[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: 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, sizeable 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 for the revenue loss estimated from 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 1999-2005 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 of the chapter on performance measures and economic
effects presents information related to assessment of the effect of tax
expenditures on the achievement of program performance goals. This
section is a complement to the government-wide performance plan required
by the Government Performance and Results Act of 1993. Tax expenditures
are also discussed in Section V 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, 1999.
Expired or repealed provisions are not listed if their revenue effects
result only from taxpayer activity occurring before fiscal year 1999.
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
1999-2005 are displayed according to 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 tables.
Table 5-2 reports the respective portions of the total revenue losses
that arise under the individual and corporate income taxes. Listing
revenue loss estimates under the individual and corporate headings does
not imply that these categories of filers benefit from the special tax
provisions in proportion to the respective tax expenditure amounts
shown. Rather, these breakdowns show the specific tax accounts through
which the various provisions are cleared. The ultimate beneficiaries of
corporate tax expenditures could be stock
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holders, employees, customers, or others, depending on economic forces.
Table 5-3 ranks the major tax expenditures by fiscal year 2001 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
The revenue loss estimates shown for individual tax expenditures in
Tables 5-1, 5-2, and 5-3 do not necessarily equal the increase in
Federal revenues (or the change in the budget balance) that would result
from repealing these 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, because 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 estimates 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 could yield
their full potential revenue gains relatively quickly, whereas changes
to other provisions would only gradually yield their full revenue
potential, especially if certain deductions or exemptions were
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. Although 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 on major tax provisions may have some impact on overall levels
of income and rates of economic growth and, thus, on the budget economic
assumptions. In practice, 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 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 would be
paid out and taxes would 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
--------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004 2005 2001-2005
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Defense
1 Exclusion of benefits and allowances to armed forces 2,120 2,140 2,160 2,180 2,200 2,220 2,240 11,000
personnel..............................................
International affairs:
2 Exclusion of income earned abroad by U.S. citizens...... 2,330 2,550 2,790 3,040 3,285 3,545 3,825 16,485
3 Exclusion of certain allowances for Federal employees 635 665 695 725 760 795 830 3,805
abroad.................................................
4 Exclusion of income of foreign sales corporations....... 3,640 3,890 4,160 4,460 4,770 5,100 5,460 23,950
5 Inventory property sales source rules exception......... 1,050 1,100 1,150 1,250 1,350 1,450 1,550 6,750
6 Deferral of income from controlled foreign corporations 5,800 6,200 6,600 7,000 7,450 7,900 8,400 37,350
(normal tax method)....................................
7 Deferred taxes for financial firms on certain income 960 1,190 1,290 540 0 0 0 1,830
earned overseas........................................
General science, space, and technology:
8 Expensing of research and experimentation expenditures 1,890 1,865 1,885 1,965 2,090 2,245 2,410 10,595
(normal tax method)....................................
9 Credit for increasing research activities............... 1,705 1,010 3,360 3,710 2,970 2,605 1,505 14,150
Energy:
10 Expensing of exploration and development costs, fuels... -80 -15 -30 -10 15 15 15 5
11 Excess of percentage over cost depletion, fuels......... 265 275 280 280 285 290 290 1,425
12 Alternative fuel production credit...................... 1,025 960 905 845 125 125 125 2,125
13 Exception from passive loss limitation for working 30 25 25 25 25 25 25 125
interests in oil and gas properties....................
14 Capital gains treatment of royalties on coal............ 65 65 70 70 75 80 85 380
15 Exclusion of interest on energy facility bonds.......... 115 115 115 120 120 120 120 595
16 Enhanced oil recovery credit............................ 225 260 295 340 390 450 515 1,990
17 New technology credit................................... 50 60 80 90 90 90 85 435
18 Alcohol fuel credits \1\................................ 15 15 15 15 15 15 15 75
19 Tax credit and deduction for clean-fuel burning vehicles 85 90 105 100 80 55 20 360
20 Exclusion from income of conservation subsidies provided 85 80 80 80 85 85 85 415
by public utilities....................................
Natural resources and environment:
21 Expensing of exploration and development costs, nonfuel 15 15 20 20 20 20 20 100
minerals...............................................
22 Excess of percentage over cost depletion, nonfuel 225 230 245 250 265 275 285 1,320
minerals...............................................
23 Exclusion of interest on bonds for water, sewage, and 460 460 470 475 480 480 490 2,395
hazardous waste facilities.............................
24 Capital gains treatment of certain timber income........ 65 65 70 70 75 80 85 380
25 Expensing of multiperiod timber growing costs........... 495 500 530 565 590 605 630 2,920
26 Investment credit and seven-year amortization for 10 10 10 15 15 15 15 70
reforestation expenditures.............................
27 Tax incentives for preservation of historic structures.. 210 220 240 250 265 280 295 1,330
Agriculture:
28 Expensing of certain capital outlays.................... 70 70 75 75 80 85 90 405
29 Expensing of certain multiperiod production costs....... 85 85 90 95 105 110 110 510
30 Treatment of loans forgiven for solvent farmers......... 10 10 10 10 10 10 10 50
31 Capital gains treatment of certain income............... 635 665 695 725 760 795 830 3,805
32 Income averaging for farmers............................ 75 75 80 80 80 85 85 410
33 Deferral of gain on sale of farm refiners............... 10 10 10 10 15 15 15 65
Commerce and housing:
Financial institutions and insurance:
34 Exemption of credit union income....................... 1,470 1,550 1,650 1,765 1,890 2,020 2,155 9,480
35 Excess bad debt reserves of financial institutions..... 60 65 55 45 35 20 5 160
36 Exclusion of interest on life insurance savings........ 13,920 14,985 16,130 17,365 18,870 20,130 21,680 94,175
37 Special alternative tax on small property and casualty 5 5 5 5 5 5 5 25
insurance companies...................................
38 Tax exemption of certain insurance companies owned by 220 225 235 240 250 255 265 1,245
tax-exempt organizations..............................
39 Small life insurance company deduction................. 100 100 100 100 100 105 105 510
Housing:
40 Exclusion of interest on owner-occupied mortgage 905 915 920 930 940 950 955 4,695
subsidy bonds.........................................
41 Exclusion of interest on rental housing bonds.......... 155 155 160 160 160 160 160 800
42 Deductibility of mortgage interest on owner-occupied 56,920 58,815 60,925 63,240 65,955 68,965 72,160 331,245
homes.................................................
43 Deductibility of State and local property tax on owner- 21,215 22,185 23,075 24,000 24,980 25,915 26,840 124,810
occupied homes........................................
44 Deferral of income from post-1987 installment sales.... 995 1,015 1,035 1,055 1,075 1,095 1,115 5,375
45 Capital gains exclusion on home sales.................. 18,000 18,540 19,095 19,670 20,260 20,870 21,495 101,390
46 Exception from passive loss rules for $25,000 of rental 5,315 5,035 4,790 4,555 4,330 4,100 3,885 21,660
loss..................................................
47 Credit for low-income housing investments.............. 2,820 3,055 3,195 3,300 3,405 3,485 3,540 16,925
48 Accelerated depreciation on rental housing (normal tax 3,710 3,985 4,225 4,500 4,765 4,975 5,145 23,610
method)...............................................
Commerce:
49 Cancellation of indebtedness........................... 40 25 15 15 20 20 25 95
50 Exceptions from imputed interest rules................. 160 160 160 165 165 165 165 820
51 Capital gains (except agriculture, timber, iron ore, 39,405 40,575 41,780 43,025 44,300 45,615 46,965 221,685
and coal) (normal tax method).........................
52 Capital gains exclusion of small corporation stock..... 5 5 5 5 5 5 5 25
53 Step-up basis of capital gains at death................ 25,800 27,090 28,240 29,370 30,545 31,765 33,035 152,955
54 Carryover basis of capital gains on gifts.............. 175 185 195 205 210 220 230 1,060
55 Ordinary income treatment of loss from small business 35 35 40 40 40 40 40 200
corporation stock sale................................
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56 Accelerated depreciation of buildings other than rental 1,660 710 -435 -755 -1,115 -1,695 -2,145 -6,145
housing (normal tax method)...........................
57 Accelerated depreciation of machinery and equipment 26,445 27,740 32,830 33,345 34,265 36,390 37,330 174,160
(normal tax method)...................................
58 Expensing of certain small investments (normal tax 1,465 1,590 1,925 1,965 1,920 1,895 1,905 9,610
method)...............................................
59 Amortization of start-up costs (normal tax method)..... 200 205 205 215 215 220 225 1,080
60 Graduated corporation income tax rate (normal tax 6,360 6,300 6,275 6,460 6,490 6,710 6,815 32,750
method)...............................................
61 Exclusion of interest on small issue bonds............. 310 315 315 320 320 325 330 1,610
Transportation:
62 Deferral of tax on shipping companies................... 15 15 15 15 15 15 15 75
63 Exclusion of reimbursed employee parking expenses....... 1,725 1,805 1,895 1,995 2,100 2,210 2,330 10,530
64 Exclusion for employer-provided transit passes.......... 130 150 170 190 215 235 260 1,070
Community and regional development:
65 Investment credit for rehabilitation of structures 25 25 30 30 30 30 30 150
(other than historic)..................................
66 Exclusion of interest for airport, dock, and similar 730 735 740 750 755 765 770 3,780
bonds..................................................
67 Exemption of certain mutuals' and cooperatives' income.. 60 60 60 65 65 65 70 325
68 Empowerment zones and enterprise communities............ 330 445 500 465 330 300 260 1,855
69 Expensing of environmental remediation costs............ 115 150 175 60 -30 -35 -30 140
Education, training, employment, and social services:
Education:
70 Exclusion of scholarship and fellowship income (normal 1,085 1,110 1,120 1,130 1,140 1,150 1,165 5,705
tax method)...........................................
71 HOPE tax credit........................................ 4,595 4,925 5,125 5,145 4,745 4,615 5,335 24,965
72 Lifetime Learning tax credit........................... 2,170 2,375 2,420 2,465 4,405 4,430 4,630 18,350
73 Education Individual Retirement Accounts............... 0 10 25 40 60 80 105 310
74 Deductibility of student-loan interest................. 240 265 310 350 375 395 430 1,860
75 Deferral for State prepaid tuition plans............... 120 175 225 275 320 350 385 1,555
76 Exclusion of interest on student-loan bonds............ 245 250 255 255 255 260 260 1,285
77 Exclusion of interest on bonds for private nonprofit 590 595 600 600 610 615 620 3,045
educational facilities................................
78 Credit for holders of zone academy bonds............... 5 10 20 35 50 65 70 240
79 Exclusion of interest on savings bonds redeemed to 10 15 15 15 15 20 20 85
finance educational expenses..........................
80 Parental personal exemption for students age 19 or over 915 965 1,015 1,055 1,105 1,155 1,185 5,515
81 Child credit \2\....................................... 19,435 19,575 19,480 18,970 18,155 17,535 16,855 90,995
82 Deductibility of charitable contributions (education).. 2,525 2,650 2,765 2,910 3,035 3,140 3,300 15,150
83 Exclusion of employer-provided educational assistance.. 220 235 250 175 0 0 0 425
Training, employment, and social services:
84 Work opportunity tax credit............................ 270 455 465 350 215 95 35 1,160
85 Welfare-to-work tax credit............................. 35 60 80 80 60 25 10 255
86 Exclusion of employer-provided child care.............. 645 670 700 725 765 805 850 3,845
87 Adoption assistance.................................... 125 140 140 125 40 15 10 330
88 Exclusion of employee meals and lodging (other than 650 680 710 740 775 810 845 3,880
military).............................................
89 Credit for child and dependent care expenses........... 2,420 2,390 2,360 2,330 2,305 2,275 2,250 11,520
90 Credit for disabled access expenditures................ 50 50 55 55 55 60 60 285
91 Expensing of costs of removing certain architectural 0 0 5 5 5 5 5 25
barriers to the handicapped...........................
92 Deductibility of charitable contributions, other than 19,220 20,015 20,860 21,780 22,750 23,765 24,895 114,050
education and health..................................
93 Exclusion of certain foster care payments.............. 35 40 40 45 45 50 50 230
94 Exclusion of parsonage allowances...................... 320 340 365 390 415 445 475 2,090
Health:
95 Exclusion of employer contributions for medical 69,610 75,095 80,570 86,175 90,655 95,960 102,725 456,085
insurance premiums and medical care....................
