basis of the shares surrendered. In addition, 
immediate gain recognition would be required whenever the basis of stock 
with respect to which any extraordinary dividend was received was 
reduced below zero. The proposed change generally would be effective for 
distributions after May 3, 1995.
  Repeal percentage depletion for non-fuel minerals mined on Federal and 
formerly Federal lands.--Taxpayers are allowed to deduct a reasonable 
allowance for depletion relating to certain mineral deposits. The 
depletion deduction for any taxable year is calculated under either the 
cost depletion method or the percentage depletion method, whichever 
results in the greater allowance for depletion for the year. The 
percentage depletion method is viewed as an incentive for mineral 
production rather than as a normative rule for recovering the taxpayer's 
investment in the property. This incentive is excessive with respect to 
minerals mined on Federal and formerly Federal lands under the 1872 
mining act, in light of the minimal costs of acquiring the mining rights 
($5.00 or less per acre). Effective for taxable years beginning after 
the date of enactment, the Administration proposes to repeal percentage 
depletion for non-fuel minerals mined both on Federal lands where the 
mining rights were originally acquired under the 1872 law, and on 
private lands acquired under the 1872 law.
  Modify loss carryback and carryforward rules.--Net operating losses 
(NOLs) generally can be used to offset taxable income from the prior 
three taxable years (carrybacks) and the succeeding 15 taxable years 
(carryforwards). Because of the increased complexity and administrative 
burden associated with carrybacks, the carryback period should be 
shortened. The carryforward period could be lengthened, however, to 
allow taxpayers more time to utilize their NOLs without increasing 
either complexity or administrative burdens. The Administration proposes 
to limit carrybacks of NOLs to one year and to extend carryforwards to 
20 years, effective for NOLs arising in taxable years beginning after 
the date of enactment.
  Treat certain preferred stock as ``boot.''--In reorganization 
transactions, no gain or loss is recognized except to the extent ``other 
property'' (boot) is received; that is, property other than certain 
stock, including preferred stock. Upon the receipt of ``other 
property,'' gain but not loss can be recognized. Because preferred stock 
has an enhanced likelihood of recovery of principal or of maintaining a 
dividend or both, such tax-free treatment is inappropriate. The 
Administration therefore proposes to treat certain preferred stock as 
``other property,'' subject to certain exceptions. The proposal would be 
effective for transactions on or after the date of first committee 
action.
  Repeal tax-free conversions of large C corporations to S corporations 
(Section 1374).--A corporation can avoid the existing two-tier tax by 
electing to be treated as an S corporation or by converting to a 
partnership. Converting to a partnership is a taxable event that 
generally requires the corporation to recognize any built-in gain on its 
assets and requires the shareholders to recognize any built-in gain on 
their stock. By contrast, the conversion to an S corporation is 
generally tax-free, except that the S corporation generally must 
recognize the built-in gain on assets held at the time of conversion if 
the assets are sold within ten years. Under the Administration's 
proposal, the conversion of a C corporation with a value of more than $5 
million into an S corporation would be treated as a liquidation of the C 
corporation followed by a contribution of the assets to an S corporation 
by the recipient shareholders. Thus, the proposal would require 
immediate gain recognition by both the corporation (with respect to its 
appreciated assets) and its shareholders (with respect to their stock). 
This proposal makes the tax treatment of conversions to an S corporation 
generally consistent with conversions to a partnership. The proposal 
would apply to elections that are first effective for a taxable year 
beginning on or after January 1, 1998 and to acquisitions of a C 
corporation by an S corporation made after December 31, 1997.
  Require gain recognition on certain distributions of controlled 
corporation stock.--A corporation is generally required to recognize 
gain on a distribution of property (including stock of a controlled 

[[Page 51]]

corporation) unless the distribution meets certain requirements. If 
various requirements are met, including restrictions relating to 
acquisitions and dispositions of stock of the distributing corporation 
or the controlled corporation, a distribution of the stock of a 
controlled corporation will be tax-free to the distributing corporation. 
Certain distributions may effectively be dispositions of a business, in 
which case tax-free treatment for the distributing corporation is 
inappropriate. Accordingly, the Administration proposes to adopt 
additional restrictions on acquisitions and dispositions of the stock of 
a distributing corporation or controlled corporation that are related to 
the distribution. Under this proposal, the distributing corporation 
would recognize gain on the distribution of the stock of the controlled 
corporation if the shareholders of the distributing corporation do not 
retain a sufficient stock interest (generally 50 percent) in the 
distributing and controlled corporations during the four-year period 
commencing two years prior to the distribution. For this purpose, 
unrelated transactions (such as public trading on the stock market) 
would be disregarded. This proposal would be effective for distributions 
occurring on or after the date of first committee action.
  Reform the treatment of certain stock transfers.--Certain sales of 
stock to a related corporation are treated as the payment of a dividend 
by the purchaser. In cases where the seller is a corporation that does 
not actually own stock in the purchaser, taxpayers may take the position 
that the transaction produces tax benefits that would be unavailable if 
the purchaser distributed a dividend to its actual shareholders. For 
example, if a foreign-controlled domestic corporation sells the stock of 
a subsidiary to a foreign sister corporation, the domestic corporation 
may take the position that it is entitled to credit foreign taxes that 
were paid by the foreign sister corporation. In such cases, the 
Administration proposes to limit the amount treated as a dividend (and 
the associated foreign tax credits) from the purchaser to the amount of 
the purchaser's earnings and profits attributable to stock owned by U.S. 
persons related to the seller. If the purchaser is a domestic 
corporation, taxpayers may take the position that stock basis need not 
be reduced by the nontaxed portion of the dividend. The proposal would 
also clarify that a deemed dividend from a purchaser that is a domestic 
corporation should generally be treated as an extraordinary dividend 
requiring a basis reduction. The proposal would further require gain 
recognition to the extent that the nontaxed portion exceeds the basis of 
the shares transferred. The proposal would be effective for transactions 
on or after the date of first committee action.
  Expand Subpart F provisions regarding income from notional principal 
contracts and stock lending transactions.--Subpart F income includes 
income from notional principal contracts referenced to foreign currency, 
commodities, or interest rates, or to indices based thereon. It also 
includes income with respect to the lending of debt securities. Subpart 
F income does not include income from equity swaps or other types of 
notional principal contracts or income from transfers of equities. 
Subpart F income should include income from all types of notional 
principal contracts and from stock-lending transactions, because such 
income is indistinguishable on policy grounds from other types of highly 
mobile income already targeted by Subpart F. The Administration is 
proposing to include in Subpart F income the net income from equity 
swaps and certain categories of notional principal contracts that are 
not reached by current law, as well as income from stock lending 
transactions. An ordinary-course-of-business exception would be provided 
for regular dealers in property, forwards, options, notional principal 
contracts, and similar financial instruments. The proposal would be 
effective for taxable years beginning after the date of enactment.
  Modify taxation of captive ``insurance'' companies.--For tax purposes, 
``insurance'' has been defined by the courts to require ``risk 
shifting'' or ``risk distribution.'' In the case of a ``captive'' 
insurance company, one court has held that risk-shifting and risk-
distribution requirements are satisfied even if the captive's ``related 
person insurance income'' accounts for nearly 70 percent of its total 
business. The Administration proposes that an insurance arrangement 
between a captive insurer and a large shareholder of the captive 
generally would not be respected as a valid insurance arrangement if 
more than 50 percent of the captive's net written premiums were 
attributable to the insurance or reinsurance of large-shareholder risks. 
In addition, such a captive would not be considered an insurance company 
for tax purposes. The proposal would be effective for taxable years 
beginning after the date of enactment.
  Modify foreign tax credit carryback and carryforward rules.--The 
United States permits taxpayers to credit income taxes paid to a foreign 
government against U.S. tax on foreign source income. Through the 
foreign tax credit limitations, the Code prevents the use of foreign tax 
credits to reduce U.S. tax on U.S. source income. Under the foreign tax 
credit mechanism, current foreign income taxes in excess of the relevant 
current-year foreign tax credit limitation are not creditable against 
current U.S. tax liabilities. However, such excess foreign tax credits 
generally may be carried back for two years and carried forward for five 
years, and used as a credit to the extent there is excess foreign tax 
credit limitation (that is, an excess of the foreign tax credit 
limitation over creditable foreign taxes) in any of those years. 
Experience over the years has shown, however, that carrybacks are 
associated with increased complexity and administrative burdens as 
compared to carryforwards. Therefore, to reduce such complexity and 
burdens, the proposal would limit foreign tax credit carrybacks to one 
year and extend foreign tax credit carryforwards to seven years. The 
proposal would be effective for foreign taxes paid or 

