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



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                    FEDERAL RECEIPTS AND COLLECTIONS

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[[Page 41]]


 
                          3.  FEDERAL RECEIPTS

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

  Growth in receipts.--Total receipts in 1999 are estimated to be 
$1,742.7 billion, an increase of $84.9 billion or 5.1 percent relative 
to 1998. This increase is largely due to assumed increases in incomes 
resulting from both real economic growth and inflation. Receipts are 
projected to grow at an average annual rate of 3.9 percent between 1999 
and 2003, rising to $2,028.2 billion.
  As a share of GDP, receipts are projected to decline from 19.9 percent 
in 1998 to 19.6 percent in 2003.

                                     

                    Table 3-1.  RECEIPTS BY SOURCE--SUMMARY                                                        
                            (In billions of dollars)                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Estimate                                     
                        Source                           1997 actual -----------------------------------------------------------------------------------
                                                                          1998          1999          2000          2001          2002          2003    
--------------------------------------------------------------------------------------------------------------------------------------------------------
Individual income taxes...............................      737.5         767.8         791.5         804.6         833.4         877.1         915.5   
Corporation income taxes..............................      182.3         190.8         198.0         202.9         209.2         214.7         220.4   
Social insurance and retirement receipts..............      539.4         571.4         595.9         623.0         649.0         677.8         706.5   
  (On-budget).........................................     (147.4)       (155.4)       (161.8)       (169.1)       (176.3)       (183.5)       (189.9)  
  (Off-budget)........................................     (392.0)       (416.0)       (434.1)       (453.9)       (472.7)       (494.3)       (516.6)  
Excise taxes..........................................       56.9          55.5          72.0          69.6          71.6          74.0          74.6   
Estate and gift taxes.................................       19.8          20.4          20.5          21.6          22.6          24.4          25.6   
Customs duties........................................       17.9          18.4          18.2          19.5          20.4          22.4          24.0   
Miscellaneous receipts................................       25.5          33.5          46.7          52.2          56.4          59.0          61.4   
                                                       -------------------------------------------------------------------------------------------------
  Total receipts......................................    1,579.3       1,657.9       1,742.7       1,793.6       1,862.6       1,949.3       2,028.2   
    (On-budget).......................................   (1,187.3)     (1,241.9)     (1,308.6)     (1,339.7)     (1,389.9)     (1,455.0)     (1,511.5)  
    (Off-budget)......................................     (392.0)       (416.0)      ( 434.1)       (453.9)       (472.7)       (494.3)       (516.6)  
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                     

                           Table 3-2.  CHANGES IN RECEIPTS                                        
                              (In billions of dollars)                                            
----------------------------------------------------------------------------------------------------------------
                                                                            Estimate                            
                                               -----------------------------------------------------------------
                                                   1998       1999       2000       2001       2002       2003  
----------------------------------------------------------------------------------------------------------------
Receipts under tax rates and structure in                                                                       
 effect January 1, 1998 \1\...................    1,657.9    1,728.7    1,774.4    1,837.3    1,918.0    1,991.8
Social security (OASDI) taxable earnings base                                                                   
 increases:...................................                                                                  
  $68,400 to $70,800 on Jan. 1, 1999..........  .........        1.1        3.0        3.3        3.6        3.9
  $70,800 to $74,100 on Jan. 1, 2000..........  .........  .........        1.6        4.1        4.5        4.9
  $74,100 to $76,800 on Jan. 1, 2001..........  .........  .........  .........        1.3        3.3        3.7
  $76,800 to $79,800 on Jan. 1, 2002..........  .........  .........  .........  .........        1.4        3.7
  $79,800 to $82,800 on Jan. 1, 2003..........  .........  .........  .........  .........  .........        1.4
Proposals \2\.................................       -0.1       12.9       14.7       16.7       18.5       18.7
                                               -----------------------------------------------------------------
  Total, receipts under existing and proposed                                                                   
   legislation................................    1,657.9    1,742.7    1,793.6    1,862.6    1,949.3   2,028.2 
----------------------------------------------------------------------------------------------------------------
\1\ These estimates assume a social security taxable earnings base of $68,400 through 2003.                     
\2\ Net of income offsets.                                                                                      


[[Page 42]]

                           ENACTED LEGISLATION

  Several laws were enacted in 1997 that have an effect on governmental 
receipts. The major legislative changes affecting receipts are described 
below.

  Airport and Airway Trust Fund Tax Reinstatement Act of 1997.--This Act 
reinstated, through September 30, 1997, aviation excise taxes that 
expired on December 31, 1996. The reinstated taxes on commercial air 
transportation included a 10-percent excise tax on domestic passenger 
tickets, a $6-per-person international departure tax, and a 6.5-percent 
domestic air freight excise tax. The reinstated taxes also included an 
excise tax on fuels used in general aviation of 17.5 cents per gallon 
for jet fuel and 15 cents per gallon for aviation gasoline. In addition, 
the Act authorized the Treasury Department to transfer to the Airport 
and Airway Trust Fund any aviation excise taxes collected during the 
fourth quarter of calendar year 1996 but not remitted to the Federal 
government during that period.
  Taxpayer Relief Act of 1997. --This Act, together with the Balanced 
Budget Act of 1997, implements the bipartisan budget agreement announced 
on May 2, 1997. The legislation includes, with certain modifications, 
the key features of the Administration's proposals to give middle-income 
families the tax relief they need to help raise their children, save for 
the future, and pay for postsecondary education. In addition, the 
provisions of the Act promote a fairer tax system and encourage economic 
growth, while being fiscally responsible. The major provisions of the 
Act are described below.

                            Family Tax Relief

  Provide tax credit for dependent children.--A credit is allowed for 
each dependent child under the age of 17. The credit equals $400 for 
1998 and rises to $500 for 1999 and subsequent years. The credit is 
phased out for taxpayers with adjusted gross income (AGI) in excess of 
the following thresholds: $110,000 for married taxpayers filing a joint 
return, $75,000 for a single taxpayer or head of household, and $55,000 
for married taxpayers filing a separate return. The amount of the credit 
and the thresholds are not indexed for inflation. The phase-out rate is 
$50 for each $1,000 of modified AGI (or fraction thereof) in excess of 
the threshold. For low-income families with three or more children, a 
refundable child credit is available to the extent that their income and 
employee payroll taxes exceed their earned income tax credit.

                        Education Tax Incentives

  Provide tax credits for higher education tuition expenses.--Taxpayers 
are allowed to claim a per-student nonrefundable tax credit (Hope 
Credit) for qualified tuition and fees for enrollment of the taxpayer, 
the taxpayer's spouse or the taxpayer's dependent in a post-secondary 
degree or certificate program. To be eligible for the credit, a student 
must be enrolled on at least a half-time basis. The Hope Credit is equal 
to 100 percent of the first $1,000 of qualified expenses and 50 percent 
of the next $1,000 of qualified expenses, for a maximum credit of $1,500 
per student. The maximum credit is indexed for inflation. The Hope 
Credit is available for expenses paid after December 31, 1997, for 
education furnished in academic periods beginning after that date, and 
is available for only the first two years of a student's post-secondary 
education. Alternatively, taxpayers are allowed a nonrefundable Lifetime 
Learning Credit for all postsecondary education, including graduate 
education. The credit is equal to 20 percent of qualified tuition and 
fees paid during the taxable year on behalf of the taxpayer, the 
taxpayer's spouse, or the taxpayer's dependent. A maximum credit of 
$1,000 per family is provided for expenses paid after June 30, 1998 and 
before January 1, 2003; the maximum credit increases to $2,000 per 
family effective for expenses paid after December 31, 2002. There is no 
limit on the number of years for which the Lifetime Learning Credit may 
be claimed. With respect to an eligible student, a taxpayer may elect 
either the Hope Credit, the Lifetime Learning Credit, or the exclusion 
from gross income for withdrawals from an education savings account 
(discussed below), but only one of these preferences may be used in a 
taxable year. Both credits are phased out for married taxpayers filing a 
joint return with modified AGI between $80,000 and $100,000 and for 
single taxpayers and heads of households with modified AGI between 
$40,000 and $50,000. The phase-out ranges will be indexed for inflation 
beginning in 2002.
  Provide deduction for student loan interest.--Interest paid on a 
qualified education loan during the first 60 months that payment is 
required is deductible for income tax purposes, effective for payments 
due and paid after December 31, 1997. The maximum allowable deduction is 
$1,000 in 1998, $1,500 in 1999, $2,000 in 2000 and $2,500 in 2001 and 
subsequent years. The maximum amount is not indexed for inflation. In 
addition, the deduction is phased out ratably for single taxpayers with 
AGI between $40,000 and $55,000 and for married taxpayers filing a joint 
return with AGI between $60,000 and $75,000. The phase-out ranges are 
indexed for inflation beginning after 2002.
  Expand tax preferences provided qualified State tuition programs.--
Qualified State tuition programs (programs eligible for tax-exempt 
status and deferral of tax on earnings) are expanded to include State 
programs where individuals prepay for room and board, in addition to 
tuition, fees, books and supplies. This Act also expands the definition 
of eligible institution, expands the definition of ``member of the 
family'' with regard to tax-free rollovers of credits or account 
balances, and clarifies the estate and gift tax treatment of 
contributions to such programs. These modifications generally are 
effective after December 31, 1997.

[[Page 43]]

  Provide penalty-free withdrawals from Individual Retirement Accounts 
(IRAs) for education expenses.--Penalty-free withdrawals are permitted 
from IRAs for qualified higher education expenses of the taxpayer, the 
taxpayer's spouse, and the children and grandchildren of the taxpayer 
and the taxpayer's spouse. The provision applies to distributions made 
after December 31, 1997 with respect to expenses paid after that date 
for education furnished in academic periods beginning after that date.
  Establish education savings accounts for children under 18.--Effective 
for taxable years beginning after December 31, 1997, taxpayers may 
contribute up to $500 per year, per beneficiary under age 18, to an 
education savings account. Earnings on contributions accumulate tax-free 
and distributions are excludable from gross income to the extent that 
the distribution does not exceed qualified higher education expenses 
incurred during the year the distribution is made. The earnings portion 
of a distribution not used to cover qualified education expenses is 
includable in the gross income of the beneficiary and is generally 
subject to an additional 10-percent tax. However, prior to the 
beneficiary reaching age 30, tax-free (and penalty-free) rollovers of 
account balances may be made to an education IRA benefitting another 
family member. The contribution limit is phased out ratably for married 
couples filing a joint return with AGI between $150,000 and $160,000 and 
for single taxpayers and heads of households with AGI between $95,000 
and $110,000. If a taxpayer uses tax-free education savings account 
withdrawals for a student's qualified education expenses in a taxable 
year, neither the Hope Credit nor the Lifetime Learning Credit may be 
claimed in that year for the same student's education expenses.
  Extend exclusion for employer-provided educational assistance.--
Certain amounts paid by an employer for undergraduate educational 
assistance expenses are excluded from the employee's gross income for 
income and payroll tax purposes. This exclusion, which was scheduled to 
expire with respect to undergraduate education beginning after June 30, 
1997, is extended to apply to undergraduate education courses beginning 
before June 1, 2000. The exclusion is limited to $5,250 of undergraduate 
educational assistance with respect to an individual during a calendar 
year.
  Modify limit on qualified section 501(c)(3) private activity bonds.--
Interest on State and local government bonds generally is excluded from 
income if the bonds are issued to finance activities carried out and 
paid for with revenues of these governments. Interest on bonds issued by 
these governments to finance activities of other persons, e.g., private 
activity bonds, is taxable unless a specific exception is provided in 
law. One such exception is for private activity bonds issued by certain 
tax-exempt organizations (section 501(c)(3) organizations) to finance 
activities that do not constitute an unrelated trade or business. The 
$150 million limit on the amount of outstanding bonds issued by an 
organization for other than hospital purposes is repealed, effective for 
section 501(c)(3) bonds isued after August 5, 1997 that are used to 
finance capital expenditures incurred after that date.
  Enhance deduction for corporate contributions of computer technology 
and equipment.--Under current law augmented deductions are provided for 
certain corporate contributions of inventory property and scientific 
equipment. The amount of augmented deduction available to a corporation 
making these contributions is equal to its basis in the donated property 
plus one-half of the amount of ordinary income that would have been 
realized if the property had been sold. However, the amount of augmented 
deduction cannot exceed twice the basis of the donated property. 
Effective for contributions made in taxable years beginning after 1997 
and before January 1, 2000, the list of contributions that qualify for 
the augmented deduction is expanded to include gifts of computer 
technology and equipment to be used within the United States for 
educational purposes in any of grades K-12.
  Provide tax credit for holders of qualified zone academy bonds.--
Certain financial institutions that hold qualified zone academy bonds 
are provided a nonrefundable tax credit in an amount equal to a credit 
rate (set by the Department of Treasury) multiplied by the face amount 
of the bond. The tax credit is includable in the gross income of the 
holder as interest. A qualified zone academy bond is any bond issued by 
a State or local government, provided that (1) 95 percent of the 
proceeds are used for the purpose of renovating, providing equipment to, 
developing course materials for use at, or training teachers and other 
school personnel in a qualified zone academy and (2) private entities 
have promised to contribute to the qualified zone academy certain 
equipment, technical assistance or training, employee services, or other 
property or services with a value equal to at least 10 percent of the 
bond proceeds. A total of $400 million of qualified zone academy bonds 
may be issued in each of 1998 and 1999. The bond cap is allocated each 
year to the States according to their respective populations of 
individuals below the poverty line; any unused allocation may be carried 
into subsequent years.

                    Savings and Investment Incentives

  Expand Individual Retirement Accounts (IRAs).--Under prior law, 
eligibility for a deductible IRA was phased out for a single taxpayer 
with AGI between $25,000 and $35,000 and a married taxpayer filing a 
joint return with AGI between $40,000 and $50,000, if the individual (or 
the individual's spouse) was an active participant in an employer-
sponsored retirement plan. Under this Act, the AGI thresholds and phase-
out ranges are doubled over time. For 1998, eligibility is phased out 
for single taxpayers with AGI between $30,000 and $40,000, and for 
couples filing a joint return with AGI between $50,000 and $60,000. For 
1999 through 2002, the phase-out ranges are increased by $1,000 per 
year. For 2003, eligibility is phased out for single taxpayers with AGI 
between $40,000 and

[[Page 44]]

$50,000, and for couples filing a joint return with AGI between $60,000 
and $70,000. For 2004 and later years, the phase-out ranges are 
increased by $5,000 per year until the phase-out range is $50,000 to 
$60,000 for single taxpayers (2005 and subsequent years) and $80,000 to 
$100,000 for couples filing a joint return (2007 and subsequent years). 
Spouses of individuals who are active participants in an employer-
sponsored retirement plan, but who are not themselves active 
participants, are permitted to make deductible contributions to an IRA. 
This spousal deduction is phased out for taxpayers with AGI between 
$150,000 and $160,000.
  A new, tax-free nondeductible IRA called the ``Roth IRA'' is created. 
Eligibility for participation in these IRAs is phased out for single 
taxpayers with AGI between $95,000 and $110,000 and for married couples 
filing a joint return with AGI between $150,000 and $160,000. Taxpayers 
with AGI of less than $100,000 are eligible to roll over or convert an 
existing IRA to a Roth IRA. Distributions from the Roth IRA generally 
are tax free if (i) made more than 5 years after an account has been 
established, and (ii) made after age 59\1/2\, upon death or disability, 
or for first-time homebuyer expenses (up to a $10,000 lifetime cap). The 
same exceptions to the 10-percent early withdrawal tax apply to Roth 
IRAs and deductible IRAs, and these prior law exceptions have been 
expanded to include withdrawals for qualified first-time homebuyer 
expenses and qualified education expenses. Annual contributions to all 
IRAs for an individual may not exceed $2,000.
  Reduce tax rate on capital gains.--The maximum capital gains tax rate 
for individuals is reduced from 28 percent to 20 percent (10 percent for 
individuals in the 15-percent tax bracket) effective May 7, 1997. The 
prior law maximum tax rate of 28 percent is retained for collectibles 
and, effective July 29, 1997, for assets held between 1 year and 18 
months. Real estate depreciation recapture generally is taxed at a 
maximum rate of 25 percent. Beginning in 2001, assets acquired after 
December 31, 2000 and held for 5 years will be taxed at favorable rates 
of 8 percent (those in the 15-percent bracket) and 18 percent (those in 
other tax brackets). A taxpayer holding a capital asset or an asset used 
in his/her trade or business on January 1, 2001, may elect to treat the 
asset as having been sold on that date for its fair market value and as 
having been reacquired at the market price. Taxes must be paid on any 
gain realized as a result of the election; losses are disallowed.
  Provide capital gains exclusion on sale of principal residence.--Under 
prior law gains on the sale of a taxpayer's principal residence were 
subject to the capital gains tax; however, taxes on the gain could be 
deferred through the purchase of a new home of equal or greater value 
within a specified period of time. Taxpayers over 55 could elect to take 
a one-time exclusion of up to $125,000 of gain from the sale of their 
home. Effective for sales on or after May 7, 1997, up to $500,000 of 
gain from the sale of a taxpayer's principal residence ($250,000 for a 
single taxpayer) is excluded from tax. The exclusion is allowed each 
time a taxpayer selling or exchanging a principal residence meets the 
eligibility requirements, but generally no more frequently than once 
every two years. To be eligible for the exclusion, a taxpayer generally 
must have owned the residence and occupied it as a principal residence 
for at least two of the five years prior to the sale or exchange.

                Alternative Minimum Tax (AMT) Provisions

  Exempt small corporations from the AMT and conform AMT depreciation 
lives to the regular tax.--For taxable years beginning after December 
31, 1997, the corporate AMT is repealed for small businesses. A 
corporation with average gross receipts of less than $5 million for 
three taxable years, the last of which begins after December 31, 1996, 
is a small business corporation for any taxable year beginning after 
December 31, 1997. The exemption continues to apply as long as the 
business has three-year average gross receipts of less than $7.5 
million. In addition, for property placed in service after December 31, 
1998, the recovery periods used for purposes of the AMT depreciation 
adjustment are equal to the recovery periods used for purposes of the 
regular tax under present law.

          Estate, Gift, and Generation-Skipping Tax Provisions

  Increase estate and gift tax unified credit.--Under prior law, a 
unified estate and gift tax credit of $192,800 was provided, which 
effectively exempted the first $600,000 of cumulative taxable transfers 
from tax. Under this Act, a phased-in increase in the unified credit 
increases the effective exemption to $1,000,000 in 2006. The effective 
exemption is $625,000 for decedents dying and gifts made in 1998, 
$650,000 in 1999, $675,000 in 2000 and 2001, $700,000 in 2002 and 2003, 
$850,000 in 2004, $950,000 in 2005, and $1,000,000 in 2006 and 
subsequent years.
  Provide estate tax exclusion for qualified family-owned businesses, 
including farms.--If ``family-owned business interests'' comprise more 
than 50 percent of a decedent's estate and certain other requirements 
are met, the first $1 million in qualified family-owned business 
interests may be excluded from a decedent's taxable estate. This 
exclusion, which is effective with respect to decedents dying after 
December 31, 1997, is in addition to the unified credit; however, the 
total amount excluded from tax is capped at $1.3 million.
  Reduce estate tax for certain land subject to permanent conservation 
easement.--A 40-percent estate tax exclusion is provided for the value 
of any land subject to a qualified conservation easement that meets 
specified requirements. The maximum allowable exclusion is $100,000 in 
1998, $200,000 in 1999, $300,000 in 2000, $400,000 in 2001 and $500,000 
in 2002 and subsequent years. The exclusion may be taken in addition to 
the maximum exclusion for qualified family-owned business interests and 
applies to decedents dying after December 31, 1997.

[[Page 45]]

  Prohibit the revaluation of gifts for estate tax purposes after 
expiration of 3-year statute of limitations.--Estate and gift taxes 
generally must be assessed within 3 years after the filing of the 
return. In the past, in order to determine the appropriate tax rate 
bracket and unified credit for the estate tax, the Courts generally 
permitted the revaluation of a gift for which the statute of limitation 
period had expired. Effective for gifts made after August 5, 1997, 
revaluation of a gift for which the limitations period has expired is no 
longer permitted.

                           Expiring Provisions

  Extend research and experimentation tax credit.--The 20-percent tax 
credit for certain incremental research and experimentation expenditures 
is extended to apply to expenditures paid or incurred during the period 
June 1, 1997 through June 30, 1998.
  Extend orphan drug tax credit.--The 50-percent nonrefundable tax 
credit provided for qualified clinical testing expenses paid or incurred 
in the testing of certain drugs for rare diseases or conditions 
(generally known as ``orphan drugs'') is permanently extended, effective 
for expenses paid or incurred after May 31, 1997.
  Extend deduction for contributions of stock to private foundations.--
The deduction for a contribution of property to a private foundation is 
limited to the adjusted basis of the contributed property. However, 
prior law allowed a taxpayer who contributed qualified appreciated stock 
to a private foundation before June 1, 1997 to deduct the full fair 
market value of the stock, rather than the adjusted basis of the 
contributed stock. This Act extends the rule for private foundations 
through June 30, 1998.
  Extend work opportunity tax credit, with modifications.--Under prior 
law, an employer hiring individuals from one or more of seven targeted 
groups was allowed a work opportunity tax credit equal to 35 percent of 
the first $6,000 in qualified first-year wages paid to a qualified 
individual beginning work after September 30, 1996 and before October 1, 
1997. For wages paid to be eligible for the credit, the qualified 
individual had to be employed by the employer for at least 180 days (20 
days in the case of a qualified summer youth employee) or 400 hours (120 
hours in the case of a qualified summer youth employee). This Act 
extends the credit to apply to wages paid to qualified individuals 
beginning work after September 30, 1997 and before July 1, 1998. In 
addition, a credit of 25 percent is provided for wages paid to a 
qualified individual employed at least 120 and fewer than 400 hours, and 
the credit is increased to 40 percent for wages paid to a qualified 
individual employed for at least 400 hours. Eligibility is extended to 
members of families receiving AFDC benefits (or its successor programs) 
and to SSI beneficiaries.
  Extend Generalized System of Preferences (GSP).--Under GSP, duty-free 
access is provided to over 4,000 items from eligible developing 
countries that meet certain worker rights, intellectual property 
protection, and other criteria. This program, which had expired after 
May 31, 1997, is temporarily extended through June 30, 1998. Refunds of 
any duty paid between May 31, 1997 and August 5, 1997 are provided upon 
request of the importer.
  Extend unemployment surtax and increase the statutory limit on Federal 
Unemployment Act (FUTA) trust fund balances.--The temporary unemployment 
surtax of 0.2 percent imposed on employers, which was scheduled to 
expire with respect to wages paid after December 31, 1998, is extended 
through December 31, 2007. In addition, the statutory limit on balances 
in the Federal Unemployment Account (FUA) of the FUTA trust fund is 
increased from .25 percent to .50 percent of covered wages.

