Analytical Perspectives - 5. Tax Expenditures

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

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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 pension
contributions and earnings, employer contributions for medical
insurance, mortgage interest payments on owner-occupied homes, capital
gains, and payments of State and local individual income and property
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 1998-2004 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 included by reference in 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, 1998. The
analysis includes new tax expenditures that were enacted in the Tax and
Trade Relief Extension Act of 1998. Expired or repealed provisions are
not listed if their revenue effects result only from taxpayer activity
occurring before fiscal year 1998. 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
1998-2004 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

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downs show the specific tax accounts through which the various
provisions are cleared. The ultimate beneficiaries of corporate tax
expenditures could be stockholders, employees, customers, or others,
depending on economic forces.
Table 5-3 ranks the major tax expenditures by fiscal year 2000 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 1999 which cause the deferrals or other long-term revenue
effects. For instance, a pension contribution in 1999 would cause a
deferral of tax payments on wages in 1999 and on pension earnings on
this contribution (e.g., interest) in later years. In some future year,
however, the 1999 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.

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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
--------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003 2004 2000-2004
--------------------------------------------------------------------------------------------------------------------------------------------------------
......... National Defense:
1.......... Exclusion of benefits and allowances to armed forces
personnel.............................................. 2,095 2,120 2,140 2,160 2,180 2,200 2,220 10,900

......... International affairs:
2.......... Exclusion of income earned abroad by U.S. citizens..... 1,990 2,235 2,500 2,800 3,125 3,460 3,830 15,715
3.......... Exclusion of income of foreign sales corporations...... 2,150 2,250 2,400 2,550 2,700 2,900 3,100 13,650
4.......... Inventory property sales source rules exception......... 1,000 1,050 1,100 1,150 1,250 1,350 1,450 6,300
5......... Deferral of income from controlled foreign corporations
(normal tax method).................................... 5,500 5,800 6,200 6,600 7,000 7,450 7,900 35,150
6......... Deferred taxes for financial firms on certain income
earned overseas........................................ 400 1,075 65 0 0 0 0 65

......... General science, space, and technology:
7.......... Expensing of research and experimentation expenditures
(normal tax method).................................... 260 330 510 610 675 735 765 3,295
8.......... Credit for increasing research activities.............. 2,125 1,655 980 425 180 60 0 1,645

......... Energy:
9.......... Expensing of exploration and development costs, fuels... -110 -70 -10 -15 0 30 40 45
10......... Excess of percentage over cost depletion, fuels......... 250 260 265 270 275 280 290 1,380
11......... Alternative fuel production credit..................... 860 810 760 720 675 435 125 2,715
12......... Exception from passive loss limitation for working
interests in oil and gas properties.................... 30 35 35 35 40 40 40 190
13......... Capital gains treatment of royalties on coal........... 60 65 65 70 70 75 80 360
14......... Exclusion of interest on energy facility bonds......... 110 110 110 115 115 115 115 570
15......... Enhanced oil recovery credit........................... 140 160 180 210 240 275 320 1,225
16......... New technology credit.................................. 25 30 35 40 40 35 35 185
17......... Alcohol fuel credits \1\............................... 15 15 15 15 15 15 15 75
18......... Tax credit and deduction for clean-fuel burning vehicles 75 80 90 95 90 75 60 410
19......... Exclusion from income of conservation subsidies provided
by public utilities.................................... 80 80 80 75 75 75 80 385

......... Natural resources and environment:
20......... Expensing of exploration and development costs, nonfuel
minerals............................................... 25 25 25 25 25 30 30 135
21......... Excess of percentage over cost depletion, nonfuel
minerals............................................... 225 240 245 255 270 280 295 1,345
22......... Exclusion of interest on bonds for water, sewage, and
hazardous waste facilities............................. 440 440 445 455 455 460 465 2,280
23......... Capital gains treatment of certain timber income....... 60 65 65 70 70 75 80 360
24......... Expensing of multiperiod timber growing costs.......... 485 500 510 530 550 570 590 2,750
25......... Investment credit and seven-year amortization for
reforestation expenditures............................. 10 10 10 10 15 15 15 65
26......... Tax incentives for preservation of historic structures. 215 235 255 275 285 305 315 1,435

......... Agriculture:
27......... Expensing of certain capital outlays.................... 65 70 70 75 75 80 85 385
28......... Expensing of certain multiperiod production costs...... 80 85 85 90 95 100 105 475
29......... Treatment of loans forgiven for solvent farmers........ 10 10 10 10 10 10 10 50
30......... Capital gains treatment of certain income.............. 605 630 655 685 715 750 785 3,590
31......... Income averaging for farmers........................... 10 75 75 80 80 80 85 400
32......... Deferral of gain on sale of farm refiners.............. 10 10 10 10 10 15 15 60

......... Commerce and housing:
......... Financial institutions and insurance:
33......... Exemption of credit union income....................... 785 840 905 970 1,040 1,120 1,200 5,235
34......... Excess bad debt reserves of financial institutions..... 70 30 10 5 5 5 0 25
35......... Exclusion of interest on life insurance savings........ 13,465 14,200 14,990 15,810 16,680 17,595 18,840 83,915
36......... Special alternative tax on small property and casualty
insurance companies................................... 5 5 5 5 5 5 5 25
37......... Tax exemption of certain insurance companies owned by
tax-exempt organizations.............................. 210 225 240 260 275 310 325 1,410
38......... Small life insurance company deduction................. 100 100 100 105 105 110 100 520
......... Housing:
39......... Exclusion of interest on owner-occupied mortgage
subsidy bonds......................................... 860 875 880 885 900 905 915 4,485
40......... Exclusion of interest on rental housing bonds.......... 150 150 150 150 155 155 155 765
41......... Deductibility of mortgage interest on owner-occupied
homes................................................. 51,700 52,990 55,100 57,590 60,415 63,425 66,615 303,145
42......... Deductibility of State and local property tax on owner-
occupied homes........................................ 17,770 18,595 19,495 20,535 21,625 22,635 23,645 107,935
43......... Deferral of income from post-1987 installment sales.... 975 995 1,015 1,035 1,055 1,075 1,095 5,275
44......... Capital gains exclusion on home sales.................. 17,475 18,000 18,540 19,095 19,670 20,260 20,870 98,435
45......... Exception from passive loss rules for $25,000 of rental
loss.................................................. 4,735 4,455 4,215 4,000 3,785 3,575 3,375 18,950
46......... Credit for low-income housing investments.............. 3,120 3,225 3,335 3,485 3,540 3,620 3,615 17,595
47......... Accelerated depreciation on rental housing (normal tax
method)............................................... 2,405 2,740 3,095 4,170 4,590 4,495 4,570 20,920
......... Commerce:
48......... Cancellation of indebtedness........................... 50 30 20 15 20 20 25 100
49......... Exceptions from imputed interest rules................. 155 160 160 160 165 165 165 815
50......... Capital gains (except agriculture, timber, iron ore,
and coal) (normal tax method)......................... 38,275 39,415 40,585 41,795 43,035 44,310 45,625 215,350
51......... Capital gains exclusion of small corporation stock..... 0 5 5 5 5 5 5 25
52......... Step-up basis of capital gains at death................ 24,570 25,800 27,090 28,240 29,370 30,545 31,765 147,010
53......... Carryover basis of capital gains on gifts.............. 170 175 185 195 205 210 220 1,015
54......... Ordinary income treatment of loss from small business
corporation stock sale................................ 35 35 35 40 40 40 40 195
55......... Accelerated depreciation of buildings other than rental
housing (normal tax method)........................... 6,270 4,895 3,430 2,385 2,365 1,875 585 10,640

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56......... Accelerated depreciation of machinery and equipment
(normal tax method)................................... 28,885 32,505 35,465 36,830 36,985 36,510 35,855 181,645
57......... Expensing of certain small investments (normal tax
method)............................................... 1,185 1,235 1,275 1,175 1,730 1,605 995 6,780
58......... Amortization of start-up costs (normal tax method)..... 205 215 220 225 225 230 240 1,140
59......... Graduated corporation income tax rate (normal tax
method)............................................... 5,400 5,360 5,360 5,620 6,120 6,680 7,120 30,900
60......... Exclusion of interest on small issue bonds............. 295 300 305 305 305 310 310 1,535

......... Transportation:
61......... Deferral of tax on shipping companies.................. 15 15 15 15 15 15 15 75
62......... Exclusion of reimbursed employee parking expenses...... 1,560 1,595 1,630 1,690 1,750 1,815 1,885 8,770
63......... Exclusion for employer-provided transit passes......... 70 80 95 105 130 155 170 655

......... Community and regional development:
64......... Investment credit for rehabilitation of structures
(other than historic).................................. 30 30 30 30 30 30 30 150
65......... Exclusion of interest for airport, dock, and similar
bonds.................................................. 695 705 710 715 725 730 740 3,620
66......... Exemption of certain mutuals' and cooperatives' income. 45 50 50 50 50 50 55 255
67......... Empowerment zones and enterprise communities........... 290 380 430 435 415 305 290 1,875
68......... Expensing of environmental remediation costs........... 90 110 145 60 -10 -25 -35 135

......... Education, training, employment, and social services:
......... Education:
69......... Exclusion of scholarship and fellowship income (normal
tax method)........................................... 910 955 995 1,040 1,085 1,135 1,185 5,440
70......... HOPE tax credit....................................... 200 4,015 4,855 5,325 5,730 5,765 5,950 27,625
71......... Lifetime Learning tax credit.......................... 110 2,510 2,655 2,970 3,015 3,355 4,565 16,560
72......... Education Individual Retirement Accounts.............. 20 100 230 380 540 710 885 2,745
73......... Deductibility of student-loan interest................ 70 245 265 315 360 385 425 1,750
74......... Deferral for State prepaid tuition plans.............. 85 125 180 235 285 330 365 1,395
75......... Exclusion of interest on student-loan bonds........... 235 235 240 245 245 250 250 1,230
76......... Exclusion of interest on bonds for private nonprofit
educational facilities................................ 560 570 570 575 580 590 595 2,910
77......... Credit for holders of zone academy bonds.............. 0 10 20 30 35 35 35 155
78......... Exclusion of interest on savings bonds redeemed to
finance educational expenses.......................... 10 10 15 15 15 15 20 80
79......... Parental personal exemption for students age 19 or
over.................................................. 875 915 965 1,015 1,055 1,105 1,155 5,295
80......... Child credit \2\...................................... 3,525 18,740 18,725 18,430 18,160 17,745 17,155 90,215
81......... Deductibility of charitable contributions (education). 2,880 2,940 3,065 3,195 3,350 3,505 3,680 16,795
82......... Exclusion of employer-provided educational assistance. 215 215 210 15 0 0 0 225
......... Training, employment, and social services:
83......... Work opportunity tax credit........................... 170 335 330 160 40 5 0 535
84......... Welfare-to-work tax credit............................ 15 35 35 20 10 5 0 70
85......... Exclusion of employer-provided child care............. 1,325 1,385 1,445 1,510 1,575 1,645 1,715 7,890
86......... Adoption assistance................................... 125 295 345 390 385 235 170 1,525
87......... Exclusion of employee meals and lodging (other than
military)............................................. 620 650 680 710 740 775 810 3,715
88......... Credit for child and dependent care expenses.......... 2,485 2,455 2,425 2,395 2,365 2,340 2,310 11,835
89......... Credit for disabled access expenditures............... 45 50 50 50 55 60 60 275
90......... Expensing of costs of removing certain architectural
barriers to the handicapped........................... 0 5 5 5 5 5 5 25
91......... Deductibility of charitable contributions, other than
education and health.................................. 18,580 19,150 20,055 21,005 22,050 23,150 24,335 110,595
92......... Exclusion of certain foster care payments............. 35 35 40 40 45 45 50 220
93......... Exclusion of parsonage allowances..................... 315 340 360 385 410 440 470 2,065

