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

    ========================================================================

                        FEDERAL RECEIPTS AND COLLECTIONS

    ========================================================================

    [[Page 35]]

                              3.  FEDERAL RECEIPTS

      Receipts (budget and off-budget) are taxes and other collections from
    the public that result from the exercise of the Federal Government's
    sovereign or governmental powers. The difference between receipts and
    outlays determines the surplus or deficit.
      The Federal Government also collects income from the public from
    market-oriented activities. Collections from these activities, which are
    subtracted from gross outlays, rather than added to taxes and other
    governmental receipts, are discussed in the following chapter.

      Growth in receipts.--Total receipts in 2002 are estimated to be
    $2,191.7 billion, an increase of $54.8 billion or 2.6 percent relative
    to 2001. Receipts are projected to grow at an average annual rate of 3.6
    percent between 2002 and 2006, rising to $2,528.7 billion. This growth
    in receipts is largely due to assumed increases in incomes resulting
    from both real economic growth and inflation, partially offset by the
    effects of the President's proposed tax reductions. In the absence of
    the President's proposed tax reductions, receipts are projected to grow
    at an average annual rate of 5.0 percent between 2002 and 2006.
      As a share of GDP, receipts are projected to decline from 20.7 percent
    in 2001 to 20.2 percent in 2002. As the President's proposed tax plan
    phases in, the receipts share of GDP is projected to decline annually,
    falling to 18.9 percent in 2006; this is 1.3 percentage points below the
    share of 20.2 percent that would be attained in the absence of the
    proposed reductions.

                                                             Table 3-1.  RECEIPTS BY SOURCE--SUMMARY
                                                                    (In billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               Estimate
                            Source                           2000 actual -----------------------------------------------------------------------------------
                                                                              2001          2002          2003          2004          2005          2006
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Individual income taxes...............................    1,004.5       1,072.9       1,078.8       1,092.3       1,117.9       1,157.0       1,196.6
    Corporation income taxes..............................      207.3         213.1         218.8         227.3         235.5         244.2         252.2
    Social insurance and retirement receipts..............      652.9         689.7         725.8         766.0         806.0         855.8         896.4
      (On-budget).........................................     (172.3)       (185.8)       (194.9)       (205.2)       (215.8)       (226.8)       (237.9)
      (Off-budget)........................................     (480.6)       (503.9)       (530.9)       (560.8)       (590.3)       (629.0)       (658.5)
    Excise taxes..........................................       68.9          71.1          74.0          76.3          78.3          80.5          82.3
    Estate and gift taxes.................................       29.0          31.1          28.7          26.6          28.3          24.9          22.5
    Customs duties........................................       19.9          21.4          22.5          24.3          25.0          26.0          27.7
    Miscellaneous receipts................................       42.8          37.6          43.1          45.4          47.8          49.3          51.0
                                                           -------------------------------------------------------------------------------------------------
        Total receipts....................................    2,025.2       2,136.9       2,191.7       2,258.2       2,338.8       2,437.8       2,528.7
          (On-budget).....................................   (1,544.6)     (1,633.1)     (1,660.8)     (1,697.4)     (1,748.5)     (1,808.8)     (1,870.2)
          (Off-budget)....................................     (480.6)       (503.9)       (530.9)       (560.8)       (590.3)       (629.0)       (658.5)
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                  Table 3-2.  EFFECT ON RECEIPTS OF CHANGES IN THE SOCIAL SECURITY TAXABLE EARNINGS BASE
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                      Estimate
                                                              ------------------------------------------------------
                                                                  2002       2003       2004       2005       2006
    ----------------------------------------------------------------------------------------------------------------
     Social security (OASDI) taxable earnings base increases:
      $80,400 to $84,600 on Jan. 1, 2002.....................        1.9        5.2        5.8        6.5        7.2
      $84,600 to $88,800 on Jan. 1, 2003.....................  .........        1.9        5.2        5.9        6.5
      $88,800 to $93,600 on Jan. 1, 2004.....................  .........  .........        2.2        6.0        6.6
      $93,600 to $98,100 on Jan. 1, 2005.....................  .........  .........  .........        2.1        5.6
      $98,100 to $102,600 on Jan. 1, 2006....................  .........  .........  .........  .........        2.1
    ----------------------------------------------------------------------------------------------------------------

    [[Page 36]]

                               ENACTED LEGISLATION

      Several laws were enacted in 2000 that have an effect on governmental
    receipts. The major legislative changes affecting receipts are described
    below.

      Community Renewal Tax Relief Act of 2000.--This Act contains a package
    of tax incentives designed to encourage investment in economically
    distressed communities, a provision that extends the availability of
    tax-favored Medical Savings Accounts (MSAs), and several administrative
    and technical provisions. The major incentives and changes provided in
    this Act include the following:
      Designate ``renewal communities''.--The Secretary of HUD is authorized
    to designate up to 40 ``renewal communities'' (12 of which must be
    rural), which will be eligible for the following tax incentives: (1) a
    zero-percent capital gains tax rate on the sale of qualifying assets
    held more than five years; (2) a 15-percent wage credit to employers for
    the first $10,000 of qualified wages; (3) a ``commercial revitalization
    deduction;'' (4) an additional $35,000 of section 179 expensing for
    qualified property; and (5) an expansion of the work opportunity tax
    credit with respect to individuals who live in a renewal community.
    These communities must be designated before January 1, 2002 and the tax
    benefits will be available for the period beginning on January 1, 2002
    and ending December 31, 2009.
      Extend and expand empowerment zones.--The Omnibus Budget
    Reconciliation Act of 1993 (OBRA93) authorized the designation of 9
    empowerment zones (Round I empowerment zones). Two additional Round I
    empowerment zones were authorized under the Taxpayer Relief Act of 1997;
    the designation of 20 Round II empowerment zones was also authorized.
    The tax incentives with respect to the original 9 Round I empowerment
    zones, which differ from those provided the two additional Round I zones
    and the Round II zones, generally would have expired after 2004. The tax
    incentives with respect to the Round II empowerment zones generally are
    available through 2008. The Community Renewal Tax Relief Act of 2000
    extends Round I and Round II empowerment zone designations through
    December 31, 2009. In addition, the tax incentives provided Round I and
    Round II empowerment zones are equalized and in some cases (the wage
    credit, tax-exempt bond financing and section 179 expensing) enhanced.
    The Secretaries of HUD and Agriculture are authorized to designate nine
    additional empowerment zones (seven in urban areas and two in rural
    areas) before January 1, 2002. Businesses in these new zones are
    eligible for the same tax incentives provided to existing zones (as
    modified by this Act), which will be available through December 31,
    2009. In addition, this Act (1) permits taxpayers to rollover gain from
    the sale or exchange of any qualified empowerment zone asset held for
    more than one year if the proceeds are used to purchase other qualifying
    empowerment zone assets, and (2) increases from 50 percent to 60 percent
    the exclusion of gain from the sale of qualifying small business stock
    held more than five years if such stock satisfies the requirements of a
    qualifying business under the empowerment zone rules.
      Provide New Markets Tax Credit.--A new tax credit is provided for
    qualified equity investments made after December 31, 2000 to acquire
    stock in a selected community development entity (CDE). A credit of five
    percent is provided to the investor for the first three years of
    investment. The credit increases to six percent for the following four
    years. The maximum amount of annual qualifying equity investment is
    capped at $1.0 billion for 2001, $1.5 billion for 2002 and 2003, $2.0
    billion for 2004 and 2005, and $3.5 billion for 2006 and 2007. A CDE is
    any domestic corporation or partnership (1) whose primary mission is
    serving or providing investment capital for low-income communities or
    low-income persons, (2) that maintains accountability to residents, and
    (3) is certified by the Department of Treasury as an eligible CDE.
      Increase and modify the low-income housing tax credit.--The low-income
    housing tax credit may be claimed over a 10-year period for the cost of
    rental housing occupied by tenants having incomes below specified
    levels. The aggregate first-year credit authority provided annually to
    each State under prior law was $1.25 per resident. This Act increases
    the per-capita housing credit cap to $1.50 per capita in calendar year
    2001, to $1.75 in 2002, and provides for annual indexation for inflation
    beginning in 2003. A minimum annual cap of $2 million (to be adjusted
    annually for inflation beginning in 2003) is provided for small States
    beginning in calendar year 2001.
      Accelerate scheduled increase in State volume limits on tax-exempt
    private activity bonds.--Interest on bonds issued by State and local
    governments to finance activities carried out and paid for by private
    persons (private activity bonds) is taxable unless the activities are
    specified in the Internal Revenue code. The volume of certain tax-exempt
    private activity bonds that State and local governments may issue in
    each calendar year is limited by State-wide volume limits. Under prior
    law the annual volume limits were the greater of $50 per resident of the
    State or $150 million, increasing to the greater of $55 per resident or
    $165 million in 2003, and increasing ratably each succeeding year,
    reaching the greater of $75 per resident or $225 million in 2007. This
    Act accelerates the scheduled increase in the volume limits to the
    greater of $62.50 per resident or $187.5 million in 2001 and to the
    greater of $75 per resident or $225 million in 2002. Beginning in 2003,
    the volume limits are increased annually for inflation.
       Extend the expensing of brownfields remediation costs.--Taxpayers can
    elect to treat certain environmental remediation expenditures that would
    otherwise be chargeable to capital accounts as deductible in the year
    paid or incurred. This Act extends the expensing of these costs, which
    was scheduled to expire with re

