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


 
                           5. TAX EXPENDITURES

  Tax expenditures are revenue losses due to preferential provisions of 
the Federal tax laws, such as special exclusions, exemptions, 
deductions, credits, deferrals, or tax rates. They are alternatives to 
other policy instruments, such as spending or regulatory programs, as 
means of achieving Federal policy goals. Tax expenditures are created 
for a variety of reasons, including to encourage certain activities, to 
improve fairness, to ease compliance with and administration of the tax 
system, and to reduce certain tax-induced distortions. The Congressional 
Budget Act of 1974 (Public Law 93-344) requires that a list of tax 
expenditures be included in the budget.
  The largest tax expenditures tend to be associated with the individual 
income tax. For example, tax preferences are provided for employer 
contributions for medical insurance, pension contributions and earnings, 
mortgage interest payments on owner-occupied homes, capital gains 
transferred at death, and payments of State and local individual income 
taxes. Tax expenditures under the corporate income tax tend to be 
related to the rate of cost recovery for various investments; as is 
discussed below, the extent to which these provisions are classified as 
tax expenditures varies according to the conceptual baseline used. 
Charitable contributions and credits for State death taxes are the 
largest tax expenditures under the unified transfer (i.e., estate and 
gift) tax.
  Because of potential interactions among provisions, this chapter does 
not present a grand total revenue loss estimate for tax expenditures. 
Moreover, past tax changes entailing broad elimination of tax 
expenditures were generally accompanied by changes in tax rates or other 
basic provisions, so that the net effects on Federal revenues were 
considerably (if not totally) offset. Nevertheless, in aggregate, tax 
expenditures have revenue impacts of hundreds of billions of dollars, 
and are some of the most important ways in which the Federal Government 
affects economic decisions and social welfare.
  While the significant economic impact is self-evident for large 
provisions, smaller tax expenditures can be important for certain 
sectors or types of taxpayers. As is discussed later in this chapter, 
the Administration is developing a framework for analyzing and reporting 
the economic and other effects of tax expenditures, so that they can be 
better compared with policy alternatives. Tax expenditures are also 
discussed in Section VI of the Budget, which considers the Federal 
Government's spending, regulatory, and tax policies across functional 
areas.
  Tax expenditures relating to the individual and corporate income taxes 
are considered first in this chapter. They are estimated for fiscal 
years 1996-2002 using three methods of accounting: revenue loss, outlay 
equivalent, and present value. The present value approach provides 
estimates of the revenue losses for tax expenditures that involve 
deferrals of tax payments into the future or have similar long-term 
effects. Tax expenditures relating to the unified transfer tax are 
considered in a section at the end of the chapter.

                   TAX EXPENDITURES IN THE INCOME TAX

                        Tax Expenditure Estimates

  The Treasury Department prepared all tax expenditure estimates 
presented here based upon tax law enacted as of December 31, 1996. The 
analysis includes new tax expenditures which were enacted this year in 
the Health Insurance Protection and Accountability Act and the Small 
Business Job Protection Act of 1996. Expired or repealed provisions are 
not listed if their revenue effects result only from taxpayer activity 
occurring before fiscal year 1996.
  The total revenue loss estimates for tax expenditures for fiscal years 
1996-2002 are displayed by the budget's functional categories in table 
5-1. Descriptions of the specific tax expenditure provisions follow the 
tables of estimates and discussion of general features of the tax 
expenditure concept.
  As in prior years, two baseline concepts--the normal tax baseline and 
the reference tax law baseline--are used to identify tax expenditures. 
For the most part, the two concepts coincide. However, items treated as 
tax expenditures under the normal tax baseline, but not the reference 
tax law baseline, are indicated by the designation ``normal tax method'' 
in the tables. The revenue losses for these items are zero using the 
reference tax rules. The alternative baseline concepts are discussed in 
detail following the estimates.
  Table 5-2 reports the respective portions of the total revenue losses 
that arise under the individual and corporate income taxes. Listing 
revenue loss estimates under the individual and corporate headings does 
not imply that these categories of filers benefit from the special tax 
provisions in proportion to the respective tax expenditure amounts 
shown. Rather, these breakdowns show the specific tax accounts through 
which the various provisions are cleared. The ultimate beneficiaries of 
corporate tax expenditures, for example, could be stockholders, 
employees, customers, or others, depending on the circumstances.

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  Table 5-3 ranks the major tax expenditures by fiscal year 1998 revenue 
loss. This table merges several individual entries provided in table 5-
1; for example, table 5-3 contains one merged entry for charitable 
contributions instead of the three separate entries found in table 5-1.

                 Interpreting Tax Expenditure Estimates

  Tax expenditure revenue loss estimates do not necessarily equal the 
increase in Federal revenues (or the reduction in budget deficits) that 
would result from repealing the special provisions, for the following 
reasons:
    Eliminating a tax expenditure may have incentive effects 
          that alter economic behavior. These incentives can affect the 
          resulting magnitudes of the formerly subsidized activity or of 
          other tax preferences or Government programs. For example, if 
          deductibility of mortgage interest were limited, some 
          taxpayers would hold smaller mortgages, with a concomitantly 
          smaller effect on the budget than if no such limits were in 
          force.
    Tax expenditures are interdependent even without incentive 
          effects. Repeal of a tax expenditure provision can increase or 
          decrease the revenue losses associated with other provisions. 
          For example, even if behavior does not change, repeal of an 
          itemized deduction could increase the revenue losses from 
          other deductions because some taxpayers would be moved into 
          higher tax brackets. Alternatively, repeal of an itemized 
          deduction could lower the revenue loss from other deductions 
          if taxpayers are led to claim the standard deduction instead 
          of itemizing. Similarly, if two provisions were repealed 
          simultaneously, the increase in tax liability could be greater 
          or less than the sum of the two separate tax expenditures, 
          since each is estimated assuming that the other remains in 
          force. In addition, the estimates reported in Table 5-1 are 
          the totals of individual and corporate income tax revenue 
          losses reported in Table 5-2 and do not reflect any possible 
          interactions between the individual and corporate income tax 
          receipts. For this reason, the figures in Table 5-1 (as well 
          as those in Table 5-5, which are also based on summing 
          individual and corporate estimates) should be regarded as 
          approximations.
    Revenues raised by changes to tax expenditures are sensitive 
          to timing effects and effective dates. Changes in some 
          provisions would yield their full potential revenue gains 
          relatively quickly, whereas changes to other provisions would 
          only gradually yield their full revenue potential, as certain 
          deductions or exemptions would likely be grandfathered.
    The annual value of tax expenditures for tax deferrals is 
          reported on a cash basis in all tables except table 5-4. Cash-
          based estimates reflect the difference between taxes deferred 
          in the current year and incoming revenues that are received 
          due to deferrals of taxes from prior years. While such 
          estimates are useful as a measure of cash flows into the 
          Government, they do not always accurately reflect the true 
          economic cost of these provisions. For example, for a 
          provision where activity levels have changed, so that incoming 
          tax receipts from past deferrals are greater than deferred 
          receipts from new activity, the cash-basis tax expenditure 
          estimate can be negative, despite the fact that in present-
          value terms current deferrals do have a real cost to the 
          Government. Alternatively, in the case of a newly enacted 
          deferral provision, a cash-based estimate can overstate the 
          real cost to the Government because the newly deferred taxes 
          will ultimately be received. Present-value estimates, which 
          are a useful supplement to the cash-basis estimates for 
          provisions involving deferrals, are discussed below.
    Repeal of some provisions could affect overall levels of 
          income and rates of economic growth. In principle, repeal of 
          major tax provisions may have some impact on the budget 
          economic assumptions. In general, however, most changes in 
          particular provisions are unlikely to have significant 
          macroeconomic effects.

                         Present-Value Estimates

  Discounted present-value estimates of revenue losses are presented in 
table 5-4 for certain provisions that involve tax deferrals or other 
long-term revenue effects. These estimates complement the cash-based tax 
expenditure estimates presented in the other tables.
  The present-value estimates represent the revenue losses, net of 
future tax payments, that follow from activities undertaken during 
calendar year 1997 which cause the deferrals or other long-term revenue 
effects. For instance, a pension contribution in 1997 would cause a 
deferral of tax payments on wages in 1997 and on pension earnings on 
this contribution (e.g., interest) in later years. In some future year, 
however, the 1997 pension contribution and accrued earnings will be paid 
out and taxes will be due; these receipts are included in the present-
value estimate. In general, this conceptual approach is similar to the 
one used for reporting the budgetary effects of credit programs, where 
direct loans and guarantees in a given year affect future cash flows.

[[Page 73]]

                 TABLE 5-1.  TOTAL REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX                
                                            (In millions of dollars)                                            
----------------------------------------------------------------------------------------------------------------
                                                                    Total Revenue Loss                          
                                        ------------------------------------------------------------------------
                 Provision                                                                                1998- 
                                           1996     1997     1998     1999     2000     2001     2002     2002  
----------------------------------------------------------------------------------------------------------------
National defense:                                                                                               
  Exclusion of benefits and allowances                                                                          
   to armed forces personnel...........    2,060    2,080    2,095    2,120    2,140    2,160    2,180    10,695
                                                                                                                
International affairs:                                                                                          
  Exclusion of income earned abroad by                                                                          
   United States citizens..............    1,520    1,680    1,865    2,065    2,290    2,545    2,825    11,590
  Exclusion of income of foreign sales                                                                          
   corporations........................    1,500    1,600    1,700    1,800    1,900    2,000    2,100     9,500
  Inventory property sales source rules                                                                         
   exception...........................    1,400    1,500    1,600    1,700    1,800    1,900    2,000     9,000
  Deferral of income from controlled                                                                            
   foreign corporations (normal tax                                                                             
   method).............................    2,100    2,200    2,400    2,600    2,800    3,000    3,200    14,000
                                                                                                                
General science, space, and technology:                                                                         
  Expensing of research and                                                                                     
   experimentation expenditures (normal                                                                         
   tax method).........................       40      195      430      580      685      740      765     3,200
  Credit for increasing research                                                                                
   activities..........................      805      685    1,045      250      105       40        5     1,445
                                                                                                                
Energy:                                                                                                         
  Expensing of exploration and                                                                                  
   development costs, fuels............     -210     -130      -40       20      100       75       80       235
  Excess of percentage over cost                                                                                
   depletion, fuels....................    1,125    1,145    1,170    1,190    1,205    1,225    1,255     6,045
  Alternative fuel production credit...      570      600      485      565      535      505      485     2,575
  Exception from passive loss                                                                                   
   limitation for working interests in                                                                          
   oil and gas properties..............       50       50       55       55       60       60       65       295
  Capital gains treatment of royalties                                                                          
   on coal.............................       15       15       15       20       20       20       20        95
  Exclusion of interest on State and                                                                            
   local IDBs for energy facilities....      315      315      315      315      310      310      310     1,560
  Enhanced oil recovery credit.........       80       85       90      100      105      105      110       510
  New technology credit................       30       35       40       40       40       45       45       210
  Alcohol fuel credit \1\ .............       10       10       10       10       10       10       10        50
  Tax credit and deduction for clean-                                                                           
   fuel burning vehicles and properties       65       65       75       80       85       90       95       425
  Exclusion from income of conservation                                                                         
   subsidies provided by public                                                                                 
   utilities...........................      150       65       15       30       35       45       45       170
                                                                                                                
Natural resources and environment:                                                                              
  Expensing of exploration and                                                                                  
   development costs, nonfuel minerals.       35       35       35       35       35       35       35       175
  Excess of percentage over cost                                                                                
   depletion, nonfuel minerals.........      285      295      300      305      315      320      325     1,565
  Capital gains treatment of iron ore..  .......  .......  .......  .......  .......  .......  .......  ........
  Special rules for mining reclamation                                                                          
   reserves............................       50       50       50       50       50       50       50       250
  Exclusion of interest on State and                                                                            
   local IDBs for pollution control and                                                                         
   sewage and waste disposal facilities      700      690      675      655      640      600      545     3,115
  Capital gains treatment of certain                                                                            
   timber income.......................       15       15       15       20       20       20       20        95
  Expensing of multiperiod timber                                                                               
   growing costs.......................      395      415      440      460      485      505      525     2,415
  Investment credit and seven-year                                                                              
   amortization for reforestation                                                                               
   expenditures........................       45       50       50       50       50       50       50       250
  Tax incentives for preservation of                                                                            
   historic structures.................      125      120      115      115      110      105      105       550
                                                                                                                
Agriculture:                                                                                                    
  Expensing of certain capital outlays.       65       65       65       70       70       70       70       345
  Expensing of certain multiperiod                                                                              
   production costs....................       80       80       80       85       85       85       85       420
  Treatment of loans forgiven solvent                                                                           
   farmers as if insolvent.............       10       10       10       10       10       10       10        50
  Capital gains treatment of certain                                                                            
   income..............................      165      170      175      180      185      190      195       925
                                                                                                                
Commerce and housing:                                                                                           
  Financial institutions and insurance:                                                                         
    Exemption of credit union income...      660      700      745      790      835      885      940     4,195
    Excess bad debt reserves of                                                                                 
     financial institutions............       90       70       40       15        5  .......  .......        60
    Deferral on income on life                                                                                  
     insurance and annuity contracts...   10,525   11,210   11,940   12,715   13,540   14,420   15,360    67,975
    Special alternative tax on small                                                                            
     property and casualty insurance                                                                            
     companies.........................        5        5        5        5        5        5        5        25
    Tax exemption of certain insurance                                                                          
     companies.........................      240      245      255      260      280      295      310     1,400
    Small life insurance company                                                                                
     deduction.........................      110      115      120      130      135      140      145       670
  Housing:                                                                                                      
    Exclusion of interest on owner-                                                                             
     occupied mortgage subsidy bonds...    1,765    1,755    1,735    1,715    1,690    1,665    1,640     8,445
    Exclusion of interest on State and                                                                          
     local debt for rental housing.....      755      760      755      760      765      760      750     3,790
    Deductibility of mortgage interest                                                                          
     on owner-occupied homes...........   47,525   49,820   52,115   54,440   56,830   59,345   62,060   284,790
    Deductibility of State and local                                                                            
     property tax on owner-occupied                                                                             
     homes.............................   15,900   16,670   17,435   18,215   19,015   19,855   20,765    95,285
    Deferral of income from post 1987                                                                           
     installment sales.................      955      975      995    1,015    1,035    1,055    1,075     5,175
    Deferral of capital gains on home                                                                           
     sales.............................   14,410   14,845   15,290   15,745   16,220   16,705   17,205    81,165
    Exclusion of capital gains on home                                                                          
     sales for persons age 55 and over.    5,225    5,230    5,095    5,515    5,295    5,810    5,495    27,210
    Exception from passive loss rules                                                                           
     for $25,000 of rental loss........    3,950    3,700    3,470    3,260    3,065    2,885    2,715    15,395
    Credit for low-income housing                                                                               
     investments.......................    2,600    2,840    3,270    3,500    3,595    3,445    3,325    17,135
    Accelerated depreciation on rental                                                                          
     housing (normal tax method).......    1,190    1,350    1,555    1,955    2,335    2,240    2,310    10,395
  Commerce:                                                                                                     
    Cancellation of indebtedness.......       70       40       15  .......      -10       -5       -5        -5
    Permanent exceptions from imputed                                                                           
     interest rules....................      150      155      155      160      160      160      165       800
    Capital gains (other than                                                                                   
     agriculture, timber, iron ore, and                                                                         
     coal) (normal tax method).........    7,990    8,230    8,480    8,730    8,995    9,265    9,540    45,010
    Capital gains exclusion of small                                                                            
     corporation stock.................  .......  .......        5       20       40       70       95       230
    Step-up basis of capital gains at                                                                           
     death.............................   29,530   30,715   31,945   33,225   34,555   35,940   37,375   173,040
    Carryover basis of capital gains on                                                                         
     gifts.............................      140      150      160      170      180      190      200       900
    Ordinary income treatment of loss                                                                           
     from small business corporation                                                                            
     stock sale........................       35       35       35       35       40       40       40       190

[[Page 74]]

    Accelerated depreciation of                                                                                 
     buildings other than rental                                                                                
     housing (normal tax method).......    6,800    5,800    4,660    3,420    2,385    1,640    1,085    13,190
    Accelerated depreciation of                                                                                 
     machinery and equipment (normal                                                                            
     tax method).......................   25,430   27,280   29,285   32,500   35,730   38,325   40,125   175,965
    Expensing of certain small                                                                                  
     investments (normal tax method)...    1,440    1,065      900      890      850      700      560     3,900
    Amortization of start-up costs                                                                              
     (normal tax method)...............      195      200      205      210      215      220      225     1,075
    Graduated corporation income tax                                                                            
     rate (normal tax method)..........    4,435    4,695    4,940    5,125    5,455    5,720    5,925    27,165
    Exclusion of interest on small                                                                              
     issue IDBs........................      275      265      260      255      250      250      240     1,255
    Treatment of Alaska Native                                                                                  
     Corporations......................       20       15       10        5        5        5  .......        25
                                                                                                                
Transportation:                                                                                                 
  Deferral of tax on shipping companies       20       20       20       20       20       20       20       100
  Exclusion of reimbursed employee                                                                              
   parking expenses....................    1,250    1,285    1,315    1,350    1,385    1,425    1,470     6,945
  Exclusion for employer-provided                                                                               
   transit passes......................       50       60       70       85      100      115      130       500
                                                                                                                
Community and regional development:                                                                             
  Investment credit for rehabilitation                                                                          
   of structures (other than historic).       80       80       70       70       70       65       65       340
  Exclusion of interest on IDBs for                                                                             
   airports, docks, and sports and                                                                              
   convention facilities...............    1,980    1,975    1,970    1,915    1,865    1,810    1,760     9,320
  Exemption of certain mutuals' and                                                                             
   cooperatives' income................       60       60       60       65       65       65       70       325
  Empowerment zones....................      530      585      640      670      700      700      530     3,240
                                                                                                                