96 Self-employed medical insurance premiums................ 935 1,250 1,380 1,545 2,070 2,905 3,210 11,110
97 Workers' compensation insurance premiums................ 4,420 4,585 4,555 4,935 5,120 5,315 5,515 25,440
98 Medical Savings Accounts................................ 20 30 30 30 30 30 25 145
99 Deductibility of medical expenses....................... 3,695 3,910 4,160 4,440 4,720 5,005 5,305 23,630
100 Exclusion of interest on hospital construction bonds.... 1,210 1,225 1,235 1,250 1,265 1,275 1,290 6,315
101 Deductibility of charitable contributions (health)..... 2,675 2,800 2,930 3,080 3,210 3,315 3,490 16,025
102 Tax credit for orphan drug research.................... 70 80 90 100 115 130 140 575
103 Special Blue Cross/Blue Shield deduction............... 245 315 200 135 180 245 315 1,075
Income security:
104 Exclusion of railroad retirement system benefits........ 395 405 410 415 420 430 430 2,105
105 Exclusion of workers' compensation benefits............ 5,185 5,330 5,785 6,040 6,310 6,575 6,865 31,575
106 Exclusion of public assistance benefits (normal tax 345 360 375 390 405 420 435 2,025
method)................................................
107 Exclusion of special benefits for disabled coal miners. 75 75 70 70 65 60 55 320
108 Exclusion of military disability pensions.............. 130 130 135 140 140 145 150 710
Net exclusion of pension contributions and earnings:
109 Employer plans......................................... 83,780 88,830 92,390 97,085 102,575 108,020 113,705 513,775
110 Individual Retirement Accounts......................... 13,350 15,050 15,975 17,030 17,630 18,250 18,750 87,635
111 Keogh plans............................................ 5,230 5,550 5,895 6,255 6,635 7,040 7,465 33,290
Exclusion of other employee benefits:
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112 Premiums on group term life insurance.................. 1,700 1,740 1,780 1,820 1,860 1,915 1,970 9,345
13 Premiums on accident and disability insurance.......... 185 195 205 215 225 235 245 1,125
114 Income of trusts to finance supplementary unemployment 0 0 0 5 5 5 5 20
benefits...............................................
115 Special ESOP rules..................................... 1,130 1,175 1,205 1,250 1,300 1,360 1,425 6,540
116 Additional deduction for the blind..................... 30 30 30 30 35 35 35 165
117 Additional deduction for the elderly................... 1,785 1,830 1,890 1,955 1,985 2,030 2,110 9,970
118 Tax credit for the elderly and disabled................ 35 35 35 35 35 35 35 175
119 Deductibility of casualty losses....................... 255 265 275 285 295 310 325 1,490
120 Earned income tax credit \3\........................... 4,825 4,700 4,790 4,985 5,205 5,440 5,740 26,160
Social Security:
Exclusion of social security benefits:
121 Social Security benefits for retired workers........... 17,135 18,010 18,885 19,995 21,230 22,505 16,515 99,130
122 Social Security benefits for disabled.................. 2,390 2,595 2,830 3,090 3,375 3,700 3,150 16,145
123 Social Security benefits for dependents and survivors.. 3,775 3,900 4,050 4,210 4,385 4,555 3,625 20,825
Veterans benefits and services:
124 Exclusion of veterans death benefits and disability 2,940 3,070 3,200 3,335 3,490 3,655 3,830 17,510
compensation...........................................
125 Exclusion of veterans pensions......................... 65 70 75 80 85 85 90 415
126 Exclusion of GI bill benefits.......................... 75 85 90 90 95 100 105 480
127 Exclusion of interest on veterans housing bonds........ 40 40 40 40 40 40 40 200
General purpose fiscal assistance:
128 Exclusion of interest on public purpose bonds........... 22,750 22,975 23,205 23,440 23,670 23,905 24,145 118,365
129 Deductibility of nonbusiness State and local taxes other 37,740 40,240 42,390 44,735 47,610 50,530 53,480 238,745
than on owner-occupied homes...........................
130 Tax credit for corporations receiving income from doing 2,515 2,590 2,670 2,600 2,550 2,600 2,650 13,070
business in U.S. possessions...........................
Interest:
131 Deferral of interest on U.S. savings bonds.............. 1,015 1,065 1,115 1,175 1,235 1,295 1,355 6,175
Addendum: Aid to State and local governments:
Deductibility of:
Property taxes on owner-occupied homes................. 21,215 22,185 23,075 24,000 24,980 25,915 26,840 124,810
Nonbusiness State and local taxes other than on owner- 37,740 40,240 42,390 44,735 47,610 50,530 53,480 238,745
occupied homes
Exclusion of interest on State and local bonds for:
Public purposes........................................ 22,750 22,975 23,205 23,440 23,670 23,905 24,145 118,365
Energy facilities...................................... 115 115 115 120 120 120 120 595
Water, sewage, and hazardous waste disposal facilities. 460 460 470 475 480 480 490 2,395
Small-issues........................................... 310 315 315 320 320 325 330 1,610
Owner-occupied mortgage subsidies...................... 905 915 920 930 940 950 955 4,695
Rental housing......................................... 155 155 160 160 160 160 160 800
Airports, docks, and similar facilities................ 730 735 740 750 755 765 770 3,780
Student loans.......................................... 245 250 255 255 255 260 260 1,285
Private nonprofit educational facilities............... 590 595 600 600 610 615 620 3,045
Hospital construction.................................. 1,210 1,225 1,235 1,250 1,265 1,275 1,290 6,315
Veterans' housing...................................... 40 40 40 40 40 40 40 200
Credit for holders of zone academy bonds................ 5 10 20 35 50 65 70 240
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\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: 1999 $760; 2000 $800; 2001 $805; 2002 $810; 2003 $815; 2004 $825; and 2005 $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: 1999
$445; 2000 $550; 2001 $520; 2002 $505; 2003 $460; 2004 $450; and 2005 $420.
\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: 1999 $25,632; 2000 $25,676; 2001 $25,799; 2002 $26,876; 2003 $27,638; 2004 $28,701; and 2005 $29,722.
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 5-2. CORPORATE AND INDIVIDUAL INCOME TAX REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue Loss
----------------------------------------------------------------------------------------------------------------------------------------------------
Corporations Individuals
----------------------------------------------------------------------------------------------------------------------------------------------------
2001- 2001-
1999 2000 2001 2002 2003 2004 2005 2005 1999 2000 2001 2002 2003 2004 2005 2005
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
National Defense
1 Exclusion of benefits and allowances to armed forces personnel...... ....... ....... ....... ....... ....... ....... ....... ........ 2,120 2,140 2,160 2,180 2,200 2,220 2,240 11,000
International affairs:
2 Exclusion of income earned abroad by U.S. citizens.................. ....... ....... ....... ....... ....... ....... ....... ........ 2,330 2,550 2,790 3,040 3,285 3,545 3,825 16,485
3 Exclusion of certain allowances for Federal employees abroad........ ....... ....... ....... ....... ....... ....... ....... ........ 635 665 695 725 760 795 830 3,805
4 Exclusion of income of foreign sales corporations................... 3,640 3,890 4,160 4,460 4,770 5,100 5,460 23,950 ....... ....... ....... ....... ........ ........ ........ ........
5 Inventory property sales source rules exception..................... 1,050 1,100 1,150 1,250 1,350 1,450 1,550 6,750 ....... ....... ....... ....... ........ ........ ........ ........
6 Deferral of income from controlled foreign corporations (normal tax 5,800 6,200 6,600 7,000 7,450 7,900 8,400 37,350 ....... ....... ....... ....... ........ ........ ........ ........
method)............................................................
7 Deferred taxes for financial firms on certain income earned overseas 960 1,190 1,290 540 0 0 0 1,830 ....... ....... ....... ....... ........ ........ ........ ........
General science, space, and technology:
8 Expensing of research and experimentation expenditures (normal tax 1,855 1,830 1,850 1,925 2,050 2,200 2,365 10,390 35 35 35 40 40 45 45 205
method)............................................................
9 Credit for increasing research activities........................... 1,675 995 3,300 3,650 2,925 2,565 1,490 13,930 30 15 60 60 45 40 15 220
Energy:
10 Expensing of exploration and development costs, fuels............... -70 -15 -30 -10 15 15 15 5 -10 0 0 0 0 0 0 0
11 Excess of percentage over cost depletion, fuels..................... 220 225 230 230 235 240 240 1,175 45 50 50 50 50 50 50 250
12 Alternative fuel production credit.................................. 975 915 860 805 125 125 125 2,040 50 45 45 40 0 0 0 85
13 Exception from passive loss limitation for working interests in oil ....... ....... ....... ....... ....... ....... ....... ........ 30 25 25 25 25 25 25 125
and gas properties.................................................
14 Capital gains treatment of royalties on coal........................ ....... ....... ....... ....... ....... ....... ....... ........ 65 65 70 70 75 80 85 380
15 Exclusion of interest on energy facility bonds...................... 30 30 30 30 30 30 30 150 85 85 85 90 90 90 90 445
16 Enhanced oil recovery credit........................................ 205 235 270 310 355 410 470 1,815 20 25 25 30 35 40 45 175
17 New technology credit............................................... 45 50 60 70 70 70 65 335 5 10 20 20 20 20 20 100
18 Alcohol fuel credits \1\............................................ 10 10 10 10 10 10 10 50 5 5 5 5 5 5 5 25
19 Tax credit and deduction for clean-fuel burning vehicles............ 70 75 85 80 65 45 15 290 15 15 20 20 15 10 5 70
20 Exclusion from income of conservation subsidies provided by public -5 -5 -5 -5 0 0 0 -10 90 85 85 85 85 85 85 425
utilities..........................................................
Natural resources and environment:
21 Expensing of exploration and development costs, nonfuel minerals.... 10 10 15 15 15 15 15 75 5 5 5 5 5 5 5 25
22 Excess of percentage over cost depletion, nonfuel minerals.......... 180 185 195 200 210 220 230 1,055 45 45 50 50 55 55 55 265
23 Exclusion of interest on bonds for water, sewage, and hazardous 115 115 120 120 120 120 125 605 345 345 350 355 360 360 365 1,790
waste facilities...................................................
24 Capital gains treatment of certain timber income.................... ....... ....... ....... ....... ....... ....... ....... ........ 65 65 70 70 75 80 85 380
25 Expensing of multiperiod timber growing costs....................... 305 310 330 350 365 375 390 1,810 190 190 200 215 225 230 240 1,110
26 Investment credit and seven-year amortization for reforestation ....... ....... ....... ....... ....... ....... ....... ........ 10 10 10 15 15 15 15 70
expenditures.......................................................
27 Tax incentives for preservation of historic structures.............. 170 180 195 205 215 230 240 1,085 40 40 45 45 50 50 55 245
Agriculture:
28 Expensing of certain capital outlays................................ 10 10 10 10 10 10 10 50 60 60 65 65 70 75 80 355
29 Expensing of certain multiperiod production costs................... 10 10 10 10 15 15 15 65 75 75 80 85 90 95 95 445
30 Treatment of loans forgiven for solvent farmers..................... ....... ....... ....... ....... ....... ....... ....... ........ 10 10 10 10 10 10 10 50
31 Capital gains treatment of certain income........................... ....... ....... ....... ....... ....... ....... ....... ........ 635 665 695 725 760 795 830 3,805
32 Income averaging for farmers........................................ ....... ....... ....... ....... ....... ....... ....... ........ 75 75 80 80 80 85 85 410
33 Deferral of gain on sale of farm refiners........................... 10 10 10 10 15 15 15 65
Commerce and housing:
Financial institutions and insurance:
34 Exemption of credit union income................................... 1,470 1,550 1,650 1,765 1,890 2,020 2,155 9,480 ....... ....... ....... ....... ........ ........ ........ ........
35 Excess bad debt reserves of financial institutions................. 60 65 55 45 35 20 5 160 ....... ....... ....... ....... ........ ........ ........ ........
[[Page 113]]
36 Exclusion of interest on life insurance savings.................... 420 450 485 520 565 605 650 2,825 13,500 14,535 15,645 16,845 18,305 19,525 21,030 91,350
37 Special alternative tax on small property and casualty insurance 5 5 5 5 5 5 5 25 ....... ....... ....... ....... ........ ........ ........ ........
companies.........................................................