    [[Page 37]]

    spect to expenditures paid or incurred after December 31, 2001, through
    December 31, 2003 and removes the geographic targeting of this
    provision.
      Extend District of Columbia homebuyer tax credit.--The $5,000 tax
    credit provided for the first-time purchase of a principal residence in
    the District of Columbia, which was scheduled to expire after December
    31, 2001, is extended through December 31, 2003.
      Extend District of Columbia Enterprise Zone designation.--The Taxpayer
    Relief Act of 1997 designated certain economically depressed census
    tracts within the District of Columbia as the District of Columbia
    Enterprise Zone, within which businesses and individual residents are
    eligible for special tax incentives through December 31, 2002. This Act
    extends the D.C. enterprise zone designation through December 31, 2003.
      Extend and modify deduction for corporate donations of computer
    technology.--The charitable contribution deduction that may be claimed
    by a corporation for donations of inventory property generally is
    limited to the lesser of fair market value or the corporation's basis in
    the property. However, corporations are provided augmented deductions,
    not subject to this limitation, for certain contributions. These
    augmented deductions equal the lesser of (1) the basis of the property
    plus one-half of the amount of ordinary income that would have been
    realized if the property had been sold, or (2) twice the basis of the
    donated property. Under prior law, an augmented deduction was provided
    for contributions of computer technology and equipment to U.S. schools
    for educational purposes in grades K-12, provided the contribution was
    made before January 1, 2001. This Act extends this augmented deduction
    to apply to donations made before January 1, 2004. In addition, the
    deduction is expanded to apply to donations to public libraries, to
    apply to property donated no later than three years (instead of two
    years as required under prior law) after the date the taxpayer acquires
    the property, and to apply to property donated after reacquisition by a
    computer manufacturer.
      Treat Indian Tribal Governments as non-profit organizations or State
    or local governments for purposes of the Federal unemployment tax
    (FUTA).--Non-profit organizations and State and local governments are
    not required to pay FUTA taxes. Instead, they may elect to reimburse the
    unemployment compensation system for unemployment compensation benefits
    actually paid to their former employees. This Act provides that an
    Indian tribal government be treated like a non-profit organization or
    State or local government for FUTA tax purposes.
      Extend the Medical Savings Account (MSA) program.--Within limits,
    contributions to an MSA are deductible in determining adjusted gross
    income if made by an eligible individual and are excludable from gross
    income and wages for employment tax purposes if made by the employer of
    an eligible individual. Earnings on amounts in an MSA are not currently
    taxable. Distributions from an MSA for medical expenses are not taxable.
    Distributions not used for medical expenses are taxable and subject to
    an additional 15-percent tax unless the distribution is made after age
    65, death, or disability. MSAs are available to self-employed
    individuals and to employees covered under a high-deductible plan
    sponsored by a small employer. This Act extends the MSA program through
    December 31, 2002 and renames MSAs as Archer MSAs. Under prior law, no
    new contributions could be made to MSAs after December 31, 2000, except
    by and on behalf of self-employed individuals and employees who had
    participated in the program before that date or were employed by a
    participating employer.
       Make administrative and technical changes.--Several administrative
    and technical provisions are provided in this Act, including the
    following: (1) clarification of the allowance of certain tax benefits
    with respect to kidnaped children, (2) authorization of agencies to use
    corrected levels of the consumer price index (CPI) for purposes of
    determining benefits and taxes, (3) prevention of the duplication or
    acceleration of loss through assumption of certain liabilities, and (4)
    disclosure of return information to the Congressional Budget Office.

      FSC Repeal and Extraterritorial Income Exclusion Act of 2000.--This
    Act repeals the foreign sales corporation (FSC) tax provisions of the
    Internal Revenue Code that the World Trade Organization (WTO) found to
    be a prohibited export subsidy in violation of international tax
    standards. In the absence of the repeal, the United States would have
    faced WTO-approved sanctions. The repealed rules are replaced with an
    exclusion from U.S. tax for extraterritorial income. Because the
    exclusion of such income is a means of avoiding double taxation, no
    foreign tax credit is allowed for foreign income taxes paid with respect
    to such excluded income. Extraterritorial income is eligible for the
    exclusion to the extent that it is ``qualifying foreign trade income.''
      Installment Tax Correction Act of 2000.--Generally, an accrual method
    of accounting requires a taxpayer to recognize income when all events
    have occurred that fix the right to its receipt and its amount can be
    determined with reasonable accuracy. The installment method of
    accounting provides an exception to these general recognition principles
    by allowing a taxpayer to defer recognition of income from the
    disposition of certain property until payment is received. This Act
    repeals provisions of law provided in the Ticket to Work and Work
    Incentives Improvement Act of 1999 that generally prohibited the use of
    the installment method of accounting for dispositions of property
    entered into on or after December 17, 1999 that would otherwise have
    been reported for Federal income tax purposes using an accrual method of
    accounting.
      Trade and Development Act of 2000.--This Act provides eligibility for
    expanded trade benefits to 48 sub-Saharan African and 27 Caribbean Basin
    countries, reduces tariffs for certain worsted wool fabric, and shifts
    $32 million in rum excise tax cover over pay

    [[Page 38]]

    ments to Puerto Rico and the Virgin Islands from 2001 to 2000.
      Tariff Suspension and Trade Act of 2000.--Technical corrections and
    miscellaneous amendments are made to certain trade laws, including the
    temporary suspension or refund of duties on approximately 200 categories
    of imported items and the alteration of the treatment of certain
    imported goods. The items affected by these changes include a wide
    variety of chemicals, some of which are used to develop cancer and AIDS-
    fighting drugs, environmentally-friendly herbicides and insecticides,
    and a number of pigments and dyes.
      Department of Transportation Appropriations Act for Fiscal Year
    2001.--Under prior law, the required retirement contribution of Federal
    employees participating in the Civil Service Retirement System (CSRS)
    was to increase to 7.5 percent of salary for calendar years 2001 and
    2002 and to decline to 7 percent of salary effective January 1, 2003.
    This Act amends Federal civil service retirement law by reducing the
    required retirement contribution of Federal employees participating in
    CSRS to 7 percent of salary effective January 1, 2001. Similar
    reductions (from 1.3 to 0.8 percent) are made for participants in the
    Federal Employees' Retirement System (FERS).
      Federal Employee Thrift Savings Plan Amendments.--Under prior law,
    contributions of employees to the Federal Thrift Savings Plan (TSP)
    could not begin until the second open season following an employee's
    date of commencing service. This Act allows employees to elect to
    contribute to the TSP on the date of commencing service. Matching and
    automatic contributions by agencies will continue to begin during the
    second open season after an employee's date of commencing service. This
    Act also allows Federal employees to contribute eligible rollover
    distributions from a qualified trust to the TSP.
       National Defense Authorization Act for Fiscal Year 2001.--
    Participation in the Federal Thrift Savings Plan (TSP) is extended to
    members of the uniformed services on active duty and to members of the
    Ready Reserve in any pay status.
       Miscellaneous Appropriations Act, 2001.--The maximum percentage
    contribution limitations to the TSP (5 percent for CSRS and 10 percent
    for FERS) are increased by one percentage point in each year, 2001
    through 2005. The maximum percentage is eliminated beginning in 2006,
    thus allowing for a 100 percent contribution, subject to the annual
    dollar contribution limitation provided under prior law.