Education, training, employment, and                                                                            
 social services:                                                                                               
  Education:                                                                                                    
    Exclusion of scholarship and                                                                                
     fellowship income (normal tax                                                                              
     method)...........................      835      845      850      860      870      875      885     4,340
    Exclusion of interest on State and                                                                          
     local student loan bonds..........      305      290      280      265      260      250      250     1,305
    Exclusion of interest on State and                                                                          
     local debt for private nonprofit                                                                           
     educational facilities............      955      930      895      860      830      800      775     4,160
    Exclusion of interest on savings                                                                            
     bonds transferred to educational                                                                           
     institutions......................        5       10       10       15       15       15       20        75
    Parental personal exemption for                                                                             
     students age 19 or over...........      820      845      885      930      985    1,045    1,090     4,935
    Deductibility of charitable                                                                                 
     contributions (education).........    1,865    1,960    2,060    2,165    2,270    2,385    2,500    11,380
    Exclusion of employer provided                                                                              
     educational assistance............       20      575       20  .......  .......  .......  .......        20
  Training, employment, and social                                                                              
   services:                                                                                                    
    Work opportunity tax credit........  .......      120      150       85       30       10  .......       275
    Exclusion of employer provided                                                                              
     child care........................      775      830      890      955    1,025    1,100    1,180     5,150
    Adoption assistance................  .......       10      200      320      355      370      365     1,610
    Exclusion of employee meals and                                                                             
     lodging (other than military).....      570      600      630      665      700      735      775     3,505
    Credit for child and dependent care                                                                         
     expenses..........................    2,580    2,705    2,840    2,985    3,130    3,290    3,455    15,700
    Credit for disabled access                                                                                  
     expenditures......................       80       85       85       85       90       90       90       440
    Expensing of costs of removing                                                                              
     certain architectural barriers to                                                                          
     the handicapped...................       20       20       20       20       20       20       20       100
    Deductibility of charitable                                                                                 
     contributions, other than                                                                                  
     education and health..............   16,045   16,845   17,680   18,560   19,480   20,445   21,455    97,620
    Exclusion of certain foster care                                                                            
     payments..........................       30       35       35       35       40       40       45       195
    Exclusion of parsonage allowances..      295      315      335      360      380      410      435     1,920
                                                                                                                
Health:                                                                                                         
  Exclusion of employer contributions                                                                           
   for medical insurance premiums and                                                                           
   medical care........................   64,450   70,460   75,750   81,285   86,900   92,815   98,995   435,745
  Medical savings accounts.............  .......       10      100      190      195      195      200       880
  Deductibility of medical expenses....    3,675    4,060    4,535    4,895    5,270    5,670    6,100    26,470
  Exclusion of interest on State and                                                                            
   local debt for private nonprofit                                                                             
   health facilities...................    2,135    2,080    2,005    1,930    1,855    1,790    1,745     9,325
  Deductibility of charitable                                                                                   
   contributions (health)..............    2,360    2,480    2,600    2,735    2,870    3,005    3,155    14,365
  Tax credit for orphan drug research..        5       20       10  .......  .......  .......  .......        10
  Special Blue Cross/Blue Shield                                                                                
   deduction...........................      120      135       95      150      165      200      250       860
                                                                                                                
Income security:                                                                                                
  Exclusion of railroad retirement                                                                              
   system benefits.....................      440      440      450      450      455      455      465     2,275
  Exclusion of workmen's compensation                                                                           
   benefits............................    4,695    4,970    5,305    5,550    5,855    6,220    6,660    29,590
  Exclusion of public assistance                                                                                
   benefits (normal tax method)........      500      515      550      575      600      625      655     3,005
  Exclusion of special benefits for                                                                             
   disabled coal miners................       90       90       85       80       75       75       70       385
  Exclusion of military disability                                                                              
   pensions............................      130      130      130      130      130      130      130       650
  Net exclusion of pension                                                                                      
   contributions and earnings:                                                                                  
    Employer plans.....................   55,410   55,810   56,245   56,665   57,085   57,510   57,940   285,445
    Individual Retirement Accounts.....    8,025    8,345    8,600    8,880    9,125    9,340    9,520    45,465
    Keogh plans........................    3,030    3,200    3,325    3,500    3,680    3,875    4,080    18,460
  Exclusion of employer provided death                                                                          
   benefits............................       35       35       35       40       40       45       45       205
  Exclusion of other employee benefits:                                                                         
    Premiums on group term life                                                                                 
     insurance.........................    2,495    2,615    2,745    2,880    3,020    3,170    3,325    15,140
    Premiums on accident and disability                                                                         
     insurance.........................      155      165      175      185      195      205      215       975
    Income of trusts to finance                                                                                 
     supplementary unemployment                                                                                 
     benefits..........................       20       20       20       20       20       20       20       100
  Special ESOP rules...................      905      735      720      740      760      790      820     3,830
  Additional deduction for the blind...       25       25       25       30       30       30       30       145
  Additional deduction for the elderly.    1,470    1,485    1,495    1,500    1,510    1,515    1,515     7,535
  Tax credit for the elderly and                                                                                
   disabled............................       45       50       50       50       50       50       50       250
  Deductibility of casualty losses.....      460      485      510      535      560      590      620     2,815
  Earned income credit \2\ ............    5,097    5,653    5,814    6,112    6,319    6,621    6,859    31,725

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Social Security:                                                                                                
  Exclusion of social security                                                                                  
   benefits:                                                                                                    
    OASI benefits for retired workers..   17,005   17,810   18,495   19,290   20,190   20,875   21,495   100,345
    Disability insurance benefits......    2,090    2,375    2,615    2,820    3,045    3,290    3,545    15,315
    Benefits for dependents and                                                                                 
     survivors.........................    3,795    3,985    4,175    4,355    4,530    4,710    4,895    22,665
                                                                                                                
Veterans benefits and services:                                                                                 
  Exclusion of veterans disability                                                                              
   compensation........................    2,615    2,770    2,930    3,100    3,280    3,470    3,675    16,455
  Exclusion of veterans pensions.......       70       70       70       70       75       80       85       380
  Exclusion of GI bill benefits........       50       60       70       80       90       95      100       435
  Exclusion of interest on State and                                                                            
   local debt for veterans housing.....       40       40       35       35       35       35       35       175
                                                                                                                
General purpose fiscal assistance:                                                                              
  Exclusion of interest on public                                                                               
   purpose State and local debt........   15,720   15,800   15,735   15,595   15,445   15,300   15,170    77,245
  Deductibility of nonbusiness State                                                                            
   and local taxes other than on owner-                                                                         
   occupied homes......................   28,265   29,630   30,995   32,375   33,800   35,290   36,910   169,370
  Tax credit for corporations receiving                                                                         
   income from doing business in U.S.                                                                           
   possessions.........................    2,760    2,700    2,770    2,800    2,885    2,970    3,060    14,485
                                                                                                                
Interest:                                                                                                       
  Deferral of interest on savings bonds    1,300    1,290    1,285    1,270    1,215    1,170    1,155     6,095
                                                                                                                
Addendum--Aid to State and local                                                                                
 governments:                                                                                                   
  Deductibility of:                                                                                             
    Property taxes on owner-occupied                                                                            
     homes.............................   15,900   16,670   17,435   18,215   19,015   19,855   20,765    95,285
    Nonbusiness State and local taxes                                                                           
     other than on owner-occupied homes   28,265   29,630   30,995   32,375   33,800   35,290   36,910   169,370
  Exclusion of interest on:                                                                                     
    Public purpose State and local debt   15,720   15,800   15,735   15,595   15,445   15,300   15,170    77,245
    IDBs for certain energy facilities.      315      315      315      315      310      310      310     1,560
    IDBs for pollution control and                                                                              
     sewage and waste disposal                                                                                  
     facilities........................      700      690      675      655      640      600      545     3,115
    Small-issue IDBs...................      275      265      260      255      250      250      240     1,255
    Owner-occupied mortgage revenue                                                                             
     bonds.............................    1,765    1,755    1,735    1,715    1,690    1,665    1,640     8,445
    State and local debt for rental                                                                             
     housing...........................      755      760      755      760      765      760      750     3,790
    IDBs for airports, docks, and                                                                               
     sports and convention facilities..    1,980    1,975    1,970    1,915    1,865    1,810    1,760     9,320
    State and local student loan bonds.      305      290      280      265      260      250      250     1,305
    State and local debt for private                                                                            
     nonprofit educational facilities..      955      930      895      860      830      800      775     4,160
    State and local debt for private                                                                            
     nonprofit health facilities.......    2,135    2,080    2,005    1,930    1,855    1,790    1,745     9,325
    State and local debt for veterans                                                                           
     housing...........................       40       40       35       35       35       35       35       175
----------------------------------------------------------------------------------------------------------------
\1\ In addition alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as follows:
  1996 $670; 1997 $670; 1998 $700; 1999 $740; 2000 $770; 2001 $800; and 2002 $840.                              
\2\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on     
  outlays (in millions of dollars) is as follows: 1996 $19,159; 1997 $21,163; 1998 $21,983; 1999 $22,864; 2000  
  $23,818; 2001 $24,634; and 2002 $25,518.                                                                      
Note: Provisions with estimates denoted ``normal tax method'' have no revenue loss under the reference tax law  
  method.                                                                                                       
All estimates have been rounded to the nearest $5 million.                                                      
Figures in table 5-1 are the arithmetic sums of corporate and individual income tax revenue loss estimates from 
  table 5-2, and do not reflect possible interactions across these two taxes.                                   


                                                   TABLE 5-2.  CORPORATE AND INDIVIDUAL INCOME TAX REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES                                                  
                                                                                    (In millions of dollars)                                                                                    
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                            Revenue Loss                                                        
                                                                   -----------------------------------------------------------------------------------------------------------------------------
                              Provision                                                      Corporations                                                   Individuals                         
                                                                   -----------------------------------------------------------------------------------------------------------------------------
                                                                      1996     1997     1998     1999     2000     2001     2002     1996     1997     1998     1999     2000     2001     2002 
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 76]]

National defense:                                                                                                                                                                               
  Exclusion of benefits and allowances to armed forces personnel..       --       --       --       --       --       --       --    2,060    2,080    2,095    2,120    2,140    2,160    2,180
                                                                                                                                                                                                
International affairs:                                                                                                                                                                          
  Exclusion of income earned abroad by United States citizens.....       --       --       --       --       --       --       --    1,520    1,680    1,865    2,065    2,290    2,545    2,825
  Exclusion of income of foreign sales corporations...............    1,500    1,600    1,700    1,800    1,900    2,000    2,100       --       --       --       --       --       --       --
  Inventory property sales source rules exception.................    1,400    1,500    1,600    1,700    1,800    1,900    2,000       --       --       --       --       --       --       --
  Deferral of income from controlled foreign corporations (normal                                                                                                                               
   tax method)....................................................    2,100    2,200    2,400    2,600    2,800    3,000    3,200       --       --       --       --       --       --       --
                                                                                                                                                                                                
General science, space, and technology:                                                                                                                                                         
  Expensing of research and experimentation expenditures (normal                                                                                                                                
   tax method)....................................................       40      190      420      570      670      725      750  .......        5       10       10       15       15       15
  Credit for increasing research activities.......................      790      670    1,035      250      105       40        5       15       15       10  .......  .......  .......  .......
                                                                                                                                                                                                
Energy:                                                                                                                                                                                         
  Expensing of exploration and development costs, fuels...........     -155      -95      -30       15       80       55       60      -55      -35      -10        5       20       20       20
  Excess of percentage over cost depletion, fuels.................      845      860      875      890      905      920      940      280      285      295      300      300      305      315
  Alternative fuel production credit..............................      535      565      450      535      505      475      455       35       35       35       30       30       30       30
  Exception from passive loss limitation for working interests in                                                                                                                               
   oil and gas properties.........................................       --       --       --       --       --       --       --       50       50       55       55       60       60       65
  Capital gains treatment of royalties on coal....................       --       --       --       --       --       --       --       15       15       15       20       20       20       20
  Exclusion of interest on State and local IDBs for energy                                                                                                                                      
   facilities.....................................................      125      125      125      125      125      125      125      190      190      190      190      185      185      185
  Enhanced oil recovery credit....................................       75       80       85       90       95       95      100        5        5        5       10       10       10       10
  New technology credit...........................................       30       35       40       40       40       45       45  .......  .......  .......  .......  .......  .......  .......
  Alcohol fuel credit \1\ ........................................        5        5        5        5        5        5        5        5        5        5        5        5        5        5
  Tax credit and deduction for clean-fuel burning vehicles and                                                                                                                                  
   properties.....................................................       55       55       60       60       60       65       70       10       10       15       20       25       25       25
  Exclusion from income of conservation subsidies provided by                                                                                                                                   
   public utilities...............................................      100       10      -45      -35      -30      -25      -25       50       55       60       65       65       70       70
                                                                                                                                                                                                
Natural resources and environment:                                                                                                                                                              
  Expensing of exploration and development costs, nonfuel minerals       25       25       25       25       25       25       25       10       10       10       10       10       10       10
  Excess of percentage over cost depletion, nonfuel minerals......      215      220      225      230      235      240      245       70       75       75       75       80       80       80
  Capital gains treatment of iron ore.............................       --       --       --       --       --       --       --  .......  .......  .......  .......  .......  .......  .......
  Special rules for mining reclamation reserves...................       45       45       45       45       45       45       45        5        5        5        5        5        5        5
  Exclusion of interest on State and local IDBs for pollution                                                                                                                                   
   control and sewage and waste disposal facilities...............      280      275      270      260      255      235      215      420      415      405      395      385      365      330
  Capital gains treatment of certain timber income................       --       --       --       --       --       --       --       15       15       15       20       20       20       20
  Expensing of multiperiod timber growing costs...................      225      235      250      260      275      285      295      170      180      190      200      210      220      230
  Investment credit and seven-year amortization for reforestation                                                                                                                               
   expenditures...................................................       20       20       20       20       20       20       20       25       30       30       30       30       30       30
  Tax incentives for preservation of historic structures..........       25       25       25       25       20       20       20      100       95       90       90       90       85       85
                                                                                                                                                                                                
Agriculture:                                                                                                                                                                                    
  Expensing of certain capital outlays............................       10       10       10       10       10       10       10       55       55       55       60       60       60       60
  Expensing of certain multiperiod production costs...............       10       10       10       10       10       10       10       70       70       70       75       75       75       75
  Treatment of loans forgiven solvent farmers as if insolvent.....       --       --       --       --       --       --       --       10       10       10       10       10       10       10
  Capital gains treatment of certain income.......................       --       --       --       --       --       --       --      165      170      175      180      185      190      195
                                                                                                                                                                                                
Commerce and housing:                                                                                                                                                                           
  Financial institutions and insurance:                                                                                                                                                         
    Exemption of credit union income..............................      660      700      745      790      835      885      940       --       --       --       --       --       --       --
    Excess bad debt reserves of financial institutions............       90       70       40       15        5  .......  .......       --       --       --       --       --       --       --
    Deferral on income on life insurance and annuity contracts....      325      345      370      395      420      445      475   10,200   10,865   11,570   12,320   13,120   13,975   14,885
    Special alternative tax on small property and casualty                                                                                                                                      
     insurance companies..........................................        5        5        5        5        5        5        5       --       --       --       --       --       --       --
    Tax exemption of certain insurance companies..................      240      245      255      260      280      295      310       --       --       --       --       --       --       --
    Small life insurance company deduction........................      110      115      120      130      135      140      145       --       --       --       --       --       --       --
  Housing:                                                                                                                                                                                      
    Exclusion of interest on owner-occupied mortgage subsidy bonds      705      700      690      685      675      665      655    1,060    1,055    1,045    1,030    1,015    1,000      985
    Exclusion of interest on State and local debt for rental                                                                                                                                    
     housing......................................................      300      305      300      305      305      305      300      455      455      455      455      460      455      450
    Deductibility of mortgage interest on owner-occupied homes....       --       --       --       --       --       --       --   47,525   49,820   52,115   54,440   56,830   59,345   62,060
    Deductibility of State and local property tax on owner-                                                                                                                                     
     occupied homes...............................................       --       --       --       --       --       --       --   15,900   16,670   17,435   18,215   19,015   19,855   20,765
    Deferral of income from post 1987 installment sales...........      245      250      255      260      265      270      275      710      725      740      755      770      785      800
    Deferral of capital gains on home sales.......................       --       --       --       --       --       --       --   14,410   14,845   15,290   15,745   16,220   16,705   17,205
    Exclusion of capital gains on home sales for persons age 55                                                                                                                                 
     and over.....................................................       --       --       --       --       --       --       --    5,225    5,230    5,095    5,515    5,295    5,810    5,495
    Exception from passive loss rules for $25,000 of rental loss..       --       --       --       --       --       --       --    3,950    3,700    3,470    3,260    3,065    2,885    2,715
    Credit for low-income housing investments.....................      520      570      655      700      720      690      665    2,080    2,270    2,615    2,800    2,875    2,755    2,660
    Accelerated depreciation on rental housing (normal tax method)      750      855    1,005    1,340    1,650    1,500    1,515      440      495      550      615      685      740      795
  Commerce:                                                                                                                                                                                     
    Cancellation of indebtedness..................................       --       --       --       --       --       --       --       70       40       15  .......      -10       -5       -5

[[Page 77]]

