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


 
                           5. TAX EXPENDITURES

  Tax expenditures are revenue losses due to preferential provisions of 
the Federal tax laws, such as special exclusions, exemptions, 
deductions, credits, deferrals, or tax rates. They are alternatives to 
other policy instruments, such as spending or regulatory programs, as 
means of achieving Federal policy goals. Tax expenditures are created 
for a variety of reasons, including to encourage certain activities, to 
improve fairness, to ease compliance with and administration of the tax 
system, and to reduce certain tax-induced distortions. The Congressional 
Budget Act of 1974 (Public Law 93-344) requires that a list of tax 
expenditures be included in the budget.
  The largest tax expenditures tend to be associated with the individual 
income tax. For example, tax preferences are provided for employer 
contributions for medical insurance, pension contributions and earnings, 
mortgage interest payments on owner-occupied homes, capital gains, and 
payments of State and local individual income taxes. Tax expenditures 
under the corporate income tax tend to be related to the rate of cost 
recovery for various investments; as is discussed below, the extent to 
which these provisions are classified as tax expenditures varies 
according to the conceptual baseline used. Charitable contributions and 
credits for State taxes on bequests are the largest tax expenditures 
under the unified transfer (i.e., estate and gift) tax.
  Because of potential interactions among provisions, this chapter does 
not present a grand total revenue loss estimate for tax expenditures. 
Moreover, past tax changes entailing broad elimination of tax 
expenditures were generally accompanied by changes in tax rates or other 
basic provisions, so that the net effects on Federal revenues were 
considerably (if not totally) offset. Nevertheless, in aggregate, tax 
expenditures have revenue impacts of hundreds of billions of dollars, 
and are some of the most important ways in which the Federal Government 
affects economic decisions and social welfare.
  Tax expenditures relating to the individual and corporate income taxes 
are considered first in this chapter. They are estimated for fiscal 
years 1997-2003 using three methods of accounting: revenue loss, outlay 
equivalent, and present value. The present value approach provides 
estimates of the revenue losses for tax expenditures that involve 
deferrals of tax payments into the future or have similar long-term 
effects. Tax expenditures relating to the unified transfer tax are 
considered in a section at the end of the chapter.
  The section in this chapter on Performance Measures and the Economic 
Effects of Tax Expenditures presents information related to assessment 
of the effect of tax expenditures on the achievement of program 
performance goals. This section was prepared under the Government 
Performance and Results Act of 1993 and is a part of the government-wide 
performance plan required by this Act (see also Sections III, IV, and VI 
of the Budget volume). Tax expenditures are also discussed in Section VI 
of the Budget, which considers the Federal Government's spending, 
regulatory, and tax policies across functional areas.

                   TAX EXPENDITURES IN THE INCOME TAX

                        Tax Expenditure Estimates

  The Treasury Department prepared all tax expenditure estimates 
presented here based upon tax law enacted as of December 31, 1997. The 
analysis includes new tax expenditures which were enacted this year in 
the Taxpayer Relief Act of 1997. Expired or repealed provisions are not 
listed if their revenue effects result only from taxpayer activity 
occurring before fiscal year 1997. Due to the time required to estimate 
the large number of tax expenditures, the estimates are based on mid-
session economic assumptions; exceptions are the earned income tax 
credit and child credit provisions, which involve outlay components and 
hence are updated to reflect the economic assumptions used elsewhere in 
the budget.
  The total revenue loss estimates for tax expenditures for fiscal years 
1997-2003 are displayed by the budget's functional categories in table 
5-1. Descriptions of the specific tax expenditure provisions follow the 
tables of estimates and discussion of general features of the tax 
expenditure concept.
  As in prior years, two baseline concepts--the normal tax baseline and 
the reference tax law baseline--are used to identify tax expenditures. 
For the most part, the two concepts coincide. However, items treated as 
tax expenditures under the normal tax baseline, but not the reference 
tax law baseline, are indicated by the designation ``normal tax method'' 
in the tables. The revenue losses for these items are zero using the 
reference tax rules. The alternative baseline concepts are discussed in 
detail following the estimates.
  Table 5-2 reports the respective portions of the total revenue losses 
that arise under the individual and corporate income taxes. Listing 
revenue loss estimates under the individual and corporate headings does 
not imply that these categories of filers benefit from the special tax 
provisions in proportion to the respective tax expenditure amounts 
shown. Rather, these break

[[Page 90]]

downs show the specific tax accounts through which the various 
provisions are cleared. The ultimate beneficiaries of corporate tax 
expenditures, for example, could be stockholders, employees, customers, 
or others, depending on the circumstances.
  Table 5-3 ranks the major tax expenditures by fiscal year 1999 revenue 
loss. This table merges several individual entries provided in table 5-
1; for example, table 5-3 contains one merged entry for charitable 
contributions instead of the three separate entries found in table 5-1.

                 Interpreting Tax Expenditure Estimates

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

                         Present-Value Estimates

  Discounted present-value estimates of revenue losses are presented in 
Table 5-4 for certain provisions that involve tax deferrals or other 
long-term revenue effects. These estimates complement the cash-based tax 
expenditure estimates presented in the other tables.
  The present-value estimates represent the revenue losses, net of 
future tax payments, that follow from activities undertaken during 
calendar year 1998 which cause the deferrals or other long-term revenue 
effects. For instance, a pension contribution in 1998 would cause a 
deferral of tax payments on wages in 1998 and on pension earnings on 
this contribution (e.g., interest) in later years. In some future year, 
however, the 1998 pension contribution and accrued earnings will be paid 
out and taxes will be due; these receipts are included in the present-
value estimate. In general, this conceptual approach is similar to the 
one used for reporting the budgetary effects of credit programs, where 
direct loans and guarantees in a given year affect future cash flows.

[[Page 91]]



Table 5-1.  TOTAL REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX                                    
                             (In millions of dollars)                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Total revenue loss from corporate and individual Income taxes        
                                                                         -------------------------------------------------------------------------------
                                                                                                                                                  1999- 
                                                                            1997      1998      1999      2000      2001      2002      2003      2003  
--------------------------------------------------------------------------------------------------------------------------------------------------------
  .........  National defense:                                                                                                                          
1..........    Exclusion of benefits and allowances to armed forces                                                                                     
                personnel...............................................     2,080     2,095     2,120     2,140     2,160     2,180     2,200    10,800
                                                                                                                                                        
  .........  International affairs:                                                                                                                     
2..........    Exclusion of income earned abroad by U.S. citizens.......     1,790     1,985     2,205     2,450     2,725     3,035     3,345    13,760
3..........    Exclusion of income of foreign sales corporations........     1,600     1,700     1,800     1,900     2,000     2,100     2,200    10,000
4..........    Inventory property sales source rules exception..........     1,500     1,600     1,700     1,800     1,900     2,000     2,100     9,500
5..........    Deferral of income from controlled foreign corporations                                                                                  
                (normal tax method).....................................     2,200     2,400     2,600     2,800     3,000     3,200     3,400    15,000
                                                                                                                                                        
  .........  General science, space, and technology:                                                                                                    
6..........    Expensing of research and experimentation expenditures                                                                                   
                (normal tax method).....................................       195       430       580       685       740       765       785     3,555
7..........    Credit for increasing research activities................       880     2,125       860       370       165        55        10     1,460
                                                                                                                                                        
  .........  Energy:                                                                                                                                    
8..........    Expensing of exploration and development costs, fuels....      -160       -95       -50        10       -10  ........        20       -30
9..........    Excess of percentage over cost depletion, fuels..........       830       835       840       855       865       880       890     4,330
10.........    Alternative fuel production credit.......................       710       670       630       600       560       530       350     2,670
11.........    Exception from passive loss limitation for working                                                                                       
                interests in oil and gas properties.....................        45        50        50        50        55        55        60       270
12.........    Capital gains treatment of royalties on coal.............        50        50        50        55        60        60        60       285
13.........    Exclusion of interest on energy facility bonds...........       175       175       170       165       155       150       140       780
14.........    Enhanced oil recovery credit.............................        95       100       100       110       115       120       130       575
15.........    New technology credit....................................        60        65        70        80        80        80        80       390
16.........    Alcohol fuel credit \1\..................................        20        20        20        20        20        20        20       100
17.........    Tax credit and deduction for clean-fuel burning vehicles                                                                                 
                and properties..........................................        65        75        80        85       100        95        70       430
18.........    Exclusion from income of conservation subsidies provided                                                                                 
                by public utilities.....................................        70        20        30        40        45        50        60       225
                                                                                                                                                        
  .........  Natural resources and environment:                                                                                                         
19.........    Expensing of exploration and development costs, nonfuel                                                                                  
                minerals................................................        45        55        55        55        55        55        55       275
20.........    Excess of percentage over cost depletion, nonfuel                                                                                        
                minerals................................................       335       340       355       360       365       380       385     1,845
21.........    Capital gains treatment of iron ore......................  ........  ........  ........  ........  ........  ........  ........  ........
22.........    Special rules for mining reclamation reserves............        20        20        20        20        20        20        20       100
23.........    Exclusion of interest on bonds for water, sewage, and                                                                                    
                hazardous waste facilities..............................       625       605       590       565       540       500       455     2,650
24.........    Capital gains treatment of certain timber income.........        50        50        50        55        60        60        60       285
25.........    Expensing of multiperiod timber growing costs............       460       480       505       525       540       555       575     2,700
26.........    Investment credit and seven-year amortization for                                                                                        
                reforestation expenditures..............................        45        45        50        50        50        50        55       255
27.........    Tax incentives for preservation of historic structures...       120       115       115       110       105       105       105       540
                                                                                                                                                        
  .........  Agriculture:                                                                                                                               
28.........    Expensing of certain capital outlays.....................        65        65        70        70        70        70        70       350
29.........    Expensing of certain multiperiod production costs........        80        80        85        85        85        85        85       425
30.........    Treatment of loans for solvent farmers...................        10        10        10        10        10        10        10        50
31.........    Capital gains treatment of certain income................       505       520       535       550       570       585       600     2,840
32.........    Income averaging for farmers.............................  ........         5        30        35        25  ........  ........        90
                                                                                                                                                        
  .........  Commerce and housing:                                                                                                                      
  .........    Financial institutions and insurance:                                                                                                    
33.........     Exemption of credit union income........................       800       880       960     1,050     1,150     1,260     1,380     5,800
34.........     Excess bad debt reserves of financial institutions......        70        45        20        10         5         5  ........        40
35.........     Exclusion of interest on life insurance savings.........    12,765    13,465    14,200    14,990    15,810    16,680    17,585    79,265
36.........     Special alternative tax on small property and casualty                                                                                  
                 insurance companies....................................         5         5         5         5         5         5         5        25
37.........     Tax exemption of insurance companies owned by tax-exempt                                                                                
                 organizations..........................................       200       215       230       245       260       280       300     1,315
38.........     Small life insurance company deduction..................       110       115       120       125       130       135       140       650
  .........    Housing:                                                                                                                                 
39.........     Exclusion of interest on owner-occupied mortgage subsidy                                                                                
                 bonds..................................................     1,750     1,670     1,595     1,520     1,440     1,365     1,290     7,210
40.........     Exclusion of interest on rental housing bonds...........       810       750       695       615       530       450       320     2,610
41.........     Deductibility of mortgage interest on owner-occupied                                                                                    
                 homes..................................................    49,060    51,245    53,695    56,515    59,505    62,730    66,245   298,690
42.........     Deductibility of State and local property tax on owner-                                                                                 
                 occupied homes.........................................    16,915    17,700    18,440    19,220    20,045    20,920    21,855   100,480
43.........     Deferral of income from post 1987 installment sales.....       960       975       995     1,015     1,035     1,055     1,075     5,175
44.........     Deferral of capital gains on home sales.................    12,245     5,770  ........  ........  ........  ........  ........  ........
45.........     Exclusion of capital gains on home sales for persons age                                                                                
                 55 and over............................................     3,740     1,110  ........  ........  ........  ........  ........  ........
46.........     Capital gains exclusion on home sales...................     8,750     9,100     9,465     9,845    10,235    10,645    11,070    51,260
47.........     Exception from passive loss rules for $25,000 of rental                                                                                 
                 loss...................................................     4,175     3,910     3,680     3,465     3,270     3,080     2,900    16,395
48.........     Credit for low-income housing investment................     2,300     2,420     2,365     2,340     2,385     2,415     2,490    11,995
49.........     Accelerated depreciation on rental housing (normal tax                                                                                  
                 method)................................................     1,365     1,585     1,845     2,100     2,235     2,560     2,880    11,620
  .........    Commerce:                                                                                                                                
50.........     Cancellation of indebtedness............................        40        15  ........       -10        -5        -5  ........       -20
51.........     Exceptions from imputed interest rules..................       155       155       160       160       160       165       165       810
52.........     Capital gains (other than agriculture, timber, iron ore,                                                                                
                 and coal) (normal tax method)..........................    24,620    25,360    26,120    26,900    27,710    28,540    29,395   138,665
53.........     Capital gains exclusion of small corporation stock......        35        35        35        35        40        40        40       190
54.........     Step-up basis of capital gains at death.................     8,750     9,100     9,465     9,845    10,235    10,645    11,070    51,260

[[Page 92]]

                                                                                                                                                        
55.........     Carryover basis of capital gains on gifts...............       155       165       180       190       200       210       220     1,000
56.........     Ordinary income treatment of loss from small business                                                                                   
                 corporation stock sale.................................  ........  ........         5        20        40        70        95       230
57.........     Accelerated depreciation of buildings other than rental                                                                                 
                 housing (normal tax method)............................     5,830     4,690     3,470     2,530     1,705     1,070       350     9,125
58.........     Accelerated depreciation of machinery and equipment                                                                                     
                 (normal tax method)....................................    24,970    26,655    28,535    29,410    30,620    31,620    31,935   152,120
59.........     Expensing of certain small investments (normal tax                                                                                      
                 method)................................................     1,050       970       880       815     1,360     1,285       930     5,270
60.........     Amortization of start-up costs (normal tax method)......       200       205       210       215       220       225       230     1,100
61.........     Graduated corporation income tax rate (normal tax                                                                                       
                 method)................................................     4,695     4,950     5,085     5,280     5,525     5,820     6,130    27,840
62.........     Exclusion of interest on small-issue bonds..............       350       295       275       255       245       230       225     1,230
                                                                                                                                                        
  .........  Transportation:                                                                                                                            
63.........    Deferral of tax on shipping companies....................        20        20        20        20        20        20        20       100
64.........    Exclusion of reimbursed employee parking expenses........     1,280     1,315     1,340     1,370     1,405     1,440     1,475     7,030
65.........    Exclusion for employer-provided transit passes...........        60        70        80        95       110       125       145       555
                                                                                                                                                        
  .........  Community and regional development:                                                                                                        
66.........    Investment credit for rehabilitation of structures (other                                                                                
                than historic)..........................................        80        70        70        70        65        65        65       335
67.........    Exclusion of interest for airport, dock, and similar                                                                                     
                bonds...................................................       970     1,020     1,060     1,095     1,125     1,140     1,160     5,580
68.........    Exemption of certain mutuals' and cooperatives' income...        60        65        65        65        65        70        70       335
69.........    Empowerment zones and enterprise communities.............       255       460       555       640       670       620       465     2,950
70.........    Expensing of environmental remediation costs.............  ........       100       120       160        65       -10       -30       305
                                                                                                                                                        
  .........  Education, training, employment, and social services:                                                                                      
  .........    Education:                                                                                                                               
71.........     Exclusion of scholarship and fellowship income (normal                                                                                  
                 tax method)............................................       875       910       955       995     1,040     1,085     1,135     5,210
72.........     HOPE tax credit.........................................  ........       205     4,160     4,870     5,225     5,525     5,625    25,405
73.........     Lifetime Learning tax credit............................  ........       115     2,550     2,590     2,805     2,840     3,160    13,945
74.........     Education Individual Retirement Accounts................  ........        15        85       190       295       405       520     1,495
75.........     Deductibility of student-loan interest..................  ........        65       235       285       345       410       430     1,705
76.........     Deferral of state prepaid tuition plans.................  ........        65       110       120       130       145       155       660
77.........     Exclusion of interest on student loan bonds.............       290       275       255       240       230       215       210     1,150
78.........     Exclusion of interest on bonds for private nonprofit                                                                                    
                 educational facilities.................................       835       860       885       910       920       935       940     4,590
79.........     Credit for holders of zone academy bonds................  ........         5        35        45        45        45        45       215
80.........     Exclusion of interest on savings bonds transferred to                                                                                   
                 educational institutions...............................        10        10        10        15        15        15        15        70
81.........     Parental personal exemption for students age 19 or over.       845       875       925       970     1,025     1,070     1,125     5,115
82.........     Child credit \2\........................................  ........     3,590    19,175    19,240    19,015    18,845    18,580    94,855
83.........     Deductibility of charitable contributions (education)...     2,670     2,890     3,010     3,145     3,295     3,460     3,640    16,550
84.........     Exclusion of employer provided educational assistance...       320       215       215       210        15  ........  ........       440
                                                                                                                                                        
  .........    Training, employment, and social services:                                                                                               
85.........     Work opportunity tax credit.............................       110       275       200       100        30        10  ........       340
86.........     Welfare-to-work tax credit..............................  ........        10        30        30        15        10         5        90
87.........     Exclusion of employer provided child care...............       860       910       950       995     1,040     1,085     1,135     5,205
88.........     Adoption assistance.....................................        10       200       320       355       370       365       225     1,635
89.........     Exclusion of employee meals and lodging (other than                                                                                     
                 military)..............................................       595       620       650       680       710       740       775     3,555
90.........     Credit for child and dependent care expenses............     2,515     2,510     2,510     2,505     2,500     2,500     2,495    12,510
91.........     Credit for disabled access expenditures.................        65        65        65        70        70        70        70       345
92.........     Expensing of costs of removing certain architectural                                                                                    
                 barriers to the handicapped............................        20        20        20        20        20        20        20       100
93.........     Deductibility of charitable contributions, other than                                                                                   
                 education and health...................................    17,080    18,700    19,565    20,530    21,555    22,655    23,830   108,135
94.........     Exclusion of certain foster care payments...............        35        35        40        40        45        45        50       220
95.........     Exclusion of parsonage allowances.......................       295       315       340       360       385       410       440     1,935
                                                                                                                                                        
  .........  Health:                                                                                                                                    
96.........    Exclusion of employer contributions for medical insurance                                                                                
                premiums and medical care...............................    67,050    71,465    76,230    81,295    86,875    93,045   100,245   437,690
97.........    Medical savings accounts.................................  ........        30       110       115       115       120       125       585
98.........    Deductibility of medical expenses........................     4,175     4,550     4,815     5,110     5,425     5,775     6,150    27,275
99.........    Exclusion of interest on hospital construction bonds.....     1,675     1,740     1,795     1,845     1,880     1,910     1,930     9,360
100........    Deductibility of charitable contributions (health).......     2,365     2,570     2,685     2,805     2,940     3,095     3,250    14,775
101........    Tax credit for orphan drug research......................        15        40        50        55        60        70        80       315
102........    Special Blue Cross/Blue Shield deduction.................       225       185       240       255       290       340       330     1,455
                                                                                                                                                        
  .........  Income security:                                                                                                                           
103........    Exclusion of railroad retirement system benefits.........       445       455       460       465       465       470       480     2,340
104........    Exclusion of workmen's compensation benefits.............     4,410     4,950     5,210     5,480     5,775     6,090     6,420    28,975
105........    Exclusion of public assistance benefits (normal tax                                                                                      
                method).................................................       545       580       605       630       655       685       710     3,285
106........    Exclusion of special benefits for disabled coal miners...        85        85        80        75        70        70        65       360
107........    Exclusion of military disability pensions................       125       130       135       140       145       150       155       725
  .........    Net exclusion of pension contributions and earnings:                                                                                     
108........     Employer plans..........................................    71,145    72,135    72,375    73,500    73,285    73,225    73,480   365,865
109........     Individual Retirement Accounts..........................     9,770    10,275    10,780    11,085    11,485    11,865    12,160    57,375
110........     Keogh plans.............................................     3,520     3,655     3,755     3,895     4,070     4,260     4,450    20,430

[[Page 93]]

                                                                                                                                                        
111........     Exclusion of employer provided death benefits...........       185       190       200       210       220       230       240     1,099
  .........    Exclusion of other employee benefits:                                                                                                    
112........     Premiums on group term life insurance...................     2,065     2,110     2,150     2,200     2,240     2,290     2,340    11,220
113........     Premiums on accident and disability insurance...........       165       175       185       195       205       215       225     1,025
114........     Income of trusts to finance supplementary unemployment                                                                                  
                 benefits...............................................         5         5         5         5         5         5         5        25
115........     Special ESOP rules......................................       735       720       740       760       790       820       850     3,960
116........     Additional deduction for the blind......................        25        30        30        30        30        35        35       160
117........     Additional deduction for the elderly....................     1,545     1,710     1,785     1,800     1,800     1,805     1,845     9,035
118........     Tax credit for the elderly and disabled.................        50        50        50        50        50        50        50       250
119........     Deductibility of casualty losses........................       465       485       510       535       560       590       620     2,815
120........     Earned income tax credit \3\............................     6,065     6,210     4,635     4,515     4,625     4,790     4,965    23,530
                                                                                                                                                        