......... Health:
94......... Exclusion of employer contributions for medical
insurance premiums and medical care.................... 67,920 72,535 77,670 83,095 88,830 94,960 101,520 446,075
95......... Self-employed medical insurance premiums................ 765 980 1,310 1,405 1,550 2,055 2,905 9,225
96......... Workers' compensation insurance premiums................ 4,260 4,420 4,585 4,755 4,935 5,120 5,315 24,710
97......... Medical Savings Accounts............................... 15 20 25 25 20 20 15 105
98......... Deductibility of medical expenses...................... 3,615 3,775 3,985 4,215 4,475 4,750 5,035 22,460
99......... Exclusion of interest on hospital construction bonds.... 1,160 1,170 1,185 1,190 1,205 1,220 1,230 6,030
100........ Deductibility of charitable contributions (health)...... 2,560 2,630 2,730 2,860 3,000 3,145 3,300 15,035
101........ Tax credit for orphan drug research..................... 40 50 55 60 70 80 90 355
02......... Special Blue Cross/Blue Shield deduction................ 210 230 250 280 325 290 250 1,395

......... Income security:
103........ Exclusion of railroad retirement system benefits....... 420 420 425 425 430 435 440 2,155
104........ Exclusion of workers' compensation benefits............ 5,140 5,330 5,475 5,940 6,205 6,480 6,755 30,855
105........ Exclusion of public assistance benefits (normal tax
method)................................................ 440 345 360 375 390 405 420 1,950
106........ Exclusion of special benefits for disabled coal miners. 85 80 75 70 70 65 60 340
107........ Exclusion of military disability pensions.............. 120 125 130 135 140 140 145 690
......... Net exclusion of pension contributions and earnings:
108........ Employer plans........................................ 82,215 82,195 84,350 86,670 89,155 91,810 94,455 446,440
109........ Individual Retirement Accounts........................ 10,565 10,770 11,170 11,440 11,550 11,485 11,270 56,915
110........ Keogh plans........................................... 3,930 4,025 4,255 4,495 4,750 5,010 5,285 23,795
......... Exclusion of other employee benefits:
111........ Premiums on group term life insurance................. 2,030 2,075 2,120 2,170 2,220 2,270 2,335 11,115

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112........ Premiums on accident and disability insurance......... 175 185 195 205 215 225 235 1,075
113........ Income of trusts to finance supplementary unemployment
benefits............................................... 5 5 5 5 5 5 5 25
114........ Special ESOP rules..................................... 920 950 980 1,020 1,060 1,100 1,140 5,300
115........ Additional deduction for the blind...................... 30 30 30 30 35 35 35 165
116........ Additional deduction for the elderly.................... 1,690 1,720 1,740 1,795 1,880 1,945 2,020 9,380
117........ Tax credit for the elderly and disabled................. 40 40 40 40 40 40 40 200
118........ Deductibility of casualty losses....................... 225 235 245 255 270 280 290 1,340
119........ Earned income tax credit \3\........................... 6,351 5,118 4,971 5,142 5,275 5,471 5,672 26,531

......... Social Security:
......... Exclusion of social security benefits:
120........ Social Security benefits for retired workers........... 16,780 17,210 18,125 19,045 20,100 21,260 22,460 100,990
121........ Social Security benefits for disabled................. 2,265 2,420 2,615 2,820 3,060 3,325 3,625 15,445
122........ Social Security benefits for dependents and survivors. 3,725 3,785 3,910 4,065 4,235 4,405 4,575 21,190

......... Veterans benefits and services:
123........ Exclusion of veterans death benefits and disability
compensation........................................... 2,820 2,940 3,070 3,210 3,350 3,495 3,650 16,775
124........ Exclusion of veterans pensions......................... 65 65 70 75 80 85 85 395
125........ Exclusion of GI bill benefits.......................... 65 75 85 90 90 95 100 460
126........ Exclusion of interest on veterans housing bonds........ 40 40 40 40 40 40 40 200

......... General purpose fiscal assistance:
127........ Exclusion of interest on public purpose bonds.......... 20,050 20,250 20,450 20,660 20,865 21,075 21,285 104,335
128........ Deductibility of nonbusiness State and local taxes
other than on owner-occupied homes..................... 32,795 34,925 37,000 39,235 41,715 44,490 47,400 209,840
129........ Tax credit for corporations receiving income from doing
business in U.S. possessions........................... 3,960 4,000 4,120 4,245 4,285 4,150 4,215 21,015

......... Interest:
130........ Deferral of interest on U.S. savings bonds.............. 965 1,015 1,065 1,115 1,175 1,235 1,295 5,885

......... Addendum--Aid to State and local governments:
......... Deductibility of:
......... Property taxes on owner-occupied homes................. 17,770 18,595 19,495 20,535 21,625 22,635 23,645 107,935
......... Nonbusiness State and local taxes other than on owner-
occupied homes........................................ 32,795 34,925 37,000 39,235 41,715 44,490 47,400 209,840
......... Exclusion of interest on:
......... Public purpose State and local debt.................... 20,050 20,250 20,450 20,660 20,865 21,075 21,285 104,335
......... IDBs for certain energy facilities..................... 110 110 110 115 115 115 115 570
......... IDBs for pollution control and sewage and waste
disposal facilities................................... 440 440 445 455 455 460 465 2,280
......... Small-issue IDBs....................................... 295 300 305 305 305 310 310 1,535
......... Owner-occupied mortgage revenue bonds.................. 860 875 880 885 900 905 915 4,485
......... State and local debt for rental housing................ 150 150 150 150 155 155 155 765
......... IDBs for airports, docks, and sports and convention
facilities............................................ 695 705 710 715 725 730 740 3,620
......... State and local student loan bonds..................... 235 235 240 245 245 250 250 1,230
......... State and local debt for private nonprofit educational
facilities............................................ 560 570 570 575 580 590 595 2,910
......... State and local debt for private nonprofit health
facilities............................................ 1,160 1,170 1,185 1,190 1,205 1,220 1,230 6,030
......... State and local debt for veterans housing.............. 40 40 40 40 40 40 40 200
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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: 1998 $680; 1999 $725; 2000 $755; 2001 $765; 2002 $790; 2003 $805; and 2004 $830.

\2\ The figures in the table indicate the effect of the child tax credit on receipts. The effect on outlays (in millions of dollars) is as follows: 1998
$0; 1999 $415; 2000 $528; 2001 $496; 2002 $483; 2003 $453; and 2004 $425.

\3\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on outlays (in millions of dollars) is as
follows: 1998 $23,239; 1999 $26,273; 2000 $26,882; 2001 $27,667; 2002 $28,632; 2003 $29,566; and 2004 $30,578.

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. Provisions with estimates that rounded to zero in each year are not ed in the table.

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Table 5-2. CORPORATE AND INDIVIDUAL INCOME TAX REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue Loss
--------------------------------------------------------------------------------------------------------------------------------------------------
Corporations Individuals
--------------------------------------------------------------------------------------------------------------------------------------------------
2000- 2000-
1998 1999 2000 2001 2002 2003 2004 2004 1998 1999 2000 2001 2002 2003 2004 2004
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
......... National Defense
1.......... Exclusion of benefits and allowances to armed forces personnel....... ....... ....... ....... ....... ....... ....... ....... ........ 2,095 2,120 2,140 2,160 2,180 2,200 2,220 10,900

......... International affairs:
2.......... Exclusion of income earned abroad by U.S. citizens................... ....... ....... ....... ....... ....... ....... ....... ........ 1,990 2,235 2,500 2,800 3,125 3,460 3,830 15,715
3......... Exclusion of income of foreign sales corporations.................... 2,150 2,250 2,400 2,550 2,700 2,900 3,100 13,650 ....... ....... ....... ....... ....... ....... ........ ........
4......... Inventory property sales source rules exception...................... 1,000 1,050 1,100 1,150 1,250 1,350 1,450 6,300 ....... ....... ....... ....... ....... ....... ........ ........
5......... Deferral of income from controlled foreign corporations (normal tax
method).............................................................. 5,500 5,800 6,200 6,600 7,000 7,450 7,900 35,150 ....... ....... ....... ....... ....... ....... ........ ........
6......... Deferred taxes for financial firms on certain income earned overseas. 400 1,075 65 0 0 0 0 65 ....... ....... ....... ....... ....... ....... ........ ........