[[Page 52]]

accrued or deemed paid or accrued in taxable years beginning on or after January 1, 1998.
  Replace sales source rules with activity-based rules.--The foreign tax 
credit generally reduces U.S. tax on foreign source income, but does not 
reduce U.S. tax on U.S. source income. Where products are manufactured 
in the United States and sold abroad, Treasury regulations provide that 
50 percent of such income generally is treated as earned in production 
activities, and sourced on the basis of the location of assets held or 
used to produce income from the sale. The remaining 50 percent of the 
income is treated as earned in sales activities and sourced based on 
where title to the inventory transfers. Thus, if a U.S. manufacturer 
sells inventory abroad, half of the income generally is treated as 
derived from domestic sources, and half of the income generally is 
treated as derived from foreign sources. However, the taxpayer may use a 
more favorable method if it can establish to the satisfaction of the IRS 
that more than half of its economic activity occurred in a foreign 
country. This 50/50 rule provides a benefit to U.S. exporters that 
operate in high-tax foreign countries. Thus, U.S. multinational 
exporters have a competititive advantage over U.S. exporters that 
conduct all their business activities in the United States. Because 
export benefits should be targeted equally to all exporters, the 
proposal reduces the amount of export sales income that such 
corporations may treat as derived from foreign sources by requiring that 
the allocation be based on actual economic activity. The proposal would 
be effective for taxable years beginning after the date of enactment.
  Modify rules relating to foreign oil and gas extraction income.--To be 
eligible for the U.S. foreign tax credit, a foreign levy must be the 
substantial equivalent of an income tax in the U.S. sense, regardless of 
the label the foreign government attaches to it. Under regulations, a 
foreign levy is a tax if it is a compulsory payment under the authority 
of a foreign government to levy taxes and is not compensation for a 
specific economic benefit provided by the foreign country. Taxpayers 
that are subject to a foreign levy and that also receive (directly or 
indirectly) a specific economic benefit from the levying country are 
referred to as ``dual capacity'' taxpayers and may not claim a credit 
for that portion of the foreign levy paid as compensation for the 
specific economic benefit received. The proposal would treat as taxes 
payments by a dual-capacity taxpayer to a foreign country that would 
otherwise qualify as income taxes or ``in lieu of'' taxes, only if there 
is a ``generally applicable income tax'' in that country. For this 
purpose, a generally applicable income tax is an income tax (or a series 
of income taxes) that applies to trade or business income from sources 
in that country, so long as the levy has substantial application both to 
non-dual-capacity taxpayers and to persons who are citizens or residents 
of that country. Where the foreign country does generally impose an 
income tax, as under present law, credits would be allowed up to the 
level of taxation that would be imposed under that general tax, so long 
as the tax satisfies the new statutory definition of a ``generally 
applicable income tax.'' The proposal would treat foreign oil and gas 
income as Subpart F income. It also would create a new foreign tax 
credit basket within Section 904 for foreign oil and gas income. The 
proposal would be effective for taxable years beginning after the date 
of enactment. The proposal would yield to U.S. treaty obligations that 
allow a credit for taxes paid or accrued on certain oil or gas income.
  Phase out preferential tax deferral for certain large farm 
corporations required to use accrual accounting.--Under the Revenue Act 
of 1987, family farm corporations were required to change to the accrual 
method of accounting if their gross receipts exceeded $25 million in any 
taxable year beginning after 1985. However, in lieu of including in 
gross income the entire amount of the adjustment attributable to the 
change in accounting method, a family farm corporation could establish a 
suspense account. The amount of the suspense account was to be included 
in gross income if the corporation ceased to be a family corporation or 
to the extent the gross receipts of the corporation from farming 
declined. To eliminate the potential indefinite deferral of the 
adjustment, the Administration proposes to repeal the ability of family 
farm corporations to establish such suspense accounts. Any taxpayer 
subsequently required to change to the accrual method of accounting 
would be required to take the adjustment into account generally over a 
ten-year period. Any existing suspense accounts would be restored to 
income ratably over a ten-year period, or sooner to the extent provided 
under existing law. This provision would be effective for taxable years 
beginning after September 13, 1995.
  Repeal lower of cost or market inventory accounting method.--Taxpayers 
required to maintain inventories are permitted to use a variety of 
methods to determine the cost of their ending inventories, including the 
last-in, first-out (LIFO) method, the first-in, first-out (FIFO) method, 
and the retail method. Taxpayers not using a LIFO method may determine 
the carrying values of their inventories by applying the lower of cost 
or market (LCM) method and by writing down the cost of goods that are 
unsalable at normal prices or unusable in the normal way because of 
damage, imperfection or other causes (subnormal goods method). The 
allowance of write-downs under the LCM and subnormal goods methods is 
essentially a one-way mark-to-market method that understates taxable 
income. The Administration proposes to repeal the LCM and subnormal 
goods methods, effective for taxable years beginning after the date of 
enactment.
  Repeal components of cost inventory accounting method.--Taxpayers that 
use the LIFO method to determine the cost of their ending inventories 
may use a variety of dollar-value methods, including double extension, 
link-chain and other index methods, in order 