    Permanent exceptions from imputed interest rules..............       --       --       --       --       --       --       --      150      155      155      160      160      160      165
    Capital gains (other than agriculture, timber, iron ore, and                                                                                                                                
     coal) (normal tax method)....................................       --       --       --       --       --       --       --    7,990    8,230    8,480    8,730    8,995    9,265    9,540
    Capital gains exclusion of small corporation stock............       --       --       --       --       --       --       --  .......  .......        5       20       40       70       95
    Step-up basis of capital gains at death.......................       --       --       --       --       --       --       --   29,530   30,715   31,945   33,225   34,555   35,940   37,375
    Carryover basis of capital gains on gifts.....................       --       --       --       --       --       --       --      140      150      160      170      180      190      200
    Ordinary income treatment of loss from small business                                                                                                                                       
     corporation stock sale.......................................       --       --       --       --       --       --       --       35       35       35       35       40       40       40
    Accelerated depreciation of buildings other than rental                                                                                                                                     
     housing (normal tax method)..................................    4,780    4,070    3,260    2,385    1,695    1,185      800    2,020    1,730    1,400    1,035      690      455      285
    Accelerated depreciation of machinery and equipment (normal                                                                                                                                 
     tax method)..................................................   20,195   21,510   23,055   25,510   27,980   29,625   31,080    5,235    5,770    6,230    6,990    7,750    8,700    9,045
    Expensing of certain small investments (normal tax method)....      875      655      575      580      560      470      385      565      410      325      310      290      230      175
    Amortization of start-up costs (normal tax method)............       90       95       95      100      100      105      105      105      105      110      110      115      115      120
    Graduated corporation income tax rate (normal tax method).....    4,435    4,695    4,940    5,125    5,455    5,720    5,925       --       --       --       --       --       --       --
    Exclusion of interest on small issue IDBs.....................      110      105      105      100      100      100       95      165      160      155      155      150      150      145
    Treatment of Alaska Native Corporations.......................       20       15       10        5        5        5  .......       --       --       --       --       --       --       --
                                                                                                                                                                                                
Transportation:                                                                                                                                                                                 
  Deferral of tax on shipping companies...........................       20       20       20       20       20       20       20       --       --       --       --       --       --       --
  Exclusion of reimbursed employee parking expenses...............       --       --       --       --       --       --       --    1,250    1,285    1,315    1,350    1,385    1,425    1,470
  Exclusion for employer-provided transit passes..................       --       --       --       --       --       --       --       50       60       70       85      100      115      130
                                                                                                                                                                                                
Community and regional development:                                                                                                                                                             
  Investment credit for rehabilitation of structures (other than                                                                                                                                
   historic)......................................................       15       15       15       15       15       15       15       65       65       55       55       55       50       50
  Exclusion of interest on IDBs for airports, docks, and sports                                                                                                                                 
   and convention facilities......................................      790      790      785      760      740      720      700    1,190    1,185    1,185    1,155    1,125    1,090    1,060
  Exemption of certain mutuals' and cooperatives' income..........       60       60       60       65       65       65       70       --       --       --       --       --       --       --
  Empowerment zones...............................................      500      550      600      625      650      650      490       30       35       40       45       50       50       40
                                                                                                                                                                                                
Education, training, employment, and social services:                                                                                                                                           
  Education:                                                                                                                                                                                    
    Exclusion of scholarship and fellowship income (normal tax                                                                                                                                  
     method)......................................................       --       --       --       --       --       --       --      835      845      850      860      870      875      885
    Exclusion of interest on State and local student loan bonds...      120      115      110      105      105      100      100      185      175      170      160      155      150      150
    Exclusion of interest on State and local debt for private                                                                                                                                   
     nonprofit educational facilities.............................      380      370      355      340      330      320      310      575      560      540      520      500      480      465
    Exclusion of interest on savings bonds transferred to                                                                                                                                       
     educational institutions.....................................       --       --       --       --       --       --       --        5       10       10       15       15       15       20
    Parental personal exemption for students age 19 or over.......       --       --       --       --       --       --       --      820      845      885      930      985    1,045    1,090
    Deductibility of charitable contributions (education).........      180      190      200      210      220      230      240    1,685    1,770    1,860    1,955    2,050    2,155    2,260
    Exclusion of employer provided educational assistance.........       --       --       --       --       --       --       --       20      575       20  .......  .......  .......  .......
  Training, employment, and social services:                                                                                                                                                    
    Work opportunity tax credit...................................  .......      100      130       70       25       10  .......  .......       20       20       15        5  .......  .......
    Exclusion of employer provided child care.....................       --       --       --       --       --       --       --      775      830      890      955    1,025    1,100    1,180
    Adoption assistance...........................................       --       --       --       --       --       --       --  .......       10      200      320      355      370      365
    Exclusion of employee meals and lodging (other than military).       --       --       --       --       --       --       --      570      600      630      665      700      735      775
    Credit for child and dependent care expenses..................       --       --       --       --       --       --       --    2,580    2,705    2,840    2,985    3,130    3,290    3,455
    Credit for disabled access expenditures.......................       50       50       50       50       55       55       55       30       35       35       35       35       35       35
    Expensing of costs of removing certain architectural barriers                                                                                                                               
     to the handicapped...........................................       15       15       15       15       15       15       15        5        5        5        5        5        5        5
    Deductibility of charitable contributions, other than                                                                                                                                       
     education and health.........................................      670      700      730      760      790      820      850   15,375   16,145   16,950   17,800   18,690   19,625   20,605
    Exclusion of certain foster care payments.....................       --       --       --       --       --       --       --       30       35       35       35       40       40       45
    Exclusion of parsonage allowances.............................       --       --       --       --       --       --       --      295      315      335      360      380      410      435
                                                                                                                                                                                                
Health:                                                                                                                                                                                         
  Exclusion of employer contributions for medical insurance                                                                                                                                     
   premiums and medical care......................................       --       --       --       --       --       --       --   64,450   70,460   75,750   81,285   86,900   92,815   98,995
  Medical savings accounts........................................       --       --       --       --       --       --       --  .......       10      100      190      195      195      200
  Deductibility of medical expenses...............................       --       --       --       --       --       --       --    3,675    4,060    4,535    4,895    5,270    5,670    6,100
  Exclusion of interest on State and local debt for private                                                                                                                                     
   nonprofit health facilities....................................      850      825      795      765      735      710      695    1,285    1,255    1,210    1,165    1,120    1,080    1,050
  Deductibility of charitable contributions (health)..............      640      675      705      745      780      810      850    1,720    1,805    1,895    1,990    2,090    2,195    2,305
  Tax credit for orphan drug research.............................        5       20       10  .......  .......  .......  .......       --       --       --       --       --       --       --
  Special Blue Cross/Blue Shield deduction........................      120      135       95      150      165      200      250       --       --       --       --       --       --       --
                                                                                                                                                                                                
Income security:                                                                                                                                                                                
  Exclusion of railroad retirement system benefits................       --       --       --       --       --       --       --      440      440      450      450      455      455      465
  Exclusion of workmen's compensation benefits....................       --       --       --       --       --       --       --    4,695    4,970    5,305    5,550    5,855    6,220    6,660
  Exclusion of public assistance benefits (normal tax method).....       --       --       --       --       --       --       --      500      515      550      575      600      625      655

[[Page 78]]

  Exclusion of special benefits for disabled coal miners..........       --       --       --       --       --       --       --       90       90       85       80       75       75       70
  Exclusion of military disability pensions.......................       --       --       --       --       --       --       --      130      130      130      130      130      130      130
  Net exclusion of pension contributions and earnings:                                                                                                                                          
    Employer plans................................................       --       --       --       --       --       --       --   55,410   55,810   56,245   56,665   57,085   57,510   57,940
    Individual Retirement Accounts................................       --       --       --       --       --       --       --    8,025    8,345    8,600    8,880    9,125    9,340    9,520
    Keogh plans...................................................       --       --       --       --       --       --       --    3,030    3,200    3,325    3,500    3,680    3,875    4,080
  Exclusion of employer provided death benefits...................       --       --       --       --       --       --       --       35       35       35       40       40       45       45
  Exclusion of other employee benefits:                                                                                                                                                         
    Premiums on group term life insurance.........................       --       --       --       --       --       --       --    2,495    2,615    2,745    2,880    3,020    3,170    3,325
    Premiums on accident and disability insurance.................       --       --       --       --       --       --       --      155      165      175      185      195      205      215
    Income of trusts to finance supplementary unemployment                                                                                                                                      
     benefits.....................................................       --       --       --       --       --       --       --       20       20       20       20       20       20       20
  Special ESOP rules..............................................      845      675      660      680      700      730      760       60       60       60       60       60       60       60
  Additional deduction for the blind..............................       --       --       --       --       --       --       --       25       25       25       30       30       30       30
  Additional deduction for the elderly............................       --       --       --       --       --       --       --    1,470    1,485    1,495    1,500    1,510    1,515    1,515
  Tax credit for the elderly and disabled.........................       --       --       --       --       --       --       --       45       50       50       50       50       50       50
  Deductibility of casualty losses................................       --       --       --       --       --       --       --      460      485      510      535      560      590      620
  Earned income credit \2\ .......................................       --       --       --       --       --       --       --    5,097    5,653    5,814    6,112    6,319    6,621    6,859
                                                                                                                                                                                                
Social Security:                                                                                                                                                                                
  Exclusion of social security benefits:                                                                                                                                                        
    OASI benefits for retired workers.............................       --       --       --       --       --       --       --   17,005   17,810   18,495   19,290   20,190   20,875   21,495
    Disability insurance benefits.................................       --       --       --       --       --       --       --    2,090    2,375    2,615    2,820    3,045    3,290    3,545
    Benefits for dependents and survivors.........................       --       --       --       --       --       --       --    3,795    3,985    4,175    4,355    4,530    4,710    4,895
                                                                                                                                                                                                
Veterans benefits and services:                                                                                                                                                                 
  Exclusion of veterans disability compensation...................       --       --       --       --       --       --       --    2,615    2,770    2,930    3,100    3,280    3,470    3,675
  Exclusion of veterans pensions..................................       --       --       --       --       --       --       --       70       70       70       70       75       80       85
  Exclusion of GI bill benefits...................................       --       --       --       --       --       --       --       50       60       70       80       90       95      100
  Exclusion of interest on State and local debt for veterans                                                                                                                                    
   housing........................................................       15       15       15       15       15       15       15       25       25       20       20       20       20       20
                                                                                                                                                                                                
General purpose fiscal assistance:                                                                                                                                                              
  Exclusion of interest on public purpose State and local debt....    6,290    6,310    6,280    6,220    6,160    6,105    6,055    9,430    9,490    9,455    9,375    9,285    9,195    9,115
  Deductibility of nonbusiness State and local taxes other than on                                                                                                                              
   owner-occupied homes...........................................       --       --       --       --       --       --       --   28,265   29,630   30,995   32,375   33,800   35,290   36,910
  Tax credit for corporations receiving income from doing business                                                                                                                              
   in U.S. possessions............................................    2,760    2,700    2,770    2,800    2,885    2,970    3,060       --       --       --       --       --       --       --
                                                                                                                                                                                                
Interest:                                                                                                                                                                                       
  Deferral of interest on savings bonds...........................       --       --       --       --       --       --       --    1,300    1,290    1,285    1,270    1,215    1,170    1,155
                                                                                                                                                                                                
Addendum--Aid to State and local governments:                                                                                                                                                   
  Deductibility of:                                                                                                                                                                             
    Property taxes on owner-occupied homes........................       --       --       --       --       --       --       --   15,900   16,670   17,435   18,215   19,015   19,855   20,765
    Nonbusiness State and local taxes other than on owner-occupied                                                                                                                              
     homes........................................................       --       --       --       --       --       --       --   28,265   29,630   30,995   32,375   33,800   35,290   36,910
  Exclusion of interest on:                                                                                                                                                                     
    Public purpose State and local debt...........................    6,290    6,310    6,280    6,220    6,160    6,105    6,055    9,430    9,490    9,455    9,375    9,285    9,195    9,115
    IDBs for certain energy facilities............................      125      125      125      125      125      125      125      190      190      190      190      185      185      185
    IDBs for pollution control and sewage and waste disposal                                                                                                                                    
     facilities...................................................      280      275      270      260      255      235      215      420      415      405      395      385      365      330
    Small-issue IDBs..............................................      110      105      105      100      100      100       95      165      160      155      155      150      150      145
    Owner-occupied mortgage revenue bonds.........................      705      700      690      685      675      665      655    1,060    1,055    1,045    1,030    1,015    1,000      985
    State and local debt for rental housing.......................      300      305      300      305      305      305      300      455      455      455      455      460      455      450
    IDBs for airports, docks, and sports and convention facilities      790      790      785      760      740      720      700    1,190    1,185    1,185    1,155    1,125    1,090    1,060
    State and local student loan bonds............................      120      115      110      105      105      100      100      185      175      170      160      155      150      150
    State and local debt for private nonprofit educational                                                                                                                                      
     facilities...................................................      380      370      355      340      330      320      310      575      560      540      520      500      480      465
    State and local debt for private nonprofit health facilities..      850      825      795      765      735      710      695    1,285    1,255    1,210    1,165    1,120    1,080    1,050
    State and local debt for veterans housing.....................       15       15       15       15       15       15       15       25       25       20       20       20       20       20

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ In addition alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as follows: 1996 $670; 1997 $670; 1998 $700; 1999 $740; 2000 $770; 2001 $800; and 2002     
  $840.                                                                                                                                                                                         
\2\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on outlays (in millions of dollars) is as follows: 1996 $19,159; 1997 $21,163; 1998    
  $21,983; 1999 $22,864; 2000 $23,818; 2001 $24,634; and 2002 $25,518.                                                                                                                          
Note: Provisions with estimates denoted ``normal tax method'' have no revenue loss under the reference tax law method.                                                                          
All estimates have been rounded to the nearest $5 million.                                                                                                                                      


[[Page 79]]

             TABLE 5-3.  MAJOR TAX EXPENDITURES IN THE INCOME TAX, RANKED BY TOTAL 1998 REVENUE LOSS            
                                            (In millions of dollars)                                            
----------------------------------------------------------------------------------------------------------------
                                    Provision                                         1998          1998-2002   
----------------------------------------------------------------------------------------------------------------
  Exclusion of employer contributions for medical insurance premiums and                                        
   medical care...............................................................      75,750          435,745     
  Net exclusion of employer pension-plan contributions and earnings...........      56,245          285,445     
  Deductibility of mortgage interest on owner-occupied homes..................      52,115          284,790     
  Step-up basis of capital gains at death.....................................      31,945          173,040     
  Deductibility of nonbusiness State and local taxes other than on owner-                                       
   occupied homes.............................................................      30,995          169,370     
  Accelerated depreciation of machinery and equipment (normal tax method).....      29,285          175,965     
  Deductibility of charitable contributions...................................      22,340          123,365     
  Exclusion of OASI benefits for retired workers..............................      18,495          100,345     
  Deductibility of State and local property tax on owner-occupied homes.......      17,435           95,285     
  Exclusion of interest on public purpose State and local debt................      15,735           77,245     
  Deferral of capital gains on home sales.....................................      15,290           81,165     
  Deferral on income on life insurance and annuity contracts..................      11,940           67,975     
  Exclusion of interest on State and local debt for various non-public                                          
   purposes...................................................................       8,925           42,450     
  Net exclusion of Individual Retirement Account contributions and earnings...       8,600           45,465     
  Capital gains (other than agriculture, timber, iron ore, and coal) (normal                                    
   tax method)................................................................       8,480           45,010     
  Earned income credit \1\ ...................................................       5,814           31,725     
  Exclusion of workmen's compensation benefits................................       5,305           29,590     
  Exclusion of capital gains on home sales for persons age 55 and over........       5,095           27,210     
  Graduated corporation income tax rate (normal tax method)...................       4,940           27,165     
  Accelerated depreciation of buildings other than rental housing (normal tax                                   
   method)....................................................................       4,660           13,190     
  Deductibility of medical expenses...........................................       4,535           26,470     
  Exclusion of Social Security benefits for dependents and survivors..........       4,175           22,665     
  Exception from passive loss rules for $25,000 of rental loss................       3,470           15,395     
  Net exclusion of Keogh plan contributions and earnings......................       3,325           18,460     
  Credit for low-income housing investments...................................       3,270           17,135     
  Exclusion of veterans disability compensation...............................       2,930           16,455     
  Credit for child and dependent care expenses................................       2,840           15,700     
  Tax credit for corporations receiving income from doing business in U.S.                                      
   possessions................................................................       2,770           14,485     
  Exclusion of employer-provided premiums on group term life insurance........       2,745           15,140     
  Exclusion of Social Security disability insurance benefits..................       2,615           15,315     
  Deferral of income from controlled foreign corporations (normal tax method).       2,400           14,000     
  Exclusion of benefits and allowances to armed forces personnel..............       2,095           10,695     
  Exclusion of interest on State and local debt for private nonprofit health                                    
   facilities.................................................................       2,005            9,325     
  Exclusion of income earned abroad by United States citizens.................       1,865           11,590     
  Exclusion of income of foreign sales corporations...........................       1,700            9,500     
  Inventory property sales source rules exception.............................       1,600            9,000     
  Accelerated depreciation on rental housing (normal tax method)..............       1,555           10,395     
  Additional deduction for the elderly........................................       1,495            7,535     
  Exclusion of reimbursed employee parking expenses...........................       1,315            6,945     
  Deferral of interest on savings bonds.......................................       1,285            6,095     
  Excess of percentage over cost depletion (fuels)............................       1,170            6,045     
  Credit for increasing research activities...................................       1,045            1,445     
  Deferral of income from post 1987 installment sales.........................         995            5,175     
  Expensing of certain small investments (normal tax method)..................         900            3,900     
  Exclusion of employer provided child care...................................         890            5,150     
  Parental personal exemption for students age 19 or over.....................         885            4,935     
  Exclusion of scholarship and fellowship income (normal tax method)..........         850            4,340     
  Exemption of credit union income............................................         745            4,195     
  Special ESOP rules..........................................................         720            3,830     
  Empowerment zones...........................................................         640            3,240     
  Exclusion of employee meals and lodging (other than military)...............         630            3,505     
  Exclusion of public assistance benefits (normal tax method).................         550            3,005     
  Deductibility of casualty losses............................................         510            2,815     
  Alternative fuel production credit..........................................         485            2,575     
  Exclusion of railroad retirement system benefits............................         450            2,275     
  Expensing of multiperiod timber growing costs...............................         440            2,415     
  Expensing of research and experimentation expenditures (normal tax method)..         430            3,200     
  Exclusion of parsonage allowances...........................................         335            1,920     
  Excess of percentage over cost depletion, nonfuel minerals..................         300            1,565     
  Exclusion of interest on small issue IDBs...................................         260            1,255     
  Tax exemption of certain insurance companies................................         255            1,400     
  Amortization of start-up costs (normal tax method)..........................         205            1,075     
  Adoption assistance.........................................................         200            1,610     
  Capital gains treatment of certain income...................................         175              925     
  Exclusion of employer-provided premiums on accident and disability insurance         175              975     
  Carryover basis of capital gains on gifts...................................         160              900     
  Permanent exceptions from imputed interest rules............................         155              800     
  Work opportunity tax credit.................................................         150              275     
  Exclusion of military disability pensions...................................         130              650     