               District of Columbia (D.C.) Tax Incentives

  Designate D.C. Enterprise Zone.--Certain economically depressed census 
tracts within D.C. are designated as the ``D.C. Enterprise Zone.'' The 
following tax incentives are available to businesses and individual 
residents within the zone: (1) a 20-percent wage credit for the first 
$15,000 of wages paid to D.C. residents who work in the zone; (2) an 
additional $20,000 of expensing under section 179 for qualified zone 
property; and (3) special tax-exempt financing for certain zone 
facilities. The D.C. Enterprise Zone designation will remain in effect 
for the period from January 1, 1998 through December 31, 2002.
  Provide zero-percent capital gains rate on certain Enterprise Zone 
property.--A zero-percent capital gains rate is provided for capital 
gains from the sale of certain qualified assets held for more than five 
years. To qualify for the zero-percent rate, the asset must be within a 
census tract within the D.C. Enterprise Zone where the poverty rate is 
not less than 10 percent.
  Provide tax credit to first-time homebuyers.--A tax credit of up to 
$5,000 of the purchase price is provided first-time homebuyers of a 
principal residence in the District of Columbia. The credit phases out 
for single taxpayers with AGI between $70,000 and $90,000 and for 
married couples filing a joint return with AGI between $110,000 and 
$130,000. The credit is available with respect to property purchased 
after August 4, 1997 and before January 1, 2001.

                       Welfare-to-Work Tax Credit

  Provide welfare-to-work tax credit.--Employers are provided a tax 
credit on the first $20,000 of eligible wages paid to qualified 
recipients of long-term family assistance (AFDC or its successor 
program) during the first two years of employment. The credit is 35 
percent of the first $10,000 of eligible wages in the first year of 
employment and 50 percent of the first $10,000 of eligible wages in the 
second year of employment. The credit is effective for wages paid or 
incurred by the employer for a qualified employee who begins work on or 
after January 1, 1998 and before May 1, 1999.

[[Page 46]]

                          Excise Tax Provisions

  Repeal excise tax on diesel fuel used in recreational motorboats.--The 
24.3-cents-per-gallon excise tax on diesel fuel used in recreational 
motorboats is repealed. Under prior law, imposition of this tax had been 
suspended through December 31, 1997.
  Transfer 4.3-cents-per-gallon General Fund highway fuels tax to the 
Highway Trust Fund.--Under prior law 4.3-cents-per-gallon of the excise 
tax on gasoline, diesel fuel, and special motor fuels used in highway 
vehicles was transferred to the General Fund of the Treasury. Under this 
Act, collections from these taxes are deposited in the Highway Trust 
Fund, with 3.45-cents-per-gallon allocated to the Highway Account and 
.85-cents-per-gallon allocated to the Mass Transit Account. Conforming 
amendments ensure that no direct spending increases will occur as a 
result of this transfer of funds.
  Modify deposit rules for excise taxes on highway motor fuels.--The 
excise taxes imposed on highway motor fuels that would otherwise be 
required to be deposited with the Treasury after July 31, 1998 and 
before September 30, 1998 are not required to be deposited until October 
5, 1998, resulting in a shift of collections from 1998 to 1999.
  Modify and expand excise tax on vaccines.--Under prior law an excise 
tax was imposed on the following vaccines: DPT (diphtheria, pertussis, 
tetanus) at $4.56 per dose; DT (diphtheria, tetanus) at $0.06 per dose; 
MMR (measles, mumps, or rubella) at $4.44 per dose; and polio at $0.29 
per dose. Effective for sales after August 5, 1997, a uniform rate of 
$0.75 per dose on any listed vaccine component is imposed on all 
previously taxed vaccines. In addition, the tax is expanded to apply to 
HIB (haemophilus influenza type B), Hepatitis B, and varicella 
(chickenpox) vaccines
  Extend and modify excise taxes deposited in the Airport and Airway 
Trust Fund.--Under prior law, the excise taxes deposited in the Airport 
and Airway Trust Fund were scheduled to expire after September 30, 1997. 
These taxes included a 10-percent excise tax on domestic passenger 
tickets, a $6-per-person international departure tax, a 6.5-percent 
domestic air freight excise tax, and an excise tax on fuels used in 
general aviation of 17.5 cents per gallon for jet fuel and 15 cents per 
gallon for aviation gasoline. This Act extends these taxes for 10 years, 
through September 30, 2007, with the following modifications:
    Tax on domestic passenger tickets.--The 10-percent ad 
          valorem tax on domestic passenger tickets is replaced with a 
          combination ad valorem and per-domestic-flight-segment tax. 
          Effective October 1, 1997 the tax is 9 percent of fare plus $1 
          per domestic flight segment. The tax changes to 8 percent of 
          fare and $2 per domestic flight segment effective October 1, 
          1998; and to 7.5 percent of fare and $2.25 per domestic flight 
          segment effective October 1, 1999. The ad valorem tax remains 
          at 7.5 percent, but the per-domestic-flight-segment tax 
          increases to $2.50 effective January 1, 2000, $2.75 effective 
          January 1, 2001 and $3 effective January 1, 2002. The $3 rate 
          is indexed annually for inflation effective January 1, 2003. 
          The per-domestic-flight-segment tax is not imposed on flight 
          segments to and from qualified rural airports; the ad valorem 
          tax on such flights is 7.5 percent of fare. The 7.5 percent ad 
          valorem tax also applies to payments to air carriers (and 
          related parties) for the right to award air travel benefits.
    Tax on international departures and arrivals.--The $6-per-
          passenger international departure tax is increased to $12 per 
          passenger and extended to apply to international arrivals 
          effective October 1, 1997. A $6-per-passenger rate is 
          applicable to the international airspace component of flights 
          between the 48 contiguous States and Alaska or Hawaii (or 
          flights between Alaska and Hawaii). Both the $6 and $12 taxes 
          are indexed annually for inflation effective January 1, 1999.
    Deposit schedule for certain aviation taxes.--Deposits of 
          air passenger taxes otherwise due after August 14, 1997 and 
          before October 1, 1997 are due on October 10, 1997. In 
          addition, deposits of air passenger taxes otherwise required 
          after August 14, 1998 and before October 1, 1998 are due on 
          October 5, 1998. Deposits of commercial air cargo and aviation 
          fuels taxes otherwise required to be made after July 31, 1998 
          and before October 1, 1998 are due on October 5, 1998.
    Transfer of General Fund taxes.--The 4.3-cents-per-gallon 
          excise tax on aviation fuels that was deposited in the General 
          Fund of the Treasury under prior law is deposited in the 
          Airport and Airway Trust Fund effective October 1, 1997.
  Impose excise taxes on kerosene as diesel fuel.--A 24.3-cents-per-
gallon excise tax is imposed on diesel fuel upon removal from a 
registered terminal storage facility unless the fuel is indelibly dyed 
and is destined for a nontaxable use. Under prior law, undyed kerosene 
was not subject to the diesel fuel excise tax when it was removed from a 
terminal. Undyed kerosene was subject to tax, however, when it was 
blended with previously taxed diesel fuel. Effective July 1, 1998, 
kerosene is taxed as diesel fuel when it is removed from a terminal. 
Exceptions are provided for aviation fuel and, to the extent provided in 
regulations, for feedstock uses. In addition, special refund rules apply 
in certain cases of kerosene used for heating purposes.
  Reinstate excise taxes deposited in the Leaking Underground Storage 
Tank (LUST) Trust Fund.--Before January 1, 1996, a 0.1-cent-per-gallon 
excise tax was levied on gasoline, other motor fuels, methanol and 
ethanol fuels, aviation fuels, and on fuels used in inland waterways and 
deposited in the LUST Trust Fund. This Act reinstates those taxes 
effective October 1, 1997 through March 31, 2005.
  Apply communications excise tax to prepaid telephone cards.--A 3-
percent excise tax is imposed on amounts paid for local and toll 
telephone service and teletypewriter exchange service. This Act extends 
this tax to

[[Page 47]]

apply to amounts paid to communications service providers (in cash or in 
kind) for the right to award or otherwise distribute free or reduced-
rate telephone service. The tax is effective for cards sold after 
October 31, 1997.
  Modify treatment of tires under the heavy highway vehicle retail 
excise tax.--A 12-percent retail excise tax is imposed on certain heavy 
highway trucks and trailers, and on highway tractors. A separate 
manufacturer's excise tax is imposed on tires weighing more than 40 
pounds. Under prior law, because tires were taxed separately, the value 
of tires installed on highway vehicles was excluded from the 12-percent 
retail excise tax on heavy highway vehicles. This Act repeals this 
exclusion; instead, a credit for the amount of manufacturers' excise tax 
paid on the tires is allowed. This change is effective after December 
31, 1997.

                        Small Business Provisions

  Clarify definition of principal place of business for home office 
deduction.--The definition of ``principal place of business'' is 
expanded to include a home office that is used by the taxpayer to 
conduct administrative or management activities of the business, 
provided that there is no other fixed location where the taxpayer 
conducts substantial administrative or management activities of the 
business, regardless of whether such activities are performed by others 
at other locations. As under prior law, deductions are allowed only if 
the office is exclusively used on a regular basis as a place of business 
and, in the case of an employee, only if such exclusive use is for the 
convenience of the employer. The expanded definition applies to taxable 
years beginning after December 31, 1998.
  Increase deduction of health insurance costs for self-employed 
individuals.--Under prior law self-employed individuals were allowed a 
deduction for the cost of health insurance for themselves and their 
spouse and dependents as follows: 40 percent for 1997; 45 percent for 
1998 through 2002; 50 percent for 2003; 60 percent for 2004; 70 percent 
for 2005; and 80 percent for 2006 and subsequent years. This Act 
increases the allowable deduction to 100 percent as follows: 45 percent 
for 1998 and 1999; 50 percent for 2000 and 2001; 60 percent for 2002; 80 
percent for 2003 through 2005; 90 percent for 2006; and 100 percent for 
2007 and subsequent years.
  Increase deduction for business meals for certain individuals.--
Generally the amount allowable as a deduction for food and beverage is 
limited to 50 percent of the otherwise deductible amount. Exceptions to 
this 50-percent rule are provided for food and beverages provided to 
crew members of certain vessels and offshore oil or gas platforms or 
drilling rigs. This Act increases the deduction for food and beverages 
consumed while away from home by an individual during or incident to a 
period of duty subject to the hours of service limitations of the 
Department of Transportation. Such individuals include certain air 
transportation employees, interstate truck operators and bus drivers, 
certain railroad employees and certain merchant mariners. The increase 
in the deductible percentage is phased in as follows: 55 percent for 
1998 and 1999, 60 percent for 2000 and 2001, 65 percent for 2002 and 
2003, 70 percent for 2004 and 2005, 75 percent for 2006 and 2007, and 80 
percent for 2008 and subsequent years.
  Increase standard mileage rate for purposes of computing the 
charitable deduction.--Effective for taxable years beginning after 
December 31, 1997, for purposes of computing the charitable deduction, 
the standard mileage rate for the use of a passenger vehicle is 
increased from 12 cents per mile to 14 cents per mile.

                     Incentives for Distressed Areas

  Provide tax incentive to clean up environmentally contaminated areas 
known as brownfields.--A current deduction is allowed for certain costs 
incurred by businesses to remediate environmentally contaminated land in 
certain areas. Qualified sites generally are limited to those properties 
located in or next to census tracts with a poverty rate of 20 percent or 
more, Federal empowerment zones and enterprise communities, and areas 
subject to certain Environmental Protection Agency (EPA) Brownfields 
Pilots. To claim this incentive, taxpayers are required to obtain from 
the appropriate State or local agency verification that the site 
satisfies geographic and contamination requirements. The deduction is 
available for qualified expenses incurred after August 5, 1997 and 
before January 1, 2001.
  Expand and modify Empowerment Zone and Enterprise Community program.--
Under the Omnibus Budget Reconciliation Act of 1993 (OBRA 93), certain 
tax incentives were provided for nine empowerment zones (6 urban and 3 
rural) and 95 enterprise communities. The tax incentives were a 20-
percent employer wage credit, an additional $20,000 of section 179 
expensing, and a new category of tax-exempt financing. Qualifying 
businesses in empowerment zones were eligible for all three incentives, 
while businesses in enterprise communities were eligible only for the 
tax-exempt financing. This Act authorizes the designation of two 
additional urban empowerment zones within 180 days of enactment; 
however, the designations, which generally will remain in effect for 10 
years, will not take effect before January 1, 2000. These two additional 
zones are subject to the same eligibility criteria as the original 6 
urban empowerment zones, and, except for a modification of the wage 
credit, generally enjoy the same tax incentives as the original zones. 
For these two additional zones the wage credit is modified slightly to 
provide that the percentage of wages taken into account for purposes of 
determining the wage credit is 20 percent for 2000 through 2004, 15 
percent for 2005, 10 percent for 2006, and 5 percent for 2007; the 
credit is not available for subsequent years. The Act also authorizes 
the designation of an additional 20 empowerment zones before 1999. 
Businesses in these 20 additional zones are not eligible for the wage 
credit, but are eligible to receive up to $20,000 of additional section 
179 expensing, and special tax-exempt financing benefits. The 
``brownfields

[[Page 48]]

tax incentive'' provided in this Act (see discussion above) is available 
within all designated empowerment zones.

                      Financial Product Provisions

  Require recognition of gain on certain appreciated positions in 
personal property.--Gains and losses generally are taken into account 
for tax purposes when realized. Gains or losses are usually realized 
with respect to a capital asset at the time the asset is sold or 
exchanged. However, because of special rules under prior law, many 
transactions designed to reduce or eliminate risk of loss and 
opportunity for gain on financial assets generally did not cause 
realization. For example, taxpayers could lock in gain on securities 
without recognizing gain for tax purposes by entering into a ``short 
sale against the box,'' that is, the taxpayer could own securities the 
same as or substantially identical to the securities borrowed and sold 
short. This Act requires in some circumstances recognition of gain (but 
not loss) upon entering into a constructive sale of any appreciated 
financial position in stock, a debt instrument, or a partnership 
interest. A constructive sale occurs when the taxpayer enters into one 
of the following transactions with respect to the same or substantially 
identical property: (1) a short sale, (2) an offsetting notional 
principal contract, (3) a futures or forward contract, or (4) to the 
extent provided in regulations, one or more transactions that have 
substantially the same effect as one of the described transactions. This 
provision generally is effective for constructive sales entered into 
after June 8, 1997.
  Permit dealers in commodities and traders in securities and 
commodities to elect mark-to-market.--This Act permits securities 
traders and commodities traders and dealers to elect mark-to-market 
accounting similar to that currently required for securities dealers. 
All securities held by an electing taxpayer in connection with a trade 
or business as a securities trader, and all commodities held by an 
electing taxpayer in connection with a trade or business as a 
commodities dealer or trader, are subject to mark-to-market treatment. 
Property not held in connection with an electing taxpayer's trading 
activity is not subject to the election provided that it is identified 
by the taxpayer, under rules similar to the present law rules for 
securities dealers, and the electing taxpayer can demonstrate by clear 
and convincing evidence that the property bears no relation to its 
activities as a trader. Gain or loss recognized by an electing taxpayer 
under the provision is ordinary gain or loss. This provision applies to 
taxable years ending after August 5, 1997.
  Change the treatment of gains and losses on extinguishment.--The tax 
law distinguishes between the sale of a right or obligation to a third 
party and the extinguishment or retirement of the right or obligation. A 
sale to a third party can give rise to capital treatment while an 
extinguishment produces ordinary income. Under prior law extinguishment 
treatment was eliminated for all debt instruments except those issued by 
natural persons and for most options and other positions in actively 
traded property. This Act eliminates the remaining portions of the 
extinguishment doctrine so that gain or loss attributable to the 
cancellation, lapse, expiration, or other termination of any right or 
obligation which is (or on acquisition would be) a capital asset in the 
hands of the taxpayer is treated as gain or loss from the sale or 
exchange of a capital asset. This change applies to property acquired or 
positions established 30 days after the date of enactment. In addition, 
redemptions of debt issued by natural persons and debt issued before 
July 2, 1982 are treated as an exchange and, accordingly, any gain or 
loss on that redemption is capital gain or loss effective for debt 
issued or purchased after June 8, 1997.
  Deny interest deduction on certain debt instruments.--If an instrument 
qualifies as equity, the issuer generally does not receive a deduction 
for dividends paid. If an instrument qualifies as debt, the issuer may 
deduct accrued interest, including original issue discount (OID). The 
Act eliminates the deduction for interest and OID on a debt instrument 
that is issued by a corporation and that is payable in stock of the 
issuer or a related party. The Act applies to debt instruments that are 
mandatorily convertible or convertible at the issuer's option into stock 
of the issuer or of a related party. The Act does not apply to debt 
instruments that are convertible at the holder's option unless, at the 
time the instrument is issued, it is substantially certain that the 
holder's option will be exercised. This provision generally is effective 
for instruments issued after June 8, 1997.
  Require reasonable payment assumptions for interest accruals on 
certain debt instruments.-- A taxpayer that holds a debt instrument 
generally accrues interest income over the life of the instrument. 
Certain debt instruments, such as credit card receivables, do not 
require the debtors to pay interest if they pay their balances in full 
by a specified date. The operation of the interest accrual rules of 
prior law provided that, in such instances, the holder could assume that 
each debtor would pay its balance by the specified date and, thereby, 
avoid accruing interest over the life of the debt instrument. In these 
cases, the holder would not accrue any interest income until the 
specified date had passed. In the case of a large pool of such debt 
instruments, the assumption that each debtor will prepay (and thereby 
avoid a finance charge) is unrealistic and results in the mismeasurement 
of income. Under the Act, taxpayers that hold large pools of prepayable 
debt instruments must accrue interest on the pool by making a reasonable 
assumption regarding the timing of payments on the instruments that make 
up the pool. The provision is effective for taxable years beginning 
after August 5, 1997.

               Corporate Organizations and Reorganizations

  Require gain recognition for certain extraordinary dividends.--A 
corporate shareholder generally is allowed to deduct a percentage of 
dividends received from

[[Page 49]]

another domestic corporation. A distribution in redemption of stock may 
be treated as a dividend if the shareholder's proportionate interest in 
the distributing corporation has not been meaningfully reduced. In 
determining if a shareholder's interest has been meaningfully reduced, 
the ownership of options to purchase stock may be treated as actual 
stock ownership, rather than as a sale of the stock, if it is 
essentially equivalent to a dividend. Certain dividends and dividend 
equivalent transactions are treated as ``extraordinary'' dividends. 
Whether a dividend is ``extraordinary'' is determined, among other 
things, by reference to the size of the dividend in relation to the 
adjusted basis of the shareholder's stock. If a corporate shareholder 
receives an extraordinary dividend, the corporate shareholder must 
reduce the basis of the stock to which the distribution relates by the 
amount of the nontaxed portion of the dividend (generally the amount of 
the dividend that was deducted). Under prior law, if the nontaxed 
portion of the dividend exceeded the basis of the stock, the excess was 
deferred and not taxed as gain until the sale or disposition of the 
stock. Under this Act a corporate shareholder generally is required to 
recognize gain immediately with respect to any redemption treated as a 
dividend when the nontaxed portion of the dividend exceeds the basis of 
the shares surrendered, if the redemption is treated as a dividend due 
to options being counted as stock ownership. In addition, immediate gain 
recognition is required whenever the basis of stock with respect to 
which any extraordinary dividend is received is reduced below zero. 
These changes generally are effective for distributions after May 3, 
1995, unless made pursuant to the terms of a written binding contract in 
effect on May 3, 1995 or a tender offer outstanding on May 3, 1995.
  Require gain recognition on certain distributions of controlled 
corporation stock.--A corporation generally is required to recognize 
gain on a distribution of property (including stock of a controlled 
corporation) unless the distribution meets certain requirements. Under 
prior law, if various requirements were met, including restrictions 
relating to acquisitions and dispositions of stock of the distributing 
corporation or the controlled corporation, a distribution of the stock 
of a controlled corporation generally was tax-free to the distributing 
corporation. This Act adopts additional restrictions on acquisitions and 
dispositions of the stock of a distributing corporation or controlled 
corporation. Under this Act, the distributing corporation is required to 
recognize gain on the distribution of the stock of the controlled 
corporation if the shareholders of the distributing corporation do not 
retain 50-percent or more of the stock interest in either the 
distributing or controlled corporation during the four-year period 
commencing two years prior to the distribution. In addition, 
distributions within an affiliated group of corporations, in connection 
with such a distribution or acquisition transaction, are no longer tax 
free. These changes generally are effective for distributions after 
April 16, 1997.
  Reform the tax treatment of certain stock transfers.--Certain sales of 
stock to a related corporation are treated as the payment of a dividend 
by the purchaser. Such dividends may qualify for the dividends received 
deduction; in addition, such dividends may bring with them foreign tax 
credits. For example, if a foreign-controlled domestic corporation sells 
the stock of a subsidiary to a foreign sister corporation, the domestic 
corporation may take the position that it is entitled to credit foreign 
taxes that were paid by the foreign sister corporation. This Act limits 
the amount treated as a dividend (and the associated foreign tax 
credits) from the purchaser to the amount of the purchaser's earnings 
and profits attributable to stock owned by U.S. persons related to the 
seller. The Act also clarifies that a deemed dividend from a purchaser 
that is a domestic corporation generally should be treated as an 
extraordinary dividend requiring a basis reduction and gain recognition 
to the extent that the nontaxed portion exceeds the basis of the shares 
transferred. These changes generally are effective for distributions or 
acquisitions after June 8, 1997, but do not apply to such distributions 
or acquisitions made pursuant to a written agreement that was binding on 
that date.
  Modify holding period for dividends-received deduction.--The 
dividends-received deduction is allowed to a corporate shareholder only 
if the shareholder satisfies a 46-day holding period for the dividend-
paying stock or a 91-day period for certain dividends on preferred 
stock. The 46- or 91-day holding period generally does not include any 
time in which the shareholder is protected from the risk of loss 
otherwise inherent in the ownership of an equity interest. However, 
under prior law, the holding period requirement did not have to be 
proximate to the time the dividend distribution was made. This Act 
requires that in order to qualify for the dividends-received deduction, 
the holding period requirement must be satisfied with respect to that 
dividend over a period immediately before or immediately after the 
taxpayer becomes entitled to receive the dividend. This change generally 
is effective for dividends paid or accrued more than 30 days after 
August 5, 1997.

