Analytical Perspectives - 5. Tax Expenditures

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

5. TAX EXPENDITURES

The Congressional Budget Act of 1974 (Public Law 93-344) requires that
a list of ``tax expenditures'' be included in the budget. So-called tax
expenditures may be defined as provisions of the Federal tax laws with
exclusions, exemptions, deductions, credits deferrals, or special tax
rates. Underlying the ``tax expenditure'' concept is the notion that the
Federal Government would otherwise collect additional revenues but for
these provisions. It assumes an arbitrary tax base is available to the
Government in its entirety as a resource to be spent. Because of the
breadth of this arbitrary tax base, the Administration believes that the
concept of ``tax expenditure'' is of questionable analytic value. The
discussion below is based on materials and formats developed and
included in previous budgets. The Administration intends to reconsider
this presentation in the future.
The largest tax expenditures tend to be associated with the individual
income tax. For example, sizeable deductions and exclusions are provided
for pension contributions and earnings, employer contributions for
medical insurance, mortgage interest payments on owner-occupied homes,
capital gains, and payments of State and local individual income and
property taxes. Tax expenditures under the corporate income tax tend to
be related to the rate of cost recovery for various investments; as is
discussed below, the extent to which these provisions are classified as
tax expenditures varies according to the conceptual baseline used.
Charitable contributions and credits for State taxes on bequests are the
largest tax expenditures under the unified transfer (i.e., estate and
gift) tax.
Because of potential interactions among provisions, this chapter does
not present a grand total for the estimated tax expenditures. Moreover,
past tax changes entailing broad elimination of tax expenditures were
generally accompanied by changes in tax rates or other basic provisions,
so that the net effects on Federal revenues were considerably (if not
totally) offset. Nevertheless, in aggregate, tax expenditures have
revenue impacts of hundreds of billions of dollars, and are some of the
most important ways in which the Federal Government affects economic
decisions.
Tax expenditures relating to the individual and corporate income taxes
are considered first in this chapter. They are estimated for fiscal
years 2000-2006 using three methods of accounting: revenue loss, outlay
equivalent, and present value. The present value approach provides
estimates of the revenue losses for tax expenditures that involve
deferrals of tax payments into the future or have similar long-term
effects. Tax expenditures relating to the unified transfer tax are
considered in a section at the end of the chapter.
The section of the chapter on performance measures and economic
effects presents information related to assessment of the effect of tax
expenditures on the achievement of program performance goals. This
section is a complement to the government-wide performance plan required
by the Government Performance and Results Act of 1993 (see the Budget
volume, which considers the Federal Government's spending, regulatory,
and tax policies across functional areas).

TAX EXPENDITURES IN THE INCOME TAX

Tax Expenditure Estimates

All tax expenditure estimates presented here are based upon tax law
enacted as of December 31, 2000. Expired or repealed provisions are not
listed if their revenue effects result only from taxpayer activity
occurring before fiscal year 2000. Due to the time required to estimate
the large number of tax expenditures, the estimates are based on mid-
session economic assumptions; exceptions are the earned income tax
credit and child credit provisions, which involve outlay components and
hence are updated to reflect the economic assumptions used elsewhere in
the budget.
The total revenue loss estimates for tax expenditures for fiscal years
2000-2006 are displayed according to the budget's functional categories
in Table 5-1. Descriptions of the specific tax expenditure provisions
follow the tables of estimates and discussion of general features of the
tax expenditure concept.
As in prior years, two baseline concepts--the normal tax baseline and
the reference tax law baseline--are used to identify tax expenditures.
For the most part, the two concepts coincide. However, items treated as
tax expenditures under the normal tax baseline, but not the reference
tax law baseline, are indicated by the designation ``normal tax method''
in the tables. The revenue losses for these items are zero using the
reference tax rules. The alternative baseline concepts are discussed in
detail following the tables.
Table 5-2 reports the respective portions of the total revenue effects
that arise under the individual and corporate income taxes. Listing the
estimates under the individual and corporate headings does not imply
that these categories of filers benefit from the special tax provisions
in proportion to the respective tax expenditure amounts shown. Rather,
these breakdowns show the specific tax accounts through which the
various pro

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visions are cleared. The ultimate beneficiaries of corporate tax
expenditures could be stockholders, employees, customers, or others,
depending on economic forces.
Table 5-3 ranks the major tax expenditures by fiscal year 2002 revenue
loss. This table merges several individual entries provided in Table 5-
1; for example, Table 5-3 contains one merged entry for charitable
contributions instead of the three separate entries found in Table 5-1.

Interpreting Tax Expenditure Estimates

The estimates shown for individual tax expenditures in Tables 5-1, 5-
2, and 5-3 do not necessarily equal the increase in Federal revenues (or
the change in the budget balance) that would result from repealing these
special provisions, for the following reasons:
Eliminating a tax expenditure may have incentive effects that alter
economic behavior. These incentives can affect the resulting magnitudes
of the activity or of other tax provisions or Government programs. For
example, if deductibility of mortgage interest were limited, some
taxpayers would hold smaller mortgages, with a concomitantly smaller
effect on the budget than if no such limits were in force.
Tax expenditures are interdependent even without incentive effects.
Repeal of a tax expenditure provision can increase or decrease the tax
revenues associated with other provisions. For example, even if behavior
does not change, repeal of an itemized deduction could increase the
revenue costs from other deductions because some taxpayers would be
moved into higher tax brackets. Alternatively, repeal of an itemized
deduction could lower the revenue cost from other deductions if
taxpayers are led to claim the standard deduction instead of itemizing.
Similarly, if two provisions were repealed simultaneously, the increase
in tax liability could be greater or less than the sum of the two
separate tax expenditures, because each is estimated assuming that the
other remains in force. In addition, the estimates reported in Table 5-1
are the totals of individual and corporate income tax revenue effects
reported in Table 5-2 and do not reflect any possible interactions
between the individual and corporate income tax receipts. For this
reason, the estimates in Table 5-1 (as well as those in Table 5-5, which
are also based on summing individual and corporate estimates) should be
regarded as approximations.
Revenues raised by changes to tax expenditures are sensitive to timing
effects and effective dates. Changes in some provisions would yield
their full potential revenue gains relatively quickly, whereas changes
to other provisions would only gradually yield their full revenue
potential, because certain deductions or exemptions would likely be
grandfathered.
The annual value of tax expenditures for tax deferrals is reported on
a cash basis in all tables except Table 5-4. Cash-based estimates
reflect the difference between taxes deferred in the current year and
incoming revenues that are received due to deferrals of taxes from prior
years. Although such estimates are useful as a measure of cash flows
into the Government, they do not accurately reflect the true economic
cost of these provisions. For example, for a provision where activity
levels have changed, so that incoming tax receipts from past deferrals
are greater than deferred receipts from new activity, the cash-basis tax
expenditure estimate can be negative, despite the fact that in present-
value terms current deferrals do have a real cost to the Government.
Alternatively, in the case of a newly enacted deferral provision, a
cash-based estimate can overstate the real cost to the Government
because the newly deferred taxes will ultimately be received. Present-
value estimates, which are a useful supplement to the cash-basis
estimates for provisions involving deferrals, are discussed below.

Present-Value Estimates

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method.

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

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

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

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

Outlay Equivalents

The concept of ``outlay equivalents'' is another theoretical measure
of the budget effect of tax expenditures. It is the amount of outlay
that would be required to provide the taxpayer the same after-tax income
as would be received through the tax provision. The outlay-equivalent
measure allows the cost of the tax expenditure to be compared with a
direct Federal outlay. Outlay equivalents are reported in Table 5-5.

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

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

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

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

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

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

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

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

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

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

[[Page 75]]

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

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

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

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

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

General purpose fiscal assistance:

[[Page 76]]

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

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

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

Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method.