  .........  Social Security:                                                                                                                           
  .........    Exclusion of social security benefits:                                                                                                   
121........     Social Security benefits for retired workers............    17,470    18,330    19,115    20,025    20,840    21,830    22,930   104,740
122........     Social Security benefits for disabled...................     2,270     2,495     2,685     2,875     3,090     3,325     3,590    15,565
123........     Social Security benefits for dependents and survivors...     3,825     4,000     4,160     4,310     4,470     4,640     4,795    22,375
                                                                                                                                                        
  .........  Veterans benefits and services:                                                                                                            
124........    Exclusion of veterans death benefits and disability                                                                                      
                compensation............................................     2,770     2,930     3,100     3,280     3,470     3,675     3,890    17,415
125........    Exclusion of veterans pensions...........................        70        70        65        70        75        80        85       376
126........    Exclusion of GI bill benefits............................        50        60        70        80        90        95       100       435
127........    Exclusion of interest on veterans housing bonds..........        75        75        75        75        75        80        85       390
                                                                                                                                                        
  .........  General purpose fiscal assistance:                                                                                                         
128........    Exclusion of interest on public purpose bonds............    13,800    14,315    14,760    15,125    15,390    15,600    15,750    76,625
129........    Deductibility of nonbusiness State and local taxes other                                                                                 
                than on owner-occupied homes............................    30,720    32,145    33,490    34,910    36,410    37,995    39,695   182,500
130........    Tax credit for corporations receiving income from doing                                                                                  
                business in U.S. possessions............................     2,700     2,770     2,800     2,885     2,970     3,060     3,075    14,790
                                                                                                                                                        
  .........  Interest:                                                                                                                                  
131........    Deferral of interest on U.S. savings bonds...............       915       965     1,015     1,065     1,115     1,175     1,235     5,605
                                                                                                                                                        
  .........  Addendum--Aid to State and local governments:                                                                                              
  .........    Deductibility of:                                                                                                                        
  .........     Property taxes on owner-occupied homes..................    16,915    17,700    18,440    19,220    20,045    20,920    21,855   100,480
  .........     Nonbusiness State and local taxes other than on owner-                                                                                  
                 occupied homes.........................................    30,720    32,145    33,490    34,910    36,410    37,995    39,695   182,500
  .........    Exclusion of interest on:                                                                                                                
  .........     Public purpose bonds....................................    13,800    14,315    14,760    15,125    15,390    15,600    15,750    76,625
  .........     Energy facility bonds...................................       175       175       170       165       155       150       140       780
  .........     Bonds for water, sewage, and hazardous waste facilities.       625       605       590       565       540       500       455     2,650
  .........     Small-issue bonds.......................................       350       295       275       255       245       230       225     1,230
  .........     Owner-occupied mortgage revenue bonds...................     1,750     1,670     1,595     1,520     1,440     1,365     1,290     7,210
  .........     Rental housing bonds....................................       810       750       695       615       530       450       320     2,610
  .........     Bonds for airports, docks, and sports and convention                                                                                    
                 facilities.............................................       970     1,020     1,060     1,095     1,125     1,140     1,160     5,580
  .........     Student loan bonds......................................       290       275       255       240       230       215       210     1,150
  .........     Bonds for private nonprofit educational facilities......       835       860       885       910       920       935       940     4,590
  .........     Hospital construction bonds.............................     1,675     1,740     1,795     1,845     1,880     1,910     1,930     9,360
  .........     Veterans housing bonds..................................        75        75        75        75        75        80        85       390
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:                                                                                                                                                  
Provisions with estimates denoted ``normal tax method'' have no revenue loss under the reference tax law method.                                        
All estimates have been rounded to the nearest $5 million.                                                                                              
Figures in tables 5-1 are the arithmetic sums of corporate and individual income tax revenue loss estimates from table 5-2, and do not reflect possible 
  interactions across these two taxes.                                                                                                                  
\1\ In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as  
  follows: 1997 $675; 1998 $720; 1999 $750; 2000 $780; 2001 $810; 2002 $845; 2003 $875.                                                                 
\2\ The figures in the table indicate the effect of the child credit on receipts. The effect on outlays in (in millions of dollars) is as follows: 1997 
  $0; 1998 $0; 1999 $538; 2000 $685; 2001 $662; 2002 $624; and 2003 $589.                                                                               
\3\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on outlays in (in millions of dollars) is as   
  follows: 1997 $21,856; 1998 $22,295; 1999 $24,496; 2000 $25,334; 2001 $26,040; 2002 $26,715; and 2003 $27,414.                                        


[[Page 94]]


Table 5-2.  CORPORATE AND INDIVIDUAL INCOME TAX REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES                                                  
                             (In millions of dollars)                                                                                    
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                            Revenue Loss                                                        
                                                                  ------------------------------------------------------------------------------------------------------------------------------
                                                                                            Corporations                                                    Individuals                         
                                                                  ------------------------------------------------------------------------------------------------------------------------------
                                                                     1997     1998     1999     2000     2001     2002     2003     1997     1998     1999     2000     2001     2002     2003  
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
  .........  National defense:                                                                                                                                                                  
1..........    Exclusion of benefits and allowances to armed                                                                                                                                    
                forces personnel.................................  .......  .......  .......  .......  .......  .......  .......    2,080    2,095    2,120    2,140    2,160    2,180     2,200
                                                                                                                                                                                                
  .........  International affairs:                                                                                                                                                             
2..........    Exclusion of income earned abroad by U.S. citizens  .......  .......  .......  .......  .......  .......  .......    1,790    1,985    2,205    2,450    2,725    3,035     3,345
3..........    Exclusion of income of foreign sales corporations.    1,600    1,700    1,800    1,900    2,000    2,100    2,200  .......  .......  .......  .......  .......  .......  ........
4..........    Inventory property sales source rules exception...    1,500    1,600    1,700    1,800    1,900    2,000    2,100  .......  .......  .......  .......  .......  .......  ........
5..........    Deferral of income from controlled foreign                                                                                                                                       
                corporations (normal tax method).................    2,200    2,400    2,600    2,800    3,000    3,200    3,400  .......  .......  .......  .......  .......  .......  ........
                                                                                                                                                                                                
  .........  General science, space, and technology:                                                                                                                                            
6..........    Expensing of research and experimentation                                                                                                                                        
                expenditures (normal tax method).................      190      420      570      670      725      750      770        5       10       10       15       15       15        15
7..........    Credit for increasing research activities.........      860    2,095      845      370      165       55       10       20       30       15  .......  .......  .......  ........
                                                                                                                                                                                                
  .........  Energy:                                                                                                                                                                            
8..........    Expensing of exploration and development costs,                                                                                                                                  
                fuels............................................     -160      -95      -50       10      -10  .......       20  .......  .......  .......  .......  .......  .......  ........
9..........    Excess of percentage over cost depletion, fuels...      620      625      630      640      645      660      665      210      210      210      215      220      220       225
10.........    Alternative fuel production credit................      680      640      600      570      540      510      340       30       30       30       30       20       20        10
11.........    Exception from passive loss limitation for working                                                                                                                               
                interests in oil and gas properties..............  .......  .......  .......  .......  .......  .......  .......       45       50       50       50       55       55        60
12.........    Capital gains treatment of royalties on coal......  .......  .......  .......  .......  .......  .......  .......       50       50       50       55       60       60        60
13.........    Exclusion of interest on energy facility bonds....       70       70       70       65       60       60       55      105      105      100      100       95       90        85
14.........    Enhanced oil recovery credit......................       90       95       95      100      105      110      120        5        5        5       10       10       10        10
15.........    New technology credit.............................       60       65       70       80       80       80       80  .......  .......  .......  .......  .......  .......  ........
16.........    Alcohol fuel credit \1\...........................       10       10       10       10       10       10       10       10       10       10       10       10       10        10
17.........    Tax credit and deduction for clean-fuel burning                                                                                                                                  
                vehicles and properties..........................       55       60       65       70       80       75       55       10       15       15       15       20       20        15
18.........    Exclusion from income of conservation subsidies                                                                                                                                  
                provided by public utilities.....................       10      -45      -35      -30      -25      -25      -20       60       65       65       70       70       75        80
                                                                                                                                                                                                
  .........  Natural resources and environment:                                                                                                                                                 
19.........    Expensing of exploration and development costs,                                                                                                                                  
                nonfuel minerals.................................       35       40       40       40       40       40       40       10       15       15       15       15       15        15
20.........    Excess of percentage over cost depletion, nonfuel                                                                                                                                
                minerals.........................................      250      255      265      270      275      285      290       85       85       90       90       90       95        95
21.........    Capital gains treatment of iron ore...............  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  ........
22.........    Special rules for mining reclamation reserves.....       20       20       20       20       20       20       20  .......  .......  .......  .......  .......  .......  ........
23.........    Exclusion of interest on bonds for water, sewage,                                                                                                                                
                and hazardous waste facilities...................      250      240      235      225      215      195      180      375      365      355      340      325      305       275
24.........    Capital gains treatment of certain timber income..  .......  .......  .......  .......  .......  .......  .......       50       50       50       55       60       60        60
25.........    Expensing of multiperiod timber growing costs.....      285      300      315      325      335      345      355      175      180      190      200      205      210       220
26.........    Investment credit and seven-year amortization for                                                                                                                                
                reforestation expenditures.......................       20       20       25       25       25       25       25       25       25       25       25       25       25        30
27.........    Tax incentives for preservation of historic                                                                                                                                      
                structures.......................................       25       25       25       20       20       20       20       95       90       90       90       85       85        85
                                                                                                                                                                                                
  .........  Agriculture:                                                                                                                                                                       
28.........    Expensing of certain capital outlays..............       10       10       10       10       10       10       10       55       55       60       60       60       60        60
29.........    Expensing of certain multiperiod production costs.       10       10       10       10       10       10       10       70       70       75       75       75       75        75
30.........    Treatment of loans for solvent farmers............  .......  .......  .......  .......  .......  .......  .......       10       10       10       10       10       10        10
31.........    Capital gains treatment of certain income.........  .......  .......  .......  .......  .......  .......  .......      505      520      535      550      570      585       600
32.........    Income averaging for farmers......................  .......  .......  .......  .......  .......  .......  .......  .......        5       30       35       25  .......  ........
                                                                                                                                                                                                
  .........  Commerce and housing:                                                                                                                                                              
  .........    Financial institutions and insurance:                                                                                                                                            
33.........     Exemption of credit union income.................      800      880      960    1,050    1,150    1,260    1,380  .......  .......  .......  .......  .......  .......  ........
34.........     Excess bad debt reserves of financial                                                                                                                                           
                 institutions....................................       70       45       20       10        5        5  .......  .......  .......  .......  .......  .......  .......  ........
35.........     Exclusion of interest on life insurance savings..      190      200      210      225      235      250      260   12,575   13,265   13,990   14,765   15,575   16,430    17,325
36.........     Special alternative tax on small property and                                                                                                                                   
                 casualty insurance companies....................        5        5        5        5        5        5        5  .......  .......  .......  .......  .......  .......  ........
37.........     Tax exemption of insurance companies owned by tax-                                                                                                                              
                 exempt organizations............................      200      215      230      245      260      280      300  .......  .......  .......  .......  .......  .......  ........
38.........     Small life insurance company deduction...........      110      115      120      125      130      135      140  .......  .......  .......  .......  .......  .......  ........
  .........    Housing:                                                                                                                                                                         
39.........     Exclusion of interest on owner-occupied mortgage                                                                                                                                
                 subsidy bonds...................................      695      660      635      600      570      540      510    1,055    1,010      960      920      870      825       780
40.........     Exclusion of interest on rental housing bonds....      320      295      275      240      205      175      115      490      455      420      375      325      275       205
41.........     Deductibility of mortgage interest on owner-                                                                                                                                    
                 occupied homes..................................  .......  .......  .......  .......  .......  .......  .......   49,060   51,245   53,695   56,515   59,505   62,730    66,245
42.........     Deductibility of State and local property tax on                                                                                                                                
                 owner-occupied homes............................  .......  .......  .......  .......  .......  .......  .......   16,915   17,700   18,440   19,220   20,045   20,920    21,855
43.........     Deferral of income from post 1987 installment                                                                                                                                   
                 sales...........................................      250      255      260      265      270      275      280      710      720      735      750      765      780       795

[[Page 95]]

                                                                                                                                                                                                
44.........     Deferral of capital gains on home sales..........  .......  .......  .......  .......  .......  .......  .......   12,245    5,770  .......  .......  .......  .......  ........
45.........     Exclusion of capital gains on home sales for                                                                                                                                    
                 persons age 55 and over.........................  .......  .......  .......  .......  .......  .......  .......    3,740    1,110  .......  .......  .......  .......  ........
46.........     Capital gains exclusion on home sales............  .......  .......  .......  .......  .......  .......  .......    8,750    9,100    9,465    9,845   10,235   10,645    11,070
47.........     Exception from passive loss rules for $25,000 of                                                                                                                                
                 rental loss.....................................  .......  .......  .......  .......  .......  .......  .......    4,175    3,910    3,680    3,465    3,270    3,080     2,900
48.........     Credit for low-income housing investment.........      460      485      475      470      475      485      500    1,840    1,935    1,890    1,870    1,910    1,930     1,990
49.........     Accelerated depreciation on rental housing                                                                                                                                      
                 (normal tax method).............................      865    1,025    1,215    1,390    1,460    1,705    1,865      500      560      630      710      775      855     1,015
  .........    Commerce:                                                                                                                                                                        
50.........     Cancellation of indebtedness.....................  .......  .......  .......  .......  .......  .......  .......       40       15  .......      -10       -5       -5  ........
51.........     Exceptions from imputed interest rules...........  .......  .......  .......  .......  .......  .......  .......      155      155      160      160      160      165       165
52.........     Capital gains (other than agriculture, timber,                                                                                                                                  
                 iron ore, and coal) (normal tax method).........  .......  .......  .......  .......  .......  .......  .......   24,620   25,360   26,120   26,900   27,710   28,540    29,395
53.........     Capital gains exclusion of small corporation                                                                                                                                    
                 stock...........................................  .......  .......  .......  .......  .......  .......  .......       35       35       35       35       40       40        40
54.........     Step-up basis of capital gains at death..........  .......  .......  .......  .......  .......  .......  .......    8,750    9,100    9,465    9,845   10,235   10,645    11,070
55.........     Carryover basis of capital gains on gifts........  .......  .......  .......  .......  .......  .......  .......      155      165      180      190      200      210       220
56.........     Ordinary income treatment of loss from small                                                                                                                                    
                 business corporation stock sale.................  .......  .......  .......  .......  .......  .......  .......  .......  .......        5       20       40       70        95
57.........     Accelerated depreciation of buildings other than                                                                                                                                
                 rental housing (normal tax method)..............    4,100    3,285    2,425    1,825    1,230      765      245    1,730    1,405    1,045      705      475      305       105
58.........     Accelerated depreciation of machinery and                                                                                                                                       
                 equipment (normal tax method)...................   19,770   21,030   22,390   23,090   23,755   24,610   24,820    5,200    5,625    6,145    6,320    6,865    7,010     7,115
59.........     Expensing of certain small investments (normal                                                                                                                                  
                 tax method).....................................      660      620      570      540      955      810      615      390      350      310      275      405      475       315
60.........     Amortization of start-up costs (normal tax                                                                                                                                      
                 method).........................................       95      100      100      105      105      110      110      105      105      110      110      115      115       120
61.........     Graduated corporation income tax rate (normal tax                                                                                                                               
                 method).........................................    4,695    4,950    5,085    5,280    5,525    5,820    6,130  .......  .......  .......  .......  .......  .......  ........
62.........     Exclusion of interest on small-issue bonds.......      135      115      110      100       95       90       90      215      180      165      155      150      140       135
                                                                                                                                                                                                
  .........  Transportation:                                                                                                                                                                    
63.........    Deferral of tax on shipping companies.............       20       20       20       20       20       20       20  .......  .......  .......  .......  .......  .......  ........
64.........    Exclusion of reimbursed employee parking expenses.  .......  .......  .......  .......  .......  .......  .......    1,280    1,315    1,340    1,370    1,405    1,440     1,475
65.........    Exclusion for employer-provided transit passes....  .......  .......  .......  .......  .......  .......  .......       60       70       80       95      110      125       145
                                                                                                                                                                                                
  .........  Community and regional development:                                                                                                                                                
66.........    Investment credit for rehabilitation of structures                                                                                                                               
                (other than historic)............................       15       15       15       15       15       15       15       65       55       55       55       50       50        50
67.........    Exclusion of interest for airport, dock, and                                                                                                                                     
                similar bonds....................................      390      410      425      440      450      455      465      580      610      635      655      675      685       695
68.........    Exemption of certain mutuals' and cooperatives'                                                                                                                                  
                income...........................................       60       65       65       65       65       70       70  .......  .......  .......  .......  .......  .......  ........
69.........    Empowerment zones and enterprise communities......       75      165      215      240      225      200      155      180      295      340      400      445      420       310
70.........    Expensing of environmental remediation costs......  .......       85      100      135       55      -10      -25  .......       15       20       25       10  .......        -5
                                                                                                                                                                                                
  .........  Education, training, employment, and social                                                                                                                                        
              services:                                                                                                                                                                         
  .........    Education:........................................                                                                                                                               
71.........     Exclusion of scholarship and fellowship income                                                                                                                                  
                 (normal tax method).............................  .......  .......  .......  .......  .......  .......  .......      875      910      955      995    1,040    1,085     1,135
72.........     HOPE tax credit..................................  .......  .......  .......  .......  .......  .......  .......  .......      205    4,160    4,870    5,225    5,525     5,625
73.........     Lifetime Learning tax credit.....................  .......  .......  .......  .......  .......  .......  .......  .......      115    2,550    2,590    2,805    2,840     3,160
74.........     Education Individual Retirement Accounts.........  .......  .......  .......  .......  .......  .......  .......  .......       15       85      190      295      405       520
75.........     Deductibility of student-loan interest...........  .......  .......  .......  .......  .......  .......  .......  .......       65      235      285      345      410       430
76.........     Deferral of state prepaid tuition plans..........  .......  .......  .......  .......  .......  .......  .......  .......       65      110      120      130      145       155
77.........     Exclusion of interest on student loan bonds......      115      110      100       95       90       85       85      175      165      155      145      140      130       125
78.........     Exclusion of interest on bonds for private                                                                                                                                      
                 nonprofit educational facilities................      335      345      355      365      370      375      375      500      515      530      545      550      560       565
79.........     Credit for holders of zone academy bonds.........  .......  .......       10       10       10       10       10  .......        5       25       35       35       35        35
80.........     Exclusion of interest on savings bonds                                                                                                                                          
                 transferred to educational institutions.........  .......  .......  .......  .......  .......  .......  .......       10       10       10       15       15       15        15
81.........     Parental personal exemption for students age 19                                                                                                                                 
                 or over.........................................  .......  .......  .......  .......  .......  .......  .......      845      875      925      970    1,025    1,070     1,125
82.........     Child credit \2\.................................  .......  .......  .......  .......  .......  .......  .......  .......    3,590   19,175   19,240   19,015   18,845    18,580
83.........     Deductibility of charitable contributions                                                                                                                                       
                 (education).....................................      920      970    1,000    1,025    1,065    1,120    1,180    1,750    1,920    2,010    2,120    2,230    2,340     2,460
84.........     Exclusion of employer provided educational                                                                                                                                      
                 assistance......................................  .......  .......  .......  .......  .......  .......  .......      320      215      215      210       15  .......  ........
  .........    Training, employment, and social services:                                                                                                                                       
85.........     Work opportunity tax credit......................       90      235      170       80       30       10  .......       20       40       30       20  .......  .......  ........
86.........     Welfare-to-work tax credit.......................  .......       10       25       25       10       10        5  .......  .......        5        5        5  .......  ........
87.........     Exclusion of employer provided child care........  .......  .......  .......  .......  .......  .......  .......      860      910      950      995    1,040    1,085     1,135
88.........     Adoption assistance..............................  .......  .......  .......  .......  .......  .......  .......       10      200      320      355      370      365       225
89.........     Exclusion of employee meals and lodging (other                                                                                                                                  
                 than military)..................................  .......  .......  .......  .......  .......  .......  .......      595      620      650      680      710      740       775
90.........     Credit for child and dependent care expenses.....  .......  .......  .......  .......  .......  .......  .......    2,515    2,510    2,510    2,505    2,500    2,500     2,495
91.........     Credit for disabled access expenditures..........       50       50       50       55       55       55       55       15       15       15       15       15       15        15
92.........     Expensing of costs of removing certain                                                                                                                                          
                 architectural barriers to the handicapped.......       15       15       15       15       15       15       15        5        5        5        5        5        5         5

