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

                               5. TAX EXPENDITURES

      The Congressional Budget Act of 1974 (Public Law 93-344) requires that
    a list of ``tax expenditures'' be included in the budget. So-called tax
    expenditures may be defined as provisions of the Federal tax laws with
    exclusions, exemptions, deductions, credits deferrals, or special tax
    rates. Underlying the ``tax expenditure'' concept is the notion that the
    Federal Government would otherwise collect additional revenues but for
    these provisions. It assumes an arbitrary tax base is available to the
    Government in its entirety as a resource to be spent. Because of the
    breadth of this arbitrary tax base, the Administration believes that the
    concept of ``tax expenditure'' is of questionable analytic value. The
    discussion below is based on materials and formats developed and
    included in previous budgets. The Administration intends to reconsider
    this presentation in the future.
      The largest tax expenditures tend to be associated with the individual
    income tax. For example, sizeable deductions and exclusions 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 estimated 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.
      Tax expenditures relating to the individual and corporate income taxes
    are considered first in this chapter. They are estimated for fiscal
    years 2000-2006 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 (see the Budget
    volume, which considers the Federal Government's spending, regulatory,
    and tax policies across functional areas).

                       TAX EXPENDITURES IN THE INCOME TAX

                            Tax Expenditure Estimates

       All tax expenditure estimates presented here are based upon tax law
    enacted as of December 31, 2000. Expired or repealed provisions are not
    listed if their revenue effects result only from taxpayer activity
    occurring before fiscal year 2000. 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
    2000-2006 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 effects
    that arise under the individual and corporate income taxes. Listing the
    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 pro

    [[Page 62]]

    visions are cleared. The ultimate beneficiaries of corporate tax
    expenditures could be stockholders, employees, customers, or others,
    depending on economic forces.
      Table 5-3 ranks the major tax expenditures by fiscal year 2002 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 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 activity or of other tax provisions 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 tax
    revenues associated with other provisions. For example, even if behavior
    does not change, repeal of an itemized deduction could increase the
    revenue costs from other deductions because some taxpayers would be
    moved into higher tax brackets. Alternatively, repeal of an itemized
    deduction could lower the revenue cost 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 effects
    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 would yield
    their full potential revenue gains relatively quickly, whereas changes
    to other provisions would only gradually yield their full revenue
    potential, because certain deductions or exemptions would likely be
    grandfathered.
      The annual value of tax expenditures for tax deferrals is reported on
    a cash basis in all tables except Table 5-4. Cash-based estimates
    reflect the difference between taxes deferred in the current year and
    incoming revenues that are received due to deferrals of taxes from prior
    years. 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.

                             Present-Value Estimates

      Discounted present-value estimates of revenue effects are presented in
    Table 5-4 for certain provisions that involve tax deferrals or other
    long-term revenue effects. These estimates complement the cash-based tax
    expenditure estimates presented in the other tables.
      The present-value estimates represent the revenue effects, net of
    future tax payments, that follow from activities undertaken during
    calendar year 2000 which cause the deferrals or other long-term revenue
    effects. For instance, a pension contribution in 2000 would cause a
    deferral of tax payments on wages in 2000 and on pension earnings on
    this contribution (e.g., interest) in later years. In some future year,
    however, the 2000 pension contribution and accrued earnings will be paid
    out and taxes will be due; these receipts are included in the present-
    value estimate. In general, this conceptual approach is similar to the
    one used for reporting the budgetary effects of credit programs, where
    direct loans and guarantees in a given year affect future cash flows.

    [[Page 63]]

                                                   Table 5-1.  ESTIMATES OF TOTAL INCOME TAX EXPENDITURES \1\
                                                                    (In millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Total from corporations and individuals
                                                                            --------------------------------------------------------------------------------
                                                                               2000      2001      2002      2003      2004      2005      2006    2002-2006
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                 National Defense
           1       Exclusion of benefits, allowances, and certain pays to       2,140     2,160     2,190     2,210     2,240     2,260     2,290    11,190
                    armed forces personnel.................................

                 International affairs:
           2       Exclusion of income earned abroad by U.S. citizens......     2,500     2,680     2,850     3,010     3,180     3,350     3,550    15,940
           3       Exclusion of certain allowances for Federal employees          680       720       750       790       830       870       920     4,160
                    abroad.................................................
           4       Exclusion of income of foreign sales corporations.......     3,890         0         0         0         0         0         0         0
           5       Extraterritorial income exclusion.......................         0     4,490     4,810     5,150     5,500     5,880     6,290    27,630
           6       Inventory property sales source rules exception.........     2,170     2,280     2,390     2,510     2,630     2,760     2,900    13,190
           7       Deferral of income from controlled foreign corporations      6,200     6,600     7,000     7,450     7,900     8,400     8,930    39,680
                    (normal tax method)....................................
           8       Deferred taxes for financial firms on certain income         1,190     1,290       540         0         0         0         0       540
                    earned overseas........................................

                 General science, space, and technology:
           9       Expensing of research and experimentation expenditures       1,680     1,650     1,680     1,770     1,880     1,980     2,100     9,410
                    (normal tax method)....................................
          10       Credit for increasing research activities...............     1,630     6,050     6,760     5,390     4,710     2,720     1,160    20,740

                 Energy:
          11       Expensing of exploration and development costs, fuels...        20        70        70       100       110       110       100       490
          12       Excess of percentage over cost depletion, fuels.........       340       340       340       340       340       350       350     1,720
          13       Alternative fuel production credit......................       970       920       860       540       130       130       130     1,790
          14       Exception from passive loss limitation for working              20        20        20        20        20        20        20       100
                    interests in oil and gas properties....................
          15       Capital gains treatment of royalties on coal............        70        70        80        80        80        90        90       420
          16       Exclusion of interest on energy facility bonds..........        90        90        90       100       110       130       140       570
          17       Enhanced oil recovery credit............................       310       370       440       530       630       770       910     3,280
          18       New technology credit...................................        40        60        70        90        90        90        90       430
          19       Alcohol fuel credits \2\................................        20        20        20        20        20        20        20       100
          20       Tax credit and deduction for clean-fuel burning vehicles        60        60        50        30         0       -30       -50         0
          21       Exclusion from income of conservation subsidies provided        90        80        80        80        90        90        90       430
                    by public utilities....................................

                 Natural resources and environment:
          22       Expensing of exploration and development costs, nonfuel         20        20        20        20        20        20        20       100
                    minerals...............................................
          23       Excess of percentage over cost depletion, nonfuel              270       280       300       310       320       330       350     1,610
                    minerals...............................................
          24       Exclusion of interest on bonds for water, sewage, and          400       400       410       450       510       560       610     2,540
                    hazardous waste facilities.............................
          25       Capital gains treatment of certain timber income........        70        70        80        80        80        90        90       420
          26       Expensing of multiperiod timber growing costs...........       570       580       610       630       640       660       680     3,220
          27       Investment credit and seven-year amortization for                0         0         0         0        10        10        10        30
                    reforestation expenditures.............................
          28       Tax incentives for preservation of historic structures..       190       200       210       220       240       250       260     1,180

                 Agriculture:
          29       Expensing of certain capital outlays....................       160       160       160       170       170       180       180       860
          30       Expensing of certain multiperiod production costs.......       110       110       120       120       120       130       130       620
          31       Treatment of loans forgiven for solvent farmers.........        10        10        10        10        10        10        10        50
          32       Capital gains treatment of certain income...............       700       740       780       820       860       900       950     4,310
          33       Income averaging for farmers............................        50        50        50        50        60        60        60       280
          34       Deferral of gain on sale of farm refiners...............        10        10        10        10        10        10        10        50

                 Commerce and housing:
                   Financial institutions and insurance:
          35        Exemption of credit union income.......................     1,550     1,650     1,770     1,890     2,020     2,160     2,280    10,120
          36        Excess bad debt reserves of financial institutions.....        70        60        50        30        20        10         0       110
          37        Exclusion of interest on life insurance savings........    13,950    15,170    16,520    17,990    19,610    21,370    23,330    98,820
          38        Special alternative tax on small property and casualty         10        10        10        10        10        10        10        50
                     insurance companies...................................
          39        Tax exemption of certain insurance companies owned by         230       240       250       270       280       300       310     1,410
                     tax-exempt organizations..............................
          40        Small life insurance company deduction.................       100       100       100       100       100       100       100       500
                   Housing:
          41        Exclusion of interest on owner-occupied mortgage              790       800       820       870       990     1,090     1,200     4,970
                     subsidy bonds.........................................
          42        Exclusion of interest on rental housing bonds..........       160       160       170       170       200       230       260     1,030
          43        Deductibility of mortgage interest on owner-occupied       60,270    63,190    65,750    68,050    70,470    73,100    76,150   353,520
                     homes.................................................
          44        Deductibility of State and local property tax on owner-    22,140    23,920    25,570    27,220    29,080    30,980    33,220   146,070
                     occupied homes........................................
          45        Deferral of income from post 1987 installment sales....     1,010     1,035     1,050     1,070     1,090     1,110     1,130     5,450
          46        Capital gains exclusion on home sales..................    18,540    19,095    19,670    20,260    20,870    21,490    22,140   104,430
          47        Exception from passive loss rules for $25,000 of rental     4,720     4,450     4,220     4,000     3,790     3,600     3,410    19,020
                     loss..................................................
          48        Credit for low-income housing investments..............     3,210     3,310     3,460     3,600     3,790     3,940     4,080    18,870
          49        Accelerated depreciation on rental housing (normal tax      4,740     5,140     5,520     5,830     6,040     6,140     6,210    29,740
                     method)...............................................
                   Commerce:
          50        Cancellation of indebtedness...........................        30        20        10        10        10        20        20        70
          51        Exceptions from imputed interest rules.................        80        80        80        80        80        80        80       400
          52        Capital gains (except agriculture, timber, iron ore,       40,520    41,720    42,950    44,220    45,530    46,870    48,260   227,830
                     and coal) (normal tax method).........................
          53        Capital gains exclusion of small corporation stock.....        40        70        90       120       160       200       250       820
          54        Step-up basis of capital gains at death................    27,090    28,240    29,370    30,540    31,760    33,030    34,360   159,060
          55        Carryover basis of capital gains on gifts..............       180       190       200       210       220       230       240     1,100

    [[Page 64]]

          56        Ordinary income treatment of loss from small business          35        40        40        40        40        40        40       200
                     corporation stock sale................................
          57        Accelerated depreciation of buildings other than rental     3,260     3,170     3,290     2,880     2,860     2,730     3,220    14,980
                     housing (normal tax method)...........................
          58        Accelerated depreciation of machinery and equipment        30,660    33,050    35,400    37,680    39,760    41,530    43,330   197,700
                     (normal tax method)...................................
          59        Expensing of certain small investments (normal tax          2,100     2,570     2,690     2,670     2,570     2,480     2,510    12,920
                     method)...............................................
          60        Amortization of start-up costs (normal tax method).....       200       200       200       210       220       220       220     1,070
          61        Graduated corporation income tax rate (normal tax           6,480     6,700     7,140     7,460     7,540     7,760     7,960    37,860
                     method)...............................................
          62        Exclusion of interest on small issue bonds.............       290       300       310       330       360       410       450     1,860

                 Transportation:
          63       Deferral of tax on shipping companies...................        20        20        20        20        20        20        20       100
          64       Exclusion of reimbursed employee parking expenses.......     1,880     1,980     2,090     2,190     2,300     2,420     2,550    11,550
          65       Exclusion for employer-provided transit passes..........       190       220       260       310       350       400       440     1,760

                 Community and regional development:
          66       Investment credit for rehabilitation of structures              30        30        30        30        30        30        30       150
                    (other than historic)..................................
          67       Exclusion of interest for airport, dock, and similar           620       630       640       690       780       850       950     3,910
                    bonds..................................................
          68       Exemption of certain mutuals' and cooperatives' income..        60        60        60        60        60        70        70       320
          69       Empowerment zones and enterprise communities............       310       320       660     1,140     1,210     1,340     1,480     5,830
          70       New markets tax credit..................................         0        10        90       200       310       440       640     1,680
          71       Expensing of environmental remediation costs............       160       350       410       330        30      -130       -80       560

                 Education, training, employment, and social services:
                   Education:
          72        Exclusion of scholarship and fellowship income (normal      1,110     1,120     1,130     1,140     1,150     1,160     1,180     5,760
                     tax method)...........................................
          73        HOPE tax credit........................................     4,210     4,480     4,610     4,280     4,110     4,360     4,630    21,990
          74        Lifetime Learning tax credit...........................     2,420     2,570     2,580     2,960     4,490     4,460     4,660    19,150
          75        Education Individual Retirement Accounts...............        20        30        50        60        80       100       120       410
          76        Deductibility of student-loan interest.................       360       370       380       380       390       400       410     1,960
          77        Deferral for state prepaid tuition plans...............       100       130       180       230       250       290       330     1,280
          78        Exclusion of interest on student-loan bonds............       210       230       230       240       270       290       330     1,360
          79        Exclusion of interest on bonds for private nonprofit          520       540       550       580       650       740       810     3,330
                     educational facilities................................
          80        Credit for holders of zone academy bonds...............        10        20        40        50        60        70        70       290
          81        Exclusion of interest on savings bonds redeemed to             10        10        10        10        10        10        10        50
                     finance educational expenses..........................
          82        Parental personal exemption for students age 19 or over       950     1,010     1,070     1,110     1,170     1,220     1,270     5,840
          83        Deductibility of charitable contributions (education)..     2,730     2,830     2,930     3,090     3,200     3,300     3,540    16,060
          84        Exclusion of employer-provided educational assistance..       240       260        90         0         0         0         0        90
                   Training, employment, and social services:
          85        Work opportunity tax credit............................       390       400       300       180        80        30        10       600
          86        Welfare-to-work tax credit.............................        50        70        70        50        20        10         0       150
          87        Exclusion of employer provided child care..............       670       700       730       760       810       850       900     4,050
          88        Adoption assistance....................................       120       130       120        30        30        20        20       220
          89        Assistance for adopted foster children.................       160       190       210       240       250       260       270     1,230
          90        Exclusion of employee meals and lodging (other than           680       710       740       780       810       850       890     4,070
                     military).............................................
          91        Child credit \3\.......................................    19,330    19,310    18,980    18,410    18,000    17,430    16,790    89,610
          92        Credit for child and dependent care expenses...........     2,390     2,360     2,330     2,300     2,280     2,250     2,220    11,380
          93        Credit for disabled access expenditures................        40        40        50        50        50        50        50       250
          94        Deductibility of charitable contributions, other than      20,150    21,020    22,030    23,160    24,240    25,380    26,780   121,590
                     education and health..................................
          95        Exclusion of certain foster care payments..............       550       570       300       630       660       700       730     3,020
          96        Exclusion of parsonage allowances......................       330       350       370       400       430       460       490     2,150