38 Tax exemption of certain insurance companies owned by tax-exempt 220 225 235 240 250 255 265 1,245 ....... ....... ....... ....... ........ ........ ........ ........
organizations.....................................................
39 Small life insurance company deduction............................. 100 100 100 100 100 105 105 510 ....... ....... ....... ....... ........ ........ ........ ........
Housing:
40 Exclusion of interest on owner-occupied mortgage subsidy bonds..... 230 230 230 235 235 240 240 1,180 675 685 690 695 705 710 715 3,515
41 Exclusion of interest on rental housing bonds...................... 40 40 40 40 40 40 40 200 115 115 120 120 120 120 120 600
42 Deductibility of mortgage interest on owner-occupied homes......... ....... ....... ....... ....... ....... ....... ....... ........ 56,920 58,815 60,925 63,240 65,955 68,965 72,160 331,245
43 Deductibility of State and local property tax on owner-occupied ....... ....... ....... ....... ....... ....... ....... ........ 21,215 22,185 23,075 24,000 24,980 25,915 26,840 124,810
homes.............................................................
44 Deferral of income from post-1987 installment sales................ 260 265 270 275 280 285 290 1,400 735 750 765 780 795 810 825 3,975
45 Capital gains exclusion on home sales.............................. ....... ....... ....... ....... ....... ....... ....... ........ 18,000 18,540 19,095 19,670 20,260 20,870 21,495 101,390
46 Exception from passive loss rules for $25,000 of rental loss....... ....... ....... ....... ....... ....... ....... ....... ........ 5,315 5,035 4,790 4,555 4,330 4,100 3,885 21,660
47 Credit for low-income housing investments.......................... 2,115 2,290 2,395 2,475 2,555 2,615 2,655 12,695 705 765 800 825 850 870 885 4,230
48 Accelerated depreciation on rental housing (normal tax method)..... 110 120 135 160 180 200 230 905 3,600 3,865 4,090 4,340 4,585 4,775 4,915 22,705
Commerce:
49 Cancellation of indebtedness....................................... ....... ....... ....... ....... ....... ....... ....... ........ 40 25 15 15 20 20 25 95
50 Exceptions from imputed interest rules............................. ....... ....... ....... ....... ....... ....... ....... ........ 160 160 160 165 165 165 165 820
51 Capital gains (except agriculture, timber, iron ore, and coal) ....... ....... ....... ....... ....... ....... ....... ........ 39,405 40,575 41,780 43,025 44,300 45,615 46,965 221,685
(normal tax method)...............................................
52 Capital gains exclusion of small corporation stock................. ....... ....... ....... ....... ....... ....... ....... ........ 5 5 5 5 5 5 5 25
53 Step-up basis of capital gains at death............................ ....... ....... ....... ....... ....... ....... ....... ........ 25,800 27,090 28,240 29,370 30,545 31,765 33,035 152,955
54 Carryover basis of capital gains on gifts.......................... ....... ....... ....... ....... ....... ....... ....... ........ 175 185 195 205 210 220 230 1,060
55 Ordinary income treatment of loss from small business corporation ....... ....... ....... ....... ....... ....... ....... ........ 35 35 40 40 40 40 40 200
stock sale........................................................
56 Accelerated depreciation of buildings other than rental housing 1,195 655 230 15 -260 -625 -905 -1,545 465 55 -665 -770 -855 -1,070 -1,240 -4,600
(normal tax method)...............................................
57 Accelerated depreciation of machinery and equipment (normal tax 21,100 22,085 26,970 27,265 27,965 29,825 30,465 142,490 5,345 5,655 5,860 6,080 6,300 6,565 6,865 31,670
method)...........................................................
58 Expensing of certain small investments (normal tax method)......... 395 490 630 665 630 625 645 3,195 1,070 1,100 1,295 1,300 1,290 1,270 1,260 6,415
59 Amortization of start-up costs (normal tax method)................. 120 125 125 130 130 135 135 655 80 80 80 85 85 85 90 425
60 Graduated corporation income tax rate (normal tax method).......... 6,360 6,300 6,275 6,460 6,490 6,710 6,815 32,750 ....... ....... ....... ....... ........ ........ ........ ........
61 Exclusion of interest on small issue bonds......................... 80 80 80 80 80 80 85 405 230 235 235 240 240 245 245 1,205
Transportation:
62 Deferral of tax on shipping companies............................... 15 15 15 15 15 15 15 75 ....... ....... ....... ....... ........ ........ ........ ........
63 Exclusion of reimbursed employee parking expenses................... ....... ....... ....... ....... ....... ....... ....... ........ 1,725 1,805 1,895 1,995 2,100 2,210 2,330 10,530
64 Exclusion for employer-provided transit passes...................... ....... ....... ....... ....... ....... ....... ....... ........ 130 150 170 190 215 235 260 1,070
Community and regional development:
65 Investment credit for rehabilitation of structures (other than 15 15 15 15 15 15 15 75 10 10 15 15 15 15 15 75
historic)..........................................................
66 Exclusion of interest for airport, dock, and similar bonds.......... 185 185 185 190 190 195 195 955 545 550 555 560 565 570 575 2,825
67 Exemption of certain mutuals' and cooperatives' income.............. 60 60 60 65 65 65 70 325 ....... ....... ....... ....... ........ ........ ........ ........
68 Empowerment zones and enterprise communities........................ 150 205 220 185 130 110 90 735 180 240 280 280 200 190 170 1,120
69 Expensing of environmental remediation costs........................ 95 125 145 50 -25 -30 -25 115 20 25 30 10 -5 -5 -5 25
[[Page 114]]
Education, training, employment, and social services:
Education:
70 Exclusion of scholarship and fellowship income (normal tax method). ....... ....... ....... ....... ....... ....... ....... ........ 1,085 1,110 1,120 1,130 1,140 1,150 1,165 5,705
71 HOPE tax credit.................................................... ....... ....... ....... ....... ....... ....... ....... ........ 4,595 4,925 5,125 5,145 4,745 4,615 5,335 24,965
72 Lifetime Learning tax credit....................................... ....... ....... ....... ....... ....... ....... ....... ........ 2,170 2,375 2,420 2,465 4,405 4,430 4,630 18,350
73 Education Individual Retirement Accounts........................... ....... ....... ....... ....... ....... ....... ....... ........ 0 10 25 40 60 80 105 310
74 Deductibility of student-loan interest............................. ....... ....... ....... ....... ....... ....... ....... ........ 240 265 310 350 375 395 430 1,860
75 Deferral for State prepaid tuition plans........................... ....... ....... ....... ....... ....... ....... ....... ........ 120 175 225 275 320 350 385 1,555
76 Exclusion of interest on student-loan bonds........................ 60 65 65 65 65 65 65 325 185 185 190 190 190 195 195 960
77 Exclusion of interest on bonds for private nonprofit educational 150 150 150 150 155 155 155 765 440 445 450 450 455 460 465 2,280
facilities........................................................
78 Credit for holders of zone academy bonds........................... 5 10 20 35 50 65 70 240 ....... ....... ....... ....... ........ ........ ........ ........
79 Exclusion of interest on savings bonds redeemed to finance ....... ....... ....... ....... ....... ....... ....... ........ 10 15 15 15 15 20 20 85
educational expenses..............................................
80 Parental personal exemption for students age 19 or over............ ....... ....... ....... ....... ....... ....... ....... ........ 915 965 1,015 1,055 1,105 1,155 1,185 5,515
81 Child credit \2\................................................... ....... ....... ....... ....... ....... ....... ....... ........ 19,435 19,575 19,480 18,970 18,155 17,535 16,855 90,995
82 Deductibility of charitable contributions (education).............. 485 515 545 595 615 610 650 3,015 2,040 2,135 2,220 2,315 2,420 2,530 2,650 12,135
83 Exclusion of employer-provided educational assistance.............. ....... ....... ....... ....... ....... ....... ....... ........ 220 235 250 175 0 0 0 425
Training, employment, and social services:
84 Work opportunity tax credit........................................ 230 385 395 300 185 80 30 990 40 70 70 50 30 15 5 170
85 Welfare-to-work tax credit......................................... 30 50 65 70 50 20 10 215 5 10 15 10 10 5 0 40
86 Exclusion of employer-provided child care.......................... ....... ....... ....... ....... ....... ....... ....... ........ 645 670 700 725 765 805 850 3,845
87 Adoption assistance................................................ ....... ....... ....... ....... ....... ....... ....... ........ 125 140 140 125 40 15 10 330
88 Exclusion of employee meals and lodging (other than military)...... ....... ....... ....... ....... ....... ....... ....... ........ 650 680 710 740 775 810 845 3,880
89 Credit for child and dependent care expenses....................... ....... ....... ....... ....... ....... ....... ....... ........ 2,420 2,390 2,360 2,330 2,305 2,275 2,250 11,520
90 Credit for disabled access expenditures............................ 15 15 15 15 15 15 15 75 35 35 40 40 40 45 45 210
91 Expensing of costs of removing certain architectural barriers to 0 0 5 5 5 5 5 25
the handicapped...................................................
92 Deductibility of charitable contributions, other than education and 600 635 680 740 760 755 805 3,740 18,620 19,380 20,180 21,040 21,990 23,010 24,090 110,310
health............................................................
93 Exclusion of certain foster care payments.......................... ....... ....... ....... ....... ....... ....... ....... ........ 35 40 40 45 45 50 50 230
94 Exclusion of parsonage allowances.................................. ....... ....... ....... ....... ....... ....... ....... ........ 320 340 365 390 415 445 475 2,090
Health:
95 Exclusion of employer contributions for medical insurance premiums ....... ....... ....... ....... ....... ....... ....... ........ 69,610 75,095 80,570 86,175 90,655 95,960 102,725 456,085
and medical care...................................................
96 Self-employed medical insurance premiums............................ ....... ....... ....... ....... ....... ....... ....... ........ 935 1,250 1,380 1,545 2,070 2,905 3,210 11,110
97 Workers' compensation insurance premiums............................ ....... ....... ....... ....... ....... ....... ....... ........ 4,420 4,585 4,555 4,935 5,120 5,315 5,515 25,440
98 Medical Savings Accounts........................................... ....... ....... ....... ....... ....... ....... ....... ........ 20 30 30 30 30 30 25 145
99 Deductibility of medical expenses................................... ....... ....... ....... ....... ....... ....... ....... ........ 3,695 3,910 4,160 4,440 4,720 5,005 5,305 23,630
00 Exclusion of interest on hospital construction bonds................ 305 310 310 315 320 320 325 1,590 905 915 925 935 945 955 965 4,725
101 Deductibility of charitable contributions (health).................. 585 620 660 720 740 735 780 3,635 2,090 2,180 2,270 2,360 2,470 2,580 2,710 12,390
102 Tax credit for orphan drug research................................. 70 80 90 100 115 130 140 575 ....... ....... ....... ....... ........ ........ ........ ........
103 Special Blue Cross/Blue Shield deduction............................ 245 315 200 135 180 245 315 1,075 ....... ....... ....... ....... ........ ........ ........ ........
Income security:
104 Exclusion of railroad retirement system benefits.................... ....... ....... ....... ....... ....... ....... ....... ........ 395 405 410 415 420 430 430 2,105
105 Exclusion of workers' compensation benefits......................... ....... ....... ....... ....... ....... ....... ....... ........ 5,185 5,330 5,785 6,040 6,310 6,575 6,865 31,575
106 Exclusion of public assistance benefits (normal tax method)......... ....... ....... ....... ....... ....... ....... ....... ........ 345 360 375 390 405 420 435 2,025
[[Page 115]]
107 Exclusion of special benefits for disabled coal miners.............. ....... ....... ....... ....... ....... ....... ....... ........ 75 75 70 70 65 60 55 320
108 Exclusion of military disability pensions........................... ....... ....... ....... ....... ....... ....... ....... ........ 130 130 135 140 140 145 150 710
Net exclusion of pension contributions and earnings:
109 Employer plans..................................................... ....... ....... ....... ....... ....... ....... ....... ........ 83,780 88,830 92,390 97,085 102,575 108,020 113,705 513,775
110 Individual Retirement Accounts..................................... ....... ....... ....... ....... ....... ....... ....... ........ 13,350 15,050 15,975 17,030 17,630 18,250 18,750 87,635
111 Keogh plans........................................................ ....... ....... ....... ....... ....... ....... ....... ........ 5,230 5,550 5,895 6,255 6,635 7,040 7,465 33,290
Exclusion of other employee benefits:
112 Premiums on group term life insurance.............................. ....... ....... ....... ....... ....... ....... ....... ........ 1,700 1,740 1,780 1,820 1,860 1,915 1,970 9,345
113 Premiums on accident and disability insurance...................... ....... ....... ....... ....... ....... ....... ....... ........ 185 195 205 215 225 235 245 1,125
114 Income of trusts to finance supplementary unemployment benefits.... 0 0 0 5 5 5 5 20 ....... ....... ....... ....... ........ ........ ........ ........