......... General science, space, and technology:
7......... Expensing of research and experimentation expenditures (normal tax
method).............................................................. 255 325 500 600 665 720 750 3,235 5 5 10 10 10 15 15 60
8......... Credit for increasing research activities............................ 2,095 1,625 965 425 180 60 0 1,630 30 30 15 0 0 0 0 15

......... Energy:
9......... Expensing of exploration and development costs, fuels................. -90 -55 -10 -15 0 25 30 30 -20 -15 0 0 0 5 10 15
10........ Excess of percentage over cost depletion, fuels...................... 200 205 210 215 220 225 235 1,105 50 55 55 55 55 55 55 275
11........ Alternative fuel production credit................................... 815 765 720 680 640 420 120 2,580 45 45 40 40 35 15 5 135
12........ Exception from passive loss limitation for working interests in oil
and gas properties................................................... ....... ....... ....... ....... ....... ....... ....... ........ 30 35 35 35 40 40 40 190
13........ Capital gains treatment of royalties on coal......................... ....... ....... ....... ....... ....... ....... ....... ........ 60 65 65 70 70 75 80 360
14........ Exclusion of interest on energy facility bonds....................... 30 30 30 30 30 30 30 150 80 80 80 85 85 85 85 420
15........ Enhanced oil recovery credit......................................... 130 150 170 195 225 260 300 1,150 10 10 10 15 15 15 20 75
16........ New technology credit................................................ 25 30 35 40 40 35 35 185 ....... ....... ....... ....... ....... ....... ........ ........
17........ Alcohol fuel credits \1\.............................................. 10 10 10 10 10 10 10 50 5 5 5 5 5 5 5 25
18........ Tax credit and deduction for clean-fuel burning vehicles.............. 60 65 75 80 75 60 50 340 15 15 15 15 15 15 10 70
19........ Exclusion from income of conservation subsidies provided by public
utilities............................................................ ....... ....... ....... ....... ....... ....... ....... ........ 80 80 80 75 75 75 80 385

......... Natural resources and environment:
20........ Expensing of exploration and development costs, nonfuel minerals..... 20 20 20 20 20 25 25 110 5 5 5 5 5 5 5 25
21........ Excess of percentage over cost depletion, nonfuel minerals........... 180 190 195 205 215 225 235 1,075 45 50 50 50 55 55 60 270
22........ Exclusion of interest on bonds for water, sewage, and hazardous waste
facilities........................................................... 115 115 115 120 120 120 120 595 325 325 330 335 335 340 345 1,685
23........ Capital gains treatment of certain timber income..................... ....... ....... ....... ....... ....... ....... ....... ........ 60 65 65 70 70 75 80 360
24........ Expensing of multiperiod timber growing costs........................ 300 310 315 330 340 355 365 1,705 185 190 195 200 210 215 225 1,045
25........ Investment credit and seven-year amortization for reforestation
expenditures......................................................... ....... ....... ....... ....... ....... ....... ....... ........ 10 10 10 10 15 15 15 65
26........ Tax incentives for preservation of historic structures............... 175 195 210 225 235 250 260 1,180 40 40 45 50 50 55 55 255

......... Agriculture:
27........ Expensing of certain capital outlays................................. 10 10 10 10 10 10 10 50 55 60 60 65 65 70 75 335
28........ Expensing of certain multiperiod production costs.................... 10 10 10 10 10 10 10 50 70 75 75 80 85 90 95 425
29........ Treatment of loans forgiven for solvent farmers...................... ....... ....... ....... ....... ....... ....... ....... ........ 10 10 10 10 10 10 10 50
30........ Capital gains treatment of certain income............................ ....... ....... ....... ....... ....... ....... ....... ........ 605 630 655 685 715 750 785 3,590
31........ Income averaging for farmers......................................... ....... ....... ....... ....... ....... ....... ....... ........ 10 75 75 80 80 80 85 400
32........ Deferral of gain on sale of farm refiners............................ 10 10 10 10 10 15 15 60

......... Commerce and housing:
......... Financial institutions and insurance:
33........ Exemption of credit union income..................................... 785 840 905 970 1,040 1,120 1,200 5,235 ....... ....... ....... ....... ....... ....... ........ ........
34........ Excess bad debt reserves of financial institutions................... 70 30 10 5 5 5 0 25 ....... ....... ....... ....... ....... ....... ........ ........
35........ Exclusion of interest on life insurance savings...................... 200 210 225 235 250 260 275 1,245 13,265 13,990 14,765 15,575 16,430 17,335 18,565 82,670
36........ Special alternative tax on small property and casualty insurance
companies........................................................... 5 5 5 5 5 5 5 25 ....... ....... ....... ....... ....... ....... ........ ........
37........ Tax exemption of certain insurance companies owned by tax-exempt
organizations....................................................... 210 225 240 260 275 310 325 1,410 ....... ....... ....... ....... ....... ....... ........ ........

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38........ Small life insurance company deduction............................... 100 100 100 105 105 110 100 520 ....... ....... ....... ....... ....... ....... ........ ........

......... Housing:
39........ Exclusion of interest on owner-occupied mortgage subsidy bonds....... 225 230 230 230 235 235 240 1,170 635 645 650 655 665 670 675 3,315
40........ Exclusion of interest on rental housing bonds........................ 40 40 40 40 40 40 40 200 110 110 110 110 115 115 115 565
41........ Deductibility of mortgage interest on owner-occupied homes........... ....... ....... ....... ....... ....... ....... ....... ........ 51,700 52,990 55,100 57,590 60,415 63,425 66,615 303,145
42........ Deductibility of State and local property tax on owner-occupied homes ....... ....... ....... ....... ....... ....... ....... ........ 17,770 18,595 19,495 20,535 21,625 22,635 23,645 107,935
43........ Deferral of income from post-1987 installment sales.................. 255 260 265 270 275 280 285 1,375 720 735 750 765 780 795 810 3,900
44........ Capital gains exclusion on home sales................................ ....... ....... ....... ....... ....... ....... ....... ........ 17,475 18,000 18,540 19,095 19,670 20,260 20,870 98,435
45........ Exception from passive loss rules for $25,000 of rental loss......... ....... ....... ....... ....... ....... ....... ....... ........ 4,735 4,455 4,215 4,000 3,785 3,575 3,375 18,950
46........ Credit for low-income housing investments............................ 2,340 2,420 2,500 2,615 2,655 2,715 2,710 13,195 780 805 835 870 885 905 905 4,400
47........ Accelerated depreciation on rental housing (normal tax method)....... 1,650 1,880 2,125 2,845 3,135 3,090 3,155 14,350 755 860 970 1,325 1,455 1,405 1,415 6,570

......... Commerce:
48........ Cancellation of indebtedness......................................... ....... ....... ....... ....... ....... ....... ....... ........ 50 30 20 15 20 20 25 100
49........ Exceptions from imputed interest rules............................... ....... ....... ....... ....... ....... ....... ....... ........ 155 160 160 160 165 165 165 815
50........ Capital gains (except agriculture, timber, iron ore, and coal)
(normal tax method)................................................. ....... ....... ....... ....... ....... ....... ....... ........ 38,275 39,415 40,585 41,795 43,035 44,310 45,625 215,350
51........ Capital gains exclusion of small corporation stock................... ....... ....... ....... ....... ....... ....... ....... ........ 0 5 5 5 5 5 5 25
52........ Step-up basis of capital gains at death.............................. ....... ....... ....... ....... ....... ....... ....... ........ 24,570 25,800 27,090 28,240 29,370 30,545 31,765 147,010
53........ Carryover basis of capital gains on gifts............................ ....... ....... ....... ....... ....... ....... ....... ........ 170 175 185 195 205 210 220 1,015
54........ Ordinary income treatment of loss from small business corporation
stock sale.......................................................... ....... ....... ....... ....... ....... ....... ....... ........ 35 35 35 40 40 40 40 195
55........ Accelerated depreciation of buildings other than rental housing
(normal tax method)................................................. 4,635 3,620 2,550 1,785 1,720 1,360 450 7,865 1,635 1,275 880 600 645 515 135 2,775
56........ Accelerated depreciation of machinery and equipment (normal tax
method)............................................................. 22,025 24,645 26,800 27,835 28,050 27,790 27,380 137,855 6,860 7,860 8,665 8,995 8,935 8,720 8,475 43,790
57........ Expensing of certain small investments (normal tax method)........... 805 840 875 820 1,200 1,125 730 4,750 380 395 400 355 530 480 265 2,030
58........ Amortization of start-up costs (normal tax method)................... 120 125 130 130 130 135 140 665 85 90 90 95 95 95 100 475
59........ Graduated corporation income tax rate (normal tax method)............ 5,400 5,360 5,360 5,620 6,120 6,680 7,120 30,900 ....... ....... ....... ....... ....... ....... ........ ........
60........ Exclusion of interest on small issue bonds........................... 75 80 80 80 80 80 80 400 220 220 225 225 225 230 230 1,135

......... Transportation:
61........ Deferral of tax on shipping companies................................ 15 15 15 15 15 15 15 75 ....... ....... ....... ....... ....... ....... ........ ........
62........ Exclusion of reimbursed employee parking expenses.................... ....... ....... ....... ....... ....... ....... ....... ........ 1,560 1,595 1,630 1,690 1,750 1,815 1,885 8,770
63........ Exclusion for employer-provided transit passes....................... ....... ....... ....... ....... ....... ....... ....... ........ 70 80 95 105 130 155 170 655

......... Community and regional development:
64........ Investment credit for rehabilitation of structures (other than
historic)............................................................ 15 15 15 15 15 15 15 75 15 15 15 15 15 15 15 75
65........ Exclusion of interest for airport, dock, and similar bonds........... 180 185 185 185 190 190 195 945 515 520 525 530 535 540 545 2,675
66........ Exemption of certain mutuals' and cooperatives' income............... 45 50 50 50 50 50 55 255 ....... ....... ....... ....... ....... ....... ........ ........
67........ Empowerment zones and enterprise communities......................... 135 185 205 190 170 130 115 810 155 195 225 245 245 175 175 1,065
68........ Expensing of environmental remediation costs......................... 75 90 120 50 -10 -20 -30 110 15 20 25 10 0 -5 -5 25

......... Education, training, employment, and social services:
......... Education:
69........ Exclusion of scholarship and fellowship income (normal tax method)... ....... ....... ....... ....... ....... ....... ....... ........ 910 955 995 1,040 1,085 1,135 1,185 5,440
70........ HOPE tax credit...................................................... ....... ....... ....... ....... ....... ....... ....... ........ 200 4,015 4,855 5,325 5,730 5,765 5,950 27,625
71........ Lifetime Learning tax credit......................................... ....... ....... ....... ....... ....... ....... ....... ........ 110 2,510 2,655 2,970 3,015 3,355 4,565 16,560
72........ Education Individual Retirement Accounts............................. ....... ....... ....... ....... ....... ....... ....... ........ 20 100 230 380 540 710 885 2,745
73........ Deductibility of student-loan interest............................... ....... ....... ....... ....... ....... ....... ....... ........ 70 245 265 315 360 385 425 1,750
74........ Deferral for State prepaid tuition plans............................. ....... ....... ....... ....... ....... ....... ....... ........ 85 125 180 235 285 330 365 1,395
75........ Exclusion of interest on student-loan bonds.......................... 60 60 65 65 65 65 65 325 175 175 175 180 180 185 185 905
76........ Exclusion of interest on bonds for private nonprofit educational
facilities.......................................................... 145 150 150 150 150 155 155 760 415 420 420 425 430 435 440 2,150