[[Page 96]]

                                                                                                                                                                                                
93.........     Deductibility of charitable contributions, other                                                                                                                                
                 than education and health.......................    1,130    1,190    1,225    1,260    1,305    1,375    1,450   15,950   17,510   18,340   19,270   20,250   21,280    22,380
94.........     Exclusion of certain foster care payments........  .......  .......  .......  .......  .......  .......  .......       35       35       40       40       45       45        50
95.........     Exclusion of parsonage allowances................  .......  .......  .......  .......  .......  .......  .......      295      315      340      360      385      410       440
                                                                                                                                                                                                
  .........  Health:                                                                                                                                                                            
96.........    Exclusion of employer contributions for medical                                                                                                                                  
                insurance premiums and medical care..............  .......  .......  .......  .......  .......  .......  .......   67,050   71,465   76,230   81,295   86,875   93,045   100,245
97.........    Medical savings accounts..........................  .......  .......  .......  .......  .......  .......  .......  .......       30      110      115      115      120       125
98.........    Deductibility of medical expenses.................  .......  .......  .......  .......  .......  .......  .......    4,175    4,550    4,815    5,110    5,425    5,775     6,150
99.........    Exclusion of interest on hospital construction                                                                                                                                   
                bonds............................................      675      700      720      740      755      765      770    1,000    1,040    1,075    1,105    1,125    1,145     1,160
100........    Deductibility of charitable contributions (health)      575      610      625      645      670      705      740    1,790    1,960    2,060    2,160    2,270    2,390     2,510
101........    Tax credit for orphan drug research...............       15       40       50       55       60       70       80  .......  .......  .......  .......  .......  .......  ........
102........    Special Blue Cross/Blue Shield deduction..........      225      185      240      255      290      340      330  .......  .......  .......  .......  .......  .......  ........
                                                                                                                                                                                                
  .........  Income security:                                                                                                                                                                   
103........    Exclusion of railroad retirement system benefits..  .......  .......  .......  .......  .......  .......  .......      445      455      460      465      465      470       480
104........    Exclusion of workmen's compensation benefits......  .......  .......  .......  .......  .......  .......  .......    4,410    4,950    5,210    5,480    5,775    6,090     6,420
105........    Exclusion of public assistance benefits (normal                                                                                                                                  
                tax method)......................................  .......  .......  .......  .......  .......  .......  .......      545      580      605      630      655      685       710
106........    Exclusion of special benefits for disabled coal                                                                                                                                  
                miners...........................................  .......  .......  .......  .......  .......  .......  .......       85       85       80       75       70       70        65
107........    Exclusion of military disability pensions.........  .......  .......  .......  .......  .......  .......  .......      125      130      135      140      145      150       155
  .........    Net exclusion of pension contributions and                                                                                                                                       
                earnings:                                                                                                                                                                       
108........     Employer plans...................................  .......  .......  .......  .......  .......  .......  .......   71,145   72,135   72,375   73,500   73,285   73,225    73,480
109........     Individual Retirement Accounts...................  .......  .......  .......  .......  .......  .......  .......    9,770   10,275   10,780   11,085   11,485   11,865    12,160
110........     Keogh plans......................................  .......  .......  .......  .......  .......  .......  .......    3,520    3,655    3,755    3,895    4,070    4,260     4,450
111........     Exclusion of employer provided death benefits....  .......  .......  .......  .......  .......  .......  .......      185      190      200      210      220      230       240
  .........    Exclusion of other employee benefits:                                                                                                                                            
112........     Premiums on group term life insurance............  .......  .......  .......  .......  .......  .......  .......    2,065    2,110    2,150    2,200    2,240    2,290     2,340
113........     Premiums on accident and disability insurance....  .......  .......  .......  .......  .......  .......  .......      165      175      185      195      205      215       225
114........     Income of trusts to finance supplementary                                                                                                                                       
                 unemployment benefits...........................  .......  .......  .......  .......  .......  .......  .......        5        5        5        5        5        5         5
115........     Special ESOP rules...............................      675      660      680      700      730      760      790       60       60       60       60       60       60        60
116........     Additional deduction for the blind...............  .......  .......  .......  .......  .......  .......  .......       25       30       30       30       30       35        35
117........     Additional deduction for the elderly.............  .......  .......  .......  .......  .......  .......  .......    1,545    1,710    1,785    1,800    1,800    1,805     1,845
118........     Tax credit for the elderly and disabled..........  .......  .......  .......  .......  .......  .......  .......       50       50       50       50       50       50        50
119........     Deductibility of casualty losses.................  .......  .......  .......  .......  .......  .......  .......      465      485      510      535      560      590       620
120........     Earned income tax credit \3\.....................  .......  .......  .......  .......  .......  .......  .......    6,065    6,210    4,635    4,515    4,625    4,790     4,965
                                                                                                                                                                                                
  .........  Social Security:                                                                                                                                                                   
  .........    Exclusion of social security benefits:............                                                                                                                               
121........     Social Security benefits for retired workers.....  .......  .......  .......  .......  .......  .......  .......   17,470   18,330   19,115   20,025   20,840   21,830    22,930
122........     Social Security benefits for disabled............  .......  .......  .......  .......  .......  .......  .......    2,270    2,495    2,685    2,875    3,090    3,325     3,590
123........     Social Security benefits for dependents and                                                                                                                                     
                 survivors.......................................  .......  .......  .......  .......  .......  .......  .......    3,825    4,000    4,160    4,310    4,470    4,640     4,795
                                                                                                                                                                                                
  .........  Veterans benefits and services:                                                                                                                                                    
124........    Exclusion of veterans death benefits and                                                                                                                                         
                disability compensation..........................  .......  .......  .......  .......  .......  .......  .......    2,770    2,930    3,100    3,280    3,470    3,675     3,890
125........    Exclusion of veterans pensions....................  .......  .......  .......  .......  .......  .......  .......       70       70       65       70       75       80        85
126........    Exclusion of GI bill benefits.....................  .......  .......  .......  .......  .......  .......  .......       50       60       70       80       90       95       100
127........    Exclusion of interest on veterans housing bonds...       30       30       30       30       30       30       35       45       45       45       45       45       50        50
                                                                                                                                                                                                
  .........  General purpose fiscal assistance:                                                                                                                                                 
128........    Exclusion of interest on public purpose bonds.....    5,550    5,750    5,925    6,060    6,165    6,245    6,300    8,250    8,565    8,835    9,065    9,225    9,355     9,450
129........    Deductibility of nonbusiness State and local taxes                                                                                                                               
                other than on owner-occupied homes...............  .......  .......  .......  .......  .......  .......  .......   30,720   32,145   33,490   34,910   36,410   37,995    39,695
130........    Tax credit for corporations receiving income from                                                                                                                                
                doing business in U.S. possessions...............    2,700    2,770    2,800    2,885    2,970    3,060    3,075  .......  .......  .......  .......  .......  .......  ........
                                                                                                                                                                                                
  .........  Interest:                                                                                                                                                                          
131........    Deferral of interest on U.S. savings bonds........  .......  .......  .......  .......  .......  .......  .......      915      965    1,015    1,065    1,115    1,175     1,235
                                                                                                                                                                                                
  .........  Addendum--Aid to State and local governments:                                                                                                                                      
  .........    Deductibility of:.................................                                                                                                                               
  .........     Property taxes on owner-occupied homes...........  .......  .......  .......  .......  .......  .......  .......   16,915   17,700   18,440   19,220   20,045   20,920    21,855
  .........     Nonbusiness State and local taxes other than on                                                                                                                                 
                 owner-occupied homes............................  .......  .......  .......  .......  .......  .......  .......   30,720   32,145   33,490   34,910   36,410   37,995    39,695
  .........    Exclusion of interest on:                                                                                                                                                        
  .........     Public purpose bonds.............................    5,550    5,750    5,925    6,060    6,165    6,245    6,300    8,250    8,565    8,835    9,065    9,225    9,355     9,450
  .........     Energy facility bonds............................       70       70       70       65       60       60       55      105      105      100      100       95       90        85
  .........     Bonds for water, sewage, and hazardous waste                                                                                                                                    
                 facilities......................................      250      240      235      225      215      195      180      375      365      355      340      325      305       275
  .........     Small-issue bonds................................      135      115      110      100       95       90       90      215      180      165      155      150      140       135

[[Page 97]]

                                                                                                                                                                                                
  .........     Owner-occupied mortgage revenue bonds............      695      660      635      600      570      540      510    1,055    1,010      960      920      870      825       780
  .........     Rental housing bonds.............................      320      295      275      240      205      175      115      490      455      420      375      325      275       205
  .........     Bonds for airports, docks, and sports and                                                                                                                                       
                 convention facilities...........................      390      410      425      440      450      455      465      580      610      635      655      675      685       695
  .........     Student loan bonds...............................      115      110      100       95       90       85       85      175      165      155      145      140      130       125
  .........     Bonds for private nonprofit educational                                                                                                                                         
                 facilities......................................      335      345      355      365      370      375      375      500      515      530      545      550      560       565
  .........     Hospital construction bonds......................      675      700      720      740      755      765      770    1,000    1,040    1,075    1,105    1,125    1,145     1,160
  .........     Veterans housing bonds...........................       30       30       30       30       30       30       35       45       45       45       45       45       50        50
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:                                                                                                                                                                                          
Provisions with estimates denoted ``normal tax method'' have no revenue loss under the reference tax law method.                                                                                
All estimates have been rounded to the nearest $5 million.                                                                                                                                      
Figures in table 5-1 are the arithmetic sums of corporate and individual income tax revenue loss estimates from table 5-2, and do not reflect possible interactions across these two taxes.     
\1\ In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as follows: 1997 $675; 1998 $720; 1999 $750;
  2000 $780; 2001 $810; 2002 $845; 2003 $875.                                                                                                                                                   
\2\ The figures in the table indicate the effect of the child credit on receipts. The effect on outlays in (in millions of dollars) is as follows: 1997 $0; 1998 $0; 1999 $538; 2000 $685; 2001 
  $662; 2002 $624; and 2003 $589.                                                                                                                                                               
\3\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on outlays in (in millions of dollars) is as follows: 1997 $21,856; 1998 $22,295; 1999 
  $24,496; 2000 $25,334; 2001 $26,040; 2002 $26,715; and 2003 $27,414.                                                                                                                          


[[Page 98]]


Table 5-3.  MAJOR TAX EXPENDITURES IN THE INCOME TAX, RANKED BY TOTAL 1999 REVENUE LOSS            
                              (In millions of dollars)                                            
----------------------------------------------------------------------------------------------------------------
                                    Provision                                         1999          1999-2003   
----------------------------------------------------------------------------------------------------------------
  Exclusion of employer contributions for medical insurance premiums and                                        
   medical care...............................................................      76,230          437,690     
  Net exclusion of employer pension-plan contributions and earnings...........      72,375          365,865     
  Deductibility of mortgage interest on owner-occupied homes..................      53,695          298,690     
  Deductibility of nonbusiness State and local taxes other than owner-occupied                                  
   homes......................................................................      33,490          182,500     
  Accelerated depreciation of machinery and equipment (normal tax method).....      28,535          152,120     
  Capital gains (other than agriculture, timber, iron ore, and coal) (Normal                                    
   tax method)................................................................      26,120          138,665     
  Deductibility of charitable contributions...................................      25,260          139,460     
  Child credit \1\............................................................      19,175           94,855     
  Exclusion of Social Security benefits for retired workers...................      19,115          104,740     
  Deductibility of State and local property tax on owner-occupied homes.......      18,440          100,480     
  Exclusion of interest on public purpose bonds...............................      14,760           76,625     
  Exclusion of interest on life insurance savings.............................      14,200           79,265     
  Net Exclusion of Individual Retirement Account contributions and earnings...      10,780           57,375     
  Capital gains exclusion on home sales.......................................       9,465           51,260     
  Step-up basis of capital gains at death.....................................       9,465           51,260     
  Exclusion of interest on State and local debt for various non-public purposs       7,395           35,550     
  Exclusion of workmen's compensation benefits................................       5,210           28,975     
  Graduated corporation income tax rate (normal tax method)...................       5,085           27,840     
  Deductibility of medical expenses...........................................       4,815           27,275     
  Earned income tax credit \2\................................................       4,635           23,530     
  HOPE tax credit.............................................................       4,160           25,405     
  Exclusion of Social Security benefits for dependents and survivors..........       4,160           22,375     
  Net exclusion of Keogh plan contributions and earnings......................       3,755           20,430     
  Exception from passive loss rules for $25,000 of rental loss................       3,680           16,395     
  Accelerated depreciation of buildings other than rental housing (normal tax                                   
   method)....................................................................       3,470            9,125     
  Exclusion of veterans death benefits and disability compensation............       3,100           17,415     
  Tax credit for corporations receiving income from doing business in U.S.                                      
   possessions................................................................       2,800           14,790     
  Exclusion of Social Security benefits for disabled..........................       2,685           15,565     
  Deferral of income from controlled foreign corporations (normal tax method).       2,600           15,000     
  Lifetime Learning tax credit................................................       2,550           13,945     
  Credit for child and dependent care expenses................................       2,510           12,510     
  Credit for low-income housing investment....................................       2,365           11,995     
  Exclusion of income earned abroad by U.S. citizens..........................       2,205           13,760     
  Premiums on group term life insurance.......................................       2,150           11,220     
  Exclusion of benefits and allowances to armed forces personnel..............       2,120           10,800     
  Accelerated depreciation on rental housing (normal tax method)..............       1,845           11,620     
  Exclusion of income of foreign sales corporations...........................       1,800           10,000     
  Additional deduction for the elderly........................................       1,785            9,035     
  Inventory property sales source rules exception.............................       1,700            9,500     
  Exclusion of reimbursed employee parking expenses...........................       1,340            7,030     
  Deferral of interest on U.S. savings bonds..................................       1,015            5,605     
  Deferral of income from post 1987 installment sales.........................         995            5,175     
  Exemption of credit union income............................................         960            5,800     
  Exclusion of scholarship and fellowship income (normal tax method)..........         955            5,210     
  Exclusion of employer provided child care...................................         950            5,205     
  Parental personal exemption for students age 19 or over.....................         925            5,115     
  Expensing of certain small investments (normal tax method)..................         880            5,270     
  Credit for increasing research activities...................................         860            1,460     
  Excess of percentage over cost depletion, fuels.............................         840            4,330     
  Special ESOP rules..........................................................         740            3,960     
  Exclusion of employee meals and lodging (other than military)...............         650            3,555     
  Alternative fuel production credit..........................................         630            2,670     
  Exclusion of public assistance benefits (normal tax method).................         605            3,285     
  Expensing of research and experimentation expenditures (normal tax method)..         580            3,555     
  Empowerment zones and enterprise communities................................         555            2,950     
  Capital gains treatment of certain income...................................         535            2,840     
  Deductibility of casualty losses............................................         510            2,815     
  Expensing of multiperiod timber growing costs...............................         505            2,700     
  Exclusion of railroad retirement system benefits............................         460            2,340     
  Excess of percentage over cost depletion, nonfuel minerals..................         355            1,845     
  Exclusion of parsonage allowances...........................................         340            1,935     
  Adoption assistance.........................................................         320            1,635     
  Special Blue Cross/Blue Shield deduction....................................         240            1,455     
  Deductibility of student-loan interest......................................         235            1,705     
  Tax exemption of insurance companies owned by tax-exempt organizations......         230            1,315     
  Exclusion of employer provided educational assistance.......................         215              440     
  Amortization of start-up costs (normal tax method)..........................         210            1,100     
  Work opportunity tax credit.................................................         200              340     
  Exclusion of employer provided death benefits...............................         200            1,099     

[[Page 99]]

                                                                                                                
  Premiums on accident and disability insurance...............................         185            1,025     
  Carryover basis of capital gains on gifts...................................         180            1,000     
  Exceptions from imputed interest rules......................................         160              810     
  Exclusion of military disability pensions...................................         135              725     
  Expensing of environmental remediation costs................................         120              305     
  Small life insurance company deduction......................................         120              650     
  Tax incentives for preservation of historic structures......................         115              540     
  Medical savings accounts....................................................         110              585     
  Deferral of state prepaid tuition plans.....................................         110              660     
  Enhanced oil recovery credit................................................         100              575     
  Expensing of certain multiperiod production costs...........................          85              425     
  Education Individual Retirement Accounts....................................          85            1,495     
  Tax credit and deduction for clean-fuel burning vehicles and properties.....          80              430     
  Exclusion for employer-provided transit passes..............................          80              555     
  Exclusion of special benefits for disabled coal miners......................          80              360     
  Investment credit for rehabilitation of structures (other than historic)....          70              335     
  Expensing of certain capital outlays........................................          70              350     
  New technology credit.......................................................          70              390     
  Exclusion of GI bill benefits...............................................          70              435     
  Exclusion of veterans pensions..............................................          65              376     
  Exemption of certain mutuals' and cooperatives' income......................          65              335     
  Credit for disabled access expenditures.....................................          65              345     
  Expensing of exploration and development costs, nonfuel minerals............          55              275     
  Investment credit and seven-year amortization for reforestation expenditures          50              255     
  Capital gains treatment of certain timber income............................          50              285     
  Tax credit for orphan drug research.........................................          50              315     
  Exception from passive loss limitation for working interests in oil and gas                                   
   properties.................................................................          50              270     
  Capital gains treatment of royalties on coal................................          50              285     
  Tax credit for the elderly and disabled.....................................          50              250     
  Exclusion of certain foster care payments...................................          40              220     
  Capital gains exclusion of small corporation stock..........................          35              190     
  Credit for holders of zone academy bonds....................................          35              215     
  Welfare-to-work tax credit..................................................          30               90     
  Income averaging for farmers................................................          30               90     
  Additional deduction for the blind..........................................          30              160     
  Exclusion from income of conservation subsidies provided by public utilities          30              225     
  Expensing of costs of removing certain architectural barriers to the                                          
   handicapped................................................................          20              100     
  Special rules for mining reclamation reserves...............................          20              100     
  Deferral of tax on shipping companies.......................................          20              100     
  Excess bad debt reserves of financial institutions..........................          20               40     
  Alcohol fuel credit \3\.....................................................          20              100     
  Treatment of loans for solvent farmers......................................          10               50     
  Exclusion of interest on savings bonds transferred to educational                                             
   institutions...............................................................          10               70     
  Special alternative tax on small property and casualty insurance companies..           5               25     
  Ordinary income treatment of loss from small business corporation stock sale           5              230     
  Income of trusts to finance supplementary unemployment benefits.............           5               25     
----------------------------------------------------------------------------------------------------------------
Note: Provisions with estimates denoted ``normal tax method'' have no revenue loss under the reference tax law  
  method.                                                                                                       
                                                                                                                
All estimates have been rounded to the nearest $5 million.                                                      
                                                                                                                
Figures in table 5-3 are the arithmetic sums of corporate and individual income taxrevenue loss estimates from  
  table 5-2, and do not reflect possible interactions across these two taxes.                                   
                                                                                                                
\1\ The figures in the table indicate the effect of the child credit on receipts. The effect on outlays in (in  
  millions of dollars) is as follows: 1997 $0; 1998 $0; 1999 $538; 2000 $685; 2001 $662; 2002 $624; and 2003    
  $589.                                                                                                         
                                                                                                                
\2\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on     
  outlays in (in millions of dollars) is as follows: 1997 $21,856; 1998 $22,295; 1999 $24,496; 2000 $25,334;    
  2001 $26,040; 2002 $26,715; and 2003 $27,414.                                                                 
                                                                                                                
\3\ In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise   
  tax receipts (in millions of dollars) as follows: 1997 $675; 1998 $720; 1999 $750; 2000 $780; 2001 $810; 2002 
  $845; and 2003 $875.                                                                                          


[[Page 100]]


 Table 5-4.  PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR ACTIVITY IN 
                           CALENDAR YEAR 1998                           
                        (In millions of dollars)                        
------------------------------------------------------------------------
                                                               Present  
                         Provision                            Value of  
                                                            Revenue Loss
------------------------------------------------------------------------
Deferral of income from controlled foreign corporation                  
 (normal tax method)......................................     2,350    
Expensing of research and experimentation expenditure                   
 (normal tax method)......................................     1,655    
Expensing of exploration and development costs--fuels.....       160    
Expensing of exploration and development costs--nonfuels..        75    
Expensing of multiperiod timber growing costs.............       285    
Expensing of certain multiperiod production costs--                     
 agriculture..............................................        70    
Expensing of certain capital outlays--agriculture.........        85    
Deferral of income on life insurance and annuity contracts    19,635    
Accelerated depreciation of rental housing (normal tax                  
 method)..................................................     2,230    
Accelerated depreciation of buildings other than rental                 
 housing (normal tax method)..............................       535    
Accelerated depreciation of machinery and equipment                     
 (normal tax method)......................................    30,730    
Expensing of certain small investments (normal tax method)     1,065    
Amortization of start-up costs (normal tax method)........       180    
Deferral of tax on shipping companies.....................        10    
Credit for low-income housing investments.................     1,930    
Exclusion of pension contributions and earnings--employer               
 plans....................................................    77,260    
Exclusion of IRA contributions and earnings...............    10,525    
Exclusions of contribution and earnings for Keogh plans...     3,185    
Exclusion of interest on State and local public-purpose                 
 bonds....................................................    21,940    
Exclusion of interest on State and local non-public                     
 purposes bonds...........................................     8,665    
Deferral of interest on U.S. savings bonds................       230    
------------------------------------------------------------------------
Note: Provisions with estimates denoted ``normal tax method'' have no   
  revenue loss under the reference tax law method.                      