[[Page 53]]

to determine whether an increment has occurred and the cost of that increment. Certain taxpayers are permitted to use simplified LIFO methods based on externally developed price indexes. Some taxpayers that use a dollar-value, double-extension method make their computations with respect to the three 
components of cost (materials, labor and overhead) of their finished 
goods and work-in-process inventories (the COC method), rather than the 
aggregate cost of these goods (the total product cost method). The COC 
method, in many cases, does not adequately account for technological 
efficiencies in which skilled labor is substituted for less-skilled 
labor or where overhead costs replace direct labor costs. The 
Administration is proposing to repeal the COC method effective for 
taxable years beginning after the date of enactment.
  Expand requirement that involuntarily converted property be replaced 
with property acquired from an unrelated party.--Gain realized by 
taxpayers from certain involuntary conversions is deferred to the extent 
the taxpayer purchases property similar or related in service or use to 
the converted property within a specified period of time. C corporations 
(and partnerships with one or more corporate partners that own more than 
50 percent of the capital or profits interest in the partnership) 
generally are not entitled to defer gain if the replacement property is 
purchased from a related person. The Administration proposes to extend 
this rule to any other taxpayer, including an individual, that acquires 
replacement property from a related person, unless the taxpayer has an 
aggregate realized gain of $100,000 or less during the year as a result 
of involuntary conversions. In the case of a partnership or S 
corporation, the $100,000 annual limitation would apply to the entity 
and each partner or shareholder. The proposal would generally be 
effective for involuntary conversions occurring after September 13, 
1995.
  Place further restrictions on like-kind exchanges involving personal 
property.--An exchange of property, like a sale, is generally a taxable 
transaction. However, no gain or loss is recognized if property held for 
productive use in a trade or business or for investment is exchanged for 
property of a like kind that is to be held for productive use in a trade 
or business or for investment. In general, any kind of real estate is 
treated as of a like kind with other real property; however real 
property located in the United States and real property located outside 
the United States are not of a like kind. For personal property, 
property of a ``like class'' is treated as being of a like kind; no 
restrictions apply with regard to location in or outside the United 
States. To conform the limitations on exchanges of personal property to 
the limitations on exchanges of real property, the Administration 
proposes that effective for exchanges on or after the date of first 
committee action, personal property located in the United States and 
personal property located outside the United States would not be treated 
as like kind.
  Require registration of certain confidential corporate tax shelters.--
Many corporate tax shelters are not registered with the Internal Revenue 
Service (IRS). Requiring registration of corporate tax shelters would 
allow the IRS to make better informed judgments regarding the audit of 
corporate tax returns and to monitor whether legislation or 
administrative action is necessary regarding the type of transactions 
being registered. The Administration is therefore proposing the 
registration of any investment, plan, arrangement or transaction: (1) a 
significant purpose of the structure of which is tax avoidance or 
evasion by a corporate participant, (2) that is offered to any potential 
participant under conditions of confidentiality, and (3) for which the 
tax shelter promoter may receive total fees in excess of $100,000. The 
proposal would be effective for any tax shelter offered to potential 
participants after the date the Secretary of the Treasury prescribes 
guidance regarding the filing requirements.
  Require reporting of payments to corporations rendering services to 
Federal agencies.--All persons engaged in a trade or business and making 
payments of $600 or more to another person in remuneration for services 
generally must report those payments to the IRS and to the recipient. No 
reporting is required if the recipient is a corporation, permitting 
significant amounts of income to escape the tax system. To ensure that 
corporations that do business with the Federal Government appropriately 
report as income their payments from the Federal Government, the 
Administration proposes to require executive agencies to report payments 
of $600 or more made to corporations for services rendered. The proposal 
would be effective for returns the due date of which is more than 90 
days after the date of enactment.
  Increase penalties for failure to file correct information returns.--
Any person who fails to file required information returns in a timely 
manner or incorrectly reports such information is subject to penalties. 
For taxpayers filing large volumes of information returns or reporting 
significant payments, existing penalties ($15 per return, not to exceed 
$75,000 if corrected within 30 days; $30 per return, not to exceed 
$150,000 if corrected by August 1; and $50 per return, not to exceed 
$250,000 if not corrected at all) may not be sufficient to encourage 
timely and accurate reporting. The Administration proposes to increase 
the general penalty amount, subject to the overall dollar limitations, 
to the greater of $50 per return or 5 percent of the total amount 
required to be reported. The increased penalty would not apply if the 
aggregate amount actually reported by the taxpayer on all returns filed 
for that calendar year was at least 97 percent of the amount required to 
be reported. The increased penalty would be effective for returns the 
due date for which is more than 90 days after the date of enactment.
  Tighten the substantial understatement penalty for large 
corporations.--Currently taxpayers may be 