                 Pension and Employee Benefit Provisions

  The Act makes a number of changes affecting pension plans and other 
employee benefits, including the following:
  Change rule relating to involuntary distributions from retirement 
plans.--In the case of a participant who separates from service with the 
employer, a qualified retirement plan may cash out the participant's 
benefits without the participant's consent if the present value of the 
benefits does not exceed a dollar limit. The Act increases this limit 
from $3,500 to $5,000 effective for plan years beginning after August 5, 
1997.
  Repeal excess distribution and excess retirement accumulation taxes.--
Under prior law, an individual's distributions from qualified retirement 
plans, tax-sheltered annuities and IRAs, that, in the aggregate, 
exceeded

[[Page 50]]

$160,000 in a calendar year (or, if made as a lump sum distribution, 
five times that amount) were subject to a 15-percent excise tax on 
``excess'' distributions. This excise tax was suspended for 
distributions received in 1997, 1998, or 1999. An individual's balance 
in retirement plans was subject to an additional 15-percent estate tax 
on excess distributions to the extent that the balance exceeded the 
present value of a benefit that would not be subject to the 15-percent 
excise tax on excess distributions. The Act repeals both the excise tax 
on excess distributions (effective for distributions received after 
1996) and the estate tax on excess retirement accumulations (effective 
for decedents dying after 1996).
  Treat matching contributions of self-employed individuals as not 
constituting elective deferrals.--Employees may elect to make tax-
deferred elective contributions (``elective deferrals'') to a 401(k) 
plan up to an indexed dollar limit ($10,000 for 1998). Employers may 
make matching contributions based on the employees' elective deferrals. 
Similarly, under a SIMPLE retirement plan, employees may make elective 
deferrals (of up to $6,000 per year), and employers may make matching 
contributions. Under prior law, matching contributions that were made 
for a self-employed individual generally were treated as elective 
deferrals and were counted against the dollar limit on elective 
deferrals, as well as in the nondiscrimination test applicable to 
elective deferrals under a 401(k) plan (the ADP test). The Act changes 
this treatment of matching contributions for self-employed individuals. 
Instead of subjecting those contributions to the limits on elective 
deferrals and to the ADP test, the Act generally treats them like 
matching contributions made for employees. This change is effective for 
years beginning after 1997 in the case of 401(k) plans and for years 
beginning after 1996 in the case of SIMPLE plans.
  Change rules affecting State and local government and church plans.--
The Act makes a number of changes affecting retirement plans maintained 
by State and local governments and churches, including permanently 
exempting governmental plans from the nondiscrimination and minimum 
participation rules that otherwise apply to qualified plans. Those rules 
generally prohibit plans from discriminating in favor of highly 
compensated employees with respect to contributions or benefits, 
participation, coverage and compensation counted under the plan. The 
exemption generally is effective for taxable years beginning on or after 
August 5, 1997.
  Increase pension plan full funding limit.--Contributions to a defined 
benefit pension plan are subject to a maximum ``full funding'' limit. 
Under prior law, the full funding limit generally was the lesser of the 
plan's accrued liability (based on projected benefits) or 150 percent of 
its current liability (based on benefits accrued to date). The Act 
increases the 150-percent-of-current-liability component of the full 
funding limit to 155 percent for plan years beginning in 1999 or 2000, 
160 percent for plan years beginning in 2001 or 2002, 165 percent for 
plan years beginning in 2003 or 2004, and 170 percent for plan years 
beginning thereafter. The Act also extends the amortization period, from 
ten to twenty years, for amounts that could not be contributed because 
of the 150-percent-of-current-liability limit. This change is effective 
for plan years beginning after December 31, 1998.
  Require increased diversification of 401(k) investments.--The Employee 
Retirement Income Security Act of 1974, as amended (ERISA), generally 
permits only up to 10 percent of the fair market value of the assets of 
a retirement plan to be invested in employer securities or real property 
leased to the employer that sponsors the plan. Prior law contained an 
exception to this rule permitting defined contribution plans, including 
section 401(k) plans, to invest more than 10 percent of their assets in 
employer securities or employer real property if the plan authorized 
such investments. The Act generally provides that a plan is not 
permitted to require that an employee's elective deferrals be invested 
in employer securities or employer real property if the employee's 
elective deferrals are in excess of one percent of the employee's 
eligible compensation and if employer securities and employer real 
property exceed 10 percent of the plan's assets. The provision does not 
apply to employee stock ownership plans or if the value of assets of all 
defined contribution plans of the employer does not exceed 10 percent of 
the value of assets of all pension plans maintained by the employer. The 
provision is effective for elective deferrals for plan years beginning 
after December 31, 1998.

                   Tax Exempt Organization Provisions

  Repeal grandfather rule with respect to pension business of certain 
insurers.--Under prior law, that portion of the business of the Teachers 
Insurance Annuity Association-College Retirement Equities Fund (TIAA-
CREF) or of Mutual of America that was attributable to pension business 
was exempt from tax. Effective for taxable years beginning after 
December 31, 1997, TIAA-CREF and Mutual of America are treated for 
Federal tax purposes as life insurance companies; that portion of their 
business attributable to pension business is no longer exempt from tax.

                           Foreign Provisions

  Place further restrictions on like-kind exchanges involving personal 
property.--An exchange of property, like a sale, is generally a taxable 
transaction. However, no gain or loss is recognized if property held for 
productive use in a trade or business or for investment is exchanged for 
property of a like kind that is to be held for productive use in a trade 
or business or for investment. In general, any kind of real estate is 
treated as of a like kind with other real property; however, real 
property located in the United States and real property located outside 
the United States are not of a like kind. Under prior law, for personal 
property, property of a ``like class'' was treated as being of a like 
kind; no restrictions applied with regard to location

[[Page 51]]

in or outside the United States. To conform the limitations on exchanges 
of personal property to the limitations on exchanges of real property, 
this Act provides that personal property predominantly used within the 
United States and personal property predominantly used outside the 
United States are not ``like-kind'' properties. This change generally is 
effective for exchanges after June 8, 1997, unless the exchange is 
pursuant to a binding contract in effect on such date.
  Impose holding period requirement for claiming foreign tax credits 
with respect to dividends.--Under prior law, U.S. persons that received 
dividends from a regulated investment company (RIC), generally were 
entitled to an indirect credit for foreign taxes paid by the RIC, 
regardless of the shareholder's holding period for the RIC stock. A U.S. 
corporation that received a dividend from a foreign corporation in which 
it had a 10-percent or greater voting interest generally was entitled to 
an indirect credit for foreign taxes paid by the foreign corporation, 
also regardless of the shareholder's holding period. This Act generally 
disallows the foreign tax credits available with respect to a dividend 
from a corporation or RIC if the shareholder holds the stock for less 
than 16 days in the case of common stock and 46 days in the case of 
preferred stock. This provision is effective for dividends paid or 
accrued more than 30 days after August 5, 1997.
  Allow Foreign Sales Corporation (FSC) benefits for computer software 
licenses.--The FSC provisions provide a limited exemption from U.S. tax 
for income arising in certain export transactions; under prior law, the 
exemption was not available for most exports of intangible property, 
including computer software copyrights. This Act extends FSC benefits to 
licenses of computer software for reproduction abroad. The provision 
applies to gross receipts from computer software licenses attributable 
to periods after December 31, 1997. In the case of a multi-year license, 
the provision applies to gross receipts attributable to the period of 
such license that is after December 31, 1997.
  Increase dollar limitation on exclusion for foreign earned income.--
U.S. citizens generally are subject to U.S. income tax on all their 
income, whether derived in the United States or elsewhere. U.S. citizens 
living abroad may be eligible to exclude from their income for U.S. tax 
purposes certain foreign earned income. In order to qualify for this 
exclusion, a U.S. citizen must be either (1) a bona fide resident of a 
foreign country for an uninterrupted period that includes an entire 
taxable year, or (2) present overseas for 330 days out of any 12 
consecutive month period. In addition, the taxpayer must have his or her 
tax home in a foreign country. Under prior law, the maximum exclusion 
for foreign earned income for a taxable year was $70,000. This Act 
increases the maximum exclusion to $80,000 in increments of $2,000 each 
year beginning in 1998. The limitation on the exclusion is indexed for 
inflation beginning in 2008.

                       Other Corporate Provisions

  Require registration of certain corporate tax shelters.--Under prior 
law promoters of a corporate tax shelter were required to register such 
shelters with the Internal Revenue Service (IRS). This Act generally 
requires a promoter of a corporate tax shelter to register the shelter 
with the Secretary of the Treasury no later than the next business day 
after the day when the shelter is first offered to potential users. This 
Act also increases the penalty for failing to register in a timely 
manner a corporate tax shelter and modifies the substantial 
understatement penalty. The tax shelter registration provision applies 
to any tax shelter offered to potential participants after the date the 
Treasury Department issues guidance with respect to the filing 
requirements. The modifications to the substantial understatement 
penalty apply to items with respect to transactions entered into after 
August 5, 1997.
  Treat certain preferred stock as ``boot.''--Under prior law, in 
reorganization transactions, no gain or loss was recognized except to 
the extent ``other property'' (boot) was received; that is, property 
other than certain stock, including preferred stock. Upon the receipt of 
``other property,'' gain but not loss was recognized. This Act requires 
certain preferred stock that is received in otherwise tax-free 
transactions to be treated as ``other property.'' This change generally 
is effective for transactions after June 8, 1997 but does not apply to 
such transactions made pursuant to a written agreement that was binding 
on that date.

                        Administrative Provisions

  Require tax reporting for payments to attorneys.--Treasury regulations 
require a payor to report payments of attorney's fees if the payments 
are made in the course of a trade or business. However, under prior law 
a payor generally was not required to report payments made to 
corporations. In addition, if a payment to an attorney was a gross 
amount and it could not be determined what portion was the attorney's 
fee (as in the case of lump-sum judgments or settlements made jointly 
payable to a lawyer and a plaintiff), then no reporting was required. 
This Act requires the reporting of gross proceeds on all payments made 
to attorneys by a trade or business in the course of the trade or 
business. In addition, the prior law exception for reporting payments to 
corporations no longer applies to payments made to attorneys. The 
provision is effective for payments made after December 31, 1997.
  Require reporting of payments to corporations rendering services to 
Federal agencies.--All persons engaged in a trade or business and making 
payments of $600 or more to another person in remuneration for services 
generally must report those payments to the IRS and to the recipient. No 
reporting is required if the recipient is a corporation, unless the 
payment is made to an attorney (see previous provision). To ensure that 
corporations that do business with the Federal Government appropriately 
report as income their payments from the Federal Government, this Act 
requires execu

[[Page 52]]

tive agencies to report payments of $600 or more made to corporations 
for services rendered. An exception is provided for certain classified 
or confidential contracts. The provision is effective for returns the 
due date of which is more than 90 days after August 5, 1997.
  Establish IRS continuous levy and improve debt collection.--Under this 
Act a continuous levy is applicable to non-means-tested recurring 
Federal payments, such as Federal salaries and pensions, received by 
individuals who owe delinquent tax debt. In addition, this Act provides 
that the levy attach up to 15 percent of any specified payment due the 
taxpayer. A continuous levy of up to 15 percent also applies to 
unemployment benefits and means-tested public assistance. The Act also 
permits the disclosure of otherwise confidential tax return information 
to the Treasury Department's Financial Management Service only for the 
purpose of, and to the extent necessary, in implementing these levies. 
The provision is effective for levies issued after August 5, 1997.

          Earned Income Tax Credit (EITC) Compliance Provisions

  Deny EITC eligibility for prior acts of recklessness or fraud.--A 
taxpayer who fraudulently claims the EITC is denied eligibility for the 
subsequent 10 years. A taxpayer who erroneously claims the EITC due to 
reckless or intentional disregard of rules or regulations is denied 
eligibility for the subsequent 2 years. These sanctions are in 
additional to any other penalties imposed by current law and are 
effective for taxable years beginning after December 31, 1996.
  Require recertification for eligibility if past eligibility was denied 
as a result of deficiency procedures.--A taxpayer who has been denied 
the EITC as a result of deficiency procedures is denied eligibility in 
subsequent years unless evidence of eligibility for the credit is 
provided. To demonstrate current eligibility the taxpayer is required to 
meet evidentiary requirements established by the Secretary of the 
Treasury. Failure to provide this information is treated as a 
mathematical or clerical error. A taxpayer who has been recertified as 
eligible for the EITC does not have to resubmit this information in the 
future unless the IRS again denies the EITC as a result of a deficiency 
procedure. The provision is effective for taxable years beginning after 
December 31, 1996.
  Require tax preparers to fulfill certain due diligence requirements.--
Effective for taxable years beginning after December 31, 1996, tax 
return preparers are required to fulfill certain due diligence 
requirements with respect to returns they prepare claiming the EITC. The 
penalty for failure to meet these requirements, which is in addition to 
any other penalties assessed under current law, is $100 for each 
failure.
  Modify the definition of AGI used to phaseout the EITC.--The EITC is 
phased out for individuals with earned income (or AGI, if greater) in 
excess of certain amounts. Under prior law, the definition of AGI used 
for the phase out of the earned income credit disregarded the following 
losses: (1) net capital losses (if greater than zero); (2) net losses 
from trusts or estates; (3) net losses from nonbusiness rents and 
royalties; and (4) 50 percent of the net losses from business, computed 
separately with respect to sole proprietorships (other than in farming), 
sole proprietorships in farming, and other businesses. This Act modifies 
the definition of AGI used for phasing out the credit by adding two 
sources of nontaxable income: (1) tax-exempt interest and (2) nontaxable 
distributions from pensions, annuities, and individual retirement 
arrangements. The Act also increases to 75 percent the percentage of net 
losses from business disregarded from the definition of AGI used for the 
phase out of the EITC. These changes are effective for taxable years 
beginning after December 31, 1997.
  Use Federal case registry of child support orders for tax enforcement 
purposes.--The Personal Responsibility and Work Opportunity 
Reconciliation Act of 1997 mandated the creation of a Federal Case 
Registry of Child Support Orders (the FCR) by October 1, 1998. The FCR 
is required to include the names, and the State case identification 
numbers of individuals who are owed or who owe child support or for whom 
paternity is being established. It may also include the social security 
numbers (SSNs) of these individuals. Under the Taxpayer Relief Act, the 
Secretary of the Treasury is provided access to the FCR not later than 
October 1, 1998. Also, by October 1, 1999, the data elements on the 
State Case Registry will include the SSNs of children covered by cases 
in the Registry, and the States will provide the SSNs of these children 
to the FCR.
  Expand Social Security Administration (SSA) records for tax 
enforcement.--Effective February 1, 1998, SSA is required to obtain SSNs 
of both parents on minor children's applications for SSNs. The SSA will 
provide this information to the IRS as part of the Data Master File. 
This information will enable the IRS to identify questionable claims for 
the earned income credit, the dependent exemption, and other tax 
benefits before tax refunds are paid.

                    Other Revenue-Increase Provisions

  Phase out preferential tax deferral for certain large farm 
corporations required to use accrual accounting.--Under the Revenue Act 
of 1987, family farm corporations were required to change to the accrual 
method of accounting if their gross receipts exceeded $25 million in any 
taxable year beginning after 1985. However, in lieu of including in 
gross income the entire amount of the adjustment attributable to the 
change in accounting method, a family farm corporation could establish a 
suspense account. The amount of the suspense account was to be included 
in gross income if the corporation ceased to be a family corporation or 
to the extent the gross receipts of the corporation from farming 
declined. This Act repeals the ability of family farm corporations to 
establish such a suspense account and also repeals the requirement to 
include a portion of a suspense account in income based on a decrease in 
the

[[Page 53]]

gross receipts of the corporation. Any taxpayer required to change to 
the accrual method of accounting may take the adjustment attributable to 
the change in accounting method into account ratably over a ten-year 
period, beginning with the year of change. Any existing suspense 
accounts are to be restored to income ratably over a twenty-year period, 
subject to the existing law requirement to restore such accounts more 
rapidly. This provision is effective for taxable years ending after June 
8, 1997, except that the first year in the twenty-year period for 
restoring existing suspense accounts to income is the first taxable year 
beginning after June 8, 1997.
  Modify loss carryback and carryforward rules.--Under prior law, net 
operating losses (NOLs) generally could be used to offset taxable income 
from the prior three taxable years (carrybacks) and the succeeding 15 
taxable years (carryforwards). This Act generally limits carrybacks of 
NOLs to 2 years and extends carryforwards to 20 years, effective for 
NOLs arising in taxable years beginning after the date of enactment. The 
3-year carryback for NOLs of farmers and small businesses attributable 
to losses incurred in Presidentially declared disaster areas is 
preserved.
  Modify general business credit carryback and carryforward rules.--A 
qualified taxpayer is allowed to claim a number of tax credits 
(collectively, known as general business credits) provided under current 
law (rehabilitation credit, energy credit, alcohol fuels credit, orphan 
drug credit, etc.), subject to certain limitations based on tax 
liability for the year. Under prior law, unused general business credits 
generally could be carried back three years and carried forward 15 years 
to offset tax liability of such years. This Act limits the carryback 
period for general business credits to one year and extends the 
carryforward period to 20 years. The change is effective for taxable 
years beginning after December 31, 1997.
  Expand the limitations on deductibility of premiums and interest with 
respect to life insurance, endowment and annuity contracts.--The prior 
law premium deduction limitation is expanded to provide that no 
deduction is permitted for premiums paid on any life insurance, 
endowment or annuity contract, if the taxpayer is directly or indirectly 
a beneficiary under the contract. In addition, generally no deduction is 
allowed for interest paid or accrued on any indebtedness with respect to 
a life insurance policy or endowment or annuity contract covering the 
life of any individual. In the case of a taxpayer other than a natural 
person, no deduction is allowed for the portion of the taxpayer's 
interest expense that is allocable to unborrowed policy cash surrender 
values with respect to any life insurance policy or annuity or endowment 
contract issued after June 8, 1997. These limitations apply to contracts 
issued after June 8, 1997. For this purpose, a material increase in the 
death benefit or other material change in the contract generally causes 
the contract to be treated as a new contract.
  Expand requirement that involuntarily converted property be replaced 
with property acquired from an unrelated party.--Gain realized by 
taxpayers from certain involuntary conversions is deferred to the extent 
the taxpayer purchases property similar or related in service or use to 
the converted property within a specified period of time. C corporations 
(and partnerships with one or more corporate partners that own more than 
50 percent of the capital or profits interest in the partnership) 
generally are not entitled to defer gain if the replacement property is 
purchased from a related person. This Act extends the denial of deferral 
to any other taxpayer, including an individual, that acquires 
replacement property from a related person, unless the taxpayer has an 
aggregate realized gain of $100,000 or less during the year as a result 
of involuntary conversions. In the case of a partnership or S 
corporation, the $100,000 annual limitation applies to the entity and 
each partner or shareholder. The provision applies to involuntary 
conversions occurring after June 8, 1997.

                      Miscellaneous Tax Provisions

  Provide income-averaging for farmers.--Effective for taxable years 
beginning after December 31, 1997 and before January 1, 2001, an 
individual taxpayer generally is allowed to elect to compute his or her 
current year regular tax liability by averaging, over the three-year 
period, all or a portion of his or her taxable income from farming.
  Allow carryback of existing net operating losses of the National 
Railroad Passenger Corporation (Amtrak).--Amtrak is allowed to carryback 
its net operating losses against the aggregate of the net tax liability 
of Amtrak's railroad predecessors. The maximum allowable refund payable 
to Amtrak, which is to be divided equally between the first two taxable 
years ending after the date of enactment, is $2.323 billion. The 
availability of the refund was conditioned on enactment of Federal 
legislation authorizing reform; such legislation has been enacted.
  Modify estimated tax requirements of individuals.--An individual 
taxpayer generally is subject to an addition to tax for any underpayment 
of estimated tax. An individual generally does not have an underpayment 
of estimated tax if timely estimated tax payments are made at least 
equal to: (1) 100 percent of the tax shown on the return of the 
individual for the preceding tax year (the ``100 percent of last year's 
liability safe harbor'') or (2) 90 percent of the tax shown on the 
return for the current year. Under prior law the 100 percent of last 
year's safe harbor was modified to be a 110 percent of last year's 
liability safe harbor for any individual with an AGI of more than 
$150,000 as shown on the return for the preceding taxable year. This Act 
modifies the safe harbor for individuals with AGI of more than $150,000 
as follows: for taxable years beginning in 1998, the safe harbor is 100 
percent; for taxable years beginning in 1999, 2000, and 2001 the safe 
harbor is 105 percent; for taxable years beginning in 2002, the safe 
harbor is 112 percent. In addition, for any

[[Page 54]]

period before January 1, 1998, for any estimated payment due before 
January 16, 1998, no estimated tax penalties will be imposed on an 
underpayment created or increased by a provision of the Taxpayer Relief 
Act of 1997.

  Balanced Budget Act of 1997. --This Act, together with the Taxpayer 
Relief Act of 1997, implements the historic bipartisan budget agreement 
that will benefit generations of Americans. While this Act is primarily 
a balanced package of spending provisions that includes targeted program 
cuts while it invests in America's future, it also includes several 
revenue provisions. The major provisions of the Act affecting receipts 
are described below.
  Increase excise taxes on tobacco products.--The excise tax on small 
cigarettes is increased from 24 cents per pack to 34 cents per pack 
effective January 1, 2000 and to 39 cents per pack effective January 1, 
2002. The taxes on other tobacco products (large cigarettes, cigars, 
cigarette papers, cigarette tubes, chewing tobacco, snuff, and pipe 
tobacco) are increased proportionately. In addition, the tax on roll-
your-own tobacco is imposed at the same rate as pipe tobacco.
  Increase employee contributions to the Civil Service Retirement System 
(CSRS) and the Federal Employees Retirement System (FERS).--Employee 
contributions to CSRS and FERS are increased by 0.5 percent of base pay 
in three steps. Contributions increase by 0.25 percent of base pay on 
January 1, 1999, another 0.15 percent on January 1, 2000 and a final 
0.10 percent on January 1, 2001. These higher contribution rates are 
effective through 2002; on January 1, 2003, contribution rates return to 
the levels in effect on December 31, 1998.
  Authorize appropriation of funds for enforcement initiatives related 
to the EITC--In addition to any other funds available for this purpose, 
the following amounts are authorized to be appropriated to the Secretary 
of the Treasury for improved application of the earned income tax 
credit: not more than $138 million for 1998, $143 million for 1999, $144 
million for 2000, $145 million for 2001 and $146 million for 2002.
  Adjust payments to the Universal Service Fund--Payments to the 
Universal Service Fund by telecommunications carriers and other 
providers of interstate telecommunications are adjusted so that $3 
million in payments otherwise due in fiscal year 2001 are deferred until 
October 1, 2001. This shift in payments was subsequently repealed during 
the FY 1998 appropriations process.

                        ADMINISTRATION PROPOSALS

            PROVIDE TAX RELIEF AND EXTEND EXPIRING PROVISIONS

   The President's plan targets tax relief to provide child-care 
assistance to working families. It also includes new initiatives to 
promote energy efficiency and environmental objectives and new 
incentives to promote retirement savings, as well as education 
incentives and extensions of certain expiring tax provisions. In 
addition, the President's plan contains provisions to simplify the tax 
laws and to enhance taxpayers' rights.