                           Outlay Equivalents

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

[[Page 101]]



Table 5-5.  OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX                                     
                           (In millions of dollars)                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Outlay Equivalents                              
                                                                         -------------------------------------------------------------------------------
                                                                                                                                                  1999- 
                                                                            1997      1998      1999      2000      2001      2002      2003      2003  
--------------------------------------------------------------------------------------------------------------------------------------------------------
  .........  National defense:                                                                                                                          
1..........    Exclusion of benefits and allowances to armed forces                                                                                     
                personnel...............................................     2,425     2,445     2,470     2,495     2,520     2,545     2,570    12,600
                                                                                                                                                        
  .........  International affairs:                                                                                                                     
2..........    Exclusion of income earned abroad by U.S. citizens.......     2,355     2,610     2,900     3,225     3,585     3,990     4,440    18,140
3..........    Exclusion of income of foreign sales corporations........     2,460     2,615     2,770     2,925     3,075     3,230     3,385    15,385
4..........    Inventory property sales source rules exception..........     2,310     2,460     2,615     2,770     2,925     3,075     3,230    14,615
5..........    Deferral of income from controlled foreign corporations                                                                                  
                (normal tax method).....................................     2,200     2,400     2,600     2,800     3,000     3,200     3,400    15,000
                                                                                                                                                        
  .........  General science, space, and technology:                                                                                                    
6..........    Expensing of research and experimentation expenditures                                                                                   
                (normal tax method).....................................       190       430       585       680       740       765       785     3,555
7..........    Credit for increasing research activities................     1,360     3,270     1,315       565       250        85        15     2,230
                                                                                                                                                        
  .........  Energy:                                                                                                                                    
8..........    Expensing of exploration and development costs, fuels....      -300      -180       -95        10       -20  ........        30       -75
9..........    Excess of percentage over cost depletion, fuels..........     1,160     1,175     1,185     1,200     1,215     1,240     1,255     6,095
10.........    Alternative fuel production credit.......................     1,090     1,120       960       910       860       820       550     4,100
11.........    Exception from passive loss limitation for working                                                                                       
                interests in oil and gas properties.....................        45        50        50        50        55        55        60       270
12.........    Capital gains treatment of royalties on coal.............        65        65        70        75        75        75        80       375
13.........    Exclusion of interest on energy facility bonds...........       255       245       245       240       225       210       200     1,120
14.........    Enhanced oil recovery credit.............................       145       150       160       170       180       190       195       895
15.........    New technology credit....................................        80        90       100       105       110       110       110       535
16.........    Alcohol fuel credit \1\..................................        20        20        20        20        20        20        20       100
17.........    Tax credit and deduction for clean-fuel burning vehicles                                                                                 
                and properties..........................................        95       100       110       125       135       130       100       600
18.........    Exclusion from income of conservation subsidies provided                                                                                 
                by public utilities.....................................        95        25        40        55        60        65        80       300
                                                                                                                                                        
  .........  Natural resources and environment:                                                                                                         
19.........    Expensing of exploration and development costs, nonfuel                                                                                  
                minerals................................................        65        75        75        75        75        75        75       375
20.........    Excess of percentage over cost depletion, nonfuel                                                                                        
                minerals................................................       465       480       495       505       515       535       540     2,590
21.........    Capital gains treatment of iron ore......................  ........  ........  ........  ........  ........  ........  ........  ........
22.........    Special rules for mining reclamation reserves............        25        25        25        25        25        25        25       125
23.........    Exclusion of interest on bonds for water, sewage, and                                                                                    
                hazardous waste facilities..............................       895       870       845       810       775       720       650     3,800
24.........    Capital gains treatment of certain timber income.........        65        65        70        75        75        75        80       375
25.........    Expensing of multiperiod timber growing costs............       460       480       505       525       540       555       575     2,700
26.........    Investment credit and seven-year amortization for                                                                                        
                reforestation expenditures..............................        45        50        50        50        50        55        55       260
27.........    Tax incentives for preservation of historic structures...       120       115       115       110       105       105       105       540
                                                                                                                                                        
  .........  Agriculture:                                                                                                                               
28.........    Expensing of certain capital outlays.....................        65        65        70        70        70        70        70       350
29.........    Expensing of certain multiperiod production costs........        80        80        85        85        85        85        85       425
30.........    Treatment of loans for solvent farmers...................        10        10        10        10        10        10        10        50
31.........    Capital gains treatment of certain income................       675       695       715       735       755       780       805     3,790
32.........    Income averaging for farmers.............................  ........         5        30        35        25  ........  ........        90
                                                                                                                                                        
  .........  Commerce and housing:                                                                                                                      
  .........    Financial institutions and insurance:                                                                                                    
33.........     Exemption of credit union income........................     1,020     1,120     1,225     1,340     1,465     1,605     1,760     7,395
34.........     Excess bad debt reserves of financial institutions......        70        45        20        10         5         5  ........        40
35.........     Exclusion of interest on life insurance savings.........    12,765    13,465    14,200    14,990    15,810    16,680    17,585    79,265
36.........     Special alternative tax on small property and casualty                                                                                  
                 insurance companies....................................         5         5         5         5         5         5         5        25
37.........     Tax exemption of insurance companies owned by tax-exempt                                                                                
                 organizations..........................................       280       300       320       340       360       390       415     1,825
38.........     Small life insurance company deduction..................       145       150       160       165       170       180       190       865
  .........    Housing:                                                                                                                                 
39.........     Exclusion of interest on owner-occupied mortgage subsidy                                                                                
                 bonds..................................................     2,510     2,395     2,290     2,185     2,060     1,955     1,845    10,335
40.........     Exclusion of interest on rental housing bonds...........     1,165     1,075       990       880       755       645       440     3,710
41.........     Deductibility of mortgage interest on owner-occupied                                                                                    
                 homes..................................................    49,060    51,245    53,695    56,515    59,505    62,730    66,245   298,690
42.........     Deductibility of State and local property tax on owner-                                                                                 
                 occupied homes.........................................    16,915    17,700    18,440    19,220    20,045    20,920    21,855   100,480
43.........     Deferral of income from post 1987 installment sales.....       960       975       995     1,015     1,035     1,055     1,075     5,175
44.........     Deferral of capital gains on home sales.................    12,245     5,770  ........  ........  ........  ........  ........  ........
45.........     Exclusion of capital gains on home sales for persons age                                                                                
                 55 and over............................................     3,740     1,110  ........  ........  ........  ........  ........  ........
46.........     Capital gains exclusion on home sales...................    11,670    12,135    12,620    13,125    13,650    14,195    14,765    68,355
47.........     Exception from passive loss rules for $25,000 of rental                                                                                 
                 loss...................................................     4,175     3,910     3,680     3,465     3,270     3,080     2,900    16,395
48.........     Credit for low-income housing investment................     3,490     3,670     3,590     3,550     3,615     3,665     3,775    18,195
49.........     Accelerated depreciation on rental housing (normal tax                                                                                  
                 method)................................................     1,365     1,585     1,840     2,100     2,235     2,560     2,885    11,620
  .........    Commerce:                                                                                                                                
50.........     Cancellation of indebtedness............................        40        15  ........       -10        -5        -5  ........       -20
51.........     Exceptions from imputed interest rules..................       155       155       160       160       160       165       165       810
52.........     Capital gains (other than agriculture, timber, iron ore,                                                                                
                 and coal) (normal tax method)..........................    32,825    33,810    34,815    35,870    36,950    38,060    39,195   184,890
53.........     Capital gains exclusion of small corporation stock......  ........  ........         5        25        55        95       125       305
54.........     Step-up basis of capital gains at death.................    11,670    12,135    12,620    13,125    13,650    14,195    14,765    68,355

[[Page 102]]

                                                                                                                                                        
55.........     Carryover basis of capital gains on gifts...............       155       165       180       190       200       210       220     1,000
56.........     Ordinary income treatment of loss from small business                                                                                   
                 corporation stock sale.................................        45        45        50        50        55        55        55       265
57.........     Accelerated depreciation of buildings other than rental                                                                                 
                 housing (normal tax method)............................     5,830     4,690     3,470     2,530     1,700     1,070       350     9,120
58.........     Accelerated depreciation of machinery and equipment                                                                                     
                 (normal tax method)....................................    24,970    26,655    28,535    29,410    30,620    31,620    31,935   152,120
59.........     Expensing of certain small investments (normal tax                                                                                      
                 method)................................................     1,055       965       880       820     1,360     1,285       930     5,275
60.........     Amortization of start-up costs (normal tax method)......       200       205       210       215       220       225       230     1,100
61.........     Graduated corporation income tax rate (normal tax                                                                                       
                 method)................................................     6,345     6,690     6,870     7,135     7,465     7,865     8,280    37,615
62.........     Exclusion of interest on small-issue bonds..............       495       425       395       370       350       335       320     1,770
                                                                                                                                                        
  .........  Transportation:                                                                                                                            
63.........    Deferral of tax on shipping companies....................        20        20        20        20        20        20        20       100
64.........    Exclusion of reimbursed employee parking expenses........     1,670     1,710     1,750     1,790     1,835     1,885     1,935     9,195
65.........    Exclusion for employer-provided transit passes...........        80       100       115       135       155       175       200       780
                                                                                                                                                        
  .........  Community and regional development:                                                                                                        
66.........    Investment credit for rehabilitation of structures (other                                                                                
                than historic)..........................................        80        70        70        70        65        65        65       335
67.........    Exclusion of interest for airport, dock, and similar                                                                                     
                bonds...................................................     1,400     1,470     1,530     1,580     1,620     1,645     1,665     8,040
68.........    Exemption of certain mutuals' and cooperatives' income...        60        65        65        65        65        70        70       335
69.........    Empowerment zones and enterprise communities.............       255       460       555       635       670       620       465     2,945
70.........    Expensing of environmental remediation costs.............  ........       130       155       210        85       -20       -35       395
                                                                                                                                                        
  .........  Education, training, employment, and social services:                                                                                      
  .........    Education:                                                                                                                               
71.........     Exclusion of scholarship and fellowship income (normal                                                                                  
                 tax method)............................................       970     1,015     1,060     1,105     1,155     1,210     1,265     5,795
72.........     HOPE tax credit.........................................  ........       265     5,335     6,245     6,700     7,085     7,210    32,575
73.........     Lifetime Learning tax credit............................  ........       145     3,270     3,320     3,595     3,640     4,050    17,875
74.........     Education Individual Retirement Accounts................  ........        20       110       250       395       535       690     1,980
75.........     Deductibility of student-loan interest..................  ........        85       300       355       435       510       535     2,135
76.........     Deferral of state prepaid tuition plans.................  ........        80       140       155       170       185       200       850
77.........     Exclusion of interest on student loan bonds.............       415       390       365       345       325       310       300     1,645
78.........     Exclusion of interest on bonds for private nonprofit                                                                                    
                 educational facilities.................................     1,200     1,245     1,280     1,305     1,325     1,340     1,350     6,600
79.........     Credit for holders of zone academy bonds................  ........        10        45        65        65        65        65       305
80.........     Exclusion of interest on savings bonds transferred to                                                                                   
                 educational institutions...............................        10        15        20        20        20        20        20       100
81.........     Parental personal exemption for students age 19 or over.       935       970     1,025     1,075     1,135     1,185     1,245     5,665
82.........     Child credit \2\........................................  ........     4,785    25,565    25,655    25,355    25,125    24,775   126,475
83.........     Deductibility of charitable contributions (education)...     3,680     3,975     4,140     4,315     4,520     4,750     5,000    22,725
84.........     Exclusion of employer provided educational assistance...       395       270       270       260        20  ........  ........       550
  .........    Training, employment, and social services:                                                                                               
85.........     Work opportunity tax credit.............................       110       275       200       100        30        10  ........       340
86.........     Welfare-to-work tax credit..............................  ........        10        30        30        15        10         5        90
87.........     Exclusion of employer provided child care...............     1,145     1,215     1,265     1,325     1,385     1,445     1,515     6,935
88.........     Adoption assistance.....................................        10       240       385       430       450       435       270     1,970
89.........     Exclusion of employee meals and lodging (other than                                                                                     
                 military)..............................................       725       760       795       830       862       905       945     4,337
90.........     Credit for child and dependent care expenses............     3,350     3,350     3,345     3,340     3,335     3,330     3,330    16,680
91.........     Credit for disabled access expenditures.................       115       115       115       120       120       120       120       595
92.........     Expensing of costs of removing certain architectural                                                                                    
                 barriers to the handicapped............................        20        20        20        20        20        20        20       100
93.........     Deductibility of charitable contributions, other than                                                                                   
                 education and health...................................    22,675    24,820    25,960    27,235    28,590    30,050    31,600   143,435
94.........     Exclusion of certain foster care payments...............        40        45        45        50        50        55        55       255
95.........     Exclusion of parsonage allowances.......................       365       390       415       445       475       505       540     2,380
                                                                                                                                                        
  .........  Health:                                                                                                                                    
96.........    Exclusion of employer contributions for medical insurance                                                                                
                premiums and medical care...............................    85,585    91,445    97,690   104,225   111,355   119,245   128,370   560,885
97.........    Medical savings accounts.................................  ........        40       150       155       155       160       170       790
98.........    Deductibility of medical expenses........................     4,175     4,550     4,815     5,110     5,425     5,775     6,150    27,275
99.........    Exclusion of interest on hospital construction bonds.....     2,420     2,510     2,590     2,655     2,705     2,750     2,780    13,480
100........    Deductibility of charitable contributions (health).......     3,220     3,500     3,645     3,815     3,990     4,190     4,415    20,055
101........    Tax credit for orphan drug research......................        25        65        75        80        95       105       115       470
102........    Special Blue Cross/Blue Shield deduction.................       280       230       300       320       360       425       415     1,820
                                                                                                                                                        
  .........  Income security:                                                                                                                           
103........    Exclusion of railroad retirement system benefits.........       445       455       460       465       465       470       480     2,340
104........    Exclusion of workmen's compensation benefits.............     4,410     4,950     5,210     5,480     5,775     6,090     6,420    28,975
105........    Exclusion of public assistance benefits (normal tax                                                                                      
                method).................................................       545       580       605       630       655       685       710     3,285
106........    Exclusion of special benefits for disabled coal miners...        85        85        80        75        70        70        65       360
107........    Exclusion of military disability pensions................       125       130       135       130       145       150       155       715
  .........    Net exclusion of pension contributions and earnings:                                                                                     
108........     Employer plans..........................................    96,455    97,615    98,130    99,880    99,780    99,990   100,540   498,320
109........     Individual Retirement Accounts..........................    13,555    14,250    15,025    15,570    16,215    16,890    17,395    81,095
110........     Keogh plans.............................................     4,635     4,815     4,950     5,130     5,360     5,615     5,865    26,920
111........     Exclusion of employer provided death benefits...........       235       245       260       270       280       295       310     1,415

[[Page 103]]

                                                                                                                                                        
  .........    Exclusion of other employee benefits:                                                                                                    
112........     Premiums on group term life insurance...................     2,730     2,790     2,845     2,905     2,965     3,030     3,090    14,835
113........     Premiums on accident and disability insurance...........       210       225       235       250       260       275       290     1,310
114........     Income of trusts to finance supplementary unemployment                                                                                  
                 benefits...............................................         5         5         5         5         5         5         5        25
115........     Special ESOP rules......................................     1,020     1,000     1,030     1,055     1,095     1,140     1,190     5,510
116........     Additional deduction for the blind......................        30        35        35        35        40        40        40       190
117........     Additional deduction for the elderly....................     1,870     2,070     2,160     2,175     2,180     2,180     2,230    10,925
118........     Tax credit for the elderly and disabled.................        60        60        60        60        60        60        65       305
119........     Deductibility of casualty losses........................       600       630       665       695       730       765       805     3,660
120........     Earned income tax credit \3\............................     5,340     5,460     3,790     3,635     3,860     4,005     4,245    19,535
                                                                                                                                                        
  .........  Social Security:                                                                                                                           
  .........    Exclusion of social security benefits:                                                                                                   
121........     Social Security benefits for retired workers............    17,470    18,330    19,115    20,025    20,840    21,830    22,930   104,740
122........     Social Security benefits for disabled...................     2,270     2,495     2,685     2,875     3,090     3,325     3,590    15,565
123........     Social Security benefits for dependents and survivors...     3,825     4,000     4,160     4,310     4,470     4,640     4,795    22,375
                                                                                                                                                        
  .........  Veterans benefits and services:                                                                                                            
124........    Exclusion of veterans death benefits and disability                                                                                      
                compensation............................................     2,770     2,930     3,100     3,280     3,470     3,675     3,890    17,415
125........    Exclusion of veterans pensions...........................        70        65        70        75        80        85        90       400
126........    Exclusion of GI bill benefits............................        60        70        80        90        95       100       105       470
127........    Exclusion of interest on veterans housing bonds..........       110       110       105       110       110       115       120       560
                                                                                                                                                        
  .........  General purpose fiscal assistance:                                                                                                         
128........    Exclusion of interest on public purpose bonds............    19,915    20,650    21,285    21,795    22,170    22,475    22,680   110,405
129........    Deductibility of nonbusiness State and local taxes other                                                                                 
                than on owner-occupied homes............................    30,720    32,145    33,490    34,910    36,410    37,995    39,695   182,500
130........    Tax credit for corporations receiving income from doing                                                                                  
                business in U.S. possessions............................     3,860     3,960     4,000     4,120     4,245     4,370     4,390    21,125
                                                                                                                                                        
  .........  Interest:                                                                                                                                  
131........    Deferral of interest on U.S. savings bonds...............       915       965     1,015     1,065     1,115     1,175     1,235     5,605
                                                                                                                                                        
  .........  Addendum--Aid to State and local governments:                                                                                              
  .........    Deductibility of:                                                                                                                        
  .........     Property taxes on owner-occupied homes..................    16,915    17,700    18,440    19,220    20,045    20,920    21,855   100,480
  .........     Nonbusiness State and local taxes other than on owner-                                                                                  
                 occupied homes.........................................    30,720    32,145    33,490    34,910    36,410    37,995    39,695   182,500
  .........    Exclusion of interest on:                                                                                                                
  .........     Public purpose bonds....................................    19,915    20,650    21,285    21,795    22,170    22,475    22,680   110,405
  .........     Energy facility bonds...................................       255       245       245       240       225       210       200     1,120
  .........     Bonds for water, sewage, and hazardous waste facilities.       895       870       845       810       775       720       650     3,800
  .........     Small-issue bonds.......................................       495       425       395       370       350       335       320     1,770
  .........     Owner-occupied mortgage revenue bonds...................     2,510     2,395     2,290     2,185     2,060     1,955     1,845    10,335
  .........     Rental housing bonds....................................     1,165     1,075       990       880       755       645       440     3,710
  .........     Bonds for airports, docks, and sports and convention                                                                                    
                 facilities.............................................     1,400     1,470     1,530     1,580     1,620     1,645     1,665     8,040
  .........     Student loan bonds......................................       415       390       365       345       325       310       300     1,645
  .........     Bonds for private nonprofit educational facilities......     1,200     1,245     1,280     1,305     1,325     1,340     1,350     6,600
  .........     Hospital construction bonds.............................     2,420     2,510     2,590     2,655     2,705     2,750     2,780    13,480
  .........     Veterans housing bonds..................................       110       110       105       110       110       115       120       560
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Provisions with estimates denoted ``normal tax method'' have no revenue loss under the reference tax law method.                                  
All estimates have been rounded to the nearest $5 million.                                                                                              
Figures in table 5-1 are the arithmetic sums of corporate and individual income tax revenue loss estimates from table 5-2, and do not reflect possible  
  interactions across these two taxes.                                                                                                                  
\1\ In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as  
  follows: 1997 $675; 1998 $720; 1999 $750; 2000 $780; 2001 $810; 2002 $845; 2003 $875.                                                                 
\2\ The figures in the table indicate the effect of the child credit on receipts. The effect on outlays in (in millions of dollars) is as follows: 1997 
  $0; 1998 $0; 1999 $538; 2000 $685; 2001 $662; 2002 $624; and 2003 $589.                                                                               
\3\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on outlays in (in millions of dollars) is as   
  follows: 1997 $21,856; 1998 $22,295; 1999 $24,496; 2000 $25,334; 2001 $26,040; 2002 $26,715; and 2003 $27,414.                                        

                        Tax Expenditure Baselines

  A tax expenditure is a preferential exception to the baseline 
provisions of the tax structure. The 1974 Congressional Budget Act does 
not, however, specify the baseline provisions of the tax law. Deciding 
whether provisions are preferential exceptions, therefore, is a matter 
of judgement. As in prior years, this year's tax expenditure estimates 
are presented using two baselines: the normal tax baseline, which is 
used by the Joint Committee on Taxation, and the reference tax law 
baseline, which has been reported by the Administration since 1983.
  The normal tax baseline is patterned on a comprehensive income tax, 
which defines income as the sum of consumption and the change in net 
wealth in a given period of time. The normal tax baseline allows 
personal exemptions, a standard deduction, and deductions of the 
expenses incurred in earning income. It is not limited to a particular 
structure of tax rates, or by a specific definition of the taxpaying 
unit.