                 Health:
          97       Exclusion of employer contributions for medical             76,530    84,350    92,230    99,800   107,620   115,770   124,690   540,110
                    insurance premiums and medical care....................
          98       Self-employed medical insurance premiums................     1,340     1,510     1,760     2,470     3,580     3,900     4,220    15,930
          99       Workers' compensation insurance premiums................     4,620     4,850     5,090     5,350     5,620     5,900     6,190    28,150
         100       Medical Savings Accounts................................        20        20        30        20        20        20        20       110
         101       Deductibility of medical expenses.......................     4,250     4,560     4,870     5,170     5,480     5,790     6,110    27,420
         102       Exclusion of interest on hospital construction bonds....     1,080     1,100     1,130     1,210     1,350     1,490     1,660     6,840
         103       Deductibility of charitable contributions (health)......     2,910     3,000     3,100     3,270     3,380     3,480     3,740    16,970
         104       Tax credit for orphan drug research.....................       100       110       130       140       160       180       200       810
         105       Special Blue Cross/Blue Shield deduction................       230       250       280       320       290       280       250     1,420

                 Income security:
         106       Exclusion of railroad retirement system benefits........       360       360       360       360       360       360       360     1,800
         107       Exclusion of workers' compensation benefits.............     5,120     5,560     5,810     6,070     6,320     6,600     6,900    31,700
         108       Exclusion of public assistance benefits (normal tax            360       370       390       400       420       430       450     2,090
                    method)................................................
         109       Exclusion of special benefits for disabled coal miners..        80        70        70        60        60        60        50       300
         110       Exclusion of military disability pensions...............       120       120       130       130       130       140       140       670
                   Net exclusion of pension contributions and earnings:
         111        Employer plans.........................................    89,120    93,220    97,510   103,010   108,480   114,220   121,990   545,210
         112        Individual Retirement Accounts.........................    15,200    15,920    16,600    17,230    17,770    18,220    18,520    88,340

    [[Page 65]]

         113        Keogh plans............................................     5,500     5,830     6,180     6,540     6,930     7,330     7,750    34,730
                   Exclusion of other employee benefits:
         114        Premiums on group term life insurance..................     1,720     1,750     1,780     1,830     1,860     1,900     1,930     9,300
         115        Premiums on accident and disability insurance..........       200       210       220       230       240       250       260     1,200
         116       Income of trusts to finance supplementary unemployment          10        10        10        10        10        10        10        50
                    benefits...............................................
                   Special ESOP rules......................................     1,240     1,290     1,340     1,400     1,460     1,540     1,610     7,350
         118       Additional deduction for the blind......................        30        30        30        30        40        40        40       180
         119       Additional deduction for the elderly....................     1,920     1,990     2,060     2,130     2,210     2,260     2,350    11,010
         120       Tax credit for the elderly and disabled.................        30        30        30        30        30        30        30       150
         121       Deductibility of casualty losses........................       230       250       260       280       290       300       320     1,450
         122       Earned income tax credit \4\............................     4,644     4,692     4,693     5,225     5,456     5,688     5,965    27,297

                 Social Security:
                   Exclusion of social security benefits:
         123        Social Security benefits for retired workers...........    18,250    19,070    19,930    20,520    21,050    21,840    22,780   106,120
         124        Social Security benefits for disabled..................     2,640     2,880     3,160     3,490     3,910     4,360     4,840    19,760
         125        Social Security benefits for dependents and survivors..     3,910     4,030     4,210     4,440     4,730     5,070     5,380    23,830

                 Veterans benefits and services:
         126       Exclusion of veterans death benefits and disability          3,090     3,290     3,460     3,640     3,820     4,010     4,210    19,140
                    compensation...........................................
         127       Exclusion of veterans pensions..........................        70        70        80        80        90        90       100       440
         128       Exclusion of GI bill benefits...........................        80        90        90       100       100       110       110       510
         129       Exclusion of interest on veterans housing bonds.........        40        40        40        40        40        50        50       220

                 General purpose fiscal assistance:
         130       Exclusion of interest on public purpose State and local     22,600    23,050    23,510    23,980    24,460    24,950    25,450   122,350
                    bonds..................................................
         131       Deductibility of nonbusiness state and local taxes other    42,650    45,730    48,730    51,780    55,030    58,390    62,160   276,090
                    than on owner-occupied homes...........................
         132       Tax credit for corporations receiving income from doing      2,470     2,520     2,560     2,580     2,610     2,630     1,060    11,440
                    business in U.S. possessions...........................

                 Interest:
         133       Deferral of interest on U.S. savings bonds..............       470       490       520       540       570       600       630     2,860

                 Addendum: Aid to State and local governments:
                   Deductibility of:
                    Property taxes on owner-occupied homes.................    22,140    23,920    25,570    27,220    29,080    30,980    33,220   146,070
                    Nonbusiness State and local taxes other than on owner-     42,650    45,730    48,730    51,780    55,030    58,390    62,160   276,090
                     occupied homes........................................
                   Exclusion of interest on State and local bonds for:
                    Public purposes........................................    22,600    23,050    23,510    23,980    24,460    24,950    25,450   122,350
                    Energy facilities......................................        90        90        90       100       110       130       140       570
                    Water, sewage, and hazardous waste disposal facilities.       400       400       410       450       510       560       610     2,540
                    Small-issues...........................................       290       300       310       330       360       410       450     1,860
                    Owner-occupied mortgage subsidies......................       790       800       820       870       990     1,090     1,200     4,970
                    Rental housing.........................................       160       160       170       170       200       230       260     1,030
                    Airports, docks, and similar facilities................       620       630       640       690       780       850       950     3,910
                    Student loans..........................................       210       230       230       240       270       290       330     1,360
                    Private nonprofit educational facilities...............       520       540       550       580       650       740       810     3,330
                    Hospital construction..................................     1,080     1,100     1,130     1,210     1,350     1,490     1,660     6,840
                    Veterans' housing......................................        40        40        40        40        40        50        50       220
                   Credit for holders of zone academy bonds................        10        20        40        50        60        70        70       290
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ The determination of whether a provision is a tax expenditure is made on the basis of a broad concept of ``income'' that is larger in scope than is
      ``income'' as defined under general U.S. income tax principles. For that reason, the tax expenditure estimates include, for example, estimates related
      to the exclusion of extraterritorial income, as well as other exclusions, notwithstanding that such exclusions define income under the general rule of
      U.S. income taxation.
    \2\ 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: 2000 $840; 2001 $880; 2002 $930; 2003 $950; 2004 $960; 2005 $960; and in 2006 $960.

    \3\ The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as
      follows: 2000 $810; 2001 $790; 2002 $760; 2003 $720; 2004 $660; 2005 $630; and in 2006 $590.

    \4\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of
      dollars) is as follows: 2000 $26,099; 2001 $25,923; 2002 $26,983; 2003 $27,875; 2004 $28,545; 2005 $29,373; and in 2006 $30,165.

    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 $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.

    [[Page 66]]

                                                                                Table 5-2.  CORPORATE AND INDIVIDUAL INCOME TAX ESTIMATES OF TAX EXPENDITURES \1\
                                                                                                            (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     Corporations                                                                Individuals
                                                                                      ------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        2002-                                                                         2002-
                                                                                         2000     2001     2002     2003     2004     2005     2006     2006      2000     2001     2002      2003      2004      2005      2006      2006
    ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                 National Defense
           1       Exclusion of benefits, allowances, and certain pays to armed        .......  .......  .......  .......  .......  .......  .......  ........    2,140    2,160     2,190     2,210     2,240     2,260     2,290    11,190
                    forces personnel.................................................

                 International affairs:
           2       Exclusion of income earned abroad by U.S. citizens................  .......  .......  .......  .......  .......  .......  .......  ........    2,500    2,680     2,850     3,010     3,180     3,350     3,550    15,940
           3       Exclusion of certain allowances for Federal employees abroad......  .......  .......  .......  .......  .......  .......  .......  ........      680      720       750       790       830       870       920     4,160
           4       Exclusion of income of foreign sales corporations.................    3,890  .......  .......  .......  .......  .......  .......  ........  .......  .......  ........  ........  ........  ........  ........  ........
           5       Extraterritorial income exclusion.................................  .......    4,490    4,810    5,150    5,500    5,880    6,290    27,630  .......  .......  ........  ........  ........  ........  ........  ........
           6       Inventory property sales source rules exception...................    2,170    2,280    2,390    2,510    2,630    2,760    2,900    13,190  .......  .......  ........  ........  ........  ........  ........  ........
           7       Deferral of income from controlled foreign corporations (normal       6,200    6,600    7,000    7,450    7,900    8,400    8,930    39,680  .......  .......  ........  ........  ........  ........  ........  ........
                    tax method)......................................................
           8       Deferred taxes for financial firms on certain income earned           1,190    1,290      540  .......  .......  .......  .......       540  .......  .......  ........  ........  ........  ........  ........  ........
                    overseas.........................................................

                 General science, space, and technology:
           9       Expensing of research and experimentation expenditures (normal tax    1,650    1,620    1,650    1,740    1,840    1,940    2,060     9,230       30       30        30        30        40        40        40       180
                    method)..........................................................
          10       Credit for increasing research activities.........................    1,620    5,990    6,700    5,340    4,670    2,700    1,160    20,570       10       60        60        50        40        20  ........       170

                 Energy:
          11       Expensing of exploration and development costs, fuels.............       20       60       60       80       90       90       80       400  .......       10        10        20        20        20        20        90
          12       Excess of percentage over cost depletion, fuels...................      290      290      290      290      290      300      300     1,470       50       50        50        50        50        50        50       250
          13       Alternative fuel production credit................................      930      880      820      520      120      120      120     1,700       40       40        40        20        10        10        10        90
          14       Exception from passive loss limitation for working interests in     .......  .......  .......  .......  .......  .......  .......  ........       20       20        20        20        20        20        20       100
                    oil and gas properties...........................................
          15       Capital gains treatment of royalties on coal......................  .......  .......  .......  .......  .......  .......  .......  ........       70       70        80        80        80        90        90       420
          16       Exclusion of interest on energy facility bonds....................       20       20       20       20       30       40       40       150       70       70        70        80        80        90       100       420
          17       Enhanced oil recovery credit......................................      280      340      400      480      580      700      830     2,990       30       30        40        50        50        70        80       290
          18       New technology credit.............................................       40       60       70       90       90       90       90       430  .......  .......  ........  ........  ........  ........  ........  ........
          19       Alcohol fuel credits \2\..........................................       10       10       10       10       10       10       10        50       10       10        10        10        10        10        10        50
          20       Tax credit and deduction for clean-fuel burning vehicles..........       50       50       40       20  .......      -30      -40       -10       10       10        10        10  ........  ........       -10        10
          21       Exclusion from income of conservation subsidies provided by public  .......  .......  .......  .......  .......  .......  .......  ........       90       80        80        80        90        90        90       430
                    utilities........................................................

                 Natural resources and environment:
          22       Expensing of exploration and development costs, nonfuel minerals..       20       20       20       20       20       20       20       100  .......  .......  ........  ........  ........  ........  ........  ........
          23       Excess of percentage over cost depletion, nonfuel minerals........      250      260      280      290      300      310      330     1,510       20       20        20        20        20        20        20       100
          24       Exclusion of interest on bonds for water, sewage, and hazardous         100      100      100      120      130      140      150       640      300      300       310       330       380       420       460     1,900
                    waste facilities.................................................
          25       Capital gains treatment of certain timber income..................  .......  .......  .......  .......  .......  .......  .......  ........       70       70        80        80        80        90        90       420
          26       Expensing of multiperiod timber growing costs.....................      280      290      310      320      330      340      360     1,660      290      290       300       310       310       320       320     1,560
          27       Investment credit and seven-year amortization for reforestation     .......  .......  .......  .......  .......  .......  .......  ........  .......  .......  ........  ........        10        10        10        30
                    expenditures.....................................................
          28       Tax incentives for preservation of historic structures............      170      180      190      200      210      220      230     1,050       20       20        20        20        30        30        30       130

                 Agriculture:
          29       Expensing of certain capital outlays..............................       20       20       20       20       20       20       20       100      140      140       140       150       150       160       160       760
          30       Expensing of certain multiperiod production costs.................       10       10       20       20       20       20       20       100      100      100       100       100       100       110       110       520
          31       Treatment of loans forgiven for solvent farmers...................  .......  .......  .......  .......  .......  .......  .......  ........       10       10        10        10        10        10        10        50

    [[Page 67]]

          32       Capital gains treatment of certain income.........................  .......  .......  .......  .......  .......  .......  .......  ........      700      740       780       820       860       900       950     4,310
          33       Income averaging for farmers......................................  .......  .......  .......  .......  .......  .......  .......  ........       50       50        50        50        60        60        60       280
          34       Deferral of gain on sale of farm refiners.........................       10       10       10       10       10       10       10        50  .......  .......  ........  ........  ........  ........  ........  ........