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77........ Credit for holders of zone academy bonds............................. 0 10 20 30 35 35 35 155
78........ Exclusion of interest on savings bonds redeemed to finance
educational expenses................................................ ....... ....... ....... ....... ....... ....... ....... ........ 10 10 15 15 15 15 20 80
79........ Parental personal exemption for students age 19 or over.............. ....... ....... ....... ....... ....... ....... ....... ........ 875 915 965 1,015 1,055 1,105 1,155 5,295
80........ Child credit \2\..................................................... ....... ....... ....... ....... ....... ....... ....... ........ 3,525 18,740 18,725 18,430 18,160 17,745 17,155 90,215
81........ Deductibility of charitable contributions (education)................ 970 970 990 1,020 1,065 1,105 1,160 5,340 1,910 1,970 2,075 2,175 2,285 2,400 2,520 11,455
82........ Exclusion of employer-provided educational assistance................ ....... ....... ....... ....... ....... ....... ....... ........ 215 215 210 15 0 0 0 225

......... Training, employment, and social services:
83........ Work opportunity tax credit.......................................... 145 285 280 135 35 5 0 455 25 50 50 25 5 0 0 80
Welfare-to-work tax credit........................................... 15 30 30 15 10 5 0 60 0 5 5 5 0 0 0 10
85........ Exclusion of employer-provided child care............................ ....... ....... ....... ....... ....... ....... ....... ........ 1,325 1,385 1,445 1,510 1,575 1,645 1,715 7,890
86........ Adoption assistance.................................................. ....... ....... ....... ....... ....... ....... ....... ........ 125 295 345 390 385 235 170 1,525
87........ Exclusion of employee meals and lodging (other than military)........ ....... ....... ....... ....... ....... ....... ....... ........ 620 650 680 710 740 775 810 3,715
88........ Credit for child and dependent care expenses......................... ....... ....... ....... ....... ....... ....... ....... ........ 2,485 2,455 2,425 2,395 2,365 2,340 2,310 11,835
89........ Credit for disabled access expenditures.............................. 15 15 15 15 15 20 20 85 30 35 35 35 40 40 40 190
90........ Expensing of costs of removing certain architectural barriers to the
handicapped......................................................... 0 5 5 5 5 5 5 25
91........ Deductibility of charitable contributions, other than education and
health.............................................................. 1,190 1,190 1,215 1,255 1,310 1,360 1,425 6,565 17,390 17,960 18,840 19,750 20,740 21,790 22,910 104,030
92........ Exclusion of certain foster care payments............................ ....... ....... ....... ....... ....... ....... ....... ........ 35 35 40 40 45 45 50 220
93........ Exclusion of parsonage allowances.................................... ....... ....... ....... ....... ....... ....... ....... ........ 315 340 360 385 410 440 470 2,065

......... Health:
94........ Exclusion of employer contributions for medical insurance premiums and
medical care......................................................... ....... ....... ....... ....... ....... ....... ....... ........ 67,920 72,535 77,670 83,095 88,830 94,960 101,520 446,075
95........ Self-employed medical insurance premiums.............................. ....... ....... ....... ....... ....... ....... ....... ........ 765 980 1,310 1,405 1,550 2,055 2,905 9,225
96........ Workers' compensation insurance premiums.............................. ....... ....... ....... ....... ....... ....... ....... ........ 4,260 4,420 4,585 4,755 4,935 5,120 5,315 24,710
97........ Medical Savings Accounts.............................................. ....... ....... ....... ....... ....... ....... ....... ........ 15 20 25 25 20 20 15 105
98........ Deductibility of medical expenses..................................... ....... ....... ....... ....... ....... ....... ....... ........ 3,615 3,775 3,985 4,215 4,475 4,750 5,035 22,460
99........ Exclusion of interest on hospital construction bonds.................. 305 305 310 310 315 320 320 1,575 855 865 875 880 890 900 910 4,455
100........ Deductibility of charitable contributions (health).................... 610 610 620 640 670 695 730 3,355 1,950 2,020 2,110 2,220 2,330 2,450 2,570 11,680
101........ Tax credit for orphan drug research................................... 40 50 55 60 70 80 90 355 ....... ....... ....... ....... ....... ....... ........ ........
102........ Special Blue Cross/Blue Shield deduction.............................. 210 230 250 280 325 290 250 1,395 ....... ....... ....... ....... ....... ....... ........ ........

......... Income security:
103........ Exclusion of railroad retirement system benefits...................... ....... ....... ....... ....... ....... ....... ....... ........ 420 420 425 425 430 435 440 2,155
104........ Exclusion of workers' compensation benefits........................... ....... ....... ....... ....... ....... ....... ....... ........ 5,140 5,330 5,475 5,940 6,205 6,480 6,755 30,855
105........ Exclusion of public assistance benefits (normal tax method).......... ....... ....... ....... ....... ....... ....... ....... ........ 440 345 360 375 390 405 420 1,950
106........ Exclusion of special benefits for disabled coal miners............... ....... ....... ....... ....... ....... ....... ....... ........ 85 80 75 70 70 65 60 340
107........ Exclusion of military disability pensions............................ ....... ....... ....... ....... ....... ....... ....... ........ 120 125 130 135 140 140 145 690
......... Net exclusion of pension contributions and earnings:
108........ Employer plans....................................................... ....... ....... ....... ....... ....... ....... ....... ........ 82,215 82,195 84,350 86,670 89,155 91,810 94,455 446,440
109........ Individual Retirement Accounts....................................... ....... ....... ....... ....... ....... ....... ....... ........ 10,565 10,770 11,170 11,440 11,550 11,485 11,270 56,915
110........ Keogh plans.......................................................... ....... ....... ....... ....... ....... ....... ....... ........ 3,930 4,025 4,255 4,495 4,750 5,010 5,285 23,795
......... Exclusion of other employee benefits:
111........ Premiums on group term life insurance................................ ....... ....... ....... ....... ....... ....... ....... ........ 2,030 2,075 2,120 2,170 2,220 2,270 2,335 11,115
112........ Premiums on accident and disability insurance........................ ....... ....... ....... ....... ....... ....... ....... ........ 175 185 195 205 215 225 235 1,075
113........ Income of trusts to finance supplementary unemployment benefits...... ....... ....... ....... ....... ....... ....... ....... ........ 5 5 5 5 5 5 5 25
114........ Special ESOP rules.................................................... 660 680 700 730 760 790 820 3,800 260 270 280 290 300 310 320 1,500
115........ Additional deduction for the blind................................... ....... ....... ....... ....... ....... ....... ....... ........ 30 30 30 30 35 35 35 165
116........ Additional deduction for the elderly................................. ....... ....... ....... ....... ....... ....... ....... ........ 1,690 1,720 1,740 1,795 1,880 1,945 2,020 9,380
117........ Tax credit for the elderly and disabled.............................. ....... ....... ....... ....... ....... ....... ....... ........ 40 40 40 40 40 40 40 200
118........ Deductibility of casualty losses..................................... ....... ....... ....... ....... ....... ....... ....... ........ 225 235 245 255 270 280 290 1,340
119........ Earned income tax credit \3\......................................... ....... ....... ....... ....... ....... ....... ....... ........ 6,351 5,118 4,971 5,142 5,275 5,471 5,672 26,531

......... Social Security:
......... Exclusion of social security benefits:
120........ Social Security benefits for retired workers......................... ....... ....... ....... ....... ....... ....... ....... ........ 16,780 17,210 18,125 19,045 20,100 21,260 22,460 100,990
121........ Social Security benefits for disabled................................ ....... ....... ....... ....... ....... ....... ....... ........ 2,265 2,420 2,615 2,820 3,060 3,325 3,625 15,445

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122........ Social Security benefits for dependents and survivors................ ....... ....... ....... ....... ....... ....... ....... ........ 3,725 3,785 3,910 4,065 4,235 4,405 4,575 21,190

......... Veterans benefits and services:
123........ Exclusion of veterans death benefits and disability compensation...... ....... ....... ....... ....... ....... ....... ....... ........ 2,820 2,940 3,070 3,210 3,350 3,495 3,650 16,775
124........ Exclusion of veterans pensions....................................... ....... ....... ....... ....... ....... ....... ....... ........ 65 65 70 75 80 85 85 395
125........ Exclusion of GI bill benefits........................................ ....... ....... ....... ....... ....... ....... ....... ........ 65 75 85 90 90 95 100 460
126........ Exclusion of interest on veterans housing bonds...................... 10 10 10 10 10 10 10 50 30 30 30 30 30 30 30 150

......... General purpose fiscal assistance:
127........ Exclusion of interest on public purpose bonds......................... 5,240 5,295 5,345 5,400 5,455 5,510 5,565 27,275 14,810 14,955 15,105 15,260 15,410 15,565 15,720 77,060
128........ Deductibility of nonbusiness State and local taxes other than on owner-
occupied homes....................................................... ....... ....... ....... ....... ....... ....... ....... ........ 32,795 34,925 37,000 39,235 41,715 44,490 47,400 209,840
129........ Tax credit for corporations receiving income from doing business in
U.S. possessions..................................................... 3,960 4,000 4,120 4,245 4,285 4,150 4,215 21,015 ....... ....... ....... ....... ....... ....... ........ ........

......... Interest:
130........ Deferral of interest on U.S. savings bonds............................ ....... ....... ....... ....... ....... ....... ....... ........ 965 1,015 1,065 1,115 1,175 1,235 1,295 5,885

......... Addendum--Aid to State and local governments:
......... Deductibility of:
Property taxes on owner-occupied homes............................... ....... ....... ....... ....... ....... ....... ....... ........ 17,770 18,595 19,495 20,535 21,625 22,635 23,645 107,935
Nonbusiness State and local taxes other than on owner-occupied homes. ....... ....... ....... ....... ....... ....... ....... ........ 32,795 34,925 37,000 39,235 41,715 44,490 47,400 209,840

......... Exclusion of interest on:
Public purpose State and local debt.................................. 5,240 5,295 5,345 5,400 5,455 5,510 5,565 27,275 14,810 14,955 15,105 15,260 15,410 15,565 15,720 77,060
IDBs for certain energy facilities................................... 30 30 30 30 30 30 30 150 80 80 80 85 85 85 85 420
IDBs for pollution control and sewage and waste disposal facilities.. 115 115 115 120 120 120 120 595 325 325 330 335 335 340 345 1,685
Small-issue IDBs..................................................... 75 80 80 80 80 80 80 400 220 220 225 225 225 230 230 1,135
Owner-occupied mortgage revenue bonds................................ 225 230 230 230 235 235 240 1,170 635 645 650 655 665 670 675 3,315
State and local debt for rental housing.............................. 40 40 40 40 40 40 40 200 110 110 110 110 115 115 115 565
IDBs for airports, docks, and sports and convention facilities....... 180 185 185 185 190 190 195 945 515 520 525 530 535 540 545 2,675
State and local student loan bonds................................... 60 60 65 65 65 65 65 325 175 175 175 180 180 185 185 905
State and local debt for private nonprofit educational facilities.... 145 150 150 150 150 155 155 760 415 420 420 425 430 435 440 2,150
State and local debt for private nonprofit health facilities......... 305 305 310 310 315 320 320 1,575 855 865 875 880 890 900 910 4,455
State and local debt for veterans housing............................ 10 10 10 10 10 10 10 50 30 30 30 30 30 30 30 150
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\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: 1998 $680; 1999 $725; 2000 $755; 2001 $765; 2002 $790; 2003 $805; and
2004 $830.