[[Page 104]]

  The reference tax law baseline is also patterned on a comprehensive 
income tax, but in practice is closer to existing law. Reference law tax 
expenditures are limited to special exceptions in the tax code that 
serve programmatic functions. These functions correspond to specific 
budget categories such as national defense, agriculture, or health care. 
While tax expenditures under the reference law baseline are generally 
tax expenditures under the normal tax baseline, the reverse is not 
always true.
  Both the normal and reference tax baselines allow several major 
departures from a pure comprehensive income tax. For example:
    Income is taxable when realized in exchange. Thus, neither 
          the deferral of tax on unrealized capital gains nor the tax 
          exclusion of imputed income (such as the rental value of 
          owner-occupied housing or farmers' consumption of their own 
          produce) is regarded as a tax expenditure. Both accrued and 
          imputed income would be taxed under a comprehensive income 
          tax.
    There is a separate corporation income tax. Under a 
          comprehensive income tax corporate income would be taxed only 
          once--at the shareholder level, whether or not distributed in 
          the form of dividends.
    Values of assets and debt are not adjusted for inflation. A 
          comprehensive income tax would adjust the cost basis of 
          capital assets and debt for changes in the price level during 
          the time the assets or debt are held. Thus, under a 
          comprehensive income tax baseline the failure to take account 
          of inflation in measuring depreciation, capital gains, and 
          interest income would be regarded as a negative tax 
          expenditure (i.e., a tax penalty), and failure to take account 
          of inflation in measuring interest costs would be regarded as 
          a positive tax expenditure (i.e., a tax subsidy).
  While the reference law and normal tax baselines are generally 
similar, areas of difference include:
    Tax rates. The separate schedules applying to the various 
          taxpaying units are included in the reference law baseline. 
          Thus, corporate tax rates below the maximum statutory rate do 
          not give rise to a tax expenditure. The normal tax baseline is 
          similar, except that it specifies the current maximum rate as 
          the baseline for the corporate income tax. The lower tax rates 
          applied to the first $10 million of corporate income are thus 
          regarded as a tax expenditure. Similarly, under the reference 
          law baseline, preferential tax rates for capital gains 
          generally do not yield a tax expenditure; only capital gains 
          treatment of otherwise ``ordinary income,'' such as that from 
          coal and iron ore royalties and the sale of timber and certain 
          agricultural products, is considered a tax expenditure. The 
          alternative minimum tax is treated as part of the baseline 
          rate structure under both the reference and normal tax 
          methods.
    Income subject to the tax. Income subject to tax is defined 
          as gross income less the costs of earning that income. The 
          Federal income tax defines gross income to include: (1) 
          consideration received in the exchange of goods and services, 
          including labor services or property; and (2) the taxpayer's 
          share of gross or net income earned and/or reported by another 
          entity (such as a partnership). Under the reference tax rules, 
          therefore, gross income does not include gifts--defined as 
          receipts of money or property that are not consideration in an 
          exchange--or most transfer payments, which can be thought of 
          as gifts from the Government.\2\ The normal tax baseline also 
          excludes gifts between individuals from gross income. Under 
          the normal tax baseline, however, all cash transfer payments 
          from the Government to private individuals are counted in 
          gross income, and exemptions of such transfers from tax are 
          identified as tax expenditures. The costs of earning income 
          are generally deductible in determining taxable income under 
          both the reference and normal tax baselines.\3\
---------------------------------------------------------------------------
  \2\ Gross income does, however, include transfer payments associated 
with past employment, such as social security benefits.
  \3\ In the case of individuals who hold ``passive'' equity interests 
in businesses, however, the pro rata shares of sales and expense 
deductions reportable in a year are limited. A passive business activity 
is defined to be one in which the holder of the interest, usually a 
partnership interest, does not actively perform managerial or other 
participatory functions. The taxpayer may generally report no larger 
deductions for a year than will reduce taxable income from such 
activities to zero. Deductions in excess of the limitation may be taken 
in subsequent years, or when the interest is liquidated.
---------------------------------------------------------------------------
    Capital recovery. Under the reference tax law baseline no 
          tax expenditures arise from accelerated depreciation. Under 
          the normal tax baseline, the depreciation allowance for 
          machinery and equipment is determined using straight-line 
          depreciation over tax lives equal to mid-values of the asset 
          depreciation range (a depreciation system in effect from 1971 
          through 1980). The normal tax baseline for real property is 
          computed using 40-year straight-line depreciation.
    Treatment of foreign income. Both the normal and reference 
          tax baselines allow a tax credit for foreign income taxes paid 
          (up to the amount of U.S. income taxes that would otherwise be 
          due), which prevents double taxation of income earned abroad. 
          Under the normal tax method, however, controlled foreign 
          corporations (CFCs) are not regarded as entities separate from 
          their controlling U.S. shareholders. Thus, the deferral of tax 
          on income received by CFCs is regarded as a tax expenditure 
          under this method. In contrast, except for tax haven 
          activities, the reference law baseline follows current law in 
          treating CFCs as separate taxable entities whose income is not 
          subject to U.S. tax until distributed to U.S. taxpayers. Under 
          this baseline, deferral of tax on CFC income is not a tax 
          expenditure because U.S. taxpayers generally are not taxed on 
          accrued, but unrealized, income.
  In addition to these areas of difference, the Joint Committee on 
Taxation considers a somewhat broader

[[Page 105]]

set of tax expenditures under its normal tax baseline than is considered 
here.

    Performance Measures and the Economic Effects of Tax Expenditures

  Under the Government Performance and Results Act of 1993 (GPRA), 
Federal agencies are directed to develop both strategic and annual plans 
for their programs and activities. These plans set out performance 
objectives to be achieved over a specific time period. Achieving most of 
these objectives will largely be the result of direct expenditures of 
funds. However, tax expenditures may also contribute to goal 
achievement.
  The Senate Governmental Affairs Committee report on this Act\4\ called 
on the Executive branch to undertake a series of analyses to assess the 
effect of specific tax expenditures on the achievement of the goals and 
objectives in these strategic and annual plans. As described in OMB's 
May 1997 report on this Act,\5\ Treasury in 1997 initiated pilot studies 
of three specific tax expenditures in order to explore evaluation 
methods and resource needs associated with evaluating the relationship 
between tax expenditures and performance goals. Tax expenditures were 
selected in each of the three main areas--individual, business, and 
international taxation--within the Office of Tax Analysis. The specific 
provisions considered were: the tax exemption for worker's compensation 
benefits; the tax credit for nonconventional fuels; and the tax 
exclusion for certain amounts of income earned by Americans living 
abroad. The results of these studies are summarized in the context of 
the three specific provisions in the section that follows, which 
provides provision descriptions.
---------------------------------------------------------------------------
  \4\ Committee on Government Affairs, United States Senate, 
``Government Performance and Results Act of 1993'' (Report 103-58, 
1993).
  \5\ Director of the Office of Management and Budget, ``The Government 
Performance and Results Act,'' Report to the President and the Congress, 
May 1997.
---------------------------------------------------------------------------
  For the next year, the Administration's plan is to complete additional 
studies that will focus on the availability of the data needed to assess 
the effects of selected significant tax expenditures. In addition, 
summarized data on the beneficiaries and other economic properties of 
such provisions will be developed where feasible. This effort will 
complement information published by the Joint Committee on Taxation and 
the Senate Budget Committee on the rationale, beneficiaries, and effects 
of tax expenditures.\6\ One finding of the pilot studies is that much of 
the data needed for thorough analysis is not currently available. Hence, 
assessment of data needs and availability from Federal statistical 
agencies, program-agency studies, or private-sector sources, and, when 
feasible, publication of data on selected tax expenditures should prove 
valuable to broader efforts to assess the effects tax expenditures and 
to compare their effectiveness with outlay, regulatory and other tax 
polices as means of achieving objectives.
---------------------------------------------------------------------------
  \6\ Joint Committee on Taxation, ``Estimates of Federal Tax 
Expenditures for Fiscal Years 1998-2992,'' JCS-22-97, December 15, 1997; 
and Committee on the Budget, United States Senate, ``Tax Expenditures: 
Compendium of Background Material on Individual Provisions,'' prepared 
by the Congressional Research Service (S. Prt. 104-69, December 1996).
---------------------------------------------------------------------------

  Comparisons of tax expenditure, spending, and regulatory policies. Tax 
expenditures by definition work through the tax system and, 
particularly, the income tax. Thus, they may be relatively advantageous 
policy approaches when the benefit or incentive is related to income and 
is intended to be widely available.\7\ Because there is an existing 
public administrative and private compliance structure for the tax 
system, the incremental administrative and compliance costs for a tax 
expenditure may be low in many, though not all, cases. In addition, tax 
expenditures may help simplify the tax system, as where they leave 
certain income sources untaxed (e.g, exemptions for employer fringe 
benefits or exclusions for up to $500,000 of capital gains on home 
sales). Tax expenditures also implicitly subsidize certain activities, 
which benefits recipients; the beneficiaries experience reduced taxes 
that are offset by higher taxes (or spending reductions) elsewhere. 
Regulatory or tax-disincentive policies, which can also modify behavior, 
would have a different distributional impact. Finally, a variety of tax 
expenditure tools can be used--e.g., deductions, credits, exemptions and 
deferrals; floors and ceilings; and phase-ins and phase-outs, dependent 
on income, expenses, or demographic characteristics (age, number of 
family members, etc.). This wide range means that tax expenditures can 
be flexible and can have very different distributional and cost-
effectiveness properties.
---------------------------------------------------------------------------
  \7\ While this section focuses upon tax expenditures under the income 
tax, tax preferences also arise under the unified transfer, payroll, and 
excise tax systems. Such preferences can be useful when they relate to 
the base of those taxes, such as an excise tax exemption for certain 
types of meritorious consumption.
---------------------------------------------------------------------------
  Tax expenditures also have limitations. In some cases they can add to 
the complexity of the tax system, which can raise both administrative 
and compliance costs; for example, various holding periods and tax rates 
for capital gains can complicate filing and decisionmaking. Also, the 
income tax system does not gather information on wealth, in contrast to 
certain loan programs that are based on recipients' assets and income. 
In addition, the tax system may have little or no contact with persons 
who have no or very low incomes, and incentives for such persons may 
need to take the form of refunds. These features may reduce the 
effectiveness of tax expenditures for addressing certain income-transfer 
objectives. Tax expenditures also generally do not enable the same 
degree of agency discretion as an outlay program; for example, grant or 
direct Federal service delivery programs can prioritize which activities 
are addressed with what amount of resources in a way that is difficult 
to emulate with tax expenditures. Finally, tax expenditures tend to 
escape the budget scrutiny afforded to other programs. For instance, a 
program funded by a tax expenditure does not increase government outlays 
as a share of national product and it may even decrease receipts as a 
share of output. However, the effective government compensation to a 
service provider can be identical to that of a spending program under 
which the outlay (and possibly the receipts) share of GDP may increase.

[[Page 106]]

  Outlay programs, in contrast, have advantages where direct government 
service provision is particularly warranted--such as equipping and 
providing the armed forces or administering the system of justice. 
Outlay programs may also be specifically designed to meet the needs of 
low-income families who would not otherwise be subject to income taxes 
or need to file a return. Outlay programs may also receive more year-to-
year oversight and fine tuning, through the legislative and executive 
budget process. In addition, there are many types of spending programs--
including direct government provision; credit programs; and payments to 
State and local governments, the private sector, or individuals in the 
form of grants or contracts--which provides flexibility for policy 
design. Regarding limitations, certain outlay programs--such as direct 
government service provision--may rely less directly on economic 
incentives and private-market provision than tax incentives, which may 
reduce the relative efficiency of spending programs for some goals. 
Spending programs also require resources to be raised via taxes, user 
charges, or government borrowing. Finally, spending programs, 
particularly on the discretionary side, may respond less readily to 
changing activity levels and economic conditions than tax expenditures.
  Regulations have a key distributional difference from outlay and tax-
expenditure programs in that the immediate distributional burden of the 
regulation typically falls on the regulated party (i.e., the intended 
actor)--generally in the private sector. While the regulated parties can 
pass costs along through product or input prices, the initial incidence 
is on the regulated party. Regulations can be fine-tuned more quickly 
than tax expenditures, as they can generally be changed by the executive 
branch without legislation. Like tax expenditures, regulations often 
largely rely upon voluntary compliance, rather than detailed inspections 
and policing. As such, the public administrative costs tend to be 
modest, relative to the private resource costs associated with modifying 
activities. Historically, regulations have tended to rely on 
proscriptive measures, as opposed to economic incentives, which can 
diminish their efficiency, though this feature can also promote full 
compliance where (as in certain safety-related cases) policymakers 
believe that trade-offs with economic considerations are unnecessary. 
Also, regulations generally do not directly affect the Federal budget 
and outlays and receipts as a percentage of national output. Thus, like 
tax expenditures, they may escape the type of scrutiny that outlay 
programs receive. However, most regulations are subjected to a formal 
type of benefit-cost analysis that goes well beyond the analysis 
required for outlay and tax-expenditure programs. To some extent, the 
GPRA requirement for performance evaluation will address this lack of 
formal analysis.
  Tax expenditures, like spending and regulatory programs, have a 
variety of objectives and effects. These include: encouraging certain 
types of activities (e.g., saving for retirement or investing in certain 
sectors); increasing certain types of after-tax income (e.g., favorable 
tax treatment of social security income); reducing private compliance 
costs and government administrative costs (e.g., favorable treatment of 
certain employer-provided fringe benefits); and promoting tax neutrality 
(e.g., accelerated depreciation in the presence of inflation). Some of 
these objectives are well suited to quantitative measurement, while 
others are less well suited. Also, many tax expenditures, including 
those cited above, may have more than one objective. For example, 
favorable treatment of employer-provided pensions might be argued to 
have aspects of most, or even all, of the goals mentioned above. In 
addition, the economic effects of particular provisions can extend 
beyond their intended objectives (e.g., a provision intended to promote 
an activity or raise certain incomes may have positive or negative 
effects on tax neutrality).
  Performance measurement is generally concerned with inputs, outputs, 
and outcomes. In the case of tax expenditures, the principal input is 
usually the tax revenue loss. Outputs are quantitative or qualitative 
measures of goods and services, or changes in income and investment, 
directly produced by these inputs. Outcomes, in turn, represent the 
changes in the economy, society, or environment that are the ultimate 
goals of programs.
  Thus, for a provision that reduces taxes on certain investment 
activity, an increase in the amount of investment would likely be a key 
output. The resulting production from that investment, and, in turn, the 
associated improvements in national income, welfare, or security, could 
be the outcomes of interest. For other provisions, such as those 
designed to address a potential inequity or unintended consequence in 
the tax code, an important performance measure might be how they change 
effective tax rates (the discounted present-value of taxes owed on new 
investments or incremental earnings) or excess burden (an economic 
measure of the distortions caused by taxes). Distributional effects on 
incomes may be an important measure for certain provisions.

  An overview of evaluation issues by budget function. The discussion 
below considers the types of measures that might be useful for some 
major programmatic groups of tax expenditures. The discussion is 
intended to be illustrative, and not all encompassing. However, it is 
premised on the assumption that the data needed to perform the analysis 
are available or can be developed. In practice, data availability is 
likely to be a major challenge, and data constraints may limit the 
assessment of the effectiveness of many of the provisions for some time. 
In addition, such assessments can raise significant challenges in 
economic modeling, which has inherent uncertainties. For these reasons, 
and related time, staffing, and resource constraints, the evaluation 
process is likely to take a number of years and to include qualitative 
assessments and estimated ranges of effects, in many cases, as opposed 
to point estimates.

[[Page 107]]

  National defense.--Some tax expenditures are intended to assist 
governmental activities. For example, tax preferences for military 
benefits reflect, among other things, the view that benefits such as 
housing, subsistence, and moving expenses are intrinsic aspects of 
military service, and are provided, in part, for the benefit of the 
employer, the U.S. Government. Tax benefits for combat service are 
intended to reduce tax burdens on military personnel undertaking 
hazardous service for the Nation. A portion of the tax expenditure 
associated with foreign earnings is targeted to benefit U.S. Government 
civilian personnel working abroad, by offsetting the living costs that 
can be higher than those in the United States. These tax expenditures 
should be considered together with direct agency budget costs in making 
programmatic decisions.
  International affairs.--Tax expenditures are also aimed at promoting 
U.S. exports. These include the exclusion for income earned abroad by 
nongovernmental employees and preferences for income from exports and 
U.S.-controlled foreign corporations. Measuring the effectiveness of 
these provisions raises challenging issues. In addition to determining 
their effectiveness in markets of the benefitting firms, analysis should 
consider the extent to which macroeconomic factors lead to offsetting 
effects, such as increased imports, which could moderate any net effects 
on employment, national output, and trade deficits. Similar issues arise 
in the case of export promotion programs supported by outlays.
  General science, space and technology; energy; natural resources and 
the environment; agriculture; and commerce and housing.--A series of tax 
expenditures reduces the cost of investment, both in specific 
activities--such as research and experimentation, extractive industries, 
and certain financial activities--and more generally, through 
accelerated depreciation for plant and equipment. These provisions can 
be evaluated along a number of dimensions. For example, it could be 
useful to consider the strength of the incentives by measuring their 
effects on the cost of capital (the interest rate which investments must 
yield to cover their costs) and effective tax rates. The impact of these 
provisions on the amounts of corresponding forms of investment--such as 
research spending, exploration activity, or equipment--could also be 
estimated. In some cases, such as research, there is evidence that the 
investment can provide significant positive externalities--that is, 
economic benefits that are not reflected in the market transactions 
between private parties. It could be useful to quantify these 
externalities and compare them with the degree of tax subsidy provided. 
Measures could also indicate the provisions' effects on production from 
these investments--such as numbers or values of patents, energy 
production and reserves, and industrial production. Issues to be 
considered include the extent to which the preferences increase 
production (as opposed to benefitting existing output) and their cost-
effectiveness relative to other policies. Analysis could also consider 
objectives that are more difficult to measure but still are ultimate 
goals, such as promoting the Nation's technological base, energy 
security, environmental quality, or economic growth. Such an assessment 
is likely to involve tax analysis as well as consideration of non-tax 
matters such as market structure, scientific, and other information 
(such as the effects of increased domestic fuel production on imports 
from various regions, or the effects of various energy sources on the 
environment).
  Housing investment also benefits from tax expenditures, including the 
mortgage interest deduction and preferential treatment of capital gains 
on homes. Measures of the effectiveness of these provisions could 
include their effects on increasing the extent of home ownership and the 
quality of housing. In addition, the mortgage interest deduction offsets 
the taxable nature of investment income received by homeowners, so the 
relationship between the deduction and such earnings is also relevant to 
evaluation of this provision. Similarly, analysis of the extent of 
accumulated inflationary gains is likely to be relevant to evaluation of 
the capital gains preference for home sales. Deductibility of State and 
local property taxes assists with making housing more affordable as well 
as easing the cost of providing community services through these taxes. 
Provisions intended to promote investment in rental housing could be 
evaluated for their effects on making such housing more available and 
affordable. These provisions should then be compared with alternative 
programs that address housing supply and demand.