115 Special ESOP rules................................................. 860 890 915 950 990 1,040 1,090 4,985 270 285 290 300 310 320 335 1,555
116 Additional deduction for the blind................................. ....... ....... ....... ....... ....... ....... ....... ........ 30 30 30 30 35 35 35 165
117 Additional deduction for the elderly............................... ....... ....... ....... ....... ....... ....... ....... ........ 1,785 1,830 1,890 1,955 1,985 2,030 2,110 9,970
118 Tax credit for the elderly and disabled............................ ....... ....... ....... ....... ....... ....... ....... ........ 35 35 35 35 35 35 35 175
119 Deductibility of casualty losses................................... ....... ....... ....... ....... ....... ....... ....... ........ 255 265 275 285 295 310 325 1,490
120 Earned income tax credit \3\....................................... ....... ....... ....... ....... ....... ....... ....... ........ 4,825 4,700 4,790 4,985 5,205 5,440 5,740 26,160
Social Security:
Exclusion of social security benefits:
121 Social Security benefits for retired workers....................... ....... ....... ....... ....... ....... ....... ....... ........ 17,135 18,010 18,885 19,995 21,230 22,505 16,515 99,130
122 Social Security benefits for disabled.............................. ....... ....... ....... ....... ....... ....... ....... ........ 2,390 2,595 2,830 3,090 3,375 3,700 3,150 16,145
123 Social Security benefits for dependents and survivors.............. ....... ....... ....... ....... ....... ....... ....... ........ 3,775 3,900 4,050 4,210 4,385 4,555 3,625 20,825
Veterans benefits and services:
124 Exclusion of veterans death benefits and disability compensation.... ....... ....... ....... ....... ....... ....... ....... ........ 2,940 3,070 3,200 3,335 3,490 3,655 3,830 17,510
125 Exclusion of veterans pensions...................................... ....... ....... ....... ....... ....... ....... ....... ........ 65 70 75 80 85 85 90 415
126 Exclusion of GI bill benefits....................................... ....... ....... ....... ....... ....... ....... ....... ........ 75 85 90 90 95 100 105 480
127 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:
128 Exclusion of interest on public purpose bonds....................... 5,735 5,790 5,850 5,910 5,965 6,025 6,085 29,835 17,015 17,185 17,355 17,530 17,705 17,880 18,060 88,530
129 Deductibility of nonbusiness State and local taxes other than on ....... ....... ....... ....... ....... ....... ....... ........ 37,740 40,240 42,390 44,735 47,610 50,530 53,480 238,745
owner-occupied homes...............................................
130 Tax credit for corporations receiving income from doing business in 2,515 2,590 2,670 2,600 2,550 2,600 2,650 13,070 ....... ....... ....... ....... ........ ........ ........ ........
U.S. possessions...................................................
Interest:
131 Deferral of interest on U.S. savings bonds.......................... ....... ....... ....... ....... ....... ....... ....... ........ 1,015 1,065 1,115 1,175 1,235 1,295 1,355 6,175
Addendum: Aid to State and local governments:
Deductibility of:
Property taxes on owner-occupied homes............................. ....... ....... ....... ....... ....... ....... ....... ........ 21,215 22,185 23,075 24,000 24,980 25,915 26,840 124,810
Nonbusiness State and local taxes other than on owner-occupied ....... ....... ....... ....... ....... ....... ....... ........ 37,740 40,240 42,390 44,735 47,610 50,530 53,480 238,745
homes.............................................................
Exclusion of interest on State and local bonds for:
Public purposes.................................................... 5,735 5,790 5,850 5,910 5,965 6,025 6,085 29,835 17,015 17,185 17,355 17,530 17,705 17,880 18,060 88,530
Energy facilities.................................................. 30 30 30 30 30 30 30 150 85 85 85 90 90 90 90 445
Water, sewage, and hazardous waste disposal facilities............. 115 115 120 120 120 120 125 605 345 345 350 355 360 360 365 1,790
Small-issues....................................................... 80 80 80 80 80 80 85 405 230 235 235 240 240 245 245 1,205
Owner-occupied mortgage subsidies.................................. 230 230 230 235 235 240 240 1,180 675 685 690 695 705 710 715 3,515
Rental housing..................................................... 40 40 40 40 40 40 40 200 115 115 120 120 120 120 120 600
Airports, docks, and similar facilities............................ 185 185 185 190 190 195 195 955 545 550 555 560 565 570 575 2,825
Student loans...................................................... 60 65 65 65 65 65 65 325 185 185 190 190 190 195 195 960
Private nonprofit educational facilities........................... 150 150 150 150 155 155 155 765 440 445 450 450 455 460 465 2,280
Hospital construction.............................................. 305 310 310 315 320 320 325 1,590 905 915 925 935 945 955 965 4,725
Veterans' housing.................................................. 10 10 10 10 10 10 10 50 30 30 30 30 30 30 30 150
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Credit for holders of zone academy bonds............................ 5 10 20 35 50 65 70 240 ....... ....... ....... ....... ........ ........ ........ ........
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\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: 1999 $760; 2000 $800; 2001 $805; 2002 $810; 2003 $815; 2004 $825; and
2005 $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: 1999 $445; 2000 $550; 2001 $520; 2002 $505; 2003 $460; 2004 $450; and 2005 $420.
\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: 1999 $25,632; 2000 $25,676; 2001 $25,799; 2002 $26,876; 2003 $27,638; 2004
$28,701; and 2005 $29,722.
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.
[[Page 117]]
Table 5-3. MAJOR TAX EXPENDITURES IN THE INCOME TAX, RANKED BY TOTAL 2001 REVENUE LOSS
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Provision 2001 2001-2005
----------------------------------------------------------------------------------------------------------------
Net exclusion of pension contributions and earnings: Employer plans........... 92,390 513,775
Exclusion of employer contributions for medical insurance premiums and medical 80,570 456,085
care.........................................................................
Deductibility of mortgage interest on owner-occupied homes.................... 60,925 331,245
Deductibility of nonbusiness State and local taxes other than on owner- 42,390 238,745
occupied homes...............................................................
Capital gains (except agriculture, timber, iron ore, and coal) (normal tax 41,780 221,685
method)......................................................................
Accelerated depreciation of machinery and equipment (normal tax method)....... 32,830 174,160
Step-up basis of capital gains at death....................................... 28,240 152,955
Deductibility of charitable contributions, total.............................. 26,555 145,225
Exclusion of interest on public purpose bonds................................. 23,205 118,365
Deductibility of State and local property tax on owner-occupied homes......... 23,075 124,810
Child credit \2\.............................................................. 19,480 90,995
Capital gains exclusion on home sales......................................... 19,095 101,390
Exclusion of Social Security benefits for retired workers..................... 18,885 99,130
Exclusion of interest on life insurance savings............................... 16,130 94,175
Net exclusion of pension contributions and earnings: Individual Retirement 15,975 87,635
Accounts.....................................................................
Deferral of income from controlled foreign corporations (normal tax method)... 6,600 37,350
Graduated corporation income tax rate (normal tax method)..................... 6,275 32,750
Net exclusion of pension contributions and earnings: Keogh plans.............. 5,895 33,290
Exclusion of workers' compensation benefits................................... 5,785 31,575
HOPE tax credit............................................................... 5,125 24,965
Exclusion of interest on non-public purpose State and local debt.............. 4,850 24,720
Earned income tax credit \3\.................................................. 4,790 26,160
Exception from passive loss rules for $25,000 of rental loss.................. 4,790 21,660
Workers' compensation insurance premiums...................................... 4,555 25,440
Accelerated depreciation on rental housing (normal tax method)................ 4,225 23,610
Exclusion of income of foreign sales corporations............................. 4,160 23,950
Deductibility of medical expenses............................................. 4,160 23,630
Exclusion of Social Security benefits for dependents and survivors............ 4,050 20,825
Credit for increasing research activities..................................... 3,360 14,150
Exclusion of veterans death benefits and disability compensation.............. 3,200 17,510
Credit for low-income housing investments..................................... 3,195 16,925
Exclusion of Social Security benefits for disabled............................ 2,830 16,145
Exclusion of income earned abroad by U.S. citizens............................ 2,790 16,485
Tax credit for corporations receiving income from doing business in U.S. 2,670 13,070
possessions..................................................................
Lifetime Learning tax credit.................................................. 2,420 18,350
Credit for child and dependent care expenses.................................. 2,360 11,520
Exclusion of benefits and allowances to armed forces personnel................ 2,160 11,000
Expensing of certain small investments (normal tax method).................... 1,925 9,610
Exclusion of reimbursed employee parking expenses............................. 1,895 10,530
Additional deduction for the elderly.......................................... 1,890 9,970
Expensing of research and experimentation expenditures (normal tax method).... 1,885 10,595
Exclusion of other employee benefits: Premiums on group term life insurance... 1,780 9,345
Exemption of credit union income.............................................. 1,650 9,480
Self-employed medical insurance premiums...................................... 1,380 11,110
Deferred taxes for financial firms on certain income earned overseas.......... 1,290 1,830
Special ESOP rules............................................................ 1,205 6,540
Inventory property sales source rules exception............................... 1,150 6,750
Exclusion of scholarship and fellowship income (normal tax method)............ 1,120 5,705
Deferral of interest on U.S. savings bonds.................................... 1,115 6,175
Deferral of income from post-1987 installment sales........................... 1,035 5,375
Parental personal exemption for students age 19 or over....................... 1,015 5,515
Alternative fuel production credit............................................ 905 2,125
Exclusion of employee meals and lodging (other than military)................. 710 3,880
Exclusion of employer-provided child care..................................... 700 3,845
Capital gains treatment of certain income from agriculture.................... 695 3,805
Exclusion of certain allowances for Federal employees abroad.................. 695 3,805
Expensing of multiperiod timber growing costs................................. 530 2,920
Excess of percentage over cost depletion, fuels and nonfuel minerals.......... 525 2,745
Empowerment zones and enterprise communities.................................. 500 1,855
Work opportunity tax credit................................................... 465 1,160
Exclusion of railroad retirement system benefits.............................. 410 2,105
Exclusion of public assistance benefits (normal tax method)................... 375 2,025
Exclusion of parsonage allowances............................................. 365 2,090
Deductibility of student-loan interest........................................ 310 1,860
Enhanced oil recovery credit.................................................. 295 1,990
Deductibility of casualty losses.............................................. 275 1,490
Exclusion of employer-provided educational assistance......................... 250 425
Tax incentives for preservation of historic structures........................ 240 1,330
Tax exemption of certain insurance companies owned by tax-exempt organizations 235 1,245
[[Page 118]]
Deferral for State prepaid tuition plans...................................... 225 1,555
Amortization of start-up costs (normal tax method)............................ 205 1,080
Exclusion of other employee benefits: Premiums on accident and disability 205 1,125
insurance....................................................................