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

Tax Expenditure Baselines

A tax expenditure is an exception to the baseline provisions of the
tax structure. The 1974 Congressional Budget Act did not specify the
baseline provisions of the tax law. Deciding whether provisions are
exceptions, therefore, is a matter of judgement. As in prior years, this
year's tax expenditure estimates are presented using two baselines: the
normal tax baseline, which is used by the Joint Committee on Taxation,
and the reference tax law baseline, which has been reported by the
Administration since 1983.
The normal tax baseline is patterned on a comprehensive income tax,
which defines income as the sum of consumption and the change in net
wealth in a given period of time. The normal tax baseline allows
personal exemptions, a standard deduction, and deductions of the
expenses incurred in earning income. It is not limited to a particular
structure of tax rates, or by a specific definition of the taxpaying
unit.
The reference tax law baseline is also patterned on a comprehensive
income tax, but is closer to existing law. Tax expenditures under the
reference law baseline are generally tax expenditures under the normal
tax baseline, but the reverse is not always true.
Both the normal and reference tax baselines allow several major
departures from a pure comprehensive income tax. For example:
Income is taxable only when it is realized in exchange.
Thus, neither the deferral of tax on unrealized capital gains
nor the tax exclusion of imputed income (such as the rental
value of owner-occupied housing or farmers' consumption of
their own produce) is regarded as a tax expenditure. Both
accrued and imputed income would be taxed under a
comprehensive income tax.
There is a separate corporation income tax. Under a
comprehensive income tax, corporate income would be taxed only
once--at the shareholder level, whether or not distributed in
the form of dividends.
Values of assets and debt are not adjusted for inflation. A
comprehensive income tax would adjust the cost basis of
capital assets and debt for changes in the price level during
the time the assets or debt are held. Thus, under a
comprehensive income tax baseline, the failure to take account
of inflation in measuring depreciation, capital gains, and
interest income would be regarded as a negative tax
expenditure (i.e., a tax penalty), and failure to take account
of inflation in meas

[[Page 77]]

uring interest costs would be regarded as a positive tax
expenditure (i.e., a tax subsidy).
Although the reference law and normal tax baselines are generally
similar, areas of difference include:
Tax rates. The separate schedules applying to the various
taxpaying units are included in the reference law baseline.
Thus, corporate tax rates below the maximum statutory rate do
not give rise to a tax expenditure. The normal tax baseline is
similar, except that it specifies the current maximum rate as
the baseline for the corporate income tax. The lower tax rates
applied to the first $10 million of corporate income are thus
regarded as a tax expenditure. Similarly, under the reference
law baseline, preferential tax rates for capital gains
generally do not yield a tax expenditure; only capital gains
treatment of otherwise ``ordinary income,'' such as that from
coal and iron ore royalties and the sale of timber and certain
agricultural products, is considered a tax expenditure. The
alternative minimum tax is treated as part of the baseline
rate structure under both the reference and normal tax
methods.
Income subject to the tax. Income subject to tax is defined
as gross income less the costs of earning that income. The
Federal income tax defines gross income to include: (1)
consideration received in the exchange of goods and services,
including labor services or property; and (2) the taxpayer's
share of gross or net income earned and/or reported by another
entity (such as a partnership). Under the reference tax rules,
therefore, gross income does not include gifts--defined as
receipts of money or property that are not consideration in an
exchange--or most transfer payments, which can be thought of
as gifts from the Government. \1\ The normal tax baseline also
excludes gifts between individuals from gross income. Under
the normal tax baseline, however, all cash transfer payments
from the Government to private individuals are counted in
gross income, and exemptions of such transfers from tax are
identified as tax expenditures. The costs of earning income
are generally deductible in determining taxable income under
both the reference and normal tax baselines. \2\
---------------------------------------------------------------------------
\1\ Gross income does, however, include transfer payments associated
with past employment, such as social security benefits.
\2\ In the case of individuals who hold ``passive'' equity interests
in businesses, however, the pro-rata shares of sales and expense
deductions reportable in a year are limited. A passive business activity
is defined to be one in which the holder of the interest, usually a
partnership interest, does not actively perform managerial or other
participatory functions. The taxpayer may generally report no larger
deductions for a year than will reduce taxable income from such
activities to zero. Deductions in excess of the limitation may be taken
in subsequent years, or when the interest is liquidated. In addition,
costs of earning income may be limited under the alternative minimum
tax.
---------------------------------------------------------------------------
Capital recovery. Under the reference tax law baseline no
tax expenditures arise from accelerated depreciation. Under
the normal tax baseline, the depreciation allowance for
machinery and equipment is determined using straight-line
depreciation over tax lives equal to mid-values of the asset
depreciation range (a depreciation system in effect from 1971
through 1980). The normal tax baseline for real property is
computed using 40-year straight-line depreciation.
Treatment of foreign income. Both the normal and reference
tax baselines allow a tax credit for foreign income taxes paid
(up to the amount of U.S. income taxes that would otherwise be
due), which prevents double taxation of income earned abroad.
Under the normal tax method, however, controlled foreign
corporations (CFCs) are not regarded as entities separate from
their controlling U.S. shareholders. Thus, the deferral of tax
on income received by CFCs is regarded as a tax expenditure
under this method. In contrast, except for tax haven
activities, the reference law baseline follows current law in
treating CFCs as separate taxable entities whose income is not
subject to U.S. tax until distributed to U.S. taxpayers. Under
this baseline, deferral of tax on CFC income is not a tax
expenditure because U.S. taxpayers generally are not taxed on
accrued, but unrealized, income.
In addition to these areas of difference, the Joint Committee on
Taxation considers a somewhat broader set of tax expenditures under its
normal tax baseline than is considered here.

Performance Measures and the Economic Effects of Tax Expenditures

The Government Performance and Results Act of 1993 (GPRA) directs
Federal agencies to develop annual and strategic plans for their
programs and activities. These plans set out performance objectives to
be achieved over a specific time period. Most of these objectives will
be achieved through direct expenditure programs. However, tax
expenditures may also contribute to achieving these goals. The report of
the Senate Governmental Affairs Committee on GPRA \3\ calls on the
Executive branch to undertake a series of analyses to assess the effect
of specific tax expenditures on the achievement of agencies' performance
objectives.
---------------------------------------------------------------------------
\3\ Committee on Government Affairs, United States Senate, A
Government Performance and Results Act of 1993 (Report 103-58, 1993).
---------------------------------------------------------------------------
The Executive Branch is continuing to focus on the availability of
data needed to assess the effects of the tax expenditures designed to
increase savings. Treasury's Office of Tax Analysis and Statistics of
Income Division (IRS) have developed the specifications for a new sample
of individual income tax filers as one part of this effort. This new
``panel'' sample will follow the same taxpayers over a period of at
least ten years. The first year of this panel sample will be drawn from
tax returns filed in 2000 for tax year 1999. The sample will capture the
changing demographic and economic circumstances of individuals and the
effects of changes in tax law over an extended period of time. Data from
the sample will therefore permit more extensive, and better, analyses of
many tax provisions than can be performed using only annual (``cross-
section'') data. In particular, data from this panel sample will enhance
our ability to analyze the effect of tax expenditures

[[Page 78]]