                            ADMINISTRATION PROPOSALS

       The President's plan provides tax relief to individuals who pay
    income taxes, reduces the marriage penalty, permanently extends the
    research and experimentation (R&E) tax credit, phases out the death tax,
    and provides tax incentives for education, farmers, the disabled, health
    care, the environment, and charitable purposes. These proposed
    reductions will allow taxpayers to keep roughly one-fourth of the
    surplus that would be produced under existing tax law.

           PRESIDENT'S TAX PLAN PRESENTED TO CONGRESS ON FEBRUARY 8TH

      Create new 10-percent individual income tax bracket.--Under current
    law, there are five statutory individual income tax rate brackets
    ranging from 15 to 39.6 percent. The 15-percent bracket covers the first
    $27,050 of taxable income (for calendar year 2001) for single taxpayers,
    the first $36,250 for taxpayers who file as heads of household, and the
    first $45,200 for married taxpayers filing joint returns ($22,600 for
    married taxpayers filing separate returns). The Administration proposes
    to split the existing 15-percent tax rate bracket into two tax rate
    brackets of 10 and 15 percent. The 10-percent tax rate would apply to
    the first $6,000 of taxable income for single taxpayers (and married
    taxpayers filing separate returns), the first $10,000 of taxable income
    for unmarried heads of household, and the first $12,000 of taxable
    income for married taxpayers filing jointly. Taxable income above these
    thresholds that is currently taxed at the 15-percent rate would continue
    to be taxed at that rate. The new 10-percent rate would be phased in
    over 5 years, beginning in 2002. The tax rate for the new bracket would
    be 14 percent in 2002, 13 percent in 2003, 12 percent in 2004, 11
    percent in 2005 and 10 percent in 2006 and subsequent years. The income
    thresholds for the new tax rate bracket would be adjusted annually for
    inflation beginning in 2007.
      Reduce individual income tax rates.--The Administration proposes to
    replace the five statutory individual income tax rate brackets of
    current law (15, 28, 31, 36, and 39.6) with a simplified rate structure
    of 10, 15, 25 and 33 percent. In addition to splitting the existing 15-
    percent tax rate bracket into two rate brackets (see preceding
    discussion), the Administration proposes to reduce the tax rates in the
    existing 28-percent and 31-percent tax rate brackets to 25 percent, and
    to reduce the tax rates in the existing 36-percent and 39.6-percent tax
    rate brackets to 33 percent. The new, lower tax rates would be phased in
    over 5 years, beginning in 2002. The income thresholds for these tax
    rate brackets would be adjusted annually for inflation as provided under
    current law.
      The current 31-percent tax rate would be reduced to 30 percent in
    2002, 29 percent in 2003, 28 percent in 2004, 27 percent in 2005 and 25
    percent in 2006 and subsequent years. The current 28-percent tax rate
    would be reduced to 27 percent in 2002 and 2003, 26

    [[Page 39]]

    percent in 2004 and 2005, and 25 percent in 2006 and subsequent years.
      The current 39.6-percent tax rate would be reduced to 38 percent in
    2002, 37 percent in 2003, 36 percent in 2004, 35 percent in 2005, and 33
    percent in 2006. The current 36-percent tax rate would be reduced to 35
    percent in 2002 and 2003, 34 percent in 2004 and 2005, and 33 percent in
    2006 and subsequent years.

      Increase the child tax credit.--Current law provides taxpayers a tax
    credit of up to $500 for each qualifying child under the age of 17. The
    credit is reduced by $50 for each $1,000 (or fraction thereof) by which
    the taxpayer's modified adjusted gross income (AGI) exceeds $110,000
    ($75,000 if the taxpayer is not married and $55,000 if the taxpayer is
    married but filing a separate return). These income thresholds are not
    adjusted for inflation. Generally, the credit is nonrefundable; however,
    taxpayers with three or more qualifying children may be eligible for an
    additional refundable child tax credit if they have little or no
    individual income tax liability. The additional credit may be offset
    against social security payroll tax liability, provided that liability
    exceeds the refundable portion of the earned income tax credit (EITC).
    Beginning in taxable year 2002, the child tax credit (as well as other
    nonrefundable personal tax credits) will be allowed only to the extent
    that an individual's regular individual income tax liability exceeds his
    or her tentative minimum tax. In addition, beginning in taxable year
    2002, the refundable child tax credit and the EITC will be reduced by
    the amount of the individual's alternative minimum tax.
      To assist families with the costs of raising children, the
    Administration proposes to double the amount of the child tax credit to
    $1,000 per child, and to phase out the credit more slowly and at higher
    levels of income. The increase in the amount of the credit would be
    phased in over 5 years, rising to $600 in 2002, $700 in 2003, $800 in
    2004, $900 in 2005, and $1,000 in 2006 and subsequent years. Beginning
    in 2006, the credit would be reduced by $20 for each $1,000 (or fraction
    thereof) by which the taxpayer's modified AGI exceeds $200,000 ($100,000
    if the taxpayer is married but filing a separate return). The increase
    in the modified AGI threshold would be gradually implemented in $18,000
    annual increments ($25,000 if the taxpayer is not married and $9,000 if
    the taxpayer is married and filing a separate return) between 2002 and
    2006. Under the Administration's proposal the credit could offset both
    the regular tax and the alternative minimum tax; in addition, refundable
    credits would no longer be reduced by the amount of the alternative
    minimum tax.

      Reduce the marriage penalty.--A couple has a marriage penalty if they
    file a joint return and their individual income tax liability is greater
    than what it would be if they were not married and each filed a separate
    return. The Administration proposes to reduce the marriage penalty by
    restoring the two-earner deduction that was in effect between 1982 and
    1986, effective for taxable years beginning after December 31, 2001.
    Joint filers would be allowed to deduct 10 percent of the first $30,000
    of the earned income of the lower paid spouse. The limitation on
    eligible earnings would be phased in over 5 years, increasing from
    $6,000 in 2002 to $12,000 in 2003, $18,000 in 2004, $24,000 in 2005 and
    $30,000 in 2006 and subsequent years.
      Provide charitable contribution deduction for nonitemizers.--Under
    current law, individual taxpayers who do not itemize their deductions
    (nonitemizers) are not able to deduct contributions to qualified
    charitable organizations. The Administration proposes to allow
    nonitemizers to deduct charitable contributions in addition to claiming
    the standard deduction, effective for taxable years beginning after
    December 31, 2001. The deduction would be phased in between 2002 and
    2006 by allowing deductible amounts to increase as a percentage of
    contributions from 20 percent in 2002 to 40 percent in 2003, 60 percent
    in 2004, 80 percent in 2005, and 100 percent in 2006 and subsequent
    years. Deductible contributions would be limited to the amount of the
    taxpayer's standard deduction and would be subject to existing rules
    governing itemized charitable contributions, such as the substantiation
    requirements and the percentage-of-AGI limitations.
      Permit tax-free withdrawals from Individual Retirement Accounts (IRAs)
    for charitable contributions.--Under current law, eligible individuals
    may make deductible or non-deductible contributions to a traditional
    IRA. Pre-tax amounts (including earnings) in a traditional IRA are
    included in income when withdrawn. Effective for distributions after
    December 31, 2001, the Administration proposes to allow individuals who
    have attained age 59\1/2\ to exclude from gross income IRA distributions
    made directly to a charitable organization. The exclusion would apply
    without regard to the percentage-of-AGI limitations that apply to
    deductible charitable contributions. The exclusion would apply only to
    the extent the individual receives no return benefit in exchange for the
    transfer, and no charitable deduction would be allowed with respect to
    any amount that is excludable from income under this provision.
      Raise the cap on corporate charitable contributions.--Current law
    limits deductible charitable contributions by corporations to 10 percent
    of net income (calculated before the deduction of the charitable
    contributions and certain other deductions). The Administration proposes
    to increase the limit on deductible charitable contributions by
    corporations from 10 percent to 15 percent of net income, effective for
    taxable years beginning after December 31, 2001.
      Increase and expand education savings accounts.--Under current law,
    taxpayers may elect to contribute up to $500 per year to an education
    savings account (an ``education IRA'') for beneficiaries under age

    [[Page 40]]