[[Page 80]]

  Small life insurance company deduction......................................         120              670     

  Tax incentives for preservation of historic structures......................         115              550     
  Medical savings accounts....................................................         100              880     
  Special Blue Cross/Blue Shield deduction....................................          95              860     
  Enhanced oil recovery credit................................................          90              510     
  Credit for disabled access expenditures.....................................          85              440     
  Exclusion of special benefits for disabled coal miners......................          85              385     
  Expensing of certain multiperiod production costs...........................          80              420     
  Tax credit and deduction for clean-fuel burning vehicles and properties.....          75              425     
  Exclusion for employer-provided transit passes..............................          70              500     
  Investment credit for rehabilitation of structures (other than historic)....          70              340     
  Exclusion of veterans pensions..............................................          70              380     
  Exclusion of GI bill benefits...............................................          70              435     
  Expensing of certain capital outlays........................................          65              345     
  Exemption of certain mutuals' and cooperatives' income......................          60              325     
  Exception from passive loss limitation for working interests in oil and gas                                   
   properties.................................................................          55              295     
  Tax credit for the elderly and disabled.....................................          50              250     
  Special rules for mining reclamation reserves...............................          50              250     
  Investment credit and seven-year amortization for reforestation expenditures          50              250     
  Excess bad debt reserves of financial institutions..........................          40               60     
  New technology credit.......................................................          40              210     
  Exclusion of employer provided death benefits...............................          35              205     
  Ordinary income treatment of loss from small business corporation stock sale          35              190     
  Exclusion of certain foster care payments...................................          35              195     
  Expensing of exploration and development costs, nonfuel minerals............          35              175     
  Additional deduction for the blind..........................................          25              145     
  Exclusion of employer provided educational assistance.......................          20               20     
  Deferral of tax on shipping companies.......................................          20              100     
  Exclusion of income of trusts to finance supplementary unemployment benefits          20              100     
  Expensing of costs of removing certain architectural barriers to the                                          
   handicapped................................................................          20              100     
  Exclusion from income of conservation subsidies provided by public utilities          15              170     
  Cancellation of indebtedness................................................          15               -5     
  Capital gains treatment of royalties on coal................................          15               95     
  Capital gains treatment of certain timber income............................          15               95     
  Treatment of Alaska Native Corporations.....................................          10               25     
  Treatment of loans forgiven solvent farmers as if insolvent.................          10               50     
  Tax credit for orphan drug research.........................................          10               10     
  Exclusion of interest on savings bonds transferred to educational                                             
   institutions...............................................................          10               75     
  Alcohol fuel credit \2\ ....................................................          10               50     
  Capital gains exclusion of small corporation stock..........................           5              230     
  Special alternative tax on small property and casualty insurance companies..           5               25     
  Capital gains treatment of iron ore.........................................  ...............  ...............
  Expensing of exploration and development costs (fuels)......................         -40              235     
----------------------------------------------------------------------------------------------------------------
\1\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on     
  outlays (in millions of dollars) is as follows: 1996 $19,159; 1997 $21,163; 1998 $21,983; 1999 $22,864; 2000  
  $23,818; 2001 $24,634; and 2002 $25,518.                                                                      
\2\ In addition alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as follows:
  1996 $670; 1997 $670; 1998 $700; 1999 $740; 2000 $770; 2001 $800; and 2002 $840.                              
Note: Provisions with estimates denoted ``normal tax method'' have no revenue loss under the reference tax law  
  method.                                                                                                       
All estimates have been rounded to the nearest $5 million.                                                      
Figures in table 5-3 are the arithmetic sums of corporate and individual income tax revenue loss estimates from 
  table 5-2, and do not reflect possible interactions across these two taxes.                                   

[[Page 81]]

 TABLE 5-4.   PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR ACTIVITY IN
                           CALENDAR YEAR 1997                           
                        (In millions of dollars)                        
------------------------------------------------------------------------
                                                               Present  
                                                               Value of 
                         Provision                             Revenue  
                                                                 Loss   
------------------------------------------------------------------------
Deferral of income from controlled foreign corporations                 
 (normal tax method).......................................    2,150    
Expensing of research and experimentation expenditures                  
 (normal tax method).......................................    1,610    
Expensing of exploration and development costs--fuels......      205    
Expensing of exploration and development costs--nonfuels...       60    
Expensing of multiperiod timber growing costs..............      140    
Expensing of certain multiperiod production costs--                     
 agriculture...............................................       85    
Expensing of certain capital outlays--agriculture..........       70    
Deferral of income on life insurance and annuity contracts.   18,700    
Deferral of capital gains on home sales....................   14,630    
Credit for low-income housing investments..................    3,150    
Accelerated depreciation of rental housing (normal tax                  
 method)...................................................    2,025    
Accelerated depreciation of buildings other than rental                 
 housing (normal tax method)...............................      420    
Accelerated depreciation of machinery and equipment (normal             
 tax method)...............................................   29,830    
Expensing of certain small investments (normal tax method).    1,050    
Amortization of start-up costs (normal tax method).........      170    
Deferral of tax on shipping companies......................       10    
Exclusion of pension contributions and earnings--employer               
 plans.....................................................   54,060    
Exclusion of IRA contributions and earnings................    2,175    
Exclusions of contribution and earnings for Keogh plans....    3,220    
Exclusion of interest on State and local public-purpose                 
 bonds.....................................................   17,535    
Exclusion of interest on State and local non-public purpose             
 bonds.....................................................    8,925    
Deferral of interest on U.S. savings bonds.................      210    
------------------------------------------------------------------------
Note: Provisions with estimates denoted ``normal tax method'' have no   
  revenue loss under the reference tax law method.                      


                           Outlay Equivalents

  The concept of ``outlay equivalents'' complements ``revenue losses'' 
as a measure of the budget effect of tax expenditures. It is the amount 
of outlay that would be required to provide the taxpayer the same after-
tax income as would be received through the tax preference. The outlay 
equivalent measure allows a comparison of the cost of the tax 
expenditure with that of a direct Federal outlay. Outlay equivalents are 
reported in table 5-5.
  The measure is larger than the revenue loss estimate when the tax 
expenditure is judged to function as a Government payment for service. 
This occurs because an outlay program would increase the taxpayer's pre-
tax income. For some tax expenditures, however, the revenue loss equals 
the outlay equivalent measure. This occurs when the tax expenditure is 
judged to function like a price reduction or tax deferral that does not 
directly enter the taxpayer's pre-tax income.\1\
---------------------------------------------------------------------------
  \1\ Budget outlay figures generally reflect the pre-tax price of the 
resources. In some instances, however, Government purchases or subsidies 
are exempted from tax by a special tax provision. When this occurs, the 
outlay figure understates the resource cost of the program and is, 
therefore, not comparable with other outlay amounts. For example, the 
outlays for certain military personnel allowances are not taxed. If this 
form of compensation were treated as part of the employee's taxable 
income, the Defense Department would have to make larger cash payments 
to its military personnel to leave them as well off after tax as they 
are now. The tax subsidy must be added to the tax-exempt budget outlay 
to make this element of national defense expenditures comparable with 
other outlays.

[[Page 82]]

                 TABLE 5-5.  OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX                 
                                            (In millions of dollars)                                            
----------------------------------------------------------------------------------------------------------------
                                                                 Outlay Equivalents                             
              Provision            -----------------------------------------------------------------------------
                                      1996     1997     1998     1999      2000      2001      2002    1998-2002
----------------------------------------------------------------------------------------------------------------

National defense:                                                                                               
  Exclusion of benefits and                                                                                     
   allowances to armed forces                                                                                   
   personnel......................    2,405    2,425    2,445     2,470     2,495     2,520     2,545     12,475
                                                                                                                
International affairs:                                                                                          
  Exclusion of income earned                                                                                    
   abroad by United States                                                                                      
   citizens.......................    2,025    2,240    2,485     2,755     3,055     3,390     3,770     15,455
  Exclusion of income of foreign                                                                                
   sales corporations.............    2,310    2,460    2,615     2,770     2,925     3,075     3,230     14,615
  Inventory property sales source                                                                               
   rules exception................    2,155    2,310    2,460     2,615     2,770     2,925     3,075     13,845
  Deferral of income from                                                                                       
   controlled foreign corporations                                                                              
   (normal tax method)............    2,100    2,200    2,400     2,600     2,800     3,000     3,200     14,000
                                                                                                                
General science, space, and                                                                                     
 technology:                                                                                                    
  Expensing of research and                                                                                     
   experimentation expenditures                                                                                 
   (normal tax method)............       40      195      430       580       685       740       765      3,200
  Credit for increasing research                                                                                
   activities.....................    1,245    1,055    1,610       380       160        60        10      2,220
                                                                                                                
Energy:                                                                                                         
  Expensing of exploration and                                                                                  
   development costs, fuels.......     -210     -130      -40        20       100        75        80        235
  Excess of percentage over cost                                                                                
   depletion, fuels...............    1,580    1,620    1,640     1,675     2,705     1,730     1,765      8,515
  Alternative fuel production                                                                                   
   credit.........................      800      795      845       795       755       715       685      3,795
  Exception from passive loss                                                                                   
   limitation for working                                                                                       
   interests in oil and gas                                                                                     
   properties.....................       50       50       55        55        60        60        65        295
  Capital gains treatment of                                                                                    
   royalties on coal..............       20       20       20        25        25        25        25        120
  Exclusion of interest on State                                                                                
   and local IDBs for energy                                                                                    
   facilities.....................      420      420      415       415       410       405       400      2,045
  New technology credit...........       40       50       55        60        60        60        65        300
  Alcohol fuel credit \1\ ........       10       10       10        10        10        10        10         50
  Tax credit and deduction for                                                                                  
   clean-fuel burning vehicles and                                                                              
   properties.....................       90       95      105       110       120       125       130        590
  Exclusion from income of                                                                                      
   conservation subsidies provided                                                                              
   by public utilities............      210       95       25        40        55        60        65        245
                                                                                                                
Natural resources and environment:                                                                              
  Expensing of exploration and                                                                                  
   development costs, nonfuel                                                                                   
   minerals.......................       35       35       35        35        35        35        35        175
  Excess of percentage over cost                                                                                
   depletion, nonfuel minerals....      405      415      425       435       440       455       460      2,215
  Capital gains treatment of iron                                                                               
   ore............................  .......  .......  .......  ........  ........  ........  ........  .........
  Special rules for mining                                                                                      
   reclamation reserves...........       50       50       50        50        50        50        50        250
  Exclusion of interest on State                                                                                
   and local IDBs for pollution                                                                                 
   control and sewage and waste                                                                                 
   disposal facilities............      925      900      870       845       815       755       675      3,960
  Capital gains treatment of                                                                                    
   certain timber income..........       20       20       20        25        25        25        25        120
  Expensing of multiperiod timber                                                                               
   growing costs..................      395      415      440       460       485       505       525      2,415
  Investment credit and seven-year                                                                              
   amortization for reforestation                                                                               
   expenditures...................       65       65       75        75        75        75        75        375
  Tax incentives for preservation                                                                               
   of historic structures.........      125      120      115       115       110       105       105        550
                                                                                                                
Agriculture:                                                                                                    
  Expensing of certain capital                                                                                  
   outlays........................       65       65       65        70        70        70        70        345
  Expensing of certain multiperiod                                                                              
   production costs...............       80       80       80        85        85        85        85        420
  Treatment of loans forgiven                                                                                   
   solvent farmers as if insolvent       10       10       10        10        10        10        10         50
  Capital gains treatment of                                                                                    
   certain income.................      220      225      235       240       245       255       260      1,235
                                                                                                                
Commerce and housing:                                                                                           
  Financial institutions and                                                                                    
   insurance:                                                                                                   
    Exemption of credit union                                                                                   
     income.......................      840      895      945     1,005     1,065     1,130     1,200      5,345
    Excess bad debt reserves of                                                                                 
     financial institutions.......       90       70       40        15         5  ........  ........         60
    Deferral on income on life                                                                                  
     insurance and annuity                                                                                      
     contracts....................   10,525   11,210   11,940    12,715    13,540    14,420    15,360     67,975
    Special alternative tax on                                                                                  
     small property and casualty                                                                                
     insurance companies..........        5        5        5         5         5         5         5         25
    Tax exemption of certain                                                                                    
     insurance companies..........      315      320      335       340       370       390       405      1,840
    Small life insurance company                                                                                
     deduction....................      145      150      160       170       175       185       190        880
  Housing:                                                                                                      
    Exclusion of interest on owner-                                                                             
     occupied mortgage subsidy                                                                                  
     bonds........................    2,305    2,265    2,230     2,190     2,150     2,110     2,070     10,750
    Exclusion of interest on State                                                                              
     and local debt for rental                                                                                  
     housing......................      990      985      980       985       990       980       970      4,905
    Deductibility of mortgage                                                                                   
     interest on owner-occupied                                                                                 
     homes........................   47,525   49,820   52,115    54,440    56,830    59,345    62,060    284,790
    Deductibility of State and                                                                                  
     local property tax on owner-                                                                               
     occupied homes...............   15,900   16,670   17,435    18,215    19,015    19,855    20,765     95,285
    Deferral of income from post                                                                                
     1987 installment sales.......      955      975      995     1,015     1,035     1,055     1,075      5,175
    Deferral of capital gains on                                                                                
     home sales...................   14,410   14,845   15,290    15,745    16,220    16,705    17,205     81,165
    Exclusion of capital gains on                                                                               
     home sales for persons age 55                                                                              
     and over.....................    6,965    6,975    6,795     7,355     7,060     7,745     7,325     36,280
    Exception from passive loss                                                                                 
     rules for $25,000 of rental                                                                                
     loss.........................    3,950    3,700    3,470     3,260     3,065     2,885     2,715     15,395
    Credit for low-income housing                                                                               
     investments..................    2,660    2,945    3,270     3,500     3,595     3,445     3,325     17,135
    Accelerated depreciation on                                                                                 
     rental housing (normal tax                                                                                 
     method)......................    1,190    1,350    1,560     1,955     2,340     2,240     2,310     10,405
  Commerce:                                                                                                     
    Cancellation of indebtedness..       70       40       15  ........       -10        -5        -5         -5
    Permanent exceptions from                                                                                   
     imputed interest rules.......      150      155      155       160       160       160       165        800
    Capital gains (other than                                                                                   
     agriculture, timber, iron                                                                                  
     ore, and coal)...............   10,655   10,975   11,295    11,640    11,995    12,355    12,720     60,005
    Capital gains exclusion of                                                                                  
     small corporation stock......  .......  .......        5        25        55        95       125        305
    Step-up basis of capital gains                                                                              
     at death.....................   39,375   40,955   42,595    44,300    46,075    47,920    49,835    230,725
    Carryover basis of capital                                                                                  
     gains on gifts...............      140      150      160       170       180       190       200        900
    Ordinary income treatment of                                                                                
     loss from small business                                                                                   
     corporation stock sale.......       45       45       50        50        55        55        55        265
    Accelerated depreciation of                                                                                 
     buildings other than rental                                                                                
     housing (normal tax method)..    6,800    5,795    4,655     3,420     2,380     1,640     1,085     13,180
    Accelerated depreciation of                                                                                 
     machinery and equipment                                                                                    
     (normal tax method)..........   25,430   27,280   29,285    32,500    35,730    38,320    40,125    175,960

[[Page 83]]

    Expensing of certain small                                                                                  
     investments (normal tax                                                                                    
     method)......................    1,435    1,065      900       890       845       700       560      3,895
    Amortization of start-up costs                                                                              
     (normal tax method)..........      195      200      205       210       215       220       225      1,075
    Graduated corporation income                                                                                
     tax rate (normal tax method).    5,995    6,345    6,675     6,925     7,370     7,730     8,005     36,705
    Exclusion of interest on small                                                                              
     issue IDBs...................      335      310      300       290       285       275       270      1,420
    Treatment of Alaska Native                                                                                  
     Corporations.................       20       15       10         5         5         5  ........         25
                                                                                                                
Transportation:                                                                                                 
  Deferral of tax on shipping                                                                                   
   companies......................       20       20       20        20        20        20        20        100
  Exclusion of reimbursed employee                                                                              
   parking expenses...............    1,625    1,670    1,715     1,755     1,805     1,855     1,910      9,040
  Exclusion for employer-provided                                                                               
   transit passes.................       65       80      100       115       135       155       180        685
                                                                                                                
Community and regional                                                                                          
 development:                                                                                                   
  Investment credit for                                                                                         
   rehabilitation of structures                                                                                 
   (other than historic)..........       80       80       70        70        70        65        65        340
  Exclusion of interest on IDBs                                                                                 
   for airports, docks, and sports                                                                              
   and convention facilities......    2,570    2,550    2,525     2,445     2,360     2,280     2,200     11,810
  Exemption of certain mutuals'                                                                                 
   and cooperatives' income.......       60       60       60        65        65        65        70        325
  Empowerment zones...............      530      585      640       670       700       700       530      3,240
                                                                                                                