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

Comparison of tax expenditure, spending, and regulatory policies. Tax
expenditures by definition work through the tax system and,
particularly, the income tax. Thus, they may be relatively advantageous
policy approaches when the benefit or incentive is related to income and
is intended to be widely available. \4\ Because there is an existing
public administrative and private compliance structure for the tax
system, the incremental administrative and compliance costs for a tax
expenditure may be low in many cases. In addition, some tax expenditures
actually simplify the tax system, (for example, the exclusion for up to
$500,000 of capital gains on home sales). Tax expenditures also
implicitly subsidize certain activities. Spending, regulatory or tax-
disincentive policies can also modify behavior, but may have different
economic effects. Finally, a variety of tax expenditure tools can be
used--e.g., deductions; credits; exemptions; deferrals; floors;
ceilings; phase-ins; phase-outs; dependent on income, expenses, or
demographic characteristics (age, number of family members, etc.). This
wide range means that tax expenditures can be flexible and can have very
different economic effects.
---------------------------------------------------------------------------
\4\ Although this section focuses upon tax expenditures under the
income tax, tax expenditures also arise under the unified transfer,
payroll, and excise tax systems. Such provisions can be useful when they
relate to the base of those taxes, such as an excise tax exemption for
certain types of consumption deemed meritorious.
---------------------------------------------------------------------------
Tax expenditures also have limitations. In many cases they add to the
complexity of the tax system, which raises both administrative and
compliance costs. For example, targeting personal exemptions and credits
can complicate filing and decisionmaking. The income tax system may have
little or no contact with persons who have no or very low incomes, and
does not require information on certain characteristics of individuals
used in some spending programs, such as wealth. These features may
reduce the effectiveness of tax expenditures for addressing certain
income-transfer objectives. Tax expenditures also generally do not
enable the same degree of agency discretion as an outlay program. For
example, grant or direct Federal service delivery programs can
prioritize which activities are addressed with what amount of resources
in a way that is difficult to emulate with tax expenditures. Finally,
tax expenditures may not receive the same level of scrutiny afforded to
other programs.
Outlay programs, in contrast, have advantages where direct government
service provision is particularly warranted--such as equipping and
providing the armed forces or administering the system of justice.
Outlay programs may also be specifically designed to meet the needs of
low-income families who would not otherwise be subject to income taxes
or need to file a return. Outlay programs may also receive more year-to-
year oversight and fine tuning, through the legislative and executive
budget process. In addition, many different types of spending programs--
including direct government provision; credit programs; and payments to
State and local governments, the private sector, or individuals in the
form of grants or contracts--provide flexibility for policy design. On
the other hand, certain outlay programs--such as direct government
service provision--may rely less directly on economic incentives and
private-market provision than tax incentives, which may reduce the
relative efficiency of spending programs for some goals. Spending
programs also require resources to be raised via taxes, user charges, or
government borrowing. Finally, spending programs, particularly on the
discretionary side, may respond less readily to changing activity levels
and economic conditions than tax expenditures.
Regulations have more direct and immediate effects than outlay and
tax-expenditure programs because regulations apply directly and
immediately to the regulated party (i.e., the intended actor)--generally
in the private sector. Regulations can also be fine-tuned more quickly
than tax expenditures, because they can generally be changed by the
executive branch without legislation. Like tax expenditures, regulations
often rely largely upon voluntary compliance, rather than detailed
inspections and policing. As such, the public administrative costs tend
to be modest, relative to the private resource costs associated with
modifying activities. Historically, regulations have tended to rely on
proscriptive measures, as opposed to economic incentives. This reliance
can diminish their economic efficiency, although this feature can also
promote full compliance where (as in certain safety-related cases)
policymakers believe that trade-offs with economic considerations are
not of paramount importance. Also, regulations generally do not directly
affect Federal outlays or receipts. Thus, like tax expenditures, they
may escape the type of scrutiny that outlay programs receive. However,
most regulations are subjected to a formal benefit-cost analysis that
goes well beyond the analysis required for outlays and tax-expenditures.
To some extent, the GPRA requirement for performance evaluation will
address this lack of formal analysis.
Some policy objectives are achieved using multiple approaches. For
example, minimum wage legislation, the earned income tax credit, and the
food stamp program are regulatory, tax expenditure, and direct outlay
programs, respectively, all having the objective of improving the
economic welfare of low-wage workers.
Tax expenditures, like spending and regulatory programs, have a
variety of objectives and effects. These include: encouraging certain
types of activities (e.g., saving for retirement or investing in certain
sectors); increasing certain types of after-tax income (e.g., favorable
tax treatment of social security income); reducing private compliance
costs and government administrative costs (e.g., the exclusion for up to
$500,000 of capital gains on home sales); and promoting tax neutrality
(e.g., accelerated depreciation in the presence of inflation). Some of
these objectives are well suited to quantitative measurement, while
others are less well suited. Also, many tax expenditures, including
those cited

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above, may have more than one objective. For example, accelerated
depreciation may encourage investment. In addition, the economic effects
of particular provisions can extend beyond their intended objectives
(e.g., a provision intended to promote an activity or raise certain
incomes may have positive or negative effects on tax neutrality).
Performance measurement is generally concerned with inputs, outputs,
and outcomes. In the case of tax expenditures, the principal input is
usually the tax revenue loss. Outputs are quantitative or qualitative
measures of goods and services, or changes in income and investment,
directly produced by these inputs. Outcomes, in turn, represent the
changes in the economy, society, or environment that are the ultimate
goals of programs.
Thus, for a provision that reduces taxes on certain investment
activity, an increase in the amount of investment would likely be a key
output. The resulting production from that investment, and, in turn, the
associated improvements in national income, welfare, or security, could
be the outcomes of interest. For other provisions, such as those
designed to address a potential inequity or unintended consequence in
the tax code, an important performance measure might be how they change
effective tax rates (the discounted present-value of taxes owed on new
investments or incremental earnings) or excess burden (an economic
measure of the distortions caused by taxes). Effects on the incomes of
members of particular groups may be an important measure for certain
provisions.

An overview of evaluation issues by budget function. The discussion
below considers the types of measures that might be useful for some
major programmatic groups of tax expenditures. The discussion is
intended to be illustrative and not all encompassing. However, it is
premised on the assumption that the data needed to perform the analysis
are available or can be developed. In practice, data availability is
likely to be a major challenge, and data constraints may limit the
assessment of the effectiveness of many provisions. In addition, such
assessments can raise significant challenges in economic modeling.
National defense.--Some tax expenditures are intended to assist
governmental activities. For example, tax preferences for military
benefits reflect, among other things, the view that benefits such as
housing, subsistence, and moving expenses are intrinsic aspects of
military service, and are provided, in part, for the benefit of the
employer, the U.S. Government. Tax benefits for service in a combat zone
or qualified hazardous duty area are intended to reduce tax burdens on
military personnel undertaking hazardous service for the Nation. A
portion of the tax expenditure associated with foreign earnings is
targeted to benefit U.S. Government civilian personnel working abroad by
offsetting the living costs that can be higher than those in the United
States. These tax expenditures should be considered together with direct
agency budget costs in making programmatic decisions.
International affairs.--Tax expenditures are also aimed at goals such
as promoting tax neutrality. These include the exclusion for income
earned abroad by nongovernmental employees and exclusions for income of
U.S.-controlled foreign corporations. Measuring the effectiveness of
these provisions raises challenging issues.
General science, space and technology; energy; natural resources and
the environment; agriculture; and commerce and housing.--A series of tax
expenditures reduces the cost of investment, both in specific
activities--such as research and experimentation, extractive industries,
and certain financial activities--and more generally, through
accelerated depreciation for plant and equipment. These provisions can
be evaluated along a number of dimensions. For example, it could be
useful to consider the strength of the incentives by measuring their
effects on the cost of capital (the interest rate which investments must
yield to cover their costs) and effective tax rates. The impact of these
provisions on the amounts of corresponding forms of investment (e.g.,
research spending, exploration activity, equipment) might also be
estimated. In some cases, such as research, there is evidence that the
investment can provide significant positive externalities--that is,
economic benefits that are not reflected in the market transactions
between private parties. It could be useful to quantify these
externalities and compare them with the size of tax expenditure.
Measures could also indicate the effects on production from these
investments--such as numbers or values of patents, energy production and
reserves, and industrial production. Issues to be considered include the
extent to which the tax expenditures increase production (as opposed to
benefitting existing output) and their cost-effectiveness relative to
other policies. Analysis could also consider objectives that are more
difficult to measure but still are ultimate goals, such as promoting the
Nation's technological base, energy security, environmental quality, or
economic growth. Such an assessment is likely to involve tax analysis as
well as consideration of non-tax matters such as market structure,
scientific, and other information (such as the effects of increased
domestic fuel production on imports from various regions, or the effects
of various energy sources on the environment).
Housing investment also benefits from tax expenditures, including the
mortgage interest deduction and exclusion for capital gains on homes.
Measures of the effectiveness of these provisions could include their
effects on increasing the extent of home ownership and the quality of
housing. In addition, the mortgage interest deduction offsets the
taxable nature of investment income received by homeowners, so the
relationship between the deduction and such earnings is also relevant to
evaluation of this provision. Similarly, analysis of the extent of
accumulated inflationary gains is likely to be relevant to evaluation of
the capital gains for

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home sales. Deductibility of State and local property taxes assists with
making housing more affordable as well as easing the cost of providing
community services through these taxes. Provisions intended to promote
investment in rental housing could be evaluated for their effects on
making such housing more available and affordable. These provisions
should then be compared with alternative programs that address housing
supply and demand.