\2\ The figures in the table indicate the effect of the child tax credit on receipts. The effect on outlays (in millions of dollars) is as follows: 1998 $0; 1999 $415; 2000 $528; 2001 $496; 2002 $483; 2003 $453; and 2004 $425.

\3\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on outlays (in millions of dollars) is as follows: 1998 $23,239; 1999 $26,273; 2000 $26,882; 2001 $27,667; 2002 $28,632; 2003
$29,566; and 2004 $30,578.

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. Provisions with estimates that rounded to zero in each year are not included in the table.

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Table 5-3. MAJOR TAX EXPENDITURES IN THE INCOME TAX, RANKED BY TOTAL 2000 REVENUE LOSS
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Provision 2000 2000-2004
----------------------------------------------------------------------------------------------------------------
Net exclusion of pension contributions and earnings: Employer plans......... 84,350 446,440
Exclusion of employer contributions for medical insurance premiums and
medical care............................................................... 77,670 446,075
Deductibility of mortgage interest on owner-occupied homes.................. 55,100 303,145
Capital gains (except agriculture, timber, iron ore, and coal) (normal tax
method).................................................................... 40,585 215,350
Deductibility of nonbusiness State and local taxes other than on owner-
occupied homes............................................................. 37,000 209,840
Accelerated depreciation of machinery and equipment (normal tax method)..... 35,465 181,645
Step-up basis of capital gains at death..................................... 27,090 147,010
Deductibility of charitable contributions, total............................ 25,850 142,425
Exclusion of interest on public purpose bonds............................... 20,450 104,335
Deductibility of State and local property tax on owner-occupied homes....... 19,495 107,935
Child credit \2\............................................................ 18,725 90,215
Capital gains exclusion on home sales....................................... 18,540 98,435
Exclusion of Social Security benefits for retired workers................... 18,125 100,990
Exclusion of interest on life insurance savings............................. 14,990 83,915
Net exclusion of pension contributions and earnings: Individual Retirement
Accounts................................................................... 11,170 56,915
Deferral of income from controlled foreign corporations (normal tax method). 6,200 35,150
Exclusion of workers' compensation benefits................................. 5,475 30,855
Graduated corporation income tax rate (normal tax method)................... 5,360 30,900
Earned income tax credit \3\................................................ 4,971 26,531
HOPE tax credit............................................................. 4,855 27,625
Exclusion of interest on non-public purpose State and local debt............ 4,635 23,625
Workers' compensation insurance premiums.................................... 4,585 24,710
Net exclusion of pension contributions and earnings: Keogh plans............ 4,255 23,795
Exception from passive loss rules for $25,000 of rental loss................ 4,215 18,950
Tax credit for corporations receiving income from doing business in U.S.
possessions................................................................ 4,120 21,015
Deductibility of medical expenses........................................... 3,985 22,460
Exclusion of Social Security benefits for dependents and survivors.......... 3,910 21,190
Accelerated depreciation of buildings other than rental housing (normal tax
method).................................................................... 3,430 10,640
Credit for low-income housing investments................................... 3,335 17,595
Accelerated depreciation on rental housing (normal tax method).............. 3,095 20,920
Exclusion of veterans death benefits and disability compensation............ 3,070 16,775
Lifetime Learning tax credit................................................ 2,655 16,560
Exclusion of Social Security benefits for disabled.......................... 2,615 15,445
Exclusion of income earned abroad by U.S. citizens.......................... 2,500 15,715
Credit for child and dependent care expenses................................ 2,425 11,835
Exclusion of income of foreign sales corporations........................... 2,400 13,650
Exclusion of benefits and allowances to armed forces personnel.............. 2,140 10,900
Exclusion of other employee benefits: Premiums on group term life insurance. 2,120 11,115
Additional deduction for the elderly........................................ 1,740 9,380
Exclusion of reimbursed employee parking expenses........................... 1,630 8,770
Exclusion of employer-provided child care................................... 1,445 7,890
Self-employed medical insurance premiums.................................... 1,310 9,225
Expensing of certain small investments (normal tax method).................. 1,275 6,780
Inventory property sales source rules exception............................. 1,100 6,300
Deferral of interest on U.S. savings bonds.................................. 1,065 5,885
Deferral of income from post-1987 installment sales......................... 1,015 5,275
Exclusion of scholarship and fellowship income (normal tax method).......... 995 5,440
Credit for increasing research activities................................... 980 1,645
Special ESOP rules.......................................................... 980 5,300
Parental personal exemption for students age 19 or over..................... 965 5,295
Exemption of credit union income............................................ 905 5,235
Alternative fuel production credit.......................................... 760 2,715
Exclusion of employee meals and lodging (other than military)............... 680 3,715
Capital gains treatment of certain income................................... 655 3,590
Expensing of research and experimentation expenditures (normal tax method).. 510 3,295
Expensing of multiperiod timber growing costs............................... 510 2,750
Excess of percentage over cost depletion, fuels and nonfuel minerals........ 510 2,725
Empowerment zones and enterprise communities................................ 430 1,875
Exclusion of railroad retirement system benefits............................ 425 2,155
Exclusion of parsonage allowances........................................... 360 2,065
Exclusion of public assistance benefits (normal tax method)................. 360 1,950
Adoption assistance......................................................... 345 1,525
Work opportunity tax credit................................................. 330 535
Deductibility of student-loan interest...................................... 265 1,750
Tax incentives for preservation of historic structures...................... 255 1,435
Special Blue Cross/Blue Shield deduction.................................... 250 1,395
Deductibility of casualty losses............................................ 245 1,340
Tax exemption of certain insurance companies owned by tax-exempt
organizations.............................................................. 240 1,410
Education Individual Retirement Accounts.................................... 230 2,745

[[Page 115]]

Amortization of start-up costs (normal tax method).......................... 220 1,140
Exclusion of employer-provided educational assistance....................... 210 225
Exclusion of other employee benefits: Premiums on accident and disability
insurance.................................................................. 195 1,075
Carryover basis of capital gains on gifts................................... 185 1,015
Deferral for State prepaid tuition plans.................................... 180 1,395
Enhanced oil recovery credit................................................ 180 1,225
Exceptions from imputed interest rules...................................... 160 815
Expensing of environmental remediation costs................................ 145 135
Exclusion of military disability pensions................................... 130 690
Small life insurance company deduction...................................... 100 520
Exclusion for employer-provided transit passes.............................. 95 655
Tax credit and deduction for clean-fuel burning vehicles.................... 90 410
Exclusion of GI bill benefits............................................... 85 460
Expensing of certain multiperiod production costs........................... 85 475
Exclusion from income of conservation subsidies provided by public utilities 80 385
Exclusion of special benefits for disabled coal miners...................... 75 340
Income averaging for farmers................................................ 75 400
Exclusion of veterans pensions.............................................. 70 395
Expensing of certain capital outlays........................................ 70 385
Capital gains treatment of certain timber income............................ 65 360
Deferred taxes for financial firms on certain income earned overseas........ 65 65
Capital gains treatment of royalties on coal................................ 65 360
Tax credit for orphan drug research......................................... 55 355
Credit for disabled access expenditures..................................... 50 275
Exemption of certain mutuals' and cooperatives' income...................... 50 255
Exclusion of certain foster care payments................................... 40 220
Tax credit for the elderly and disabled..................................... 40 200
Exception from passive loss limitation for working interests in oil and gas
properties................................................................. 35 190
New technology credit....................................................... 35 185
Ordinary income treatment of loss from small business corporation stock sale 35 195
Welfare-to-work tax credit.................................................. 35 70
Investment credit for rehabilitation of structures (other than historic).... 30 150
Additional deduction for the blind.......................................... 30 165
Medical Savings Accounts.................................................... 25 105
Expensing of exploration and development costs, nonfuel minerals............ 25 135
Cancellation of indebtedness................................................ 20 100
Credit for holders of zone academy bonds.................................... 20 155
Deferral of tax on shipping companies....................................... 15 75
Exclusion of interest on savings bonds redeemed to finance educational
expenses................................................................... 15 80
Alcohol fuel credits \1\.................................................... 15 75
Treatment of loans forgiven for solvent farmers............................. 10 50
Excess bad debt reserves of financial institutions.......................... 10 25
Deferral of gain on sale of farm refiners................................... 10 60
Investment credit and seven-year amortization for reforestation expenditures 10 65
Capital gains exclusion of small corporation stock.......................... 5 25
Expensing of costs of removing certain architectural barriers to the
handicapped................................................................ 5 25
Income of trusts to finance supplementary unemployment benefits............. 5 25
Special alternative tax on small property and casualty insurance companies.. 5 25
Expensing of exploration and development costs, fuels....................... (10) 45
----------------------------------------------------------------------------------------------------------------
\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: 1998 $680; 1999 $725; 2000 $755; 2001 $765; 2002 $790; 2003
$805; and 2004 $830
\2\ The figures in the table indicate the effect of the child tax credit on receipts. The effect on outlays (in
millions of dollars) is as follows: 1998 $0; 1999 $415; 2000 $528; 2001 $496; 2002 $483; 2003 $453; and 2004
$425.

\3\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on
outlays (in millions of dollars) is as follows: 1998 $23,239; 1999 $26,273; 2000 $26,882; 2001 $27,667; 2002
$28,632; 2003 $29,566; and 2004 $30,578.

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. Provisions with estimates that rounded to
zero in each year are not included in the able.

Note: Three categories in the table are aggregated: Deductibility of chartable contributions, exclusion of
interest for non-public purpose State and local debt, and excess of percentage over cost depletion, fuels and
nonfuel minerals.