                 Commerce and housing:
                   Financial institutions and insurance:
          35        Exemption of credit union income.................................    1,550    1,650    1,770    1,890    2,020    2,160    2,280    10,120  .......  .......  ........  ........  ........  ........  ........  ........
          36        Excess bad debt reserves of financial institutions...............       70       60       50       30       20       10  .......       110  .......  .......  ........  ........  ........  ........  ........  ........
          37        Exclusion of interest on life insurance savings..................      490      530      580      630      690      750      820     3,470   13,460   14,640    15,940    17,360    18,920    20,620    22,510    95,350
          38        Special alternative tax on small property and casualty insurance        10       10       10       10       10       10       10        50  .......  .......  ........  ........  ........  ........  ........  ........
                     companies.......................................................
          39        Tax exemption of certain insurance companies owned by tax-exempt       230      240      250      270      280      300      310     1,410  .......  .......  ........  ........  ........  ........  ........  ........
                     organizations...................................................
          40        Small life insurance company deduction...........................      100      100      100      100      100      100      100       500  .......  .......  ........  ........  ........  ........  ........  ........
                   Housing:
          41        Exclusion of interest on owner-occupied mortgage subsidy bonds...      200      200      210      220      250      270      290     1,240      590      600       610       650       740       820       910     3,730
          42        Exclusion of interest on rental housing bonds....................       40       40       40       40       50       60       70       260      120      120       130       130       150       170       190       770
          43        Deductibility of mortgage interest on owner-occupied homes.......  .......  .......  .......  .......  .......  .......  .......  ........   60,270   63,190    65,750    68,050    70,470    73,100    76,150   353,520
          44        Deductibility of State and local property tax on owner-occupied    .......  .......  .......  .......  .......  .......  .......  ........   22,140   23,920    25,570    27,220    29,080    30,980    33,220   146,070
                     homes...........................................................
          45        Deferral of income from post 1987 installment sales..............      260      270      270      280      280      290      290     1,410      750      765       780       790       810       820       840     4,040
          46        Capital gains exclusion on home sales............................  .......  .......  .......  .......  .......  .......  .......  ........   18,540   19,095    19,670    20,260    20,870    21,490    22,140   104,430
          47        Exception from passive loss rules for $25,000 of rental loss.....  .......  .......  .......  .......  .......  .......  .......  ........    4,720    4,450     4,220     4,000     3,790     3,600     3,410    19,020
          48        Credit for low-income housing investments........................    2,410    2,490    2,600    2,710    2,850    2,960    3,070    14,190      800      820       860       890       940       980     1,010     4,680
          49        Accelerated depreciation on rental housing (normal tax method)...      340      370      400      420      430      440      450     2,140    4,400    4,770     5,120     5,410     5,610     5,700     5,760    27,600
                   Commerce:
          50        Cancellation of indebtedness.....................................  .......  .......  .......  .......  .......  .......  .......  ........       30       20        10        10        10        20        20        70
          51        Exceptions from imputed interest rules...........................  .......  .......  .......  .......  .......  .......  .......  ........       80       80        80        80        80        80        80       400
          52        Capital gains (except agriculture, timber, iron ore, and coal)     .......  .......  .......  .......  .......  .......  .......  ........   40,520   41,720    42,950    44,220    45,530    46,870    48,260   227,830
                     (normal tax method).............................................
          53        Capital gains exclusion of small corporation stock...............  .......  .......  .......  .......  .......  .......  .......  ........       40       70        90       120       160       200       250       820
          54        Step-up basis of capital gains at death..........................  .......  .......  .......  .......  .......  .......  .......  ........   27,090   28,240    29,370    30,540    31,760    33,030    34,360   159,060
          55        Carryover basis of capital gains on gifts........................  .......  .......  .......  .......  .......  .......  .......  ........      180      190       200       210       220       230       240     1,100
          56        Ordinary income treatment of loss from small business corporation  .......  .......  .......  .......  .......  .......  .......  ........       35       40        40        40        40        40        40       200
                     stock sale......................................................
          57        Accelerated depreciation of buildings other than rental housing      1,650    1,530    1,540    1,360    1,210    1,130    1,230     6,470    1,610    1,640     1,750     1,520     1,650     1,600     1,990     8,510
                     (normal tax method).............................................
          58        Accelerated depreciation of machinery and equipment (normal tax     28,020   30,230   32,400   34,530   36,470   38,110   39,770   181,280    2,640    2,820     3,000     3,150     3,290     3,420     3,560    16,420
                     method).........................................................
          59        Expensing of certain small investments (normal tax method).......      630      810      880      870      840      810      820     4,220    1,470    1,760     1,810     1,800     1,730     1,670     1,690     8,700
          60        Amortization of start-up costs (normal tax method)...............      120      120      120      130      130      130      130       640       80       80        80        80        90        90        90       430
          61        Graduated corporation income tax rate (normal tax method)........    6,480    6,700    7,140    7,460    7,540    7,760    7,960    37,860  .......  .......  ........  ........  ........  ........  ........  ........
          62        Exclusion of interest on small issue bonds.......................       70       80       80       90       90      100      110       470      220      220       230       240       270       310       340     1,390

    [[Page 68]]

                 Transportation:
          63       Deferral of tax on shipping companies.............................       20       20       20       20       20       20       20       100  .......  .......  ........  ........  ........  ........  ........  ........
          64       Exclusion of reimbursed employee parking expenses.................  .......  .......  .......  .......  .......  .......  .......  ........    1,880    1,980     2,090     2,190     2,300     2,420     2,550    11,550
          65       Exclusion for employer-provided transit passes....................  .......  .......  .......  .......  .......  .......  .......  ........      190      220       260       310       350       400       440     1,760

                 Community and regional development:
          66       Investment credit for rehabilitation of structures (other than           20       20       20       20       20       20       20       100       10       10        10        10        10        10        10        50
                    historic)........................................................
          67       Exclusion of interest for airport, dock, and similar bonds........      160      160      160      180      200      210      240       990      460      470       480       510       580       640       710     2,920
          68       Exemption of certain mutuals' and cooperatives' income............       60       60       60       60       60       70       70       320  .......  .......  ........  ........  ........  ........  ........  ........
          69       Empowerment zones and enterprise communities......................       80       80      210      300      310      350      370     1,540      230      240       450       840       900       990     1,110     4,290
          70       New markets tax credit............................................  .......  .......       20       50       80      110      160       420  .......       10        70       150       230       330       480     1,260
          71       Expensing of environmental remediation costs......................      130      290      340      280       40     -110      -70       480       30       60        70        50       -10       -20       -10        80

                 Education, training, employment, and social services:
                   Education:
          72        Exclusion of scholarship and fellowship income (normal tax         .......  .......  .......  .......  .......  .......  .......  ........    1,110    1,120     1,130     1,140     1,150     1,160     1,180     5,760
                     method).........................................................
          73        HOPE tax credit..................................................  .......  .......  .......  .......  .......  .......  .......  ........    4,210    4,480     4,610     4,280     4,110     4,360     4,630    21,990
          74        Lifetime Learning tax credit.....................................  .......  .......  .......  .......  .......  .......  .......  ........    2,420    2,570     2,580     2,960     4,490     4,460     4,660    19,150
          75        Education Individual Retirement Accounts.........................  .......  .......  .......  .......  .......  .......  .......  ........       20       30        50        60        80       100       120       410
          76        Deductibility of student-loan interest...........................  .......  .......  .......  .......  .......  .......  .......  ........      360      370       380       380       390       400       410     1,960
          77        Deferral for state prepaid tuition plans.........................  .......  .......  .......  .......  .......  .......  .......  ........      100      130       180       230       250       290       330     1,280
          78        Exclusion of interest on student-loan bonds......................       50       60       60       60       70       70       80       340      160      170       170       180       200       220       250     1,020
          79        Exclusion of interest on bonds for private nonprofit educational       130      140      140      150      160      190      200       840      390      400       410       430       490       550       610     2,490
                     facilities......................................................
          80        Credit for holders of zone academy bonds.........................       10       20       40       50       60       70       70       290  .......  .......  ........  ........  ........  ........  ........  ........
          81        Exclusion of interest on savings bonds redeemed to finance         .......  .......  .......  .......  .......  .......  .......  ........       10       10        10        10        10        10        10        50
                     educational expenses............................................
          82        Parental personal exemption for students age 19 or over..........  .......  .......  .......  .......  .......  .......  .......  ........      950    1,010     1,070     1,110     1,170     1,220     1,270     5,840
          83        Deductibility of charitable contributions (education)............      600      600      590      630      620      590      690     3,120    2,130    2,230     2,340     2,460     2,580     2,710     2,850    12,940
          84        Exclusion of employer-provided educational assistance............  .......  .......  .......  .......  .......  .......  .......  ........      240      260        90  ........  ........  ........  ........        90
                   Training, employment, and social services:
          85        Work opportunity tax credit......................................      350      360      270      160       70       30       10       540       40       40        30        20        10  ........  ........        60
          86        Welfare-to-work tax credit.......................................       40       60       60       40       20       10  .......       130       10       10        10        10  ........  ........  ........        20
          87        Exclusion of employer provided child care........................  .......  .......  .......  .......  .......  .......  .......  ........      670      700       730       760       810       850       900     4,050
          88        Adoption assistance..............................................  .......  .......  .......  .......  .......  .......  .......  ........      120      130       120        30        30        20        20       220
          89        Assistance for adopted foster children...........................  .......  .......  .......  .......  .......  .......  .......  ........      160      190       210       240       250       260       270     1,230
          90        Exclusion of employee meals and lodging (other than military)....  .......  .......  .......  .......  .......  .......  .......  ........      680      710       740       780       810       850       890     4,070
          91        Child credit \3\.................................................  .......  .......  .......  .......  .......  .......  .......  ........   19,330   19,310    18,980    18,410    18,000    17,430    16,790    89,610
          92        Credit for child and dependent care expenses.....................  .......  .......  .......  .......  .......  .......  .......  ........    2,390    2,360     2,330     2,300     2,280     2,250     2,220    11,380
          93        Credit for disabled access expenditures..........................       10       10       10       10       10       10       10        50       30       30        40        40        40        40        40       200
          94        Deductibility of charitable contributions, other than education        750      740      730      790      760      730      860     3,870   19,400   20,280    21,300    22,370    23,480    24,650    25,920   117,720
                     and health......................................................
          95        Exclusion of certain foster care payments........................  .......  .......  .......  .......  .......  .......  .......  ........      550      570       300       630       660       700       730     3,020
          96        Exclusion of parsonage allowances................................  .......  .......  .......  .......  .......  .......  .......  ........      330      350       370       400       430       460       490     2,150

    [[Page 69]]

                 Health:
          97       Exclusion of employer contributions for medical insurance premiums  .......  .......  .......  .......  .......  .......  .......  ........   76,530   84,350    92,230    99,800   107,620   115,770   124,690   540,110
                    and medical care.................................................
          98       Self-employed medical insurance premiums..........................  .......  .......  .......  .......  .......  .......  .......  ........    1,340    1,510     1,760     2,470     3,580     3,900     4,220    15,930
          99       Workers' compensation insurance premiums..........................  .......  .......  .......  .......  .......  .......  .......  ........    4,620    4,850     5,090     5,350     5,620     5,900     6,190    28,150
         100       Medical Savings Accounts..........................................  .......  .......  .......  .......  .......  .......  .......  ........       20       20        30        20        20        20        20       110
         101       Deductibility of medical expenses.................................  .......  .......  .......  .......  .......  .......  .......  ........    4,250    4,560     4,870     5,170     5,480     5,790     6,110    27,420
         102       Exclusion of interest on hospital construction bonds..............      270      280      290      310      340      370      410     1,720      810      820       840       900     1,010     1,120     1,250     5,120
         103       Deductibility of charitable contributions (health)................      730      720      710      760      740      710      830     3,750    2,180    2,280     2,390     2,510     2,640     2,770     2,910    13,220
         104       Tax credit for orphan drug research...............................      100      110      130      140      160      180      200       810  .......  .......  ........  ........  ........  ........  ........  ........
         105       Special Blue Cross/Blue Shield deduction..........................      230      250      280      320      290      280      250     1,420  .......  .......  ........  ........  ........  ........  ........  ........