                     Make Child Care More Affordable

  Increase and simplify child and dependent care tax credit.--Under 
current law, taxpayers may receive a nonrefundable tax credit for a 
percentage of certain child care expenses they pay in order to work. The 
credit rate is phased down from 30 percent of expenses (for taxpayers 
with adjusted gross incomes of $10,000 or less) to 20 percent (for 
taxpayers with adjusted gross incomes above $28,000). The Administration 
proposes to increase the maximum credit rate from 30 percent to 50 
percent and to extend eligibility for the maximum credit rate to 
taxpayers with adjusted gross incomes of $30,000 or less. The credit 
rate would be phased down gradually for taxpayers with adjusted gross 
incomes between $30,000 and $59,000. The credit rate would be 20 percent 
for taxpayers with adjusted gross incomes over $59,000. Eligibility for 
the credit would be simplified by elimination of a complicated household 
maintenance test. Certain credit parameters would be indexed. The 
proposal would be effective for taxable years beginning after December 
31, 1998.
  Establish tax credit for employer-provided child care.--The 
Administration proposes to provide taxpayers a credit equal to 25 
percent of expenses incurred to build or acquire a child care facility 
for employee use, or to provide child care services to children of 
employees directly or through a third party. Taxpayers also would be 
entitled to a credit equal to 10 percent of expenses incurred to provide 
employees with child care resource and referral services. A taxpayer's 
credit could not exceed $150,000 in a single year. Any deduction the 
taxpayer would otherwise be entitled to take for the expenses would be 
reduced by the amount of the credit. Similarly, the taxpayer's basis in 
a facility would be reduced to the extent that a credit is claimed for 
expenses of constructing or acquiring the facility. The credit would be 
effective for taxable years beginning after December 31, 1998.

          Promote Energy Efficiency and Improve the Environment

                                Buildings

  Provide tax credit for energy-efficient building equipment.--No income 
tax credit is provided currently for investment in energy-efficient 
building equipment. The Administration proposes to provide a new tax 
credit for the purchase of certain highly efficient building equipment 
technologies, including fuel cells, electric heat pump water heaters, 
natural gas heat

[[Page 55]]

pumps, residential size electric heat pumps, natural gas water heaters, 
and advanced central air conditioners. The credit would equal 20 percent 
of the amount of qualified investment, subject to a cap. The credit 
generally would be available for equipment purchased over the five-year 
period beginning January 1, 1999 and ending December 31, 2003.
  Provide tax credit for the purchase of new energy-efficient homes.-- 
No income tax credit is provided currently for investment in energy-
efficient homes. The Administration proposes to provide a tax credit to 
taxpayers who purchase, as a principal residence, certain newly 
constructed homes that are highly energy efficient. The credit would 
equal one percent of the purchase price of the home, up to a maximum of 
$2,000. The full credit would be available for homes purchased between 
January 1, 1999 and December 31, 2003. A credit of up to $1,000 would be 
available for homes purchased between January 1, 2004 and December 31, 
2005.

                             Transportation

  Provide tax credit for high-fuel-economy vehicles.--No income tax 
credit is provided currently for purchases of highly fuel-efficient 
vehicles. The Administration proposes to provide a credit of $4,000 for 
each vehicle that gets three times the base fuel economy for its class. 
The $4,000 credit would be available for purchases of qualifying 
vehicles after December 31, 2002. This credit would phase down beginning 
in 2007 and phase out in 2010. A $3,000 credit would also be provided 
for purchases of vehicles achieving two times the base fuel economy for 
their class. The $3,000 credit would be available for purchases of 
qualifying vehicles after December 31, 1999. This credit would phase 
down beginning in 2004 and phase out in 2006.
  Equalize treatment of parking and transit benefits.--Under current 
law, employer-provided transit and vanpool benefits are only excluded 
from income if such benefits are in addition to, not in lieu of, other 
compensation. Under the Taxpayer Relief Act of 1997, however, parking 
benefits are excluded from income even if offered in lieu of other 
compensation. The Administration proposes to allow employers to offer 
their employees transit and vanpool benefits in lieu of compensation, 
beginning January 1, 1999, thus granting transit and vanpool benefits 
the same treatment as parking benefits. Also under current law, up to 
$155 per month (in 1993 dollars) in employer-provided parking benefits 
and $60 per month (in 1993 dollars) in employer-provided transit and 
vanpool benefits are excludable from income. The Administration proposes 
to raise the monthly limit on employer-provided transit and vanpool 
benefits excludable from income to be the same as the limit on parking.

                                Industry

  Provide investment tax credit for combined heat and power (CHP) 
systems.-- Combined heat and power (CHP) assets are used in the 
production of electricity and process heat and/or mechanical power from 
the same primary energy source. No tax credits are currently available 
for investment in CHP property. The Administration proposes to establish 
a 10-percent investment credit for CHP systems in order to encourage and 
accelerate investment in such equipment. The credit would apply to 
property placed in service in the United States after December 31, 1998, 
and before January 1, 2004.
  Provide tax credit for replacement of certain circuitbreaker 
equipment.--The chlorofluorocarbon substitute sulfur hexafluoride (SF6), 
an extremely harmful greenhouse gas, is used in some large power circuit 
breakers used in the transmission and distribution of electric power. 
The Administration proposes to make a tax credit available for the 
installation of new power circuit breaker equipment to replace certain 
circuit breakers that are prone to leak SF6. The credit would be equal 
to 10 percent of qualified investment. To be eligible for the credit, 
the replaced power circuit breakers must be dual pressure circuit 
breakers with a capacity of at least 115kV, contain SF6, and have been 
installed prior to December 31, 1985. The replaced equipment must be 
destroyed so as to prevent further use. The credit would apply only to 
new equipment placed in service in the five-year period beginning 
January 1, 1999 and ending December 31, 2003.
  Provide tax credit for certain per- fluorocompound (PFC) and 
hydrofluorocom- pound (HFC) recycling equipment.--Under current law, 
semiconductor manufacturers who install equipment to recover or recycle 
PFC and HFC gases used in the production of semiconductors may 
depreciate the cost of that equipment, but no tax credit is provided for 
the purchase of such equipment. PFCs and certain HFCs are among the most 
potent greenhouse gases because of their extreme stability in the 
atmosphere and strong absorption of radiation, and they are used 
extensively in the semiconductor manufacturing industry. The 
Administration proposes to provide a 10 percent tax credit for the 
installation of qualified PFC/HFC recovery or recycling equipment to 
recover gases used in the production of semiconductors. Equipment would 
qualify for the credit only if it recovers at least 99 percent of the 
PFCs and HFCs and the equipment is placed in service in the five-year 
period beginning January 1, 1999 and ending December 31, 2003.

                               Renewables

  Provide tax credit for rooftop solar equipment.--Current law provides 
a 10 percent business energy investment tax credit for qualifying 
equipment that uses

[[Page 56]]

solar energy to generate electricity, to heat or cool, to provide hot 
water for use in a structure, or to provide solar process heat. The 
Administration proposes to make a new tax credit available for 
purchasers of rooftop photovoltaic systems and solar water heating 
systems located on or adjacent to the building for uses other than 
heating swimming pools. (Taxpayers would have to choose between the 
proposed credit and the current-law tax credit for each investment.) The 
proposed credit would be equal to 15 percent of qualified investment up 
to a maximum of $1,000 for solar water heating systems and $2,000 for 
rooftop photovoltaic systems. It would apply only to equipment placed in 
service after December 31, 1998 and before January 1, 2004 for solar 
water heating systems and after December 31, 1998 and before January 1, 
2006 for rooftop photovoltaic systems.
  Extend wind and biomass tax credit.--Current law provides taxpayers a 
1.5-cent-per-kilowatt-hour tax credit, adjusted for inflation after 
1992, for electricity produced from wind or ``closed-loop'' biomass. The 
electricity must be sold to an unrelated third party and the credit 
applies to the first 10 years of production. The current credit applies 
only to facilities placed in service before July 1, 1999, after which it 
expires. The Administration proposes to extend the current credit for 
five years, to facilities placed in service before July 1, 2004.

                   Promote Expanded Retirement Savings

  Building on recent legislation, the Administration proposes further 
expansions of retirement savings incentives, including three new 
initiatives that would expand the availability of retirement plans and 
other workplace-based savings opportunities, particularly for moderate- 
and lower-income workers not currently covered by employer-sponsored 
plans. Two of the proposals are designed to expand pension coverage for 
employees of small businesses, a group that currently has low pension 
coverage. The Administration also seeks to improve existing retirement 
plans for employers of all sizes by promoting portability, expanding 
workers' and spouses' rights to know about their retirement benefits, 
and simplifying the pension rules. These provisions generally are 
effective beginning in 1999.

  Promote Individual Retirement Account (IRA) contributions through 
payroll deduction.--Employers could offer employees the opportunity to 
make IRA contributions on a pre-tax basis through payroll deduction. 
Providing employees an exclusion from income (in lieu of a deduction) is 
designed to increase savings among workers in businesses that do not 
offer a retirement plan. Signing up for payroll deduction is easy for an 
employee. In addition, saving is facilitated because it becomes 
automatic as salary reduction contributions continue each paycheck after 
an employee's initial election. Peer-group participation may also 
encourage employees to save more. Finally, the favorable tax treatment 
of payroll deductions would encourage participation.
  Provide tax credit for new plans.--Effective in the year of enactment, 
the Administration proposes a new three-year tax credit for the 
administrative and retirement-education expenses of any small business 
that sets up a new qualified defined benefit or defined contribution 
plan (including a 401(k) plan), savings incentive match plan for 
employees (SIMPLE), simplified employee pension (SEP), or payroll 
deduction IRA arrangement. The credit would cover 50 percent of the 
first $2,000 in administrative and retirement-education expenses for the 
plan or arrangement for the first year of the plan and 50 percent of the 
first $1,000 of such expenses for each of the second and third years. 
The tax credit would help promote new plan sponsorship by targeting a 
tax benefit to employers adopting new plans or payroll deduction IRA 
arrangements, providing a marketing tool to financial institutions and 
advisors promoting new plan adoption, and increasing awareness of 
retirement savings options.
  Establish new small business pension plan.--The Administration is 
proposing a new small business defined benefit-type plan that combines 
certain key features of defined benefit plans and defined contribution 
plans: guaranteed minimum retirement benefits, an option for payments 
over the course of an employee's retirement years, and Pension Benefit 
Guaranty Corporation insurance, together with individual account 
balances that can benefit from favorable investment returns and have 
enhanced portability.
  Enhance portability and disclosure; simplify pensions.--The 
Administration is also proposing accelerated vesting of employer 
matching contributions under 401(k) plans (and other qualified plans). 
This would increase pension portability, which is important given the 
mobility of today's workforce, particularly of working women. Matching 
contributions would be required to be fully vested after an employee has 
completed three years of service (or would vest in annual 20 percent 
increments beginning after two years of service). The Administration's 
proposal also would enhance workers' and spouses' rights to know about 
their pension benefits--among other things, requiring that the same 
explanation of a pension plan's survivor benefits that is provided to a 
participant be provided to the participant's spouse, and that 
participants in 401(k) safe harbor plans receive timely notification of 
plan rules governing contributions and employer matching. Improved 
benefits for nonhighly compensated employees under the 401(k) safe 
harbors, a simplified definition of highly compensated employee, and 
simplification of rules for multiemployer plans are also being proposed.

                       Expand Education Incentives

  Provide incentives for public school construction.--The Taxpayer 
Relief Act of 1997 enacted a provi

[[Page 57]]

sion that allows certain public schools to issue ``qualified zone 
academy bonds,'' the interest on which is effectively paid by the 
Federal government in the form of an annual income tax credit. The 
proceeds of the bonds can be used for a number of purposes, including 
teacher training, purchases of equipment, curricular development, and 
rehabilitation and repair of the school facilities. The Administration 
proposes to institute a new program of Federal tax assistance for public 
school construction. Under the proposal, State and local governments 
would be able to issue up to $9.7 billion of ``qualified school 
construction bonds'' in each of 1999 and 2000. Holders of these bonds 
would receive annual federal income tax credits, set according to market 
interest rates by the Treasury Department, in lieu of interest. At least 
95 percent of the bond proceeds of a qualified school construction bond 
must be used to finance public school construction or rehabilitation. 
The Administration also proposes to expand the amount of qualified zone 
academy bonds that can be issued in 1999 from $400 million to $1.4 
billion and to authorize an additional $1.4 billion of qualified zone 
academy bonds in 2000, and to allow the proceeds of these bonds to be 
used for school construction.
  Extend and expand exclusion for employer-provided educational 
assistance.--Certain amounts paid by an employer for educational 
assistance provided to an employee currently are excluded from the 
employee's gross income for income and payroll tax purposes. The 
exclusion is limited to $5,250 of educational assistance with respect to 
an individual during a calendar year and applies whether or not the 
education is job-related. The exclusion currently is limited to 
undergraduate courses beginning before June 1, 2000. The Administration 
proposes to extend the current law exclusion by one year to apply to 
undergraduate courses beginning before June 1, 2001. In addition, the 
exclusion would be expanded to cover graduate courses beginning after 
June 30, 1998 and before June 1, 2001.
  Eliminate tax when forgiving student loans subject to income 
contingent repayment.--Students who borrow money to pay for 
postsecondary education through the Federal government's Direct Loan 
program may elect income contingent repayment of the loan. If they elect 
this option, their loan repayments are adjusted in accordance with their 
income. If after the borrower makes repayments for a twenty-five year 
period any loan balance remains, it is forgiven. The Administration 
proposes to eliminate any Federal income tax the borrower may otherwise 
owe as a result of the forgiveness of the loan balance. The proposal 
would be effective for loan cancellations after December 31, 1998.

                 Increase Low-Income Housing Tax Credit

  Increase low-income housing tax credit per capita cap.--Low-income 
housing tax credits provide an incentive to build and make available 
rental housing units to households with incomes significantly below area 
medians. The amount of first-year credits that can be awarded in each 
State is currently limited by annual allocations of $1.25 per capita. 
The $1.25 per capita limitation was established in 1986. The 
Administration proposes to increase the annual State housing credit 
limitation to $1.75 per capita effective for calendar years beginning 
after 1998. The proposed increase in this cap will permit additional new 
and rehabilitated low-income housing to be provided while still 
encouraging State housing agencies to award the credits to projects that 
meet specific needs.

                       Extend Expiring Provisions

  Extend the work opportunity tax credit.--The work opportunity tax 
credit provides an incentive for employers to hire individuals from 
certain targeted groups. The credit equals a percentage of qualified 
wages paid during the first year of the individual's employment with the 
employer. The credit percentage is 25 percent for employment of at least 
120 hours but less than 400 hours and 40 percent for employment of 400 
or more hours. The credit expires with respect to employees who begin 
work after June 30, 1998. The Administration proposes to extend the work 
opportunity tax credit so that the credit would be effective for 
individuals who begin work before May 1, 2000.
  Extend the welfare-to-work tax credit.--The welfare-to-work tax credit 
enables employers to claim a tax credit on the first $20,000 of eligible 
wages paid to certain long-term family assistance recipients. The credit 
is 35 percent of the first $10,000 of eligible wages in the first year 
of employment and 50 percent of the first $10,000 of eligible wages in 
the second year of employment. The credit is effective for individuals 
who begin work before May 1, 1999. The Administration proposes to extend 
the welfare-to-work tax credit for one year, so that the credit would be 
effective for individuals who begin work before May 1, 2000.
  Extend the R&E tax credit.--The Administration proposes to extend the 
tax credit provided for certain research and experimentation 
expenditures, which is scheduled to expire after June 30, 1998, for one 
year through June 30, 1999.
  Extend the deduction provided for contributions of appreciated stock 
to private foundations.--The special rule that allows a taxpayer to 
deduct the full fair market value of qualified stock donated to a 
private foundation expires with respect to contributions made after June 
30, 1998. The Administration proposes to extend the provision to apply 
to contributions made during the period July 1, 1998 through June 30, 
1999.
  Make permanent the expensing of brownfields remediation costs.--Under 
the Taxpayer Relief Act of 1997, taxpayers can elect to treat certain 
environmental remediation expenditures that would otherwise be 
chargeable to capital account as deductible in the year

[[Page 58]]

paid or incurred. The provision does not apply to expenditures paid or 
incurred after December 31, 2000. The Administration proposes that the 
provision be made permanent.

                  Modify International Trade Provisions

  Extend the Generalized System of Preferences (GSP) and modify other 
trade provisions.--Under GSP, duty-free access is provided to over 4,000 
items from eligible developing countries that meet certain worker 
rights, intellectual property protection, and other criteria. The 
Administration proposes to extend the program, which expires after June 
30, 1998, through September 30, 2001. The Administration is proposing 
new enhanced trade benefits for Subsaharan African countries undertaking 
strong economic reforms. The Administration also proposes to provide, 
through September 30, 2001, expanded trade benefits mainly on textiles 
and apparel to Caribbean Basin countries that meet new eligibility 
criteria to prepare for a future free trade agreement with the United 
States. The Administration also proposes to implement the OECD 
Shipbuilding Agreement.
  Extend and modify Puerto Rico economic-activity tax credit (section 
30A).--Although the Puerto Rico and possessions tax credit generally was 
repealed in 1996, both the income-based option and the economic-activity 
option under the credit remain available for existing business 
operations through 2005, subject to base-period caps. To provide a more 
efficient and effective tax incentive for the economic development of 
Puerto Rico and to continue the shift from an income-based credit to an 
economic-activity credit that was begun in the Omnibus Budget 
Reconciliation Act of 1993 (OBRA 93), the Administration proposes to 
modify the economic-activity credit for Puerto Rico by (1) extending it 
indefinitely, (2) making newly established business operations eligible 
for the credit, effective for taxable years beginning after December 31, 
1998, and (3) removing the base-period cap.
  Levy tariff on certain textiles and apparel products produced in the 
Commonwealth of the Northern Mariana Islands (CNMI).--The Administration 
has proposed a tariff on textile and apparel products produced in the 
CNMI without certain percentages of workers who are U.S. citizens, 
nationals or permanent residents or citizens of the Pacific island 
nations freely associated with the U.S.
  Expand Virgin Island tariff credits.--The Administration proposes the 
expansion of authorized but currently unused tariff credits for wages 
paid in the production of watches in the Virgin Islands to be available 
for the production of fine jewelry.

                      Provide Other Tax Incentives

  Expand tax incentives for specialized small business investment 
companies (SSBICs).--Current law provides certain tax incentives for 
investment in SSBICs. The Administration proposes to enhance the tax 
incentives for SSBICs. First, the existing provision allowing a tax-free 
rollover of the proceeds of a sale of publicly-traded securities into an 
investment in a SSBIC would be modified to extend the rollover period to 
180 days, to allow investment in the preferred stock of a SSBIC, to 
eliminate the annual caps on the SSBIC rollover gain exclusion, and to 
increase the lifetime caps to $750,000 per individual and $2,000,000 per 
corporation. Second, the proposal would allow a SSBIC to convert from a 
corporation to a partnership within 180 days of enactment without giving 
rise to tax at either the corporate or shareholder level, but the 
partnership would remain subject to an entity-level tax at any time that 
it later disposed of assets that it holds at the time of conversion on 
the amount of ``built-in'' gains inherent in such assets at the time of 
conversion. Finally, in the case of a direct or indirect sale of SSBIC 
stock that qualifies for treatment under section 1202, the proposal 
would raise the exclusion of gain from 50 percent to 60 percent. The 
tax-free rollover and section 1202 provisions would be effective for 
sales occurring after the date of enactment.
  Accelerate and expand incentives available to two new Empowerment 
Zones (EZs).--OBRA 93 authorized a Federal demonstration project in 
which nine EZs and 95 empowerment communities would be designated in a 
competitive application process. Among other benefits, businesses 
located in the nine original EZs are eligible for three Federal tax 
incentives: an employment and training credit; an additional $20,000 per 
year of section 179 expensing; and a new category of tax-exempt private 
activity bonds. The Taxpayer Relief Act of 1997 authorized the 
designation of two additional EZs located in urban areas, which 
generally are eligible for the same tax incentives as are available 
within the EZs authorized by OBRA 93. The two additional EZs will be 
designated in early 1998, but the tax incentives provided for them do 
not take effect until January 1, 2000. The incentives generally remain 
in effect for 10 years. The wage credit, however, is phased down 
beginning in 2005 and expires after 2007. The Administration proposes to 
accelerate the start-up date of the incentives for the two additional 
EZs to January 1, 1999. In addition, the proposal would provide that the 
wage credit would remain in effect for 10 years from that date and would 
be phased down using the same percentages that apply to the original 
empowerment zones designated under OBRA 93.
  Make first $2,000 of severance pay exempt from income tax.--Under 
current law, payments made to a terminated employee are taxable as 
compensation. The Administration proposes to allow an individual to 
exclude up to $2,000 of severance pay from income when certain 
conditions are met. First, the severance must result from a reduction in 
force by the employer. Second, the individual must not obtain a job 
within six months of separation with compensation at least

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equal to 95 percent of his or her prior compensation. Third, the total 
severance payments received by the employee must not exceed $125,000. 
The exclusion would be effective for severance pay received in taxable 
years beginning after December 31, 1998 and before January 1, 2004.

                          Simplify The Tax Laws

  Provide for optional Self-employment Contributions Act (SECA) 
computations.--Self-employed individuals currently may elect to increase 
their self-employment income for purposes of obtaining social security 
coverage. Current law provides more liberal treatment for farmers as 
compared to other self-employed individuals. The Administration proposes 
to extend the favorable treatment currently accorded to farmers to other 
self-employed individuals. The proposal would be effective for taxable 
years beginning after December 31, 1998.
  Provide statutory hedging and other rules to ensure business property 
is treated as ordinary property.--Under current law, there is a 
significant issue of whether income from hedging transactions is capital 
or ordinary. The rules under which assets are treated as ordinary assets 
and under which hedging transactions are accounted for need to be 
modernized. In addition, the current-law rules that allow taxpayers to 
defer loss when a taxpayer holds a position or positions that reduce the 
risk of loss on certain capital assets, the so-called straddle rules, 
are punitive and sometimes result in a total disallowance of losses. The 
proposal would generally codify the hedging rules previously promulgated 
by Treasury Department and make some modifications to help clarify the 
rules. The proposal would clarify that certain assets are ordinary 
assets for Federal income tax purposes, provide more equitable timing of 
losses under the straddle rules, and eliminate an exception to the 
straddle rules for positions in corporate stock. The proposal generally 
would be effective after the date of enactment, and would give the 
Treasury Department authority to issue regulations similar to the 
hedging provisions governing hedging transactions entered into prior to 
the effective date.
  Clarify rules relating to certain disclaimers.--Under current law, if 
a person refuses to accept (i.e., disclaims) a gift or bequest prior to 
accepting the transfer (or any of its benefits), the transfer to the 
disclaiming person generally is ignored for Federal transfer tax 
purposes. Current law is unclear as to whether certain transfer-type 
disclaimers benefit from rules applicable to other disclaimers under the 
estate and gift tax. Current law is also silent as to the income tax 
consequences of a disclaimer. The Administration proposes to extend to 
transfer-type disclaimers the rule permitting disclaimer of an undivided 
interest in property as well as the rule permitting a spouse to disclaim 
an interest that will pass to a trust for the spouse's benefit. The 
proposal also clarifies that disclaimers are effective for income tax 
purposes. The proposal would apply to disclaimers made after the date of 
enactment.
  Simplify the foreign tax credit limitation for dividends from 10/50 
companies.--The Taxpayer Relief Act of 1997 modified the regime 
applicable to indirect foreign tax credits generated by dividends from 
so-called 10/50 companies. Specifically, the Act retained the prior law 
``separate basket'' approach with respect to pre-2003 distributions by 
such companies, adopted a ``single basket'' approach with respect to 
post-2002 distributions by such companies of their pre-2003 earnings, 
and adopted a ``look-through'' approach with respect to post-2002 
distributions by such companies of their post-2002 earnings. The 
application of the three approaches results in significant additional 
complexity. The proposal would simplify significantly the application of 
the foreign tax credit limitation by applying a look-through approach 
immediately to dividends paid by 10/50 companies, regardless of the year 
in which the earnings and profits out of which the dividends are paid 
were accumulated (including pre-2003 years). The proposal would be 
effective for taxable years beginning after December 31, 1997.
  Provide interest treatment for certain payments from regulated 
investment companies to foreign persons.--Under current law, foreign 
investors in U.S. bond and money-market mutual funds are effectively 
subject to withholding tax on interest income and short term capital 
gains derived through such funds. Foreign investors that hold U.S. debt 
obligations directly generally are not subject to U.S. taxation on such 
interest income and gains. This proposal would eliminate the discrepancy 
between these two classes of foreign investors by eliminating the U.S. 
withholding tax on distributions from U.S. mutual funds that hold 
substantially all of their assets in cash or U.S. debt securities (or 
foreign debt securities that are not subject to withholding tax under 
foreign law). The proposal is designed to enhance the ability of U.S. 
mutual funds to attract foreign investors and to eliminate needless 
complications now associated with the structuring of vehicles for 
foreign investment in U.S. debt securities. The proposal would be 
effective for mutual fund taxable years beginning after the date of 
enactment.