[[Page 116]]

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
----------------------------------------------------------------------------------------------------------------
1.......... Deferral of income from controlled foreign corporations (normal tax method).......... 5,700
2.......... Deferred taxes for financial firms on income earned overseas......................... 550
3.......... Expensing of research and experimentation expenditures (normal tax method)........... 1,650
4.......... Expensing of exploration and development costs--fuels............................... 90
5.......... Expensing of exploration and development costs--nonfuels............................ 20
6.......... Expensing of multiperiod timber growing costs........................................ 250
7.......... Expensing of certain multiperiod production costs--agriculture...................... 90
8.......... Expensing of certain capital outlays--agriculture................................... 75
9.......... Deferral of income on life insurance and annuity contracts........................... 20,615
10......... Accelerated depreciation of rental housing (normal tax method)....................... 3,415
11......... Accelerated depreciation of buildings other than rental housing (normal tax method).. 560
12......... Accelerated depreciation of machinery and equipment (normal tax method).............. 39,670
13......... Expensing of certain small investments (normal tax method)........................... 1,375
14......... Amortization of start-up costs (normal tax method)................................... 180
15......... Deferral of tax on shipping companies................................................ 15
16......... Credit for holders of zone academy bonds............................................. 180
17......... Credit for low-income housing investments............................................ 2,745
18......... Exclusion of pension contributions--employer plans................................... 84,430
19......... Exclusion of IRA contributions and earnings.......................................... 13,285
20......... Exclusion of contributions and earnings for Keogh plans.............................. 3,555
21......... Exclusion of interest on public-purpose bonds........................................ 22,360
22......... Exclusion of interest on non-public purpose bonds.................................... 3,435
23......... Deferral of interest on U.S. savings bonds........................................... 390
----------------------------------------------------------------------------------------------------------------

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 117]]

Table 5-5. OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX
(In millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Outlay Equivalents
--------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003 2004 2000-2004
--------------------------------------------------------------------------------------------------------------------------------------------------------
......... National Defense:
1.......... Exclusion of benefits and allowances to armed forces
personnel.............................................. 2,445 2,470 2,495 2,520 2,545 2,570 2,595 12,725

......... International affairs:
2.......... Exclusion of income earned abroad by U.S. citizens...... 2,640 2,965 3,315 3,710 4,145 4,590 5,080 20,840
3.......... Exclusion of income of foreign sales corporations....... 3,310 3,460 3,700 3,920 4,150 4,460 4,770 21,000
4.......... Inventory property sales source rules exception........ 1,550 1,620 1,690 1,770 1,920 2,080 2,230 9,690
5.......... Deferral of income from controlled foreign corporations
(normal tax method).................................... 5,500 5,800 6,200 6,600 7,000 7,450 7,900 35,150
6.......... Deferred taxes for financial firms on income earned
overseas............................................... 400 1,075 65 0 0 0 0 65

......... Energy:
9.......... Expensing of exploration and development costs, fuels... (130) (90) (20) (25) 0 40 45 40
10......... Excess of percentage over cost depletion, fuels........ 285 295 300 310 320 325 335 1,590
11........ Alternative fuel production credit..................... 1,100 1,030 975 915 860 555 165 3,470
12........ Exception from passive loss limitation for working
interests in oil and gas properties.................... 30 35 35 35 40 40 40 190
13........ Capital gains treatment of royalties on coal........... 80 85 85 95 95 100 105 480
14........ Exclusion of interest on energy facility bonds......... 155 155 155 165 165 165 165 815
15........ Enhanced oil recovery credit........................... 215 245 285 325 375 425 490 1,900
16........ New technology credit.................................. 30 40 45 50 55 55 40 245
17........ Alcohol fuel credits \1\............................... 15 15 15 15 15 15 15 75
18........ Tax credit and deduction for clean-fuel burning vehicles 95 105 115 130 120 95 65 525
19........ Exclusion from income of conservation subsidies
provided by public utilities........................... 110 110 105 105 100 105 105 520

......... Natural resources and environment:
20........ Expensing of exploration and development costs, nonfuel
minerals............................................... 30 30 30 30 30 40 40 170
21........ Excess of percentage over cost depletion, nonfuel
minerals............................................... 275 280 300 310 325 340 350 1,625
22........ Exclusion of interest on bonds for water, sewage, and
hazardous waste facilities............................. 630 630 640 650 650 655 665 3,260
23........ Capital gains treatment of certain timber income....... 80 85 85 95 95 100 105 480
24........ Expensing of multiperiod timber growing costs.......... 485 500 510 530 550 570 590 2,750
25........ Investment credit and seven-year amortization for
reforestation expenditures............................. 15 15 15 15 15 15 15 75
26........ Tax incentives for preservation of historic structures. 215 235 255 275 285 305 315 1,435

......... Agriculture:
27........ Expensing of certain capital outlays.................... 65 70 70 75 75 80 85 385
28........ Expensing of certain multiperiod production costs...... 80 85 85 90 95 100 105 475
29........ Treatment of loans forgiven for solvent farmers........ 10 10 10 10 10 10 10 50
30........ Capital gains treatment of certain income.............. 805 840 875 915 955 1,000 1,045 4,790
31........ Income averaging for farmers........................... 10 75 75 80 80 80 85 400
32........ Deferral of gain on sale of farm refiners.............. 10 10 10 10 10 15 15 60

......... Commerce and housing:
Financial institutions and insurance:
33........ Exemption of credit union income....................... 1,000 1,070 1,150 1,235 1,325 1,425 1,530 6,665
34........ Excess bad debt reserves of financial institutions..... 70 30 10 5 5 5 0 25
35........ Exclusion of interest on life insurance savings........ 13,465 14,200 14,990 15,810 16,680 17,595 18,840 83,915
36........ Special alternative tax on small property and casualty
insurance companies................................... 5 5 5 5 5 5 5 25
37........ Tax exemption of certain insurance companies owned by
tax-exempt organizations.............................. 290 315 335 345 365 415 450 1,910
38........ Small life insurance company deduction................. 140 140 140 150 150 150 150 740
Housing:
39........ Exclusion of interest on owner-occupied mortgage
subsidy bonds......................................... 1,230 1,255 1,260 1,270 1,290 1,295 1,315 6,430
40........ Exclusion of interest on rental housing bonds.......... 215 215 215 215 220 220 220 1,090
41........ Deductibility of mortgage interest on owner-occupied
homes................................................. 51,700 52,990 55,100 57,590 60,415 63,425 66,615 303,145
42........ Deductibility of State and local property tax on owner-
occupied homes........................................ 17,770 18,595 19,495 20,535 21,625 22,635 23,645 107,935
43........ Deferral of income from post-1987 installment sales.... 975 995 1,015 1,035 1,055 1,075 1,095 5,275
44........ Capital gains exclusion on home sales.................. 21,845 22,500 23,175 23,870 24,590 25,325 26,090 123,050
45........ Exception from passive loss rules for $25,000 of rental
loss.................................................. 4,735 4,455 4,215 4,000 3,785 3,575 3,375 18,950
46........ Credit for low-income housing investments.............. 4,065 4,210 4,340 4,540 4,610 4,720 4,705 22,915
47........ Accelerated depreciation on rental housing (normal tax
method)............................................... 2,405 2,740 3,095 4,170 4,590 4,495 4,570 20,920
Commerce:
48........ Cancellation of indebtedness........................... 50 30 20 15 20 20 25 100
49........ Exceptions from imputed interest rules................. 155 160 160 160 165 165 165 815
50........ Capital gains (except agriculture, timber, iron ore,
and coal) (normal tax method)......................... 51,035 52,555 54,115 55,725 57,380 59,080 60,835 287,135
51........ Capital gains exclusion of small corporation stock..... 0 5 5 5 5 5 5 25
52........ Step-up basis of capital gains at death................ 32,760 34,400 36,120 37,655 39,160 40,725 42,355 196,015
53........ Carryover basis of capital gains on gifts.............. 170 175 185 195 205 210 220 1,015
54........ Ordinary income treatment of loss from small business
corporation stock sale................................ 45 45 45 55 55 55 55 265
55........ Accelerated depreciation of buildings other than rental
housing (normal tax method)........................... 6,270 4,895 3,430 2,385 2,365 1,875 585 10,640

[[Page 118]]

56........ Accelerated depreciation of machinery and equipment
(normal tax method)................................... 28,885 32,505 35,465 36,830 36,985 36,510 35,855 181,645
57........ Expensing of certain small investments (normal tax
method)............................................... 1,185 1,235 1,275 1,175 1,730 1,605 995 6,780
58........ Amortization of start-up costs (normal tax method)..... 205 215 220 225 225 230 240 1,140
59........ Graduated corporation income tax rate (normal tax
method)............................................... 7,400 7,340 7,340 7,700 8,385 9,150 9,755 42,330
60........ Exclusion of interest on small issue bonds............. 425 430 435 435 435 445 445 2,195

......... Transportation:
61........ Deferral of tax on shipping companies................... 20 20 20 20 20 20 20 100
62........ Exclusion of reimbursed employee parking expenses...... 2,010 2,060 2,105 2,180 2,260 2,345 2,430 11,320
63........ Exclusion for employer-provided transit passes......... 95 115 130 150 180 215 240 915

......... Community and regional development:
64........ Investment credit for rehabilitation of structures
(other than historic).................................. 30 30 30 30 30 30 30 150
65........ Exclusion of interest for airport, dock, and similar
bonds.................................................. 995 1,010 1,015 1,025 1,040 1,045 1,060 5,185
66........ Exemption of certain mutuals' and cooperatives' income. 45 50 50 50 50 50 55 255
67........ Empowerment zones and enterprise communities........... 290 380 430 435 415 305 290 1,875
68........ Expensing of environmental remediation costs........... 120 145 195 80 (15) (35) (45) 180