                 Income security:
         106       Exclusion of railroad retirement system benefits..................  .......  .......  .......  .......  .......  .......  .......  ........      360      360       360       360       360       360       360     1,800
         107       Exclusion of workers' compensation benefits.......................  .......  .......  .......  .......  .......  .......  .......  ........    5,120    5,560     5,810     6,070     6,320     6,600     6,900    31,700
         108       Exclusion of public assistance benefits (normal tax method).......  .......  .......  .......  .......  .......  .......  .......  ........      360      370       390       400       420       430       450     2,090
         109       Exclusion of special benefits for disabled coal miners............  .......  .......  .......  .......  .......  .......  .......  ........       80       70        70        60        60        60        50       300
         110       Exclusion of military disability pensions.........................  .......  .......  .......  .......  .......  .......  .......  ........      120      120       130       130       130       140       140       670
                   Net exclusion of pension contributions and earnings:
         111        Employer plans...................................................  .......  .......  .......  .......  .......  .......  .......  ........   89,120   93,220    97,510   103,010   108,480   114,220   121,990   545,210
         112        Individual Retirement Accounts...................................  .......  .......  .......  .......  .......  .......  .......  ........   15,200   15,920    16,600    17,230    17,770    18,220    18,520    88,340
         113        Keogh plans......................................................  .......  .......  .......  .......  .......  .......  .......  ........    5,500    5,830     6,180     6,540     6,930     7,330     7,750    34,730
                   Exclusion of other employee benefits:
         114        Premiums on group term life insurance............................  .......  .......  .......  .......  .......  .......  .......  ........    1,720    1,750     1,780     1,830     1,860     1,900     1,930     9,300
         115        Premiums on accident and disability insurance....................  .......  .......  .......  .......  .......  .......  .......  ........      200      210       220       230       240       250       260     1,200
         116        Income of trusts to finance supplementary unemployment benefits..       10       10       10       10       10       10       10        50  .......  .......  ........  ........  ........  ........  ........  ........
         117        Special ESOP rules...............................................      940      980    1,020    1,070    1,120    1,180    1,240     5,630      300      310       320       330       340       360       370     1,720
         118        Additional deduction for the blind...............................  .......  .......  .......  .......  .......  .......  .......  ........       30       30        30        30        40        40        40       180
         119        Additional deduction for the elderly.............................  .......  .......  .......  .......  .......  .......  .......  ........    1,920    1,990     2,060     2,130     2,210     2,260     2,350    11,010
         120        Tax credit for the elderly and disabled..........................  .......  .......  .......  .......  .......  .......  .......  ........       30       30        30        30        30        30        30       150
         121        Deductibility of casualty losses.................................  .......  .......  .......  .......  .......  .......  .......  ........      230      250       260       280       290       300       320     1,450
         122        Earned income tax credit \4\.....................................  .......  .......  .......  .......  .......  .......  .......  ........    4,644    4,692     4,963     5,225     5,436     5,688     5,965    27,297

                 Social Security:
                   Exclusion of social security benefits:
         123        Social Security benefits for retired workers.....................  .......  .......  .......  .......  .......  .......  .......  ........   18,250   19,070    19,930    20,520    21,050    21,840    22,780   106,120
         124        Social Security benefits for disabled............................  .......  .......  .......  .......  .......  .......  .......  ........    2,640    2,880     3,160     3,490     3,910     4,360     4,840    19,760
         125        Social Security benefits for dependents and survivors............  .......  .......  .......  .......  .......  .......  .......  ........    3,910    4,030     4,210     4,440     4,730     5,070     5,380    23,830

                 Veterans benefits and services:
         126       Exclusion of veterans death benefits and disability compensation..  .......  .......  .......  .......  .......  .......  .......  ........    3,090    3,290     3,460     3,640     3,820     4,010     4,210    19,140
         127       Exclusion of veterans pensions....................................  .......  .......  .......  .......  .......  .......  .......  ........       70       70        80        80        90        90       100       440
         128       Exclusion of GI bill benefits.....................................  .......  .......  .......  .......  .......  .......  .......  ........       80       90        90       100       100       110       110       510
         129       Exclusion of interest on veterans housing bonds...................       10       10       10       10       10       10       10        50       30       30        30        30        30        40        40       170

                 General purpose fiscal assistance:
         130       Exclusion of interest on public purpose State and local bonds.....    5,730    5,840    5,960    6,080    6,200    6,320    6,450    31,010   16,870   17,210    17,550    17,900    18,260    18,630    19,000    91,340
         131       Deductibility of nonbusiness state and local taxes other than on    .......  .......  .......  .......  .......  .......  .......  ........   42,650   45,730    48,730    51,780    55,030    58,390    62,160   276,090
                    owner-occupied homes.............................................

    [[Page 70]]

         132       Tax credit for corporations receiving income from doing business      2,470    2,520    2,560    2,580    2,610    2,630    1,060    11,440  .......  .......  ........  ........  ........  ........  ........  ........
                    in U.S. possessions..............................................

                 Interest:
         133       Deferral of interest on U.S. savings bonds........................  .......  .......  .......  .......  .......  .......  .......  ........      470      490       520       540       570       600       630     2,860

                 Addendum: Aid to State and local governments:
                   Deductibility of:
                    Property taxes on owner-occupied homes...........................  .......  .......  .......  .......  .......  .......  .......  ........   22,140   23,920    25,570    27,220    29,080    30,980    33,220   146,070
                    Nonbusiness State and local taxes other than on owner-occupied     .......  .......  .......  .......  .......  .......  .......  ........   42,650   45,730    48,730    51,780    55,030    58,390    62,160   276,090
                     homes...........................................................
                   Exclusion of interest on State and local bonds for:
                    Public purposes..................................................    5,730    5,840    5,960    6,080    6,200    6,320    6,450    31,010   16,870   17,210    17,550    17,900    18,260    18,630    19,000    91,340
                    Energy facilities................................................       20       20       20       20       30       40       40       150       70       70        70        80        80        90       100       420
                    Water, sewage, and hazardous waste disposal facilities...........      100      100      100      120      130      140      150       640      300      300       310       330       380       420       460     1,900
                    Small-issues.....................................................       70       80       80       90       90      100      110       470      220      220       230       240       270       310       340     1,390
                    Owner-occupied mortgage subsidies................................      200      200      210      220      250      270      290     1,240      590      600       610       650       740       820       910     3,730
                    Rental housing...................................................       40       40       40       40       50       60       70       260      120      120       130       130       150       170       190       770
                    Airports, docks, and similar facilities..........................      160      160      160      180      200      210      240       990      460      470       480       510       580       640       710     2,920
                    Student loans....................................................       50       60       60       60       70       70       80       340      160      170       170       180       200       220       250     1,020
                    Private nonprofit educational facilities.........................      130      140      140      150      160      190      200       840      390      400       410       430       490       550       610     2,490
                    Hospital construction............................................      270      280      290      310      340      370      410     1,720      810      820       840       900     1,010     1,120     1,250     5,120
                    Veterans' housing................................................       10       10       10       10       10       10       10        50       30       30        30        30        30        40        40       170
                   Credit for holders of zone academy bonds..........................       10       20       40       50       60       70       70       290  .......  .......  ........  ........  ........  ........  ........  ........
    ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ The determination of whether a provision is a tax expenditure is made on the basis of a broad concept of ``income'' that is larger in scope than is ``income'' as defined under general U.S. income tax principles. For that reason,
      the tax expenditure estimates include, for example, estimates related to the exclusion of extraterritorial income, as well as other exclusions, notwithstanding that such exclusions define income under the general rule of U.S.
      income taxation.
    \2\ 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: 2000 $840; 2001 $880; 2002 $930; 2003 $950; 2004 $960; 2005 $960; and in
      2006 $960.

    \3\ The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2000 $810; 2001 $790; 2002 $760; 2003 $720; 2004 $660; 2005 $630; and
      in 2006 $590.

    \4\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2000 $26,099; 2001 $25,923; 2002 $26,983; 2003 $27,875; 2004
      $28,545; 2005 $29,373; and in 2006 $30,165.

    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 $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.

    [[Page 71]]

                    Table 5-3.  INCOME TAX EXPENDITURES RANKED BY TOTAL 2002 PROJECTED REVENUE EFFECT
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                        Provision                                         2002          2002-2006
    ----------------------------------------------------------------------------------------------------------------
    Net exclusion of pension contributions and earnings: Employer Plans...........      97,510          545,210
    Exclusion of employer contributions for medical insurance premiums and medical      92,230          540,110
     care.........................................................................
    Deductibility of mortgage interest on owner-occupied homes....................      65,750          353,520
    Deductibility of nonbusiness state and local taxes other than on owner-             48,730          276,090
     occupied homes...............................................................
    Capital gains (except agriculture, timber, iron ore, and coal) (normal tax          42,950          227,830
     method)......................................................................
    Accelerated depreciation of machinery and equipment (normal tax method).......      35,400          197,700
    Step-up basis of capital gains at death.......................................      29,370          159,060
    Deductibility of State and local property tax on owner-occupied homes.........      25,570          146,070
    Exclusion of interest on public purpose State and local bonds.................      23,510          122,350
    Deductibility of charitable contributions, other than education and health....      22,030          121,590
    Exclusion of Social Security benefits for retired workers.....................      19,930          106,120
    Capital gains exclusion on home sales.........................................      19,670          104,430
    Child credit..................................................................      18,980           89,610
    Net exclusion of pension contributions and earnings: Individual Retirement          16,600           88,340
     Accounts.....................................................................
    Exclusion of interest on life insurance savings...............................      16,520           98,820
    Graduated corporation income tax rate (normal tax method).....................       7,140           37,860
    Deferral of income from controlled foreign corporations (normal tax method)...       7,000           39,680
    Credit for increasing research activities.....................................       6,760           20,740
    Net exclusion of pension contributions and earnings: Keough Plans.............       6,180           34,730
    Exclusion of workers' compensation benefits...................................       5,810           31,700
    Accelerated depreciation on rental housing (normal tax method)................       5,520           29,740
    Workers' compensation insurance premiums......................................       5,090           28,150
    Earned income tax credit......................................................       4,963           27,297
    Deductibility of medical expenses.............................................       4,870           27,420
    Extraterritorial income exclusion.............................................       4,810           27,630
    HOPE tax credit...............................................................       4,610           21,990
    Exception from passive loss rules for $25,000 of rental loss..................       4,220           19,020
    Exclusion of Social Security benefits for dependents and survivors............       4,210           23,830
    Credit for low-income housing investments.....................................       3,460           18,870
    Exclusion of veterans death benefits and disability compensation..............       3,460           19,140
    Accelerated depreciation of buildings other than rental housing (normal tax          3,290           14,980
     method)......................................................................
    Exclusion of Social Security benefits for disabled............................       3,160           19,760
    Deductibility of charitable contributions (health)............................       3,100           16,970
    Deductibility of charitable contributions (education).........................       2,930           16,060
    Exclusion of income earned abroad by U.S. citizens............................       2,850           15,940
    Expensing of certain small investments (normal tax method)....................       2,690           12,920
    Lifetime Learning tax credit..................................................       2,580           19,150
    Tax credit for corporations receiving income from doing business in U.S.             2,560           11,440
     possessions..................................................................
    Inventory property sales source rules exception...............................       2,390           13,190
    Credit for child and dependent care expenses..................................       2,330           11,380
    Exclusion of benefits, allowances, and certain pays to armed forces personnel.       2,190           11,190
    Exclusion of reimbursed employee parking expenses.............................       2,090           11,550
    Additional deduction for the elderly..........................................       2,060           11,010
    Exclusion of premiums on group term life insurance............................       1,780            9,300
    Exemption of credit union income..............................................       1,770           10,120
    Self-employed medical insurance premiums......................................       1,760           15,930
    Expensing of research and experimentation expenditures (normal tax method)....       1,680            9,410
    Special ESOP rules............................................................       1,340            7,350
    Exclusion of scholarship and fellowship income (normal tax method)............       1,130            5,760
    Exclusion of interest on hospital construction bonds..........................       1,130            6,840
    Parental personal exemption for students age 19 or over.......................       1,070            5,840
    Deferral of income from post 1987 installment sales...........................       1,050            5,450
    Alternative fuel production credit............................................         860            1,790
    Exclusion of interest on owner-occupied mortgage subsidy bonds................         820            4,970
    Capital gains treatment of certain income.....................................         780            4,310
    Exclusion of certain allowances for Federal employees abroad..................         750            4,160
    Exclusion of employee meals and lodging (other than military).................         740            4,070
    Exclusion of employer provided child care.....................................         730            4,050
    Empowerment zones and enterprise communities..................................         660            5,830
    Exclusion of interest for airport, dock, and similar bonds....................         640            3,910
    Expensing of multiperiod timber growing costs.................................         610            3,220
    Exclusion of interest on bonds for private nonprofit educational facilities...         550            3,330
    Deferred taxes for financial firms on certain income earned overseas..........         540              540
    Deferral of interest on U.S. savings bonds....................................         520            2,860
    Enhanced oil recovery credit..................................................         440            3,280
    Exclusion of interest on bonds for water, sewage, and hazardous waste                  410            2,540
     facilities...................................................................
    Expensing of environmental remediation costs..................................         410              560
    Exclusion of public assistance benefits (normal tax method)...................         390            2,090
    Deductibility of student-loan interest........................................         380            1,960

    [[Page 72]]