  Transportation.--Employer-provided parking is a fringe benefit that, 
for the most part, is excluded from taxation. The tax expenditure 
revenue loss estimates reflect the cost of parking that is leased by 
employers for employees; an estimate is not currently available for the 
value of parking owned by employers and provided to their employees. The 
exclusion for employer-provided transit passes is intended to promote 
use of this mode of transportation, which has environmental and 
congestion benefits. The tax treatments of these different benefits 
could be compared with alternative transportation policies.
  Community and regional development.--A series of tax expenditures is 
intended to promote community and regional development by reducing the 
costs of financing specialized infrastructure, such as airports, docks, 
and stadiums. Empowerment zone and enterprise community provisions are 
designed to promote activity in disadvantaged areas. These provisions 
can be compared with grant and other policies designed to spur economic 
development.
  Education, training, employment, and social services.--Major 
provisions in this function are intended to promote post-secondary 
education, to offset costs of raising children, and to promote a variety 
of charitable activities. The education incentives can be compared with 
loans, grants, and other programs designed to promote higher education 
and training. The

[[Page 108]]

child credits are intended to adjust the tax system for the costs of 
raising children; as such, they could be compared to other Federal tax 
and spending policies, including related features of the tax system, 
such as personal exemptions (which are not defined as a tax 
expenditure). Evaluation of charitable activities requires consideration 
of the beneficiaries of these activities, who are generally not the 
parties receiving the tax reduction.
  Health.--Individuals also benefit from favorable treatment of 
employer-provided health insurance. Measures of these benefits could 
include increased coverage and the distribution of this coverage across 
different income groups. The effects of insurance coverage on final 
outcome measures of actual health (e.g., infant mortality, days of work 
lost due to illness, or life expectancy) or intermediate outcomes (e.g., 
use of preventive health care or health care costs) could also be 
investigated. The distribution of employer-provided health insurance is 
not readily evident from tax return information; thus, the distribution 
of benefits from this exclusion must be imputed using tax as well as 
other forms of information.
  Income security, social security, and veterans benefits and 
services.--Major tax expenditures in the income security function 
benefit retirement savings, through employer-provided pensions, 
individual retirement accounts, and Keogh plans. These provisions might 
be evaluated in terms of their effects on boosting retirement incomes, 
private savings, and national savings (which would include the effect on 
private savings as well as public savings or deficits). In considering 
the provisions' distributional effects, it may be useful to consider 
beneficiaries' incomes while retired and over their entire lifetimes. 
Interactions with other programs, including social security, also may 
merit analysis. As in the case of employer-provided health insurance, 
analysis of employer-provided pension programs requires imputing the 
benefits of the firm-level contributions back to individuals.
  Other provisions principally have income distribution, rather than 
incentive, effects. For example, tax-favored treatment of social 
security benefits, certain veterans benefits, and deductions for the 
blind and elderly provide increased incomes to eligible parties. The 
distribution of these benefits may be a useful performance measure. The 
earned-income tax credit, in contrast, should be evaluated both for its 
effects on labor force participation and its distributional properties.

  General purpose fiscal assistance and interest.--The tax-exemption for 
public purpose State and local bonds reduces the costs of borrowing for 
a variety of purposes; borrowing for non-public purposes is reflected 
under other budget functions. The deductibility of certain State and 
local taxes reflected under this function primarily relates to personal 
income taxes; property tax deductibility is reflected under the commerce 
and housing function. Tax preferences for Puerto Rico and other U.S. 
possessions are also included here. These provisions can be compared 
with other tax and spending policies as means of benefitting fiscal and 
economic conditions in the States, localities, and possessions. Finally, 
the tax deferral for interest on U.S. savings bonds benefits savers who 
invest in these instruments; the extent of these benefits and any 
effects on Federal borrowing costs could be evaluated.
  The above illustrative discussion, while broad, is nevertheless 
incomplete, both for the provisions mentioned and the many that are not 
explicitly cited. Developing a framework that is sufficiently 
comprehensive, accurate, and flexible to reflect the objectives and 
effects of the wide range of tax expenditures will be a significant 
challenge. OMB, Treasury, and other agencies will work together, as 
appropriate, to address this challenge. Particularly over the next few 
years, a significant portion of this effort is likely to be devoted to 
data issues. Because the compilation of data is resource intensive, and 
must be balanced with other objectives (including minimizing information 
collection burdens), careful planning will be essential. Given the 
challenges inherent in this work, the nature of the analyses is likely 
to evolve and improve over the next several years.

                          Other Considerations

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

                  Descriptions of Income Tax Provisions

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

                            National Defense

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

                          International Affairs

  2. Income earned abroad.--A U.S. citizen or resident alien who resides 
or stays overseas for at least 11 of the past 12 months may exclude 
$70,000 per year of foreign-earned income. Beginning in 1998, the 
exclusion limit is increased to $80,000 in $2,000 annual increments. 
Eligible taxpayers also may exclude or deduct reasonable housing costs 
in excess of one-sixth of the salary of a civil servant at grade GS-14, 
step 1 ($60,270 in 1997). Federal employees working abroad are not 
eligible for the foreign-earned income exclusion.

[[Page 109]]

Federal employees, however, may exclude certain allowances from their 
taxable income.
  The exclusion for certain income earned abroad was one of the tax 
expenditures examined by the Department of the Treasury in its pilot 
performance evaluations this year. This tax expenditure consists of two 
specific components: section 911 of the tax code, which covers private-
sector employees, and section 912, which covers civilian government 
employees.\8\
---------------------------------------------------------------------------
  \8\ Section 911 was also the subject of a January 1993 Treasury report 
to Congress, ``Taxation of Americans Working Overseas.''
---------------------------------------------------------------------------
  The benefits for private-sector employees account for about 85 percent 
of the combined revenue loss from the two tax expenditures. The private-
sector provision is intended to promote U.S. exports, help make U.S. 
companies competitive when doing business abroad, and to offset the 
costs of living abroad, which can be higher than costs in the United 
States. Because American workers in higher-tax nations can offset their 
U.S. taxes through use of the foreign tax credit, in practice the 
provision primarily benefits U.S. citizens who work in nations with 
income taxes that are lower than U.S. taxes. Using tax-return data from 
1987, Treasury finds that 70 percent of the benefit of the provision 
goes to taxpayers with income (defined here as adjusted gross income 
plus the exclusion) above $50,000; over 98 percent of the housing 
exclusion, went to this group of taxpayers.
  The provision benefiting civilian government employees is intended to 
help them maintain their standard of living when stationed abroad by 
compensating them for the higher costs of living abroad. To the extent 
that this compensation is carried out via the tax code, as opposed to 
agency appropriations, costs are shifted from outlays to revenue losses.
  3. Income of Foreign Sales Corporations.--The Foreign Sales 
Corporation (FSC) provisions exempt from tax a portion of U.S. 
exporters' foreign trading income to reflect the FSC's sales functions 
as foreign corporations. These provisions conform to the General 
Agreement on Tariffs and Trade.
  4. Sales source rule exceptions.--The worldwide income of U.S. persons 
is taxable by the United States and a credit for foreign taxes paid is 
allowed. The amount of foreign taxes that can be credited is limited to 
the pre-credit U.S. tax on the foreign source income. The sales source 
rules for inventory property allow U.S. exporters to use more foreign 
tax credits by allowing the exporters to attribute a larger portion of 
their earnings abroad than would be the case if the allocation of 
earnings was based on actual economic activity.
  5. Income of U.S.-controlled foreign corporations.--The income of 
foreign corporations controlled by U.S. shareholders is not subject to 
U.S. taxation. The income becomes taxable only when the controlling U.S. 
shareholders receive dividends or other distributions from their foreign 
stockholding. Under the normal tax method, the currently attributable 
foreign source pre-tax income from such a controlling interest is 
subject to U.S. taxation, whether or not distributed. Thus, the normal 
tax method considers the amount of controlled foreign corporation income 
not distributed to a U.S. shareholder as tax-deferred income.

                 General Science, Space, and Technology

  6. Expensing R&E expenditures.--Research and experimentation (R&E) 
projects can be viewed as investments because, if successful, their 
benefits accrue for several years. It is often difficult, however, to 
identify whether a specific R&E project is successful and, if 
successful, what its expected life will be. Under the normal tax method, 
the expensing of R&E expenditures is viewed as a tax expenditure. The 
baseline assumed for the normal tax method is that all R&E expenditures 
are successful and have an expected life of five years.
  7. R&E credit.--The research and experimentation (R&E) credit, which 
expired on May 31, 1997, was reinstated under the Taxpayer Relief Act of 
1997 for 13 months (through June 30, 1998). The tax credit is 20 percent 
of qualified research expenditures in excess of a base amount. The base 
amount is generally determined by multiplying a ``fixed-base 
percentage'' (limited to a maximum of .16) by the average amount of the 
company's gross receipts for the 1984 to 1988 period. Certain start-up 
companies are assigned a fixed-base percentage of .03 for the first five 
taxable years, which is gradually phased out in years 6 through 10 and 
replaced by the firm's actual fixed-base percentage. Taxpayers may also 
elect an alternative credit regime. Under the alternative credit regime, 
the credit rate is reduced and the taxpayer is assigned a three-tiered 
fixed-base percentage that is lower than the fixed-base percentage that 
would otherwise apply. A credit with a separate threshold is provided 
for a taxpayer's payments to universities for basic research.

                                 Energy

  8. Exploration and development costs.--For successful investments in 
domestic oil and gas wells, intangible drilling costs (e.g., wages, the 
costs of using machinery for grading and drilling, the cost of 
unsalvageable materials used in constructing wells) may be expensed 
rather than amortized over the productive life of the property. 
Integrated oil companies may deduct only 70 percent of such costs and 
must amortize the remaining 30 percent over five years. The same rule 
applies to the exploration and development costs of surface stripping 
and the construction of shafts and tunnels for other fuel minerals.
  9. Percentage depletion.--Independent fuel mineral producers and 
royalty owners are generally allowed to take percentage depletion 
deductions rather than cost depletion on limited quantities of output. 
Under cost depletion, outlays are deducted over the productive life of 
the property based on the fraction of the resource extracted. Under 
percentage depletion, taxpayers deduct a percentage of gross income from 
mineral production at rates of 22 percent for uranium; 15 percent for 
oil, gas and oil shale; and 10 percent for coal. The deduction is 
limited to 50 percent of net income from

[[Page 110]]

the property, except for oil and gas where the deduction can be 100 
percent of net property income. Production from geothermal deposits is 
eligible for percentage depletion at 65 percent of net income, but with 
no limit on output and no limitation with respect to qualified 
producers. Unlike depreciation or cost depletion, percentage depletion 
deductions can exceed the cost of the investment.
  10. Alternative fuel production credit.--A nontaxable credit of $3 per 
barrel (in 1979 dollars) of oil-equivalent production is provided for 
several forms of alternative fuels. The credit is generally available if 
the price of oil stays below $29.50 (in 1979 dollars). The credit 
generally expires on December 31, 2002.
  Treasury reviewed the nonconventional fuel production tax credit as 
one of its pilot studies of tax expenditures under the Government 
Performance and Results Act. The provision provides a significant 
credit--currently about $6 per barrel of oil equivalent or $1 per 
thousand cubic feet of natural gas, or roughly half of the wellhead 
price of gas. Coalbed methane (natural gas) and gas from tight 
formations currently account for most of the credit. While the credit 
has been effective in stimulating the coalbed methane industry, 
increased domestic production of natural gas tends to discourage imports 
from stable suppliers (in particular, Canada), so there is relatively 
little benefit to U.S. energy security. In addition, there are 
indications that credit-qualified gas displaced some non-qualified 
domestic gas.
  11. Oil and gas exception to passive loss limitation.--Owners of 
working interests in oil and gas properties are exempt from the 
``passive income'' limitations. As a result, the working interest-
holder, who manages on behalf of himself and all other owners the 
development of wells and incurs all the costs of their operation, may 
aggregate negative taxable income from such interests with his income 
from all other sources.
  12. Capital gains treatment of royalties on coal.--Sales of certain 
coal under royalty contracts can be treated as capital gains rather than 
ordinary income.
  13. Energy facility bonds.--Interest earned on state and local bonds 
used to finance construction of certain energy facilities is tax-exempt. 
These bonds are generally subject to the state private-activity bond 
annual volume cap.
  14. Enhanced oil recovery credit.--A credit is provided equal to 15 
percent of the taxpayer's costs for tertiary oil recovery on U.S. 
projects. Qualifying costs include tertiary injectant expenses, 
intangible drilling and development costs on a qualified enhanced oil 
recovery project, and amounts incurred for tangible depreciable 
property.
  15. New technology credits.--A credit of 10 percent is available for 
investment in solar and geothermal energy facilities. In addition, a 
credit of 1.5 cents is provided per kilowatt hour of electricity 
produced from renewable resources such as wind and biomass. The 
renewable resources credit applies only to electricity produced by a 
facility placed in service before July 1, 1999.
  16. Alcohol fuel credits.--Gasohol, a motor fuel composed of at least 
10 percent alcohol, is exempt from 5.4 of the 18.4 cents per gallon 
Federal excise tax on gasoline. Smaller exemptions are allowed for motor 
fuel with lower alcohol content. There is a corresponding income tax 
credit for alcohol used as a fuel in applications where the excise tax 
is not assessed. This credit, equal to a subsidy of 54 cents per gallon 
for alcohol used as a motor fuel, is intended to encourage substitution 
of alcohol for petroleum-based gasoline. In addition, small producers of 
ethanol are eligible for a 10 cent per gallon credit.
  17. Credit and deduction for clean-fuel vehicles and property.--A tax 
credit of 10 percent (not to exceed $4,000) is provided for purchasers 
of electric vehicles. Purchasers of other clean-fuel burning vehicles 
and owners of clean-fuel refueling property may deduct part of their 
expenditures. The credit and deduction are phased out from 2002 through 
2005.
  18. Exclusion of utility conservation subsidies.--Subsidies by public 
utilities for customer expenditures on energy conservation measures are 
excluded from the gross income of the customer. The exclusion does not 
apply to subsidies provided to businesses after December 31, 1996.

                    Natural Resources and Environment

  19. Exploration and development costs.--Certain capital outlays 
associated with exploration and development of nonfuel minerals may be 
expensed rather than depreciated over the life of the asset.
  20. Percentage depletion.--Most nonfuel mineral extractors may use 
percentage depletion rather than cost depletion, with percentage 
depletion rates ranging from 22 percent for sulphur to 5 percent for 
sand and gravel.
  21. Capital gains treatment of iron ore.--Iron ore sold under a 
royalty contract can be treated as capital gains rather than ordinary 
income.
  22. Mining reclamation reserves.--Taxpayers are allowed to establish 
reserves to cover certain costs of mine reclamation and of closing solid 
waste disposal properties. Net increases in reserves may be taken as a 
deduction against taxable income.
  23. Sewage, water, and hazardous waste bonds.--Interest earned on 
state and local bonds used to finance the construction of sewage, water, 
or hazardous waste facilities is tax-exempt. These bonds are generally 
subject to the state private-activity bond annual volume cap.
  24. Capital gains treatment of certain timber.--Certain timber sold 
under a royalty contract can be treated as capital gains rather than 
ordinary income.
  25. Expensing multiperiod timber growing costs.--Most of the 
production costs of growing timber may be expensed rather than 
capitalized and deducted when the timber is sold. In most other 
industries, these

[[Page 111]]

costs are capitalized under the uniform capitalization rules.
  26. Credit and seven-year amortization for reforestation.--A 10-
percent investment tax credit is allowed for up to $10,000 invested 
annually to clear land and plant trees for the production of timber. Up 
to $10,000 in forestation investment may also be amortized over a seven-
year period rather than capitalized and deducted when the trees are sold 
or harvested. The amount of forestation investment that is amortizable 
is not reduced by any of the allowable investment credit.
  27. Historic preservation.--Expenditures to preserve and restore 
historic structures qualify for a 20-percent investment credit, but the 
depreciable basis must be reduced by the full amount of the credit 
taken.

                               Agriculture

  28. Expensing certain capital outlays.--Farmers, except for certain 
agricultural corporations and partnerships, are allowed to expense 
certain expenditures for feed and fertilizer, as well as for soil and 
water conservation measures. Expensing is allowed, even though these 
expenditures are for inventories held beyond the end of the year, or for 
capital improvements that would otherwise be capitalized.
  29. Expensing multiperiod livestock and crop production costs.--The 
production of livestock and crops with a production period of less than 
two years is exempt from the uniform cost capitalization rules. Farmers 
establishing orchards, constructing farm facilities for their own use, 
or producing any goods for sale with a production period of two years or 
more may elect not to capitalize costs. If they do, they must apply 
straight-line depreciation to all depreciable property they use in 
farming.
  30. Loans forgiven solvent farmers.--Farmers are forgiven the tax 
liability on certain forgiven debt. Normally, the debtor must include 
the amount of loan forgiveness as income or reduce his recoverable basis 
in the property to which the loan relates. If the debtor elects to 
reduce basis and the amount of forgiveness exceeds his basis in the 
property, the excess forgiveness is taxable. For insolvent (bankrupt) 
debtors, however, the amount of loan forgiveness never results in an 
income tax liability.\9\ Farmers with forgiven debt are considered 
insolvent for tax purposes, and thus qualify for income tax forgiveness.
---------------------------------------------------------------------------
  \9\ The insolvent taxpayer's carryover losses and unused credits are 
extinguished first, and then his basis in assets reduced to no less than 
amounts still owed creditors. Finally, the remainder of the forgiven 
debt is excluded from tax.
---------------------------------------------------------------------------
  31. Capital gains treatment of certain income.--Certain agricultural 
income, such as unharvested crops, can be treated as capital gains 
rather than ordinary income.
  32. Income averaging for farmers.--The Taxpayer Relief Act of 1997 
allows taxpayers to lower their tax liability by averaging, over the 
prior three-year period, their taxable income from farming. Taxpayers 
may average their farm income beginning in 1998; the provision generally 
expires on December 31, 2000.

                          Commerce and Housing

  This category includes a number of tax expenditure provisions that 
also affect economic activity in other functional categories. For 
example, provisions related to investment, such as accelerated 
depreciation, could be classified under the energy, natural resources 
and environment, agriculture, or transportation categories.
  33. Credit union income.--The earnings of credit unions not 
distributed to members as interest or dividends are exempt from income 
tax.
  34. Bad debt reserves.--Small (less than $500 million in assets) 
commercial banks, mutual savings banks, and savings and loan 
associations may deduct additions to bad debt reserves in excess of 
actually experienced losses.
  35. Deferral of income on life insurance and annuity contracts.--
Favorable tax treatment is provided for investment income within 
qualified life insurance and annuity contracts. Investment income earned 
on qualified life insurance contracts held until death is permanently 
exempt from income tax. Investment income distributed prior to the death 
of the insured is tax-deferred, if not tax-exempt. Investment income 
earned on annuities is treated less favorably than income earned on life 
insurance contracts, but it benefits from tax deferral without annual 
contribution or income limits generally applicable to other tax-favored 
retirement income plans.
  36. Small property and casualty insurance companies.-- Insurance 
companies that have annual net premium incomes of less than $350,000 are 
exempt from tax; those with $350,000 to $2,100,000 of net premium 
incomes may elect to pay tax only on the income earned by their 
investment portfolio.
  37. Insurance companies owned by exempt organizations.--Generally, the 
income generated by life and property and casualty insurance companies 
is subject to tax, albeit by special rules. Insurance operations 
conducted by such exempt organizations as fraternal societies and 
voluntary employee benefit associations, however, are exempt from tax.
  38. Small life insurance company deduction.--Small life insurance 
companies (gross assets of less than $500 million) can deduct 60 percent 
of the first $3 million of otherwise taxable income. The deduction 
phases out for otherwise taxable income between $3 million and $15 
million.
  39. Mortgage housing bonds.--Interest earned on state and local bonds 
used to finance homes purchased by first-time, low-to-moderate-income 
buyers is tax-exempt. The amount of state and local tax-exempt bonds 
that can be issued to finance such private activity is limited. The 
combined volume cap for mortgage housing bonds, rental housing bonds, 
student loan bonds, and industrial development bonds is $50 per capita 
($150 million minimum) per state. States may issue mortgage credit 
certificates (MCCs) in lieu of mortgage revenue