......... Education, training, employment, and social services:
Education:
69........ Exclusion of scholarship and fellowship income (normal
tax method)........................................... 1,015 1,060 1,105 1,155 1,210 1,265 1,320 6,055
70........ HOPE tax credit........................................ 255 5,150 6,225 6,830 7,345 7,390 7,625 35,415
71........ Lifetime Learning tax credit........................... 140 3,215 3,405 3,805 3,865 4,305 5,850 21,230
72........ Education Individual Retirement Accounts............... 25 125 295 480 685 895 1,120 3,475
73........ Deductibility of student-loan interest................. 90 305 330 390 450 485 530 2,185
74........ Deferral for State prepaid tuition plans............... 85 125 180 235 285 330 365 1,395
75........ Exclusion of interest on student-loan bonds............ 340 340 345 350 350 360 360 1,765
76........ Exclusion of interest on bonds for private nonprofit
educational facilities................................ 800 820 820 825 835 845 850 4,175
77......... Credit for holders of zone academy bonds............... 0 15 30 45 50 50 50 225
78........ Exclusion of interest on savings bonds redeemed to
finance educational expenses.......................... 15 15 20 20 20 20 30 110
79........ Parental personal exemption for students age 19 or over 970 1,010 1,070 1,125 1,165 1,225 1,280 5,865
80........ Child credit \2\....................................... 4,700 24,985 24,965 24,575 24,215 23,660 22,875 120,290
81........ Deductibility of charitable contributions (education).. 3,995 4,090 4,250 4,435 4,650 4,870 5,125 23,330
82........ Exclusion of employer-provided educational assistance.. 270 270 260 20 0 0 0 280
Training, employment, and social services:
83........ Work opportunity tax credit............................ 170 335 330 160 40 5 0 535
84........ Welfare-to-work tax credit............................. 15 35 35 20 10 5 0 70
85........ Exclusion of employer-provided child care.............. 1,765 1,845 1,925 2,015 2,100 2,195 2,285 10,520
86........ Adoption assistance.................................... 155 355 415 470 460 285 205 1,835
87........ Exclusion of employee meals and lodging (other than
military)............................................. 760 795 830 865 905 945 990 4,535
88........ Credit for child and dependent care expenses........... 3,315 3,275 3,235 3,195 3,155 3,115 3,080 15,780
89........ Credit for disabled access expenditures................ 60 65 65 65 75 80 85 370
90........ Expensing of costs of removing certain architectural
barriers to the handicapped........................... 0 5 5 5 5 5 5 25
91........ Deductibility of charitable contributions, other than
education and health.................................. 25,000 25,780 27,015 28,320 29,770 31,310 32,980 149,395
92........ Exclusion of certain foster care payments.............. 45 45 50 50 50 55 60 265
93........ Exclusion of parsonage allowances...................... 390 415 445 475 505 540 580 2,545

......... Health:
94........ Exclusion of employer contributions for medical
insurance premiums and medical care.................... 86,925 92,985 99,735 106,890 114,465 122,580 131,280 574,950
95........ Self-employed medical insurance premiums................ 935 1,195 1,600 1,715 1,890 2,505 3,545 11,255
96........ Workers' compensation insurance premiums................ 5,320 5,520 5,730 5,945 6,170 6,400 6,645 30,890
97........ Medical Savings Accounts................................ 20 30 30 35 30 30 25 150
98........ Deductibility of medical expenses....................... 3,615 3,775 3,985 4,215 4,475 4,750 5,035 22,460
99........ Exclusion of interest on hospital construction bonds.... 1,665 1,680 1,695 1,705 1,725 1,750 1,765 8,640
100........ Deductibility of charitable contributions (health)...... 3,520 3,600 3,760 3,930 4,120 4,330 4,560 20,700
101........ Tax credit for orphan drug research..................... 60 75 80 90 105 115 130 520
102........ Special Blue Cross/Blue Shield deduction................ 280 310 335 375 435 385 335 1,865

......... Income security:
103........ Exclusion of railroad retirement system benefits........ 420 420 425 425 430 435 440 2,155
104........ Exclusion of workers' compensation benefits............ 5,140 5,330 5,475 5,940 6,205 6,480 6,755 30,855
105........ Exclusion of public assistance benefits (normal tax
method)................................................ 440 345 360 375 390 405 420 1,950
106........ Exclusion of special benefits for disabled coal miners. 85 80 75 70 70 65 60 340
107........ Exclusion of military disability pensions.............. 120 125 130 135 140 140 145 690
Net exclusion of pension contributions and earnings:
108........ Employer plans......................................... 106,170 106,840 109,760 112,750 116,015 119,475 122,975 580,975
109........ Individual Retirement Accounts......................... 14,115 14,475 15,095 15,570 15,855 15,940 15,845 78,305
110........ Keogh plans............................................ 5,010 5,105 5,400 5,705 6,025 6,360 6,710 30,200
Exclusion of other employee benefits:
111........ Premiums on group term life insurance.................. 2,690 2,750 2,815 2,880 2,945 3,015 3,085 14,740

[[Page 119]]

112........ Premiums on accident and disability insurance.......... 225 235 250 260 275 290 305 1,380
113........ Income of trusts to finance supplementary unemployment
benefits............................................... 5 5 5 5 5 5 5 25
114........ Special ESOP rules..................................... 1,280 1,320 1,360 1,415 1,470 1,530 1,585 7,360
115........ Additional deduction for the blind..................... 35 35 35 35 40 40 45 195
116........ Additional deduction for the elderly................... 2,045 2,085 2,105 2,175 2,275 2,355 2,440 11,350
117........ Tax credit for the elderly and disabled................ 50 50 50 50 50 50 55 255
118........ Deductibility of casualty losses....................... 245 260 270 285 295 310 320 1,480
119........ Earned income tax credit \3\........................... 7,056 5,687 5,523 5,714 5,861 6,079 6,303 29,480

......... Social Security:
Exclusion of social security benefits:
120........ Social Security benefits for retired workers........... 16,780 17,210 18,125 19,045 20,100 21,260 22,460 100,990
121........ Social Security benefits for disabled.................. 2,265 2,420 2,615 2,820 3,060 3,325 3,625 15,445
122........ Social Security benefits for dependents and survivors.. 3,725 3,785 3,910 4,065 4,235 4,405 4,575 21,190

......... General purpose fiscal assistance:
127........ Exclusion of interest on public purpose bonds.......... 28,720 29,005 29,290 29,595 29,890 30,190 30,490 149,455
128........ Deductibility of nonbusiness State and local taxes other
than on owner-occupied homes........................... 32,795 34,925 37,000 39,235 41,715 44,490 47,400 209,840
129........ Tax credit for corporations receiving income from doing
business in U.S. possessions........................... 3,960 4,000 4,120 4,245 4,285 4,150 4,215 21,015

......... Interest:
130........ Deferral of interest on U.S. savings bonds.............. 965 1,015 1,065 1,115 1,175 1,235 1,295 5,885

......... Addendum--Aid to State and local governments:
Deductibility of:
Property taxes on owner-occupied homes................. 17,770 18,595 19,495 20,535 21,625 22,635 23,645 107,935
Nonbusiness State and local taxes other than on owner-
occupied homes........................................ 32,795 34,925 37,000 39,235 41,715 44,490 47,400 209,840
Exclusion of interest on:
Public purpose State and local debt.................... 28,720 29,005 29,290 29,595 29,890 30,190 30,490 149,455
IDBs for certain energy facilities..................... 155 155 155 165 165 165 165 815
IDBs for pollution control and sewage and waste
disposal facilities................................... 630 630 640 650 650 655 665 3,260
Small-issue IDBs....................................... 425 430 435 435 435 445 445 2,195
Owner-occupied mortgage revenue bonds.................. 1,230 1,255 1,260 1,270 1,290 1,295 1,315 6,430
State and local debt for rental housing................ 215 215 215 215 220 220 220 1,090
IDBs for airports, docks, and sports and convention
facilities............................................ 995 1,010 1,015 1,025 1,040 1,045 1,060 5,185
State and local student loan bonds..................... 340 340 345 350 350 360 360 1,765
State and local debt for private nonprofit educational
facilities............................................ 800 820 820 825 835 845 850 4,175
State and local debt for private nonprofit health
facilities............................................ 1,665 1,680 1,695 1,705 1,725 1,750 1,765 8,640
State and local debt for veterans housing.............. 60 60 60 60 60 60 60 300
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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: 1998 $680; 1999 $725; 2000 $755; 2001 $765; 2002 $790; 2003 $805; and 2004 $830.

\3\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on outlays (in millions of dollars) is as
follows: 1998 $23,240; 1999 $25,650; 2000 $26,525; 2001 $27,265; 2002 $27,975; 2003 $28,705; and 2004 $29,655.

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. Provisions with estimates that rounded to zero in each year are not included in the table.

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.
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

[[Page 120]]

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

[[Page 121]]

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 within the Office of Tax Analysis in each of the three main
areas--individual, business, and international taxation. 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.
---------------------------------------------------------------------------
Over the next few years, the Administration's plan is to undertake
additional studies that will focus on the availability of the data
needed to assess the effects of selected significant tax expenditures,
primarily those designed to increase savings. 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 1999-1993,'' JCS-7-98, December 14, 1998;
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 benefit 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 consumption deemed meritorious.
---------------------------------------------------------------------------
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.
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

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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, many different 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--provide flexibility for policy design. On
the other hand, 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. This reliance
can diminish their economic 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
not of paramount importance. 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.
There are examples of policy objectives that employ multiple
approaches. Minimum wage legislation, the earned income tax credit, and
the food stamp program are examples of programs that utilize regulatory,
tax expenditure, and direct outlay approaches, respectively, in order to
improve the economic welfare of low-wage workers. Their relative
strengths and weaknesses have merited significant attention.
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. 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

[[Page 123]]

and estimated ranges of effects, in many cases, as opposed to point
estimates.
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

[[Page 124]]

charitable activities. The education incentives can be compared with
loans, grants, and other programs designed to promote higher education
and training. The 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.--In 1998, a U.S. citizen or resident alien
who resides or stays overseas for at least 11 of the past 12 months may
exclude $72,000 per year of foreign-earned income. The exclusion limit
increases in $2,000 annual increments until it reaches $80,000 in 2002.
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,

[[Page 125]]

step 1 ($61,656 in 1998). Federal employees working abroad are not
eligible for the foreign-earned income exclusion. 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 benefitting 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.
6. Exceptions under subpart F for active financing income.--Financial
firms can defer taxes on income earned overseas in an active business.
This provision was originally enacted in the Taxpayer Relief Act of
1997, was canceled by a line-item veto by the President, and was
restored by the Supreme Court decision declaring the line-item veto
unconstitutional.

General Science, Space, and Technology

7. 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.
8. R&E credit.--The research and experimentation (R&E) credit, which
expired on June 30, 1998, was reinstated (retroactively) in the Tax and
Trade Relief Extension Act of 1998 for one year (through June 30, 1999).
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

9. 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.