    Exclusion of parsonage allowances.............................................         370            2,150
    Exclusion of railroad retirement system benefits..............................         360            1,800
    Excess of percentage over cost depletion, fuels...............................         340            1,720
    Exclusion of interest on small issue bonds....................................         310            1,860
    Excess of percentage over cost depletion, nonfuel minerals....................         300            1,610
    Work opportunity tax credit...................................................         300              600
    Exclusion of certain foster care payments.....................................         300            3,020
    Special Blue Cross/Blue Shield deduction......................................         280            1,420
    Exclusion for employer-provided transit passes................................         260            1,760
    Deductibility of casualty losses..............................................         260            1,450
    Tax exemption of certain insurance companies owned by tax-exempt organizations         250            1,410
    Exclusion of interest on student-loan bonds...................................         230            1,360
    Exclusion of premiums on accident and disability insurance....................         220            1,200
    Tax incentives for preservation of historic structures........................         210            1,180
    Assistance for adopted foster children........................................         210            1,230
    Carryover basis of capital gains on gifts.....................................         200            1,100
    Amortization of start-up costs (normal tax method)............................         200            1,070
    Deferral for state prepaid tuition plans......................................         180            1,280
    Exclusion of interest on rental housing bonds.................................         170            1,030
    Expensing of certain capital outlays..........................................         160              860
    Tax credit for orphan drug research...........................................         130              810
    Exclusion of military disability pensions.....................................         130              670
    Expensing of certain multiperiod production costs.............................         120              620
    Adoption assistance...........................................................         120              220
    Small life insurance company deduction........................................         100              500
    Exclusion of interest on energy facility bonds................................          90              570
    Capital gains exclusion of small corporation stock............................          90              820
    New markets tax credit........................................................          90            1,680
    Exclusion of employer-provided educational assistance.........................          90               90
    Exclusion of GI bill benefits.................................................          90              510
    Capital gains treatment of royalties on coal..................................          80              420
    Exclusion from income of conservation subsidies provided by public utilities..          80              430
    Capital gains treatment of certain timber income..............................          80              420
    Exceptions from imputed interest rules........................................          80              400
    Exclusion of veterans pensions................................................          80              440
    Expensing of exploration and development costs, fuels.........................          70              490
    New technology credit.........................................................          70              430
    Welfare-to-work tax credit....................................................          70              150
    Exclusion of special benefits for disabled coal miners........................          70              300
    Exemption of certain mutuals' and cooperatives' income........................          60              320
    Tax credit and deduction for clean-fuel burning vehicles......................          50       ...............
    Income averaging for farmers..................................................          50              280
    Excess bad debt reserves of financial institutions............................          50              110
    Education Individual Retirement Accounts......................................          50              410
    Credit for disabled access expenditures.......................................          50              250
    Ordinary income treatment of loss from small business corporation stock sale..          40              200
    Credit for holders of zone academy bonds......................................          40              290
    Exclusion of interest on veterans housing bonds...............................          40              220
    Investment credit for rehabilitation of structures (other than historic)......          30              150
    Medical Savings Accounts......................................................          30              110
    Additional deduction for the blind............................................          30              180
    Tax credit for the elderly and disabled.......................................          30              150
    Exception from passive loss limitation for working interests in oil and gas             20              100
     properties...................................................................
    Alcohol fuel credits..........................................................          20              100
    Expensing of exploration and development costs, nonfuel minerals..............          20              100
    Deferral of tax on shipping companies.........................................          20              100
    Treatment of loans forgiven for solvent farmers...............................          10               50
    Deferral of gain on sale of farm refiners.....................................          10               50
    Special alternative tax on small property and casualty insurance companies....          10               50
    Cancellation of indebtedness..................................................          10               70
    Exclusion of interest on savings bonds redeemed to finance educational                  10               50
     expenses.....................................................................
    Income of trusts to finance supplementary unemployment benefits...............          10               50
    Exclusion of income of foreign sales corporations.............................  ...............  ...............
    Investment credit and seven-year amortization for reforestation expenditures..  ...............          30
    ----------------------------------------------------------------------------------------------------------------

    [[Page 73]]

                Table 5-4.  PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR ACTIVITY IN CALENDAR YEAR 2000
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                                           Present
                                                       Provision                                          Value of
                                                                                                        Revenue Loss
    ----------------------------------------------------------------------------------------------------------------
           1     Deferral of income from controlled foreign corporations (normal tax method)..........     6,360
           2     Deferred taxes for financial firms on income earned overseas.........................     1,130
           3     Expensing of research and experimentation expenditures (normal tax method)...........     1,650
           4     Expensing of exploration and development costs--fuels................................       140
           5     Expensing of exploration and development costs--nonfuels.............................        10
           6     Expensing of multiperiod timber growing costs........................................       340
           7     Expensing of certain multiperiod production costs--agriculture.......................       250
           8     Expensing of certain capital outlays--agriculture....................................       280
           9     Deferral of income on life insurance and annuity contracts...........................    21,220
          10     Accelerated depreciation of rental housing (normal tax method).......................     4,470
          11     Accelerated depreciation of buildings other than rental housing (normal tax method)..       460
          12     Accelerated depreciation of machinery and equipment (normal tax method)..............    35,760
          13     Expensing of certain small investments (normal tax method)...........................     1,140
          14     Amortization of start-up costs (normal tax method)...................................       180
          15     Deferral of tax on shipping companies................................................        20
          16     Deferral for state prepaid tuition plans.............................................       110
          17     Credit for holders of zone academy bonds.............................................       160
          18     Credit for low-income housing investments............................................     2,490
          19     Exclusion of pension contributions--employer plans...................................   121,100
          20     Exclusion of IRA contributions and earnings..........................................     5,930
          21     Exclusion of contributions and earnings for Keogh plans..............................     4,320
          22     Exclusion of interest on public-purpose bonds........................................    19,670
          23     Exclusion of interest on non-public purpose bonds....................................     5,170
          24     Deferral of interest on U.S. savings bonds...........................................       410
    ----------------------------------------------------------------------------------------------------------------

                               Outlay Equivalents

      The concept of ``outlay equivalents'' is another theoretical 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 provision. The outlay-equivalent
    measure allows the cost of the tax expenditure to be compared with a
    direct Federal outlay. Outlay equivalents are reported in Table 5-5.

                                       Table 5-5.  OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX \1\
                                                                    (In millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                            Outlay Equivalents
                                                                            --------------------------------------------------------------------------------
                                                                               2000      2001      2002      2003      2004      2005      2006    2002-2006
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                 National Defense
           1       Exclusion of benefits, allowances, and certain pays to       2,490     2,510     2,540     2,570     2,600     2,620     2,650    12,980
                    armed forces personnel.................................

                 International affairs:
           2       Exclusion of income earned abroad by U.S. citizens......     3,460     3,700     3,950     4,170     4,400     4,640     4,910    22,070
           3       Exclusion of certain allowances for Federal employees          920       970     1,020     1,070     1,120     1,180     1,240     5,630
                    abroad.................................................
           4       Exclusion of income of foreign sales corporations.......     5,990  ........  ........  ........  ........  ........  ........  .........
           5       Extraterritorial income exclusion.......................  ........     6,910     7,410     7,920     8,470     9,050     9,670    42,520
           6       Inventory property sales source rules exception.........     3,340     3,500     3,670     3,860     4,050     4,250     4,460    20,290
           7       Deferral of income from controlled foreign corporations      6,200     6,600     7,000     7,450     7,900     8,400     8,930    39,680
                    (normal tax method)....................................
           8       Deferred taxes for financial firms on certain income         1,190     1,290       540  ........  ........  ........  ........       540
                    earned overseas........................................

                 General science, space, and technology:
           9       Expensing of research and experimentation expenditures       1,680     1,650     1,680     1,770     1,880     1,980     2,100     9,410
                    (normal tax method)....................................
          10       Credit for increasing research activities...............     2,510     9,320    10,390     8,300     7,240     4,190     1,790    31,910
                 Energy:
          11       Expensing of exploration and development costs, fuels...        30        90        90       130       150       140       130       640
          12       Excess of percentage over cost depletion, fuels.........       450       450       460       460       460       470       470     2,320
          13       Alternative fuel production credit......................     1,310     1,230     1,150       730       170       170       170     2,390
          14       Exception from passive loss limitation for working              20        20        20        20        20        20        20       100
                    interests in oil and gas properties....................
          15       Capital gains treatment of royalties on coal............        90       100       100       110       110       120       120       560
          16       Exclusion of interest on energy facility bonds..........       130       130       130       140       160       190       210     1,090
          17       Enhanced oil recovery credit............................       410       500       590       710       860     1,030     1,230     4,420
          18       New technology credit...................................        50        80       100       120       130       120       120       590

    [[Page 74]]

          19       Alcohol fuel credits \2\................................        20        20        20        20        20        20        20       100
          20       Tax credit and deduction for clean-fuel burning vehicles        80        90        70        40        10       -40       -60        20
          21       Exclusion from income of conservation subsidies provided       110       110       110       110       120       120       120       580
                    by public utilities....................................

                 Natural resources and environment:
          22       Expensing of exploration and development costs, nonfuel         30        30        30        30        30        30        30       150
                    minerals...............................................
          23       Excess of percentage over cost depletion, nonfuel              340       350       370       380       400       420       430     2,000
                    minerals...............................................
          24       Exclusion of interest on bonds for water, sewage, and          570       570       590       650       750       830       900     3,720
                    hazardous waste facilities.............................
          25       Capital gains treatment of certain timber income........        90       100       100       110       110       120       120       560
          26       Expensing of multiperiod timber growing costs...........       740       770       800       820       840       870       890     4,220
          27       Investment credit and seven-year amortization for         ........  ........  ........        10        10        10        10        40
                    reforestation expenditures.............................
          28       Tax incentives for preservation of historic structures..       190       200       210       220       240       250       260     1,180

                 Agriculture:
          29       Expensing of certain capital outlays....................       200       200       200       210       210       220       220     1,060
          30       Expensing of certain multiperiod production costs.......       140       140       150       150       150       150       150       750
          31       Treatment of loans forgiven for solvent farmers.........        10        10        10        10        10        10        10        50
          32       Capital gains treatment of certain income...............       940       990     1,040     1,100     1,150     1,210     1,270     5,770
          33       Income averaging for farmers............................        60        60        60        70        70        70        70       340
          34       Deferral of gain on sale of farm refiners...............        10        10        10        10        10        10        10        50

                 Commerce and housing:
                   Financial institutions and insurance:
          35        Exemption of credit union income.......................     2,310     2,460     2,640     2,820     3,010     3,220     3,400    15,090
          36        Excess bad debt reserves of financial institutions.....        80        70        60        40        20        10  ........       130
          37        Exclusion of interest on life insurance savings........    13,950    15,170    16,520    17,990    19,610    21,370    23,330    98,820
          38        Special alternative tax on small property and casualty         10        10        10        10        10        10        10        50
                     insurance companies...................................
          39        Tax exemption of certain insurance companies owned by         300       310       320       340       360       380       400     1,800
                     tax-exempt organizations..............................
          40        Small life insurance company deduction.................       130       130       130       130       130       130       130       650
                   Housing:
          41        Exclusion of interest on owner-occupied mortgage            1,130     1,140     1,170     1,270     1,440     1,600     1,790     7,270
                     subsidy bonds.........................................
          42        Exclusion of interest on rental housing bonds..........       230       230       240       240       290       340       390     1,500
          43        Deductibility of mortgage interest on owner-occupied       60,270    63,190    65,750    68,050    70,470    73,100    76,150   353,520
                     homes.................................................
          44        Deductibility of State and local property tax on owner-    22,140    23,920    25,570    27,220    29,080    30,980    33,220   146,070
                     occupied homes........................................
          45        Deferral of income from post 1987 installment sales....     1,000     1,020     1,040     1,060     1,080     1,100     1,120     5,400
          46        Capital gains exclusion on home sales..................    23,170    23,870    24,590    25,320    26,090    26,870    27,670   130,540
          47        Exception from passive loss rules for $25,000 of rental     4,720     4,450     4,220     4,000     3,790     3,600     3,410    19,020
                     loss..................................................
          48        Credit for low-income housing investments..............     4,350     4,500     4,690     4,900     5,150     5,360     5,540    25,640
          49        Accelerated depreciation on rental housing (normal tax      4,740     5,140     5,520     5,830     6,040     6,140     6,210    29,740
                     method)...............................................
                   Commerce:
          50        Cancellation of indebtedness...........................        30        20        10        10        10        20        20        70
          51        Exceptions from imputed interest rules.................        80        80        80        80        80        80        80       400
          52        Capital gains (except agriculture, timber, iron ore,       54,030    55,630    57,270    58,960    60,700    62,500    64,340   303,770
                     and coal) (normal tax method).........................
          53        Capital gains exclusion of small corporation stock.....        50        90       120       170       220       270       330     1,110
          54        Step-up basis of capital gains at death................    36,120    37,650    39,160    40,720    42,350    44,040    45,810   212,080
          55        Carryover basis of capital gains on gifts..............       180       190       200       210       220       230       240     1,100
          56        Ordinary income treatment of loss from small business          40        50        50        50        60        60        60       280
                     corporation stock sale................................
          57        Accelerated depreciation of buildings other than rental     3,260     3,170     3,290     2,880     2,860     2,730     3,220    14,980
                     housing (normal tax method)...........................
          58        Accelerated depreciation of machinery and equipment        30,660    33,050    35,400    37,680    39,760    41,530    43,330   197,700
                     (normal tax method)...................................
          59        Expensing of certain small investments (normal tax          2,100     2,570     2,690     2,670     2,570     2,480     2,510    12,920
                     method)...............................................
          60        Amortization of start-up costs (normal tax method).....       200       200       200       210       220       220       220     1,070
          61        Graduated corporation income tax rate (normal tax           9,960    10,300    10,980    11,470    11,600    11,940    12,250    58,240
                     method)...............................................
          62        Exclusion of interest on small issue bonds.............       410       430       440       480       520       600       670     2,710

                 Transportation:
          63       Deferral of tax on shipping companies...................        20        20        20        20        20        20        20       100
          64       Exclusion of reimbursed employee parking expenses.......     2,420     2,560     2,690     2,830     2,970     3,130     3,280    14,900
          65       Exclusion for employer-provided transit passes..........       260       300       360       430       490       550       610     2,440