Transportation.--Employer-provided parking is a fringe benefit that,
for the most part, is excluded from taxation. The tax expenditure
estimates reflect the cost of parking that is leased by employers for
employees; an estimate is not currently available for the value of
parking owned by employers and provided to their employees. The
exclusion for employer-provided transit passes is intended to promote
use of this mode of transportation, which has environmental and
congestion benefits. The tax treatments of these different benefits
could be compared with alternative transportation policies.
Community and regional development.--A series of tax expenditures is
intended to promote community and regional development by reducing the
costs of financing specialized infrastructure, such as airports, docks,
and stadiums. Empowerment zone and enterprise community provisions are
designed to promote activity in disadvantaged areas. These provisions
can be compared with grants and other policies designed to spur economic
development.
Education, training, employment, and social services.--Major
provisions in this function are intended to promote post-secondary
education, to offset costs of raising children, and to promote a variety
of charitable activities. The education incentives can be compared with
loans, grants, and other programs designed to promote higher education
and training. The child credits are intended to adjust the tax system
for the costs of raising children; as such, they could be compared to
other Federal tax and spending policies, including related features of
the tax system, such as personal exemptions (which are not defined as a
tax expenditure). Evaluation of charitable activities requires
consideration of the beneficiaries of these activities, who are
generally not the parties receiving the tax reduction.
Health.--Individuals also benefit from favorable treatment of
employer-provided health insurance. Measures of these benefits could
include increased coverage and pooling of risks. The effects of
insurance coverage on final outcome measures of actual health (e.g.,
infant mortality, days of work lost due to illness, or life expectancy)
or intermediate outcomes (e.g., use of preventive health care or health
care costs) could also be investigated.
Income security, social security, and veterans benefits and
services.--Major tax expenditures in the income security function
benefit retirement savings, through employer-provided pensions,
individual retirement accounts, and Keogh plans. These provisions might
be evaluated in terms of their effects on boosting retirement incomes,
private savings, and national savings (which would include the effect on
private savings as well as public savings or deficits). Interactions
with other programs, including social security, also may merit analysis.
As in the case of employer-provided health insurance, analysis of
employer-provided pension programs requires imputing the benefits
provided at the firm level to individuals.
Other provisions principally affect the incomes of members of certain
groups, rather than affecting incentives. For example, tax-favored
treatment of social security benefits, certain veterans benefits, and
deductions for the blind and elderly provide increased incomes to
eligible parties. The earned-income tax credit, in contrast, should be
evaluated for its effects on labor force participation as well as the
income it provides lower-income workers.

General purpose fiscal assistance and interest.--The tax-exemption for
public purpose State and local bonds reduces the costs of borrowing for
a variety of purposes (borrowing for non-public purposes is reflected
under other budget functions). The deductibility of certain State and
local taxes reflected under this function primarily relates to personal
income taxes (property tax deductibility is reflected under the commerce
and housing function). Tax preferences for Puerto Rico and other U.S.
possessions are also included here. These provisions can be compared
with other tax and spending policies as means of benefitting fiscal and
economic conditions in the States, localities, and possessions. Finally,
the tax deferral for interest on U.S. savings bonds benefits savers who
invest in these instruments. The extent of these benefits and any
effects on Federal borrowing costs could be evaluated.
The above illustrative discussion, although broad, is nevertheless
incomplete, both for the provisions mentioned and the many that are not
explicitly cited. Developing a framework that is sufficiently
comprehensive, accurate, and flexible to reflect the objectives and
effects of the wide range of tax expenditures will be a significant
challenge. OMB, Treasury, and other agencies will work together, as
appropriate, to address this challenge. As indicated above, over the
next few years the Executive Branch's focus will be on the availability
of the data needed to assess the effects of the tax expenditures
designed to increase savings.

Descriptions of Income Tax Provisions

Descriptions of the individual and corporate income tax expenditures
reported upon in this chapter follow. These descriptions relate to
current law and do not reflect proposals made elsewhere in the Budget.

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National Defense

1. Benefits and allowances to armed forces personnel.--The housing and
meals provided military personnel, either in cash or in kind, as well as
certain amounts of pay related to service in a combat zone or qualified
hazardous duty area are excluded from income subject to tax.

International Affairs

2. Income earned abroad.--U.S. citizens who lived abroad, worked in
the private sector, and satisfied a foreign residency requirement in
2000 may exclude up to $76,000 in foreign earned income from U.S. taxes.
The exclusion increases to $78,000 in 2001 and to $80,000 in 2002. In
addition, if these taxpayers receive a specific allowance for foreign
housing from their employers, they may also exclude the value of that
allowance. If they do not receive a specific allowance for housing
expenses, they may deduct against their U.S. taxes that portion of such
expenses that exceeds one-sixth the salary of a civil servant at grade
GS-14, step 1 ($65,983 in 2000).
3. Exclusion of certain allowances for federal employees abroad.--U.S.
Federal civilian employees and Peace Corps members who work outside the
continental United States are allowed to exclude from U.S. taxable
income certain special allowances they receive to compensate them for
the relatively high costs associated with living overseas. The
allowances supplement wage income and cover expenses like rent,
education, and the cost of travel to and from the United States.
4. Income of Foreign Sales Corporations.--The Foreign Sales
Corporation (FSC) provisions exempt from tax a portion of U.S.
exporters' foreign trading income to reflect the FSC's sales functions
as foreign corporations. The FSC provisions were generally repealed by
the FSC Repeal and Extraterritorial Income Exclusion Act of 2000,
effective for transactions after September 30, 2000.
5. Extraterritorial income exclusion \5\.--For purposes of calculating
U.S. tax liability, a taxpayer may exclude from gross income the
qualifying foreign trade income attributable to foreign trading gross
receipts. The exclusion generally applies to income from the sale or
lease of qualifying foreign trade property and certain types of services
income. The exclusion is generally available for transactions entered
into after September 30, 2000.
---------------------------------------------------------------------------
\5\ The determination of whether a provision is a tax expenditure is
made on the basis of a broad concept of ``income'' that is larger in
scope than is ``income'' as defined under general U.S. income tax
principles. For that reason, the tax expenditure estimates include, for
example, estimates related to the exclusion of extraterritorial income,
as well as other exclusions, notwithstanding that such exclusions define
income under the general rule of U.S. income taxation.
---------------------------------------------------------------------------
6. Sales source rule exceptions.--The worldwide income of U.S. persons
is taxable by the United States and a credit for foreign taxes paid is
allowed. The amount of foreign taxes that can be credited is limited to
the pre-credit U.S. tax on the foreign source income. The sales source
rules for inventory property allocates earnings between the United
States and abroad equally, which may increase foreign source income use
of foreign tax credits.
7. Income of U.S.-controlled foreign corporations.--The income of
foreign corporations controlled by U.S. shareholders is not subject to
U.S. taxation. The income becomes taxable only when the controlling U.S.
shareholders receive dividends or other distributions from their foreign
stockholding. Under the normal tax method, the currently attributable
foreign source pre-tax income from such a controlling interest is
considered to be subject to U.S. taxation, whether or not distributed.
Thus, the normal tax method considers the amount of controlled foreign
corporation income not distributed to a U.S. shareholder as tax-deferred
income.
8. Exceptions under subpart F for active financing income.--Consistent
with the rules applicable to U.S.-controlled foreign corporations,
financial firms can defer taxes on income earned overseas in an active
business. Taxes on income earned through December 31, 2001 can be
deferred.

General Science, Space, and Technology

9. Expensing R&E expenditures.--Research and experimentation (R&E)
projects can be viewed as investments because, if successful, their
benefits accrue for several years. It is often difficult, however, to
identify whether a specific R&E project is successful and, if
successful, what its expected life will be. Under the normal tax method,
the expensing of R&E expenditures is viewed as a tax expenditure. The
baseline assumed for the normal tax method is that all R&E expenditures
are successful and have an expected life of five years.
10. R&E credit.--The research and experimentation (R&E) credit is 20
percent of qualified research expenditures in excess of a base amount.
The base amount is generally determined by multiplying a ``fixed-base
percentage'' by the average amount of the company's gross receipts for
the prior four years. The taxpayer's fixed base percentage generally is
the ratio of its research expenses to gross receipts for 1984 through
1988. Taxpayers may also elect an alternative credit regime. Under the
alternative credit regime the taxpayer is assigned a three-tiered fixed-
base percentage that is lower than the fixed-base percentage that would
otherwise apply, and the credit rate is reduced (the rates range from
2.65 percent to 3.75 percent). A 20-percent credit with a separate
threshold is provided for a taxpayer's payments to universities for
basic research. The credit applies to research conducted before July 1,
2004 and extends to research conducted in Puerto Rico and the U.S.
possessions.