Special Blue Cross/Blue Shield deduction...................................... 200 1,075
Carryover basis of capital gains on gifts..................................... 195 1,060
Expensing of environmental remediation costs.................................. 175 140
Exclusion for employer-provided transit passes................................ 170 1,070
Exceptions from imputed interest rules........................................ 160 820
Adoption assistance........................................................... 140 330
Exclusion of military disability pensions..................................... 135 710
Tax credit and deduction for clean-fuel burning vehicles...................... 105 360
Small life insurance company deduction........................................ 100 510
Expensing of certain multiperiod production costs............................. 90 510
Exclusion of GI bill benefits................................................. 90 480
Tax credit for orphan drug research........................................... 90 575
Welfare-to-work tax credit.................................................... 80 255
Income averaging for farmers.................................................. 80 410
New technology credit......................................................... 80 435
Exclusion from income of conservation subsidies provided by public utilities.. 80 415
Exclusion of veterans pensions................................................ 75 415
Expensing of certain capital outlays.......................................... 75 405
Capital gains treatment of royalties on coal.................................. 70 380
Exclusion of special benefits for disabled coal miners........................ 70 320
Capital gains treatment of certain timber income.............................. 70 380
Exemption of certain mutuals' and cooperatives' income........................ 60 325
Credit for disabled access expenditures....................................... 55 285
Excess bad debt reserves of financial institutions............................ 55 160
Ordinary income treatment of loss from small business corporation stock sale.. 40 200
Exclusion of certain foster care payments..................................... 40 230
Tax credit for the elderly and disabled....................................... 35 175
Medical Savings Accounts...................................................... 30 145
Additional deduction for the blind............................................ 30 165
Investment credit for rehabilitation of structures (other than historic)...... 30 150
Education Individual Retirement Accounts...................................... 25 310
Exception from passive loss limitation for working interests in oil and gas 25 125
properties...................................................................
Credit for holders of zone academy bonds...................................... 20 240
Expensing of exploration and development costs, nonfuel minerals.............. 20 100
Cancellation of indebtedness.................................................. 15 95
Alcohol fuel credits \1\...................................................... 15 75
Exclusion of interest on savings bonds redeemed to finance educational 15 85
expenses.....................................................................
Deferral of tax on shipping companies......................................... 15 75
Deferral of gain on sale of farm refiners..................................... 10 65
Investment credit and seven-year amortization for reforestation expenditures.. 10 70
Treatment of loans forgiven for solvent farmers............................... 10 50
Capital gains exclusion of small corporation stock............................ 5 25
Special alternative tax on small property and casualty insurance companies.... 5 25
Expensing of costs of removing certain architectural barriers to the 5 25
handicapped..................................................................
Income of trusts to finance supplementary unemployment benefits............... 0 20
Expensing of exploration and development costs, fuels......................... -30 5
Accelerated depreciation of buildings other than rental housing (normal tax -435 -6,145
method)......................................................................
----------------------------------------------------------------------------------------------------------------
\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: 1999 $760; 2000 $800; 2001 $805; 2002 $810; 2003 $815; 2004
$825; and 2005 $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: 1999 $445; 2000 $550; 2001 $520; 2002 $505; 2003 $460; 2004 $450; and 2005
$420.
\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: 1999 $25,630; 2000 $25,675; 2001 $25,800; 2002 $26,875; 2003
$27,640; 2004 $28,700; and 2005 $29,720.
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.
Note: Three categories in the table are aggregated: Deductibility of charitable contributions, exclusion of
interest for non-public purpose State and local debt, and excess of percentage over cost depletion for fuels
and nonfuel minerals.
[[Page 119]]
Table 5-4. PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR ACTIVITY IN CALENDAR YEAR 1999
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Present
Provision Value of
Revenue Loss
----------------------------------------------------------------------------------------------------------------
1 Deferral of income from controlled foreign corporations (normal tax method).......... 5,960
2 Deferred taxes for financial firms on income earned overseas......................... 965
3 Expensing of research and experimentation expenditures (normal tax method)........... 2,570
4 Expensing of exploration and development costs--fuels................................ 110
5 Expensing of exploration and development costs--nonfuels............................. 10
6 Expensing of multiperiod timber growing costs........................................ 240
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........................... 22,100
10 Accelerated depreciation of rental housing (normal tax method)....................... 2,845
11 Accelerated depreciation of buildings other than rental housing (normal tax method).. 335
12 Accelerated depreciation of machinery and equipment (normal tax method).............. 32,780
13 Expensing of certain small investments (normal tax method)........................... 1,030
14 Amortization of start-up costs (normal tax method)................................... 170
15 Deferral of tax on shipping companies................................................ 15
16 Deferral for state prepaid tuition plans............................................. 170
17 Credit for holders of zone academy bonds............................................. 220
18 Credit for low-income housing investments............................................ 2,730
19 Exclusion of pension contributions--employer plans................................... 95,620
20 Exclusion of IRA contributions and earnings.......................................... 6,005
21 Exclusion of contributions and earnings for Keogh plans.............................. 3,510
22 Exclusion of interest on public-purpose bonds........................................ 26,995
23 Exclusion of interest on non-public purpose bonds.................................... 3,950
24 Deferral of interest on U.S. savings bonds........................................... 405
----------------------------------------------------------------------------------------------------------------
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 outlay-equivalent 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 120]]
Table 5-5. OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX
(In millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Outlay Equivalents
--------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004 2005 2001-2005
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Defense
1 Exclusion of benefits and allowances to armed forces 2,470 2,495 2,520 2,545 2,570 2,600 2,630 12,865
personnel..............................................
International affairs:
2 Exclusion of income earned abroad by U.S. citizens...... 3,940 4,270 4,625 5,000 5,370 5,760 6,185 26,940
3 Exclusion of income of foreign sales corporations....... 5,600 5,980 6,400 6,860 7,340 7,850 8,400 36,850
4 Inventory property sales source rules exception......... 1,620 1,690 1,770 1,920 2,080 2,230 2,380 10,380
5 Deferral of income from controlled foreign corporations 5,800 6,200 6,600 7,000 7,450 7,900 8,400 37,350
(normal tax method)....................................
6 Deferred taxes for financial firms on income earned 960 1,190 1,290 540 0 0 0 1,830
overseas...............................................
General science, space, and technology:
7 Expensing of research and experimentation expenditures 1,890 1,865 1,875 1,960 2,090 2,245 2,415 10,585
(normal tax method)....................................
8 Credit for increasing research activities............... 2,625 1,550 5,175 5,710 4,570 4,010 2,320 21,785
Energy:
9 Expensing of exploration and development costs, fuels... -80 -20 -30 -10 15 15 15 5
10 Excess of percentage over cost depletion, fuels......... 325 330 335 340 345 350 355 1,725
11 Alternative fuel production credit...................... 1,495 1,400 1,315 1,235 775 180 180 3,685
12 Exception from passive loss limitation for working 30 25 25 25 25 25 25 125
interests in oil and gas properties....................
13 Capital gains treatment of royalties on coal............ 85 85 95 95 100 105 115 510
14 Exclusion of interest on energy facility bonds.......... 165 165 165 170 170 170 170 845
15 Enhanced oil recovery credit............................ 315 360 415 480 550 635 730 2,810
16 New technology credit................................... 70 85 120 130 125 125 125 625
17 Alcohol fuel credits \1\................................ 15 15 15 15 15 15 15 75
18 Tax credit and deduction for clean-fuel burning vehicles 110 125 135 125 105 70 25 460
19 Exclusion from income of conservation subsidies provided 115 110 105 110 115 115 115 560
by public utilities....................................
Natural resources and environment:
20 Expensing of exploration and development costs, nonfuel 15 15 15 15 15 20 20 85
minerals...............................................
21 Excess of percentage over cost depletion, nonfuel 275 285 295 310 320 335 350 1,610
minerals...............................................
22 Exclusion of interest on bonds for water, sewage, and 660 660 670 680 685 685 705 3,425
hazardous waste facilities.............................
23 Capital gains treatment of certain timber income........ 85 85 95 95 100 105 115 510
24 Expensing of multiperiod timber growing costs........... 495 500 530 565 585 610 630 2,920
25 Investment credit and seven-year amortization for 15 15 15 15 15 15 15 75
reforestation expenditures.............................
26 Tax incentives for preservation of historic structures.. 205 225 240 255 265 280 295 1,335
Agriculture:
27 Expensing of certain capital outlays.................... 65 70 75 75 80 85 85 400
28 Expensing of certain multiperiod production costs....... 85 85 90 95 100 105 110 500
29 Treatment of loans forgiven for solvent farmers......... 10 10 10 10 10 10 10 50
30 Capital gains treatment of certain income............... 845 885 925 965 1,015 1,060 1,105 5,070
31 Income averaging for farmers............................ 75 75 80 80 80 85 85 410
32 Deferral of gain on sale of farm refiners............... 10 10 10 10 15 15 15 65
Commerce and housing:
Financial institutions and insurance:
33 Exemption of credit union income....................... 1,910 2,015 2,160 2,320 2,490 2,675 2,865 12,510
34 Excess bad debt reserves of financial institutions..... 75 85 70 55 40 25 5 195
35 Exclusion of interest on life insurance savings........ 13,920 14,985 16,130 17,365 18,870 20,130 21,680 94,175
36 Special alternative tax on small property and casualty 5 5 5 5 5 5 5 25
insurance companies...................................
37 Tax exemption of certain insurance companies owned by 295 300 315 320 335 340 355 1,665
tax-exempt organizations..............................
38 Small life insurance company deduction................. 135 135 135 135 135 140 140 685
Housing:
39 Exclusion of interest on owner-occupied mortgage 1,300 1,310 1,320 1,330 1,345 1,365 1,370 6,730
subsidy bonds.........................................
40 Exclusion of interest on rental housing bonds.......... 220 220 230 230 230 230 230 1,150
41 Deductibility of mortgage interest on owner-occupied 56,920 58,815 60,925 63,240 65,955 68,965 72,160 331,245
homes.................................................
42 Deductibility of State and local property tax on owner- 21,215 22,185 23,075 24,000 24,980 25,915 26,840 124,810
occupied homes........................................
43 Deferral of income from post-1987 installment sales.... 995 1,015 1,035 1,055 1,075 1,095 1,115 5,375
44 Capital gains exclusion on home sales.................. 22,500 23,175 23,870 24,590 25,325 26,090 26,870 126,745
45 Exception from passive loss rules for $25,000 of rental 5,315 5,035 4,790 4,555 4,330 4,100 3,885 21,660
loss..................................................
46 Credit for low-income housing investments.............. 0 0 0 5 5 5 5 20
47 Accelerated depreciation on rental housing (normal tax 3,710 3,985 4,225 4,495 4,760 4,975 5,145 23,600
method)...............................................
Commerce:
48 Cancellation of indebtedness........................... 40 25 15 15 20 20 25 95
49 Exceptions from imputed interest rules................. 160 160 160 165 165 165 165 820
50 Capital gains (except agriculture, timber, iron ore, 52,540 54,100 55,705 57,365 59,065 60,820 62,620 295,575
and coal) (normal tax method).........................
51 Capital gains exclusion of small corporation stock..... 5 5 5 5 5 5 5 25
52 Step-up basis of capital gains at death................ 34,400 36,120 37,655 39,160 40,725 42,355 44,045 203,940
53 Carryover basis of capital gains on gifts.............. 175 185 195 205 210 220 230 1,060
54 Ordinary income treatment of loss from small business 45 45 55 55 55 55 55 275
corporation stock sale................................
55 Accelerated depreciation of buildings other than rental 1,655 705 -435 -755 -1,110 -1,695 -2,140 -6,135
housing (normal tax method)...........................
[[Page 121]]
56 Accelerated depreciation of machinery and equipment 26,440 27,735 32,825 33,340 34,260 36,380 37,325 174,130
(normal tax method)...................................
57 Expensing of certain small investments (normal tax 1,465 1,590 1,920 1,965 1,915 1,890 1,900 9,590
method)...............................................
58 Amortization of start-up costs (normal tax method)..... 200 205 205 215 215 220 225 1,080
59 Graduated corporation income tax rate (normal tax 9,790 9,690 9,655 9,940 9,985 10,325 10,485 50,390
method)...............................................
60 Exclusion of interest on small issue bonds............. 445 450 450 460 460 465 475 2,310
Transportation:
61 Deferral of tax on shipping companies................... 20 20 20 20 20 20 20 100
62 Exclusion of reimbursed employee parking expenses....... 2,225 2,330 2,450 2,575 2,710 2,855 3,005 13,595
63 Exclusion for employer-provided transit passes.......... 180 205 235 265 295 330 360 1,485
Community and regional development:
64 Investment credit for rehabilitation of structures 25 25 25 25 25 25 30 130
(other than historic)..................................
65 Exclusion of interest for airport, dock, and similar 1,045 1,050 1,060 1,075 1,085 1,095 1,105 5,420
bonds..................................................