    18. The contribution limit is phased out for taxpayers with modified AGI
    between $95,000 and $110,000 ($150,000 and $160,000 for married couples
    filing a joint return). Contributions are not deductible, but earnings
    on contributions accumulate tax-free. Distributions are excludable from
    gross income to the extent they do not exceed qualified higher education
    expenses incurred during the year the distributions are made. The
    earnings portion of a distribution not used to cover qualified education
    expenses is included in the gross income of the beneficiary and is
    generally subject to an additional 10-percent tax. If any portion of a
    distribution from an education savings account is excluded from gross
    income, an education tax credit may not be claimed with respect to the
    same student in the same taxable year.
       The Administration proposes to increase the annual contribution limit
    to education savings accounts to $5,000. The higher contribution limit
    would be phased in over 5 years, increasing to $1,000 in 2002, $2,000 in
    2003, $3,000 in 2004, $4,000 in 2005, and $5,000 in 2006 and subsequent
    years. The Administration also proposes to expand education savings
    accounts to allow tax-free and penalty-free distributions for certain
    elementary, secondary, and after-school program expenses. Eligible
    expenses generally would include tuition, fees, academic tutoring,
    special needs services, books, supplies, computer equipment, and certain
    expenses for room and board, uniforms, and transportation. Expenses for
    both public and private educational institutions would qualify. Under
    the proposal, both an education tax credit and a tax-free distribution
    from an education savings account would be allowed with respect to the
    same student in the same taxable year, provided the credit and the
    distribution were not used for the same expenses. These changes are
    proposed to be effective for contributions and distributions made after
    December 31, 2001.

      Permanently extend the research and experimentation (R&E) tax
    credit.--The Administration proposes to permanently extend the 20-
    percent tax credit for qualified research and experimentation
    expenditures above a base amount and the alternative incremental credit,
    which are scheduled to expire on June 30, 2004.
      Phase out death tax.--The Administration proposes to reduce estate tax
    rates between 2002 and 2008, and to repeal the estate, gift and
    generation-skipping transfer tax completely in 2009. The tax rate
    reductions would begin in 2002, with a 5-percentage-point reduction in
    each existing tax rate bracket. The 5-percentage-point surtax, which
    currently phases out the benefit of the graduated rate schedule, would
    be repealed in 2002. State death tax credit rates would be reduced to
    maintain the current relationship between the credit rates and the
    Federal estate tax rates. After repeal of the estate, gift and
    generation-skipping transfer taxes, inherited assets generally would
    carry the decedent's tax basis. However, there would be an adjustment to
    basis, so that in general, to the extent that taxpayers are not
    currently subject to estate tax, they would not be subject to capital
    gains tax on inherited assets. There would also be provisions to
    discourage transfers made for the purpose of avoiding income or capital
    gains tax.

                            ADDITIONAL TAX INCENTIVES

                         Strengthen and Reform Education

      Allow teachers to deduct out-of-pocket classroom expenses.--Under
    current law, teachers who incur unreimbursed, job-related expenses may
    deduct those expenses to the extent that when combined with other
    miscellaneous itemized deductions they exceed 2 percent of AGI.
    Effective for expenses incurred in taxable years beginning after
    December 31, 2001, the Administration proposes to allow teachers and
    other elementary and secondary school professionals to treat up to $400
    in qualified out-of-pocket classroom expenses as a non-itemized
    deduction (above-the-line deduction). Unreimbursed expenditures for
    certain books, supplies and equipment related to classroom instruction
    and for certain professional training programs would qualify for the
    deduction.
      Allow tax-free distributions from Qualified State Tuition Plans
    (QSTPs) for certain higher education expenses and allow private colleges
    to offer prepaid tuition plans.--Current law provides two basic tax
    benefits to contributions to, and beneficiaries of, QSTPs: (1) earnings
    on amounts invested in a QSTP are not subject to tax until a
    distribution is made (or educational benefits are provided), and (2)
    distributions made on behalf of a beneficiary are taxed at the
    beneficiary's (rather than the contributor's) individual income tax
    rate. These programs generally take two forms - prepaid tuition plans
    and savings plans. Under a prepaid tuition plan, an individual may
    purchase tuition credits or certificates on behalf of a designated
    beneficiary, which entitle the beneficiary to the waiver or payment of
    qualified higher education expenses at participating educational
    institutions. Under a savings plan, an individual may make contributions
    to an account, which is established for the purpose of meeting the
    qualified higher education expenses of a designated beneficiary.
    Distributions from QSTPs for nonqualified expenses generally are subject
    to a more than de minimus penalty (typically 10 percent of the earnings
    portion of the distribution). There is no specific dollar cap on annual
    contributions to a QSTP; in addition, there is no limit on contributions
    to a QSTP based on the contributor's income. Contributions to a QSTP are
    permitted at any time during the beneficiary's lifetime and the account
    can remain open after the beneficiary reaches age 30. However, a QSTP
    must provide adequate safeguards to prevent contributions on behalf of a
    designated beneficiary in excess of amounts necessary to provide for
    qualified education expenses.
      Effective for taxable years beginning after December 31, 2001, the
    Administration proposes to allow tax-free withdrawals from QSTPs for
    qualified higher education

    [[Page 41]]

    expenses, including room and board, tuition and fees, and certain
    expenses for books, supplies, and equipment. An education tax credit, a
    tax-free distribution from an education savings account, and a tax-free
    distribution from a QSTP would be allowed with respect to the same
    student in the same taxable year, provided the credit and the
    distributions were not used for the same expenses. The Administration
    also proposes to allow private educational institutions to establish
    qualified prepaid tuition plans (but not savings plans), provided the
    institution is eligible to participate in Federal financial aid programs
    under Title IV of the Higher Education Act of 1965.

      Allow States to issue tax-exempt private activity bonds for school
    construction.--Current law does not exclude from income the interest on
    private activity bonds used to finance school construction or equipment.
    The Administration proposes to provide States with annual authority of
    $10 per resident (a minimum of $5 million is provided for small States)
    to issue tax-exempt, private activity bonds for constructing and
    equipping public elementary and secondary schools. Private entities
    would construct the schools and own the schools while the bonds are
    outstanding; ownership would revert to the school district when the
    bonds are retired. The proposal would be effective for bonds issued
    after December 31, 2001.

                              Invest in Health Care

      Provide refundable tax credit for the purchase of health insurance.--
    Current law provides a tax preference for employer-provided group health
    insurance plans, but not for individually purchased health insurance
    coverage except to the extent that deductible medical expenses exceed
    7.5 percent of AGI or the individual has self-employment income. The
    Administration proposes to make health insurance more affordable for
    individuals not covered by an employer plan nor eligible for public
    programs. Effective for taxable years beginning after December 31, 2001,
    a new refundable tax credit would be provided for the cost of health
    insurance purchased by individuals under age 65. The credit, which would
    equal 90 percent of health insurance premiums, would be capped at $750
    for single policies and $1,500 for family policies in 2002 and 2003, and
    $1,000 for single policies and $2,000 for family policies in 2004 and
    subsequent years. The credit would be phased out for single taxpayers
    with AGI between $15,000 and $30,000 ($30,000 and $60,000 for married
    couples filing a joint return and purchasing a family policy). The
    maximum credit amounts and the income phase-out thresholds would be
    indexed annually for inflation beginning in 2003. The Administration is
    looking at ways to implement the credit so it is available to potential
    beneficiaries when they need it. To qualify for the credit, the
    purchased health insurance would be required to include coverage for
    catastrophic medical expenses. Individuals would not be allowed to claim
    the credit and make a contribution to an MSA for the same taxable year.
      Provide an above-the-line deduction for long-term care insurance
    premiums.--Current law provides a tax preference for employer-paid long-
    term care insurance, but not for individually-purchased long-term case
    insurance except to the extent that deductible medical expenses exceed
    7.5 percent of AGI or the individual has self-employment income.
    Premiums on qualified long-term care insurance are deductible as a
    medical expense, subject to annual dollar limitations that increase with
    age. The Administration proposes to make individually-purchased long-
    term care insurance (the vast majority of the long-term care insurance
    market) more affordable by creating an above-the-line deduction for
    qualified long-term care insurance premiums. To qualify for the
    deduction, the long-term care insurance would be required to meet
    certain standards providing consumer protections. The deduction would be
    available to taxpayers who individually purchase qualified long-term
    care insurance and to those who pay at least 50 percent of the cost of
    employer-provided coverage (the employer-paid share of the cost is less
    than 50 percent). The deduction would be effective for taxable years
    beginning after December 31, 2001 but would be phased in over six years.
    The deduction would be subject to current law annual dollar limitations
    on qualified long-term care insurance premiums.
      Allow up to $500 in unused benefits in a health flexible spending
    arrangement to be carried forward to the next year.--Under current law,
    unused benefits in a health flexible spending arrangement under a
    cafeteria plan for a particular year revert to the employer at the end
    of the year. Effective for plan years beginning after December 31, 2001,
    the Administration proposes to allow up to $500 in unused benefits in a
    health flexible spending arrangement at the end of a particular year to
    be carried forward to the next plan year.
      Provide additional choice with regard to unused benefits in a health
    flexible spending arrangement.--In addition to the proposed carryforward
    of unused benefits (see preceding discussion), the Administration
    proposes to allow up to $500 in unused benefits in a health flexible
    spending arrangement at the end of a particular year to be distributed
    to the participant as taxable income, contributed to an Archer MSA, or
    contributed to the employer's 401(k), 403(b), or governmental 457(b)
    retirement plan. Amounts distributed to the participant would be subject
    to income tax withholding and employment taxes. Amounts contributed to
    an Archer MSA or retirement plan would be subject to the normal rules
    applicable to elective contributions to the receiving plan or account.
    The proposal would be effective for plan years beginning after December
    31, 2001.