Education, training, employment,                                                                                
 and social services:                                                                                           
  Education:                                                                                                    
    Exclusion of scholarship and                                                                                
     fellowship income (normal tax                                                                              
     method)......................      915      925      935       945       955       965       980      4,780
    Exclusion of interest on State                                                                              
     and local student loan bonds.      380      360      335       320       305       295       290      1,545
    Exclusion of interest on State                                                                              
     and local debt for private                                                                                 
     nonprofit educational                                                                                      
     facilities...................    1,225    1,175    1,120     1,065     1,015       970       935      5,105
    Exclusion of interest on                                                                                    
     savings bonds transferred to                                                                               
     educational institutions.....        5       10       10        15        15        15        20         75
    Parental personal exemption                                                                                 
     for students age 19 or over..      910      935      980     1,030     1,090     1,155     1,205      5,460
    Deductibility of charitable                                                                                 
     contributions (education)....    2,480    2,605    2,730     2,870     3,000     3,155     3,295     15,050
    Exclusion of employer provided                                                                              
     educational assistance.......       25      710       25  ........  ........  ........  ........         25
  Training, employment, and social                                                                              
   services:                                                                                                    
    Work opportunity tax credit...  .......      120      150        85        30        10  ........        275
    Exclusion of employer provided                                                                              
     child care...................    1,035    1,105    1,185     1,275     1,365     1,465     1,575      6,865
    Adoption assistance...........  .......       10      240       385       430       450       435      1,940
    Exclusion of employee meals                                                                                 
     and lodging (other than                                                                                    
     military)....................      695      730      770       810       855       900       950      4,285
    Credit for child and dependent                                                                              
     care expenses................    3,440    3,605    3,785     3,980     4,175     4,385     4,605     20,930
    Credit for disabled access                                                                                  
     expenditures.................      105      115      115       115       120       120       120        590
    Expensing of costs of removing                                                                              
     certain architectural                                                                                      
     barriers to the handicapped..       20       20       20        20        20        20        20        100
    Deductibility of charitable                                                                                 
     contributions, other than                                                                                  
     education and health.........   27,365   28,740   30,185    31,735    33,305    34,965    36,365    166,555
    Exclusion of certain foster                                                                                 
     care payments................       40       40       45        45        50        50        55        245
    Exclusion of parsonage                                                                                      
     allowances...................      365      390      415       440       470       505       540      2,370
                                                                                                                
Health:                                                                                                         
  Exclusion of employer                                                                                         
   contributions for medical                                                                                    
   insurance premiums and medical                                                                               
   care...........................   82,200   90,035   96,950   104,220   111,490   119,100   127,045    558,805
  Medical savings accounts........  .......       10      110       205       210       210       220        955
  Deductibility of medical                                                                                      
   expenses.......................    3,675    4,060    4,535     4,895     5,270     5,670     6,100     26,470
  Exclusion of interest on State                                                                                
   and local debt for private                                                                                   
   nonprofit health facilities....    2,740    2,630    2,510     2,390     2,275     2,175     2,095     11,445
  Deductibility of charitable                                                                                   
   contributions (health).........    3,175    3,325    3,585     3,655     3,825     4,005     4,195     19,265
  Tax credit for orphan drug                                                                                    
   research.......................        5       30       15  ........  ........  ........  ........         15
  Special Blue Cross/Blue Shield                                                                                
   deduction......................      155      175      125       200       220       260       330      1,135
                                                                                                                
Income security:                                                                                                
  Exclusion of railroad retirement                                                                              
   system benefits................      440      440      450       450       455       455       465      2,275
  Exclusion of workmen's                                                                                        
   compensation benefits..........    4,695    4,970    5,305     5,550     5,855     6,220     6,660     29,590
  Exclusion of public assistance                                                                                
   benefits (normal tax method)...      500      515      550       575       600       625       655      3,005
  Exclusion of special benefits                                                                                 
   for disabled coal miners.......       90       90       85        80        75        75        70        385
  Exclusion of military disability                                                                              
   pensions.......................      130      130      130       130       130       130       130        650
  Net exclusion of pension                                                                                      
   contributions and earnings:                                                                                  
    Employer plans................   72,195   77,045   77,625    78,175    78,760    79,350    79,950    314,510
    Individual Retirement Accounts   11,110   11,615   12,045    12,515    12,950    13,370    13,755     64,635
    Keogh plans...................    3,990    4,215    4,380     4,610     4,850     5,105     5,375     24,320
  Exclusion of employer provided                                                                                
   death benefits.................       45       50       50        55        55        60        65        285
  Exclusion of other employee                                                                                   
   benefits:                                                                                                    
    Premiums on group term life                                                                                 
     insurance....................    3,280    3,440    3,610     3,790     3,975     4,170     4,375     19,920
    Premiums on accident and                                                                                    
     disability insurance.........      200      210      225       235       250       260       275      1,245
    Income of trusts to finance                                                                                 
     supplementary unemployment                                                                                 
     benefits.....................       20       20       20        20        20        20        20        100
  Special ESOP rules..............    1,255    1,020    1,000     1,030     1,055     1,095     1,140      5,320
  Additional deduction for the                                                                                  
   blind..........................       30       30       35        35        35        35        40        180
  Additional deduction for the                                                                                  
   elderly........................    1,780    1,795    1,805     1,815     1,825     1,830     1,830      9,105
  Tax credit for the elderly and                                                                                
   disabled.......................       60       60       60        60        60        60        60        300
  Deductibility of casualty losses      600      630      660       695       730       765       805      3,655
  Earned income credit \2\ .......    5,663    6,281    6,460     6,792     7,021     7,357     7,621     35,251

[[Page 84]]
                                                                                                                
Social Security:                                                                                                
  Exclusion of social security                                                                                  
   benefits:                                                                                                    
    OASI benefits for retired                                                                                   
     workers......................   17,005   17,810   18,495    19,290    20,190    20,875    21,495    100,345
    Disability insurance benefits.    2,090    2,375    2,615     2,820     3,045     3,290     3,545     15,315
    Benefits for dependents and                                                                                 
     survivors....................    3,795    3,985    4,175     4,355     4,530     4,710     4,895     22,665
                                                                                                                
Veterans benefits and services:                                                                                 
  Exclusion of veterans disability                                                                              
   compensation...................    2,615    2,770    2,930     3,100     3,280     3,470     3,675     16,455
  Exclusion of veterans pensions..       70       70       70        70        75        80        85        380
  Exclusion of GI bill benefits...       50       60       70        80        90        95       100        435
  Exclusion of interest on State                                                                                
   and local debt for veterans                                                                                  
   housing........................       50       45       45        45        40        40        40        210
                                                                                                                
General purpose fiscal assistance:                                                                              
  Exclusion of interest on public                                                                               
   purpose State and local debt...   19,840   19,700   19,490    19,225    18,950    18,675    18,420     94,760
  Deductibility of nonbusiness                                                                                  
   State and local taxes other                                                                                  
   than on owner-occupied homes...   28,265   29,630   30,995    32,375    33,800    35,290    36,910    169,370
  Tax credit for corporations                                                                                   
   receiving income from doing                                                                                  
   business in U.S. possessions...    3,940    3,860    3,960     4,000     4,120     4,245     4,370     20,695
                                                                                                                
Interest:                                                                                                       
  Deferral of interest on savings                                                                               
   bonds..........................    1,300    1,290    1,285     1,270     1,215     1,170     1,155      6,095
                                                                                                                
Addendum--Aid to State and local                                                                                
 governments:                                                                                                   
  Deductibility of:                                                                                             
    Property taxes on owner-                                                                                    
     occupied homes...............   15,900   16,670   17,435    18,215    19,015    19,855    20,765     95,285
    Nonbusiness State and local                                                                                 
     taxes other than on owner-                                                                                 
     occupied homes...............   28,265   29,630   30,995    32,375    33,800    35,290    36,910    169,370
  Exclusion of interest on:                                                                                     
    Public purpose State and local                                                                              
     debt.........................   19,840   19,700   19,490    19,225    18,950    18,675    18,420     94,760
    IDBs for certain energy                                                                                     
     facilities...................      420      420      415       415       410       405       400      2,045
    IDBs for pollution control and                                                                              
     sewage and waste disposal                                                                                  
     facilities...................      925      900      870       845       815       755       675      3,960
    Small-issue IDBs..............      335      310      300       290       285       275       270      1,420
    Owner-occupied mortgage                                                                                     
     revenue bonds................    2,305    2,265    2,230     2,190     2,150     2,110     2,070     10,750
    State and local debt for                                                                                    
     rental housing...............      990      985      980       985       990       980       970      4,905
    IDBs for airports, docks, and                                                                               
     sports and convention                                                                                      
     facilities...................    2,570    2,550    2,525     2,445     2,360     2,280     2,200     11,810
    State and local student loan                                                                                
     bonds........................      380      360      335       320       305       295       290      1,545
    State and local debt for                                                                                    
     private nonprofit educational                                                                              
     facilities...................    1,225    1,175    1,120     1,065     1,015       970       935      5,105
    State and local debt for                                                                                    
     private nonprofit health                                                                                   
     facilities...................    2,740    2,630    2,510     2,390     2,275     2,175     2,095     11,445
    State and local debt for                                                                                    
     veterans housing.............       50       45       45        45        40        40        40        210
----------------------------------------------------------------------------------------------------------------
\1\ In addition, alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as        
  follows: 1996 $670; 1997 $670; 1998 $700; 1999 $740; 2000 $770; 2001 $800; and 2002 $840.                     
\2\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on     
  outlays (in millions of dollars) is as follows: 1996 $19,159; 1997 $21,163; 1998 $21,983; 1999 $22,864; 2000  
  $23,818; 2001 $24,634; and 2002 $25,518.                                                                      
Note: Provisions with estimates denoted ``normal tax method'' have outlay equivalents of zero under the         
  reference tax law method.                                                                                     
All estimates have been rounded to the nearest $5 million.                                                      

                        Tax Expenditure Baselines

  A tax expenditure is a preferential exception to the baseline 
provisions of the tax structure. The 1974 Congressional Budget Act does 
not, however, specify the baseline provisions of the tax law. Deciding 
whether provisions are preferential exceptions, therefore, is a matter 
of judgement. As in prior years, this year's tax expenditure estimates 
are presented using two baselines: the normal tax baseline, which is 
used by the Joint Committee on Taxation, and the reference tax law 
baseline, which has been used by the Administration since 1983.
  The normal tax baseline is patterned on a comprehensive income tax, 
which defines income as the sum of consumption and the change in net 
wealth in a given period of time. The normal tax baseline allows 
personal exemptions, a standard deduction, and deductions of the 
expenses incurred in earning income. It is not limited to a particular 
structure of tax rates, or by a specific definition of the taxpaying 
unit.
  The reference tax law baseline is also patterned on a comprehensive 
income tax, but in practice is closer to existing law. Reference law tax 
expenditures are limited to special exceptions in the tax code that 
serve programmatic functions. These functions correspond to specific 
budget categories such as national defense, agriculture, or health care. 
While tax expenditures under the reference law baseline are generally 
tax expenditures under the normal tax baseline, the reverse is not 
always true.
  Both the normal and reference tax baselines allow several major 
departures from a pure comprehensive income tax. For example:
    Income is taxable when realized in exchange. Thus, neither 
          the deferral of tax on unrealized capital gains nor the tax 
          exclusion of imputed income (such as the rental value of 
          owner-occupied housing or farmers' consumption of their own 
          produce) is regarded as a tax expenditure. Both accrued and 
          imputed income would be taxed under a comprehensive income 
          tax.
    There is a separate corporation income tax. Under a 
          comprehensive income tax corporate income would be taxed only 
          once--at the shareholder 

[[Page 85]]

level, whether or not distributed in the form of dividends.
    Values of assets and debt are not adjusted for inflation. A 
          comprehensive income tax would adjust the cost basis of 
          capital assets and debt for changes in the price level during 
          the time the assets or debt are held. Thus, under a 
          comprehensive income tax baseline the failure to take account 
          of inflation in measuring depreciation, capital gains, and 
          interest income would be regarded as a negative tax 
          expenditure (i.e., a tax penalty), and failure to take account 
          of inflation in measuring interest costs would be regarded as 
          a positive tax expenditure (i.e., a tax subsidy).
  While the reference law and normal tax baselines are generally 
similar, areas of difference include:
    Tax rates. The separate schedules applying to the various 
          taxpaying units are included in the reference law baseline. 
          Thus, corporate tax rates below the maximum statutory rate do 
          not give rise to a tax expenditure. The normal tax baseline is 
          similar, except that it specifies the current maximum rate as 
          the baseline for the corporate income tax. The lower tax rates 
          applied to the first $10 million of corporate income are thus 
          regarded as a tax expenditure. Similarly, under the reference 
          law baseline, preferential tax rates for capital gains 
          generally do not yield a tax expenditure; only capital gains 
          treatment of otherwise ``ordinary income,'' such as that from 
          coal and iron ore royalties and the sale of timber and certain 
          agricultural products, is considered a tax expenditure. The 
          alternative minimum tax is treated as part of the baseline 
          rate structure under both the reference and normal tax 
          methods.
    Income subject to the tax. Income subject to tax is defined 
          as gross income less the costs of earning that income. The 
          Federal income tax defines gross income to include: (1) 
          consideration received in the exchange of goods and services, 
          including labor services or property; and (2) the taxpayer's 
          share of gross or net income earned and/or reported by another 
          entity (such as a partnership). Under the reference tax rules, 
          therefore, gross income does not include gifts--defined as 
          receipts of money or property that are not consideration in an 
          exchange--or most transfer payments, which can be thought of 
          as gifts from the Government.\2\ The normal tax baseline also 
          excludes gifts between individuals from gross income. Under 
          the normal tax baseline, however, all cash transfer payments 
          from the Government to private individuals are counted in 
          gross income, and exemptions of such transfers from tax are 
          identified as tax expenditures. The costs of earning income 
          are generally deductible in determining taxable income under 
          both the reference and normal tax baselines.\3\
---------------------------------------------------------------------------
  \2\ Gross income does, however, include transfer payments associated 
with past employment, such as social security benefits.
  \3\ In the cases of individuals who hold ``passive'' equity interests 
in businesses, however, the pro rata shares of sales and expense 
deductions reportable in a year are limited. A passive business activity 
is defined to be one in which the holder of the interest, usually a 
partnership interest, does not actively perform managerial or other 
participatory functions. The taxpayer may generally report no larger 
deductions for a year than will reduce taxable income from such 
activities to zero. Deductions in excess of the limitation may be taken 
in subsequent years, or when the interest is liquidated.
---------------------------------------------------------------------------
    Capital recovery. Under the reference tax law baseline no 
          tax expenditures arise from accelerated depreciation. Under 
          the normal tax baseline, the depreciation allowance for 
          machinery and equipment is determined using straight-line 
          depreciation over tax lives equal to mid-values of the asset 
          depreciation range (a depreciation system in effect from 1971 
          through 1980). The normal tax baseline for real property is 
          computed using 40-year straight-line depreciation.
    Treatment of foreign income. Both the normal and reference 
          tax baselines allow a tax credit for foreign income taxes paid 
          (up to the amount of U.S. income taxes that would otherwise be 
          due), which prevents double taxation of income earned abroad. 
          Under the normal tax method, however, controlled foreign 
          corporations (CFCs) are not regarded as entities separate from 
          their controlling U.S. shareholders. Thus, the deferral of tax 
          on income received by CFCs is regarded as a tax expenditure 
          under this method. In contrast, except for tax haven 
          activities, the reference law baseline follows current law in 
          treating CFCs as separate taxable entities whose income is not 
          subject to U.S. tax until distributed to U.S. taxpayers. Under 
          this baseline, deferral of tax on CFC income is not a tax 
          expenditure because U.S. taxpayers generally are not taxed on 
          accrued, but unrealized, income.
  In addition to these areas of difference, the Joint Committee on 
Taxation considers a somewhat broader set of tax expenditures under its 
normal tax baseline than is considered here.