66 Exemption of certain mutuals' and cooperatives' income.. 60 60 60 65 65 65 70 325
67 Empowerment zones and enterprise communities............ 325 445 500 470 325 300 265 1,860
68 Expensing of environmental remediation costs............ 150 200 235 80 -40 -50 -40 185
Education, training, employment, and social services:
Education:
69 Exclusion of scholarship and fellowship income (normal 1,190 1,220 1,235 1,240 1,255 1,265 1,280 6,275
tax method)...........................................
70 HOPE tax credit........................................ 5,890 6,310 6,570 6,595 6,080 5,915 6,845 32,005
71 Lifetime Learning tax credit........................... 2,780 3,045 3,100 3,160 5,645 5,675 5,935 23,515
72 Education Individual Retirement Accounts............... 0 10 25 40 60 80 105 310
73 Deductibility of student-loan interest................. 300 335 390 440 470 495 535 2,330
74 Deferral for State prepaid tuition plans............... 120 175 225 275 320 355 385 1,560
75 Exclusion of interest on student-loan bonds............ 355 360 365 365 365 370 370 1,835
76 Exclusion of interest on bonds for private nonprofit 845 855 860 860 875 880 890 4,365
educational facilities................................
77 Credit for holders of zone academy bonds............... 5 15 30 50 75 90 100 345
78 Exclusion of interest on savings bonds redeemed to 15 20 20 20 20 30 30 120
finance educational expenses..........................
79 Parental personal exemption for students age 19 or over 1,010 1,070 1,125 1,165 1,225 1,280 1,310 6,105
80 Child credit \2\....................................... 25,915 26,100 25,975 25,290 24,205 23,385 22,475 121,330
81 Deductibility of charitable contributions (education).. 3,435 3,685 3,850 4,040 4,250 4,395 4,610 21,145
82 Exclusion of employer-provided educational assistance.. 275 290 310 215 0 0 0 525
Training, employment, and social services:
83 Work opportunity tax credit............................ 270 455 465 350 215 95 35 1,160
84 Welfare-to-work tax credit............................. 35 60 80 80 60 25 10 255
85 Exclusion of employer provided child care.............. 860 890 930 970 1,020 1,075 1,135 5,130
86 Adoption assistance.................................... 160 175 180 160 55 20 10 425
87 Exclusion of employee meals and lodging (other than 795 830 865 905 945 990 1,030 4,735
military).............................................
88 Credit for child and dependent care expenses........... 3,225 3,185 3,145 3,110 3,075 3,035 3,000 15,365
89 Credit for disabled access expenditures................ 65 65 75 75 75 80 80 385
90 Expensing of costs of removing certain architectural 0 0 5 5 5 5 5 25
barriers to the handicapped...........................
91 Deductibility of charitable contributions, other than 25,750 26,955 28,115 29,380 30,790 32,200 33,755 154,240
education and health..................................
92 Exclusion of certain foster care payments.............. 45 50 50 55 55 60 60 280
93 Exclusion of parsonage allowances...................... 395 420 450 480 515 550 585 2,580
Health:
94 Exclusion of employer contributions for medical 88,730 95,950 103,085 110,390 115,840 122,545 131,495 583,355
insurance premiums and medical care....................
95 Self-employed medical insurance premiums................ 1,145 1,535 1,700 1,900 2,550 3,580 3,955 13,685
96 Workers' compensation insurance premiums................ 5,520 5,730 5,945 6,170 6,400 6,645 3,895 29,055
97 Medical Savings Accounts................................ 30 40 45 45 45 40 35 210
98 Deductibility of medical expenses....................... 3,695 3,910 4,160 4,440 4,720 5,005 5,305 23,630
99 Exclusion of interest on hospital construction bonds.... 1,735 1,755 1,770 1,790 1,815 1,830 1,850 9,055
100 Deductibility of charitable contributions (health)...... 3,640 3,910 4,095 4,300 4,525 4,665 4,900 22,485
101 Tax credit for orphan drug research..................... 70 80 90 100 115 130 140 575
102 Special Blue Cross/Blue Shield deduction................ 325 420 270 180 240 325 420 1,435
Income security:
103 Exclusion of railroad retirement system benefits........ 395 405 410 415 420 430 430 2,105
104 Exclusion of workers' compensation benefits............. 5,185 5,330 5,785 6,040 6,310 6,575 6,865 31,575
105 Exclusion of public assistance benefits (normal tax 345 360 375 390 405 420 435 2,025
method)................................................
106 Exclusion of special benefits for disabled coal miners.. 75 75 70 70 65 60 55 320
107 Exclusion of military disability pensions............... 130 130 135 140 140 145 150 710
Net exclusion of pension contributions and earnings:
108 Employer plans......................................... 97,960 104,060 108,190 113,770 120,275 126,700 133,400 602,335
109 Individual Retirement Accounts......................... 18,290 20,025 21,360 22,770 23,695 24,645 25,445 117,915
110 Keogh plans............................................ 6,630 7,040 7,475 7,930 8,415 8,925 9,465 42,210
Exclusion of other employee benefits:
111 Premiums on group term life insurance.................. 2,240 2,290 2,340 2,395 2,445 2,520 2,590 12,290
[[Page 122]]
112 Premiums on accident and disability insurance.......... 235 250 260 275 290 305 315 1,445
113 Income of trusts to finance supplementary unemployment 0 0 0 5 5 5 5 20
benefits...............................................
114 Special ESOP rules...................................... 1,565 1,630 1,670 1,730 1,800 1,885 1,975 9,060
115 Additional deduction for the blind...................... 35 35 40 40 40 45 45 210
116 Additional deduction for the elderly.................... 2,155 2,215 2,285 2,360 2,400 2,455 2,555 12,055
117 Tax credit for the elderly and disabled................. 45 45 45 45 45 45 45 225
118 Deductibility of casualty losses........................ 280 290 300 315 325 340 355 1,635
119 Earned income tax credit \3\............................ 5,360 5,220 5,320 5,540 5,785 6,045 6,380 29,070
Social Security:
Exclusion of social security benefits:
120 Social Security benefits for retired workers........... 17,135 18,010 18,885 19,995 21,230 22,505 16,515 99,130
121 Social Security benefits for disabled.................. 2,390 2,595 2,830 3,090 3,375 3,700 3,150 16,145
122 Social Security benefits for dependents and survivors.. 3,775 3,900 4,050 4,210 4,385 4,555 3,625 20,825
Veterans benefits and services:
123 Exclusion of veterans death benefits and disability 2,940 3,070 3,200 3,335 3,490 3,655 3,830 17,510
compensation...........................................
124 Exclusion of veterans pensions.......................... 65 70 75 80 85 85 90 415
125 Exclusion of GI bill benefits........................... 75 85 90 90 95 100 105 480
126 Exclusion of interest on veterans housing bonds......... 60 60 60 60 60 60 60 300
General purpose fiscal assistance:
127 Exclusion of interest on public purpose bonds........... 32,600 32,925 33,250 33,590 33,920 34,255 34,600 169,615
128 Deductibility of nonbusiness State and local taxes other 37,740 40,240 42,390 44,735 47,610 50,530 53,480 238,745
than on owner-occupied homes...........................
129 Tax credit for corporations receiving income from doing 3,590 3,700 3,815 3,715 3,640 3,715 3,785 18,670
business in U.S. possessions...........................
Interest:
130 Deferral of interest on U.S. savings bonds.............. 1,015 1,065 1,115 1,175 1,235 1,295 1,355 6,175
Addendum: Aid to State and local governments:
Deductibility of:
Property taxes on owner-occupied homes................. 21,215 22,185 23,075 24,000 24,980 25,915 26,840 124,810
Nonbusiness State and local taxes other than on owner- 37,740 40,240 42,390 44,735 47,610 50,530 53,480 238,745
occupied homes........................................
Exclusion of interest on State and local bonds for:
Public purposes........................................ 32,600 32,925 33,250 33,590 33,920 34,255 34,600 169,615
Energy facilities...................................... 165 165 165 170 170 170 170 845
Water, sewage, and hazardous waste disposal facilities. 660 660 670 680 685 685 705 3,425
Small-issues........................................... 445 450 450 460 460 465 475 2,310
Owner-occupied mortgage subsidies...................... 1,300 1,310 1,320 1,330 1,345 1,365 1,370 6,730
Rental housing......................................... 220 220 230 230 230 230 230 1,150
Airports, docks, and similar facilities................ 1,045 1,050 1,060 1,075 1,085 1,095 1,105 5,420
Student loans.......................................... 355 360 365 365 365 370 370 1,835
Private nonprofit educational facilities............... 845 855 860 860 875 880 890 4,365
Hospital construction.................................. 1,735 1,755 1,770 1,790 1,815 1,830 1,850 9,055
Veterans' housing...................................... 60 60 60 60 60 60 60 300
Credit for holders of zone academy bonds................ 5 15 30 50 75 90 100 345
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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: 1999 $760; 2000 $800; 2001 $805; 2002 $810; 2003 $815; 2004 $825; and 2005 $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: 1999
$445; 2000 $550; 2001 $520; 2002 $505; 2003 $460; 2004 $450; and 2005 $420.
\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: 1999 $25,632; 2000 $25,676; 2001 $25,799; 2002 $26,876; 2003 $27,638; 2004 $28,701; and 2005 $29,722.
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.
[[Page 123]]
Tax Expenditure Baselines
A tax expenditure is a preferential exception to the baseline
provisions of the tax structure. The 1974 Congressional Budget Act did
not, however, specify the baseline provisions of the tax law. Deciding
whether provisions are preferential exceptions, therefore, is a matter
of judgment. 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 is closer to existing law. Reference law tax
expenditures are limited to special exceptions in the tax code that
serve programmatic functions. These functions correspond to specific
budget categories such as national defense, agriculture, or health care.
Tax expenditures under the reference law baseline are generally tax
expenditures under the normal tax baseline, but 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 only when it is 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).
Although 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.
[[Page 124]]
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.
Beyond these examples, there are still more areas of difference where
the Joint Committee on Taxation considers a somewhat broader set of tax
expenditures under its normal tax baseline than under the reference
baseline considered here.
Performance Measures and the Economic Effects of Tax Expenditures
The Government Performance and Results Act of 1993 (GPRA) directs
Federal agencies to develop annual and strategic plans for their
programs and activities. These plans set out performance objectives to
be achieved over a specific time period. Most of these objectives will
be achieved through direct expenditure programs. However, tax
expenditures may also contribute to achieving these goals. The report of
the Senate Governmental Affairs Committee on GPRA \4\ calls on the
Executive branch to undertake a series of analyses to assess the effect
of specific tax expenditures on the achievement of agencies' performance
objectives.
---------------------------------------------------------------------------
\4\ Committee on Government Affairs, United States Senate,
``Government Performance and Results Act of 1993'' (Report 103-58,
1993).
---------------------------------------------------------------------------
One finding of pilot studies on selected tax expenditures undertaken
by Treasury's Office of Tax Analysis is that much of the data needed for
thorough analysis are not currently available. Hence, assessment of data
needs and availability from Federal statistical agencies, program-agency
studies, or private-sector sources, should prove valuable to broader
efforts to assess the effects of tax expenditures and to compare their
effectiveness with other policy means of achieving important public
objectives. This effort will complement information published by the
Joint Committee on Taxation and the Senate Budget Committee on tax
expenditures.\5\
---------------------------------------------------------------------------
\5\ 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).
---------------------------------------------------------------------------
Over the next few years, the Executive Branch's focus will be on the
availability of the data needed to assess the effects of the tax
expenditures designed to increase savings. As one part of this effort,
Treasury's Office of Tax Analysis and its Statistics of Income Division
(IRS) are developing the specifications for a new data sample which will
follow the same individual income tax filers over an extended period of
time. Such a sample is called a ``panel'' sample. Current economic
analyses of the effect of Federal tax laws are generally based on data
from ``cross-section'' samples, which capture the demographic and
economic circumstances of individuals and the provisions of Federal tax
law only at a single point in time. However, over time, the demographic
and economic status of individuals changes in ways that can
significantly change how they are affected by current (or proposed)
Federal tax laws. In addition, some provisions of the tax law have
effects over multiple years, and the effects of some tax provisions
change over time due to phase-ins, phase-outs, and other factors. The
new panel sample will capture the changing demographic and economic
circumstances of individuals and the effects of changes in tax law over
an extended period of time. Data from the panel sample will therefore
permit more extensive, and better, analyses of many tax provisions than
can be performed using only cross-section data. In particular, data from
the panel sample will enhance our ability to analyze the effect of tax
expenditures designed to increase savings. Other efforts to improve data
available for the analysis of savings tax expenditures will be
undertaken over the next several years by OMB, Treasury and other
agencies.