    [[Page 42]]

      Permanently extend and reform Archer MSAs.--Current law allows only
    self-employed individuals and employees of small firms to establish
    Archer MSAs, and caps the number of accounts at 750,000. In addition to
    other requirements, (1) individuals who establish MSAs must be covered
    by a high-deductible health plan (and no other plan) with a deductible
    of at least $1,600 but not greater than $2,400 for policies covering a
    single person and a deductible of at least $3,200 but not greater than
    $4,800 in all other cases, (2) tax-preferred contributions are limited
    to 65 percent of the deductible for single policies and 75 percent of
    the deductible for other policies, and (3) either an individual or an
    employer, but not both, may make a tax-preferred contribution to an MSA
    for a particular year. The Administration proposes to permanently extend
    the MSA program, which is scheduled to expire on December 31, 2002.
    Effective after December 31, 2001, the Administration proposes to remove
    the 750,000 cap on the number of accounts. In addition, the program
    would be reformed by (1) expanding eligibility to include all
    individuals and employees of firms of all sizes covered by a high-
    deductible health plan, (2) modifying the definition of high deductible
    to permit a deductible as low as $1,000 for policies covering a single
    person and $2,000 in all other cases, (3) increasing tax-preferred
    contributions to 100 percent of the deductible, (4) allowing tax-
    preferred contributions by both employers and employees for a particular
    year, up to the applicable maximum, and (5) allowing contributions to
    MSAs under cafeteria plans. Individuals would not be allowed to make a
    contribution to an MSA and claim the proposed refundable tax credit for
    health insurance premiums for the same taxable year.
      Provide an additional personal exemption to home caretakers of family
    members.--Current law provides a tax deduction for certain long-term
    care expenses. In addition, taxpayers are allowed to claim exemptions
    for themselves (and their spouses, if married) and dependents who they
    support. However, neither provision may meet the needs of taxpayers who
    provide long-term care in their own home for close family members.
    Effective for taxable years beginning after December 31, 2001, the
    Administration proposes to provide an additional personal exemption to
    taxpayers who care for certain qualified spouses or ancestors with long-
    term care needs. The spouse or ancestor must be a member of the
    taxpayer's household for the entire year. There would be no support
    requirement for the additional exemption. An individual would be
    considered to have long-term care needs if he or she were certified by a
    licensed physician as being unable for at least 180 consecutive days to
    perform at least two activities of daily living without substantial
    assistance from another individual due to a loss of functional capacity.
    Alternatively, an individual would be considered to have long-term care
    needs if he or she were certified by a licensed physician (1) as
    requiring substantial supervision for at least 180 consecutive days to
    be protected from threats to his or her own health and safety due to
    severe cognitive impairment and (2) being unable for at least six months
    to perform at least one activity of daily living or being unable to
    engage in age appropriate activities.
      Provide tax relief for awards under certain health education
    programs.--Current law provides tax-free treatment for certain
    scholarship and fellowship grants used to pay qualified tuition and
    related expenses, but not to the extent that any grant represents
    compensation for services. The Administration proposes to provide that
    any amounts received by an individual under the National Health Service
    Corps Scholarship Program or the Armed Forces Health Professions
    Scholarship and Financial Assistance Program are ``qualified
    scholarships'' excludable from income, without regard to the recipient's
    future service obligation. The proposal would be effective for awards
    received after December 31, 2001.

                       Assist Americans With Disabilities

      Exclude from income the value of employer-provided computers, software
    and peripherals.--The Administration proposes to allow individuals with
    disabilities to exclude from income the value of employer-provided
    computers, software or other office equipment that are necessary for the
    individual to perform work for the employer at home. To qualify for the
    exclusion, the employee would be required to make substantial use of the
    equipment (relative to overall use) performing work for his or her
    employer. However, unlike current law, which limits the exclusion to the
    extent that the equipment is used to perform work for the employer, the
    proposed exclusion would apply to all use of such equipment, including
    use by the employee for personal or non-employer-related trade or
    business purposes. Employees would be required to provide their employer
    with a certification from a licensed physician that they meet
    eligibility criteria. The proposal would be effective for taxable years
    beginning after December 31, 2001.

                               Strengthen Families

      Permanently extend and increase the adoption tax credit.--Current law
    provides a permanent nonrefundable 100-percent tax credit for the first
    $6,000 of qualified expenses incurred in the adoption of a child with
    special needs. A nonrefundable 100-percent tax credit is provided for
    the first $5,000 of qualified expenses incurred before January 1, 2002
    in the adoption of a child without special needs. The dollar limits are
    cumulative per adoption but may be used over more than one calendar
    year. Qualified expenses do not include any expenses that are paid or
    reimbursed under any other government or non-government program. The
    credit is phased out ratably for taxpayers with incomes between $75,000
    and $115,000; in addition, it is not available for adoptions by
    stepparents. The Administration proposes to make the tax credit for the
    adoption of children without special needs permanent. In addi

    [[Page 43]]

    tion, effective for expenses incurred after December 31, 2001, the
    Administration proposes to increase the credit to $8,500 for the
    adoption of a child with special needs and to $7,500 for the adoption of
    a child without special needs.

              Help Farmers and Fishermen Manage Economic Downturns

      Establish Farm, Fish and Ranch Risk Management (FFARRM) savings
    accounts.--Current law does not provide for the elective deferral of
    farm or fishing income. However, farmers can elect to average their
    farming income over a three-year period, and farmers may carry back net
    operating losses over the five previous years. In addition, taxes can be
    deferred on certain forms of income, including disaster payments, crop
    insurance and proceeds from emergency livestock sales. The
    Administration proposes to allow up to 20 percent of taxable income
    attributable to an eligible farming or fishing business to be
    contributed to a FFARRM savings account each year and deducted from
    income. Earnings on contributions would be taxable as earned and
    distributions from the account (except those attributable to earnings on
    contributions) would be included in gross income. Any amount not
    distributed within five years of deposit would be deemed to have been
    distributed and included in gross income; in addition, such
    distributions would be subject to a 10-percent surtax. The proposal
    would be effective for taxable years beginning after December 31, 2001.

                         Increase Housing Opportunities

      Provide tax credit for developers of affordable single-family
    housing.--The Administration proposes to provide annual tax credit
    authority to States (including U.S. possessions) designed to promote the
    development of affordable single-family housing in low-income urban and
    rural neighborhoods. Beginning in calendar year 2002, first-year credit
    authority of $1.75 per capita (indexed annually for inflation
    thereafter) would be made available to each State. State housing
    agencies would award first-year credits to single-family housing units
    comprising a project located in a census tract with median income equal
    to 80 percent or less of area median income. Units in condominiums and
    cooperatives could qualify as single-family housing. Credits would be
    awarded as a fixed amount for individual units comprising a project. The
    present value of the credits, determined on the date of a qualifying
    sale, could not exceed 50 percent of the cost of constructing a new home
    or rehabilitating an existing property. The taxpayer (developer or
    investor partnership) owning the housing unit immediately prior to the
    sale to a qualified buyer would be eligible to claim credits over a 5-
    year period beginning on the date of sale. Eligible homebuyers would be
    required to have incomes equal to 80 per cent or less of area median
    income. Technical features of the provision would follow similar
    features of current law with respect to the low-income housing tax
    credit and mortgage revenue bonds.