[[Page 54]]

penalized for erroneous, but non-negligent, return positions if the amount of the understatement is ``substantial'' and the taxpayer did not disclose the position in a statement with the return. ``Substantial'' is defined as ten percent of the taxpayer's total current tax liability, but this can be a very large amount. This has led some large corporations to take aggressive 
reporting positions where huge amounts of potential tax liability are at 
stake--in effect playng the audit lottery--without any downside risk of 
penalties if they are caught, because the potential tax still would not 
exceed ten percent of the company's total tax liability. To discourage 
such aggressive tax planning, the proposal considers any deficiency 
greater than $10 million to be ``substantial'' for purposes of the 
substantial understatement penalty, whether or not it exceeds ten 
percent of the taxpayer's liability. The proposal, which would be 
effective for taxable years beginning after the date of enactment, 
affects only taxpayers that have tax liabilities greater than or equal 
to $100 million.
  Repeal exemption for withholding on gambling winnings from bingo and 
keno in excess of $5,000.--Proceeds of most wagers with odds of less 
than 300 to 1 are exempt from withholding, as are all bingo and keno 
winnings. The proposal would impose withholding on proceeds of bingo or 
keno in excess of $5,000 at a rate of 28 percent, regardless of the odds 
of the wager, effective for payments made after the date of enactment.
  Require tax reporting for payments to attorneys.--Tax information 
reporting is required for persons engaged in a trade or business making 
payments of rent, salaries, wages, or other fixed or determinable income 
in the course of the trade or business. Treasury regulations require a 
payor to report payments of attorney's fees if the payments are made in 
the course of a trade or business, although generally a payor is not 
required to report payments made to corporations. If a payment to an 
attorney is a gross amount, and it cannot be determined what portion is 
the attorney's fee (as in the case of lump-sum judgments or settlements 
made jointly payable to a lawyer and a plaintiff), then no reporting is 
required. The Administration proposes requiring that any person making a 
payment in the course of a trade or business to a lawyer or a law firm, 
whether as sole or joint payee, report the payment to the IRS. When the 
portion that constitutes fees cannot be determined, the amount paid 
would be reported as gross proceeds. A lawyer receiving a payment would 
be required to provide his or her taxpayer identification number to the 
payor or be subject to backup withholding and applicable penalties. The 
exception for payments to corporations would not apply to payments of 
attorney's fees. The proposal would be effective for payments made after 
December 31, 1997.
  Extend oil spill excise tax.--Before January 1, 1995, a five-cents-
per-barrel excise tax was imposed on domestic crude oil and imported oil 
and petroleum products. The tax was dedicated to the Oil Spill Liability 
Trust Fund to finance the cleanup of oil spills and was not imposed for 
a calendar quarter if the unobligated balance in the Trust Fund exceeded 
$1 billion at the close of the preceding quarter. The Administration 
proposes to reinstate this tax for the period after the date of 
enactment and before October 1, 2007. The tax would be suspended for a 
given calendar quarter if the unobligated Trust Fund balance at the end 
of the preceding quarter exceeded $2.5 billion.
  Impose excise taxes on kerosene as diesel fuel.--A 24.3-cents-per-
gallon excise tax is imposed on diesel fuel upon removal from a 
registered terminal facility unless the fuel is indelibly dyed and is 
destined for a nontaxable use. Treasury regulations provide that 
kerosene is not treated as a diesel fuel for this purpose; thus, undyed 
kerosene is not subject to the diesel fuel excise tax when it is removed 
from a terminal. Undyed kerosene is subject to tax, however, when it is 
blended with previously taxed diesel fuel. Some producers of this 
blended fuel may not be paying the tax, thereby placing complying 
taxpayers at a competitive disadvantage and resulting in revenue losses 
to the Federal government. Effective July 1, 1998, the Administration 
proposes to tax kerosene as diesel fuel when it is removed from a 
terminal. Exceptions would be provided for aviation fuel and, to the 
extent provided in regulations, for feedstock uses. In addition, special 
refund rules would apply in certain cases of kerosene used for heating 
purposes.
  Limit extension of tax credit for producing fuel from a 
nonconventional source.--The Small Business Job Protection Act extended 
the $3 per barrel synthetic fuels tax credit to apply to synthetic fuels 
from coal and gas from biomass sold before January 1, 2008, if produced 
from facilities placed in service before July 1, 1998, pursuant to a 
binding contract entered into before January 1, 1997. The prior law 
placed in service and binding contract dates had been January 1, 1997 
and January 1, 1996, respectively. The Administration proposes to modify 
the extension of the placed-in-service date by moving it to July 1, 
1997; the binding contract date would not be modified.
  Extend and modify Federal Unemployment Act (FUTA) provisions.--The 
temporary unemployment surtax of 0.2 percent imposed on employers, which 
is scheduled to expire with respect to wages paid after December 31, 
1998, is proposed to be extended through December 31, 2007. Beginning in 
2002, the Administration proposes to require an employer to pay Federal 
and State unemployment taxes monthly (instead of quarterly) in a given 
year, if the employer's FUTA tax liability in the immediately prior year 
was $1,100 or more.

                  Other Provisions That Affect Receipts

  Extend environmental tax on corporate taxable income deposited in the 
Hazardous Substance 

[[Page 55]]