Comparison 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.\6\ 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 some cases. In addition, some tax expenditures
actually simplify the tax system (for example, the exclusion for up to
$500,000 of capital gains on home sales). Tax expenditures also
implicitly subsidize certain activities. Spending, regulatory or tax-
disincentive policies, can also modify behavior, but may have different
economic effects. 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 economic effects.
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\6\ Although 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 bases of those taxes, such as an excise tax exemption
for certain types of consumption that are deemed meritorious.
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Tax expenditures also have limitations. In many cases they add to the
complexity of the tax system, which raises both administrative and
compliance costs. For example, various holding periods and tax rates for
capital gains can complicate filing and decisionmaking. The income tax
system may have little or no contact with persons who have no or very
low incomes, and does not inquire into certain characteristics of
individ
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uals used in some spending programs, such as wealth. 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 outlay programs. 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 may not receive the same frequency or level of scrutiny
afforded to other programs.
Outlay programs, in contrast, have advantages where direct government
service provision is particularly warranted--such as equipping and
providing the armed forces or administering the system of justice.
Outlay programs may also be specifically designed to meet the needs of
low-income families who would not otherwise be subject to income taxes
or need to file a return. Outlay programs may also receive more year-to-
year oversight and fine tuning through the legislative and executive
budget process. In addition, the availability of 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--provides
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 more direct and immediate effects than outlay and
tax-expenditure programs because regulations apply directly and
immediately to the regulated party (i.e., the intended actor)--generally
in the private sector. Regulations can also be fine-tuned more quickly
than tax expenditures, because they can generally be changed by the
executive branch without legislation. Like tax expenditures, regulations
often rely largely 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, although 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 Federal outlays or receipts. 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 outlays and tax-
expenditures. To some extent, the GPRA requirement for performance
evaluation will address this lack of formal analysis.
Some policy objectives are achieved using multiple approaches. For
example, minimum wage legislation, the earned income tax credit, and the
food stamp program are regulatory, tax expenditure, and direct outlay
programs, respectively, all having the objective of improving the
economic welfare of low-wage workers.
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., the exclusion for up to
$500,000 of capital gains on home sales); 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,
accelerated depreciation may encourage investment. 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). Effects on the incomes of
members of particular groups 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 devel
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oped. In practice, data availability is likely to be a major challenge,
and data constraints may limit the assessment of the effectiveness of
many provisions. In addition, such assessments can raise significant
challenges in economic modeling.
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--might 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 producers) 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 grants and other policies designed to spur economic
development.
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Education, training, employment, and social services.--Major
provisions in this function are intended to promote post-secondary
education, to offset costs of raising children, and to promote a variety
of charitable activities. The education incentives can be compared with
loans, grants, and other programs designed to promote higher education
and training. The 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 pooling of risks. 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.
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). 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
provided at the firm level to individuals.
Other provisions principally affect the incomes of members of certain
groups, rather than affecting incentives. 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 earned-income tax credit, in contrast, should be
evaluated for its effects on labor force participation as well as the
income it provides lower-income workers.
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, although 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. As indicated above, over the
next few years the Executive Branch's focus will be on the availability
of the data needed to assess the effects of the tax expenditures
designed to increase savings.
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.--U.S. citizens who lived abroad, worked in
the private sector, and satisfyied a foreign residency requirement in
1999 may exclude up to $74,000 in foreign earned income from U.S. taxes.
The exclusion increases in 2000, 2001, and 2002 to $76,000, $78,000, and
$80,000, respectively. In addition, if these taxpayers receive a
specific allowance for foreign housing from their employers, they may
also exclude the value of that allowance. If they do not receive a
specific allowance for housing expenses, they may deduct against their
U.S. taxes that portion of such expenses that exceeds one-sixth the
salary of a civil servant at grade GS-14, step 1 ($63,567 in 1999).
Beginning this year, the value of U.S. tax benefits provided to
employees of the U.S. government who live and work overseas is not
included under this heading. Those tax benefits now are included under
their own heading, Exclusion of Certain Allowances for Federal Employees
Abroad (#3).
3. Exclusion of Certain Allowances for Federal Employees Abroad.--U.S.
Federal civilian employees and Peace Corps members who work outside the
continental United States are allowed to exclude from U.S. taxable
income certain special allowances they receive to compensate them for
the relatively high costs associated with living overseas. The
allowances supplement wage income and cover expenses like rent,
education, and the cost of travel to and from the United States.
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4. 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.
5. 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.
6. 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
considered to be 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.
7. Exceptions under subpart F for active financing income.--Financial
firms can defer taxes on income earned overseas in an active business.
Taxes on income earned through December 31, 2001 can be deferred. The
Tax Relief Extension Act of 1999 extended the expiration date from
December 31, 1999 to December 31, 2001.
General Science, Space, and Technology
8. 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.
9. R&E credit.--The research and experimentation (R&E) credit, which
expired on June 30, 1999, was reinstated (retroactively) in the Tax
Relief Extension Act of 1999 for five years (through June 30, 2004). The
Act also increased the credit rates for the alternative credit by one
percentage point and extended the research credit to include research
conducted in Puerto Rico and the U.S. possessions. 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'' by the average amount of the company's gross receipts for
the prior four years. The taxpayer's fixed base percentage generally is
the ratio of its research expenses to gross receipts for 1984 through
1988. Taxpayers may also elect an alternative credit regime. Under the
alternative credit regime the taxpayer is assigned a three-tiered fixed-
base percentage that is lower than the fixed-base percentage that would
otherwise apply, and the credit rate is reduced (the rates range from
2.65 percent to 3.75 percent). A 20-percent credit with a separate
threshold is provided for a taxpayer's payments to universities for
basic research.
Energy
10. 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.
11. 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.
12. 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.
13. 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.
14. Capital gains treatment of royalties on coal.--Sales of certain
coal under royalty contracts can be treated as capital gains rather than
ordinary income.
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15. 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.
16. 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.
17. 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 on or before December 31, 2001. The Tax
Relief Extension Act of 1999 extended the expiration date from June 30,
1999 to December 31, 2001 and expanded the credit to apply to
electricity produced from poultry waste facilities (placed in service
after December 31, 1999).
18. 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; 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.
19. 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.
20. 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
21. 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.
22. Percentage depletion.--Most nonfuel mineral extractors may use
percentage depletion rather than cost depletion, with percentage
depletion rates ranging from 22 percent for sulfur to 5 percent for sand
and gravel.
23. Sewage, water, and hazardous waste bonds.--Interest earned on
State and local bonds used to finance the construction of sewage, water,
or hazardous waste facilities is tax-exempt. These bonds are generally
subject to the State private-activity bond annual volume cap.
24. Capital gains treatment of certain timber.--Certain timber sold
under a royalty contract can be treated as a capital gain rather than
ordinary income.
25. Expensing multiperiod timber growing costs.--Most of the
production costs of growing timber may be expensed rather than
capitalized and deducted when the timber is sold. In most other
industries, these costs are capitalized under the uniform capitalization
rules.
26. Credit and seven-year amortization for reforestation.--A 10-
percent investment tax credit is allowed for up to $10,000 invested
annually to clear land and plant trees for the production of timber. Up
to $10,000 in forestation investment may also be amortized over a seven-
year period rather than capitalized and deducted when the trees are sold
or harvested. The amount of forestation investment that may be amortized
is not reduced by any of the allowable investment credit.
27. Historic preservation.--Expenditures to preserve and restore
historic structures qualify for a 20-percent investment credit, but the
depreciable basis must be reduced by the full amount of the credit
taken.
Agriculture
28. Expensing certain capital outlays.--Farmers, except for certain
agricultural corporations and partnerships, are allowed to expense
certain expenditures for feed and fertilizer, as well as for soil and
water conservation measures. Expensing is allowed, even though these
expenditures are for inventories held beyond the end of the year, or for
capital improvements that would otherwise be capitalized.
29. Expensing multiperiod livestock and crop production costs.--The
production of livestock and crops with a production period of less than
two years is exempt from the uniform cost capitalization rules. Farmers
establishing orchards, constructing farm facilities for their own use,
or producing any goods for sale with a production period of two years or
more may elect not to capitalize costs. If they do, they must apply
straight-line depreciation to all depreciable property they use in
farming.
30. Loans forgiven solvent farmers.--Farmers are forgiven the tax
liability on certain forgiven debt. Normally, a 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 reduces carryover losses, then
unused credits, and then basis; any remainder of the forgiven debt is
excluded from tax. Farmers with forgiven debt are considered insolvent
for tax purposes, and thus qualify for income tax forgiveness.
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31. Capital gains treatment of certain income.--Certain agricultural
income, such as unharvested crops, can be treated as capital gains
rather than ordinary income.
32. Income averaging for farmers.--Taxpayers can lower their tax
liability by averaging, over the prior three-year period, their taxable
income from farming.
33. 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.
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.
34. Credit union income.--The earnings of credit unions not
distributed to members as interest or dividends are exempt from income
tax.
35. 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.
36. 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.
37. 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 $2.1 million of net premium
incomes may elect to pay tax only on the income earned by their
investment portfolio.
38. 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.
39. 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.
40. 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 volume cap increases 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.
41. 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.
42. 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.
43. 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.
44. Installment sales.--Dealers in real and personal property (i.e.,
sellers who 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 pay
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ment 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 million is, therefore, a tax expenditure.
45. 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.
46. 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.
47. 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.
48. Accelerated depreciation of rental property.--The tax depreciation
allowance provisions are part of the reference law rules, and thus do
not give rise to 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, a 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.
49. 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.
50. 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. In general, any debt associated
with the sale of property worth less than $250,000 is excepted from the
general interest accounting rules. This general $250,000 exception is
not a tax expenditure under reference law but is under normal law.
Exceptions above $250,000 are a tax expenditure under reference law;
these exceptions include the following: (1) sales of personal residences
worth more than $250,000, and (2) sales of farms and small businesses
worth between $250,000 and $1 million.
51. 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, the top tax rate is 20 percent
(10 percent for taxpayers who would otherwise pay capital gains tax at
the 15-percent rate).
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.
52. 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.
53. 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.
54. Carryover basis of capital gains on gifts.--When a gift is made,
the donor's basis in the transferred property (the cost that was
incurred when the transferred property was first acquired) carries-over
to the donee. The carryover of the donor's basis allows a continued
deferral of unrealized capital gains.
55. 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.
56. Accelerated depreciation of non-rental-housing buildings.--The tax
depreciation allowance provisions are part of the reference law rules,
and thus do not give rise to 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.
57. Accelerated depreciation of machinery and equipment.--The tax
depreciation allowance provisions are part of the reference law rules,
and thus do not give rise to 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.
58. Expensing of certain small investments.--In 1999, qualifying
investments in tangible property up to $19,000 can be expensed rather
than depreciated
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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 1999, the amount expensed is completely phased out when qualifying
investments exceed $219,000.
59. 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.
60. 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.
61. Small issue industrial development bonds.--Interest earned on
small issue industrial development bonds (IDBs) issued by State and
local governments to finance manufacturing facilities is tax-exempt.
Depreciable property financed with small issue IDBs must be depreciated,
however, using the straight-line method. The annual volume of small
issue IDBs is subject to the unified volume cap discussed in the
mortgage housing bond section above.
Transportation
62. 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.
63. Exclusion of employee parking expenses.--Employee parking expenses
that are paid for by the employer or that are received in lieu of wages
are excludable from the income of the employee. In 1999, the maximum
amount of the parking exclusion was $175 (indexed, except in 1999) per
month. The tax expenditure estimate does not include parking at
facilities owned by the employer.
64. Exclusion of employee transit pass expenses.--Transit passes,
tokens, fare cards, and vanpool expenses paid for by an employer or
provided in lieu of wages to defray an employee's commuting costs are
excludable from the employee's income. In 1999, the maximum amount of
the exclusion wasis $65 (indexed, except in 1999) per month.
Community and Regional Development
65. 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.
66. 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.
67. 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.
68. 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 on homes purchased on or before December 31,
2001, and investors in certain D.C. property can receive a capital gains
break.
