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


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                    FEDERAL RECEIPTS AND COLLECTIONS

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[[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)
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              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
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[[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.