                                Encourage Saving

      Establish Individual Development Accounts (IDAs).--The Administration
    proposes to allow eligible individuals to make contributions to a new
    savings vehicle, the Individual Development Account, which would be set
    up and administered by financial institutions. Financial institutions
    would be allowed a tax credit for a portion of their matching
    contributions to an IDA. Matching contributions and the earnings on
    those contributions would be deposited in a separate ``parallel
    account.'' Contributions to an IDA by an eligible individual would not
    be deductible, and earnings on those contributions would be included in
    income. Matching contributions by financial institutions and the
    earnings on those contributions would be tax free, provided they are
    withdrawn for qualified purposes (higher education, the first-time
    purchase of a home, business start-up, and qualified rollovers).
    Withdrawals for other than qualified purposes would result in the
    forfeiture of matching contributions and the earnings on those
    contributions. Individuals eligible to contribute to an IDA would be
    required to be at least 18 years of age, a citizen or legal resident of
    the United States, and meet certain income limitations. The proposal
    would be effective for contributions to IDAs and matching contributions
    made with respect to such IDAs after December 31, 2001.

                                  Promote Trade

      Extend and expand Andean trade preferences.--The Administration
    proposes to renew and enhance the Andean Trade Preference Program (ATPA)
    when it expires on December 4, 2001. The current ATPA program was
    enacted in 1991 to augment beneficiary countries' efforts to diversify
    their economies away from narcotics production and drug trafficking. The
    current program provides duty-free treatment on most, but not all,
    imports from Bolivia, Columbia, Peru and Ecuador. The Administration is
    seeking to work with Congress to expand the list of products eligible
    for duty free treatment under a renewed ATPA. It supports extending ATPA
    benefits for the period until the entry into force of the Free Trade
    Area of the Americas (FTAA). The Administration is seeking to conclude
    the FTAA negotiations in time for entry into force of the agreement by
    January 1, 2005.

                             Protect the Environment

      Permanently extend expensing of brownfields remediation costs.--
    Taxpayers may elect to treat certain environmental remediation
    expenditures that would otherwise be chargeable to capital account as
    deductible in the year paid or incurred. Under current law, the ability
    to deduct such expenditures expires with respect to expenditures paid or
    incurred after December 31, 2003. The Administration proposes to
    permanently extend this provision, facilitating its use by businesses to
    undertake projects that may extend beyond the cur

    [[Page 44]]

    rent expiration date and be uncertain in overall duration.
      Exclude 50 percent of gains from the sale of property for conservation
    purposes.--The Administration proposes to create a new incentive for
    private, voluntary land protection. This incentive is a cost-effective,
    non-regulatory approach to conservation. Under the proposal, when land
    (or an interest in land or water) is sold for conservation purposes,
    only 50 percent of any gain would be included in the seller's income. To
    be eligible for the exclusion, the sale may be either to a government
    agency or to a qualified conservation organization, and the buyer must
    supply a letter of intent that the acquisition will serve conservation
    purposes. In addition, the taxpayer or a member of the taxpayer's family
    must have owned the property for the three years immediately preceding
    the sale. The provision would be effective for sales taking place on or
    after the date of first committee action.

                             Energy Policy Proposals

      Extend and modify the tax credit for producing electricity from
    certain sources.--Taxpayers are provided a 1.5-cent-per-kilowatt-hour
    tax credit, adjusted for inflation after 1992, for electricity produced
    from wind, closed-loop biomass (organic material from a plant grown
    exclusively for use at a qualified facility to produce electricity), and
    poultry waste. To qualify for the credit, the electricity must be sold
    to an unrelated third party and must be produced during the first 10
    years of production at a facility placed in service before January 1,
    2002. The Administration proposes to extend the credit for electricity
    produced from wind and biomass to facilities placed in service before
    January 1, 2005. In addition, eligible biomass sources would be expanded
    to include certain biomass from forest-related resources, agricultural
    sources, and other specified sources. Special rules would apply to
    biomass facilities placed in service before January 1, 2002. Electricity
    produced at such facilities from newly eligible sources would be
    eligible for the credit only from January 1, 2002 through December 31,
    2004, and at a rate equal to 60 percent of the generally applicable
    rate. Electricity produced from newly eligible biomass co-fired in coal
    plants would also be eligible for the credit only from January 1, 2002
    through December 31, 2004, and at a rate equal to 30 percent of the
    generally applicable rate.
      Provide tax credit for residential solar energy systems.--Current law
    provides a 10-percent investment tax credit to businesses for qualifying
    equipment that uses solar energy to generate electricity; to heat, cool
    or provide hot water for use in a structure; or to provide solar process
    heat. A credit currently is not provided for nonbusiness purchases of
    solar energy equipment. The Administration proposes a new tax credit for
    individuals who purchase solar energy equipment to generate electricity
    (photovoltaic equipment) or heat water (solar water heating equipment
    used exclusively for purposes other than heating swimming pools) for use
    in a dwelling unit that the individual uses as a residence. The proposed
    nonrefundable credit would be equal to 15 percent of the cost of the
    equipment and its installation; each individual taxpayer would be
    allowed a maximum credit of $2,000 for photovoltaic equipment and $2,000
    for solar water heating equipment. The credit would apply to
    photovoltaic equipment placed in service after December 31, 2001 and
    before January 1, 2008 and to solar water heating equipment placed in
    service after December 31, 2001 and before January 1, 2006.
      Modify treatment of nuclear decommissioning funds.--Under current law,
    deductible contributions to nuclear decommissioning funds are limited to
    the amount included in the taxpayer's cost of service for ratemaking
    purposes. For deregulated utilities, this limitation may result in the
    denial of any deduction for contributions to a nuclear decommissioning
    fund. The Administration proposes to repeal this limitation.
      Also under current law, deductible contributions are not permitted to
    exceed the amount the IRS determines to be necessary to provide for
    level funding of an amount equal to the taxpayer's post-1983
    decommissioning costs. The Administration proposes to permit funding of
    all decommissioning costs through deductible contributions. Any portion
    of these additional contributions relating to pre-1983 costs that
    exceeds the amount previously deducted (other than under the nuclear
    decommissioning fund rules) or excluded from the taxpayer's gross income
    on account of the taxpayer's liability for decommissioning costs, would
    be allowed as a deduction ratably over the remaining useful life of the
    nuclear power plant.
      The Administration's proposal would also permit taxpayers to make
    deductible contributions to a qualified fund after the end of the
    nuclear power plant's estimated useful life and would provide that
    nuclear decommissioning costs are deductible when paid. These changes in
    the treatment of nuclear decommissioning funds are proposed to be
    effective for taxable years beginning after December 31, 2001.

                ONE-YEAR EXTENSION OF PROVISIONS EXPIRING IN 2001

      Extend the work opportunity tax credit.--The work opportunity tax
    credit provides an incentive for employers to expand the number of entry
    level positions for individuals from certain targeted groups. The credit
    generally applies to the first $6,000 of wages paid to several
    categories of economically disadvantaged or handicapped workers. The
    credit rate is 25 percent of qualified wages for employment of at least
    120 hours but less than 400 hours and 40 percent for employment of 400
    or more hours. The Administration proposes to extend the credit for one
    year, making the credit available for workers hired after December 31,
    2001 and before January 1, 2003.