                 Community and regional development:
          66       Investment credit for rehabilitation of structures              30        30        30        30        30        30        30       150
                    (other than historic)..................................
          67       Exclusion of interest for airport, dock, and similar           890       900       920       990     1,140     1,250     1,410     5,710
                    bonds..................................................
          68       Exemption of certain mutuals' and cooperatives' income..        60        60        60        60        60        70        70       320
          69       Empowerment zones and enterprise communities............       310       320       660     1,140     1,210     1,340     1,480     5,830
          70       New markets tax credit..................................  ........        10       120       250       390       560       810     2,130
          71       Expensing of environmental remediation costs............       200       440       510       410        40      -160      -100       700

                 Education, training, employment, and social services:
                   Education:
          72        Exclusion of scholarship and fellowship income (normal      1,220     1,230     1,240     1,250     1,270     1,280     1,290     6,330
                     tax method)...........................................
          73        HOPE tax credit........................................     5,400     5,750     5,910     5,490     5,260     5,590     5,930    28,180

    [[Page 75]]

          74        Lifetime Learning tax credit...........................     3,110     3,290     3,310     3,800     5,750     5,720     5,980    24,560
          75        Education Individual Retirement Accounts...............        20        30        50        60        80       100       120       410
          76        Deductibility of student-loan interest.................       430       440       450       460       470       480       490     2,350
          77        Deferral for state prepaid tuition plans...............       100       130       180       230       250       290       330     1,280
          78        Exclusion of interest on student-loan bonds............       300       330       330       340       390       420       490     1,970
          79        Exclusion of interest on bonds for private nonprofit          740       770       790       840       950     1,090     1,200     4,870
                     educational facilities................................
          80        Credit for holders of zone academy bonds...............        10        30        50        70        90       100       100       410
          81        Exclusion of interest on savings bonds redeemed to             10        20        20        20        20        20        20       100
                     finance educational expenses..........................
          82        Parental personal exemption for students age 19 or over     1,060     1,120     1,180     1,230     1,290     1,350     1,410     6,460
          83        Deductibility of charitable contributions (education)..     3,770     3,890     4,110     4,310     4,450     4,650     4,970    22,490
          84        Exclusion of employer-provided educational assistance..       300       320       110  ........  ........  ........  ........       110
                   Training, employment, and social services:
          85        Work opportunity tax credit............................       390       400       300       180        80        30        10       600
          86        Welfare-to-work tax credit.............................        50        70        70        50        20        10  ........       150
          87        Exclusion of employer provided child care..............       890       930       970     1,020     1,080     1,140     1,200     5,410
          88        Adoption assistance....................................       150       160       150        40        40        30        20       280
          89        Assistance for adopted foster children.................       180       210       240       270       280       290       300     1,380
          90        Exclusion of employee meals and lodging (other than           830       870       910       950       990     1,030     1,080     4,960
                     military).............................................
          91        Child credit \3\.......................................    25,770    25,750    25,310    24,550    24,000    23,240    23,240   120,340
          92        Credit for child and dependent care expenses...........     3,190     3,150     3,110     3,080     3,340     3,000     2,970    15,500
          93        Credit for disabled access expenditures................        60        60        70        70        70        70        80       360
          94        Deductibility of charitable contributions, other than      27,070    28,280    29,760    31,300    32,810    34,460    36,340   164,670
                     education and health..................................
          95        Exclusion of certain foster care payments..............       630       660       690       730       760       800       840     3,820
          96        Exclusion of parsonage allowances......................       410       440       470       500       530       570       610     2,680

                 Health:
          97       Exclusion of employer contributions for medical             98,640   108,840   119,110   129,040   139,290   150,010   161,800   699,250
                    insurance premiums and medical care....................
          98       Self-employed medical insurance premiums................     1,660     1,870     2,200     3,080     4,480     4,880     5,290    19,930
          99       Workers' compensation insurance premiums................     5,780     6,060     6,370     6,690     7,020     7,370     7,740    35,190
         100       Medical Savings Accounts................................        30        30        30        30        30        30        20       140
         101       Deductibility of medical expenses.......................     4,250     4,560     4,870     5,170     5,480     5,790     6,110    27,420
         102       Exclusion of interest on hospital construction bonds....     1,540     1,570     1,620     1,750     1,980     2,190     2,470    10,010
         103       Deductibility of charitable contributions (health)......     4,000     4,140     4,380     4,520     4,650     4,860     5,210    23,620
         104       Tax credit for orphan drug research.....................       100       110       130       140       160       180       200       810
         105       Special Blue Cross/Blue Shield deduction................       320       250       390       460       410       390       350     2,000

                 Income security:
         106       Exclusion of railroad retirement system benefits........       360       360       360       360       360       360       360     1,800
         107       Exclusion of workers' compensation benefits.............     5,120     5,560     5,810     6,070     6,320     6,600     6,900    31,700
         108       Exclusion of public assistance benefits (normal tax            360       370       390       400       420       430       450     2,090
                    method)................................................
         109       Exclusion of special benefits for disabled coal miners..        80        70        70        60        60        60        50       300
         110       Exclusion of military disability pensions...............       120       120       130       130       130       140       140       670
                   Net exclusion of pension contributions and earnings:
         111        Employer plans.........................................   104,170   109,010   114,010   120,710   127,260   134,160   143,530   639,670
         112        Individual Retirement Accounts.........................    20,310    21,350    22,370    23,320    24,200    24,960    25,560   120,410
         113        Keogh plans............................................     6,980     7,400     7,840     8,300     8,780     9,290     9,830    44,040
                   Exclusion of other employee benefits:
         114        Premiums on group term life insurance..................     2,070     2,110     2,150     2,200     2,240     2,290     2,330    11,210
         115        Premiums on accident and disability insurance..........       250       260       270       290       300       320       330     1,510
         116       Income of trusts to finance supplementary unemployment          10        10        10        10        10        10        10        50
                    benefits...............................................
         117       Special ESOP rules......................................     1,340     1,400     1,460     1,530     1,600     1,690     1,770     8,050
         118       Additional deduction for the blind......................        40        40        40        40        40        40        50       210
         119       Additional deduction for the elderly....................     2,320     2,410     2,490     2,570     2,680     2,730     2,840    13,310
         120       Tax credit for the elderly and disabled.................        40        40        40        40        40        40        40       200
         121       Deductibility of casualty losses........................       260       270       290       310       320       330       350     1,600
         122       Earned income tax credit \4\............................     5,160     5,214     5,515     5,806     6,062     6,320     6,628    30,331

                 Social Security:
                   Exclusion of social security benefits:..................
         123       Social Security benefits for retired workers............    18,250    19,070    19,930    20,520    21,050    21,840    22,780   106,120
         124       Social Security benefits for disabled...................     2,640     2,880     3,160     3,490     3,910     4,360     4,840    19,760
         125       Social Security benefits for dependents and survivors...     3,910     4,030     4,210     4,440     4,730     5,070     5,380    23,830

                 Veterans benefits and services:
         126       Exclusion of veterans death benefits and disability          3,090     3,290     3,460     3,640     3,820     4,010     4,210    19,140
                    compensation...........................................
         127       Exclusion of veterans pensions..........................        70        70        80        80        90        90       100       440
         128       Exclusion of GI bill benefits...........................        80        90        90       100       100       110       100       500
         129       Exclusion of interest on veterans housing bonds.........        60        60        60        60        60        70        70       320

                 General purpose fiscal assistance:

    [[Page 76]]

         130       Exclusion of interest on public purpose State and local     32,380    33,030    33,690    34,370    35,050    35,750    36,470   175,330
                    bonds..................................................
         131       Deductibility of nonbusiness state and local taxes other    42,650    45,730    48,730    51,780    55,030    58,390    62,160   276,090
                    than on owner-occupied homes...........................
         132       Tax credit for corporations receiving income from doing      3,530     3,600     3,650     3,690     3,720     3,760     1,510    16,330
                    business in U.S. possessions...........................

                 Interest:
         133       Deferral of interest on U.S. savings bonds..............       470       490       520       540       570       600       630     2,860

                 Addendum: Aid to State and local governments:
                   Deductibility of:
                    Property taxes on owner-occupied homes.................    22,140    23,920    25,570    27,220    29,080    30,980    33,220   146,070
                    Nonbusiness State and local taxes other than on owner-     42,650    45,730    48,730    51,780    55,030    58,390    62,160   276,090
                     occupied homes........................................
                   Exclusion of interest on State and local bonds for:
                    Public purposes........................................    32,380    33,030    33,690    34,370    35,050    35,750    36,470   175,330
                    Energy facilities......................................       130       130       130       140       160       190       210     1,090
                    Water, sewage, and hazardous waste disposal facilities.       570       570       590       650       750       830       900     3,720
                    Small-issues...........................................       410       430       440       480       520       600       670     2,710
                    Owner-occupied mortgage subsidies......................     1,130     1,140     1,170     1,270     1,440     1,600     1,790     7,270
                    Rental housing.........................................       230       230       240       240       290       340       390     1,500
                    Airports, docks, and similar facilities................       890       900       920       990     1,140     1,250     1,410     5,710
                    Student loans..........................................       300       330       330       340       390       420       490     1,970
                    Private nonprofit educational facilities...............       740       770       790       840       950     1,090     1,200     4,870
                    Hospital construction..................................     1,540     1,570     1,620     1,750     1,980     2,190     2,470    10,010
                    Veterans' housing......................................        60        60        60        60        60        70        70       320
                   Credit for holders of zone academy bonds................        10        30        50        70        90       100       100       410
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ The determination of whether a provision is a tax expenditure is made on the basis of a broad concept of ``income'' that is larger in scope than is
      ``income'' as defined under general U.S. income tax principles. For that reason, the tax expenditure estimates include, for example, estimates related
      to the exclusion of extraterritorial income, as well as other exclusions, notwithstanding that such exclusions define income under the general rule of
      U.S. income taxation.
    \2\ 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: 2000 $840; 2001 $880; 2002 $930; 2003 $950; 2004 $960; 2005 $960; and in 2006 $960.

    \3\ The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as
      follows: 2000 $810; 2001 $790; 2002 $760; 2003 $720; 2004 $660; 2005 $630; and in 2006 $590.

    \4\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of
      dollars) is as follows: 2000 $26,099; 2001 $25,923; 2002 $26,983; 2003 $27,875; 2004 $28,545; 2005 $29,373; and in 2006 $30,165.

    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 $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.

                            Tax Expenditure Baselines

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

    [[Page 77]]

              uring 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. \1\ 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. \2\
    ---------------------------------------------------------------------------
      \1\ Gross income does, however, include transfer payments associated
    with past employment, such as social security benefits.
      \2\ 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. In addition,
    costs of earning income may be limited under the alternative minimum
    tax.
    ---------------------------------------------------------------------------
        Capital recovery. Under the reference tax law baseline no
              tax expenditures arise from accelerated depreciation. Under
              the normal tax baseline, the depreciation allowance for
              machinery and equipment is determined using straight-line
              depreciation over tax lives equal to mid-values of the asset
              depreciation range (a depreciation system in effect from 1971
              through 1980). The normal tax baseline for real property is
              computed using 40-year straight-line depreciation.
        Treatment of foreign income. Both the normal and reference
              tax baselines allow a tax credit for foreign income taxes paid
              (up to the amount of U.S. income taxes that would otherwise be
              due), which prevents double taxation of income earned abroad.
              Under the normal tax method, however, controlled foreign
              corporations (CFCs) are not regarded as entities separate from
              their controlling U.S. shareholders. Thus, the deferral of tax
              on income received by CFCs is regarded as a tax expenditure
              under this method. In contrast, except for tax haven
              activities, the reference law baseline follows current law in
              treating CFCs as separate taxable entities whose income is not
              subject to U.S. tax until distributed to U.S. taxpayers. Under
              this baseline, deferral of tax on CFC income is not a tax
              expenditure because U.S. taxpayers generally are not taxed on
              accrued, but unrealized, income.
      In addition to these areas of difference, the Joint Committee on
    Taxation considers a somewhat broader set of tax expenditures under its
    normal tax baseline than is considered here.

        Performance Measures and the Economic Effects of Tax Expenditures

      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 \3\ 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.
    ---------------------------------------------------------------------------
      \3\ Committee on Government Affairs, United States Senate, A
    Government Performance and Results Act of 1993 (Report 103-58, 1993).
    ---------------------------------------------------------------------------
      The Executive Branch is continuing to focus on the availability of
    data needed to assess the effects of the tax expenditures designed to
    increase savings. Treasury's Office of Tax Analysis and Statistics of
    Income Division (IRS) have developed the specifications for a new sample
    of individual income tax filers as one part of this effort. This new
    ``panel'' sample will follow the same taxpayers over a period of at
    least ten years. The first year of this panel sample will be drawn from
    tax returns filed in 2000 for tax year 1999. The 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 sample will therefore permit more extensive, and better, analyses of
    many tax provisions than can be performed using only annual (``cross-
    section'') data. In particular, data from this panel sample will enhance
    our ability to analyze the effect of tax expenditures

    [[Page 78]]

    designed to increase savings. Other efforts by OMB, Treasury, and other
    agencies to improve data available for the analysis of savings tax
    expenditures will continue over the next several years.