Superfund Trust Fund.--A tax equal to 0.12 percent 
of alternative minimum taxable income (with certain modifications) in 
excess of $2 million is levied on all corporations and deposited in the 
Hazardous Substance Superfund Trust Fund. The Administration proposes to 
reinstate this tax, which expired on December 31, 1995, for taxable 
years beginning after December 31, 1996 and before January 1, 2008.
  Extend excise taxes deposited in the Hazardous Substance Superfund 
Trust Fund.--The excise taxes that are levied on petroleum, chemicals, 
and imported substances and deposited in the Hazardous Substance 
Superfund Trust Fund, are proposed to be reinstated for the period after 
the date of enactment and before October 1, 2007. These taxes expired on 
December 31, 1995.
  Extend excise taxes deposited in the Leaking Underground Storage Tank 
(LUST) Trust Fund.--The excise taxes that are levied on gasoline, other 
motor fuels, methanol and ethanol fuels, aviation fuel, and on fuels 
used in inland waterways and deposited in the LUST Trust Fund, expired 
on December 31, 1995. The Administration proposes to reinstate these 
taxes for the period after the date of enactment and before October 1, 
2007.
  Extend excise taxes deposited in the Airport and Airway Trust Fund/
assess fees for Federal Aviation Administration (FAA) services.--The 
excise taxes that are levied on domestic air passenger tickets, 
international departures, domestic air cargo and non-commercial aviation 
fuels and deposited in the Airport and Airway Trust Fund, are proposed 
to be reinstated for the period April 1, 1997 through September 30, 
2007. These taxes expired on December 31, 1996. The Administration will 
propose legislation to completely replace these taxes, effective October 
1, 1998, with cost-based user fees, as part of the Administration's 
effort to create a more business-like Federal Aviation Administration.
  Extend the Generalized System of Preferences (GSP) and modify other 
trade provisions.--Under GSP duty-free access is provided to over 4,000 
items from eligible developing countries that meet certain worker 
rights, intellectual property protection, and other criteria. The 
Administration proposes to extend the program, which expires May 31, 
1997. The Administration also proposes to provide expanded trade 
benefits mainly on textiles and apparel to Caribbean Basin countries 
that meet new eligibility criteria to prepare for a future free trade 
agreement with the U.S. The program is proposed to expire on September 
30, 2005. The Administration also proposes to implement the OECD 
Shipbuilding Agreement.
  Assess fees for examination of FDIC-insured banks and bank holding 
companies (receipt effect).--The Administration proposes to require the 
Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve to 
assess fees for examination of FDIC-insured banks and bank holding 
companies. The Federal Reserve currently funds the costs of such 
examinations from earnings; therefore, deposits of earnings by the 
Federal Reserve, which are classified as governmental receipts, will 
increase by the amount of the fees.
  Modify method of reimbursing Federal Reserve Banks.--Beginning in 
fiscal year 1998 and thereafter, the Administration proposes to 
appropriate such sums as may be necessary to reimburse Federal Reserve 
Banks in their capacity as depositaries and fiscal agents for the United 
States for all services required or directed by the Secretary of the 
Treasury to be performed by such banks on behalf of the Treasury or 
other fiscal agencies. These payments to the Federal Reserve Banks would 
be deficit neutral because they would result in corresponding increases 
in deposits of earnings by the Federal Reserve.
  Establish IRS continuous levy.--The Administration seeks to strengthen 
the enforcement tools available to the IRS to recover delinquent tax 
debt. New authority is proposed for the IRS to effect a continuous levy 
on non-means tested Federal payments, such as Federal salaries and 
pensions, received by individuals who owe delinquent tax debt.
  Assess fees for National Transportation Safety Board (NTSB) aviation 
accident investigation activities.--Beginning in 1998, the 
Administration proposes to charge a fee on commercial air carrier 
operations to offset a portion of the NTSB's growing cost of commercial 
aviation accident investigations.
  Establish alien labor certification fee.--To protect U.S. workers, the 
Employment and Training Administration of the Department of Labor 
administers the Alien Labor Certification program. This program 
determines the admissibility of aliens to work in the United States. 
Consistent with a recommendation by the National Performance Review, the 
Administration proposes to charge employers who benefit from the program 
a fee for alien labor certification services.
  Exempt Federal vaccine purchases from the payment of the vaccine 
excise tax.--The Administration proposes to exempt vaccine purchases 
paid through grants from the Centers for Disease Control and Prevention 
and the Health Care Financing Administration from payment of the vaccine 
excise tax. The proposal is effective for purchases after September 30, 
1997 and before September 30, 1998.
  Extend and increase Food and Drug Administration (FDA) user fees.--To 
finance FDA activities, the Administration proposes to reauthorize the 
Prescription Drug User Fee Act (PDUFA) of 1992 and the Mammography 
Quality Standards Act (MQSA), which are currently authorized through 
fiscal year 1997. PDUFA au-

[[Page 56]]

thorizes the collection of fees paid by the pharmaceutical industry to expedite FDA's review of human drug applications and MQSA authorizes the collection of fees for the inspection of mammography facilities. Along with the continued collection of these fees, the Administration proposes new fees effective October 1, 1997 for medical device reviews, animal drug approvals, 
import inspections, food additive petition reviews, generic/over-the-
counter drug applications, and the postmarket surveillance of products.
  Initiate Health Care Financing Administration (HCFA) Medicare survey 
and certification fee.--In order to participate in the Medicare program 
(or the Medicaid program for dually-participating providers), providers 
must demonstrate that they comply with Federal health and safety 
standards. Program certification allows them to provide services to 
Medicare and Medicaid beneficiaries. Beginning in fiscal year 1998, the 
Administration would require State survey agencies to impose fees on 
health care providers for initial surveys required as a condition of 
participation in the Medicare program. The proposal would allow State 
survey agencies to collect and retain fees from health care providers to 
cover the cost of conducting initial surveys.
  Increase employee contributions to the Civil Service Retirement System 
(CSRS) and the Federal Employees Retirement System (FERS).--The 
Administration proposes to increase employee contributions to CSRS and 
FERS by 0.5 percent of base pay in three steps. Contributions would 
increase by 0.25 percent of base pay on January 1, 1999, another 0.15 
percent on January 1, 2000 and a final 0.10 percent on January 1, 2001. 
These higher contribution rates would be effective through 2002; on 
January 1, 2003, contribution rates would return to the levels in effect 
on December 31, 1998.
  Modify Federal pay raise (receipt effect).--The Administration is 
proposing a pay raise of 2.8 percent for 1998, less than the raise that 
would take effect under normal operation of the law. This raise would 
cover both the national schedule and the locality pay adjustments. The 
lower proposed pay raise affects Federal employees' contributions to 
CSRS and FERS.

                Tax Simplification and Taxpayers' Rights

  The Administration continues to support revenue-neutral initiatives 
designed to promote sensible and equitable administration of the tax 
laws. These include simplification, technical corrections, and taxpayer 
compliance measures. The Administration will propose to Congress in the 
near future a package of measures to simplify the tax laws and enhance 
taxpayers' rights. In addition to legislative initiatives, the 
Administration is committed to taking appropriate administrative action 
to simplify tax laws and enhance procedural safeguards for taxpayers.