    Performance Measures and the Economic Effects of Tax Expenditures

  Under the Government Performance and Results Act of 1993 (GPRA), 
Federal agencies, in conjunction with the Office of Management and 
Budget, are directed to develop strategic plans for their functions and 
programs, with specific performance measures and performance goals. 
Consistent with this effort, OMB and the Department of the Treasury have 
started to develop a framework for evaluating the performance and 
economic effects of tax expenditures. This framework is expected to 
evolve based on additional work within the Executive branch and 
consultation with Congressional units, including the Joint Committee on 
Taxation and the General Accounting Office. Initial work is summarized 
below and will be updated in the Administration's May 1997 report on 
GPRA implementation.
  Tax expenditures have a variety of objectives and effects. These 
include encouraging certain types of activities (e.g., saving for 
retirement or investing in certain sectors); increasing certain types of 
after-tax income (e.g., favorable tax treatment of social security 

[[Page 86]]

income); reducing private compliance costs and government administrative 
costs (e.g., favorable treatment of certain employer-provided fringe 
benefits); and promoting tax neutrality (e.g., accelerated depreciation 
in the presence of inflation). Some of these objectives are well suited 
to quantitative measurement, while others are less suited. Also, many 
tax expenditures, including those cited above, may have more than one 
objective. As just one example, favorable treatment of employer-provided 
pensions might be argued to have aspects of most, or even all, of the 
goals mentioned above. In addition, the economic effects of particular 
provisions can extend beyond their intended objectives (e.g., a 
provision intended to promote an activity or raise certain incomes may 
have positive or negative effects on tax neutrality).
  Performance measurement is generally concerned with inputs, outputs, 
and outcomes. In the case of tax expenditures, the principal input is 
likely to be the tax revenue loss. Outputs are quantitative or 
qualitative measures of goods and services, or changes in income and 
investment, directly produced by these inputs. Outcomes, in turn, 
represent the changes in the economy, society, or environment that are 
the ultimate goals of programs.
  Thus, for a provision that reduces taxes on investment in a certain 
activity, an increase in the amount of investment would likely be a key 
output. The resulting production from that investment, and, in turn, the 
associated improvements in national income, welfare, or security, could 
be the outcomes of interest. For other provisions, such as those 
designed to address a potential inequity or unintended consequence in 
the tax code, an important performance measure might be how they change 
effective tax rates (the discounted present-value of taxes owed on new 
investments or incremental earnings) or excess burden (an economic 
measure of the distortions caused by taxes). Distributional effects on 
incomes may be an important concern for certain provisions.
  Estimation of these performance indicators and economic effects may be 
pursued via economic modeling and use of tax data. It is anticipated 
that OMB, Treasury, and other agencies will work together, as 
appropriate, on determining a set of useful measures and in developing 
quantitative and other estimates of provisions' impacts.
  The discussion below considers the types of measures that might be 
useful for some major programmatic groups of tax expenditures. The 
discussion is intended to be illustrative, and not all encompassing.
  One major set of tax expenditures benefits retirement savings, through 
employer-provided pensions, individual retirement accounts, Keogh plans 
and other instruments, such as annuities. These provisions might be 
evaluated in terms of their effects on boosting retirement incomes and 
private savings. In considering the provisions' distributional effects, 
it may be of interest to consider beneficiaries' incomes while retired 
and over their entire lifetimes.
  Individuals also benefit from favorable treatment of employer-provided 
health insurance. Measures of these benefits could include increased 
coverage and the distribution of this coverage across different income 
groups. In principle, the effects of insurance coverage on final outcome 
measures of actual health (e.g., infant mortality, days of work lost due 
to illness, or life expectancy) or intermediate outcomes (e.g., use of 
preventative health care) could also be investigated.
  Other provisions principally have income distribution, rather than 
incentive, effects. For example, tax-favored treatment of social 
security benefits provides increased incomes to eligible groups; the 
distribution of these increased incomes may be a useful performance 
measure. The earned-income tax credit, in contrast, should probably be 
evaluated both for its effects on labor force participation and its 
distributional properties.
  Housing investment also benefits from tax expenditures, including the 
mortgage interest deduction and preferential treatment of capital gains 
on housing. Measures of the effectiveness of these provisions could 
include consideration of their effects on increasing the extent of home 
ownership and the quality of housing. The effects of the capital gains 
provisions in terms of offsetting inflationary gains are also likely to 
be relevant. Deductibility of State and local property taxes assists 
with making housing more affordable as well as easing the cost of 
providing community services through these taxes. Provisions that are 
intended to promote investment in rental housing could be evaluated for 
their effects on making rental housing more available and affordable.
  A series of tax expenditures reduces the cost of investment, both in 
specific activities--such as research and experimentation, extractive 
industries, and certain financial activities--and more generally, 
through accelerated depreciation for plant and equipment. These 
provisions can be evaluated along a number of dimensions. For example, 
in addition to considering revenue effects, it is can be useful to 
consider the extent of the incentive delivered by measuring the 
provisions' effects on the cost of capital (the interest rate which 
investments must yield to cover their pretax tax costs) and effective 
tax rates. Another set of measures would reflect the impact of these 
provisions on the amounts of corresponding forms of investment--such as 
research spending, exploration activity, or equipment. A third group of 
measures would, in turn, consider the provisions' effects on production 
from these investments--such as numbers or value of patents, energy 
production and reserves, and industrial production. Other measures could 
consider objectives which are less directly attributable but still are 
ultimate goals, such as assisting the U.S. technological base, energy 
security, or economic growth.
  The above illustrative discussion, while broad, is nevertheless 
incomplete, both for the provisions mentioned and the many that are not 
explicitly cited. Developing a framework which is appropriately 
comprehensive, accurate, and flexible to reflect the objectives and 
effects 

[[Page 87]]

of the wide range of tax expenditures will be a significant 
challenge. It is expected that this framework will evolve and improve 
over the next several years and that quantitative estimates will be made 
to the extent possible. Such estimates could then be compared with the 
costs of the provisions and with the costs and benefits of other means 
of achieving the same performance goals.

                          Other Considerations

  The tax expenditure analysis could be extended beyond the income and 
transfer taxes to include payroll and excise taxes. The exclusion of 
certain forms of compensation from the wage base, for instance, reduces 
payroll taxes, as well as income taxes. Payroll tax exclusions are 
complex to analyze, however, because they also affect social insurance 
benefits. Certain targeted excise tax provisions might also be 
considered tax expenditures. In this case challenges include determining 
an appropriate baseline.

                  Descriptions of Income Tax Provisions

  Descriptions of the individual and corporate income tax expenditures 
reported upon in this chapter follow.

                             National Defense

  Benefits and allowances to armed forces personnel.--The housing and 
meals provided military personnel, either in cash or in kind, as well as 
certain amounts of pay related to combat service are excluded from 
income subject to tax.

                           International Affairs

  Income earned abroad.--A U.S. citizen or resident alien who resides in 
a foreign country or who stays in one or more foreign countries for a 
minimum of 11 out of the past 12 months may exclude $70,000 per year of 
foreign-earned income. Eligible taxpayers also may exclude or deduct 
reasonable housing costs in excess of one-sixth of the salary of a civil 
servant at grade GS -14, step 1. These provisions do not apply to 
Federal employees working abroad; however, the tax expenditure estimate 
does reflect certain allowances that are excluded from their taxable 
income.
  Income of Foreign Sales Corporations.--The Foreign Sales Corporation 
(FSC) provisions exempt from tax a portion of U.S. exporters' foreign 
trading income to reflect the FSC's sales functions as foreign 
corporations. These provisions conform to the General Agreement on 
Tariffs and Trade.
  Source rule exceptions.--The worldwide income of U.S. persons is 
taxable by the United States and a credit for foreign taxes paid is 
allowed. The amount of foreign taxes that can be credited is limited to 
the pre-credit U.S. tax on the foreign source income. The treatment of 
sales of inventory property is a tax expenditure because it permits 
greater use of foreign tax credits by U.S. exporters by allowing the 
exporters to attribute a larger portion of their earnings abroad than 
would be the case if the allocation of earnings was based upon actual 
economic activity.
  Income of U.S.-controlled foreign corporations.--The income of foreign 
corporations controlled by U.S. shareholders is not subject to U.S. 
taxation. The income becomes taxable only when the controlling U.S. 
shareholders receive dividends or other distributions from their foreign 
stockholding. Under the normal tax method, the currently attributable 
foreign source pre-tax income from such a controlling interest is 
subject to U.S. taxation, whether or not distributed. Thus, under the 
normal tax baseline the excess of controlled foreign corporation income 
over the amount distributed to a U.S. shareholder gives rise to a tax 
expenditure in the form of a tax deferral.

                  General Science, Space, and Technology

  Expensing R&E expenditures.--Research and experimentation (R&E) 
projects can be viewed as investments because their benefits accrue for 
several years when they are successful. It is difficult, however, to 
identify whether a specific R&E project is completed and successful and, 
if it is successful, what its expected life will be. For these reasons, 
the statutory provision that these expenditures may be expensed is 
considered part of the reference law. Under the normal tax method, 
however, the expensing of R&E expenditures is viewed as a tax 
expenditure. The baseline assumed for the normal tax method is that all 
R&E expenditures are successful and have an expected life of five years.
  R&E credit.--The R&E credit, which had expired on July 1, 1995, was 
reinstated under the Small Business Job Protection Act of 1996 for 11 
months (July 1, 1996 through May 31, 1997). The 1996 Act also provided a 
special rule for taxpayers that elect an alternative credit regime. The 
tax credit is 20 percent of qualified research expenditures in excess of 
a base amount. The base amount is generally determined by multiplying a 
``fixed-base percentage'' (limited to a maximum of .16) by the average 
amount of the company's gross receipts for the 1984 to 1988 period. 
Certain start-up companies are assigned a fixed-base percentage of .03 
for the first five taxable years, which is gradually phased out in years 
6 through 10 and replaced by the firm's actual fixed- base percentage. 
Under the alternative credit regime, the credit rate is reduced and the 
taxpayer is assigned a three-tiered fixed-base percentage that is lower 
than the fixed-base percentage that would otherwise apply. A credit with 
a separate threshold is provided for a taxpayer's payments to 
universities for basic research.

                                  Energy

  Exploration and development costs.--In the case of successful 
investments in domestic oil and gas wells, 

[[Page 88]]

intangible drilling costs, such as wages, the costs of using machinery for grading and drilling, and the cost of unsalvageable materials used in constructing wells, may be expensed rather than amortized over the productive life of the property.
  Integrated oil companies may currently deduct only 70 percent of such 
costs and amortize the remaining 30 percent over five years. The same 
rule applies to the exploration and development costs of surface 
stripping and the construction of shafts and tunnels for other fuel 
minerals.

  Percentage depletion.--Independent fuel mineral producers and royalty 
owners are generally allowed to take percentage depletion deductions 
rather than cost depletion on limited quantities of output. Under cost 
depletion, outlays are deducted over the productive life of the property 
based on the fraction of the resource extracted. Under percentage 
depletion taxpayers deduct a percentage of gross income from mineral 
production at rates of 22 percent for uranium, 15 percent for oil, gas 
and oil shale, and 10 percent for coal. The deduction is limited to 50 
percent of net income from the property, except for oil and gas where 
the deduction can be 100 percent of net property income. Production from 
geothermal deposits is eligible for percentage depletion at 65 percent 
of net income, but with no limit on output and no limitation with 
respect to qualified producers. Unlike depreciation or cost depletion, 
percentage depletion deductions can exceed the cost of the investment.
  Alternative fuel production credit.--A nontaxable credit of $3 per 
barrel (in 1979 dollars) of oil-equivalent production is provided for 
several forms of alternative fuels. It is generally available as long as 
the price of oil stays below $29.50 (in 1979 dollars). The credit 
generally expires on December 31, 2002.
  Oil and gas exception to passive loss limitation.--Although owners of 
working interests in oil and gas properties are subject to the 
alternative minimum tax, they are exempted from the ``passive income'' 
limitations. This means that the working interest-holder, who manages on 
behalf of himself and all other owners the development of wells and 
incurs all the costs of their operation, may aggregate negative taxable 
income from such interests with his income from all other sources. Thus, 
he will be relieved of the minimum tax rules limit on tax deferrals.
  Capital gains treatment of royalties on coal.--Sales of certain coal 
under royalty contracts can be treated as capital gains. While the top 
statutory rate on ordinary income is 39.6 percent, the rates on capital 
gains are limited to 28 percent.
  Tax-exempt bonds for energy facilities.--Certain energy facilities, 
such as municipal electric and gas utilities, may benefit from tax-
exempt financing.
  Enhanced oil recovery credit.--A credit is provided equal to 15 
percent of the taxpayer's costs for tertiary oil recovery on projects in 
the United States. Qualifying costs include tertiary injectant expenses, 
intangible drilling and development costs on a qualified enhanced oil 
recovery project, and amounts incurred for tangible depreciable 
property.
  New technology credits.--A credit of 10 percent is available for 
investment in solar and geothermal energy facilities. In addition, a 
credit of 1.5 cents is provided per kilowatt hour of electricity 
produced from renewable resources such as wind and biomass. The 
renewable resources credit applies only to electricity produced by a 
facility placed in service before July 1, 1999.
  Alcohol fuel credit.--Gasohol, a motor fuel composed of at least 10 
percent alcohol, is exempt from 5.4 of the 18.4 cents per gallon Federal 
excise tax on gasoline. Smaller exemptions are allowed for motor fuel 
with lower alcohol content. There is a corresponding income tax credit 
for alcohol used as a fuel in applications where the excise tax is not 
assessed. This credit, equal to a subsidy of 54 cents per gallon for 
alcohol used as a motor fuel, is intended to encourage substitution of 
alcohol for petroleum-based gasoline. In addition, small producers of 
ethanol are eligible for a 10 cent per gallon credit.
  Credit and deduction for clean-fuel vehicles and property.--A tax 
credit of 10 percent is provided for electric vehicles. In addition, a 
deduction is provided for other clean-fuel burning vehicles as well as 
refueling property.
  Exclusion of utility conservation subsidies.--Subsidies by public 
utilities for customer expenditures on energy conservation measures are 
excluded from the gross income of the customer. After December 31, 1996, 
the exclusion does not apply to subsidies provided to businesses.

                     Natural Resources and Environment

  Exploration and development costs.--As is true for fuel minerals, 
certain capital outlays associated with exploration and development of 
nonfuel minerals may be expensed rather than depreciated over the life 
of the asset.
  Percentage depletion.--Most nonfuel mineral extractors also make use 
of percentage depletion rather than cost depletion, with percentage 
depletion rates ranging from 22 percent for sulphur down to 5 percent 
for sand and gravel.
  Capital gains treatment of iron ore and of certain timber income.--
Iron ore and certain timber sold under a royalty contract can be treated 
as capital gains.
  Mining reclamation reserves.--Taxpayers are allowed to establish 
reserves to cover certain costs of 

[[Page 89]]

mine reclamation and of closing solid waste disposal properties. Net increases in reserves may be taken as a deduction against taxable income.
  Tax-exempt bonds for pollution control and waste disposal.--Interest 
on State and local government debt issued to finance private pollution 
control and waste disposal facilities was excludable from income subject 
to tax. This authorization was repealed for most pollution control 
equipment and limits placed on the amount of debt that can be issued for 
private waste disposal facilities by the Tax Reform Act of 1986.
  Expensing multiperiod timber growing costs.--Generally, costs must be 
capitalized when goods are produced for inventory used in one's own 
trade or business, or under contract to another party. Timber 
production, however, was specifically exempted from these multiperiod 
cost capitalization rules, creating a special benefit derived from this 
deferral of taxable income.
  Credit and seven-year amortization for reforestation.--A special 10 
percent investment tax credit is allowed for up to $10,000 invested 
annually in clearing land and planting trees for the ultimate production 
of timber. The same amount of forestation investment may also be 
amortized over a seven-year period. Without this preference, the amount 
would have to be capitalized and could be recovered (deducted) only when 
the trees were sold or harvested 20 or more years later. Moreover, the 
amount of forestation investment that is amortizable is not reduced by 
any of the investment credit that is allowed.
  Historic preservation.--Expenditures to preserve and restore historic 
structures qualify for a 20 percent investment credit, but the 
depreciable basis must be reduced by the full amount of the credit 
taken.

                                Agriculture

  Expensing certain capital outlays.--Farmers, except for certain 
agricultural corporations and partnerships, are allowed to deduct 
certain expenditures for feed and fertilizer, as well as for soil and 
water conservation measures. Expensing is allowed, even though these 
expenditures are for inventories held beyond the end of the year, or for 
capital improvements that would otherwise be capitalized.
  Expensing multiperiod livestock and crop production costs.--The 
production of livestock and crops with a production period of less than 
two years is exempted from the uniform cost capitalization rules. 
Farmers establishing orchards, constructing farm facilities for their 
own use, or producing any goods for sale with a production period of two 
years or more may elect not to capitalize costs. If they do, they must 
apply straight-line depreciation to all depreciable property they use in 
farming.
  Loans forgiven solvent farmers.--Farmers are granted special tax 
treatment by being forgiven the tax liability on certain forgiven debt. 
Normally, the amount of loan forgiveness is accounted for as a gain 
(income) of the debtor and he must either report the gain, or reduce his 
recoverable basis in the property to which the loan relates. If the 
debtor elects to reduce basis and the amount of forgiveness exceeds his 
basis in the property, the excess forgiveness is taxable. However, in 
the case of insolvent (bankrupt) debtors, the amount of loan forgiveness 
never results in an income tax liability.\4\ Farmers with forgiven debt 
are considered insolvent for tax purposes, and thus qualify for income 
tax forgiveness.
---------------------------------------------------------------------------
  \4\ The insolvent taxpayer's carryover losses and unused credits are 
extinguished first, and then his basis in assets reduced to no less than 
amounts still owed creditors. Finally, the remainder of the forgiven 
debt is excluded from tax.
---------------------------------------------------------------------------

  Capital gains treatment of certain income.--Certain agricultural 
income, such as unharvested crops, can be treated as capital gains.

                           Commerce and Housing

  This category includes a number of tax expenditure provisions that 
also affect economic activity in other functional categories. For 
example, provisions related to investment, such as accelerated 
depreciation, could also have been classified under the energy, natural 
resources and environment, agriculture, or transportation categories.

  Credit union income.--The earnings of credit unions not distributed to 
members as interest or dividends are exempt from income tax.
  Bad debt reserves.--Small (less than $500 million in assets) 
commercial banks, mutual savings banks, and savings and loan 
associations may deduct additions to bad debt reserves in excess of 
actually experienced losses. Before January 1, 1996, all thrifts could 
use either the ``experience'' method or the ``percentage of taxable 
income'' method for determining deductible additions to bad debt 
reserves.
  Deferral of income on life insurance and annuity contracts.--Favorable 
tax treatment is provided for investment income (``inside buildup'') 
within qualified life insurance and annuity contracts. Investment income 
earned on qualified life insurance contracts held until death is 
permanently exempted from Federal income tax. Investment income 
distributed prior to the death of the insured is tax-deferred, if not 
tax-exempt. Investment income earned on annuities is treated less 
favorably than income earned on life insurance contracts, but it 
benefits from tax deferral without annual contribution or income limits 
generally applicable to other tax-favored retirement income plans.
  Small property and casualty insurance companies.-- Insurance companies 
that have annual net premium incomes of less than $350,000 are exempted 
from 

[[Page 90]]

tax; those with $350,000 to $2,100,000 of net premium incomes may 
elect to pay tax only on the income earned by their investment 
portfolio.
  Insurance companies owned by exempt organizations.--Generally, the 
income generated by life and property and casualty insurance companies 
is subject to tax, albeit by special rules. Insurance operations 
conducted by such exempt organizations as fraternal societies and 
voluntary employee benefit associations, however, are exempted from tax.
  Mortgage housing bonds.--Interest on all mortgage revenue bonds issued 
by State and local governments is exempt from taxation. Proceeds are 
used to finance homes purchased by first-time buyers--with low to 
moderate incomes--of dwellings with prices under 90 percent of the 
average area purchase price.
  There are limits imposed on the amount of tax-exempt State and local 
government bonds that could be issued to fund private activity. The 
volume cap for single-family mortgage revenue bonds and multifamily 
rental housing bonds is combined with the cap for student loans and 
industrial development bonds (IDBs). The cap is set at $50 per capita or 
a minimum of $150 million for each State.
  States are authorized to issue mortgage credit certificates (MCCs) in 
lieu of qualified mortgage revenue bonds because the bonds are 
relatively inefficient subsidies to first-time home buyers. MCCs entitle 
home buyers to income tax credits for a specified percentage of interest 
on qualified mortgage loans. In this way, the entire amount of the 
subsidy flows directly to the home buyer without being partly diverted 
to financial middlemen or bondholders. A State cannot issue an aggregate 
annual amount of MCCs greater than 25 percent of its annual ceiling for 
qualified mortgage bonds. Because of the relationship between MCCs and 
qualified mortgage bonds, their estimates are presented as one line item 
in the tables.