    [[Page 45]]

      Extend the welfare-to-work tax credit.--The welfare-to-work tax credit
    entitles employers to claim a tax credit for hiring certain recipients
    of long-term family assistance. The purpose of the credit is to expand
    job opportunities for persons making the transition from welfare to
    work. The credit is 35 percent of the first $10,000 of eligible wages in
    the first year of employment and 50 percent of the first $10,000 of
    eligible wages in the second year of employment. Eligible wages include
    cash wages plus the cash value of certain employer-paid health,
    dependent care, and educational fringe benefits. The minimum employment
    period that employees must work before employers can claim the credit is
    400 hours. The Administration proposes to extend the credit for one
    year, to apply to individuals who begin work after December 31, 2001 and
    before January 1, 2003.
      Extend exclusion for employer-provided educational assistance.--
    Certain amounts paid or incurred by an employer for educational
    assistance provided to an employee are excluded from the employee's
    gross income for income and payroll tax purposes. The exclusion is
    limited to $5,250 of educational assistance with respect to an
    individual during a calendar year and applies whether or not the
    education is job-related. The Administration proposes to extend the
    exclusion, which is limited to undergraduate courses, to apply to
    courses beginning after December 31, 2001 and before January 1, 2003.
      Extend minimum tax relief for individuals.--A temporary provision of
    prior law permits nonrefundable personal tax credits to be offset
    against both the regular tax and the alternative minimum tax; in
    addition, refundable credits are not reduced by the amount of the
    alternative minimum tax. The temporary provision expires after taxable
    year 2001. The Administration is concerned that the AMT may limit the
    benefit of personal tax credits and impose financial and compliance
    burdens on taxpayers who have few, if any, tax preference items and who
    were not the originally intended targets of the AMT. The Administration
    proposes to extend minimum tax relief for nonrefundable personal tax
    credits (other than the child credit) one year, to apply to taxable year
    2002. The Administration's proposal to double the child credit (see
    earlier discussion) includes a provision providing permanent minimum tax
    relief for the child credit and refundable personal credits.
      Extend exceptions provided under subpart F for certain active
    financing income.--Under the Subpart F rules, certain U.S. shareholders
    of a controlled foreign corporation (CFC) are subject to U.S. tax
    currently on certain income earned by the CFC, whether or not such
    income is distributed to the shareholders. The income subject to current
    inclusion under the subpart F rules includes, among other things,
    ``foreign personal holding company income'' and insurance income.
    Foreign personal holding company income generally includes many types of
    income derived by a financial service company, such as dividends;
    interest; royalties; rents; annuities; net gains from the sale of
    certain property, including securities, commodities and foreign
    currency; and income from notional principal contracts and securities
    lending activities. For taxable years beginning before 2002, certain
    income derived in the active conduct of a banking, financing, insurance,
    or similar business is excepted from Subpart F. The Administration
    proposes to extend the exception for one year, to apply to taxable years
    beginning in 2002.
      Extend suspension of net income limitation on percentage depletion
    from marginal oil and gas wells.--Taxpayers are allowed to recover their
    investment in oil and gas wells through depletion deductions. For
    certain properties, deductions may be determined using the percentage
    depletion method; however, in any year, the amount deducted generally
    may not exceed 100 percent of the net income from the property. For
    taxable years beginning after December 31, 1997 and before January 1,
    2002, domestic oil and gas production from ``marginal'' properties is
    exempt from the 100-percent of net income limitation. The Administration
    proposes to extend the exemption to apply to taxable years beginning
    after December 31, 2001 and before January 1, 2003.
      Extend Generalized System of Preferences (GSP).--Under GSP, duty-free
    access is provided to over 4,000 items from eligible developing
    countries that meet certain worker rights, intellectual property
    protection, and other criteria. The Administration proposes to extend
    this program, which is scheduled to expire after September 30, 2001,
    through September 30, 2002.
      Extend authority to issue Qualified Zone Academy Bonds.--Prior law
    allows State and local governments to issue ``qualified zone academy
    bonds,'' the interest on which is effectively paid by the Federal
    government in the form of an annual income tax credit. The proceeds of
    the bonds must be used for teacher training, purchases of equipment,
    curricular development, or rehabilitation and repairs at certain public
    school facilities. A nationwide total of $400 million of qualified zone
    academy bonds was authorized to be issued in each of calendar years 1998
    through 2001. In addition, unused authority arising in 1998 and 1999 may
    be carried forward for up to three years and unused authority arising in
    2000 and 2001 may be carried forward for up to two years. The
    Administration proposes to authorize the issuance of an additional $400
    million of qualified zone academy bonds in calendar year 2002.

                      OTHER PROVISIONS THAT AFFECT RECEIPTS

      Recover State bank supervision and regulation expenses (receipt
    effect).--The Administration proposes to require the Federal Deposit
    Insurance Corporation (FDIC) and the Federal Reserve to recover their

    [[Page 46]]

    respective costs for supervision and regulation of State-chartered banks
    and bank holding companies. The Federal Reserve currently funds the
    costs of such examinations from earnings; therefore, deposits of
    earnings by the Federal Reserve, which are classified as governmental
    receipts, will increase by the amount of the recoveries.

                                                           Table 3-3.  EFFECT OF PROPOSALS ON RECEIPTS
                                                                    (In millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             Estimate
                                                                     ---------------------------------------------------------------------------------------
                                                                        2001      2002      2003       2004       2005       2006     2002-2006   2002-2011
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    President's Tax Plan presented to Congress on February 8th:

      Create new 10-percent individual income tax bracket...........  ........   -5,678   -13,847    -21,932    -29,849    -37,407    -108,713     -310,618
      Reduce individual income tax rates............................  ........  -11,793   -21,047    -33,493    -42,306    -57,299    -165,938     -500,666
      Increase the child tax credit \1\.............................  ........   -1,238    -7,505    -11,455    -16,347    -20,963     -57,508     -192,657
      Reduce the marriage penalty...................................  ........   -1,435    -4,844     -7,773    -10,343    -12,675     -37,070     -112,834
      Provide charitable contribution deduction for nonitemizers....  ........     -482    -1,690     -2,963     -4,448     -6,065     -15,648      -52,171
      Permit tax-free withdrawals from IRAs for charitable            ........      -53      -181       -195       -210       -225        -864       -2,261
       contributions................................................
      Raise the cap on corporate charitable contributions...........  ........      -85      -136       -136       -143       -149        -649       -1,579
      Increase and expand education savings accounts................  ........       -3       -25        -88       -204       -373        -693       -5,645
      Permanently extend the R&E tax credit.........................  ........  ........  ........    -1,055     -3,431     -5,415      -9,901      -49,576
      Phase out death tax...........................................     -154    -4,930   -10,435    -11,442    -13,411    -16,263     -56,481     -261,257
                                                                     ---------------------------------------------------------------------------------------
        Total, President's Tax Plan presented to Congress on             -154   -25,697   -59,710    -90,532   -120,692   -156,834    -453,465   -1,489,264
         February 8th \1\...........................................

    Provide refundable tax credit for the purchase of health          ........     -219    -1,513     -3,966     -5,796     -6,143     -17,637      -52,858
     insurance \1\..................................................

    Additional tax incentives \2\...................................      -18    -1,812    -3,602     -4,322     -5,090     -6,001     -20,827      -66,531

    One-year extension of provisions expiring in 2001 \2\...........  ........   -1,614    -1,355       -170        -94        -66      -3,299       -3,410
                                                                     ---------------------------------------------------------------------------------------
          Total tax reduction \1\, \2\..............................     -172   -29,342   -66,180    -98,990   -131,672   -169,044    -495,228   -1,612,063
                                                                     ---------------------------------------------------------------------------------------

    Other provisions that affect receipts:

      Recover State bank supervision and regulation expenses \1\,     ........       70        74         76         80         84         384          866
       \2\..........................................................

    --------------------------------------------------------------------------------------------------------------------------------------------------------
     \1\ Affects both receipts and outlays. Only the receipt effect is shown here; the outlay effect is shown in Table S-9 of the Budget of the United
      States Government, Fiscal Year 2002.