                        Enhance Taxpayers' Rights

                               Collection

  Suspend collection by levy during refund suit.--Generally, full 
payment of the tax at issue is a prerequisite to a refund suit (Flora v. 
United States), but this rule does not apply in the case of 
``divisible'' taxes (such as employment taxes or the ``100 percent 
penalty'' under section 6672). The Administration proposes to require 
the IRS to suspend collection by levy of liabilities that are the 
subject of a refund suit during the pendency of the litigation. This 
would only apply where refund suits can be brought without the full 
payment of the tax, i.e., divisible taxes. Collection by levy would

[[Page 60]]

be suspended unless jeopardy exists or the taxpayer waives the 
suspension of collection in writing. This proposal would not affect the 
IRS's ability to collect other assessments that are not the subject of 
the refund suit, to offset refunds or to file a notice of federal tax 
lien. The statute of limitations on collection would be stayed for the 
period during which collection by levy is prohibited. The proposal would 
be effective for refund suits brought with respect to taxable years 
beginning after December 31, 1998.
  Suspend collection by levy while offer in compromise is pending.--The 
Administration proposes to bar the IRS from collecting a tax liability 
by levy during any period that a taxpayer's offer in compromise of that 
liability is being processed, during the 30 days following rejection of 
an offer, and for any period during which an appeal of a rejected offer 
is being considered. Levy would not be precluded if the IRS determines 
that collection is in jeopardy or that the offer is submitted solely to 
delay collection. This proposal would not affect liabilities or 
assessments that are not the subject of the offer in compromise, the 
IRS's ability to offset refund, or its ability to file a notice of 
Federal tax lien. The proposal would not require the IRS to stop any 
levy action that was initiated, or withdraw any lien that was filed, 
prior to the taxpayer's making an offer in compromise. The statute of 
limitations on collection would be stayed for the period during which 
collection by levy is barred. The proposal would be effective with 
respect to taxes assessed 60 days after the date of enactment.
  Suspend collection to permit resolution of disputes as to liability.--
The Administration proposes to permit an individual taxpayer to request 
that collection be suspended temporarily with regard to an income tax 
liability that is assessed based upon a statutory notice of deficiency 
that the taxpayer failed to receive or to which the taxpayer failed to 
respond. The IRS would suspend collection for a 60-day period, during 
which the taxpayer may dispute the merits of the underlying assessment. 
The 60-day period would be extended in appropriate cases where progress 
is being made in resolving the liability. Collection by refund offset 
and jeopardy levies would be exempted. The proposal would not affect the 
IRS's ability to file a notice of Federal tax lien. The statutory 
collection period would be stayed while the taxpayer's claim is pending. 
The proposal would be effective for taxes assessed with respect to 
taxable years beginning after December 31, 1998.
  Require District Counsel approval of certain third party collection 
activities.--The Administration proposes to require IRS District Counsel 
approval before a notice of Federal tax lien can be filed or levy is 
made in connection with property held by a nominee, transferee, or alter 
ego of the taxpayer. Counsel approval would also be required before the 
IRS seizes property encumbered by a Federal tax lien if the property is 
presently neither owned nor titled in the name of the taxpayer. The only 
exception would be in jeopardy situations. If District Counsel's 
approval was not obtained, the property-owner would be entitled to 
obtain release of the lien or levy, and, if the IRS failed to make such 
release, to appeal first to the Collections Appeals process and then to 
the U.S. District Court. The proposal would be effective with respect to 
taxes assessed after the date of enactment.
  Require management approval of levies on certain assets.--The 
Administration proposes to require the personal approval of an IRS 
District Director or Assistant District Director of any levy made 
against non-Federal pensions or the cash value of life insurance 
policies. The proposal would thus place these assets in the same class 
as principal residences pursuant to section 6334(e). The only exception 
would be in jeopardy situations. If the District Director's approval was 
not obtained, the taxpayer would be entitled to obtain release of the 
levy, and, if the IRS failed to make such release, to appeal first to 
the Collections Appeals process and then to the U.S. District Court. The 
proposal would be effective with respect to taxes assessed after the 
date of enactment.
  Require District Counsel review and approval of jeopardy and 
termination assessments and jeopardy levies.--Current law provides 
special procedures allowing the IRS to make jeopardy assessments or 
termination assessments in certain extraordinary circumstances, for 
instance, if the taxpayer is leaving or removing property from the 
United States or if assessment or collection would be jeopardized by 
delay. In jeopardy situations, a levy may also be made without the 30-
day notice of intent to levy that is ordinarily required. Jeopardy and 
termination assessments and jeopardy levies often involve difficult 
legal issues, and the government bears the burden of proof with respect 
to the reasonableness of a jeopardy or termination assessment or a 
jeopardy levy. The Administration proposes to require IRS District 
Counsel review and approval before the IRS could make a jeopardy 
assessment, a termination assessment, or a jeopardy levy. If District 
Counsel's approval was not obtained, the taxpayer would be entitled to 
obtain abatement of the assessment or release of the levy, and, if the 
IRS failed to offer such relief, to appeal first to the Collections 
Appeals process and then to the U.S. District Court. The proposal would 
be effective with respect to taxes assessed after the date of enactment.
  Require management approval of sales of perishable goods.--Because of 
the nature of the property at issue, special accelerated procedures 
apply to the sale of perishable property that has been seized to satisfy 
a tax liability. The Administration proposes to require approval by an 
IRS District Director or Assistant District Director before perishable 
goods are sold. The proposal would also clarify what a ``perishable'' 
item is for these purposes. The proposal would be effective

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with respect to taxes assessed after the date of enactment.
  Codify certain Fair Debt Collection procedures.--Government agencies, 
including the IRS, are generally exempt from the Fair Debt Collection 
Practices Act (FDCPA). In the past, appropriations legislation funding 
the IRS has required IRS officers and employees to comply with certain 
provisions of the FDCPA. Placing these requirements in the Internal 
Revenue Code would ensure that both taxpayers and employees of the IRS 
are fully aware of these requirements. Therefore, the Administration 
proposes to add to the Internal Revenue Code two provisions of the FDCPA 
concerning communications in connection with debt collection and the 
prohibition on harassment or abuse. The proposal would be effective on 
the date of enactment.
  Modify payment of taxes.--The Secretary of the Treasury is authorized 
to accept payments by stamps, check, or money orders, as provided in 
regulations. Checks or money orders currently are made payable to the 
``Internal Revenue Service.'' The proposal would require amending the 
rules, regulations, and procedures to allow payment of taxes by check or 
money order to be made payable to the order of ``United States 
Treasury.'' This would make it clearer to taxpayers that their tax 
payments support the entire Federal Government, not just the IRS. The 
proposal would be effective on the date of enactment.
  Require disclosures relating to extension of statutes of limitation by 
agreement.--Taxpayers and the IRS may agree in writing to extend the 
statutory period of limitations on assessment or collection, either for 
a specified period or for an indefinite period. The Administration 
proposes to require that, on each occasion that the taxpayer is 
requested by the IRS to extend the statute of limitations, the IRS must 
notify the taxpayer of the taxpayer's right to refuse to extend the 
statute of limitations or to limit the extension to particular issues. 
The proposal would apply to requests to extend the statute of 
limitations made after the date of enactment.
  Publish living allowance schedules relating to offers in compromise.--
The IRS is authorized to compromise a taxpayer's tax liability for less 
than the full amount due. In general, there are two grounds on which an 
offer in compromise can be made: doubt as to the taxpayer's liability 
for the full amount, or doubt as to the taxpayer's ability to pay in 
full the amount owed. The proposal would require the IRS to develop and 
publish schedules of national and local living allowances, taking into 
account variations in the cost of living in different areas. The IRS 
would use this information in evaluating the sufficiency of offers in 
compromise. The schedules would be required to be published no later 
than 180 days after the date of enactment.
  Ensure availability of installment agreements.--The IRS is authorized 
to enter agreements permitting taxpayers to pay taxes in installments if 
such an agreement will ``facilitate collection'' of the liability. The 
IRS has discretion to determine when an installment agreement is 
appropriate. The Administration proposes to codify the IRS's current 
practice of requiring an installment agreement (at the taxpayer's 
option) for liabilities of $10,000 or less, provided certain conditions 
are met. The proposal would be effective on the date of enactment.
  Increase ``superpriority'' dollar limits.--Current law provides 
protection to certain property interests even though a Notice of Federal 
Tax Lien has been properly filed before the interests arise. Such 
``superpriorities'' are subject to certain dollar limitations, however. 
The proposal would increase the current dollar limit for purchasers at a 
casual sale from $250 to $1,000, and it would increase the current 
dollar limit from $1,000 to $5,000 for mechanics lienors who provide 
home improvement work for residential real property. The proposal would 
also clarify current law to reflect current banking practices, where a 
``passbook''-type loan may be made even though an actual ``passbook'' is 
not used. The proposal would be effective on the date of enactment.
  Permit personal delivery of 100 percent penalty notices.--The proposal 
would permit personal delivery, in addition to the Internal Revenue 
Code's current requirement of mail delivery, of a preliminary notice 
that the IRS intends to assess a 100 percent penalty under section 6672 
against the taxpayer. The proposal would be effective on the date of 
enactment.

                               Examination

  Allow taxpayers to quash all third party summonses.--Summonses issued 
to ``third party recordkeepers'' are subject to different procedures 
than other summonses: notice of the summons must be given to the 
taxpayer, and the taxpayer has an opportunity to bring a court 
proceeding to quash the summons, during which time collection action is 
stayed and the third party recordkeeper is prohibited from complying 
with the summons. The Administration proposes generally to expand the 
``third party recordkeeper'' procedures to apply to all summonses issued 
to third parties other than the taxpayer. This would have the beneficial 
effect of giving taxpayers notice and an opportunity to contest any 
summons issued to a third party in connection with the determination of 
their liability. The provision would be effective for summonses served 
after the date of enactment.
  Require disclosure of criteria for examination selection.--The IRS 
examines Federal tax returns to determine the correct liability of 
taxpayers. Returns are selected for examination in a number of ways, 
such as through ``matching'' of returns and information returns or 
through the use of a computerized classifica

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tion system (the discriminant function (DIF) system). Taxpayers should 
better understand the reasons why they may be selected for examination. 
Therefore, the Administration proposes to require that within 180 days 
the IRS add to Publication 1 (Your Rights as a Taxpayer) a statement 
setting forth, in simple and nontechnical terms, the criteria and 
procedures for selecting taxpayers for examination. The statement would 
not include any information that would be detrimental to law 
enforcement, and drafts of the statement would be required to be 
submitted to the congressional tax-writing committees prior to 
publication.
  Prohibit threat of audit to coerce tip reporting alternative 
commitment agreements.--Restaurants may enter into Tip Reporting 
Alternative Commitment (TRAC) agreements. A restaurant entering into a 
TRAC agreement is obligated to educate its employees on their tip 
reporting obligations, to institute formal tip reporting procedures, to 
fulfill all filing and record keeping requirements, and to pay and 
deposit taxes. In return, the IRS agrees to base the restaurant's 
liability for employment taxes solely on reported tips and any 
unreported tips discovered during an IRS audit of an employee. The 
proposal would require the IRS to instruct its employees that they may 
not threaten to audit any taxpayer in an attempt to coerce the taxpayer 
to enter into a TRAC agreement. The provision would be effective on the 
date of enactment.
  Permit service of summonses by mail.--This proposal would permit the 
IRS to serve summonses by mail, in addition to the present law 
requirement that all summonses be personally served. Most summonses are 
served on financial institutions, where personal service can disrupt the 
working environment. Further, notice to the taxpayer that a summons has 
been served on a third party recordkeeper can already be given by mail, 
and the proposal would thus bring the service of the actual summons into 
line with the notice requirements. The provision would be effective for 
summonses served after the date of enactment.

                              New Remedies

  Allow suits for damages if IRS violates certain bankruptcy 
procedures.--No remedy exists under the Internal Revenue Code if the IRS 
willfully violates the automatic stay or discharge provisions of the 
Bankruptcy Code. The Administration proposes to provide for payment of 
damages, plus attorneys fees' and costs, for willful violations by 
officers or employees of the IRS of either the automatic stay provision 
or the discharge injunction under the Bankruptcy Code. Jurisdiction over 
such cases would lie with the Bankruptcy Court, but the claimant would 
be required to exhaust administrative remedies to the same extent as for 
other damage claims. The provision would be effective with respect to 
violations occurring after the date of enactment.
  Increase Tax Court's ``small case'' limit.--Taxpayers may choose to 
contest many tax disputes in the Tax Court. Under current law, special 
``small case procedures'' apply to disputes involving $10,000 or less, 
if the taxpayer chooses to utilize these procedures (and the Tax Court 
concurs). The Administration proposes to increase the cap for small case 
treatment in the Tax Court from $10,000 to $25,000. The proposal would 
apply to proceedings commenced after the date of enactment.
  Provide equitable tolling.--A refund claim that is not filed within 
certain specified time periods is rejected as untimely. The Supreme 
Court recently held (United States v. Brockamp) that these limitations 
periods cannot be extended, or ``tolled,'' for equitable reasons. This 
may lead to harsh results for some taxpayers, particularly when they 
fail to seek a refund because of a well-documented disability or similar 
compelling circumstance that prevents them from doing so. Consequently, 
the Administration proposes to permit ``equitable tolling'' of the 
limitation period on claims for refund for the period of time during 
which an individual taxpayer is under a sufficient medically determined 
physical or mental disability as to be unable to manage his or her 
financial affairs. Tolling would not apply during periods in which the 
taxpayer's spouse or another person is authorized to act on the 
taxpayer's behalf in financial matters. The proposal would apply with 
respect to taxable years ending after the date of enactment.
  Require notice of deficiency to specify Tax Court filing deadlines.--
Under current law, taxpayers must file a petition with the Tax Court 
within 90 days after the notice of deficiency is mailed (150 days if the 
person is outside the United States). Because timely filing in Tax Court 
is a jurisdictional prerequisite, the IRS cannot extend the filing 
period, nor can the Tax Court hear the case of a taxpayer who relies on 
erroneous information from the IRS and files too late. The 
Administration proposes to require the IRS to include on each notice of 
deficiency the date it determines is the last day on which the taxpayer 
may file a Tax Court petition (including the last day for a taxpayer who 
is outside the United States). Any petition filed by the later of the 
statutory date or the date shown on the notice would be timely. The 
provision would apply to notices mailed after December 31, 1998.
  Allow actions for refund with respect to certain estates that have 
elected the installment method of payment.--Under the Internal Revenue 
Code, a taxpayer may bring a refund suit only if full payment of the 
assessed tax liability has been made. However, under certain conditions, 
the executor of an estate may pay the estate tax attributable to certain 
closely-held businesses over a 14-year period. These two rules can be in 
conflict, preventing electing estates from obtaining full relief in a 
refund jurisdiction. The Administration proposes to grant courts refund 
jurisdiction to deter

[[Page 63]]

mine the correct liability of such an estate, so long as the estate had 
properly elected to pay in installments and was current on all payments. 
The proposal also would make a number of technical and conforming 
amendments to implement this change. The proposal would be effective for 
claims for refunds filed after the date of enactment.
  Expand authority to award costs and fees.--Any person who 
substantially prevails in a dispute related to taxes, interest, or 
penalties may be awarded reasonable administrative costs incurred before 
the IRS and reasonable litigation costs incurred in connection with any 
court proceeding. Individuals can receive an award of litigation and 
administrative costs only if their net worth does not exceed $2 million. 
Awards cannot exceed amounts actually paid or incurred, and cannot 
exceed a statutorily limited rate ($110 per hour, indexed for 
inflation). Taxpayers who are represented pro bono, and thus bear no 
actual attorney's fees and costs, cannot recover such amounts. The 
Administration proposes to allow the award of attorney's fees (in 
amounts up to the statutory limit) to persons who represent such 
taxpayers for no more than a nominal fee. The proposal would be 
effective with respect to costs incurred and services performed after 
the date of enactment.
  Expand authority to issue taxpayer assistance orders.--Under current 
law, taxpayers can request that the Taxpayer Advocate issue a taxpayer 
assistance order (TAO) to require the IRS to release property of the 
taxpayer that has been levied upon, or to cease any action, take any 
action as permitted by law, or refrain from taking any action with 
respect to the taxpayer. A TAO may be issued if the taxpayer is 
suffering or about to suffer a significant hardship as a result of the 
manner in which the laws are being administered by IRS. The 
Administration proposes to provide that, in determining whether to issue 
a TAO, the Taxpayer Advocate will also be authorized to consider, among 
other factors, the following: unreasonable delays in resolving the 
taxpayer's account problems; immediate threats of substantial adverse 
action (such as the seizure of a residence to pay overdue taxes); the 
likelihood of irreparable harm if relief is not granted; whether the 
taxpayer will have to pay significant professional fees if relief is not 
granted; and the possibility of long-term adverse impact on the 
taxpayer. The proposal would be effective on the date of enactment.
  Provide new remedy for third parties who claim that the IRS has filed 
an erroneous lien.--The Supreme Court held (Williams v. United States) 
that a third party who paid another person's tax under protest to remove 
a lien on the third party's property could bring a refund suit, because 
she had no other adequate administrative or judicial remedy. However, 
the Court left many important questions unresolved. The Administration 
proposes to create administrative and judicial remedies for a third 
party in that situation. Under this procedure, the owner of property 
(other than the taxpayer) could obtain a certificate discharging 
property from the Federal tax lien as a matter of right, provided 
certain conditions were met. The certificate of discharge would enable 
the property owner to sell the property free and clear of the Federal 
tax lien in all circumstances. The proposal would also establish a 
judicial cause of action for persons challenging a Federal tax lien that 
is similar to the wrongful levy remedy already in the Internal Revenue 
Code. The proposal would be effective on the date of enactment.
  Allow damage suits by persons other than the taxpayer.--Under current 
law, taxpayers have a right to sue for damages if, in connection with 
any collection of Federal tax, any officer or employee of the IRS 
recklessly or intentionally disregards any provision of the Internal 
Revenue Code or any regulation thereunder. Recoverable damages are the 
lesser of actual, direct economic damages sustained, plus attorneys' 
fees, or $1 million. Actions under this provision may only be brought by 
an injured taxpayer, however, and not by an injured third party. The 
Administration proposes that persons other than the taxpayer from whom 
collection is sought be granted a right to sue for damages. The current 
law limitations on awards for damages would apply to third party 
plaintiffs, as well. The proposal would be effective with respect to 
collection actions taken after the date of enactment.

                              Joint Returns

  Suspend collection in certain joint liability cases.--When a married 
couple's joint return is the subject of a Tax Court proceeding, the 
Administration proposes to require the IRS to withhold collection by 
levy against a nonpetitioning spouse while a Tax Court proceeding 
involving the other spouse is pending. This would treat the 
nonpetitioning spouse the same as the petitioning spouse in most 
situations. Certain exceptions would be provided, including in jeopardy 
situations; when the taxpayer waives this protection (i.e., agrees to 
the collection action); other, limited but automatic kinds of collection 
activity, such as automatic refund offset; filing of protective notices 
of Federal tax lien, etc.; or certain other situations. The statute of 
limitations on assessment and collection would be stayed for the period 
during which collection by levy is barred. If there is a final decision 
that reduces the proposed assessment against the petitioning spouse, the 
assessment against the nonpetitioning spouse would likewise be reduced. 
The proposal would not affect the IRS's ability to collect other 
liabilities or assessments that are not the subject of the Tax Court 
proceeding. The proposal would be effective for taxes assessed with 
respect to taxable years beginning after December 31, 1998.
  Require explanation of joint and several liability.--In general, 
spouses who file a joint tax return are jointly and severally liable for 
the tax due. Thus each is fully responsible for the accuracy of the 
return

[[Page 64]]

and the full amount of the liability, even if only one spouse earned the 
wages or income that is shown on the return. Married taxpayers need to 
better understand the legal implications of signing a joint return. 
Therefore, the Administration proposes to require the IRS to establish 
procedures to alert married taxpayers clearly of their joint and several 
liability on appropriate tax publications and instructions. The proposal 
would require that such procedures be established no later than 180 days 
after the date of enactment.
  Relieve innocent spouse of liability in certain cases.--Spouses who 
file a joint tax return are each fully responsible for the accuracy of 
the return and for the full tax liability, even if only one spouse 
earned the wages or income shown on the return. Relief from liability is 
available for ``innocent spouses'' in certain circumstances, but the 
conditions are frequently hard to meet and the Tax Court may not have 
jurisdiction to review all denials of innocent spouse relief. The 
Administration proposes to generally make innocent spouse status easier 
to obtain. It would first eliminate certain applicable dollar thresholds 
for understatements of tax. Second, the proposal would specifically 
provide the Tax Court with jurisdiction to review the IRS's denial of 
innocent spouse relief and to order appropriate relief. Except in 
limited cases, the IRS could not collect the tax until the Tax Court 
case is final (although the statute of limitations would be extended 
while the Tax Court case is pending). Finally, the proposal would 
require the IRS to develop a separate form with instructions for 
taxpayers to use in applying for innocent spouse relief within 180 days 
from the date of enactment. The proposal would be effective for 
understatements in years beginning after the date of enactment and for 
overpayments assessed within the previous two years.