  Rental housing bonds.--State and local government issues of IDBs are 
restricted to multifamily rental housing projects in which 20 percent 
(15 percent in targeted areas) of the units are reserved for families 
whose income does not exceed 50 percent of the area's median income; or 
40 percent for families with incomes of no more than 60 percent of the 
area median income. Other tax-exempt bonds for multifamily rental 
projects are generally issued with the requirement that all tenants must 
be low or moderate income families. Rental housing bonds are subject to 
the volume cap discussed in the mortgage housing bond section above.
  Interest and taxes on owner-occupied homes.--Owner-occupants of homes 
may deduct mortgage interest and property taxes on their primary and 
secondary residences as itemized nonbusiness deductions. The mortgage 
interest deduction is limited to interest on debt no greater than the 
owner's basis in the residence and, for debt incurred after October 13, 
1987, it is limited to no more than $1 million. Interest on up to 
$100,000 of other debt secured by a lien on a principal or second 
residence is also deductible, irrespective of the purpose of borrowing, 
provided the debt does not exceed the fair market value of the 
residence. Mortgage interest deductions on personal residences are tax 
expenditures because the taxpayers are not required to report the value 
of owner-occupied housing services as gross income.
  Real property installment sales.--Dealers in real and personal 
property, i.e., sellers that regularly hold property for sale or resale, 
cannot defer taxable income from installment sales until the receipt of 
the loan repayment. Nondealers, defined as sellers of real property used 
in their business, are required to pay interest to the Federal 
Government on deferred taxes attributable to their total installment 
obligations in excess of $5 million. Only properties with sales prices 
exceeding $150,000 are includable in the total. The payment of a market 
rate of interest eliminates the benefit of the tax deferral. The tax 
exemption for nondealers with total installment obligations of less than 
$5,000,000 is, therefore, a tax expenditure.
  Capital gains on home sales.--When a primary residence is sold, the 
homeowner can defer paying a capital gains tax on the proceeds by 
purchasing or constructing a home of value at least equal to that of the 
prior home (net of sales and qualified fix-up expenses) within two 
years. This deferral is a tax expenditure.
  Capital gains on sales by owners aged 55 or older.--A taxpayer who is 
55 years of age or older at the time of the sale of his residence may 
elect to exclude from tax up to $125,000 of the gain from its sale. This 
is a once-in-a-lifetime election. In effect, this provision converts 
some prior deferrals of tax into forgiveness of tax.
  Passive loss real estate exemption.--In general, passive losses may 
not offset income from other sources. Losses up to $25,000 attributable 
to certain rental real estate activity, however, are exempted from this 
rule.
  Low-income housing investment.--Through 1989, a tax credit for 
investment in new, substantially rehabilitated, and certain 
unrehabilitated low-income housing was structured to have a present 
value of 70 percent of construction or rehabilitation costs incurred and 
was allowed over 10 years. For Federally subsidized projects and those 
involving unrehabilitated existing low income housing, the credit was 
structured to have a present value of 30 percent. Beginning on January 
1, 1990, the credit was extended at a present value of 70 percent, 
including projects financed with other Federal subsidies, but only if 
substantial rehabilitation was done. Notwithstanding the capital grant 
character of this subsidy, the investor's recoverable basis is not 
reduced by the substantial credit allowed.

[[Page 91]]

  Accelerated depreciation of real property, machinery and equipment.--
As previously noted, the tax depreciation allowance provisions are part 
of the reference law rules, and thus do not cause tax expenditures under 
the reference method. Under the normal tax method, however, a 40-year 
tax life for depreciable real property is the norm. So, the statutory 
depreciation period in effect from 1987 to 1993 for nonresidential 
properties of 31.5 years, and the 39-year period for property placed in 
service after February 25, 1993, give rise to tax expenditures. The 
statutory depreciation period for residential property is 27.5 years, 
which also results in tax expenditures. Statutory depreciation of 
machinery, equipment, and some other property also is somewhat 
accelerated relative to the normal tax baseline. In addition, tax 
expenditures arise from pre-1987 tax allowances for real and personal 
property.
  Cancellation of indebtedness.--Individuals are not required to report 
the cancellation of certain indebtedness as current income. However, if 
they do not, it would be included as an adjustment in the basis of the 
underlying property.
  Imputed interest rules.--Under reference law rules commonly referred 
to as original issue discount (OID), both the holder and seller of a 
financial contract are generally required to report interest earned in 
the period it accrues, not when the contract payments are made. 
Moreover, the amount of interest accruable is determined by the actual 
price paid for the contract, not by the stated or nominal principal and 
interest stipulated in the contract.\5\
---------------------------------------------------------------------------
  \5\ Thus, when a borrower on December 31, 1996, issues a promise to 
pay $1,000 plus interest at 10 percent on December 30, 1997, for a total 
repayment of $1,100, and accepts $900 from a lender in exchange for the 
contract, the rules require that both parties: (a) recognize that $900 
is the amount lent, so that the effective loan interest rate is not the 
nominal 10 percent rate but is 22.2 percent; and (b) both report $200 as 
interest paid or received in 1996, as the case may be.
---------------------------------------------------------------------------
  Exceptions to the general rules for accounting for interest expense or 
income include the following: (a) permission for the mortgagor of his 
personal residence to treat the discount from the nominal principal of 
his mortgage loan, commonly called ``points,'' as prepaid interest which 
is deductible in the year paid, not the year accrued; and (b) sellers of 
farms and small businesses worth less than $1 million, in exchange for 
the purchaser's debt obligation, are exempted from the OID rules. This 
is $750,000 more than the $250,000 exemption that the reference tax law 
generally allows for such transactions.

  Capital gains (other than agriculture, timber, iron ore and coal).--
While the top statutory rate on ordinary income is 39.6 percent, the 
rates on capital gains are limited to 28 percent. This treatment is 
considered a tax expenditure under the normal tax method but not under 
the reference law method.
  Capital gains exclusion for small business stock.--An exclusion of 50 
percent is provided for capital gains from qualified small business 
stock held by individuals for more than 5 years. A qualified small 
business is a corporation whose gross assets do not exceed $50 million 
as of the date of issuance of the stock. Certain activities such as 
personal services and banking are ineligible for the exclusion.
  Step-up in basis of capital gains at death.--Capital gains on assets 
held at the owner's death are not subject to capital gains taxes. The 
cost basis of the appreciated assets is adjusted upward to the market 
value at the owner's date of death. The step-up in the heir's cost basis 
means that, in effect, the capital gain is forgiven.
  Carryover basis of capital gains on gifts.--When a gift is made, the 
transferred property carries to the donee the donor's basis--the cost 
that was incurred when the property was first acquired. The carryover of 
the donor's basis allows a continued deferral of unrealized capital 
gains.
  Ordinary income treatment of losses from sale of small business 
corporate stock shares.--Up to $100,000 in losses from the sale of such 
stock may be treated as ordinary losses, and therefore not be subject to 
the $3,000 annual capital loss write-off limit if the corporation's 
capitalization is less than $1 million.
  Expensing of certain small investments.--In 1996, qualifying 
investments in tangible property up to $18,500 can be expensed rather 
than depreciated over time. (The expensing limit increases annually 
until 2003, when it reaches $25,000). To the extent that qualifying 
investment during the year exceeds $200,000, the amount eligible for 
expensing is decreased. In 1996, the amount expensed is completely 
phased out when qualifying investments exceed $218,500.
  Business start-up costs.--When an individual or corporation acquires 
or otherwise enters into a new business, certain start-up expenses, such 
as the costs of investigating opportunities and legal services, are 
normally incurred. The taxpayer may elect to amortize these outlays over 
60 months although they are similar to other payments he makes for 
nondepreciable intangible assets that are not recoverable until the 
business is sold. Under the normal tax method this gives rise to a tax 
expenditure, while under the reference method it does not.
  Graduated corporation income tax rate schedule.--The schedule is 
graduated, with rates of 15 percent on the first $50,000 of taxable 
income, 25 percent on the next $25,000, 34 percent on the next $9.925 
million, and a rate of 35 percent on income over $10 million. As 
compared with a flat 35 percent tax rate, the lower rates provide a 
$111,000 reduction in tax liability for corporations with taxable 
incomes of $10 million. This benefit is recaptured in the cases of 
corporations with taxable incomes exceeding $100,000. 

[[Page 92]]

This is accomplished by (1) a 5 percent additional tax on corporate incomes in 
excess of $100,000, but less than $335,000 and (2) a 3 percent 
additional tax on income over $15 million but less than $18.33 million. 
At this point the $111,000 is fully recaptured. Since this rate schedule 
is part of the reference tax law, it does not give rise to a tax 
expenditure under the reference method. A flat corporation income tax 
rate is taken as the baseline under the normal tax method; therefore the 
lower rates do yield a tax expenditure under this concept.
  Small issue industrial development bonds.--The interest on small issue 
industrial development bonds (IDBs) issued by State and local 
governments to finance private business property is excluded from income 
subject to tax. Depreciable property financed with small issue IDBs must 
be depreciated, however, using the straight-line method. The tax 
exemption of small issue bonds expired in 1986, except for small issue 
IDBs exclusively issued to finance manufacturing facilities for which 
the tax exemption is permanent. The annual volume of small issue IDBs is 
subject to the unified volume cap discussed in the mortgage housing bond 
section above.
  Treatment of Alaskan Native Corporations losses.--Tax law restricts 
the ability of profitable corporations to reduce their tax liabilities 
by merging or buying corporations with accumulated net operating losses 
(NOLs) and as yet unrefunded claims to investment credits. Alaska Native 
Corporations have a limited exemption (fifteen years after the NOL or 
credit claim was first experienced) from these restrictions that 
includes NOLs and credits claimable prior to April 26, 1988.

                              Transportation

  Shipping companies that are U.S. flag carriers.--Certain companies 
that operate U.S. flag vessels receive a deferral of income taxes on 
that portion of their income used for shipping purposes, primarily 
construction, modernization and major repairs to ships, and repayment of 
loans to finance these qualified investments. Once indefinite, the 
deferral has been limited to 25 years since January 1, 1987.
  Exclusion of reimbursed employee parking expenses.--Parking at or near 
an employer's business premises that is paid for by the employer is 
excludable from the income of the employee as a working condition fringe 
benefit. The maximum amount of the parking exclusion is $155 month (in 
1993 dollars), indexed in $5 increments. The tax expenditure estimate 
does not include parking at facilities owned by the employer.
  Exclusion of employer-provided transit passes.--Transit passes, 
tokens, and fare cards provided by an employer to defray an employee's 
commuting costs are excludable from the employee's income as a de 
minimis fringe benefit, if the total value of the benefit does not 
exceed $60 per month (in 1993 dollars), indexed in $5 increments.

                    Community and Regional Development

  Rehabilitation of structures.--A 10 percent investment tax credit is 
available for the rehabilitation of buildings that are used for business 
or productive activities and that were erected before 1936 for other 
than residential purposes. A full reduction by the amount of the credit 
is required in the taxpayer's recoverable basis.
  Tax-exempt bonds for airports and similar facilities.--Government-
owned airports, docks and wharves, as well as high-speed rail facilities 
that need not be government-owned, may be financed with tax-exempt 
bonds. These bonds are not covered by a volume cap.
  Exemption of certain mutuals' and cooperatives' income.--The incomes 
of mutual and cooperative telephone and electric companies are exempted 
from tax if at least 85 percent of their revenues are derived from 
patron service charges.
  Empowerment zones.--Qualifying businesses in designated economically 
depressed areas can receive tax benefits such as an employer wage 
credit, increasing expensing of investment in equipment, tax-exempt 
financing, and accelerated depreciation. In addition, a tax credit for 
contributions to certain community development corporations can be 
available.

           Education, Training, Employment, and Social Services

  Scholarship and fellowship income.--Scholarships and fellowships are 
excluded from taxable income to the extent they pay for tuition and 
course-related expenses of the grantee. Similarly, tuition reductions 
for employees of educational institutions and their families are not 
included in taxable income. From an economic point of view, scholarships 
and fellowships are either gifts not conditioned on the performance of 
services, or they are rebates of educational costs. Thus, under the 
reference law method, this exclusion is not a tax expenditure because 
this method does not include either gifts or price reductions in a 
taxpayer's gross income. Under the normal tax method, however, the 
exclusion is considered a tax expenditure because under this method 
gift-like transfers of government funds--and many scholarships are 
derived directly or indirectly from government funding--are included in 
gross income.
  Tax-exempt bonds for educational purposes.--Interest on State and 
local government debt issued to finance student loans or the 
construction of facilities used by private nonprofit educational 
institutions is excluded from income subject to tax. The aggregate 
vol-

[[Page 93]]

ume of such private activity bonds that each State may issue during 
any calendar year is limited.
  U.S. savings bonds for education.--Interest on U.S. savings bonds, 
issued after December 31, 1989, may be excluded from tax if the bonds, 
plus accrued interest, are transferred to an educational institution as 
payment for educational expenses. The exclusion from tax is phased out 
for joint returns with adjusted gross incomes of $74,200 to $104,200 and 
$49,250 to $64,250 for single and head of household returns in 1996.
  Dependent students age 19 or older.--Taxpayers can claim personal 
exemptions for dependent children age 19 or over who receive parental 
support payments of $1,000 or more per year, are full-time students, and 
do not claim a personal exemption on their own tax returns. This 
preferential arrangement usually generates tax savings because the 
students' marginal tax rates are more often than not lower than their 
parents' marginal tax rates.
  Charitable contributions.--Contributions to charitable, religious, and 
certain other nonprofit organizations are allowed as an itemized 
deduction for individuals, generally up to 50 percent of adjusted gross 
income. Taxpayers who donate capital assets to charitable or educational 
organizations can deduct the assets' current value without the taxation 
of any appreciation in value. Corporations can also deduct charitable 
contributions up to 10 percent of their pre-tax income. Tax expenditures 
resulting from the deductibility of contributions are shown separately 
for educational and other institutions. Contributions to health 
institutions are reported under the health function.
  Employer provided benefits.--Many employers provide employee benefits 
that are not counted in employee income. The employers' costs for these 
benefits are deductible business expenses. The exclusion from an 
employee's income of the value of educational assistance, child care, 
meals and lodging, as well as ministers' housing allowances and the 
rental value of parsonages are tax expenditures. The exclusion for 
educational assistance expires in mid-1997. After June 30, 1996, the 
exclusion does not apply to graduate courses. Health and other insurance 
benefits are reported under the health and income security functions. 
Certain parking and transit benefits are reported under the 
transportation function.
  Work opportunity tax credit.--Employers can claim a tax credit for 
qualified wages paid to individuals who begin work after September 30, 
1996 and before October 1, 1997 and who are certified as members of 
various targeted groups. The amount of the credit that can be claimed is 
35 percent of the first $6,000 paid during the first year of employment. 
Employers must reduce their deduction for wages paid by the amount of 
the credit claimed. The work opportunity tax credit is similar to the 
targeted jobs tax credit, which applied to employees hired before 
January 1, 1995.
  Child and dependent care expenses.--A tax credit may be claimed by 
married couples for child and dependent care expenses incurred when one 
spouse works full time and the other works at least part time or goes to 
school. The credit may also be claimed by divorced or separated parents 
who have custody of children, and by single parents. Expenditures up to 
a maximum $2,400 for one dependent and $4,800 for two or more dependents 
are eligible for the credit. The credit is equal to 30 percent of 
qualified expenditures for taxpayers with incomes of $10,000 or less. 
The credit is reduced to a minimum of 20 percent by one percentage point 
for each $2,000 of income between $10,000 and $28,000.
  Adoption assistance.--Beginning January 1, 1997, taxpayers can receive 
a nonrefundable tax credit for qualified adoption expenses. The maximum 
credit is $5,000 per child ($6,000 for special needs adoptions, except 
foreign adoptions). The credit is phased-out ratably for taxpayers with 
modified AGI between $75,000 and $115,000. Unused credits may be carried 
forward. In lieu of the tax credit, taxpayers may exclude qualified 
adoption expenses from income, subject to the same maximum amounts and 
phase-out as the credit. The non-special needs adoption assistance and 
foreign special needs assistance expire on December 31, 2001.
  Disabled access expenditures.--A credit is provided of 50 percent of 
eligible disabled access expenditures in excess of $250. The credit is 
limited to $5,000.
  Costs of removing architectural barriers to the handicapped.--The 
investment cost of making any business accessible to persons suffering 
physical or mental disabilities may be deducted, rather than capitalized 
as part of the taxpayer's basis in such property and recovered by 
subsequent depreciation allowances, as is generally required.
  Foster care payments.--Foster parents provide a home and care for 
children who are wards of the State, under contract with the State. 
Compensation received for this service is explicitly excluded from the 
gross incomes of foster parents, making the expenses they incur 
nondeductible. This activity is, in effect, tax-exempt.

                                  Health

  Employer paid medical insurance and expenses.--Employee compensation, 
in the form of payments by employers for health insurance premiums and 
other medical expenses (including long-term care), is deducted as a 
business expense by employers, but it is not included in employee gross 
income. The self-employed also may deduct part of their family health 
insurance premiums.