      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. \4\ Because there is an existing
    public administrative and private compliance structure for the tax
    system, the incremental administrative and compliance costs for a tax
    expenditure may be low in many 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; deferrals; floors;
    ceilings; phase-ins; 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.
    ---------------------------------------------------------------------------
      \4\ Although this section focuses upon tax expenditures under the
    income tax, tax expenditures also arise under the unified transfer,
    payroll, and excise tax systems. Such provisions can be useful when they
    relate to the base of those taxes, such as an excise tax exemption for
    certain types of consumption deemed meritorious.
    ---------------------------------------------------------------------------
      Tax expenditures also have limitations. In many cases they add to the
    complexity of the tax system, which raises both administrative and
    compliance costs. For example, targeting personal exemptions and credits
    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 require information on certain characteristics of individuals
    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 an outlay program. For
    example, grant or direct Federal service delivery programs can
    prioritize which activities are addressed with what amount of resources
    in a way that is difficult to emulate with tax expenditures. Finally,
    tax expenditures may not receive the same 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, many different types of spending programs--
    including direct government provision; credit programs; and payments to
    State and local governments, the private sector, or individuals in the
    form of grants or contracts--provide flexibility for policy design. On
    the other hand, certain outlay programs--such as direct government
    service provision--may rely less directly on economic incentives and
    private-market provision than tax incentives, which may reduce the
    relative efficiency of spending programs for some goals. Spending
    programs also require resources to be raised via taxes, user charges, or
    government borrowing. Finally, spending programs, particularly on the
    discretionary side, may respond less readily to changing activity levels
    and economic conditions than tax expenditures.
      Regulations have 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 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

    [[Page 79]]

    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 developed. 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 service in a combat zone
    or qualified hazardous duty area 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 goals such
    as promoting tax neutrality. These include the exclusion for income
    earned abroad by nongovernmental employees and exclusions for income of
    U.S.-controlled foreign corporations. Measuring the effectiveness of
    these provisions raises challenging issues.
      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 (e.g.,
    research spending, exploration activity, 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 size of tax expenditure.
    Measures could also indicate the 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 tax expenditures increase production (as opposed to
    benefitting existing output) and their cost-effectiveness relative to
    other policies. Analysis could also consider objectives that are more
    difficult to measure but still are ultimate goals, such as promoting the
    Nation's technological base, energy security, environmental quality, or
    economic growth. Such an assessment is likely to involve tax analysis as
    well as consideration of non-tax matters such as market structure,
    scientific, and other information (such as the effects of increased
    domestic fuel production on imports from various regions, or the effects
    of various energy sources on the environment).
      Housing investment also benefits from tax expenditures, including the
    mortgage interest deduction and exclusion for 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 for

    [[Page 80]]

    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
    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.
      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. These descriptions relate to
    current law and do not reflect proposals made elsewhere in the Budget.

    [[Page 81]]

                                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 service in a combat zone or qualified
    hazardous duty area 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 satisfied a foreign residency requirement in
    2000 may exclude up to $76,000 in foreign earned income from U.S. taxes.
    The exclusion increases to $78,000 in 2001 and to $80,000 in 2002. 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 ($65,983 in 2000).
      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.
      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. The FSC provisions were generally repealed by
    the FSC Repeal and Extraterritorial Income Exclusion Act of 2000,
    effective for transactions after September 30, 2000.
      5. Extraterritorial income exclusion \5\.--For purposes of calculating
    U.S. tax liability, a taxpayer may exclude from gross income the
    qualifying foreign trade income attributable to foreign trading gross
    receipts. The exclusion generally applies to income from the sale or
    lease of qualifying foreign trade property and certain types of services
    income. The exclusion is generally available for transactions entered
    into after September 30, 2000.
    ---------------------------------------------------------------------------
      \5\ The determination of whether a provision is a tax expenditure is
    made on the basis of a broad concept of ``income'' that is larger in
    scope than is ``income'' as defined under general U.S. income tax
    principles. For that reason, the tax expenditure estimates include, for
    example, estimates related to the exclusion of extraterritorial income,
    as well as other exclusions, notwithstanding that such exclusions define
    income under the general rule of U.S. income taxation.
    ---------------------------------------------------------------------------
      6. 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 allocates earnings between the United
    States and abroad equally, which may increase foreign source income use
    of foreign tax credits.
      7. 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.
      8. Exceptions under subpart F for active financing income.--Consistent
    with the rules applicable to U.S.-controlled foreign corporations,
    financial firms can defer taxes on income earned overseas in an active
    business. Taxes on income earned through December 31, 2001 can be
    deferred.

                     General Science, Space, and Technology

      9. 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.
      10. R&E credit.--The research and experimentation (R&E) 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. The credit applies to research conducted before July 1,
    2004 and extends to research conducted in Puerto Rico and the U.S.
    possessions.

                                     Energy

      11. 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

    [[Page 82]]

    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.
      12. 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.
      13. 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.
      14. 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.
      15. Capital gains treatment of royalties on coal.--Sales of certain
    coal under royalty contracts can be treated as capital gains rather than
    ordinary income.
      16. 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.
      17. 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.
      18. 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, biomass, and poultry
    waste facilities. The renewable resources credit applies only to
    electricity produced by a facility placed in service on or before
    December 31, 2001.
      19. 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 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.
      20. 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.
      21. Exclusion of utility conservation subsidies.--Non-business
    customers can exclude from gross income subsidies received from public
    utilities for expenditures on energy conservation measures.

                        Natural Resources and Environment

      22. 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.
      23. 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.
      24. Sewage, water, solid and hazardous waste facility 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.
      25. Capital gains treatment of certain timber.--Certain timber sold
    under a royalty contract can be treated as a capital gain rather than
    ordinary income.
      26. 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.
      27. 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.

    [[Page 83]]

      28. 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

      29. 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.
      30. 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.
      31. 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.
      32. Capital gains treatment of certain income.--Certain agricultural
    income, such as unharvested crops, can be treated as capital gains
    rather than ordinary income.
      33. Income averaging for farmers.--Taxpayers can lower their tax
    liability by averaging, over the prior three-year period, their taxable
    income from farming.
      34. 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.
      35. Credit union income.--The earnings of credit unions not
    distributed to members as interest or dividends are exempt from income
    tax.
      36. 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.
      37. 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.
      38. 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.
      39. 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.
      40. 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.
      41. 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 these and other private activity is
    limited. The combined volume cap for private activity bonds, including
    mortgage housing bonds, rental housing bonds, student loan bonds, and
    industrial development bonds, is $50 per capita ($150 million minimum)
    per State in 2000, $62.50 per capita ($187.5 million minimum) in 2001,
    and $75 per capita ($225 million minimum) in 2002. The Community Renewal
    Tax Relief Act of 2000 accelerated the scheduled increase in the state
    volume cap and indexed the cap for inflation, beginning in 2003. States
    may issue mortgage credit certificates (MCCs) in lieu of mortgage
    revenue bonds. MCCs entitle homebuyers 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.
      42. Rental housing bonds.--Interest earned on State and local
    government bonds used to finance mul

    [[Page 84]]

    tifamily 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.
      43. 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.
      44. 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.
      45. 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 payment of a market rate of interest eliminates the benefit
    of the tax deferral. The tax exemption for nondealers with total
    installment obligations of less than $5 million is, therefore, a tax
    expenditure.
      46. Capital gains exclusion on home sales.--A homeowner can exclude
    from tax up to $500,000 ($250,000 for singles) of the capital gains from
    the sale of a principal residence. The exclusion may not be used more
    than once every two years.
      47. Passive loss real estate exemption.--In general, passive losses
    may not offset income from other sources. Losses up to $25,000
    attributable to certain rental real estate activity, however, are exempt
    from this rule.
      48. Low-income housing credit.--Taxpayers who invest in certain low-
    income housing are eligible for a tax credit. The credit rate is set so
    that the present value of the credit is equal to 70 percent for new
    construction and 30 percent for (1) housing receiving other Federal
    benefits (such as tax-exempt bond financing), or (2) substantially
    rehabilitated existing housing. The credit is allowed in equal amounts
    over 10 years. State agencies determine who receives the credit; States
    are limited in the amount of credit they may authorize annually to $1.25
    per resident in 2000. The Community Renewal Tax Relief Act of 2000
    increased the per-resident limit to $1.50 in 2001 and to $1.75 in 2002
    and indexed the limit for inflation, beginning in 2003. The Act also
    created a $2 million minimum annual cap for small States beginning in
    2002; the cap is indexed for inflation, beginning in 2003.
      49. 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.
      50. Cancellation of indebtedness.--Individuals are not required to
    report the cancellation of certain indebtedness as current income. If
    the canceled debt is not reported as current income, however, the basis
    of the underlying property must be reduced by the amount canceled.
      51. Imputed interest rules.--Holders (issuers) of debt instruments are
    generally required to report interest earned (paid) in the period it
    accrues, not when paid. In addition, the amount of interest accrued is
    determined by the actual price paid, not by the stated 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.
      52. Capital gains (other than agriculture, timber, iron ore, and
    coal).--Capital gains on assets held for more than 1 year are taxed at a
    lower rate than ordinary income. The lower rate on capital gains is
    considered a tax expenditure under the normal tax method but not under
    the reference law method.
      For most assets held for more than 1 year, the top capital gains tax
    rate is 20 percent. For assets acquired after December 31, 2000, the top
    capital gains tax rate for assets held for more than 5 years is 18
    percent. On January 1, 2001, taxpayers may mark-to-market existing
    assets to start the 5-year holding period. Losses from the mark-to-
    market are not recognized.
      For assets held for more than 1 year by taxpayers in the 15-percent
    ordinary tax bracket, the top capital gains tax rate is 10 percent.
    After December 31, 2000,

    [[Page 85]]

    the top capital gains tax rate for assets held by these taxpayers for
    more than 5 years is 8 percent.
      53. Capital gains exclusion for small business stock.--An exclusion of
    50 percent is provided for capital gains from qualified small business
    stock held by individuals for more than 5 years. A qualified small
    business is a corporation whose gross assets do not exceed $50 million
    as of the date of issuance of the stock.
      54. Step-up in basis of capital gains at death.--Capital gains on
    assets held at the owner's death are not subject to capital gains taxes.
    The cost basis of the appreciated assets is adjusted upward to the
    market value at the owner's date of death. The step-up in the heir's
    cost basis means that, in effect, the tax on the capital gain is
    forgiven.
      55. Carryover basis of capital gains on gifts.--When a gift is made,
    the 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.
      56. Ordinary income treatment of losses from sale of small business
    corporate stock shares.--Up to $100,000 in losses from the sale of small
    business corporate stock (capitalization less than $1 million) may be
    treated as ordinary losses. Such losses would, thus, not be subject to
    the $3,000 annual capital loss write-off limit.
      57. Accelerated depreciation of non-rental-housing buildings.--The tax
    depreciation allowance provisions are part of the reference law rules,
    and thus do not 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.
      58. 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.
      59. Expensing of certain small investments.--In 2000, qualifying
    investments in tangible property up to $20,000 can be expensed rather
    than depreciated over time. The expensing limit increases to $24,000 in
    2001 and to $25,000 in 2003. To the extent that qualifying investment
    during the year exceeds $200,000, the amount eligible for expensing is
    decreased. In 2000, the amount expensed is completely phased out when
    qualifying investments exceed $220,000.
      60. Business start-up costs.--When taxpayers enter into a new
    business, certain start-up expenses, such as the cost of legal services,
    are normally incurred. Taxpayers may elect to amortize these outlays
    over 60 months even though they are similar to other payments made for
    nondepreciable intangible assets that are not recoverable until the
    business is sold. The normal tax method treats this amortization as a
    tax expenditure; the reference tax method does not.
      61. Graduated corporation income tax rate schedule.--The corporate
    income tax schedule is graduated, with rates of 15 percent on the first
    $50,000 of taxable income, 25 percent on the next $25,000, and 34
    percent on the next $9.925 million. Compared with a flat 34-percent
    rate, the lower rates provide an $11,750 reduction in tax liability for
    corporations with taxable income of $75,000. 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.
      62. Small issue industrial development bonds.--Interest earned on
    small issue industrial development bonds (IDBs) issued by State and
    local governments to finance manufacturing facilities is tax-exempt.
    Depreciable property financed with small issue IDBs must be depreciated,
    however, using the straight-line method. The annual volume of small
    issue IDBs is subject to the unified volume cap discussed in the
    mortgage housing bond section above.

                                 Transportation

      63. Deferral of tax on U.S. shipping companies.--Certain companies
    that operate U.S. flag vessels can defer income taxes on that portion of
    their income used for shipping purposes, primarily construction,
    modernization and major repairs to ships, and repayment of loans to
    finance these investments. Once indefinite, the deferral has been
    limited to 25 years since January 1, 1987.
      64. Exclusion of 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 2000, the maximum
    amount of the parking exclusion is $175 (indexed) per month. The tax
    expenditure estimate does not include parking at facilities owned by the
    employer.
      65. Exclusion of employee transit pass expenses.--Transit passes,
    tokens, fare cards, and vanpool expenses paid for by an employer or
    provided in

    [[Page 86]]

    lieu of wages to defray an employee's commuting costs are excludable
    from the employee's income. In 2000, the maximum amount of the exclusion
    is $65 (indexed) per month. In 2002, the maximum amount of the exclusion
    increases to $100 (indexed) per month.