                              Miscellaneous

  Allow ``global'' interest netting of under- and over-payments.--The 
rate of interest charged taxpayers on their tax underpayments differs 
from the rate paid to taxpayers on overpayments. Although the IRS 
ameliorates the effect of this interest rate differential by ``netting'' 
offsetting underpayments and overpayments in some situations, there is 
no authority to net when either the overpayment or the underpayment has 
been satisfied already (``global'' netting). Global interest netting for 
income taxes would be implemented under this proposal. The proposal 
would be effective for calendar quarters with periods of overlapping 
mutual indebtedness after the date of enactment.
  Facilitate archiving of IRS records.--The IRS, like all other Federal 
agencies, must create, maintain, and preserve agency records, and must 
transfer significant and historical records to the National Archives and 
Records Administration (NARA) for retention or disposal. However, tax 
returns and return information are confidential and can be disclosed 
only pursuant to limited exceptions. There is no exception authorizing 
the disclosure of return information to NARA. The Administration 
proposes to provide an exception to the disclosure rules, authorizing 
the IRS to disclose tax returns and return information to officers or 
employees of NARA, upon written request from the Archivist, for purposes 
of the appraisal of such records for destruction or retention. The 
prohibitions on, and penalties for, unauthorized re-disclosure of such 
information would apply. The proposal would be effective for requests 
made by the Archivist after the date of enactment.
  Clarify authority to prescribe manner of making elections.--Except as 
otherwise provided by statute, elections under the Internal Revenue Code 
must be made in such manner as the Secretary of the Treasury ``shall by 
regulations or forms prescribe.'' The question has arisen whether the 
Secretary can prescribe the manner of required elections other than by 
regulations or forms, for instance in revenue rulings or revenue 
procedures. The proposal would clarify that, except as otherwise 
provided, the Secretary may prescribe the manner of making any election 
by any reasonable means. The proposal would be effective on the date of 
enactment.
  Grant IRS broad authority to enter into cooperative agreements with 
State taxing agencies.--Taxpayers currently must file returns with both 
their State taxing agency and the IRS, and frequently must resolve 
issues with the agencies at different times. If appropriate statutory 
authority were enacted, taxpayers could file only one return for both 
State and Federal taxes. Then, pursuant to a cooperative agreement 
between the IRS and the State, the information could be processed by one 
tax administrator and shared between the two, substantially simplifying 
filing requirements and reducing taxpayer burden. The Administration 
proposes to allow the IRS to enter such agreements with the States to 
provide for joint filing and processing of returns, joint collection of 
taxes (other than Federal income taxes), and such other provisions as 
may enhance joint tax administration. It would further amend the 
Internal Revenue Code's confidentiality provisions to permit sharing of 
common tax data, would address the effect of joint agreements in a 
number of situations, and would include a thorough list of conforming 
amendments. The provision would be effective on the date of enactment.
  Provide clinics for low-income taxpayers.--Low-income individuals 
frequently have difficulty complying with their tax obligations or 
resolving disputes over their tax liabilities. Providing tax services to 
such individuals through clinics that offer such services for a nominal 
fee would improve compliance with the tax laws and should be encouraged. 
The Administration proposes that the Legal Services Corporation be 
authorized to make up to $3,000,000 in grants for the development, 
expansion, or continuation of certain low-income

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taxpayer clinics. The provision would be effective on the date of 
enactment.
  Provide procedures for release of field service memoranda.--The 
Administration proposes to clarify that Field Service Advice Memoranda 
(FSAs) are return information that is protected under the Internal 
Revenue Code and cannot be disclosed without authorization. It would 
also, however, make the non-confidential information in such documents 
public, subject to a redaction process in which the taxpayer whose 
liability is the subject of the FSA would be allowed to participate. The 
proposal would be effective on the date of enactment, but it would 
include a schedule of time over which the IRS would make past FSAs 
available under the redaction procedure.

     ELIMINATE UNWARRANTED BENEFITS AND ADOPT OTHER REVENUE MEASURES

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

  Defer deduction for interest and original issue discount (OID) on 
convertible debt.-- The accrued but unpaid interest and OID on a 
convertible debt instrument generally is deductible, even if the 
instrument is converted into the stock of the issuer or a related party 
before the issuer pays any interest or OID. The Administration proposes 
to defer the deduction for all interest, including OID, on convertible 
debt until payment. The proposal would be effective for convertible debt 
issued on or after the date of first committee action.
  Eliminate dividends-received deduction for certain preferred stock.--A 
corporate holder of stock generally is entitled to a deduction for 
dividends received on stock in the following amounts: 70 percent if the 
recipient owns less than 20 percent of the stock of the payor, 80 
percent if the recipient owns 20 percent or more of the stock, and 100 
percent of qualifying dividends received from members of the same 
affiliated group. The Administration proposes to eliminate the 70- and 
80-percent dividends-received deduction for dividends on certain 
limited-term preferred stock, effective for stock issued after the date 
of enactment.
  Repeal percentage depletion for non-fuel minerals mined on Federal and 
formerly Federal lands.--Taxpayers are allowed to deduct a reasonable 
allowance for depletion relating to certain mineral deposits. The 
depletion deduction for any taxable year is calculated under either the 
cost depletion method or the percentage depletion method, whichever 
results in the greater allowance for depletion for the year. The 
percentage depletion method is viewed as an incentive for mineral 
production rather than as a normative rule for recovering the taxpayer's 
investment in the property. This incentive is excessive with respect to 
minerals mined on Federal and formerly Federal lands under the 1872 
mining act, in light of the minimal costs of acquiring the mining rights 
($5.00 or less per acre). The Administration proposes to repeal 
percentage depletion for non-fuel minerals mined on Federal lands where 
the mining rights were originally acquired under the 1872 law, and on 
private lands acquired under the 1872 law. The proposal would be 
effective for taxable years beginning after the date of enactment.
  Repeal tax-free conversions of large C corporations to S corporations 
(section 1374).--A corporation can avoid the existing two-tier tax by 
electing to be treated as an S corporation or by converting to a 
partnership. Converting to a partnership is a taxable event that 
generally requires the corporation to recognize any built-in gain on its 
assets and requires the shareholders to recognize any built-in gain on 
their stock. By contrast, the conversion to an S corporation is 
generally tax-free, except that the S corporation generally must 
recognize the built-in gain on assets held at the time of conversion if 
the assets are sold within ten years. The Administration proposes that 
the conversion of a C corporation with a value of more than $5 million 
into an S corporation would be treated as a liquidation of the C 
corporation, followed by a contribution of the assets to an S 
corporation by the recipient shareholders. Thus, the proposal would 
require immediate gain recognition by both the corporation (with respect 
to its appreciated assets) and its shareholders (with respect to their 
stock). This proposal would make the tax treatment of conversions to an 
S corporation generally consistent with conversions to a partnership. 
The proposal would apply to elections that are first effective for a 
taxable year beginning after January 1, 1999 and to acquisitions of a C 
corporation by an S corporation made after December 31, 1998.
  Replace sales-source rules with activity-based rules.--The foreign tax 
credit generally reduces U.S. tax on foreign source income, but does not 
reduce U.S. tax on U.S. source income. When products are manufactured in 
the United States and sold abroad, Treasury regulations provide that 50 
percent of such income generally is treated as earned in production 
activities, and sourced on the basis of the location of assets held or 
used to produce income from the sale. The remaining 50 percent of the 
income is treated as earned in sales activities and sourced based on 
where title to the inventory transfers. Thus, if a U.S. manufacturer 
sells inventory abroad, half of the income generally is treated as 
derived from domestic sources, and half of the income generally is 
treated as derived from foreign sources. However, the taxpayer may use a 
more favorable method if it can establish to the satisfaction of the IRS 
that more than half of its economic activity occurred in a foreign 
country. This 50/50 rule provides a benefit to U.S. exporters that 
operate in high-tax foreign countries. Thus, U.S. multinational 
exporters have a competitive advantage over U.S. exporters that conduct 
all their business activities in the U.S. Because export benefits should 
be targeted equally to all export

[[Page 66]]

ers, the Administration proposes to reduce the amount of export sales 
income that such corporations may treat as derived from foreign sources 
by requiring that the allocation be based on actual economic activity. 
The proposal would be effective for taxable years beginning after the 
date of enactment.
  Modify rules relating to foreign oil and gas extraction income.--To be 
eligible for the U.S. foreign tax credit, a foreign levy must be the 
substantial equivalent of an income tax in the U.S. sense, regardless of 
the label the foreign government attaches to it. Under regulations, a 
foreign levy is a tax if it is a compulsory payment under the authority 
of a foreign government to levy taxes and is not compensation for a 
specific economic benefit provided by the foreign country. Taxpayers 
that are subject to a foreign levy and that also receive (directly or 
indirectly) a specific economic benefit from the levying country are 
referred to as ``dual capacity'' taxpayers and may not claim a credit 
for that portion of the foreign levy paid as compensation for the 
specific economic benefit received. The Administration proposes to treat 
as taxes payments by a dual-capacity taxpayer to a foreign country that 
would otherwise qualify as income taxes or ``in lieu of'' taxes, only if 
there is a ``generally applicable income tax'' in that country. For this 
purpose, a generally applicable income tax is an income tax (or a series 
of income taxes) that applies to trade or business income from sources 
in that country, so long as the levy has substantial application both to 
non-dual-capacity taxpayers and to persons who are citizens or residents 
of that country. Where the foreign country does generally impose an 
income tax, as under present law, credits would be allowed up to the 
level of taxation that would be imposed under that general tax, so long 
as the tax satisfies the new statutory definition of a ``generally 
applicable income tax.'' The proposal also would create a new foreign 
tax credit basket within section 904 for foreign oil and gas income. The 
proposal would be effective for taxable years beginning after the date 
of enactment. The proposal would yield to U.S. treaty obligations that 
allow a credit for taxes paid or accrued on certain oil or gas income.
  Repeal lower-of-cost-or-market inventory accounting method.--Taxpayers 
required to maintain inventories are permitted to use a variety of 
methods to determine the cost of their ending inventories, including the 
last-in, first-out (LIFO) method, the first-in, first-out (FIFO) method, 
and the retail method. Taxpayers not using a LIFO method may determine 
the carrying values of their inventories by applying the lower-of-cost-
or-market (LCM) method and by writing down the cost of goods that are 
unsalable at normal prices or unusable in the normal way because of 
damage, imperfection or other causes (subnormal goods method). The 
allowance of write-downs under the LCM and subnormal goods methods is 
essentially a one-way mark-to-market method that understates taxable 
income. The Administration proposes to repeal the LCM and subnormal 
goods methods effective for taxable years beginning after the date of 
enactment.
  Increase penalties for failure to file correct information returns.--
Any person who fails to file required information returns in a timely 
manner or incorrectly reports such information is subject to penalties. 
For taxpayers filing large volumes of information returns or reporting 
significant payments, existing penalties ($15 per return, not to exceed 
$75,000 if corrected within 30 days; $30 per return, not to exceed 
$150,000 if corrected by August 1; and $50 per return, not to exceed 
$250,000 if not corrected at all) may not be sufficient to encourage 
timely and accurate reporting. The Administration proposes to increase 
the general penalty amount, subject to the overall dollar limitations, 
to the greater of $50 per return or 5 percent of the total amount 
required to be reported. The increased penalty would not apply if the 
aggregate amount actually reported by the taxpayer on all returns filed 
for that calendar year was at least 97 percent of the amount required to 
be reported. The increased penalty would be effective for returns the 
due date for which is more than 90 days after the date of enactment.
  Tighten the substantial understatement penalty for large 
corporations.--Currently taxpayers may be penalized for erroneous, but 
non-negligent, return positions if the amount of the understatement is 
``substantial'' and the taxpayer did not disclose the position in a 
statement with the return. ``Substantial'' is defined as 10 percent of 
the taxpayer's total current tax liability, but this can be a very large 
amount. This has led some large corporations to take aggressive 
reporting positions where huge amounts of potential tax liability are at 
stake--in effect playing the audit lottery--without any downside risk of 
penalties if they are caught, because the potential tax still would not 
exceed 10 percent of the company's total tax liability. To discourage 
such aggressive tax planning, the Administration proposes that any 
deficiency greater than $10 million be considered ``substantial'' for 
purposes of the substantial understatement penalty, whether or not it 
exceeds 10 percent of the taxpayer's liability. The proposal, which 
would be effective for taxable years beginning after the date of 
enactment, would affect only taxpayers that have tax liabilities greater 
than or equal to $100 million.
  Repeal exemption for withholding on gambling winnings from bingo and 
keno in excess of $5,000.--Proceeds of most wagers with odds of less 
than 300 to 1 are exempt from withholding, as are all bingo and keno 
winnings. The Administration proposes to impose withholding on proceeds 
of bingo or keno in excess of $5,000 at a rate of 28 percent, regardless 
of the odds of the wager, effective for payments made after the start of 
the first calendar quarter that is at least 30 days after the date of 
enactment.

[[Page 67]]

  Reinstate oil spill excise tax.--Before January 1, 1995, a five-cents-
per-barrel excise tax was imposed on domestic crude oil and imported oil 
and petroleum products. The tax was dedicated to the Oil Spill Liability 
Trust Fund to finance the cleanup of oil spills and was not imposed for 
a calendar quarter if the unobligated balance in the Trust Fund exceeded 
$1 billion at the close of the preceding quarter. The Administration 
proposes to reinstate this tax for the period after the date of 
enactment and before October 1, 2008. The tax would be suspended for a 
given calendar quarter if the unobligated Trust Fund balance at the end 
of the preceding quarter exceeded $5 billion.
  Modify Federal Unemployment Act (FUTA) provisions.--Beginning in 2004, 
the Administration proposes to require an employer to pay Federal and 
State unemployment taxes monthly (instead of quarterly) in a given year, 
if the employer's FUTA tax liability in the immediately preceding year 
was $1,100 or more.
  Extend pro rata disallowance of tax-exempt interest expense that 
applies to banks to all financial intermediaries.--No income tax 
deduction is allowed for interest on debt used directly or indirectly to 
acquire or hold investments that produce tax-exempt income. The 
determination of whether debt is used to acquire or hold tax-exempt 
investments differs depending on the holder of the instrument. For banks 
and a limited class of other financial institutions, debt generally is 
treated as financing all of the taxpayer's assets proportionately. 
Securities dealers are not included in the definition of ``financial 
institution,'' and under a special rule are subject to a disallowance of 
a much smaller portion of their interest deduction. For other financial 
intermediaries, such as finance companies, that are also not included in 
the narrow definition of ``financial institutions,'' deductions are 
disallowed only when indebtedness is incurred or continued for the 
purpose of purchasing or carrying tax-exempt investments. These 
taxpayers are therefore able to reduce their tax liabilities 
inappropriately through the double Federal tax benefits of interest 
expense deductions and tax-exempt interest income, notwithstanding that 
they operate similarly to banks. Effective for taxable years beginning 
after the date of enactment, with respect to obligations acquired on or 
after the date of first committee action, the Administration proposes 
that all financial intermediaries, other than insurance companies (which 
are subject to a separate regime), be treated the same as banks are 
treated under current law with regard to deductions for interest on debt 
used directly or indirectly to acquire or hold tax-exempt obligations.
  Increase the proration percentage for property casualty (P&C) 
insurance companies.--In computing their underwriting income, P&C 
insurance companies deduct reserves for losses and loss expenses 
incurred. These loss reserves are funded in part with the company's 
investment income. In 1986, Congress reduced the reserve deductions of 
P&C insurance companies by 15 percent of the tax-exempt interest or the 
deductible portion of certain dividends received. In 1997, Congress 
expanded the 15-percent proration rule to apply to the inside buildup on 
certain insurance contracts. The existing 15-percent proration rule 
still enables P&C insurance companies to fund a substantial portion of 
their deductible reserves with tax-exempt or tax-deferred income. Other 
financial intermediaries, such as life insurance companies and banks, 
are subject to more stringent proration rules that substantially reduce 
or eliminate their ability to use tax-exempt or tax-deferred investments 
to fund currently deductible reserves or to deduct interest expense. 
Effective for taxable years beginning after the date of enactment, with 
respect to investments acquired on or after the date of first committee 
action, the Administration proposes to increase the proration percentage 
to 30 percent.
  Preclude certain taxpayers from prematurely claiming losses from 
receivables.--An accrual method taxpayer generally must recognize income 
when all events have occurred that fix the right to its receipt and its 
amount can be determined with reasonable accuracy. In the event that a 
receivable arising in the ordinary course of the taxpayer's trade or 
business becomes uncollectible, the accrual method taxpayer may deduct 
the account receivable as a business bad debt in the year in which it 
becomes wholly or partially worthless. Accrual method service providers, 
however, are provided a special exception to these general rules. Under 
the exception, a taxpayer using an accrual method with respect to 
amounts to be received for the performance of services is not required 
to accrue any portion of such amounts that (on the basis of experience) 
will not be collected. This special exception permits an accrual method 
service provider to reduce current taxable income by an estimate of its 
future bad debt losses. This method of estimation results in a 
mismeasurement of a taxpayer's economic income and, because this tax 
benefit only applies to amounts to be received for the performance of 
services, promotes controversy over whether a taxpayer's receivables 
represent amounts to be received for the performance of services or for 
the provision of goods. The Administration proposes to repeal the 
special exception for accrual method service providers effective for 
taxable years ending after the date of enactment.
  In general, dealers in securities are required to use a mark-to-market 
method of accounting. Under this method, securities that are inventory 
in the hands of the dealer must be included in inventory at fair market 
value. A taxpayer that is otherwise not a dealer in securities may elect 
to be treated as such for this purpose if the taxpayer purchases and 
sells debt instruments that, at the time of purchase or sale, are 
customer paper with respect to either the taxpayer or a corporation that 
is a member of the same consolidated group as the taxpayer (the 
``customer paper election''). Significant numbers of taxpayers whose 
principal activities are selling nonfinancial goods or providing 
nonfinancial services are making the customer paper elec

[[Page 68]]

tion as a means of restoring bad debt reserves. The customer paper 
election is also being used inappropriately to mark-to-market trade 
receivables that bear little or no interest in order to recognize loss. 
Under the proposal, certain customer receivables would not be allowed to 
be marked to market. The proposal would be effective for taxable years 
ending after the date of enactment.

  Restrict special net operating loss carryback rules for specified 
liability losses.--Under current law, the portion of a net operating 
loss that qualifies as a specified liability loss may be carried back 10 
years rather than being limited to the general two-year carryback 
period. A specified liability loss includes amounts allowable as a 
deduction with respect to product liability, and also certain 
liabilities that arise under Federal or State law or out of any tort of 
the taxpayer. The proper interpretation of the specified liability loss 
provisions as they apply to liabilities arising under Federal or State 
law or out of any tort of the taxpayer has been the subject of 
manipulation and significant controversy. Accordingly, the 
Administration proposes to modify the specified liability loss 
provisions to provide that only a limited class of liabilities qualifies 
as a specified liability loss. Under the proposal, specified liability 
losses would include (in addition to product liability losses) any 
amount allowable as a deduction that is attributable to a liability 
under Federal or State law for reclamation of land, decommissioning of a 
nuclear power plant (or any unit thereof), dismantlement of an offshore 
oil drilling platform, remediation of environmental contamination, or 
payments under a workers' compensation statute. The proposal would be 
effective for taxable years beginning after the date of enactment.
  Freeze grandfather status of stapled (or ``paired-share'') Real Estate 
Investment Trusts (REITs).--REITs generally are limited to owning 
passive investments in real estate and certain securities. Prior to 
1984, certain ``stapled'' REITs were paired with subchapter C 
corporations and traded in tandem as a single unit. This effectively 
allowed these stapled REITs to circumvent the restrictions on operating 
active businesses. In the Deficit Reduction Act of 1984, Congress 
restricted REITs' ability to avoid these investment limitations by 
providing that stapled entities must be treated as one entity for 
purposes of determining qualification under the REIT rules. However, 
Congress grandfathered the existing stapled REITs indefinitely. The 
Administration proposes to limit the grandfather status of the existing 
stapled REITs. Under the proposal, for purposes of determining whether 
any grandfathered entity is a REIT, the stapled entities would be 
treated as one entity with respect to properties acquired on or after 
the date of the first committee action and with respect to activities or 
services relating to such properties (i.e., properties acquired after 
the effective date) that are undertaken or performed by one of the 
stapled entities on or after such date.
  Restrict impermissible business indirectly conducted by REITs.--REITs 
generally are restricted to owning passive investments in real estate 
and certain securities. To prevent indirect ownership of impermissible 
businesses, current law restricts a REIT from owning more than 10 
percent of the outstanding voting securities of any issuer. Nonetheless, 
a REIT can essentially conduct an impermissible business through a 
subsidiary by holding a significant amount of non-voting stock in a 
corporation. Through the retention of non-voting stock and debt, the 
REIT is able to retain most, if not all, of the income generated by the 
impermissible business and to circumvent the restrictions on operating 
active businesses. The Administration proposes to restrict this ability 
by prohibiting REITs from holding stock possessing more than 10 percent 
of the vote or value of all classes of stock of a corporation. In 
general, the proposal would be effective with respect to stock acquired 
on or after the date of first committee action.
  Modify treatment of closely held REITs.--When originally enacted, the 
REIT legislation was intended to provide a tax-favored vehicle through 
which small investors could invest in a professionally managed real 
estate portfolio. REITs are intended to be widely held entities, and 
certain requirements of the REIT rules are designed to ensure this 
result. Among other requirements, in order for an entity to qualify for 
REIT status, the beneficial ownership of the entity must be held by 100 
or more persons. In addition, a REIT cannot be closely held, which 
generally means that no more than 50 percent of the value of the REIT's 
stock can be owned by five or fewer individuals during the last half of 
the taxable year. Certain attribution rules apply in making this 
determination. The Administration has become aware of a number of tax 
avoidance transactions involving the use of closely held REITs. In order 
to meet the 100 or more shareholder requirement, the REIT generally 
issues common stock, which is held by one shareholder, and a separate 
class of non-voting preferred stock with a relatively nominal value, 
which is held by 99 ``friendly'' shareholders. The closely held 
limitation does not disqualify the REITs that are utilizing this 
ownership structure because the majority shareholders of these REITs are 
not individuals. The Administration proposes to impose as an additional 
requirement for REIT qualification that no person can own stock of a 
REIT possessing more than 50 percent of the total combined voting power 
of all classes of voting stock or more than 50 percent of the total 
value of shares of all classes of stock. For purposes of determining a 
person's stock ownership, rules similar to the attribution rules 
contained in section 856(d)(5) would apply. The proposal would be 
effective for entities electing REIT status for taxable years beginning 
on or after the date of first committee action.
  Modify depreciation method for tax-exempt use property.--Current law 
requires tax-exempt use property (property owned by a U.S. person but 
leased to a foreign or tax-exempt person) to be depreciated using