Energy

11. Exploration and development costs.--For successful investments in
domestic oil and gas wells, intangible drilling costs (e.g., wages, the
costs of using machinery for grading and drilling, the cost of
unsalvageable materials used in constructing wells) may be expensed
rather than amortized over the productive life of the property.
Integrated oil companies

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may deduct only 70 percent of such costs and must amortize the remaining
30 percent over five years. The same rule applies to the exploration and
development costs of surface stripping and the construction of shafts
and tunnels for other fuel minerals.
12. Percentage depletion.--Independent fuel mineral producers and
royalty owners are generally allowed to take percentage depletion
deductions rather than cost depletion on limited quantities of output.
Under cost depletion, outlays are deducted over the productive life of
the property based on the fraction of the resource extracted. Under
percentage depletion, taxpayers deduct a percentage of gross income from
mineral production at rates of 22 percent for uranium; 15 percent for
oil, gas and oil shale; and 10 percent for coal. The deduction is
limited to 50 percent of net income from the property, except for oil
and gas where the deduction can be 100 percent of net property income.
Production from geothermal deposits is eligible for percentage depletion
at 65 percent of net income, but with no limit on output and no
limitation with respect to qualified producers. Unlike depreciation or
cost depletion, percentage depletion deductions can exceed the cost of
the investment.
13. Alternative fuel production credit.--A nontaxable credit of $3 per
barrel (in 1979 dollars) of oil-equivalent production is provided for
several forms of alternative fuels. The credit is generally available if
the price of oil stays below $29.50 (in 1979 dollars). The credit
generally expires on December 31, 2002.
14. Oil and gas exception to passive loss limitation.--Owners of
working interests in oil and gas properties are exempt from the
``passive income'' limitations. As a result, the working interest-
holder, who manages on behalf of himself and all other owners the
development of wells and incurs all the costs of their operation, may
aggregate negative taxable income from such interests with his income
from all other sources.
15. Capital gains treatment of royalties on coal.--Sales of certain
coal under royalty contracts can be treated as capital gains rather than
ordinary income.
16. Energy facility bonds.--Interest earned on State and local bonds
used to finance construction of certain energy facilities is tax-exempt.
These bonds are generally subject to the State private-activity bond
annual volume cap.
17. Enhanced oil recovery credit.--A credit is provided equal to 15
percent of the taxpayer's costs for tertiary oil recovery on U.S.
projects. Qualifying costs include tertiary injectant expenses,
intangible drilling and development costs on a qualified enhanced oil
recovery project, and amounts incurred for tangible depreciable
property.
18. New technology credits.--A credit of 10 percent is available for
investment in solar and geothermal energy facilities. In addition, a
credit of 1.5 cents is provided per kilowatt hour of electricity
produced from renewable resources such as wind, biomass, and poultry
waste facilities. The renewable resources credit applies only to
electricity produced by a facility placed in service on or before
December 31, 2001.
19. Alcohol fuel credits.--An income tax credit is provided for
ethanol that is derived from renewable sources and used as fuel. The
credit equals 54 cents per gallon in 2000; 53 cents per gallon in 2001
and 2002; 52 cents per gallon in 2003 and 2004; and 51 cents per gallon
in 2005, 2006, and 2007. To the extent that ethanol is mixed with
taxable motor fuel to create gasohol, taxpayers may claim an exemption
of the Federal excise tax rather than the income tax credit. In
addition, small ethanol producers are eligible for a separate 10 cents
per gallon credit.
20. Credit and deduction for clean-fuel vehicles and property.--A tax
credit of 10 percent (not to exceed $4,000) is provided for purchasers
of electric vehicles. Purchasers of other clean-fuel burning vehicles
and owners of clean-fuel refueling property may deduct part of their
expenditures. The credit and deduction are phased out from 2002 through
2005.
21. Exclusion of utility conservation subsidies.--Non-business
customers can exclude from gross income subsidies received from public
utilities for expenditures on energy conservation measures.

Natural Resources and Environment

22. Exploration and development costs.--Certain capital outlays
associated with exploration and development of nonfuel minerals may be
expensed rather than depreciated over the life of the asset.
23. Percentage depletion.--Most nonfuel mineral extractors may use
percentage depletion rather than cost depletion, with percentage
depletion rates ranging from 22 percent for sulfur to 5 percent for sand
and gravel.
24. Sewage, water, solid and hazardous waste facility bonds.--Interest
earned on State and local bonds used to finance the construction of
sewage, water, or hazardous waste facilities is tax-exempt. These bonds
are generally subject to the State private-activity bond annual volume
cap.
25. Capital gains treatment of certain timber.--Certain timber sold
under a royalty contract can be treated as a capital gain rather than
ordinary income.
26. Expensing multiperiod timber growing costs.--Most of the
production costs of growing timber may be expensed rather than
capitalized and deducted when the timber is sold. In most other
industries, these costs are capitalized under the uniform capitalization
rules.
27. Credit and seven-year amortization for reforestation.--A 10-
percent investment tax credit is allowed for up to $10,000 invested
annually to clear land and plant trees for the production of timber. Up
to $10,000 in forestation investment may also be amortized over a seven-
year period rather than capitalized and deducted when the trees are sold
or harvested. The amount of forestation investment that may be amortized
is not reduced by any of the allowable investment credit.

[[Page 83]]

28. Historic preservation.--Expenditures to preserve and restore
historic structures qualify for a 20-percent investment credit, but the
depreciable basis must be reduced by the full amount of the credit
taken.

Agriculture

29. Expensing certain capital outlays.--Farmers, except for certain
agricultural corporations and partnerships, are allowed to expense
certain expenditures for feed and fertilizer, as well as for soil and
water conservation measures. Expensing is allowed, even though these
expenditures are for inventories held beyond the end of the year, or for
capital improvements that would otherwise be capitalized.
30. Expensing multiperiod livestock and crop production costs.--The
production of livestock and crops with a production period of less than
two years is exempt from the uniform cost capitalization rules. Farmers
establishing orchards, constructing farm facilities for their own use,
or producing any goods for sale with a production period of two years or
more may elect not to capitalize costs. If they do, they must apply
straight-line depreciation to all depreciable property they use in
farming.
31. Loans forgiven solvent farmers.--Farmers are forgiven the tax
liability on certain forgiven debt. Normally, a debtor must include the
amount of loan forgiveness as income or reduce his recoverable basis in
the property to which the loan relates. If the debtor elects to reduce
basis and the amount of forgiveness exceeds his basis in the property,
the excess forgiveness is taxable. For insolvent (bankrupt) debtors,
however, the amount of loan forgiveness reduces carryover losses, then
unused credits, and then basis; any remainder of the forgiven debt is
excluded from tax. Farmers with forgiven debt are considered insolvent
for tax purposes, and thus qualify for income tax forgiveness.
32. Capital gains treatment of certain income.--Certain agricultural
income, such as unharvested crops, can be treated as capital gains
rather than ordinary income.
33. Income averaging for farmers.--Taxpayers can lower their tax
liability by averaging, over the prior three-year period, their taxable
income from farming.
34. Deferral of gain on sales of farm refiners.--A taxpayer who sells
stock in a farm refiner to a farmers' cooperative can defer recognition
of gain if the taxpayer reinvests the proceeds in qualified replacement
property.

Commerce and Housing

This category includes a number of tax expenditure provisions that
also affect economic activity in other functional categories. For
example, provisions related to investment, such as accelerated
depreciation, could be classified under the energy, natural resources
and environment, agriculture, or transportation categories.
35. Credit union income.--The earnings of credit unions not
distributed to members as interest or dividends are exempt from income
tax.
36. Bad debt reserves.--Small (less than $500 million in assets)
commercial banks, mutual savings banks, and savings and loan
associations may deduct additions to bad debt reserves in excess of
actually experienced losses.
37. Deferral of income on life insurance and annuity contracts.--
Favorable tax treatment is provided for investment income within
qualified life insurance and annuity contracts. Investment income earned
on qualified life insurance contracts held until death is permanently
exempt from income tax. Investment income distributed prior to the death
of the insured is tax-deferred, if not tax-exempt. Investment income
earned on annuities is treated less favorably than income earned on life
insurance contracts, but it benefits from tax deferral without annual
contribution or income limits generally applicable to other tax-favored
retirement income plans.
38. Small property and casualty insurance companies.--Insurance
companies that have annual net premium incomes of less than $350,000 are
exempt from tax; those with $350,000 to $2.1 million of net premium
incomes may elect to pay tax only on the income earned by their
investment portfolio.
39. Insurance companies owned by exempt organizations.--Generally, the
income generated by life and property and casualty insurance companies
is subject to tax, albeit by special rules. Insurance operations
conducted by such exempt organizations as fraternal societies and
voluntary employee benefit associations, however, are exempt from tax.
40. Small life insurance company deduction.--Small life insurance
companies (gross assets of less than $500 million) can deduct 60 percent
of the first $3 million of otherwise taxable income. The deduction
phases out for otherwise taxable income between $3 million and $15
million.
41. Mortgage housing bonds.--Interest earned on State and local bonds
used to finance homes purchased by first-time, low-to-moderate-income
buyers is tax-exempt. The amount of State and local tax-exempt bonds
that can be issued to finance these and other private activity is
limited. The combined volume cap for private activity bonds, including
mortgage housing bonds, rental housing bonds, student loan bonds, and
industrial development bonds, is $50 per capita ($150 million minimum)
per State in 2000, $62.50 per capita ($187.5 million minimum) in 2001,
and $75 per capita ($225 million minimum) in 2002. The Community Renewal
Tax Relief Act of 2000 accelerated the scheduled increase in the state
volume cap and indexed the cap for inflation, beginning in 2003. States
may issue mortgage credit certificates (MCCs) in lieu of mortgage
revenue bonds. MCCs entitle homebuyers to income tax credits for a
specified percentage of interest on qualified mortgages. The total
amount of MCCs issued by a State cannot exceed 25 percent of its annual
ceiling for mortgage-revenue bonds.
42. Rental housing bonds.--Interest earned on State and local
government bonds used to finance mul