                                     

                                   Table 3-3.  EFFECT OF PROPOSALS ON RECEIPTS                                  
                                            (In billions of dollars)                                            
----------------------------------------------------------------------------------------------------------------
                                                                          Estimate                              
                                          ----------------------------------------------------------------------
                                             1997      1998      1999      2000      2001      2002    1998-2002
----------------------------------------------------------------------------------------------------------------
Provide tax relief and extend expiring                                                                          
 provisions:                                                                                                    
  Middle Class Bill of Rights:                                                                                  
    Provide tax credit for dependent                                                                            
     children............................     -0.7      -9.9      -6.8      -8.6     -10.4     -10.4      -46.0 
    Expand Individual Retirement Accounts                                                                       
     (IRAs)..............................  ........     -1.5      -0.5      -0.8      -1.2      -1.7       -5.5 
    Provide tax incentive for education                                                                         
     and training........................     -0.1      -4.0      -6.2      -7.8      -8.6      -9.4      -36.1 
                                          ----------------------------------------------------------------------
      Subtotal, Middle Class Bill of                                                                            
       Rights............................     -0.8     -15.4     -13.5     -17.2     -20.2     -21.4      -87.6 
                                                                                                                
  Provide targeted welfare-to-work tax                                                                          
   credit................................  ........     -0.1      -0.1      -0.2      -0.1      -0.1       -0.6 
  Provide capital gains exclusion on sale                                                                       
   of principal residence................     -0.1      -0.3      -0.3      -0.3      -0.3      -0.2       -1.4 
  Establish DC tax incentive program.....  ........       -*        -*      -0.1      -0.1      -0.1       -0.3 
  Provide estate tax relief for small                                                                           
   business..............................  ........       -*      -0.2      -0.2      -0.2      -0.2       -0.7 
  Provide tax incentives for distressed                                                                         
   areas.................................       -*      -0.4      -0.5      -0.5      -0.5      -0.4       -2.3 
  Provide tax credit for investment in                                                                          
   community development financial                                                                              
   institutions (CDFI)...................  ........       -*        -*        -*        -*        -*         -* 
  Toll statute of limitations for                                                                               
   incapacitated taxpayers...............  ........  ........  ........  ........       -*        -*       -0.1 
  Allow Foreign Sales Corporation (FSC)                                                                         
   benefits for computer software                                                                               
   licenses..............................       -*      -0.1      -0.1      -0.1      -0.1      -0.1       -0.6 
  Extend exclusion for employer-provided                                                                        
   educational assistance................     -0.1      -0.6      -0.7      -0.8      -0.2   ........      -2.3 
  Extend R&E tax credit..................     -0.4      -0.8      -0.5      -0.2      -0.1        -*       -1.7 
  Extend orphan drug tax credit..........       -*        -*        -*        -*        -*        -*         -* 
  Extend work opportunity tax credit.....  ........     -0.1      -0.2      -0.1        -*        -*       -0.4 
  Extend deduction for contributions of                                                                         
   appreciated stock.....................  ........       -*        -*   ........  ........  ........      -0.1 
  Extend and modify Puerto Rico economic-                                                                       
   activity tax credit...................  ........       -*      -0.1      -0.1      -0.1      -0.1       -0.4 
                                          ----------------------------------------------------------------------
    Subtotal, Provide tax relief and                                                                            
     extend expiring provisions..........     -1.4     -17.9     -16.2     -19.6     -21.9     -22.8      -98.4 
                                                                                                                
Eliminate unwarranted benefits and adopt                                                                        
 other revenue measures:                                                                                        
  Deny interest deduction on certain debt                                                                       
   instruments...........................        *       0.1       0.1       0.2       0.2       0.3        0.8 
  Defer original issue discount deduction                                                                       
   on convertible debt...................  ........        *         *         *         *       0.1        0.2 

[[Page 57]]

  Limit dividends-received deduction                                                                            
   (DRD):                                                                                                       
    Reduce DRD to 50 percent.............  ........      0.3       0.3       0.4       0.4       0.4        1.7 
    Eliminate DRD for certain stock......  ........        *         *         *         *       0.1        0.2 
    Modify holding period for DRD........  ........        *         *         *         *         *        0.1 
    Interaction..........................  ........       -*        -*        -*        -*        -*         -* 
  Extend pro-rata disallowance of tax-                                                                          
   exempt interest expense to all                                                                               
   corporations..........................  ........        *         *         *       0.1       0.1        0.2 
  Require average-cost basis for stocks,                                                                        
   securities, etc.......................  ........      0.6       0.6       0.6       0.6       0.6        3.0 
  Require recognition of gain on certain                                                                        
   stocks, indebtedness and partnership                                                                         
   interests.............................  ........        *       0.1       0.1       0.1       0.1        0.3 
  Change the treatment of gains and                                                                             
   losses on extinguishment..............  ........        *         *         *         *         *          * 
  Require reasonable payment assumptions                                                                        
   for interest accruals on certain debt                                                                        
   instruments...........................  ........      0.1       0.2       0.3       0.3       0.2        1.1 
  Require gain recognition for certain                                                                          
   extraordinary dividends...............      0.4       0.6         *         *         *         *        0.6 
  Repeal percentage depletion for non-                                                                          
   fuel minerals mined on Federal and                                                                           
   formerly Federal lands................        *       0.1       0.1       0.1       0.1       0.1        0.5 
  Modify loss carryback and carryforward                                                                        
   rules.................................        *       0.1       0.6       0.8       0.7       0.6        2.9 
  Treat certain preferred stock as                                                                              
   ``boot''..............................        *       0.1       0.2       0.2       0.2       0.1        0.8 
  Repeal tax-free conversions of large C                                                                        
   corporations to S corporations........  ........        *         *         *         *         *        0.1 
  Require gain recognition in certain                                                                           
   distributions of controlled                                                                                  
   corporation stock.....................        *       0.1       0.1       0.1       0.1       0.1        0.3 
  Reform treatment of certain stock                                                                             
   transfers.............................        *       0.1       0.1       0.1       0.1       0.2        0.7 
  Expand Subpart F provisions regarding                                                                         
   certain income........................  ........        *         *         *         *         *        0.2 
  Modify taxation of captive                                                                                    
   ``insurance'' companies...............  ........        *         *         *         *         *        0.1 
  Modify foreign tax credit carryback and                                                                       
   carryforward rules....................  ........        *       0.3       0.3       0.3       0.3        1.2 
  Replace sales source rules with                                                                               
   activity-based rules..................  ........      0.9       1.5       1.6       1.8       1.9        7.5 
  Modify rules relating to foreign oil                                                                          
   and gas extraction income.............  ........        *       0.1       0.1       0.1       0.1        0.4 
  Phase out preferential tax deferral for                                                                       
   certain large farm corporations                                                                              
   required to use accrual accounting....        *       0.1       0.1       0.1       0.1       0.1        0.6 
  Initiate inventory reform:                                                                                    
    Repeal lower of cost or market method        *       0.2       0.4       0.4       0.4       0.2        1.5 
    Repeal components of cost method.....        *       0.1       0.2       0.2       0.2       0.2        0.9 
  Expand requirement that involuntarily                                                                         
   converted property be replaced with                                                                          
   property acquired from an unrelated                                                                          
   party.................................  ........        *         *         *         *         *          * 
  Place further restrictions on like-kind                                                                       
   exchanges involving personal property.        *         *         *         *         *         *        0.1 
  Require registration of certain                                                                               
   corporate tax shelters................  ........        *         *         *         *         *          * 
  Require reporting of payments to                                                                              
   corporations rendering services to                                                                           
   Federal agencies......................  ........        *         *         *         *       0.1        0.2 
  Increase penalties for failure to file                                                                        
   correct information returns...........  ........        *         *         *         *         *        0.1 
  Tighten substantial understatement                                                                            
   penalty for large corporations........  ........        *         *         *         *         *        0.2 
  Repeal exemption for withholding on                                                                           
   gambling winnings from bingo and keno                                                                        
   in excess of $5,000...................        *         *         *         *         *         *          * 
  Require tax reporting for payments to                                                                         
   attorneys.............................  ........  ........        *         *         *         *          * 
  Extend oil spill excise tax \1\........        *       0.2       0.2       0.2       0.2       0.2        1.1 
  Impose excise taxes on kerosene as                                                                            
   diesel fuel \1\.......................        *         *         *         *         *         *        0.2 
  Limit extension of tax credit for                                                                             
   producing fuel from a nonconventional                                                                        
   source................................        *       0.1       0.1       0.1       0.1       0.1        0.5 
  Extend and modify FUTA provisions:                                                                            
    Extend FUTA surtax \1\...............  ........  ........      0.9       1.2       1.3       1.3        4.7 
    Accelerate deposit of unemployment                                                                          
     insurance taxes.....................  ........  ........  ........  ........  ........      1.3        1.3 
                                          ----------------------------------------------------------------------
      Subtotal, Eliminate unwarranted                                                                           
       benefits..........................      0.6       4.1       6.3       7.3       7.6       8.9       34.3 
                                                                                                                