                       Community and Regional Development

      66. Rehabilitation of structures.--A 10-percent investment tax credit
    is available for the rehabilitation of buildings that are used for
    business or productive activities and that were erected before 1936 for
    other than residential purposes. The taxpayer's recoverable basis must
    be reduced by the amount of the credit.
      67. Airport, dock, and similar facility bonds.--Interest earned on
    State and local bonds issued to finance high-speed rail facilities and
    government-owned airports, docks, wharves, and sport and convention
    facilities is tax-exempt. These bonds are not subject to a volume cap.
      68. Exemption of income of mutuals and cooperatives.--The incomes of
    mutual and cooperative telephone and electric companies are exempt from
    tax if at least 85 percent of their revenues are derived from patron
    service charges.
      69. Empowerment zones, enterprise communities, and renewal
    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, accelerated depreciation, and certain capital gains
    incentives. 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, 2003, and investors in certain D.C.
    property can receive a capital gains break. The Community Renewal Tax
    Relief Act of 2000 created the renewal communities tax benefits, which
    begin on January 1, 2002 and expire on December 31, 2009. The Act also
    created additional empowerment zones, increased the tax benefits for
    empowerment zones, and extended the expiration date of (1) empowerment
    zones from December 31, 2004 to December 31, 2009, and (2) the D.C.
    homebuyer credit from December 31, 2001 to December 31, 2003.
      70. New markets tax credit.--Taxpayers who invest in a community
    development entity (CDE) after December 31, 2000 are eligible for a tax
    credit. The total equity investment available for the credit across all
    CDEs is $1.0 billion in 2001, $1.5 billion in 2002 and 2003, $2.0
    billion in 2004 and 2005, and $3.5 billion in 2006 and 2007. The amount
    of the credit equals (1) 5 percent in the year of purchase and the
    following 2 years, and (2) 6 percent in the following 4 years. A CDE is
    any domestic firm whose primary mission is to serve or provide
    investment capital for low-income communities/individuals; a CDE must be
    accountable to residents of low-income communities. The Community
    Renewal Tax Relief Act of 2000 created the new markets tax credit.
      71. Expensing of environmental remediation costs.--Taxpayers who clean
    up certain hazardous substances at a qualified site may expense the
    clean-up costs, rather than capitalize the costs, even though the
    expenses may increase the value of the property significantly. The
    expensing only applies to clean-up costs incurred on or before December
    31, 2003. The Community Renewal Tax Relief Act of 2000 extended the
    expiration date from December 31, 2001 to December 31, 2003. The Act
    also expanded the number of qualified sites.

              Education, Training, Employment, and Social Services

      72. 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).
      73. 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).
      74. 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.
      75. 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 sin

    [[Page 87]]

    gles). 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.
      76. Student-loan interest.--In 2000, taxpayers may claim an above-the-
    line deduction of up to $2,000 on interest paid on an education loan.
    The maximum deduction increases to $2,500 in 2001. 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).
      77. 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.
      78. 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.
      79. 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.
      80. Credit for holders of zone academy bonds.--Financial institutions
    that own zone academy bonds receive a non-refundable tax credit (at a
    rate 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 renovate, but not construct, qualifying schools and for certain
    other school purposes. The total amount of zone academy bonds that may
    be issued is limited to $1.6 billion--$400 million in each year from
    1998 to 2001.
      81. 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
    $81,100 and $111,100 ($54,100 and $69,100 for singles) in 2000.
      82. 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.
      83. Charitable contributions to educational institutions.--Taxpayers
    may deduct contributions to nonprofit educational institutions.
    Taxpayers who donate capital assets to educational institutions can
    deduct the assets' current value without being taxed on any appreciation
    in value. An individual's total charitable contribution generally may
    not exceed 50 percent of adjusted gross income; a corporation's total
    charitable contributions generally may not exceed 10 percent of pre-tax
    income.
      84. Employer-provided educational assistance.--Employer-provided
    educational assistance is excluded from an employee's gross income even
    though the employer's costs for this assistance are a deductible
    business expense. This exclusion applies only to non-graduate courses
    beginning on or before December 31, 2001.
      85. Work opportunity tax credit.--Employers can claim a tax credit for
    qualified wages paid to individuals who begin work on or before December
    31, 2001 and who are certified as members of various targeted groups.
    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.
      86. 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.
      87. 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.
      88. Assistance for adopted foster children.--Taxpayers who adopt
    eligible children from the public foster care system can receive monthly
    payments for the children's significant and varied needs and a
    reimbursement of up to $2,000 for nonrecurring adoption expenses. These
    payments are excluded from gross income.
      89. 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). The
    credit is phased-out ratably for taxpayers with modified AGI between
    $75,000 and $115,000. Unused credits may be carried forward and used
    during the five subsequent years. Taxpayers may also exclude qualified
    adoption expenses from income, subject to the same maximum amounts and
    phase-out as the credit. The same expenses cannot qualify for tax
    benefits under both programs; however, a taxpayer may use the benefits
    of the exclusion and the tax credit for different expenses. Stepchild
    adoptions are not eligible for either benefit. Both of the current tax
    benefits expire at the end of 2001, except for the tax credit for
    expenses associated with special needs adoptions, which is permanent.
      90. Employer-provided meals and lodging.--Employer-provided meals and
    lodging are excluded from

    [[Page 88]]

    an employee's gross income even though the employer's costs for these
    items are a deductible business expense.
      91. 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.
      92. 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 single parents and by divorced or
    separated parents who have custody of children. 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.
      93. 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.
      94. 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.
      95. 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.
      96. 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

      97. 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.
      98. 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
    2000 and 2001, 70 percent in 2002, and 100 percent in 2003 and
    thereafter.
      99. 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.
      100. Medical savings accounts.--Some employees may deduct annual
    contributions to a medical savings account (MSA); employer contributions
    to MSAs (except those made through cafeteria plans) for qualified
    employees are also excluded from income. An employee may contribute to
    an MSA in a given year only if the employer does not contribute to the
    MSA in that year. MSAs are only available to self-employed individuals
    or employees covered under an employer-sponsored high deductible health
    plan of a small employer. The maximum annual MSA contribution is 75
    percent of the deductible under the high deductible plan for family
    coverage (65 percent for individual coverage). Earnings from MSAs are
    excluded from taxable income. Distributions from an MSA for medical
    expenses are not taxable. The number of taxpayers who may benefit
    annually from MSAs is generally limited to 750,000. No new MSAs may be
    established after December 31, 2002. The Community Renewal Tax Relief
    Act of 2000 extended the expiration date from December 31, 2000 to
    December 31, 2002.
      101. 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.
      102. Hospital construction bonds.--Interest earned on State and local
    government debt issued to finance hospital construction is excluded from
    income subject to tax.
      103. 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.
      104. 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.
      105. 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

      106. Railroad retirement benefits.--Railroad retirement benefits are
    not generally subject to the income tax unless the recipient's gross
    income reaches

    [[Page 89]]

    a certain threshold. The threshold is discussed more fully under the
    social security function.
      107. Workers' compensation benefits.--Workers compensation provides
    payments to disabled workers. These benefits, although income to the
    recipients, are not subject to the income tax.
      108. 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.
      109. 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.
      110. Military disability pensions.--Most of the military pension
    income received by current disabled retired veterans is excluded from
    their income subject to tax.
      111. 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.
      112. 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 federal
    government's Thrift Savings Plan).
      In 2000, an employee could exclude up to $10,500 (indexed) of wages
    from AGI under a qualified arrangement with an employer's 401(k). In
    2000, 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 $52,000 ($32,000 for singles). The AGI limit
    increases annually until it reaches $80,000 in 2007 ($50,000 in 2005 for
    singles). In 2000, the IRA deduction is phased out for taxpayers with
    AGI between $52,000 and $62,000 ($32,000 and $42,000 for singles). The
    phase-out range increases annually until it reaches $80,000 to $100,000
    in 2007 ($50,000 to $60,000 in 2005 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).
      113. 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.
      114. 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.
      115. 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.
      116. 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.
      117. 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.
      118. Additional deduction for the blind.--Taxpayers who are blind may
    take an additional $1,000 standard deduction if single, or $800 if
    married.
      119. 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.
      120. 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

    [[Page 90]]

    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.
      121. 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.
      122. 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 $6,920 of earned income in 2000. The credit is 40
    percent of the first $9,720 of income for a family with two or more
    qualifying children. When the taxpayer's income exceeds $12,690, 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
    $27,413 of modified adjusted gross income ($31,152 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 2000, the credit is 7.65
    percent of the first $4,610 of earned income. When the taxpayer's income
    exceeds $5,770, the credit is phased out at the rate of 7.65 percent. It
    is completely phased out at $10,380 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

      123. 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.
      124. Social Security benefits for the disabled.--Benefit payments from
    the Social Security Trust Fund, for disability and for dependents and
    survivors, are excluded from a beneficiary's gross incomes.
      125. Social Security benefits for dependents and survivors.--Benefit
    payments from the Social Security Trust Fund for dependents and
    survivors are excluded from a beneficiary's gross income.

                         Veterans Benefits and Services

      126. Veterans death benefits and disability compensation.--All
    compensation due to death or disability paid by the Veterans
    Administration is excluded from taxable income.
      127. Veterans pension payments.--Pension payments made by the Veterans
    Administration are excluded from gross income.
      128. G.I. Bill benefits.--G.I. Bill benefits paid by the Veterans
    Administration are excluded from gross income.
      129. 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

      130. 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), equipment acquisition, and other public
    purposes is tax-exempt. Interest on bonds issued by Indian tribal
    governments for essential governmental purposes is also tax-exempt.
      131. 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.
      132. Business income earned in U.S. possessions.--U.S. corporations
    operating in a U.S. possession (e.g., Puerto Rico) can claim a credit
    against some or all of their U.S. tax liability on possession business
    income. The credit expires December 31, 2005.

                                    Interest

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

    [[Page 91]]

                  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 2000, this credit allows each taxpayer to
              make a $675,000 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 2006. \6\
    ---------------------------------------------------------------------------
      \6\ An additional tax, at a flat rate of 55 percent, is imposed on
    lifetime, generation-skipping transfers in excess of $1 million
    (indexed). It is considered a generation-skipping transfer whenever the
    transferee is at least two generations younger than the transferor, as
    it would be in the case of transfers to grandchildren or great-
    grandchildren. The liability of this tax is on the recipients of the
    transfer.
    ---------------------------------------------------------------------------
         Time when tax is due and payable. Donors are required to
              pay the tax annually as gifts are made. The generation-
              skipping transfer tax is payable by the donees whenever they
              accede to the gift. The net estate tax liability is due and
              payable within nine months after the decedent's death. The
              Internal Revenue Service may grant an extension of up to 10
              years for a reasonable cause. Interest is charged on the
              unpaid tax liability at a rate equal to the cost of Federal
              short-term borrowing, plus three percentage points.

                          Tax Expenditures by Function

      The estimates of tax expenditures in the Federal unified transfer tax
    for fiscal years 2000-2006 are displayed by functional category in Table
    5-6. Outlay equivalent estimates are similar to revenue loss estimates
    for transfer tax expenditures and, therefore, are not shown separately.
    A description of the provisions follows.

                        Natural Resources and Environment

      1. Donations of conservation easements.--Bequests of property and
    easements (in perpetuity) for conservation purposes can be excluded from
    taxable estates. Use of the property and easements must be restricted to
    at least one of the following purposes: outdoor recreation or scenic
    enjoyment for the general public; protection of the natural habitats of
    fish, wildlife, plants, etc.; and preservation of historic land areas
    and structures. Conservation gifts are similarly excluded from the gift
    tax. Up to 40 percent of the value of land subject to certain
    conservation easements may be excluded from taxable estates; the maximum
    amount of the exclusion is $300,000 in 2000 and increases to $400,000 in
    2001 and to $500,000 in 2002.

                                   Agriculture

      2. Special-use valuation of farms.--In 2000, 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 gross 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. A 2-percent interest rate (non-
    deductible) is applied to the first $1 million (indexed) of deferred
    taxable value.

                              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

    [[Page 92]]

    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 cannot exceed $675,000. The combined
    value of the exclusion and the exemption value of the unified credit
    cannot exceed $1.3 million. 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 under the estate tax.
      8. Charitable contributions, other than education and health.--
    Bequests to charitable, religious, and certain other nonprofit
    organizations can be deducted under the estate tax.

                                     Health

      9. Charitable contributions to health institutions.--Bequests to
    health institutions can be deducted under the estate tax.

                               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.

    [[Page 93]]

                                         Table 5-6.  ESTIMATES FOR TAX EXPENDITURES IN THE FEDERAL UNIFIED TRANSFER TAX
                                                                    (In millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                         Description                           2000      2001      2002      2003      2004      2005      2006    2002-2006
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                 Natural Resources and Environment:
           1       Donations of conservation easements.....................  ........  ........  ........        10        10        10        20         50

                 Agriculture:
           2       Special use valuation of farm real property.............       110       110       120       120       130       130       130        630
           3       Tax deferral of closely held farms......................  ........  ........        10        10        20        20        30         90

                 Commerce:
           4       Special use valuation of real property used in closely          10        10        10        10        10        10        10         50
                    held businesses........................................
           5       Tax deferral of closely held business...................       -20        30        60        80       100       130       140        510
           6       Exclusion for family owned businesses...................       130       140       150       160       170       170       170        820

                 Education, training, employment, and social services:
           7       Deduction for charitable contributions (education)......       780       880       960       990     1,030     1,060     1,100      5,140
           8       Deduction for charitable contributions (other than           2,300     2,600     2,830     2,930     3,050     3,120     3,260     15,190
                    education and health)..................................

                 Health:
           9       Deduction for charitable contributions (health).........       700       800       870       900       930       960     1,000      4,660

                 General government:
          10       Credit for State death taxes............................     6,420     6,720     7,030     7,340     7,660     8,000     8,350     38,380
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