[[Page 84]]

tifamily rental housing projects is tax-exempt. At least 20 percent (15
percent in targeted areas) of the units must be reserved for families
whose income does not exceed 50 percent of the area's median income; or
40 percent for families with incomes of no more than 60 percent of the
area median income. Other tax-exempt bonds for multifamily rental
projects are generally issued with the requirement that all tenants must
be low or moderate income families. Rental housing bonds are subject to
the volume cap discussed in the mortgage housing bond section above.
43. Interest on owner-occupied homes.--Owner-occupants of homes may
deduct mortgage interest on their primary and secondary residences as
itemized nonbusiness deductions. The mortgage interest deduction is
limited to interest on debt no greater than the owner's basis in the
residence and, for debt incurred after October 13, 1987, it is limited
to no more than $1 million. Interest on up to $100,000 of other debt
secured by a lien on a principal or second residence is also deductible,
irrespective of the purpose of borrowing, provided the debt does not
exceed the fair market value of the residence. Mortgage interest
deductions on personal residences are tax expenditures because the
taxpayers are not required to report the value of owner-occupied housing
services as gross income.
44. Taxes on owner-occupied homes.--Owner-occupants of homes may
deduct property taxes on their primary and secondary residences even
though they are not required to report the value of owner-occupied
housing services as gross income.
45. Installment sales.--Dealers in real and personal property (i.e.,
sellers who regularly hold property for sale or resale) cannot defer
taxable income from installment sales until the receipt of the loan
repayment. Nondealers (i.e., sellers of real property used in their
business) are required to pay interest on deferred taxes attributable to
their total installment obligations in excess of $5 million. Only
properties with sales prices exceeding $150,000 are includable in the
total. The payment of a market rate of interest eliminates the benefit
of the tax deferral. The tax exemption for nondealers with total
installment obligations of less than $5 million is, therefore, a tax
expenditure.
46. Capital gains exclusion on home sales.--A homeowner can exclude
from tax up to $500,000 ($250,000 for singles) of the capital gains from
the sale of a principal residence. The exclusion may not be used more
than once every two years.
47. Passive loss real estate exemption.--In general, passive losses
may not offset income from other sources. Losses up to $25,000
attributable to certain rental real estate activity, however, are exempt
from this rule.
48. Low-income housing credit.--Taxpayers who invest in certain low-
income housing are eligible for a tax credit. The credit rate is set so
that the present value of the credit is equal to 70 percent for new
construction and 30 percent for (1) housing receiving other Federal
benefits (such as tax-exempt bond financing), or (2) substantially
rehabilitated existing housing. The credit is allowed in equal amounts
over 10 years. State agencies determine who receives the credit; States
are limited in the amount of credit they may authorize annually to $1.25
per resident in 2000. The Community Renewal Tax Relief Act of 2000
increased the per-resident limit to $1.50 in 2001 and to $1.75 in 2002
and indexed the limit for inflation, beginning in 2003. The Act also
created a $2 million minimum annual cap for small States beginning in
2002; the cap is indexed for inflation, beginning in 2003.
49. Accelerated depreciation of rental property.--The tax depreciation
allowance provisions are part of the reference law rules, and thus do
not give rise to tax expenditures under the reference method. Under the
normal tax method, however, a 40-year tax life for depreciable real
property is the norm. Thus, a statutory depreciation period for rental
property of 27.5 years is a tax expenditure. In addition, tax
expenditures arise from pre-1987 tax allowances for rental property.
50. Cancellation of indebtedness.--Individuals are not required to
report the cancellation of certain indebtedness as current income. If
the canceled debt is not reported as current income, however, the basis
of the underlying property must be reduced by the amount canceled.
51. Imputed interest rules.--Holders (issuers) of debt instruments are
generally required to report interest earned (paid) in the period it
accrues, not when paid. In addition, the amount of interest accrued is
determined by the actual price paid, not by the stated principal and
interest stipulated in the instrument. In general, any debt associated
with the sale of property worth less than $250,000 is excepted from the
general interest accounting rules. This general $250,000 exception is
not a tax expenditure under reference law but is under normal law.
Exceptions above $250,000 are a tax expenditure under reference law;
these exceptions include the following: (1) sales of personal residences
worth more than $250,000, and (2) sales of farms and small businesses
worth between $250,000 and $1 million.
52. Capital gains (other than agriculture, timber, iron ore, and
coal).--Capital gains on assets held for more than 1 year are taxed at a
lower rate than ordinary income. The lower rate on capital gains is
considered a tax expenditure under the normal tax method but not under
the reference law method.
For most assets held for more than 1 year, the top capital gains tax
rate is 20 percent. For assets acquired after December 31, 2000, the top
capital gains tax rate for assets held for more than 5 years is 18
percent. On January 1, 2001, taxpayers may mark-to-market existing
assets to start the 5-year holding period. Losses from the mark-to-
market are not recognized.
For assets held for more than 1 year by taxpayers in the 15-percent
ordinary tax bracket, the top capital gains tax rate is 10 percent.
After December 31, 2000,

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the top capital gains tax rate for assets held by these taxpayers for
more than 5 years is 8 percent.
53. Capital gains exclusion for small business stock.--An exclusion of
50 percent is provided for capital gains from qualified small business
stock held by individuals for more than 5 years. A qualified small
business is a corporation whose gross assets do not exceed $50 million
as of the date of issuance of the stock.
54. Step-up in basis of capital gains at death.--Capital gains on
assets held at the owner's death are not subject to capital gains taxes.
The cost basis of the appreciated assets is adjusted upward to the
market value at the owner's date of death. The step-up in the heir's
cost basis means that, in effect, the tax on the capital gain is
forgiven.
55. Carryover basis of capital gains on gifts.--When a gift is made,
the donor's basis in the transferred property (the cost that was
incurred when the transferred property was first acquired) carries-over
to the donee. The carryover of the donor's basis allows a continued
deferral of unrealized capital gains.
56. Ordinary income treatment of losses from sale of small business
corporate stock shares.--Up to $100,000 in losses from the sale of small
business corporate stock (capitalization less than $1 million) may be
treated as ordinary losses. Such losses would, thus, not be subject to
the $3,000 annual capital loss write-off limit.
57. Accelerated depreciation of non-rental-housing buildings.--The tax
depreciation allowance provisions are part of the reference law rules,
and thus do not give rise to tax expenditures under reference law. Under
normal law, however, a 40-year life for non-rental-housing buildings is
the norm. Thus, the 39-year depreciation period for property placed in
service after February 25, 1993, the 31.5-year depreciation period for
property placed in service from 1987 to February 25, 1993, and the pre-
1987 depreciation periods create a tax expenditure.
58. Accelerated depreciation of machinery and equipment.--The tax
depreciation allowance provisions are part of the reference law rules,
and thus do not give rise to tax expenditures under reference law.
Statutory depreciation of machinery and equipment, however, is
accelerated somewhat relative to the normal tax baseline, creating a tax
expenditure.
59. Expensing of certain small investments.--In 2000, qualifying
investments in tangible property up to $20,000 can be expensed rather
than depreciated over time. The expensing limit increases to $24,000 in
2001 and to $25,000 in 2003. To the extent that qualifying investment
during the year exceeds $200,000, the amount eligible for expensing is
decreased. In 2000, the amount expensed is completely phased out when
qualifying investments exceed $220,000.
60. Business start-up costs.--When taxpayers enter into a new
business, certain start-up expenses, such as the cost of legal services,
are normally incurred. Taxpayers may elect to amortize these outlays
over 60 months even though they are similar to other payments made for
nondepreciable intangible assets that are not recoverable until the
business is sold. The normal tax method treats this amortization as a
tax expenditure; the reference tax method does not.
61. Graduated corporation income tax rate schedule.--The corporate
income tax schedule is graduated, with rates of 15 percent on the first
$50,000 of taxable income, 25 percent on the next $25,000, and 34
percent on the next $9.925 million. Compared with a flat 34-percent
rate, the lower rates provide an $11,750 reduction in tax liability for
corporations with taxable income of $75,000. This benefit is recaptured
for corporations with taxable incomes exceeding $100,000 by a 5-percent
additional tax on corporate incomes in excess of $100,000 but less than
$335,000.
The corporate tax rate is 35 percent on income over $10 million.
Compared with a flat 35-percent tax rate, the 34-percent rate provides a
$100,000 reduction in tax liability for corporations with taxable
incomes of $10 million. This benefit is recaptured for corporations with
taxable incomes exceeding $15 million by a 3-percent additional tax on
income over $15 million but less than $18.33 million. Because the
corporate rate schedule is part of reference tax law, it is not
considered a tax expenditure under the reference method. A flat
corporation income tax rate is taken as the baseline under the normal
tax method; therefore the lower rates is considered a tax expenditure
under this concept.
62. Small issue industrial development bonds.--Interest earned on
small issue industrial development bonds (IDBs) issued by State and
local governments to finance manufacturing facilities is tax-exempt.
Depreciable property financed with small issue IDBs must be depreciated,
however, using the straight-line method. The annual volume of small
issue IDBs is subject to the unified volume cap discussed in the
mortgage housing bond section above.