Other provisions that affect receipts:                                                                          
  Extend corporate environmental tax \2\.  ........      1.1       0.7       0.8       0.8       0.8        4.2 
  Extend Superfund excise taxes \1\......      0.1       0.7       0.7       0.7       0.7       0.7        3.4 
  Extend LUST excise taxes \1\...........        *       0.1       0.1       0.1       0.1       0.1        0.6 
  Extend aviation excise taxes/new user                                                                         
   fees \1\, \3\.........................      2.3       5.0       6.7       6.6       6.8       7.0       32.2 
  Extend GSP and modify other trade                                                                             
   provisions \1\........................  ........     -0.7      -0.5      -0.6      -0.7      -0.8       -3.3 
  Assess fees for examination of FDIC-                                                                          
   insured banks and bank holding                                                                               
   companies (receipt effect) \1\........  ........      0.1       0.1       0.1       0.1       0.1        0.4 
  Modify method of reimbursing Federal                                                                          
   Reserve Banks (receipt effect)........  ........      0.1       0.1       0.1       0.1       0.1        0.6 
  Establish IRS continuous levy..........  ........      0.4       0.4       0.4       0.3       0.2        1.6 
  Assess fees for NTSB aviation accident                                                                        
   investigation activities \1\..........  ........        *         *         *         *         *          * 
  Establish alien labor certification fee                                                                       
    \1\..................................  ........        *         *         *         *         *        0.2 
  Exempt Federal vaccine purchases from                                                                         
   the payment of vaccine excise taxes                                                                          
   \1\...................................  ........     -0.1   ........  ........  ........  ........      -0.1 
  Extend and increase FDA user fees \1\..  ........      0.2       0.2       0.2       0.2       0.2        1.0 
  Initiate HCFA Medicare survey and                                                                             
   certification fee \1\.................  ........        *         *         *         *         *          * 
  Increase employee contributions to CSRS                                                                       
   and FERS..............................  ........  ........      0.2       0.4       0.6       0.6        1.8 
  Modify Federal pay raise (receipt                                                                             
   effect)...............................  ........     -0.2      -0.2      -0.2      -0.2      -0.2       -1.0 
                                          ----------------------------------------------------------------------
      Subtotal, Other....................      2.4       6.8       8.5       8.6       8.8       9.0       41.7 
                                          ----------------------------------------------------------------------
        Subtotal, Eliminate unwarranted                                                                         
         benefits and other provisions                                                                          
         that affect receipts............      3.0      10.9      14.9      15.9      16.4      17.9       76.0 
                                   
[[Page 58]]

       ----------------------------------------------------------------------
Total effect of proposals \1\............      1.6      -7.0      -1.4      -3.7      -5.5      -4.9     -22.4  
----------------------------------------------------------------------------------------------------------------
* $50 million or less.                                                                                          
\1\ Net of income offsets.                                                                                      
\2\ Net of deductibility for income tax purposes.                                                               
\3\ The aviation excise taxes are proposed to be reinstated effective April 1, 1997. In addition, the           
  Administration proposes that aviation excise taxes be repealed effective October 1, 1998 and replaced with    
  cost-based user fees.                                                                                         

[[Page 59]]

3.  FEDERAL RECEIPTS

                      Table 3-4. RECEIPTS BY SOURCE

(In millions of dollars)