[[Page 112]]

bonds. MCCs entitle home buyers to income tax credits for a specified 
percentage of interest on qualified mortgages. The total amount of MCCs 
issued by a state cannot exceed 25 percent of its annual ceiling for 
mortgage-revenue bonds.
  40. Rental housing bonds.--Interest earned on state and local 
government bonds used to finance multifamily rental housing projects is 
tax-exempt. At least 20 percent (15 percent in targeted areas) of the 
units must be reserved for families whose income does not exceed 50 
percent of the area's median income; or 40 percent for families with 
incomes of no more than 60 percent of the area median income. Other tax-
exempt bonds for multifamily rental projects are generally issued with 
the requirement that all tenants must be low or moderate income 
families. Rental housing bonds are subject to the volume cap discussed 
in the mortgage housing bond section above.
  41. Interest on owner-occupied homes.--Owner-occupants of homes may 
deduct mortgage interest on their primary and secondary residences as 
itemized nonbusiness deductions. The mortgage interest deduction is 
limited to interest on debt no greater than the owner's basis in the 
residence and, for debt incurred after October 13, 1987, it is limited 
to no more than $1 million. Interest on up to $100,000 of other debt 
secured by a lien on a principal or second residence is also deductible, 
irrespective of the purpose of borrowing, provided the debt does not 
exceed the fair market value of the residence. Mortgage interest 
deductions on personal residences are tax expenditures because the 
taxpayers are not required to report the value of owner-occupied housing 
services as gross income.
  42. Taxes on owner-occupied homes.--Owner-occupants of homes may 
deduct property taxes on their primary and secondary residences even 
though they are not required to report the value of owner-occupied 
housing services as gross income.
  43. Installment sales.--Dealers in real and personal property (i.e., 
sellers that regularly hold property for sale or resale) cannot defer 
taxable income from installment sales until the receipt of the loan 
repayment. Nondealers (i.e., sellers of real property used in their 
business) are required to pay interest on deferred taxes attributable to 
their total installment obligations in excess of $5 million. Only 
properties with sales prices exceeding $150,000 are includable in the 
total. The payment of a market rate of interest eliminates the benefit 
of the tax deferral. The tax exemption for nondealers with total 
installment obligations of less than $5,000,000 is, therefore, a tax 
expenditure.
  44. Capital gains deferral on home sales.--Homeowners can defer paying 
capital gains tax on the sale of a principal residence by buying or 
constructing a home at least equal in value to that of the sold home 
(net of sales and qualified fix-up costs) within two years. This 
deferral applies to homes sold before May 7, 1997. For homes sold 
between May 7, 1997 and July 28, 1997, taxpayers may defer paying the 
capital gains tax if they elect not to use the $500,000 ($250,000 for 
singles) exclusion on the sale of a principal residence. The $500,000 
exclusion was created by the Taxpayer Relief Act of 1997. For homes sold 
after July 28, 1997, no capital gains deferral is allowed.
  45. Capital gains on sales by owners aged 55 or older.--A taxpayer who 
is 55 years of age or older may elect to exclude from gross income up to 
$125,000 of the capital gain from the sale of a principal residence. The 
exclusion is a once-in-a-lifetime election. This exclusion applies to 
homes sold before May 7, 1997. For homes sold between May 7, 1997 and 
July 28, 1997, taxpayers may exclude the $125,000 from gross income if 
they elect not to use the $500,000 ($250,000 for singles) exclusion on 
the sale of a principal residence. The $500,000 exclusion was created by 
the Taxpayer Relief Act of 1997. For homes sold after July 28, 1997, the 
$125,000 exclusion is not allowed.
  46. Capital gains exclusion on home sales.--A homeowner can exclude 
from tax up to $500,000 ($250,000 for singles) of the capital gains from 
the sale of a principal residence. The exclusion was created by the 
Taxpayer Relief Act of 1997 and applies only to homes sold after May 6, 
1997. The exclusion may not be used more than once every two years.
  47. Passive loss real estate exemption.--In general, passive losses 
may not offset income from other sources. Losses up to $25,000 
attributable to certain rental real estate activity, however, are exempt 
from this rule.
  48. Low-income housing credit.--Taxpayers who invest in certain low-
income housing are eligible for a tax credit. The credit rate is set so 
that the present value of the credit is equal to 70 percent for new 
construction and 30 percent for (1) housing receiving other Federal 
benefits (such as tax-exempt bond financing), or (2) substantially 
rehabilitated existing housing. The credit is allowed in equal amounts 
over 10 years. States agencies determine who receives the credit; states 
are limited in the amount of credit they may authorize annually to $1.25 
per resident.
  49. Accelerated depreciation of rental property.--The tax depreciation 
allowance provisions are part of the reference law rules, and thus do 
not cause tax expenditures under the reference method. Under the normal 
tax method, however, a 40-year tax life for depreciable real property is 
the norm. Thus, statutory depreciation period for rental property of 
27.5 years is a tax expenditure. In addition, tax expenditures arise 
from pre-1987 tax allowances for rental property.
  50. Cancellation of indebtedness.--Individuals are not required to 
report the cancellation of certain indebtedness as current income. If 
the canceled debt is not reported as current income, however, the basis 
of the underlying property must be reduced by the amount canceled.
  51. Imputed interest rules.--Holders (issuers) of debt instruments are 
generally required to report interest earned (paid) in the period it 
accrues, not when paid. In addition, the amount of interest accrued is 
determined by the actual price paid, not by the stated

[[Page 113]]

principal and interest stipulated in the instrument.\10\ In general, any 
debt associated with the sale of property worth less than $250,000 is 
excepted from the general interest accounting rules. This general 
$250,000 exception is not a tax expenditure under reference law but is 
under normal law. Exceptions above $250,000 are a tax expenditure under 
reference law; these exceptions include the following: (1) sales of 
personal residences worth more than $250,000, and (2) sales of farms and 
small businesses worth between $250,000 and $1 million.
---------------------------------------------------------------------------
  \10\ For example, if a borrower on December 31, 1997 issues a promise 
to pay $1,000 plus interest at 10 percent on December 30, 1998, for a 
total repayment of $1,100 and accepts $900 from a lender in exchange for 
the contract, the rules require that both parties (a) recognize that 
$900 is the amount lent, so that the effective loan interest rate is not 
the stated 10 percent but is 22.2 percent, and (b) report $200 as 
interest paid or received in 1998.
---------------------------------------------------------------------------
  52. Capital gains (other than agriculture, timber, iron ore, and 
coal).--Capital gains on assets held for more than 1 year are taxed at a 
lower rate than ordinary income. The lower rate on capital gains is 
considered a tax expenditure under the normal tax method but not under 
the reference law method.
  For assets held for more than 1 year and sold before May 7, 1997, the 
top tax rate is 28 percent. For assets held for more than 1 year and 
sold between May 7, 1997 and July 28, 1997, the top rate is 20 percent 
(10 percent for taxpayers who would otherwise pay capital gains tax at 
the 15-percent rate). For assets held for more than 1.5 years and sold 
after July 28, 1997, the top rate is 20 percent (10 percent for 
taxpayers who would otherwise pay capital gains tax at the 15-percent 
rate). For assets held for more than 1 year but not more than 1.5 years 
and sold after July 28, 1997, the top rate is 28 percent.
  In addition, for assets acquired after December 31, 2000, the maximum 
capital gains tax rates for assets held more than 5 years are 8 percent 
and 18 percent (rather than 10 percent and 20 percent). On January 1, 
2001, taxpayers may mark-to-market existing assets to start the 5-year 
holding period.
  53. Capital gains exclusion for small business stock.--An exclusion of 
50 percent is provided for capital gains from qualified small business 
stock held by individuals for more than 5 years. A qualified small 
business is a corporation whose gross assets do not exceed $50 million 
as of the date of issuance of the stock.
  54. Step-up in basis of capital gains at death.--Capital gains on 
assets held at the owner's death are not subject to capital gains taxes. 
The cost basis of the appreciated assets is adjusted upward to the 
market value at the owner's date of death. The step-up in the heir's 
cost basis means that, in effect, the tax on the capital gain is 
forgiven.
  55. Carryover basis of capital gains on gifts.--When a gift is made, 
the transferred property carries to the donee the donor's basis--the 
cost that was incurred when the property was first acquired. The 
carryover of the donor's basis allows a continued deferral of unrealized 
capital gains.
  56. Ordinary income treatment of losses from sale of small business 
corporate stock shares.--Up to $100,000 in losses from the sale of small 
business corporate stock (capitalization less than $1 million) may be 
treated as ordinary losses. Such losses would, thus, not be subject to 
the $3,000 annual capital loss write-off limit.
  57. Accelerated depreciation of non-rental-housing buildings.--The tax 
depreciation allowance provisions are part of the reference law rules, 
and thus do not cause tax expenditures under reference law. Under normal 
law, however, a 40-year life for non-rental-housing buildings is the 
norm. Thus, the 39-year depreciation period for property placed in 
service after February 25, 1993, the 31.5-year depreciation period for 
property placed in service from 1987 to February 25, 1993, and the pre-
1987 depreciation periods create a tax expenditure.
  58. Accelerated depreciation of machinery and equipment.--The tax 
depreciation allowance provisions are part of the reference law rules, 
and thus do not cause tax expenditures under reference law. Statutory 
depreciation of machinery and equipment, however, is accelerated 
somewhat relative to the normal tax baseline, creating a tax 
expenditure.
  59. Expensing of certain small investments.--In 1997, qualifying 
investments in tangible property up to $18,000 can be expensed rather 
than depreciated over time. (The expensing limit increases annually 
until 2003, when it reaches $25,000). To the extent that qualifying 
investment during the year exceeds $200,000, the amount eligible for 
expensing is decreased. In 1997, the amount expensed is completely 
phased out when qualifying investments exceed $218,000.
  60. Business start-up costs.--When taxpayers enter into a new 
business, certain start-up expenses, such as the cost of legal services, 
are normally incurred. Taxpayers may elect to amortize these outlays 
over 60 months even though they are similar to other payments made for 
nondepreciable intangible assets that are not recoverable until the 
business is sold. The normal tax method treats this amortization as a 
tax expenditure; the reference tax method does not.
  61. Graduated corporation income tax rate schedule.--The corporate 
income tax schedule is graduated, with rates of 15 percent on the first 
$50,000 of taxable income, 25 percent on the next $25,000, and 34 
percent on the next $9.925 million. Compared with a flat 34-percent 
rate, the lower rates provide an $11,750 reduction in tax liability for 
corporations with taxable income of $10 million. This benefit is 
recaptured for corporations with taxable incomes exceeding $100,000 by a 
5-percent additional tax on corporate incomes in excess of $100,000, but 
less than $335,000.
  The corporate tax rate is 35 percent on income over $10 million. 
Compared with a flat 35-percent tax rate, the 34-percent rate provides a 
$100,000 reduction in tax liability for corporations with taxable 
incomes of $10 million. This benefit is recaptured for corporations

[[Page 114]]

with taxable incomes exceeding $15 million by a 3-percent additional tax 
on income over $15 million but less than $18.33 million. Because the 
corporate rate schedule is part of reference tax law, it is not 
considered a tax expenditure under the reference method. A flat 
corporation income tax rate is taken as the baseline under the normal 
tax method; therefore the lower rates is considered a tax expenditure 
under this concept.
  62. Small issue industrial development bonds.--Interest earned on 
small issue industrial development bonds (IDBs) issued by state and 
local governments to finance manufacturing facilities is tax-exempt. 
Depreciable property financed with small issue IDBs must be depreciated, 
however, using the straight-line method. The annual volume of small 
issue IDBs is subject to the unified volume cap discussed in the 
mortgage housing bond section above.

                             Transportation

  63. Deferral of tax on U.S. shipping companies.--Certain companies 
that operate U.S. flag vessels can defer income taxes on that portion of 
their income used for shipping purposes, primarily construction, 
modernization and major repairs to ships, and repayment of loans to 
finance these investments. Once indefinite, the deferral has been 
limited to 25 years since January 1, 1987.
  64. Exclusion of reimbursed employee parking expenses.--Parking at or 
near an employer's business premises that is paid for by the employer is 
excludable from the income of the employee. In 1997, the maximum amount 
of the parking exclusion is $170 (indexed) per month. The tax 
expenditure estimate does not include parking at facilities owned by the 
employer.
  65. Exclusion of employer-provided transit passes.--Transit passes, 
tokens, and fare cards provided by an employer to defray an employee's 
commuting costs are excludable from the employee's income if the total 
value of the benefit does not exceed the transit limit. In 1997, the 
limit is $70 (indexed) per month.

                   Community and Regional Development

  66. Rehabilitation of structures.--A 10-percent investment tax credit 
is available for the rehabilitation of buildings that are used for 
business or productive activities and that were erected before 1936 for 
other than residential purposes. The taxpayer's recoverable basis must 
be reduced by the amount of the credit.
  67. Airport, dock, and similar facility bonds.--Interest earned on 
state and local bonds issued to finance high-speed rail facilities and 
government-owned airports, docks, wharves, and sport and convention 
facilities is tax-exempt. These bonds are not subject to a volume cap.
  68. Exemption of income of mutuals and cooperatives.--The incomes of 
mutual and cooperative telephone and electric companies are exempt from 
tax if at least 85 percent of their revenues are derived from patron 
service charges.
  69. Empowerment zones and enterprise communities.--Qualifying 
businesses in designated economically depressed areas can receive tax 
benefits such as an employer wage credit, increased expensing of 
investment in equipment, special tax-exempt financing, and accelerated 
depreciation. A tax credit for contributions to certain community 
development corporations can also be available. In addition, certain 
first-time buyers of a principal residence in the District of Columbia 
can receive a tax credit, and investors in certain D.C. property can 
receive a capital gains break.
  70. Expensing of environmental remediation costs.--The Taxpayer Relief 
Act of 1997 allows taxpayers who clean up hazardous substances at a 
qualified site to expense the clean-up costs, rather than capitalize the 
costs, even though the expenses will generally increase the value of the 
property significantly or appreciably prolong the life of the property. 
The expensing only applies to clean-up costs incurred after August 5, 
1997 and before January 1, 2001.

          Education, Training, Employment, and Social Services

  71. Scholarship and fellowship income.--Scholarships and fellowships 
are excluded from taxable income to the extent they pay for tuition and 
course-related expenses of the grantee. Similarly, tuition reductions 
for employees of educational institutions and their families are not 
included in taxable income. From an economic point of view, scholarships 
and fellowships are either gifts not conditioned on the performance of 
services, or they are rebates of educational costs. Thus, under the 
reference law method, this exclusion is not a tax expenditure because 
this method does not include either gifts or price reductions in a 
taxpayer's gross income. The exclusion, however, is considered a tax 
expenditure under the normal tax method, which includes gift-like 
transfers of government funds in gross income (many scholarships are 
derived directly or indirectly from government funding).
  72. HOPE tax credit.--The Taxpayer Relief Act of 1997 created the non-
refundable HOPE tax credit, which allows a credit for 100 percent of an 
eligible student's first $1,000 of tuition and fees and 50 percent of 
the next $1,000 of tuition and fees. The credit only covers tuition and 
fees paid during the first two years of a student's post-secondary 
education. The credit is phased out ratably for taxpayers with modified 
AGI between $80,000 and $100,000 ($40,000 and $50,000 for singles).
  73. Lifetime Learning tax credit.--The Taxpayer Relief Act of 1997 
created the non-refundable Lifetime Learning tax credit, which allows a 
credit for 20 percent of an eligible student's tuition and fees. For 
tuition and fees paid between July 1, 1998 and December 31, 2002, the 
maximum credit per return is $1,000. For tuition and fees paid after 
December 31, 2002, the maximum credit per return is $2,000. The credit 
is phased

[[Page 115]]

out ratably for taxpayers with modified AGI between $80,000 and $100,000 
($40,000 and $50,000 for singles). The credit applies to both 
undergraduate and graduate students.
  74. Education Individual Retirement Accounts.--The Taxpayer Relief Act 
of 1997 created education IRAs. Contributions to an education IRA are 
not tax-deductible. Investment income earned by education IRAs is not 
taxed when earned, and investment income from an education IRA is tax-
exempt when withdrawn to pay for a student's tuition and fees. The 
maximum contribution to an education IRA is $500 per year per 
beneficiary. Contributions can be made after December 31, 1997. The 
maximum contribution is phased down ratably for taxpayers with modified 
AGI between $150,000 and $160,000 ($95,000 and $110,000 for singles). 
Contributions may not be made to an education IRA in any year in which a 
contribution has been made to a state tuition plan for the same 
beneficiary.
  75. Student-loan interest.--Taxpayers may claim an above-the-line 
deduction of up to $2,500 ($1,000 in 1998, $1,500 in 1999, and $2,000 in 
2000) on interest paid on an education loan. Interest may only be 
deducted for the first five years in which interest payments are 
required. The maximum deduction is phased down ratably for taxpayers 
with modified AGI between $60,000 and $75,000 ($40,000 and $55,000 for 
singles). Only interest paid and due after December 31, 1997 may be 
deducted.
  76. State prepaid tuition plans.--Some states have adopted prepaid 
tuition plans, which allow persons to pay in advance for college tuition 
for designated beneficiaries. Taxes on the earnings from these plans are 
paid by the beneficiaries and are deferred until the tuition is actually 
paid. The Taxpayer Relief Act of 1997 expanded state prepaid tuition 
plans to include pre-payment for room and board expenses.
  77. Student-loan bonds.--Interest earned on state and local bonds 
issued to finance student loans is tax-exempt. The volume of all such 
private activity bonds that each state may issue annually is limited.
  78. Bonds for private nonprofit educational institutions.--Interest 
earned on state and local government bonds issued to finance the 
construction of facilities used by private nonprofit educational 
institutions is not taxed. The aggregate volume of all such private 
activity bonds that each state may issue during any calendar year is 
limited.
  79. Credit for holders of zone academy bonds.--Financial institutions 
that own zone academy bonds receive a non-refundable tax credit rather 
than interest. The credit is included in gross income. Proceeds from 
zone academy bonds may only be use to improve impoverished schools. The 
total amount of zone academy bonds that may be issued is limited to $800 
million; no bonds may be issued before January 1, 1998.
  80. U.S. savings bonds for education.--Interest earned on U.S. savings 
bonds issued after December 31, 1989 is tax-exempt if the bonds are 
transferred to an educational institution to pay for educational 
expenses. The tax exemption is phased out for taxpayers with AGI between 
$76,250 and $106,250 ($50,850 and $65,850 for singles) in 1997.
  81. Dependent students age 19 or older.--Taxpayers may claim personal 
exemptions for dependent children age 19 or over who (1) receive 
parental support payments of $1,000 or more per year, (2) are full-time 
students, and (3) do not claim a personal exemption on their own tax 
returns.
  82. Child credit.--The Taxpayer Relief Act of 1997 provides for a $500 
child credit for taxpayers with children under age 17, beginning January 
1, 1999. (The Act also provides for a $400 credit in 1998.) The credit 
is phased out for taxpayers at the rate of $50 per $1,000 of modified 
AGI above $110,000 ($75,000 for singles). The child credit is refundable 
for taxpayers with three or more children.
  83. Charitable contributions to educational institutions.--Taxpayers 
may deduct contributions to nonprofit educational institutions. 
Taxpayers who donate capital assets to educational institutions can 
deduct the assets' current value without being taxed on any appreciation 
in value. An individual's total charitable contribution generally may 
not exceed 50 percent of adjusted gross income; a corporation's total 
charitable contributions generally may not exceed 10 percent of pre-tax 
income.
  84. Employer-provided educational assistance.--Employer-provided 
educational assistance is excluded from an employee's gross income even 
though the employer's costs for this assistance are a deductible 
business expense. This exclusion applies only to non-graduate courses 
beginning before July 1, 2000.
  85. Work opportunity tax credit.--Employers can claim a tax credit for 
qualified wages paid to individuals who begin work after September 30, 
1996 and before July 1, 1998 and who are certified as members of various 
targeted groups. For employees hired before October 1, 1997, the amount 
of the credit that can be claimed is 35 percent of the first $6,000 paid 
during the first year of employment. For employees hired after September 
30, 1997, the credit is 25 percent for employment of less than 400 hours 
and 40 percent for employment of 400 hours or more. Employers must 
reduce their deduction for wages paid by the amount of the credit 
claimed.
  86. Welfare-to-work tax credit.--The Taxpayer Relief Act of 1997 
provides for an employer tax credit on the first $20,000 of eligible 
wages paid to qualified long-term family assistance recipients during 
the first two years of employment. The credit is 35 percent of the first 
$10,000 of wages in the first year of employment and 50 percent of the 
first $10,000 of wages in the second year of employment. The maximum 
credit is $8,500 per employee. The credit applies to wages paid to 
employees who are hired after December 31, 1997 and before May 1, 1999.
  87. Employer-provided child care.--Employer-provided child care is 
excluded from an employee's gross

[[Page 116]]

income even though the employer's costs for the child care are a 
deductible business expense.
  88. Adoption assistance.--Beginning January 1, 1997, taxpayers can 
receive a nonrefundable tax credit for qualified adoption expenses. The 
maximum credit is $5,000 per child ($6,000 for special needs adoptions, 
except foreign adoptions). The credit is phased-out ratably for 
taxpayers with modified AGI between $75,000 and $115,000. Unused credits 
may be carried forward. In lieu of the tax credit, taxpayers may exclude 
qualified adoption expenses from income, subject to the same maximum 
amounts and phase-out as the credit. The non-special needs adoption 
assistance and foreign special needs assistance expire on December 31, 
2001.
  89. Employer-provided meals and lodging.--Employer-provided meals and 
lodging are excluded from an employee's gross income even though the 
employer's costs for these items are a deductible business expense.
  90. Child and dependent care expenses.--Married couples with child and 
dependent care expenses may claim a tax credit when one spouse works 
full time and the other works at least part time or goes to school. The 
credit may also be claimed by divorced or separated parents who have 
custody of children, and by single parents. Expenditures up to a maximum 
$2,400 for one dependent and $4,800 for two or more dependents are 
eligible for the credit. The credit is equal to 30 percent of qualified 
expenditures for taxpayers with incomes of $10,000 or less. The credit 
is reduced to a minimum of 20 percent by one percentage point for each 
$2,000 of income between $10,000 and $28,000.
  91. Disabled access expenditure credit.--Small businesses (less than 
$1 million in gross receipts or fewer than 31 full-time employees) can 
claim a 50-percent credit for expenditures in excess of $250 to remove 
access barriers for disabled persons. The credit is limited to $5,000.
  92. Expensing costs of removing architectural barriers.--Taxpayers can 
expense (up to $15,000 annually) the cost of removing architectural 
barriers to the handicapped rather than depreciate the cost over the 
useful life of the asset.
  93. Charitable contributions, other than education and health.--
Taxpayers may deduct contributions to charitable, religious, and certain 
other nonprofit organizations. Taxpayers who donate capital assets to 
charitable organizations can deduct the assets' current value without 
being taxed on any appreciation in value. An individual's total 
charitable contribution generally may not exceed 50 percent of adjusted 
gross income; a corporation's total charitable contributions generally 
may not exceed 10 percent of pre-tax income.
  94. Foster care payments.--Foster parents provide a home and care for 
children who are wards of the State, under contract with the State. 
Compensation received for this service is excluded from the gross 
incomes of foster parents; the expenses they incur are nondeductible.
  95. Parsonage allowances.--The value of a minister's housing allowance 
and the rental value of parsonages are not included in a minister's 
taxable income.