Transportation

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

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

Community and Regional Development

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

Education, Training, Employment, and Social Services

72. Scholarship and fellowship income.--Scholarships and fellowships
are excluded from taxable income to the extent they pay for tuition and
course-related expenses of the grantee. Similarly, tuition reductions
for employees of educational institutions and their families are not
included in taxable income. From an economic point of view, scholarships
and fellowships are either gifts not conditioned on the performance of
services, or they are rebates of educational costs. Thus, under the
reference law method, this exclusion is not a tax expenditure because
this method does not include either gifts or price reductions in a
taxpayer's gross income. The exclusion, however, is considered a tax
expenditure under the normal tax method, which includes gift-like
transfers of government funds in gross income (many scholarships are
derived directly or indirectly from government funding).
73. HOPE tax credit.--The non-refundable HOPE tax credit allows a
credit for 100 percent of an eligible student's first $1,000 of tuition
and fees and 50 percent of the next $1,000 of tuition and fees. The
credit only covers tuition and fees paid during the first two years of a
student's post-secondary education. The credit is phased out ratably for
taxpayers with modified AGI between $80,000 and $100,000 ($40,000 and
$50,000 for singles).
74. Lifetime Learning tax credit.--The non-refundable Lifetime
Learning tax credit allows a credit for 20 percent of an eligible
student's tuition and fees. For tuition and fees paid before January 1,
2003, the maximum credit per return is $1,000. For tuition and fees paid
after December 31, 2002, the maximum credit per return is $2,000. The
credit is phased out ratably for taxpayers with modified AGI between
$80,000 and $100,000 ($40,000 and $50,000 for singles). The credit
applies to both undergraduate and graduate students.
75. Education Individual Retirement Accounts.--Contributions to an
education IRA are not tax-deductible. Investment income earned by
education IRAs is not taxed when earned, and investment income from an
education IRA is tax-exempt when withdrawn to pay for a student's
tuition and fees. The maximum contribution to an education IRA is $500
per year per beneficiary. The maximum contribution is phased down
ratably for taxpayers with modified AGI between $150,000 and $160,000
($95,000 and $110,000 for sin

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gles). Contributions may not be made to an education IRA in any year in
which a contribution has been made to a State tuition plan for the same
beneficiary.
76. Student-loan interest.--In 2000, taxpayers may claim an above-the-
line deduction of up to $2,000 on interest paid on an education loan.
The maximum deduction increases to $2,500 in 2001. Interest may only be
deducted for the first five years in which interest payments are
required. The maximum deduction is phased down ratably for taxpayers
with modified AGI between $60,000 and $75,000 ($40,000 and $55,000 for
singles).
77. State prepaid tuition plans.--Some States have adopted prepaid
tuition plans and prepaid room and board plans, which allow persons to
pay in advance for college expenses for designated beneficiaries. Taxes
on the earnings from these plans are paid by the beneficiaries and are
deferred until the tuition is actually paid.
78. Student-loan bonds.--Interest earned on State and local bonds
issued to finance student loans is tax-exempt. The volume of all such
private activity bonds that each State may issue annually is limited.
79. Bonds for private nonprofit educational institutions.--Interest
earned on State and local government bonds issued to finance the
construction of facilities used by private nonprofit educational
institutions is not taxed.
80. Credit for holders of zone academy bonds.--Financial institutions
that own zone academy bonds receive a non-refundable tax credit (at a
rate set by the Treasury Department) rather than interest. The credit is
included in gross income. Proceeds from zone academy bonds may only be
used to renovate, but not construct, qualifying schools and for certain
other school purposes. The total amount of zone academy bonds that may
be issued is limited to $1.6 billion--$400 million in each year from
1998 to 2001.
81. U.S. savings bonds for education.--Interest earned on U.S. savings
bonds issued after December 31, 1989 is tax-exempt if the bonds are
transferred to an educational institution to pay for educational
expenses. The tax exemption is phased out for taxpayers with AGI between
$81,100 and $111,100 ($54,100 and $69,100 for singles) in 2000.
82. Dependent students age 19 or older.--Taxpayers may claim personal
exemptions for dependent children age 19 or over who (1) receive
parental support payments of $1,000 or more per year, (2) are full-time
students, and (3) do not claim a personal exemption on their own tax
returns.
83. Charitable contributions to educational institutions.--Taxpayers
may deduct contributions to nonprofit educational institutions.
Taxpayers who donate capital assets to educational institutions can
deduct the assets' current value without being taxed on any appreciation
in value. An individual's total charitable contribution generally may
not exceed 50 percent of adjusted gross income; a corporation's total
charitable contributions generally may not exceed 10 percent of pre-tax
income.
84. Employer-provided educational assistance.--Employer-provided
educational assistance is excluded from an employee's gross income even
though the employer's costs for this assistance are a deductible
business expense. This exclusion applies only to non-graduate courses
beginning on or before December 31, 2001.
85. Work opportunity tax credit.--Employers can claim a tax credit for
qualified wages paid to individuals who begin work on or before December
31, 2001 and who are certified as members of various targeted groups.
The amount of the credit that can be claimed is 25 percent for
employment of less than 400 hours and 40 percent for employment of 400
hours or more. The maximum credit per employee is $2,400 and can only be
claimed on the first year of wages an individual earns from an employer.
Employers must reduce their deduction for wages paid by the amount of
the credit claimed.
86. Welfare-to-work tax credit.--An employer is eligible for a tax
credit on the first $20,000 of eligible wages paid to qualified long-
term family assistance recipients during the first two years of
employment. The credit is 35 percent of the first $10,000 of wages in
the first year of employment and 50 percent of the first $10,000 of
wages in the second year of employment. The maximum credit is $8,500 per
employee. The credit applies to wages paid to employees who are hired on
or before December 31, 2001.
87. Employer-provided child care.--Employer-provided child care is
excluded from an employee's gross income even though the employer's
costs for the child care are a deductible business expense.
88. Assistance for adopted foster children.--Taxpayers who adopt
eligible children from the public foster care system can receive monthly
payments for the children's significant and varied needs and a
reimbursement of up to $2,000 for nonrecurring adoption expenses. These
payments are excluded from gross income.
89. Adoption credit and exclusion.--Taxpayers can receive a
nonrefundable tax credit for qualified adoption expenses. The maximum
credit is $5,000 per child ($6,000 for special needs adoptions). The
credit is phased-out ratably for taxpayers with modified AGI between
$75,000 and $115,000. Unused credits may be carried forward and used
during the five subsequent years. Taxpayers may also exclude qualified
adoption expenses from income, subject to the same maximum amounts and
phase-out as the credit. The same expenses cannot qualify for tax
benefits under both programs; however, a taxpayer may use the benefits
of the exclusion and the tax credit for different expenses. Stepchild
adoptions are not eligible for either benefit. Both of the current tax
benefits expire at the end of 2001, except for the tax credit for
expenses associated with special needs adoptions, which is permanent.
90. Employer-provided meals and lodging.--Employer-provided meals and
lodging are excluded from