     \2\ Net of income offsets

    [[Page 47]]

                                             Table 3-4.  RECEIPTS BY SOURCE
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                             Estimate
               Source                2000    -----------------------------------------------------------------------
                                    Actual       2001        2002        2003        2004        2005        2006
    ----------------------------------------------------------------------------------------------------------------
    Individual income taxes
     (federal funds):
      Existing law..............   1,004,462   1,073,088   1,102,871   1,148,882   1,205,565   1,273,084   1,345,297
        Proposed Legislation      ..........        -161     -24,082     -56,592     -87,684    -116,040    -148,690
         (PAYGO)................
                                 -----------------------------------------------------------------------------------
    Total individual income        1,004,462   1,072,927   1,078,789   1,092,290   1,117,881   1,157,044   1,196,607
     taxes......................
                                 ===================================================================================
    Corporation income taxes:
      Federal funds:
        Existing law............     207,286     213,080     219,984     228,800     237,816     249,059     259,360
          Proposed Legislation    ..........         -11      -1,198      -1,507      -2,319      -4,907      -7,201
           (PAYGO)..............
                                 -----------------------------------------------------------------------------------
      Total Federal funds            207,286     213,069     218,786     227,293     235,497     244,152     252,159
       corporation income taxes.
                                 -----------------------------------------------------------------------------------
      Trust funds:
        Hazardous substance                3  ..........  ..........  ..........  ..........  ..........  ..........
         superfund..............
                                 -----------------------------------------------------------------------------------
    Total corporation income         207,289     213,069     218,786     227,293     235,497     244,152     252,159
     taxes......................
                                 ===================================================================================
    Social insurance and
     retirement receipts (trust
     funds):
      Employment and general
       retirement:
        Old-age and survivors        411,677     430,916     453,853     479,405     504,598     537,690     562,913
         insurance (Off-budget).
        Disability insurance          68,907      72,954      77,067      81,407      85,689      91,307      95,594
         (Off-budget)...........
        Hospital insurance......     135,529     147,228     154,098     162,932     171,656     182,952     191,783
        Railroad retirement:
          Social Security              1,650       1,713       1,755       1,801       1,836       1,877       1,916
           equivalent account...
          Rail pension and             2,688       2,694       2,758       2,826       2,881       2,932       2,981
           supplemental annuity.
                                 -----------------------------------------------------------------------------------
      Total employment and           620,451     655,505     689,531     728,371     766,660     816,758     855,187
       general retirement.......
        On-budget...............     139,867     151,635     158,611     167,559     176,373     187,761     196,680
        Off-budget..............     480,584     503,870     530,920     560,812     590,287     628,997     658,507
                                 -----------------------------------------------------------------------------------
      Unemployment insurance:
        Deposits by States \1\ .      20,701      22,405      24,601      25,944      27,623      27,362      29,485
        Federal unemployment           6,871       7,105       7,257       7,437       7,619       7,805       7,998
         receipts \1\ ..........
        Railroad unemployment             68          50          88         134         149         105          74
         receipts \1\ ..........
                                 -----------------------------------------------------------------------------------
      Total unemployment              27,640      29,560      31,946      33,515      35,391      35,272      37,557
       insurance................
                                 -----------------------------------------------------------------------------------
      Other retirement:
        Federal employees'             4,691       4,523       4,259       4,106       3,948       3,767       3,582
         retirement--employee
         share..................
        Non-Federal employees             70          68          62          53          50          45          41
         retirement \2\ ........
                                 -----------------------------------------------------------------------------------
      Total other retirement....       4,761       4,591       4,321       4,159       3,998       3,812       3,623
                                 -----------------------------------------------------------------------------------
    Total social insurance and       652,852     689,656     725,798     766,045     806,049     855,842     896,367
     retirement receipts........
      On-budget.................     172,268     185,786     194,878     205,233     215,762     226,845     237,860
      Off-budget................     480,584     503,870     530,920     560,812     590,287     628,997     658,507
                                 ===================================================================================
    Excise taxes:
      Federal funds:
        Alcohol taxes...........       8,140       7,688       7,810       7,885       7,946       8,011       8,074
        Tobacco taxes...........       7,221       7,548       8,140       8,175       7,941       7,778       7,643
        Transportation fuels tax         819         779         743         759         766         784         306
        Telephone and teletype         5,670       5,914       6,295       6,687       7,097       7,526       7,976
         services...............
        Ozone depleting                  125          94          65          39          20  ..........  ..........
         chemicals and products.
        Other Federal fund               717       1,961       1,863       1,774       1,772       1,826       1,885
         excise taxes...........
                                 -----------------------------------------------------------------------------------
      Total Federal funds excise      22,692      23,984      24,916      25,319      25,542      25,925      25,884
       taxes....................
                                 -----------------------------------------------------------------------------------
      Trust funds:
        Highway.................      34,972      35,431      36,539      37,646      38,727      39,823      40,867
        Airport and airway......       9,739      10,414      11,183      11,875      12,578      13,311      14,085
        Aquatic resources.......         342         352         392         401         420         429         440
        Black lung disability            518         555         570         583         596         609         618
         insurance..............
        Inland waterway.........         101          93          93          94          95          96          97
        Hazardous substance                2  ..........  ..........  ..........  ..........  ..........  ..........
         superfund..............
        Oil spill liability.....         182  ..........  ..........  ..........  ..........  ..........  ..........

    [[Page 48]]

        Vaccine injury                   133         134         137         140         142         143         145
         compensation...........
        Leaking underground              184         185         190         196         200         207         210
         storage tank...........
                                 -----------------------------------------------------------------------------------
      Total trust funds excise        46,173      47,164      49,104      50,935      52,758      54,618      56,462
       taxes....................
                                 -----------------------------------------------------------------------------------
    Total excise taxes..........      68,865      71,148      74,020      76,254      78,300      80,543      82,346
                                 ===================================================================================
    Estate and gift taxes:
      Federal funds.............      29,010      31,072      32,068      34,480      37,036      35,364      35,605
        Proposed Legislation      ..........  ..........      -3,369      -7,841      -8,739     -10,467     -13,107
         (PAYGO)................
                                 -----------------------------------------------------------------------------------
    Total estate and gift taxes.      29,010      31,072      28,699      26,639      28,297      24,897      22,498
                                 ===================================================================================
    Customs duties:
      Federal funds.............      19,172      20,635      22,403      23,650      24,299      25,302      26,775
        Proposed Legislation      ..........  ..........        -716        -264        -274        -285         -74
         (PAYGO)................
      Trust funds...............         742         807         850         895         936         972       1,023
                                 -----------------------------------------------------------------------------------
    Total customs duties........      19,914      21,442      22,537      24,281      24,961      25,989      27,724
                                 ===================================================================================
    MISCELLANEOUS RECEIPTS: \3\
      Miscellaneous taxes.......          99         104         109         111         113         115         118
      United Mine Workers of             155         149         143         135         129         125         121
       America combined benefit
       fund.....................
      Deposit of earnings,            32,293      26,599      31,800      33,345      34,944      35,881      36,693
       Federal Reserve System...
        Proposed Legislation      ..........  ..........          93          98         102         107         112
         (PAYGO)................
      Defense cooperation.......          12           6           6           6           6           6           6
      Fees for permits and             7,664       8,919       9,189       9,969      10,771      11,314      12,189
       regulatory and judicial
       services.................
      Fines, penalties, and            2,422       1,923       1,880       1,907       1,915       1,923       1,932
       forfeitures..............
      Gifts and contributions...         260         286         183         172         168         170         166
      Refunds and recoveries....         -79        -354        -298        -305        -317        -325        -327
                                 -----------------------------------------------------------------------------------
    Total miscellaneous receipts      42,826      37,632      43,105      45,438      47,831      49,316      51,010
                                 ===================================================================================
    Total budget receipts.......   2,025,218   2,136,946   2,191,734   2,258,240   2,338,816   2,437,783   2,528,711
      On-budget.................   1,544,634   1,633,076   1,660,814   1,697,428   1,748,529   1,808,786   1,870,204
      Off-budget................     480,584     503,870     530,920     560,812     590,287     628,997     658,507
                                 -----------------------------------------------------------------------------------
             MEMORANDUM
      Federal funds.............   1,325,755   1,401,028   1,416,473   1,440,883   1,479,627   1,526,937   1,575,483
      Trust funds...............     426,651     450,829     478,176     504,047     527,620     557,380     586,271
      Interfund transactions....    -207,772    -218,781    -233,835    -247,502    -258,718    -275,531    -291,550
                                 -----------------------------------------------------------------------------------
    Total on-budget.............   1,544,634   1,633,076   1,660,814   1,697,428   1,748,529   1,808,786   1,870,204
                                 -----------------------------------------------------------------------------------
    Off-budget (trust funds)....     480,584     503,870     530,920     560,812     590,287     628,997     658,507
                                 ===================================================================================
    Total.......................   2,025,218   2,136,946   2,191,734   2,258,240   2,338,816   2,437,783   2,528,711
    ----------------------------------------------------------------------------------------------------------------
    \1\ Deposits by States cover the benefit part of the program. Federal unemployment receipts cover administrative
      costs at both the Federal and State levels. Railroad unemployment receipts cover both the benefits and
      administrative costs of the program for the railroads.
    \2\ Represents employer and employee contributions to the civil service retirement and disability fund for
      covered employees of Government-sponsored, privately owned enterprises and the District of Columbia municipal
      government.
    \3\ Includes both Federal and trust funds.