[[Page 94]]

  Medical savings accounts.--Beginning January 1, 1997, some employees 
may deduct annual contributions to a medical savings account (MSA); 
employer contributions to MSAs (except those made through cafeteria 
plans) for qualified employees are also excluded from income. An 
employee may contribute to an MSA in a given year only if the employer 
does not contribute to the MSA in that year. MSAs are only available to 
self-employed individuals or employees covered under an employer-
sponsored high deductible health plan of a small employer. The maximum 
annual MSA contribution is 75 percent of the deductible under the high 
deductible plan for family coverage (65 percent for individual 
coverage). Earnings from MSAs are excluded from taxable income. 
Distributions from an MSA for medical expenses are not taxable. The 
number of taxpayers who may benefit annually from MSAs is generally 
limited to 750,000. No new MSAs may be established after December 31, 
2000.
  Medical care expenses.--Personal expenditures for medical care 
(including the costs of prescription drugs) exceeding 7.5 percent of the 
taxpayer's adjusted gross income are deductible.
  Tax-exempt bonds for hospital construction.--Interest earned on State 
and local government debt issued to finance hospital construction is 
excluded from income subject to tax.
  Charitable contributions to health institutions.--Contributions to 
nonprofit health institutions are allowed as a deduction for individuals 
and corporations. Tax expenditures resulting from the deductibility of 
contributions to other charitable institutions are listed under the 
education, training, employment, and social services function.
  Orphan drugs.--To encourage the development of drugs for the treatment 
of rare diseases or physical conditions, a tax credit was granted equal 
to 50 percent of the costs for clinical testing that must be completed 
before manufacture and distribution are approved by the Food and Drug 
Administration. Because the drug firm was not required to reduce its 
deduction for testing expenses (an R&D expenditure) by the amount of 
this credit, the private cost of clinically testing orphan drugs was 
reduced substantially. This tax expenditure expires on May 31, 1997.
  Blue Cross and Blue Shield.--Although these organizations are not 
qualified as exempt, they are provided exceptions from otherwise 
applicable insurance company income tax accounting rules that 
effectively eliminate their tax liabilities.

                              Income Security

  Railroad retirement benefits.--These benefits are not generally 
subject to the income tax unless the recipient's gross income reaches a 
certain threshold discussed more fully under the social security 
function.
  Workmen's compensation benefits.--Workmen's compensation provides 
payments to disabled workers. These benefits, although income to the 
recipients, are a tax preference because they are not subject to the 
income tax.
  Public assistance benefits.--The exclusion from taxable income of 
public assistance benefits received by individuals is listed as a tax 
expenditure under the normal tax method because, under this method, cash 
transfers from government are included in gross income. In contrast, 
gifts not conditioned on the performance of services, including 
transfers from government, are not taxable under the reference law. 
Therefore, under the reference tax method, the tax exclusion for public 
assistance benefits is not shown as a tax expenditure.
  Special benefits for disabled coal miners.--Disability payments to 
former coal miners out of the Black Lung Trust Fund, although income to 
the recipient, are not subject to the income tax.
  Military disability pensions.--Most of the military pension income 
received by current disabled retired veterans is excluded from their 
income subject to tax.
  Pension contributions and earnings.--Certain employer contributions to 
pension plans, along with individual contributions to individual 
retirement accounts (IRAs) and amounts set aside by the self-employed, 
are excluded from adjusted gross income in the year of contribution. The 
investment income earned by pension funds and other qualifying 
retirement plans is not taxable when earned, and this deferral is, 
therefore, also a tax expenditure.
  In 1997, $9,500 (indexed) can be excluded from an employee's adjusted 
gross income under a qualified cash or deferred arrangement with the 
employer (401(k) plan). An employee's own contribution of no more than 
$9,500 or the 401(k) limitation (whichever is greater) may be excluded 
annually from an employee's adjusted gross income when placed in a tax-
sheltered annuity (403(b) plan).
  In 1996, employees could deduct annual contributions to an IRA of 
$2,000 (or 100 percent of compensation, if less), or $2,250 on a joint 
return with only one spouse earning income (beginning January 1, 1997, 
each spouse may contribute $2,000 to a deductible IRA), if: (a) neither 
the individual or spouse is an active participant in an employer-
provided retirement plan; or (b) their adjusted gross income falls below 
$40,000 ($25,000 for a single taxpayer). The allowable IRA deduction is 
phased out between $40,000 and $50,000 for a joint return and $25,000 
and $35,000 for a single return. Beyond these income limits, 
nondeductible contributions to IRAs are available to taxpayers who are 
active participants in employer-provided retirement plans. Self-employed 
persons can make deductible contributions to their own retirement 
(Keogh) plans equal to 

[[Page 95]]

25 percent of their income, up to a maximum of $30,000 per year.

  Employer provided insurance benefits.--Many employers cover part or 
all the cost of premiums or payments for: (a) employees' life insurance 
benefits; (b) accident and disability benefits; (c) death benefits; and 
(d) supplementary unemployment benefits. The amounts are deductible by 
the employers and are excluded as well from employees' gross incomes for 
tax purposes.
  Employer Stock Ownership Plan (ESOP) provisions.--A special type of 
employee benefit plan, organized as a trust, is tax-exempt. Employer-
paid contributions (the value of stock issued to the ESOP) are 
deductible by the employer as part of employee compensation costs. They 
are not included in the employees' gross income for tax purposes, 
however, until they are paid out as benefits. The following special 
income tax provisions for ESOPs are intended to increase ownership of 
corporations by their employees: (1) annual employer contributions are 
subject to less restrictive limitations (percentages of employees' cash 
compensation); (2) ESOPs may borrow to purchase employer stock, 
guaranteed by their agreement with the employer that the debt will be 
serviced by his payment (deductible by him) of a portion of wages 
(excludable by the employees) to service the loan; (3) ESOPs' lenders 
may exclude half the interest from their gross income (the ESOP interest 
exclusion expired on June 10, 1996); (4) employees who sell appreciated 
company stock to the ESOP may defer any taxes due until they withdraw 
benefits; and (5) dividends paid to ESOP-held stock are deductible by 
the employer.
  Support of the aged and the blind.--Taxpayers who are blind or 65 
years of age or older may take an additional $1,000 standard deduction 
if single, or $800 if married. In addition, individuals who are 65 years 
of age or older, or who are permanently disabled, can take a tax credit 
equal to 15 percent of the sum of their earned and retirement income. 
Qualified income is limited to no more than $2,500 for single 
individuals or married couples filing a joint return where only one 
spouse is 65 years of age or older, and up to $3,750 for joint returns 
where both spouses are 65 years of age or older. These limits are 
reduced by one-half of the taxpayer's adjusted gross income over $7,500 
for single individuals and $10,000 for married couples filing a joint 
return.
  Casualty losses.--Neither the purchase of property nor insurance 
premiums to protect its value are deductible as costs of earning income; 
therefore, reimbursement for insured loss of such property is not 
reportable as a part of gross income. However, a special provision 
permits relief for taxpayers suffering an uninsured loss. They may 
deduct casualty and theft losses of more than $100 each, but only to the 
extent that total losses during the year exceed 10 percent of adjusted 
gross income.
  Earned income credit.--This credit may be claimed by low income 
workers. For a family with one qualifying child, the credit is 34 
percent of the first $6,500 of earned income in 1997. The credit is 40 
percent of the first $9,140 of income for a family with two or more 
qualifying children. When the taxpayer's income exceeds $11,930, the 
credit is phased out at the rate of 15.98 percent (21.06 percent if two 
or more qualifying children are present). It is completely phased out at 
$25,760 of adjusted gross income ($29,290 if two or more qualifying 
children are present).
  The credit may also be claimed by workers who do not have children 
living with them. Qualifying workers must be at least age 25 and may not 
be claimed as a dependent on another taxpayer's return. The credit is 
not available to workers age 65 or older. In 1996, the credit is 7.65 
percent of the first $4,340 of earned income. When the taxpayer's income 
exceeds $5,430, the credit is phased out at the rate of 7.65 percent. It 
is completely phased out at $9,770 of adjusted gross income.
  For workers with or without children, the income level at which the 
credit's phase-outs begin and the maximum amounts of income on which the 
credit can be taken are adjusted for inflation. Earned income tax 
credits in excess of tax liabilities are refundable to individuals, and 
as such are paid by the Federal Government. This portion of the credit 
is included in outlays, while the amount that offsets tax liabilities is 
shown as a tax expenditure.

                              Social Security

  Old Age and Survivors Insurance (OASI) benefits for retired workers.--
Social security benefits that exceed the beneficiary's contributions out 
of taxed income are deferred employee compensation and the deferral of 
tax on that compensation is a tax expenditure. These additional 
retirement benefits are paid for partly by employers' contributions that 
were not included in employees' taxable compensation. Portions (reaching 
as much as 85 percent) of recipients' social security and tier 1 
railroad retirement benefits are included in the income tax base, 
however, if the recipient's provisional income exceeds certain base 
amounts. Provisional income is equal to adjusted gross income plus 
foreign or U.S. possession income and tax-exempt interest, and one half 
of social security and tier 1 railroad retirement benefits. The tax 
expenditure is limited to the portion of the benefits received by 
taxpayers who are below the base amounts at which 85 percent of the 
benefits are taxable.
  Social Security benefits for the disabled, dependents and survivors.--
Benefit payments from the Social Security Trust Fund, for disability and 
for dependents and survivors, are excluded from the beneficiaries' gross 
incomes, and thus give rise to tax expenditures.

[[Page 96]]

                      Veterans Benefits and Services

  Veterans benefits.--All compensation due to death or disability and 
pensions paid by the Veterans Administration are excluded from taxable 
income.
  Tax-exempt mortgage bonds for veterans.--Interest earned on general 
obligation bonds issued by State and local governments to finance 
housing for veterans is excluded from taxable income. The issuance of 
such bonds is limited, however, to five pre-existing State programs and 
to amounts based upon previous volume levels for the period January 1, 
1979 to June 22, 1984. Furthermore, future issues are limited to 
veterans who served on active duty before 1977.

                            General Government

  Public purpose State and local debt.--Interest on State and local 
government debt, issued to finance government activities, is excluded 
from Federal taxation. State and local governments, therefore, can sell 
debt obligations at a lower interest cost than would be possible if such 
interest were subject to tax. Only the excluded interest on bonds for 
public purposes, such as schools, roads, and sewers, is included here.
  Nonbusiness State and local taxes excluding home-owner property 
taxes.--The deductibility of nonbusiness State and local income and 
personal property taxes gives indirect assistance to these governments 
by reducing the costs of the services they provide.
  Business income earned in U.S. possessions.--Under certain conditions, 
U.S. corporations receiving income from an active trade or business, or 
from investments located in a U.S. possession, can claim a special 
credit against U.S. tax otherwise due.

                                 Interest

  U.S. savings bonds.--The interest on U.S. savings bonds is not taxable 
until the bonds are redeemed, thereby deferring tax liability. The 
deferral is equivalent to an interest-free loan and, therefore, it is a 
tax expenditure.

              TAX EXPENDITURES IN THE UNIFIED TRANSFER TAX

  Exceptions to the general terms of the Federal unified transfer tax 
favor particular transferees or dispositions of transferors, similar to 
Federal direct expenditure or loan programs. The transfer tax provisions 
identified as tax expenditures satisfy the reference law criteria for 
inclusion in the tax expenditure budget that were described above. There 
is no generally accepted normal tax baseline for transfer taxes.

                  Unified Transfer Tax Reference Rules

  The reference tax rules for the unified transfer tax from which 
departures represent tax expenditures include:
    Definition of the taxpaying unit. The payment of the tax is 
          the liability of the transferor whether the transfer of cash 
          or property was made by gift or bequest.
    Definition of the tax base. The base for the tax is the 
          transferor's cumulative, taxable lifetime gifts made plus the 
          net estate at death. Gifts in the tax base are all annual 
          transfers in excess of $10,000 to any donee except the donor's 
          spouse. Excluded are, however, payments on behalf of family 
          members' educational and medical expenses, as well as the cost 
          of ceremonial gatherings and celebrations that are not in 
          honor of the donor.
    Property valuation. In general, property is valued at its 
          fair market value at the time it is transferred. This is not 
          necessarily the case in the valuation of property for transfer 
          tax purposes. Executors of estates are provided the option to 
          value assets at the time of the testator's death or up to six 
          months later.
    Tax rate schedule. A single graduated tax rate schedule 
          applies to all taxable transfers. This is reflected in the 
          name of the ``unified transfer tax'' that has replaced the 
          former separate gift and estate taxes. The tax rates vary from 
          18 percent on the first $10,000 of aggregate taxable 
          transfers, to 55 percent on amounts exceeding $3 million. A 
          $192,800 lifetime credit is provided against the tax in 
          determining the final amount of transfer taxes that are due 
          and payable. This allows each taxpayer to make a $600,000 tax-
          free transfer of assets that otherwise would be liable to the 
          unified transfer tax.\6\
---------------------------------------------------------------------------
  \6\ An additional tax, at a flat rate of 55 percent, is imposed on 
lifetime, generation-skipping transfers in excess of $1 million. It is 
considered a generation-skipping transfer whenever the transferee is at 
least two generations younger than the transferor, as it would be in the 
case of transfers to grandchildren or great-grandchildren. The liability 
of this tax is on the recipients of the transfer.
---------------------------------------------------------------------------
    Time when tax is due and payable. Donors are required to pay 
          the tax annually as gifts are made. The generation-skipping 
          transfer tax is payable by the donees whenever they accede to 
          the gift. The net estate tax liability is due and payable 
          within nine months after the decedent's death. The Internal 
          Revenue Service may grant an extension of up to 10 years for a 
          reasonable cause. Interest is charged on the unpaid tax 
          liability at a rate equal to the cost of Federal short-term 
          borrowing, plus three percentage points.

[[Page 97]]

                      Tax Expenditures by Function

  The estimates of tax expenditures in the Federal unified transfer tax 
for fiscal years 1996-2002 are displayed by functional category in table 
5-6. Outlay equivalent estimates are similar to revenue loss estimates 
for transfer tax expenditures and, therefore, are not shown separately. 
A description of the provisions follows.

                                     

                               TABLE 5-6.  REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES IN THE FEDERAL UNIFIED TRANSFER TAX                              
                                                                (In millions of dollars)                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              Fiscal Years                              
                                  Description                                  -------------------------------------------------------------------------
                                                                                  1996     1997     1998     1999     2000     2001     2002   1998-2002
--------------------------------------------------------------------------------------------------------------------------------------------------------
Natural Resources and Environment:                                                                                                                      
  Deductions for donations of conservation easements..........................  .......  .......  .......  .......  .......  .......  .......  .........
Agriculture:                                                                                                                                            
  Special use valuation of farm real property.................................       75       80       85       90       95      100      105       475 
  Tax deferral of closely held farms..........................................       10       10       10       15       15       15       15        70 
                                                                                                                                                        
Commerce:                                                                                                                                               
  Special use valuation of real property used in closely held businesses......       20       20       25       25       25       25       30       130 
  Tax deferral of closely held business.......................................       60       65       70       75       80       85       90       400 
                                                                                                                                                        
Education, training, employment, and social services:                                                                                                   
  Deduction for charitable contributions (education)..........................      940    1,005    1,080    1,155    1,240    1,330    1,430     6,235 
  Deduction for charitable contributions (other than education and health)....    2,765    2,965    3,180    3,415    3,665    3,930    4,220    18,410 
                                                                                                                                                        
Health:                                                                                                                                                 
  Deduction for charitable contributions (health).............................      845      905      975    1,045    1,120    1,205    1,290     5,635 
General government:                                                                                                                                     
  Credit for State death taxes................................................    3,235    3,465    3,720    3,990    4,285    4,600    4,935    21,530 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: All estimates have been rounded to the nearest $5 million.                                                                                        

                     Natural Resources and Environment

  Donations of conservation easements.--Bequests for conservation are 
excluded from taxable estates. A conservation bequest is the value of 
property and easements (in perpetuity) to such property the use of which 
is restricted to any one or more of the following: the public for 
outdoor recreation; protection of the natural habitats of fish, 
wildlife, plants, etc.; scenic enjoyment of the public; and preservation 
of historic land areas and structures. Similar conservation gifts are 
excluded from the gift tax base and are also deductible from the donor's 
otherwise taxable income in the year of the gift.

                                Agriculture

  Special use valuation of farms.--Farmland owned and operated by a 
decedent and/or a member of the family may be valued for estate tax 
purposes on the basis of its ``continued use'' as a farm if: the 
farmland is at least 25 percent of the decedent's gross estate; the 
entire value of all farm property is at least 50 percent of the gross 
estate; and family heirs to the farm agree to continue to operate the 
property as a farm for at least 10 years. Since continued use valuation 
of farmland is frequently substantially less than the fair market value, 
the resulting reduction in tax liability serves as a subsidy to the 
continued operation of family farms.
  Tax deferral of closely held farms.--Decedents' estates may use a 
preferential, extended installment payment period of five to 15 years to 
discharge estate tax liabilities if the value of the farm properties 
exceeds 35 percent of the net estates. The interest charged is only 4 
percent for the first five years, rather than the standard Federal 
short-term borrowing rate plus three percentage points, which applies 
during the last 10 years of the repayment period.

                        Commerce and Housing Credit

  Special use valuation of closely held businesses.--The two estate tax 
incentives to family farming are also available to the estates of owners 
of 1995 nonfarm family businesses. If the same three conditions 
previously described are met, the real property in their estates is 
eligible for continued use valuation.
  Tax deferral of closely held businesses.--Nonfarm family businesses 
that satisfy the net estate requirements qualify for preferential 15 
year deferred estate tax payment. To be eligible for this special 
provision, the value of stock in closely held corporations must exceed 
35 percent of the decedent's gross estate, less debt and funeral 
expenses.

           Education, Training, Employment, and Social Services

  Bequests to tax-exempt organizations.--These bequests are deductible 
from decedent's otherwise taxable lifetime transfers.

[[Page 98]]

                                  Health

  Bequests to health providers.--Such bequests, that are exempt from the 
income tax, are deductible from otherwise taxable lifetime transfers of 
decedents.

                            General Government

  State and local death taxes.--A credit is allowed for state death 
taxes against any Federal estate tax that otherwise would be due. The 
amount of the state death tax credit is determined by a rate schedule 
that reaches a limit of 16 percent of the taxable estate in excess of 
$60,000.