                                                                        
------------------------------------------------------------------------
                                         1996        1997        1998   
               Source                   actual     estimate    estimate 
------------------------------------------------------------------------
Individual income taxes (federal                                        
 funds):                                                                
  Existing law......................     656,417     674,342     708,356
  Proposal (PAYGO)..................  ..........      -1,659     -17,178
  Proposal (non-PAYGO)..............  ..........  ..........          21
                                     -----------------------------------
Total individual income taxes.......     656,417     672,683     691,199
                                     ===================================
Corporation income taxes:                                               
  Federal funds:                                                        
    Existing law....................     171,501     176,196     187,009
    Proposal (PAYGO)................  ..........          -1       1,280
    Proposal (non-PAYGO)............  ..........  ..........           4
                                     -----------------------------------
  Total Federal funds corporation                                       
   income taxes.....................     171,501     176,195     188,293
                                     -----------------------------------
  Trust funds:                                                          
    Hazardous substance superfund...         323           4  ..........
    Proposal (PAYGO)................  ..........  ..........       1,369
                                     -----------------------------------
Total corporation income taxes......     171,824     176,199     189,662
                                     ===================================
Social insurance taxes and                                              
 contributions (trust funds):                                           
  Employment taxes and                                                  
   contributions:                                                       
    Old-age and survivors insurance                                     
     (Off-budget)...................     311,869     334,139     349,435
    Disability insurance (Off-                                          
     budget)........................      55,623      54,764      55,509
    Hospital insurance..............     104,997     109,180     114,167
    Railroad retirement:                                                
      Social Security equivalent                                        
       account......................       1,510       1,496       1,486
      Rail pension and supplemental                                     
       annuity......................       2,362       2,384       2,375
                                     -----------------------------------
  Total employment taxes and                                            
   contributions....................     476,361     501,963     522,972
                                     -----------------------------------
    On-budget.......................     108,869     113,060     118,028
    Off-budget......................     367,492     388,903     404,944
                                     -----------------------------------
  Unemployment insurance:                                               
    State taxes deposited in                                            
     Treasury \1\ ..................      22,706      23,517      24,496
    Federal unemployment tax                                            
     receipts \1\ ..................       5,854       5,920       5,976
    Railroad unemployment tax                                           
     receipts \1\ ..................          24          28          67
                                     -----------------------------------
  Total unemployment insurance......      28,584      29,465      30,539
                                     -----------------------------------
  Other retirement contributions:                                       
    Federal employees' retirement--                                     
     employee contributions.........       4,389       4,266       4,370
      Proposal (non-PAYGO)..........  ..........  ..........        -164
    Contributions for non-Federal                                       
     employees \2\ .................          80          72          66
                                     -----------------------------------
  Total other retirement                                                
   contributions....................       4,469       4,338       4,272
                                     -----------------------------------
Total social insurance taxes and                                        
 contributions......................     509,414     535,766     557,783
                                     ===================================
  On-budget.........................     141,922     146,863     152,839
  Off-budget........................     367,492     388,903     404,944
                                     ===================================
Excise taxes:                                                           
  Federal funds:                                                        
    Alcohol taxes...................       7,220       7,171       7,119
    Tobacco taxes...................       5,795       5,694       5,661
    Transportation fuels tax........       7,468       7,669       7,835
    Telephone and teletype services.       4,234       4,485       4,746
    Ozone depleting chemicals and                                       
     products.......................         320         113          47
    Other Federal fund excise taxes.         410       1,363       1,341
      Proposal (PAYGO)..............  ..........        -327         952
      Proposal (non-PAYGO)..........  ..........  ..........         -24
                                     -----------------------------------
  Total Federal fund excise taxes...      25,447      26,168      27,677
                                     -----------------------------------
  Trust funds:                                                          
    Highway.........................      24,651      24,880      25,332
      Proposal (PAYGO)..............  ..........           2        -617
    Airport and airway..............       2,369       1,439  ..........
      Proposal (PAYGO)..............  ..........       3,384       6,391
    Aquatic resources...............         315         324         331
    Black lung disability insurance.         614         604         613
    Inland waterway.................         108         117         121
    Hazardous substance superfund...         313  ..........  ..........
      Proposal (PAYGO)..............  ..........         147         881
    Oil spill liability.............          34  ..........  ..........
      Proposal (PAYGO)..............  ..........          34         296
    Vaccine injury compensation.....         115         125         125
      Proposal (non-PAYGO)..........  ..........  ..........         -73
    Leaking underground storage tank          48  ..........  ..........
      Proposal (PAYGO)..............  ..........          23         162
                                     -----------------------------------
  Total trust funds excise taxes....      28,567      31,079      33,562
                                     -----------------------------------
Total excise taxes..................      54,014      57,247      61,239
                                     ===================================
Estate and gift taxes:                                                  
  Existing law......................      17,189      17,588      18,818
  Proposal (PAYGO)..................  ..........  ..........          -1
                                     -----------------------------------
Total estate and gift taxes.........      17,189      17,588      18,817
                                     ===================================
Customs duties:                                                         
  Federal funds.....................      17,910      16,545      18,271
    Proposal (PAYGO)................  ..........  ..........        -799
  Trust funds.......................         760         783         835
                                     -----------------------------------
Total customs duties................      18,670      17,328      18,307
                                     ===================================
MISCELLANEOUS RECEIPTS: \3\                                             
  Miscellaneous taxes...............         110         123         127
  United Mine Workers of America                                        
   combined benefit fund............         304         311         280
  Deposit of earnings, Federal                                          
   Reserve System...................      20,477      23,184      22,788
    Proposal (PAYGO)................  ..........  ..........          96
    Proposal (non-PAYGO)............  ..........  ..........         122
  Fees for permits and regulatory                                       
   and judicial services............       2,896       3,456       4,533
    Proposal (PAYGO)................  ..........  ..........         278
  Fines, penalties, and forfeitures.       1,744       1,412       1,435
  Gifts and contributions...........         122         139         187
  Refunds and recoveries............        -119         -11         -11
                                     -----------------------------------
Total miscellaneous receipts........      25,534      28,614      29,835
                                     ===================================
Total budget receipts...............   1,453,062   1,505,425   1,566,842
  On-budget.........................   1,085,570   1,116,522   1,161,898
  Off-budget........................     367,492     388,903     404,944
                                     -----------------------------------
             MEMORANDUM                                                 
  Federal funds.....................     916,802     938,126     973,677
  Trust funds.......................     353,105     366,155     396,764
  Interfund transactions............    -184,337    -187,759    -208,543
                                     -----------------------------------
Total on-budget.....................   1,085,570   1,116,522   1,161,898
                                     -----------------------------------
Off-budget (trust funds)............     367,492     388,903     404,944
                                     ===================================

[[Page 60]]

Total...............................   1,453,062   1,505,425   1,566,842
------------------------------------------------------------------------
\1\ Deposits by States are State payroll taxes that cover benefit part  
  of the program. Federal unemployment tax receipts cover administrative
  costs at both the Federal and State level. Railroad unemployment tax  
  receipts cover both the benefits and adminstrative costs of the       
  program for the railroads.                                            
\2\ Represents employer and employee contributions to the civil service 
  retirement and disability fund for covered employees of Government-   
  sponsored, privately owned enterprises and the District of Columbia   
  municipal government.                                                 
\3\ Includes both Federal and trust funds. Trust fund amounts in        
  miscellaneous receipts are 1996: $557 million; 1997: $663 million; and
  1998: $687 million.