[[Page 69]]

the straight-line method over a period equal to the greater of (1) the 
property's class life; or (2) 125 percent of the lease term. This rule 
has led to manipulations designed to create a shortened recovery period. 
The Administration proposes to lengthen the recovery period for ``tax-
exempt use property'' to 150 percent of its class life. This will 
prevent the U.S. tax system from providing tax benefits in the form of 
accelerated depreciation for the use of property that is not connected 
with U.S. business activities. The proposal generally would be effective 
for property placed in service after December 31, 1998.
  Impose excise tax on purchase of structured settlements.--Current law 
facilitates the use of structured personal injury settlements because 
recipients of annuities under these settlements are less likely than 
recipients of lump sum awards to consume their awards too quickly and 
require public assistance. Consistent with that policy, this favorable 
treatment is conditional upon a requirement that the periodic payments 
cannot be accelerated, deferred, increased or decreased by the injured 
person. Nonetheless, certain factoring companies are able to purchase a 
portion of the annuities from the recipients for heavily discounted lump 
sums. These purchases are inconsistent with the policy underlying 
favorable tax treatment of structured settlements. Accordingly, the 
Administration proposes to impose on any person who purchases (or 
otherwise acquires for consideration) a structured settlement payment 
stream, a 20-percent excise tax on the purchase price unless such 
purchase is pursuant to a court order finding that the extraordinary and 
unanticipated needs of the original intended recipient render such a 
transaction desirable. The proposal would apply to purchases occurring 
after the date of enactment. No inference is intended as to the 
contractual validity of the purchase or the effect of the purchase 
transaction on the tax treatment of any party other than the purchaser.
  Clarify and expand math error procedures.--If the IRS determines that 
a taxpayer has failed to provide a correct taxpayer identification 
number (TIN) that is required by statute, the IRS may, in certain cases, 
use the streamlined procedures for mathematical and clerical errors 
(``math error procedures'') to expedite the assessment of tax. The 
Administration proposes the following clarifications to the math error 
procedures applicable to the child tax credit, the child and dependent 
care tax credit, the personal exemption for dependents, the Hope and 
Lifetime Learning tax credits, and the earned income tax credit. First, 
the term ``correct taxpayer identification number'' used on a tax return 
would be defined as the TIN assigned to such individual by the Social 
Security Administration (SSA), or in certain limited cases, the IRS. 
Second, the IRS would be authorized to use data obtained from SSA to 
verify that the TIN provided on the return corresponds to the individual 
for whom the TIN was assigned. Such data would include the individual's 
name, age or date of birth, and Social Security number. Third, the IRS 
would be authorized to use math error procedures to deny eligibility for 
those tax benefits subject to the math error procedures that impose a 
statutory age restriction (i.e., the child tax credit, the child and 
dependent care tax credit and the earned income tax credit) if the 
taxpayer provides a TIN for either the taxpayer or qualifying child that 
the IRS determines, using data from SSA, does not meet the statutory age 
restrictions. The proposal would be effective for taxable years ending 
after the date of enactment.
  Clarify the meaning of ``subject to'' liabilities under section 
357(c).--A transferor generally is required to recognize gain on a 
transfer of property in an otherwise tax-free section 351 exchange to 
the extent the sum of the liabilities assumed, plus those to which the 
transferred property is subject, exceeds the basis in the property. If a 
recourse liability is secured by multiple assets, it is unclear under 
present law whether a transfer of one asset where the transferor remains 
liable is a transfer of property ``subject to the liability.'' Similar 
issues exist with respect to nonrecourse liabilities. Under the 
Administration's proposal, the distinction between the assumption of a 
liability and the acquisition of an asset subject to a liability would 
be eliminated. Instead, the extent to which a liability (including a 
nonrecourse liability) is treated as assumed for Federal income tax 
purposes in connection with a transfer of property would be determined 
on the basis of all the facts and circumstances. In general, if 
nonrecourse indebtedness is secured by more than one asset, and any 
assets securing the indebtedness are transferred subject to the 
indebtedness without any indemnity agreements, then for all Federal 
income tax purposes the transferee would be treated as assuming an 
allocable portion of the liability based upon the relative fair market 
values (determined without regard to section 7701(g)) of the assets 
securing the liability. The proposal would be effective for transfers 
after the date of first committee action. No inference regarding the tax 
treatment under current law is intended.
  Simplify foster child definition under EITC.--In order to simplify the 
EITC rules, the Administration proposes to clarify the definition of 
foster child for purposes of claiming the EITC. Under the proposal, the 
foster child must be the taxpayer's sibling (or a descendant of the 
taxpayer's sibling), or be placed in the taxpayer's home by an agency of 
a State or one of its political subdivisions or a tax-exempt child 
placement agency licensed by a State. The proposal would be effective 
for taxable years beginning after December 31, 1998.
  Clarify tie-breaker rule under EITC.--The earned income tax credit 
tie-breaker rule prevents a lower-income individual from claiming the 
credit with respect to a particular child who could also be a qualifying 
child with respect to a higher-income individual. The Administration 
proposes to clarify that the requirement that a taxpayer identify on his 
or her tax return any

[[Page 70]]

child with respect to whom the taxpayer is claiming the EITC is a 
requirement for claiming the credit, rather than an element of the 
definition of ``qualifying child.'' Thus, under the EITC tie-breaker 
rule, the child would be a qualifying child with respect to the higher-
income individual, regardless of whether the higher-income individual 
actually identifies the child on his or her return. A similar change 
would be made to the definition of ``eligible individual.'' The proposal 
is effective with respect to taxable years ending after the date of 
enactment. No inference is intended as to the operation of the tie-
breaker rule under current law.
  Eliminate non-business valuation discounts.--Under current law, 
taxpayers are claiming large discounts on the valuation of gifts and 
bequests of interests in entities holding marketable assets. Because 
these discounts are inappropriate, the Administration proposes to 
eliminate valuation discounts except as they apply to active businesses. 
Interests in entities generally would be required to be valued for gift 
and estate tax purposes at a proportional share of the net asset value 
of the entity to the extent that the entity holds readily marketable 
assets. The proposal would be effective for gifts made after, and 
decedents dying after, the date of enactment.
  Eliminate ``Crummey'' rule.--Currently, gifts of present interests of 
up to $10,000 (in 1998) per donor per donee each year are excepted from 
the gift tax. The decision in Crummey v. Commissioner held that a 
transfer in trust is a transfer of a present interest if the beneficiary 
has a right to withdraw the property from the trust for a limited period 
of time. The Administration proposes to overrule this decision so that 
only outright gifts of present interests would be counted for purposes 
of the $10,000 gift exception. The proposal would be effective for gifts 
completed after December 31, 1998.
  Eliminate gift tax exemption for personal residence trusts.-- Current 
law excepts transfers of personal residences in trust from the special 
valuation rules applicable when a grantor retains an interest in a 
trust. The Administration proposes to repeal this personal residence 
exception. Thereafter, if a residence is to be used to fund a grantor 
retained interest trust, the trust would be required to pay out the 
required annuity or unitrust amount or else the grantor's retained 
interest would be valued at zero for gift tax purposes. This proposal 
would be effective for transfers in trust after the date of enactment.
  Include qualified terminable interest property (QTIP) trust assets in 
surviving spouse's estate.--A marital deduction is allowed for qualified 
terminable interest property (QTIP) passing to a qualifying trust for a 
spouse either by gift or by bequest. The value of the recipient spouse's 
estate includes the value of any such property in which the decedent had 
a qualifying income interest for life and a deduction was allowed under 
the gift or estate tax. In some cases, taxpayers have attempted to 
whipsaw the government by claiming the deduction in the first estate and 
then arguing against inclusion in the second estate due to some 
technical flaw in the QTIP election. The Administration proposes that, 
if a deduction is allowed under the QTIP provisions, inclusion is 
required in the beneficiary spouse's estate. The proposal would be 
effective for decedents dying after the date of enactment.
  Apply 7.7 percent capitalization rate to credit life insurance 
premiums.--Under current law, a company that issues group credit life 
insurance contracts is required to capitalize 2.05 percent of its net 
premiums for such contracts. However, commissions and other policy 
acquisition expenses on credit life insurance contracts generally are 
higher than policy acquisition expenses for individual life insurance 
contracts, to which a 7.7 percent capitalization rate applies. Thus, the 
statutory proxy rate for policy acquisition costs on credit life 
insurance contracts does not accurately reflect the level of commissions 
and other policy acquisition expenses for credit life insurance. Under 
the Administration's proposal, insurance companies would be required to 
capitalize 7.7 percent of their net premiums for a taxable year with 
respect to all credit life insurance contracts. The proposal would be 
effective for taxable years beginning after the date of enactment.
  Modify corporate-owned life insurance (COLI) rules.--In general, 
interest on policy loans or other indebtedness with respect to life 
insurance, endowment or annuity contracts is not deductible unless the 
insurance contract insures the life of a ``key person'' of a business. 
In addition, the interest deductions of a business generally are reduced 
under a proration rule if the business owns or is a direct or indirect 
beneficiary with respect to certain insurance contracts. The COLI 
proration rules generally do not apply if the contract covers an 
individual who is a 20 percent owner of the business or is an officer, 
director, or employee of such business. These exceptions under current 
law still permit leveraged businesses to fund significant amounts of 
deductible interest and other expenses with tax-exempt or tax-deferred 
inside buildup. The Administration proposes to repeal the exception 
under the COLI proration rules for contracts insuring employees, 
officers or directors (other than 20 percent owners) of the business. 
The proposal also would conform the key person exception for disallowed 
interest deductions attributable to policy loans and other indebtedness 
with respect to insurance contracts to the 20 percent owner exception in 
the COLI proration rules. The proposal would be effective for taxable 
years beginning after date of enactment.
  Modify reserve rules for annuity contracts.--Under current law, a life 
insurance company that issues an annuity contract claims a reserve 
deduction equal to the greater of the net surrender value of the 
contract and an amount that is based on the Commissioner's

[[Page 71]]

Annuities Reserve Valuation Method (CARVM) in effect on the date that 
the annuity contract is issued, subject to a cap equal to the annual 
statement reserve for the contract. In 1997, the National Association of 
Insurance Commissioners adopted new actuarial guidelines interpreting 
CARVM. The guidelines generally require life insurance companies to 
compute CARVM reserves by determining the greatest possible present 
value of all guaranteed benefits, using a number of worst case or 
``conservative'' assumptions. The guidelines are effective on December 
31, 1998, and apply to all contracts issued on or after January 1, 1981. 
Because these new guidelines would be inappropriate for calculating tax 
reserves, the Administration proposes that tax reserves for all annuity 
contracts with cash surrender values would be set at the contract's net 
cash surrender value plus a specified percentage of the contract's net 
cash surrender value that would be phased out over a portion of the 
contract period. The proposal would be effective for taxable years 
ending on or after the date of enactment.
  Tax certain exchanges of insurance contracts and reallocations of 
assets within variable insurance contracts.--Generally, investors are 
taxed upon the sale or exchange of assets. However, certain exchanges of 
life insurance, endowment and annuity contracts are not taxed. Also, the 
holder of a variable contract who liquidates part or all of his 
investment in one fund, and reallocates the proceeds to a different fund 
within a variable contract, is not taxed. The Adminstration proposes 
that all exchanges of an insurance contract for a variable contract 
would be taxable. Exchanges of variable contracts for any type of life 
insurance, endowment or annuity contract would be taxable. Each variable 
contract investment in a separate account mutual fund or in the 
insurance company's general account would be treated as a separate 
contract. In addition, the investment in the contract would be net of 
mortality and expense charges. These rules would apply to contracts 
issued after the date of first committee action. A material change in an 
existing contract would be treated as the issuance of a new contract.
  Reduce ``investment in the contract'' for mortality and expense 
charges on certain insurance contracts.--For purposes of computing the 
amount of taxable investment income under section 72 of the Internal 
Revenue Code from distributions under cash value life insurance, 
endowment, or annuity contracts, the holder's tax basis includes 
premiums used to pay mortality and expense charges. These charges are 
used to pay for annual term life insurance coverage, other types of 
insurance coverage, and options to buy life annuities at specified rates 
guaranteed in a deferred annuity contract. As a result, these rules 
overstate basis and thus understate the amount of tax-deferred income 
under these contracts when they are surrendered for cash or the holder 
receives other distributions under the contract. The Administration 
proposes to modify the computation of basis under section 72 by 
subtracting mortality and expense charges. This proposal would apply to 
contracts issued after the date of first committee action.
  Amend 80/20 company rules.--Dividends paid by a so-called ``80/20 
company'' generally are partially or fully exempt from U.S. withholding 
tax. A U.S. corporation is treated as an 80/20 company if at least 80 
percent of the gross income of the corporation for the three-year period 
preceding the year of a dividend is foreign source income attributable 
to the active conduct of a foreign trade or business (or the foreign 
business of a subsidiary). Certain foreign multinationals improperly 
seek to exploit the rules applicable to 80/20 companies in order to 
avoid U.S. withholding tax liability on earnings of U.S. subsidiaries 
that are distributed abroad. The proposal would prevent taxpayers from 
avoiding withholding tax through manipulations of these rules. The 
proposal would apply to interest or dividends paid or accrued after the 
date of enactment.
  Prescribe regulatory directive to address tax avoidance involving 
foreign built-in losses.--Certain taxpayers are engaging in tax 
avoidance transactions that inappropriately use losses generated outside 
the United States to offset income that otherwise would be subject to 
U.S. tax. The provision would direct the Secretary of Treasury to 
prescribe regulations, as may be necessary or appropriate to prevent the 
avoidance of tax, to determine (1) the basis of assets held directly or 
indirectly by a person other than a United States person, and (2) the 
amount of built-in deductions of a person other than a U.S. person, or 
an entity held directly or indirectly by such a person. The proposal 
would be effective on the date of enactment.
  Prescribe regulatory directive to address tax avoidance through use of 
hybrids.--Certain persons are entering into tax avoidance transactions 
that utilize hybrid entities, securities and transactions to achieve tax 
results that are inconsistent with the purposes of the provisions of 
U.S. law (including treaties) that are relied on for such results. Other 
transactions involving hybrids do not achieve tax results that are 
inconsistent with the purposes of U.S. law. The consequences of these 
transactions should be described in the form of promptly issued 
administrative guidance both to prevent inappropriate results and to 
provide taxpayers with greater certainty. The proposal would direct the 
Secretary of Treasury to prescribe regulations to prevent the avoidance 
of tax through the use of hybrid entities, securities and transactions 
that achieve results inconsistent with the purposes of U.S. law 
(including treaties). The proposal would be effective on the date of 
enactment.
  Modify foreign office material participation exception applicable to 
inventory sales attributable to nonresident's U.S. office.--In the case 
of a sale of inventory property that is attributable to a non

[[Page 72]]

resident's office or other fixed place of business within the United 
States, the sales income is generally U.S. source. The income is foreign 
source, however, if the inventory is sold for use, disposition, or 
consumption outside the United States and the nonresident's foreign 
office or other fixed place of business materially participates in the 
sale. The proposal would provide that the foreign source exception shall 
apply only if an income tax equal to at least 10 percent of the income 
from the sale is actually paid to a foreign country with respect to such 
income. The proposal thereby ensures that the United States does not 
cede its jurisdiction to tax such sales unless the income from the sale 
is actually taxed by a foreign country at some minimal level. The 
proposal would be effective for transactions occurring on or after the 
date of enactment.
  Stop abuse of controlled foreign corporation (CFC) exception to 
ownership requirements.--Under section 887 of the Internal Revenue Code, 
a foreign corporation is subject to a four-percent tax on its United 
States source gross transportation income. The tax does not apply, 
however, if the corporation is organized in a country (an ``exemption 
country'') that grants an equivalent tax exemption to U.S. shipping 
companies. The exemption from the four-percent tax is subject to an 
anti-abuse rule that requires at least 50 percent of the stock of the 
corporation be owned by individual residents of an exemption country. 
Thus residents of a non-exemption country cannot secure the exemption 
simply by forming their shipping corporation in an exemption country. 
The anti-abuse rule requiring exemption country ownership does not 
apply, however, if the corporation is a controlled foreign corporation 
(the ``CFC exception''). The premise for the CFC exception is that the 
U.S. shareholders of a CFC will be subject under U.S. tax law to current 
income taxation on their share of the foreign corporation's shipping 
income and thus the four-percent tax should not apply if the corporation 
is organized in an exemption country. However, residents of non-
exemption countries can achieve CFC status for their shipping companies 
simply by owning the corporations through U.S. partnerships. Non-
exemption country individuals can thereby avoid the anti-abuse rule 
requiring exemption country ownership and illegitimately secure the 
exemption from the U.S. four-percent tax. The proposal would stop that 
abuse. It would be effective for taxable years beginning after the date 
of enactment.

                  OTHER PROVISIONS THAT AFFECT RECEIPTS

  Reinstate environmental tax imposed on corporate taxable income and 
deposited in the Hazardous Substance Superfund Trust Fund.--Under prior 
law a tax equal to 0.12 percent of alternative minimum taxable income 
(with certain modifications) in excess of $2 million was levied on all 
corporations and deposited in the Hazardous Substance Superfund Trust 
Fund. The Administration proposes to reinstate this tax, which expired 
on December 31, 1995, for taxable years beginning after December 31, 
1997 and before January 1, 2009.
  Reinstate excise taxes deposited in the Hazardous Substance Superfund 
Trust Fund.--The excise taxes that were levied on petroleum, chemicals, 
and imported substances and deposited in the Hazardous Substance 
Superfund Trust Fund, are proposed to be reinstated for the period after 
the date of enactment and before October 1, 2008. These taxes expired on 
December 31, 1995.
   Extend excise taxes on gasoline, diesel fuel, and special motor 
fuels.--Excise taxes are imposed on gasoline (other than aviation 
gasoline) at a rate of 18.4 cents per gallon, diesel fuel at a rate of 
24.4 cents per gallon, and special motor fuels at varying rates. The tax 
rates are scheduled to fall to 4.4 cents per gallon (or comparable rates 
in the case of special motor fuels) on September 30, 1999. The 
Administration proposes to extend the current rates of tax on 
nonaviation gasoline, diesel fuel and special motor fuels (with a 0.1-
cent-per-gallon reduction, reflecting the expiration of the LUST Trust 
Fund tax on April 1, 2005).
  Convert excise taxes deposited in the Airport and Airway Trust Fund to 
cost-based user fees assessed for Federal Aviation Administration (FAA) 
services.--Beginning in 2000, the excise taxes that are levied on 
domestic air passenger tickets and flight segments, international 
departures and arrivals, domestic air cargo, and aviation fuels are 
proposed to be phased out over a five-year period, and replaced with 
more efficient, cost-based user fees charged for FAA services. As part 
of a continuing effort to create a more business-like FAA, the 
Administration will propose legislation by which the FAA would be 
entirely funded by cost-based user fees by 2003.
  Receipts from tobacco legislation.--The Administration includes 
receipts from tobacco legislation in the 1999 budget. These receipts, 
which total approximately $65 billion for the five years 1999 through 
2003, would support tobacco-related public health and other activities 
at the State and Federal level.
  Assess fees for examination of bank holding companies and State-
chartered member banks (receipt effect).--The Administration proposes to 
require the Federal Reserve and the Federal Deposit Insurance 
Corporation (FDIC) to assess fees for the examination of bank holding 
companies and State-chartered banks. The Federal Reserve currently funds 
the costs of such examinations from earnings; therefore, deposits of 
earnings by the Federal Reserve, which are classified as governmental 
receipts, will increase by the amount of the fees.
  Transfer retirees and certain active employees of the FDIC and the 
Board of Governors of the Federal Reserve to the Federal Employee Health

[[Page 73]]

Benefits Program (FEHBP) (receipt effect).--The Administration supports 
the transfer of health coverage for retirees and certain active 
employees of the FDIC and the Board of Governors of the Federal Reserve, 
who are now covered by in-house health care plans, to the FEHBP 
administered by the Office of Personnel Management (OPM). The current 
plans are becoming more expensive because of the small size and age of 
the insured group. FEHBP coverage would be more cost effective. This 
proposal will reduce the administrative costs of the Federal Reserve, 
thereby increasing deposits of earnings by the Federal Reserve, which 
are classified as governmental receipts.
  Repeal Federal Employees Retirement System (FERS) open season (receipt 
effect).--The Administration proposes, in a supplemental, to repeal 
section 642 of the Treasury and General Government Appropriation Act, 
1998. That section provides an ``open season'' from July 1, 1998 through 
December 31, 1998 during which time Federal and Postal Service employees 
covered by the Civil Service Retirement System (CSRS) could switch to 
FERS. Repealing section 642 would increase employee payments to the 
Civil Service Retirement and Disability Fund.
  Create solvency incentive for State Unemployment Trust Fund 
accounts.--The Administration proposes to create an incentive for States 
to improve the solvency of their State accounts in the Federal 
Unemployment Trust Fund. This is intended to improve the ability of 
States to continue paying benefits in the event of a recession. The 
incentive consists of tying a portion of the projected distributions to 
the States under the Reed Act to demonstrated improvements in solvency.