[[Page 126]]

10. Percentage depletion.--Independent fuel mineral producers and
royalty owners are generally allowed to take percentage depletion
deductions rather than cost depletion on limited quantities of output.
Under cost depletion, outlays are deducted over the productive life of
the property based on the fraction of the resource extracted. Under
percentage depletion, taxpayers deduct a percentage of gross income from
mineral production at rates of 22 percent for uranium; 15 percent for
oil, gas and oil shale; and 10 percent for coal. The deduction is
limited to 50 percent of net income from the property, except for oil
and gas where the deduction can be 100 percent of net property income.
Production from geothermal deposits is eligible for percentage depletion
at 65 percent of net income, but with no limit on output and no
limitation with respect to qualified producers. Unlike depreciation or
cost depletion, percentage depletion deductions can exceed the cost of
the investment.
11. 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.
12. 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.
13. Capital gains treatment of royalties on coal.--Sales of certain
coal under royalty contracts can be treated as capital gains rather than
ordinary income.
14. 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.
15. 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.
16. 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.
17. Alcohol fuel credits.--An income tax credit is provided for
ethanol that is derived from renewable sources and used as fuel. The
credit equals 54 cents per gallon in 1998, 1999, and 2000. The
Transportation Equity Act of the 21st Century made the credit 53 cents
per gallon in 2001 and 2002; 52 cents per gallon in 2003 and 2004; and
51 cents per gallon in 2005, 2006, and 2007. To the extent that ethanol
is mixed with taxable motor fuel to create gasohol, taxpayers may claim
an exemption of the federal excise tax rather than the income tax
credit. In addition, small ethanol producers are eligible for a separate
10 cents per gallon credit.
18. 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.
19. Exclusion of utility conservation subsidies.--Subsidies by public
utilities for non-business customer expenditures on energy conservation
measures are excluded from the gross income of the customer.

Natural Resources and Environment

20. 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.
21. 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.
22. 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.
23. Capital gains treatment of certain timber.--Certain timber sold
under a royalty contract can be treated as capital gains rather than
ordinary income.
24. 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 127]]

costs are capitalized under the uniform capitalization rules.
25. 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.
26. 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

27. 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.
28. 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.
29. 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.
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\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.
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30. Capital gains treatment of certain income.--Certain agricultural
income, such as unharvested crops, can be treated as capital gains
rather than ordinary income.
31. Income averaging for farmers.--The Tax and Trade Relief Extension
Act of 1998 permanently extended the provision that allows taxpayers to
lower their tax liability by averaging, over the prior three-year
period, their taxable income from farming. Without extension, the
provision generally would have expired on December 31, 2000.
32. Deferral of gain on sales of farm refiners.--A taxpayer who sells
stock in a farm refiner to a farmers' cooperative can defer recognition
of gain if the taxpayer reinvests the proceeds in qualified replacement
property. This provision was originally enacted in the Taxpayer Relief
Act of 1997, was canceled by a line-item veto by the President, and was
restored by the Supreme Court decision declaring the line-item veto
unconstitutional.

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.

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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. The Tax and Trade Relief Extension Act
of 1998 increased the volume cap to $55 per capita ($165 million
minimum) in 2003 and ratably annually thereafter until the cap reaches
$75 per capita ($225 million minimum) in 2007. States may issue mortgage
credit certificates (MCCs) in lieu of mortgage revenue 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 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 may not be used more
than once every two years.
45. 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.
46. 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. State agencies determine who receives the credit; states
are limited in the amount of credit they may authorize annually to $1.25
per resident.
47. 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.
48. 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.
49. 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 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

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farms and small businesses worth between $250,000 and $1 million.
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\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, 1999, 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 1999.
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50. 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 after December 31, 1997,
the top tax rate is 20 percent (10 percent for taxpayers who would
otherwise pay capital gains tax at the 15-percent rate). The IRS
Restructuring and Reform Act of 1998 eliminated the 28-percent capital
gains rate by lowering the holding period for the 20-percent capital
gains rate from 15 years to 1 year.
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.
51. 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.
52. 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.
53. 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.
54. 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.
55. 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.
56. 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.
57. Expensing of certain small investments.--In 1998, qualifying
investments in tangible property up to $18,500 can be expensed rather
than depreciated over time. (The expensing limit increases annually
until 2003, when it reaches $25,000). To the extent that qualifying
investment during the year exceeds $200,000, the amount eligible for
expensing is decreased. In 1998, the amount expensed is completely
phased out when qualifying investments exceed $218,500.
58. 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.
59. 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 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.
60. 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.

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Transportation

61. 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, 1987.62. 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 1998, the maximum amount of the parking exclusion is
$175 (indexed, except in 1999) per month. The tax expenditure estimate
does not include parking at facilities owned by the employer.
63. 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 1998, the
limit is $65 (indexed, except in 1999) per month.

Community and Regional Development

64. 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.
65. 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.
66. 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.
67. 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.
68. Expensing of environmental remediation costs.-- Taxpayers who
clean up hazardous substances at a qualified site may 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. he expensing only applies
to clean-up costs incurred after August 5, 1997 and before January 1,
2001.

Education, Training, Employment, and Social Services

69. 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).
70. HOPE tax credit.-- The non-refundable HOPE tax credit 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).
71. Lifetime Learning tax credit.--The non-refundable Lifetime
Learning tax credit 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 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.
72. Education Individual Retirement Accounts.--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. 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.
73. 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 pay

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ments 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.
74. State prepaid tuition plans.--Some states have adopted prepaid
tuition plans and prepaid room and board plans, which allow persons to
pay in advance for college expenses for designated beneficiaries. Taxes
on the earnings from these plans are paid by the beneficiaries and are
deferred until the tuition is actually paid.
75. 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.
76. 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.
77. 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.
78. 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
$78,350 and $108,350 ($52,250 and $67,250 for singles) in 1998.
79. 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.
80. Child credit.--Taxpayers with children under age 17 can qualify
for a $500 child credit beginning January 1, 1999 ($400 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.
81. 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.
82. 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.
83. 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, 1999 and who are certified as members of various
targeted groups. The Tax and Trade Relief Extension Act of 1998 extended
the expiration date from July 1, 1998 to July 1, 1999. 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.
84. Welfare-to-work tax credit.--An employer is eligible for a 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 July 1, 1999. The Tax and Trade
Relief Extension Act of 1998 extended the expiration date from May 1,
1999 to July 1, 1999.
85. Employer-provided child care.--Employer-provided child care is
excluded from an employee's gross income even though the employer's
costs for the child care are a deductible business expense.
86. Adoption credit and exclusion.--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.
87. 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.
88. 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

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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.
89. 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.
90. 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.
91. 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.
92. 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.
93. 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

94. Employer-paid medical insurance and expenses.--Employer-paid
health insurance premiums and other medical expenses (including long-
term care) are deducted as a business expense by employers, but they are
not included in employee gross income. The self-employed also may deduct
part of their family health insurance premiums.
95. Self-employed medical insurance premiums.--Self-employed taxpayers
may deduct a percentage of their family health insurance premiums.
Taxpayers without self-employment income are not eligible for the
special percentage deduction. The deductible percentage is 45 percent in
1998, 60 percent in 1999 through 2001, 70 percent in 2002, and 100
percent in 2003 and thereafter.
96. Workers' compensation insurance premiums.--Workers' compensation
insurance premiums are paid by employers and deducted as a business
expense, but the premiums are not included in employee gross income.
97. Medical savings accounts.--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.

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. Workers' compensation benefits.--Workers& 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

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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 1998, an employee could exclude up to $10,000 (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 taxpayers with AGI between $50,000 and $60,000 ($30,000 and
$40,000 for singles). The phase-out range increases annually until it
reaches $80,000 to $100,000 in 2007 ($50,000 to $60,000 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.
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 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.
112. 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.
113. 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.
114. 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 corporations
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.
115. Additional deduction for the blind.--Taxpayers who are blind may
take an additional $1,000 standard deduction if single, or $800 if
married.
116. 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.
117. 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 t

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o 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.
118. 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.
119. 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 $6,680 of earned income in 1998. The credit is 40
percent of the first $9,390 of income for a family with two or more
qualifying children. When the taxpayer's income exceeds $12,260, 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
$26,473 of modified adjusted gross income ($30,095 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 $4,460 of earned income. When the taxpayer's income
exceeds $5,570, the credit is phased out at the rate of 7.65 percent. It
is completely phased out at $10,030 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

120. 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.
121. 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.
122. 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
123. Veterans death benefits and disability compensation.--All
compensation due to death or disability paid by the Veterans
Administration is excluded from taxable income.
124. Veterans pension payments.--Pension payments made by the Veterans
Administration are excluded from gross income.
125. G.I. Bill benefits.--G.I. Bill benefits paid by the Veterans
Administration are excluded from gross income.
126. Tax-exempt mortgage bonds for veterans.--Interest earned on
general obligation bonds issued by State and local governments to
finance housing for veterans is excluded from taxable income. The
issuance of such bonds is limited, however, to five pre-existing State
programs and to amounts based upon previous volume levels for the period
January 1, 1979 to June 22, 1984. Furthermore, future issues are limited
to veterans who served on active duty before 1977.

General Government

127. 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.
128. 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.
129. 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

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

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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\
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\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.
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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 1998-2004 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. Up to 40 percent of the value of land subject to certain
conservation easements may 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.

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. For estates of
decedents dying after December 31, 1997, the applicable interest rates
are lower and the interest is non-deductible.

Commerce and Housing

4. Special-use valuation of closely-held businesses.--The special-use
valuation rule available for

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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.--Certain family-owned
businesses that are bequeathed to qualified heirs can be excluded from
taxable estates. The exclusion generally 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.

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)
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2000-
Description 1998 1999 2000 2001 2002 2003 2004 2004
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......... Natural Resources and Environment:
1.......... Donations of conservation easements...................... 0 10 25 40 55 75 95 290

......... Agriculture:
2.......... Special use valuation of farm real property.............. 80 95 110 115 120 125 135 605
3.......... Tax deferral of closely held farms...................... 0 0 0 5 5 10 10 30

......... Commerce:
4.......... Special use valuation of real property used in closely
held businesses......................................... 5 5 5 5 5 10 10 35
5.......... Tax deferral of closely held business................... 15 0 10 20 30 50 65 175
6.......... Exclusion for family owned businesses................... 0 490 490 495 525 530 555 2,595

......... Education, training, employment, and social services:
7.......... Deduction for charitable contributions (education)...... 1,115 1,195 1,245 1,305 1,395 1,470 1,560 6,975
8.......... Deduction for charitable contributions (other than
education and health)................................... 3,295 3,525 3,670 3,850 4,115 4,345 4,605 20,585

......... Health:
9.......... Deduction for charitable contributions (health)......... 1,010 1,080 1,125 1,180 1,260 1,330 1,410 6,305

......... General government:
10......... Credit for State death taxes............................. 4,650 4,970 5,175 5,410 5,670 5,965 6,200 28,420
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