69. 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. The expensing only applies
to clean-up costs incurred on or before December 31, 2001. Tax Relief
Extension Act of 1999 extended the expiration date from December 31,
2000 to December 31, 2001.
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Education, Training, Employment, and Social Services
70. 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).
71. 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).
72. 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 before January 1,
2003, 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.
73. 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.
74. Student-loan interest.--Taxpayers may claim an above-the-line
deduction of up to $2,500 ($1,000 in 1998, $1,500 in 1999, and $2,000 in
2000) on interest paid on an education loan. Interest may only be
deducted for the first five years in which interest payments are
required. The maximum deduction is phased down ratably for taxpayers
with modified AGI between $60,000 and $75,000 ($40,000 and $55,000 for
singles).
75. 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.
76. 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.
77. 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.
78. Credit for holders of zone academy bonds.--Financial institutions
that own zone academy bonds receive a non-refundable tax credit (set by
the Treasury Department) rather than interest. The credit is included in
gross income. Proceeds from zone academy bonds may only be used to
improve impoverished schools. The total amount of zone academy bonds
that may be issued is limited to $1.6 billion--$400 million in each year
between 1998 and 2001. The Tax Relief Extension Act of 1999 allowed
bonds to be issued in 2000 and 2001.
79. 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
$79,650 and $109,650 ($53,100 and $68,100 for singles) in 1999.
80. 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.
81. Child credit.--Taxpayers with children under age 17 can qualify
for a $500 child credit. 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.
82. 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.
83. Employer-provided educational assistance.--Employer-provided
educational assistance is excluded
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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 on or before December 31,
2001. The Tax Relief Extension Act of 1999 extended the expiration date
from May 31, 2000 to December 31, 2001.
84. Work opportunity tax credit.--Employers can claim a tax credit for
qualified wages paid to individuals who begin work on or before December
31, 2000 and who are certified as members of various targeted groups.
The Tax Relief Extension Act of 1999 extended the expiration date from
June 30, 1999 to December 31, 2000. The amount of the credit that can be
claimed is 25 percent for employment of less than 400 hours and 40
percent for employment of 400 hours or more. The maximum credit per
employee is $2,400 and can only be claimed on the first year of wages an
individual earns from an employer. Employers must reduce their deduction
for wages paid by the amount of the credit claimed.
85. 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 on
or before December 31, 2001. The Tax Relief Extension Act of 1999
extended the expiration date from June 30, 1999 to December 31, 2001.
86. 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.
87. 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.
88. 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.
89. Child and dependent care expenses.--Married couples with child and
dependent care expenses may claim a tax credit when one spouse works
full time and the other works at least part time or goes to school. The
credit may also be claimed by divorced or separated parents who have
custody of children, and by single parents. Expenditures up to a maximum
$2,400 for one dependent and $4,800 for two or more dependents are
eligible for the credit. The credit is equal to 30 percent of qualified
expenditures for taxpayers with incomes of $10,000 or less. The credit
is reduced to a minimum of 20 percent by one percentage point for each
$2,000 of income between $10,000 and $28,000.
90. 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.
91. 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.
92. 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.
93. 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.
94. 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
95. 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.
96. 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 60 percent in
1999 through 2001, 70 percent in 2002, and 100 percent in 2003 and
thereafter.
97. 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.
98. Medical savings accounts.--Some employees may deduct annual
contributions to a medical savings
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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.
99. 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.
100. Hospital construction bonds.--Interest earned on State and local
government debt issued to finance hospital construction is excluded from
income subject to tax.
101. 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.
102. 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.
103. 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
104. 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.
105. Workers' compensation benefits.--Workers compensation provides
payments to disabled workers. These benefits, although income to the
recipients, are not subject to the income tax.
106. 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.
107. 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.
108. Military disability pensions.--Most of the military pension
income received by current disabled retired veterans is excluded from
their income subject to tax.
109. 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.
110. 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 1999, 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).
111. 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.
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112. Employer-provided life insurance benefits.--Employer-provided
life insurance benefits are excluded from an employee's gross income
even though the employer's costs for the insurance are a deductible
business expense.
113. Employer-provided accident and disability benefits.--Employer-
provided accident and disability benefits are excluded from an
employee's gross income even though the employer's costs for the
benefits are a deductible business expense.
114. Employer-provided supplementary unemployment benefits.--Employer-
provided supplementary unemployment benefits are excluded from an
employee's gross income even though the employer's costs for the
benefits are a deductible business expense.
115. Employer Stock Ownership Plan (ESOP) provisions.--ESOPs are a
special type of tax-exempt employee benefit plan. Employer-paid
contributions (the value of stock issued to the ESOP) are deductible by
the employer as part of employee compensation costs. They are not
included in the employees' gross income for tax purposes, however, until
they are paid out as benefits. The following special income tax
provisions for ESOPs are intended to increase ownership of 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.
116. Additional deduction for the blind.--Taxpayers who are blind may
take an additional $1,000 standard deduction if single, or $800 if
married.
117. Additional deduction for the elderly.--Taxpayers who are 65 years
or older may take an additional $1,000 standard deduction if single, or
$800 if married.
118. Tax credit for the elderly and disabled.--Individuals who are 65
years of age or older, or who are permanently disabled, can take a tax
credit equal to 15 percent of the sum of their earned and retirement
income. Income is limited to no more than $5,000 for single individuals
or married couples filing a joint return where only one spouse is 65
years of age or older, and up to $7,500 for joint returns where both
spouses are 65 years of age or older. These limits are reduced by one-
half of the taxpayer's adjusted gross income over $7,500 for single
individuals and $10,000 for married couples filing a joint return.
119. Casualty losses.--Neither the purchase of property nor insurance
premiums to protect its value are deductible as costs of earning income;
therefore, reimbursement for insured loss of such property is not
reportable as a part of gross income. Taxpayers, however, may deduct
uninsured casualty and theft losses of more than $100 each, but only to
the extent that total losses during the year exceed 10 percent of AGI.
120. Earned income tax credit (EITC).--The EITC may be claimed by low
income workers. For a family with one qualifying child, the credit is 34
percent of the first $6,800 of earned income in 1999. The credit is 40
percent of the first $9,540 of income for a family with two or more
qualifying children. When the taxpayer's income exceeds $12,460, 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
$26,928 of modified adjusted gross income ($30,580 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 1999, the credit is 7.65
percent of the first $4,530 of earned income. When the taxpayer's income
exceeds $5,670, the credit is phased out at the rate of 7.65 percent. It
is completely phased out at $10,200 of modified adjusted gross income.
For workers with or without children, the income level at which the
credit's phase-outs begin and the maximum amounts of income on which the
credit can be taken are adjusted for inflation. Earned income tax
credits in excess of tax liabilities owed through the individual income
tax system are refundable to individuals. This portion of the credit is
shown as an outlay, while the amount that offsets tax liabilities is
shown as a tax expenditure.
Social Security
121. Social Security benefits for retired workers.--Social security
benefits that exceed the beneficiary's contributions out of taxed income
are deferred employee compensation and the deferral of tax on that
compensation is a tax expenditure. These additional retirement benefits
are paid for partly by employers' contributions that were not included
in employees' taxable compensation. Portions (reaching as much as 85
percent) of recipients' social security and tier 1 railroad retirement
benefits are included in the income tax base, however, if the
recipient's provisional income exceeds certain base amounts. Provisional
income is equal to adjusted gross income plus foreign or U.S. possession
income and tax-exempt interest, and one half of social security and tier
1 railroad retirement benefits. The tax expenditure is limited to the
portion of the benefits received by taxpayers who are below the base
amounts at which 85 percent of the benefits are taxable.
122. Social Security benefits for the disabled.--Benefit payments from
the Social Security Trust Fund, for disability and for dependents and
survivors, are excluded from the beneficiaries' gross incomes.
123. Social Security benefits for dependents and survivors.--Benefit
payments from the Social Security
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Trust Fund for dependents and survivors are excluded from the
beneficiaries' gross income.
Veterans Benefits and Services
124. Veterans death benefits and disability compensation.--All
compensation due to death or disability paid by the Veterans
Administration is excluded from taxable income.
125. Veterans pension payments.--Pension payments made by the Veterans
Administration are excluded from gross income.
126. G.I. Bill benefits.--G.I. Bill benefits paid by the Veterans
Administration are excluded from gross income.
127. Tax-exempt mortgage bonds for veterans.--Interest earned on
general obligation bonds issued by State and local governments to
finance housing for veterans is excluded from taxable income. The
issuance of such bonds is limited, however, to five pre-existing State
programs and to amounts based upon previous volume levels for the period
January 1, 1979 to June 22, 1984. Furthermore, future issues are limited
to veterans who served on active duty before 1977.
General Government
128. Public purpose State and local bonds.--Interest earned on State
and local government bonds issued to finance public purpose construction
(e.g., schools, roads, sewers) is tax-exempt.
129. Deductibility of certain nonbusiness State and local taxes.--
Taxpayers may deduct State and local income taxes and property taxes
even though these taxes primarily pay for services that, if purchased
directly by taxpayers, would not be deductible.
130. Business income earned in U.S. possessions.--U.S. corporations
receiving income from investments or businesses located in a U.S.
possession (e.g., Puerto Rico) can claim a credit against U.S. tax,
which effectively excludes some of this income from tax. The credit
expires December 31, 2005.
Interest
131. U.S. savings bonds.--Taxpayers may defer paying tax on interest
earned on U.S. savings bonds until the bonds are redeemed.
TAX EXPENDITURES IN THE UNIFIED TRANSFER TAX
Exceptions to the general terms of the Federal unified transfer tax
favor particular transferees or dispositions of transferors, similar to
Federal direct expenditure or loan programs. The transfer tax provisions
identified as tax expenditures satisfy the reference law criteria for
inclusion in the tax expenditure budget that were described above. There
is no generally accepted normal tax baseline for transfer taxes.
Unified Transfer Tax Reference Rules
The reference tax rules for the unified transfer tax from which
departures represent tax expenditures include:
Definition of the taxpaying unit. The payment of the tax is
the liability of the transferor whether the transfer of cash
or property was made by gift or bequest.
Definition of the tax base. The base for the tax is the
transferor's cumulative, taxable lifetime gifts made plus the
net estate at death. Gifts in the tax base are all annual
transfers in excess of $10,000 (indexed) 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 1999, this credit allows each taxpayer to
make a $650,000 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.\7\
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\7\ 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
lease 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 1999-2005 are dis
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played 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 $200,000 in 1999 and increases by $100,000 in
each year through 2002.
Agriculture
2. Special-use valuation of farms.--Up to $750,000 (indexed) 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.
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.
Commerce and Housing
4. Special-use valuation of closely-held businesses.--The special-use
valuation rule available for family farms is also available for nonfarm
family businesses. To be eligible for the special-use valuation, the
same three conditions previously described must be met.
5. Tax deferral of closely-held businesses.--The tax-deferral rule
available for family farms is also available for nonfarm family
businesses. To be eligible for the tax deferral, the value of stock in
closely-held corporations must exceed 35 percent of the decedent's gross
estate, less debt and funeral expenses.
6. Exclusion for family-owned businesses.--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 exemption 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.
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Table 5-6. REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES IN THE FEDERAL UNIFIED TRANSFER TAX
(In millions of dollars)
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Description 1999 2000 2001 2002 2003 2004 2005 2001-2005
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Natural Resources and Environment:
1 Donations of conservation easements..................... 10 25 40 55 75 95 105 370
Agriculture:
2 Special use valuation of farm real property............. 95 100 105 110 115 125 120 575
3 Tax deferral of closely held farms...................... 5 15 20 20 20 25 30 115
Commerce:
4 Special use valuation of real property used in closely 10 10 10 10 15 15 15 65
held businesses........................................
5 Tax deferral of closely held business................... 35 100 110 110 120 130 180 650
6 Exclusion for family owned businesses................... 505 520 535 550 495 440 395 2,415
Education, training, employment, and social services:
7 Deduction for charitable contributions (education)...... 682 760 830 855 910 930 1,020 4,545
8 Deduction for charitable contributions (other than 2,015 2,240 2,450 2,525 2,680 2,750 3,015 13,420
education and health)..................................
Health:
9 Deduction for charitable contributions (health)......... 615 685 750 775 820 840 925 4,110
General government:
10 Credit for State death taxes............................ 5,825 6,070 6,345 6,640 6,945 7,265 7,595 34,790
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