                                     

                   Table 3-3.  EFFECT OF PROPOSALS ON RECEIPTS                                  
                             (In billions of dollars)                                            
----------------------------------------------------------------------------------------------------------------
                                                                          Estimate                              
                                          ----------------------------------------------------------------------
                                             1998      1999      2000      2001      2002      2003    1999-2003
----------------------------------------------------------------------------------------------------------------
Provide tax relief and extend expiring                                                                          
 provisions:                                                                                                    
  Make child care more affordable:                                                                              
    Increase and simplify child and                                                                             
     dependent care tax credit...........  ........     -0.3      -1.3      -1.1      -1.2      -1.2       -5.1 
    Establish tax credit for employer-                                                                          
     provided child care.................  ........       -*      -0.1      -0.1      -0.1      -0.1       -0.5 
                                          ----------------------------------------------------------------------
      Subtotal, make child care more                                                                            
       affordable........................  ........     -0.3      -1.3      -1.3      -1.3      -1.4       -5.6 
                                                                                                                
  Promote energy efficiency and improve                                                                         
   the environment:                                                                                             
    Provide tax credit for energy-                                                                              
     efficient building equipment........  ........     -0.1      -0.2      -0.3      -0.3      -0.4       -1.4 
    Provide tax credit for purchase of                                                                          
     new energy-efficient homes..........  ........       -*        -*        -*      -0.1      -0.1       -0.2 
    Provide tax credit for high-fuel-                                                                           
     economy vehicles....................  ........  ........  ........     -0.1      -0.2      -0.4       -0.7 
    Equalize treatment of parking and                                                                           
     transit benefits....................  ........       -*        -*        -*        -*        -*       -0.1 
    Provide investment tax credit for CHP                                                                       
     systems.............................        *      -0.3      -0.3      -0.1      -0.1      -0.2       -0.9 
    Provide tax credit for replacement of                                                                       
     certain circuitbreaker equipment....  ........       -*        -*        -*        -*        -*         -* 
    Provide tax credit for certain PFC                                                                          
     and HFC recycling equipment.........  ........       -*        -*        -*        -*        -*         -* 
    Provide tax credit for rooftop solar                                                                        
     equipment...........................  ........       -*        -*        -*        -*        -*       -0.1 
    Extend wind and biomass tax credit...  ........       -*        -*        -*      -0.1      -0.1       -0.2 
                                          ----------------------------------------------------------------------
      Subtotal, promote energy efficiency                                                                       
       and improve the environment.......        *      -0.4      -0.6      -0.6      -0.8      -1.2       -3.6 
                                                                                                                
  Promote expanded retirement savings....       -*      -0.1      -0.2      -0.2      -0.2      -0.2       -0.9 
  Expand education incentives:                                                                                  
    Provide incentives for public school                                                                        
     construction........................  ........     -0.2      -0.9      -1.3      -1.3      -1.3       -5.0 
    Extend and expand exclusion for                                                                             
     employer-provided educational                                                                              
     assistance..........................       -*      -0.2      -0.3      -0.4      -0.1   ........      -1.0 
    Eliminate tax when forgiving student                                                                        
     loans subject to income contingent                                                                         
     repayment...........................  ........  ........  ........  ........  ........  ........  .........
                                          ----------------------------------------------------------------------
      Subtotal, expand education                                                                                
       incentives........................       -*      -0.4      -1.2      -1.7      -1.4      -1.3       -6.0 
                                                                                                                
  Increase low-income housing tax credit                                                                        
   per capita cap........................  ........       -*      -0.2      -0.3      -0.4      -0.6       -1.6 
  Extend expiring provisions:                                                                                   
    Extend work opportunity tax credit...       -*      -0.2      -0.3      -0.2      -0.1        -*       -0.8 
    Extend welfare-to-work tax credit....  ........       -*      -0.1      -0.1        -*        -*       -0.2 
    Extend R&E tax credit................     -0.4      -0.8      -0.6      -0.3      -0.1        -*       -1.8 
    Extend deduction provided for                                                                               
     contributions of appreciated stock                                                                         
     to private foundations..............  ........       -*        -*   ........  ........  ........      -0.1 
    Make permanent the expensing of                                                                             
     brownfields remediation costs.......  ........  ........  ........     -0.1      -0.2      -0.2       -0.5 
                                          ----------------------------------------------------------------------
      Subtotal, extend expiring                                                                                 
       provisions........................     -0.4      -1.1      -1.0      -0.6      -0.4      -0.3       -3.4 
                                                                                                                
  Modify international trade provisions:                                                                        
    Extend GSP and modify other trade                                                                           
     provisions \1\......................  ........     -0.5      -0.5      -0.5        -*        -*       -1.5 
    Extend and modify Puerto Rico                                                                               
     economic-activity tax credit........  ........       -*      -0.1      -0.1      -0.2      -0.2       -0.6 
    Levy tariff on certain textiles and                                                                         
     apparel products produced in the                                                                           
     CNMI \1\............................  ........  ........      0.2       0.2       0.2       0.2        0.7 
    Expand Virgin Island tariff credits                                                                         
     \1\.................................  ........  ........       -*        -*        -*        -*         -* 
                                          ----------------------------------------------------------------------
      Subtotal, modify international                                                                            
       trade provisions \1\..............  ........     -0.6      -0.4      -0.4         *        -*       -1.4 
                                                                                                                

[[Page 74]]

                                                                                                                
  Provide other tax incentives:                                                                                 
    Expand tax incentives for SSBICs.....       -*        -*        -*        -*        -*        -*         -* 
    Accelerate and expand incentives                                                                            
     available to two new empowerment                                                                           
     zones...............................  ........       -*        -*   ........  ........  ........      -0.1 
    Make first $2,000 of severance pay                                                                          
     exempt from income tax..............  ........       -*      -0.2      -0.2      -0.2      -0.2       -0.8 
                                          ----------------------------------------------------------------------
      Subtotal, provide other tax                                                                               
       incentives........................       -*      -0.1      -0.2      -0.2      -0.2      -0.2       -0.8 
                                                                                                                
  Simplify the tax laws..................       -*      -0.1      -0.1      -0.1      -0.1      -0.1       -0.6 
  Enhance taxpayers' rights..............  ........       -*        -*        -*      -0.1      -0.1       -0.2 
                                          ----------------------------------------------------------------------
    Subtotal, provide tax relief and                                                                            
     extend expiring provisions \1\......     -0.5      -3.2      -5.1      -5.5      -5.0      -5.4      -24.2 
                                                                                                                
Eliminate unwarranted benefits and adopt                                                                        
 other revenue measures:                                                                                        
  Defer deduction for interest and OID on                                                                       
   convertible debt......................        *         *         *         *         *       0.1        0.2 
  Eliminate dividends-received deduction                                                                        
   for certain preferred stock...........        *         *         *         *         *       0.1        0.2 
  Repeal percentage depletion for non-                                                                          
   fuel minerals mined on Federal and                                                                           
   formerly Federal lands................  ........      0.1       0.1       0.1       0.1       0.1        0.5 
  Repeal tax-free conversions of large C                                                                        
   corporations to S corporations........  ........        *         *         *         *       0.1        0.1 
  Replace sales-source rules with                                                                               
   activity-based rules..................  ........      0.6       1.4       1.5       1.5       1.6        6.6 
  Modify rules relating to foreign oil                                                                          
   and gas extraction income.............  ........        *       0.1       0.1       0.1       0.1        0.4 
  Repeal lower-of-cost-or-market                                                                                
   inventory accounting method...........        *       0.4       0.5       0.4       0.2       0.1        1.6 
  Increase penalties for failure to file                                                                        
   correct information returns...........  ........        *         *         *         *         *        0.1 
  Tighten the substantial understatement                                                                        
   penalty for large corporations........  ........  ........        *         *         *         *        0.1 
  Repeal exemption for withholding on                                                                           
   gambling winnings from bingo and keno                                                                        
   in excess of $5,000...................  ........        *         *         *         *         *          * 
  Reinstate oil spill excise tax \1\.....        *       0.2       0.2       0.2       0.2       0.3        1.2 
  Modify Federal Unemployment Act                                                                               
   provisions............................  ........  ........  ........  ........  ........  ........  .........
  Extend pro-rata disallowance of tax-                                                                          
   exempt interest expense that applies                                                                         
   to banks to all financial                                                                                    
   intermediaries........................        *         *         *         *         *         *        0.1 
  Increase proration percentage for P&C                                                                         
   insurance companies...................       -*         *       0.1       0.1       0.1       0.1        0.4 
  Preclude certain taxpayers from                                                                               
   prematurely claiming losses from                                                                             
   receivables...........................  ........      0.4       0.1       0.1       0.1       0.1        0.7 
  Restrict special net operating loss                                                                           
   carryback rules for specified                                                                                
   liability losses......................  ........        *         *         *         *         *        0.1 
  Freeze grandfather status of stapled                                                                          
   (or ``paired-share'') REITs...........        *         *         *         *         *         *        0.1 
  Restrict impermissible business                                                                               
   indirectly conducted by REITs.........  ........        *         *         *         *         *          * 
  Modify treatment of closely held REITs.  ........        *         *         *         *         *        0.1 
  Modify depreciation method for tax-                                                                           
   exempt use property...................  ........        *         *         *         *         *        0.1 
  Impose excise tax on purchase of                                                                              
   structured settlements \1\............  ........        *         *         *         *         *        0.1 
  Clarify and expand math-error                                                                                 
   procedures............................  ........        *       0.1       0.1       0.1       0.1        0.3 
  Clarify the meaning of ``subject to''                                                                         
   liabilities under section 357(c)......        *         *         *         *         *         *        0.1 
  Simplify foster child definition under                                                                        
   EITC..................................  ........  ........        *         *         *         *          * 
  Clarify tie-breaker rule under EITC....  ........        *         *         *         *         *          * 
  Eliminate non-business valuation                                                                              
   discounts.............................  ........  ........      0.2       0.2       0.3       0.3        1.0 
  Eliminate ``Crummey'' rule.............  ........  ........        *         *         *         *        0.1 
  Eliminate gift tax exemption for                                                                              
   personal residence trusts.............  ........       -*        -*         *         *         *          * 
  Include QTIP trust assets in surviving                                                                        
   spouse's estate.......................  ........  ........        *         *         *         *          * 
  Apply 7.7% capitalization rate to                                                                             
   credit life insurance premiums........        *         *         *         *         *         *        0.1 
  Modify corporate-owned life insurance                                                                         
   (COLI) rules..........................      0.3       0.4       0.4       0.4       0.5       0.5        2.2 
  Modify reserve rules for annuity                                                                              
   contracts.............................  ........      1.8       0.7       0.8       0.6       0.7        4.6 
  Tax certain exchanges of insurance                                                                            
   contracts and reallocations of assets                                                                        
   within variable insurance contracts...        *         *       0.1       0.2       0.3       0.4        0.9 
  Reduce ``investment in the contract''                                                                         
   for mortality and expense charges on                                                                         
   certain insurance contracts...........  ........        *         *         *         *       0.1        0.1 
  Amend 80/20 company rules..............        *         *         *         *       0.1       0.1        0.2 
  Prescribe regulatory directive to                                                                             
   address tax avoidance involving                                                                              
   foreign built-in losses...............  ........        *       0.1       0.1       0.1       0.1        0.2 
  Prescribe regulatory directive to                                                                             
   address tax avoidance through use of                                                                         
   hybrids...............................  ........        *       0.1       0.1         *         *        0.2 
  Modify foreign office material                                                                                
   participation exception applicable to                                                                        
   inventory sales attributable to                                                                              
   nonresident's U.S. office.............        *         *         *         *         *         *          * 
  Stop abuse of CFC exception to                                                                                
   ownership requirements................  ........        *         *         *         *         *          * 
                                          ----------------------------------------------------------------------
      Subtotal, eliminate unwarranted                                                                           
       benefits and adopt other revenue                                                                         
       measures \1\......................      0.3       4.3       4.3       4.7       4.7       5.0       23.0 
                                                                                                                
Other provisions that affect receipts:                                                                          
  Reinstate environmental tax imposed on                                                                        
   corporate taxable income \2\..........  ........      1.1       0.7       0.7       0.7       0.7        3.8 
  Reinstate Superfund excise taxes \1\...      0.1       0.7       0.7       0.7       0.7       0.7        3.6 
  Extend excise taxes on gasoline, diesel                                                                       
   fuel and special motor fuels \1\......  ........  ........      0.4       0.4       0.4       0.4        1.5 
  Convert airport and airway trust fund                                                                         
   taxes to a cost-based user fee system                                                                        
   \1\...................................  ........  ........      1.7       1.7       1.7       0.8        6.0 
  Receipts from tobacco legislation......  ........      9.8      11.8      13.3      14.5      16.1       65.5 
  Assess fees for examination of bank                                                                           
   holding companies and State-chartered                                                                        
   member banks (receipt effect) \1\.....  ........      0.1       0.1       0.1       0.1       0.1        0.4 
  Transfer retirees and certain active                                                                          
   employees of the FDIC and Board of                                                                           
   Governors of the Federal Reserve to                                                                          
   FEHBP (receipt effect)................  ........        *         *         *         *         *          * 

[[Page 75]]

                                                                                                                
  Repeal FERS open season (receipt                                                                              
   effect)...............................        *       0.2       0.2       0.2       0.2       0.2        1.0 
  Create solvency incentive for State                                                                           
   unemployment trust fund accounts \1\..  ........  ........  ........      0.4       0.4   ........       0.8 
                                          ----------------------------------------------------------------------
      Subtotal, other provisions that                                                                           
       affect receipts \1\...............      0.1      11.8      15.5      17.4      18.8      19.1       82.6 
                                          ----------------------------------------------------------------------
Total effect of proposals \1\............     -0.1      12.9      14.7      16.7      18.5      18.7      81.5  
----------------------------------------------------------------------------------------------------------------
* $50 million or less.                                                                                          
\1\ Net of income offsets.                                                                                      
\2\ Net of deductibility for income tax purposes.                                                               


[[Page 76]]


                          Table 3-4.  RECEIPTS BY SOURCE                                         
                             (In millions of dollars)                                            
----------------------------------------------------------------------------------------------------------------
                                 1997        1998        1999        2000        2001        2002        2003   
           Source               actual     estimate    estimate    estimate    estimate    estimate    estimate 
----------------------------------------------------------------------------------------------------------------
Individual income taxes                                                                                         
 (Federal funds):                                                                                               
  Existing law..............     737,466     767,874     792,739     808,471     837,867     881,538     919,874
  Proposed Legislation                                                                                          
   (PAYGO)..................  ..........        -106      -1,285      -3,907      -4,503      -4,485      -4,341
                             -----------------------------------------------------------------------------------
Total individual income                                                                                         
 taxes......................     737,466     767,768     791,454     804,564     833,364     877,053     915,533
                             ===================================================================================
Corporation income taxes:                                                                                       
  Federal funds:                                                                                                
    Existing law............     182,289     190,944     194,412     200,388     206,033     211,741     217,427
    Proposed Legislation                                                                                        
     (PAYGO)................  ..........        -102       2,210       1,671       2,255       2,080       2,145
                             -----------------------------------------------------------------------------------
  Total Federal funds                                                                                           
   corporation income taxes.     182,289     190,842     196,622     202,059     208,288     213,821     219,572
                             -----------------------------------------------------------------------------------
  Trust funds:                                                                                                  
    Hazardous substance                                                                                         
     superfund..............           4  ..........  ..........  ..........  ..........  ..........  ..........
    Proposed Legislation                                                                                        
     (PAYGO)................  ..........  ..........       1,343         870         863         863         864
                             -----------------------------------------------------------------------------------
Total corporation income                                                                                        
 taxes......................     182,293     190,842     197,965     202,929     209,151     214,684     220,436
                             ===================================================================================
Social insurance and                                                                                            
 retirement receipts (trust                                                                                     
 funds):                                                                                                        
  Employment and general                                                                                        
   retirement:                                                                                                  
    Old-age and survivors                                                                                       
     insurance (Off-budget).     336,729     358,949     374,612     388,988     404,101     422,586     441,648
    Disability insurance                                                                                        
     (Off-budget)...........      55,261      57,042      59,516      64,915      68,630      71,756      74,995
    Hospital insurance......     110,710     118,029     122,626     128,479     134,081     140,430     146,899
    Railroad retirement:                                                                                        
      Social Security                                                                                           
       equivalent account...       1,611       1,611       1,619       1,624       1,636       1,648       1,651
      Rail pension and                                                                                          
       supplemental annuity.       2,440       2,493       2,495       2,507       2,521       2,536       2,548
                             -----------------------------------------------------------------------------------
  Total employment and                                                                                          
   general retirement.......     506,751     538,124     560,868     586,513     610,969     638,956     667,741
                             -----------------------------------------------------------------------------------
    On-budget...............     114,761     122,133     126,740     132,610     138,238     144,614     151,098
    Off-budget..............     391,990     415,991     434,128     453,903     472,731     494,342     516,643
                             -----------------------------------------------------------------------------------
  Unemployment insurance:                                                                                       
    Deposits by States \1\ .      22,071      22,658      24,175      25,456      26,319      27,175      28,075
      Proposed Legislation                                                                                      
       (PAYGO)..............  ..........  ..........  ..........  ..........         450         490  ..........
    Federal unemployment                                                                                        
     receipts \1\ ..........       6,103       6,196       6,254       6,345       6,359       6,449       6,495
    Railroad unemployment                                                                                       
     receipts \1\ ..........          28          68         104          97          78          78          95
                             -----------------------------------------------------------------------------------
  Total unemployment                                                                                            
   insurance................      28,202      28,922      30,533      31,898      33,206      34,192      34,665
                             -----------------------------------------------------------------------------------
  Other retirement:                                                                                             
    Federal employees'                                                                                          
     retirement--employee                                                                                       
     share..................       4,344       4,245       4,247       4,361       4,601       4,382       3,838
      Proposed Legislation                                                                                      
       (non-PAYGO)..........  ..........           6         167         201         212         224         232
    Non-Federal employees                                                                                       
     retirement \2\ ........          74          77          71          65          60          54          44
                             -----------------------------------------------------------------------------------
  Total other retirement....       4,418       4,328       4,485       4,627       4,873       4,660       4,114
                             -----------------------------------------------------------------------------------
Total social insurance and                                                                                      
 retirement receipts........     539,371     571,374     595,886     623,038     649,048     677,808     706,520
                             ===================================================================================
  On-budget.................     147,381     155,383     161,758     169,135     176,317     183,466     189,877
  Off-budget................     391,990     415,991     434,128     453,903     472,731     494,342     516,643
                             ===================================================================================
Excise taxes:                                                                                                   
  Federal funds:                                                                                                
    Alcohol taxes...........       7,257       7,251       7,254       7,250       7,236       7,223       7,211
    Tobacco taxes...........       5,873       5,926       5,900       7,495       8,083       8,686       8,895
    Transportation fuels tax       7,107         442         682          88          89          90          92
    Telephone and teletype                                                                                      
     services...............       4,543       4,864       5,129       5,394       5,691       6,015       6,356
    Ozone depleting                                                                                             
     chemicals and products.         130          55          30          10  ..........  ..........  ..........
    Other Federal fund                                                                                          
     excise taxes...........       2,921       1,529       1,613       1,430       1,373       1,338       1,263
      Proposed Legislation                                                                                      
       (PAYGO)..............  ..........  ..........          12         515         531         550         568
                             -----------------------------------------------------------------------------------
  Total Federal fund excise                                                                                     
   taxes....................      27,831      20,067      20,620      22,182      23,003      23,902      24,385
                             -----------------------------------------------------------------------------------
  Trust funds:                                                                                                  
    Highway.................      23,867      26,063      38,614      33,201      33,812      34,448      35,107
    Airport and airway......       4,007       7,975      10,038       9,273       9,793      10,525      11,095

[[Page 77]]

                                                                                                                
      Proposed Legislation                                                                                      
       (PAYGO)..............  ..........  ..........  ..........       2,267       2,267       2,267       1,133
    Aquatic resources.......         316         281         379         339         345         353         359
    Black lung disability                                                                                       
     insurance..............         614         640         662         684         703         718         733
    Inland waterway.........          96         116         120         123         126         131         135
    Hazardous substance                                                                                         
     superfund..............          71  ..........  ..........  ..........  ..........  ..........  ..........
      Proposed Legislation                                                                                      
       (PAYGO)..............  ..........         101         934         949         960         976         990
    Oil spill liability.....           1  ..........  ..........  ..........  ..........  ..........  ..........
      Proposed Legislation                                                                                      
       (PAYGO)..............  ..........          46         317         321         325         330         336
    Vaccine injury                                                                                              
     compensation...........         123         111         111         111         111         111         111
    Leaking underground                                                                                         
     storage tank...........          -2         140         214         182         186         189         193
                             -----------------------------------------------------------------------------------
  Total trust funds excise                                                                                      
   taxes....................      29,093      35,473      51,389      47,450      48,628      50,048      50,192
                             -----------------------------------------------------------------------------------
Total excise taxes..........      56,924      55,540      72,009      69,632      71,631      73,950      74,577
                             ===================================================================================
Estate and gift taxes:                                                                                          
  Existing law..............      19,845      20,436      20,542      21,389      22,353      24,156      25,300
  Proposed Legislation                                                                                          
   (PAYGO)..................  ..........  ..........          -1         253         266         291         319
                             -----------------------------------------------------------------------------------
Total estate and gift taxes.      19,845      20,436      20,541      21,642      22,619      24,447      25,619
                             ===================================================================================
Customs duties:                                                                                                 
  Federal funds.............      17,131      17,515      17,928      18,890      19,691      21,053      22,655
    Proposed Legislation                                                                                        
     (PAYGO)................  ..........  ..........        -658        -323        -333         225         224
  Trust funds...............         797         848         905         964       1,029       1,097       1,171
                             -----------------------------------------------------------------------------------
Total customs duties........      17,928      18,363      18,175      19,531      20,387      22,375      24,050
                             ===================================================================================
MISCELLANEOUS RECEIPTS: \3\                                                                                     
  Miscellaneous taxes.......         107         113         115         118         120         123         126
  Receipts from tobacco                                                                                         
   legislation (PAYGO)......  ..........  ..........       9,795      11,787      13,283      14,544      16,085
  United Mine Workers of                                                                                        
   America combined benefit                                                                                     
   fund.....................         339         323         282         273         266         258         251
  Deposit of earnings,                                                                                          
   Federal Reserve System...      19,636      24,991      24,544      24,950      25,501      26,121      26,786
    Proposed Legislation                                                                                        
     (PAYGO)................  ..........  ..........          98         102         106         111         116
  Defense cooperation.......  ..........          12           6  ..........  ..........  ..........  ..........
  Fees for permits and                                                                                          
   regulatory and judicial                                                                                      
   services.................       3,222       5,778       9,605      12,888      15,097      15,843      16,074
  Fines, penalties, and                                                                                         
   forfeitures..............       1,994       2,140       2,100       1,991       1,899       1,877       1,877
  Gifts and contributions...         184         194         177         147         126         121         123
  Refunds and recoveries....         -17         -16         -16         -16         -16         -16         -16
                             -----------------------------------------------------------------------------------
Total miscellaneous receipts      25,465      33,535      46,706      52,240      56,382      58,982      61,422
                             ===================================================================================
Total budget receipts.......   1,579,292   1,657,858   1,742,736   1,793,576   1,862,582   1,949,299   2,028,157
  On-budget.................   1,187,302   1,241,867   1,308,608   1,339,673   1,389,851   1,454,957   1,511,514
  Off-budget................     391,990     415,991     434,128     453,903     472,731     494,342     516,643
                             -----------------------------------------------------------------------------------
         MEMORANDUM                                                                                             
  Federal funds.............   1,010,315   1,050,472   1,093,576   1,121,674   1,163,467   1,219,949   1,269,885
  Trust funds...............     365,248     383,120     412,247     423,654     441,874     461,621     480,193
  Interfund transactions....    -188,261    -191,725    -197,215    -205,655    -215,490    -226,613    -238,564
                             -----------------------------------------------------------------------------------
Total on-budget.............   1,187,302   1,241,867   1,308,608   1,339,673   1,389,851   1,454,957   1,511,514
                             -----------------------------------------------------------------------------------
Off-budget (trust funds)....     391,990     415,991     434,128     453,903     472,731     494,342     516,643
                             ===================================================================================
Total.......................   1,579,292   1,657,858   1,742,736   1,793,576   1,862,582   1,949,299   2,028,157
----------------------------------------------------------------------------------------------------------------
\1\ Deposits by States cover the benefit part of the program. Federal unemployment receipts cover administrative
  costs at both the Federal and State levels. Railroad unemployment receipts cover both the benefits and        
  administrative costs of the program for the railroads.                                                        
\2\ Represents employer and employee contributions to the civil service retirement and disability fund for      
  covered employees of Government-sponsored, privately owned enterprises and the District of Columbia municipal 
  government.                                                                                                   
\3\ Includes both Federal and trust funds. Trust fund amounts in miscellaneous receipts are 1997: $746 million; 
  1998: $740 million; 1999: $683 million; 2000: $649 million; 2001: $639 million; 2002: $647 million; and 2003: 
  $662 million.