                                 Health

  96. Employer-paid medical insurance and expenses.--Employer-paid 
health insurance premiums and other medical expenses (including long-
term care) is deducted as a business expense by employers, but it is not 
included in employee gross income. The self-employed also may deduct 
part of their family health insurance premiums.
  97. Medical savings accounts.--Beginning January 1, 1997, some 
employees may deduct annual contributions to a medical savings account 
(MSA); employer contributions to MSAs (except those made through 
cafeteria plans) for qualified employees are also excluded from income. 
An employee may contribute to an MSA in a given year only if the 
employer does not contribute to the MSA in that year. MSAs are only 
available to self-employed individuals or employees covered under an 
employer-sponsored high deductible health plan of a small employer. The 
maximum annual MSA contribution is 75 percent of the deductible under 
the high deductible plan for family coverage (65 percent for individual 
coverage). Earnings from MSAs are excluded from taxable income. 
Distributions from an MSA for medical expenses are not taxable. The 
number of taxpayers who may benefit annually from MSAs is generally 
limited to 750,000. No new MSAs may be established after December 31, 
2000.
  98. Medical care expenses.--Personal expenditures for medical care 
(including the costs of prescription drugs) exceeding 7.5 percent of the 
taxpayer's adjusted gross income are deductible.
  99. Hospital construction bonds.--Interest earned on state and local 
government debt issued to finance hospital construction is excluded from 
income subject to tax.
  100. Charitable contributions to health institutions.--Individuals and 
corporations may deduct contributions to nonprofit health institutions. 
Tax expenditures resulting from the deductibility of contributions to 
other charitable institutions are listed under the education, training, 
employment, and social services function.
  101. Orphan drugs.--Drug firms can claim a tax credit of 50 percent of 
the costs for clinical testing required by the Food and Drug 
Administration for drugs that treat rare physical conditions or rare 
diseases.
  102. Blue Cross and Blue Shield.--Blue Cross and Blue Shield health 
insurance providers in existence on August 16, 1986 and certain other 
nonprofit health insurers are provided exceptions from otherwise 
applicable insurance company income tax accounting rules that 
substantially reduce (or even eliminate) their tax liabilities.

[[Page 117]]

                             Income Security

  103. Railroad retirement benefits.--Railroad retirement benefits are 
not generally subject to the income tax unless the recipient's gross 
income reaches a certain threshold. The threshold is discussed more 
fully under the social security function.
  104. Workmen's compensation benefits.--Workmen's compensation provides 
payments to disabled workers. These benefits, although income to the 
recipients, are not subject to the income tax.
  Treasury reviewed the Federal income tax exemption for workers' 
compensation wage replacement benefits as one of its pilot analyses of 
tax expenditures. Workers' compensation programs, with the principal 
exception of the program covering Federal employees, are State programs 
that do not have to conform to any national criteria. While the 
legislative history does not explain the goal of the tax exemption, the 
exemption has the effect of reducing taxes on families with unexpected 
losses of earnings from work-related injuries or death. Because the tax 
exemption may have been considered in setting the levels of benefits 
mandated by State laws, the net benefit of the tax exemption to 
recipients is uncertain.
  105. Public assistance benefits.--Public assistance benefits are 
excluded from tax. The normal tax method considers cash transfers from 
the government as taxable and, thus, treats the exclusion for public 
assistance benefits as a tax expenditure.
  106. Special benefits for disabled coal miners.--Disability payments 
to former coal miners out of the Black Lung Trust Fund, although income 
to the recipient, are not subject to the income tax.
  107. Military disability pensions.--Most of the military pension 
income received by current disabled retired veterans is excluded from 
their income subject to tax.
  108. Employer-provided pension contributions and earnings.--Certain 
employer contributions to pension plans are excluded from an employee's 
gross income even though the employer can deduct the contributions. In 
addition, the tax on the investment income earned by the pension plans 
is deferred until the money is withdrawn.
  109. 401(k) plans and Individual Retirement Accounts.--Individual 
taxpayers can take advantage of several different tax-preferenced 
retirement plans: deductible IRAs, non-deductible IRAs, Roth IRAs, and 
401(k) plans (and 401(k)-type plans like 403(b) plans and the 
government's Thrift Savings Plan).
  In 1997, an employee could exclude up to $9,500 (indexed) of wages 
from AGI under a qualified arrangement with an employer's 401(k). 
Employees can annually contribute to a deductible IRA up to $2,000 (or 
100 percent of compensation, if less) or $4,000 on a joint return with 
only one working spouse if: (a) neither the individual nor spouse is an 
active participant in an employer-provided retirement plan, or (b) their 
AGI is below $40,000 ($25,000 for singles). The IRA deduction is phased 
out for AGI between $40,000 and $50,000 ($25,000 and $35,000 for 
singles). The Taxpayer Relief Act of 1997 raises the phaseout range in 
1998 to $50,000 and $60,000 ($30,000 and $40,000 for singles). Taxpayers 
whose AGI is above the start of the IRA phase-out range or who are 
active participants in an employer-provided retirement plan can 
contribute to a non-deductible IRA. The tax on the investment income 
earned by 401(k) plans, non-deductible IRAs, and deductible IRAs is 
deferred until the money is withdrawn.
  The Taxpayer Relief Act of 1997 created Roth IRAs, effective January 
1, 1998. An employed taxpayer can make a non-deductible contribution of 
up to $2,000 (a non-employed spouse can also contribute up to $2,000 if 
a joint return is filed) to a Roth IRA. Investment income of a Roth IRA 
is not taxed when earned. Withdrawals from a Roth IRA are tax free if 
(1) the Roth IRA was opened at least 5 years before the withdrawal, and 
(2) the taxpayer either (a) is at least 59-1/2, (b) dies, (c) is 
disabled, or (d) purchases a first-time house. The maximum contribution 
to a Roth IRA is phased out for taxpayers with AGI between $150,000 and 
$160,000 ($95,000 and $110,000 for singles). Total annual contributions 
to a taxpayer's deductible, non-deductible, and Roth IRAs cannot exceed 
$2,000 ($4,000 for joints).
  110. Keogh plans.--Self-employed individuals can make deductible 
contributions to their own retirement (Keogh) plans equal to 25 percent 
of their income, up to a maximum of $30,000 per year. In addition, the 
tax on the investment income earned by Keogh plans is deferred until the 
money is withdrawn.
  111. Employer-provided death benefits.--Employer-provided death 
benefits are excluded from an employee's gross income even though the 
employer's costs for the death benefits are a deductible business 
expense.
  112. Employer-provided life insurance benefits.--Employer-provided 
life insurance benefits are excluded from an employee's gross income 
even though the employer's costs for the insurance are a deductible 
business expense.
  113. Employer-provided accident and disability benefits.--Employer-
provided accident and disability benefits are excluded from an 
employee's gross income even though the employer's costs for the 
benefits are a deductible business expense.
  114. Employer-provided supplementary unemployment benefits.--Employer-
provided supplementary unemployment benefits are excluded from an 
employee's gross income even though the employer's costs for the 
benefits are a deductible business expense.
  115. Employer Stock Ownership Plan (ESOP) provisions.--ESOPs are a 
special type of tax-exempt employee benefit plan. Employer-paid 
contributions (the value of stock issued to the ESOP) are deductible by 
the employer as part of employee compensation costs. They are not 
included in the employees' gross income for tax purposes, however, until 
they are paid out as benefits. The following special income tax 
provisions for ESOPs are intended to increase ownership of cor

[[Page 118]]

porations by their employees: (1) annual employer contributions are 
subject to less restrictive limitations; (2) ESOPs may borrow to 
purchase employer stock, guaranteed by their agreement with the employer 
that the debt will be serviced by his payment (deductible by him) of a 
portion of wages (excludable by the employees) to service the loan; (3) 
employees who sell appreciated company stock to the ESOP may defer any 
taxes due until they withdraw benefits; and (4) dividends paid to ESOP-
held stock are deductible by the employer.
  116. Additional deduction for the blind.--Taxpayers who are blind may 
take an additional $1,000 standard deduction if single, or $800 if 
married.
  117. Additional deduction for the elderly.--Taxpayers who are 65 years 
or older may take an additional $1,000 standard deduction if single, or 
$800 if married.
  118. Tax credit for the elderly and disabled.--Individuals who are 65 
years of age or older, or who are permanently disabled, can take a tax 
credit equal to 15 percent of the sum of their earned and retirement 
income. Income is limited to no more than $5,000 for single individuals 
or married couples filing a joint return where only one spouse is 65 
years of age or older, and up to $7,500 for joint returns where both 
spouses are 65 years of age or older. These limits are reduced by one-
half of the taxpayer's adjusted gross income over $7,500 for single 
individuals and $10,000 for married couples filing a joint return.
  119. Casualty losses.--Neither the purchase of property nor insurance 
premiums to protect its value are deductible as costs of earning income; 
therefore, reimbursement for insured loss of such property is not 
reportable as a part of gross income. Taxpayers, however, may deduct 
uninsured casualty and theft losses of more than $100 each, but only to 
the extent that total losses during the year exceed 10 percent of AGI.
  120. Earned income tax credit (EITC).--The EITC may be claimed by low 
income workers. For a family with one qualifying child, the credit is 34 
percent of the first $6,500 of earned income in 1997. The credit is 40 
percent of the first $9,140 of income for a family with two or more 
qualifying children. When the taxpayer's income exceeds $11,930, the 
credit is phased out at the rate of 15.98 percent (21.06 percent if two 
or more qualifying children are present). It is completely phased out at 
$25,760 of modified adjusted gross income ($29,290 if two or more 
qualifying children are present).
  The credit may also be claimed by workers who do not have children 
living with them. Qualifying workers must be at least age 25 and may not 
be claimed as a dependent on another taxpayer's return. The credit is 
not available to workers age 65 or older. In 1997, the credit is 7.65 
percent of the first $4,340 of earned income. When the taxpayer's income 
exceeds $5,430, the credit is phased out at the rate of 7.65 percent. It 
is completely phased out at $9,770 of modified adjusted gross income.
  For workers with or without children, the income level at which the 
credit's phase-outs begin and the maximum amounts of income on which the 
credit can be taken are adjusted for inflation. Earned income tax 
credits in excess of tax liabilities owed through the individual income 
tax system are refundable to individuals. This portion of the credit is 
shown as an outlay, while the amount that offsets tax liabilities is 
shown as a tax expenditure.

                             Social Security

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

                     Veterans Benefits and Services

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

[[Page 119]]

                           General Government

  128. Public purpose State and local bonds.--Interest earned on State 
and local government bonds issued to finance public purpose construction 
(e.g., schools, roads, sewers) is tax-exempt.
  129. Deductibility of certain nonbusiness State and local taxes.--
Taxpayers may deduct State and local income taxes and property taxes 
even though these taxes primarily pay for services that, if purchased 
directly by taxpayers, would not be deductible.
  130. Business income earned in U.S. possessions.--U.S. corporations 
receiving income from investments or businesses located in a U.S. 
possession (e.g., Puerto Rico) can claim a credit against U.S. tax, 
which effectively excludes some of this income from tax. The credit 
expires December 31, 2005.

                                Interest

  131. U.S. savings bonds.--Taxpayers may defer paying tax on interest 
earned on U.S. savings bonds until the bonds are redeemed.

              TAX EXPENDITURES IN THE UNIFIED TRANSFER TAX

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

                  Unified Transfer Tax Reference Rules

  The reference tax rules for the unified transfer tax from which 
departures represent tax expenditures include:
    Definition of the taxpaying unit. The payment of the tax is 
          the liability of the transferor whether the transfer of cash 
          or property was made by gift or bequest.
    Definition of the tax base. The base for the tax is the 
          transferor's cumulative, taxable lifetime gifts made plus the 
          net estate at death. Gifts in the tax base are all annual 
          transfers in excess of $10,000 to any donee except the donor's 
          spouse. Excluded are, however, payments on behalf of family 
          members' educational and medical expenses, as well as the cost 
          of ceremonial gatherings and celebrations that are not in 
          honor of the donor.
    Property valuation. In general, property is valued at its 
          fair market value at the time it is transferred. This is not 
          necessarily the case in the valuation of property for transfer 
          tax purposes. Executors of estates are provided the option to 
          value assets at the time of the testator's death or up to six 
          months later.
    Tax rate schedule. A single graduated tax rate schedule 
          applies to all taxable transfers. This is reflected in the 
          name of the ``unified transfer tax'' that has replaced the 
          former separate gift and estate taxes. The tax rates vary from 
          18 percent on the first $10,000 of aggregate taxable 
          transfers, to 55 percent on amounts exceeding $3 million. A 
          lifetime credit is provided against the tax in determining the 
          final amount of transfer taxes that are due and payable. For 
          decedents dying in 1998, this credit allows each taxpayer to 
          make a $625,000 tax-free transfer of assets that otherwise 
          would be liable to the unified transfer tax. This figure is 
          scheduled to increase in steps to $1 million in 2005.\11\
---------------------------------------------------------------------------
  \11\ An additional tax, at a flat rate of 55 percent, is imposed on 
lifetime, generation-skipping transfers in excess of $1 million. It is 
considered a generation-skipping transfer whenever the transferee is at 
least two generations younger than the transferor, as it would be in the 
case of transfers to grandchildren or great-grandchildren. The liability 
of this tax is on the recipients of the transfer.
---------------------------------------------------------------------------
    Time when tax is due and payable. Donors are required to pay 
          the tax annually as gifts are made. The generation-skipping 
          transfer tax is payable by the donees whenever they accede to 
          the gift. The net estate tax liability is due and payable 
          within nine months after the decedent's death. The Internal 
          Revenue Service may grant an extension of up to 10 years for a 
          reasonable cause. Interest is charged on the unpaid tax 
          liability at a rate equal to the cost of Federal short-term 
          borrowing, plus three percentage points.

                      Tax Expenditures by Function

  The estimates of tax expenditures in the Federal unified transfer tax 
for fiscal years 1997-2003 are displayed by functional category in table 
5-6. Outlay equivalent estimates are similar to revenue loss estimates 
for transfer tax expenditures and, therefore, are not shown separately. 
A description of the provisions follows.

                    Natural Resources and Environment

  1. Donations of conservation easements.--Bequests of property and 
easements (in perpetuity) for conservation purposes can be excluded from 
taxable estates. Use of the property and easements must be restricted to 
at least one of the following purposes: outdoor recreation or scenic 
enjoyment for the general public; protection of the natural habitats of 
fish, wildlife, plants, etc.; and preservation of historic land areas 
and structures. Conservation gifts are similarly excluded from the gift 
tax. The Taxpayer Relief Act of 1997 (TRA97) allows up to 40 percent of 
the value of land subject to certain conservation easements to be 
excluded from taxable estates; the maximum amount of the exclusion is 
$100,000 in 1998 and increases by $100,000 in each year through 2002. 
The TRA97 exclusion applies to the estates of decedents dying after 
December 31, 1997.

[[Page 120]]

                               Agriculture

  2. Special-use valuation of farms.--Up to $750,000 in farmland owned 
and operated by a decedent and/or a member of the family may be valued 
for estate tax purposes on the basis of its ``continued use'' as 
farmland if: (1) the value of the farmland is at least 25 percent of the 
gross estate; (2) the entire value of all farm property is at least 50 
percent of the gross estate; and (3) family heirs to the farm agree to 
continue to operate the property as a farm for at least 10 years. The 
$750,000 limit is indexed at 1998 levels, beginning in 1999.
  3. Tax deferral of closely held farms.--The tax on a decedent's farm 
can be deferred for up to 14 years if the value of the farm is at least 
35 percent of the net estate. For the first 4 years of deferral, no tax 
need be paid. During the last 10 years of deferral, the tax liability 
must be paid in equal annual installments. Throughout the 14 year 
period, interest is charged at a special, favorable rate. The Taxpayer 
Relief Act of 1997 (TRA97) lowered the applicable interest rates and 
made the interest non-deductible. The TRA97 provision applies to the 
estates of decedents dying after December 31, 1997.

                          Commerce and Housing

  4. Special-use valuation of closely-held businesses.--The special-use 
valuation rule available for family farms is also available for nonfarm 
family businesses. To be eligible for the special-use valuation, the 
same three conditions previously described must be met.
  5. Tax deferral of closely-held businesses.--The tax-deferral rule 
available for family farms is also available for nonfarm family 
businesses. To be eligible for the tax deferral, the value of stock in 
closely-held corporations must exceed 35 percent of the decedent's gross 
estate, less debt and funeral expenses.
  6. Exclusion for family-owned businesses.--The Taxpayer Relief Act of 
1997 added a provision excluding from taxable estates certain family-
owned businesses that are bequeathed to qualified heirs. The exclusion 
cannot exceed $1.3 million less the value of the unified credit. The 
exclusion is recaptured if certain conditions are not maintained for 10 
years. The exclusion applies to the estates of decedents dying after 
December 31, 1997.

          Education, Training, Employment, and Social Services

  7. Charitable contributions to educational institutions.--Bequests to 
educational institutions can be deducted from taxable estates.
  8. Charitable contributions, other than education and health.-- 
Bequests to charitable, religious, and certain other nonprofit 
organizations can be deducted from taxable estates.

                                 Health

  9. Charitable contributions to health institutions.--Bequests to 
health institutions can be deducted from taxable estates.

                           General Government

  10. State and local death taxes.--A credit against the federal estate 
tax is allowed for State taxes on bequests. The amount of this credit is 
determined by a rate schedule that reaches a maximum of 16 percent of 
the taxable estate in excess of $60,000.

                                     

Table 5-6.  REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES IN THE FEDERAL UNIFIED TRANSFER TAX                              
                            (In millions of dollars)                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                  1999- 
                                     Description                            1997      1998      1999      2000      2001      2002      2003      2003  
--------------------------------------------------------------------------------------------------------------------------------------------------------
  .........  Natural Resources and Environment:                                                                                                         
1..........    Donations of conservation easements......................         0         0        10        25        40        55        75       205
  .........  Agriculture:                                                                                                                               
2..........    Special use valuation of farm real property..............        80        85        90        95       100       105       110       500
3..........    Tax deferral of closely held farms.......................        10        10        15        15        15        20        20        85
                                                                                                                                                        
  .........  Commerce:                                                                                                                                  
4..........    Special use valuation of real property used in closely                                                                                   
                held businesses.........................................        20        25        25        25        30        30        35       145
5..........    Tax deferral of closely held business....................        65        70        75        80        85        95       105       440
6..........    Exclusion for family owned businesses....................         0         0       390       395       400       420       435     2,040
                                                                                                                                                        
  .........  Education, training, employment, and social services:                                                                                      
7..........    Deduction for charitable contributions (education).......       835       905       930       975     1,025     1,100     1,160     5,190
8..........    Deduction for charitable contributions (other than                                                                                       
                education and health)...................................     2,460     2,670     2,745     2,880     3,035     3,245     3,425    15,330
                                                                                                                                                        
  .........  Health:                                                                                                                                    
9..........    Deduction for charitable contributions (health)..........       755       820       840       880       930       995     1,050     4,695
  .........  General government:                                                                                                                        
10.........    Credit for State death taxes.............................     3,910     4,120     4,260     4,465     4,685     4,930     5,215   23,555 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: All estimates have been rounded to the nearest $5 million.