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an employee's gross income even though the employer's costs for these
items are a deductible business expense.
91. Child credit.--Taxpayers with children under age 17 can qualify
for a $500 child credit. The credit is phased out for taxpayers at the
rate of $50 per $1,000 of modified AGI above $110,000 ($75,000 for
singles). The child credit is refundable for taxpayers with three or
more children.
92. Child and dependent care expenses.--Married couples with child and
dependent care expenses may claim a tax credit when one spouse works
full time and the other works at least part time or goes to school. The
credit may also be claimed by single parents and by divorced or
separated parents who have custody of children. Expenditures up to a
maximum $2,400 for one dependent and $4,800 for two or more dependents
are eligible for the credit. The credit is equal to 30 percent of
qualified expenditures for taxpayers with incomes of $10,000 or less.
The credit is reduced to a minimum of 20 percent by one percentage point
for each $2,000 of income between $10,000 and $28,000.
93. Disabled access expenditure credit.--Small businesses (less than
$1 million in gross receipts or fewer than 31 full-time employees) can
claim a 50-percent credit for expenditures in excess of $250 to remove
access barriers for disabled persons. The credit is limited to $5,000.
94. Charitable contributions, other than education and health.--
Taxpayers may deduct contributions to charitable, religious, and certain
other nonprofit organizations. Taxpayers who donate capital assets to
charitable organizations can deduct the assets' current value without
being taxed on any appreciation in value. An individual's total
charitable contribution generally may not exceed 50 percent of adjusted
gross income; a corporation's total charitable contributions generally
may not exceed 10 percent of pre-tax income.
95. Foster care payments.--Foster parents provide a home and care for
children who are wards of the State, under contract with the State.
Compensation received for this service is excluded from the gross
incomes of foster parents; the expenses they incur are nondeductible.
96. Parsonage allowances.--The value of a minister's housing allowance
and the rental value of parsonages are not included in a minister's
taxable income.

Health

97. Employer-paid medical insurance and expenses.--Employer-paid
health insurance premiums and other medical expenses (including long-
term care) are deducted as a business expense by employers, but they are
not included in employee gross income. The self-employed also may deduct
part of their family health insurance premiums.
98. Self-employed medical insurance premiums.--Self-employed taxpayers
may deduct a percentage of their family health insurance premiums.
Taxpayers without self-employment income are not eligible for the
special percentage deduction. The deductible percentage is 60 percent in
2000 and 2001, 70 percent in 2002, and 100 percent in 2003 and
thereafter.
99. Workers compensation insurance premiums.--Workers compensation
insurance premiums are paid by employers and deducted as a business
expense, but the premiums are not included in employee gross income.
100. Medical savings accounts.--Some employees may deduct annual
contributions to a medical savings account (MSA); employer contributions
to MSAs (except those made through cafeteria plans) for qualified
employees are also excluded from income. An employee may contribute to
an MSA in a given year only if the employer does not contribute to the
MSA in that year. MSAs are only available to self-employed individuals
or employees covered under an employer-sponsored high deductible health
plan of a small employer. The maximum annual MSA contribution is 75
percent of the deductible under the high deductible plan for family
coverage (65 percent for individual coverage). Earnings from MSAs are
excluded from taxable income. Distributions from an MSA for medical
expenses are not taxable. The number of taxpayers who may benefit
annually from MSAs is generally limited to 750,000. No new MSAs may be
established after December 31, 2002. The Community Renewal Tax Relief
Act of 2000 extended the expiration date from December 31, 2000 to
December 31, 2002.
101. Medical care expenses.--Personal expenditures for medical care
(including the costs of prescription drugs) exceeding 7.5 percent of the
taxpayer's adjusted gross income are deductible.
102. Hospital construction bonds.--Interest earned on State and local
government debt issued to finance hospital construction is excluded from
income subject to tax.
103. Charitable contributions to health institutions.--Individuals and
corporations may deduct contributions to nonprofit health institutions.
Tax expenditures resulting from the deductibility of contributions to
other charitable institutions are listed under the education, training,
employment, and social services function.
104. Orphan drugs.--Drug firms can claim a tax credit of 50 percent of
the costs for clinical testing required by the Food and Drug
Administration for drugs that treat rare physical conditions or rare
diseases.
105. Blue Cross and Blue Shield.--Blue Cross and Blue Shield health
insurance providers in existence on August 16, 1986 and certain other
nonprofit health insurers are provided exceptions from otherwise
applicable insurance company income tax accounting rules that
substantially reduce (or even eliminate) their tax liabilities.

Income Security

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

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a certain threshold. The threshold is discussed more fully under the
social security function.
107. Workers' compensation benefits.--Workers compensation provides
payments to disabled workers. These benefits, although income to the
recipients, are not subject to the income tax.
108. Public assistance benefits.--Public assistance benefits are
excluded from tax. The normal tax method considers cash transfers from
the government as taxable and, thus, treats the exclusion for public
assistance benefits as a tax expenditure.
109. Special benefits for disabled coal miners.--Disability payments
to former coal miners out of the Black Lung Trust Fund, although income
to the recipient, are not subject to the income tax.
110. Military disability pensions.--Most of the military pension
income received by current disabled retired veterans is excluded from
their income subject to tax.
111. Employer-provided pension contributions and earnings.--Certain
employer contributions to pension plans are excluded from an employee's
gross income even though the employer can deduct the contributions. In
addition, the tax on the investment income earned by the pension plans
is deferred until the money is withdrawn.
112. 401(k) plans and Individual Retirement Accounts.--Individual
taxpayers can take advantage of several different tax-preferenced
retirement plans: deductible IRAs, non-deductible IRAs, Roth IRAs, and
401(k) plans (and 401(k)-type plans like 403(b) plans and the federal
government's Thrift Savings Plan).
In 2000, an employee could exclude up to $10,500 (indexed) of wages
from AGI under a qualified arrangement with an employer's 401(k). In
2000, employees can annually contribute to a deductible IRA up to $2,000
(or 100 percent of compensation, if less) or $4,000 on a joint return
with only one working spouse if: (a) neither the individual nor spouse
is an active participant in an employer-provided retirement plan, or (b)
their AGI is below $52,000 ($32,000 for singles). The AGI limit
increases annually until it reaches $80,000 in 2007 ($50,000 in 2005 for
singles). In 2000, the IRA deduction is phased out for taxpayers with
AGI between $52,000 and $62,000 ($32,000 and $42,000 for singles). The
phase-out range increases annually until it reaches $80,000 to $100,000
in 2007 ($50,000 to $60,000 in 2005 for singles). Taxpayers whose AGI is
above the start of the IRA phase-out range or who are active
participants in an employer-provided retirement plan can contribute to a
non-deductible IRA. The tax on the investment income earned by 401(k)
plans, non-deductible IRAs, and deductible IRAs is deferred until the
money is withdrawn.
An employed taxpayer can make a non-deductible contribution of up to
$2,000 (a non-employed spouse can also contribute up to $2,000 if a
joint return is filed) to a Roth IRA. Investment income of a Roth IRA is
not taxed when earned. Withdrawals from a Roth IRA are tax free if (1)
the Roth IRA was opened at least 5 years before the withdrawal, and (2)
the taxpayer either (a) is at least 59\1/2\, (b) dies, (c) is disabled,
or (d) purchases a first-time house. The maximum contribution to a Roth
IRA is phased out for taxpayers with AGI between $150,000 and $160,000
($95,000 and $110,000 for singles). Total annual contributions to a
taxpayer's deductible, non-deductible, and Roth IRAs cannot exceed
$2,000 ($4,000 for joints).
113. Keogh plans.--Self-employed individuals can make deductible
contributions to their own retirement (Keogh) plans equal to 25 percent
of their income, up to a maximum of $30,000 per year. In addition, the
tax on the investment income earned by Keogh plans is deferred until the
money is withdrawn.
114. Employer-provided life insurance benefits.--Employer-provided
life insurance benefits are excluded from an employee's gross income
even though the employer's costs for the insurance are a deductible
business expense.
115. Employer-provided accident and disability benefits.--Employer-
provided accident and disability benefits are excluded from an
employee's gross income even though the employer's costs for the
benefits are a deductible business expense.
116. Employer-provided supplementary unemployment benefits.--Employer-
provided supplementary unemployment benefits are excluded from an
employee's gross income even though the employer's costs for the
benefits are a deductible business expense.
117. Employer Stock Ownership Plan (ESOP) provisions.--ESOPs are a
special type of tax-exempt employee benefit plan. Employer-paid
contributions (the value of stock issued to the ESOP) are deductible by
the employer as part of employee compensation costs. They are not
included in the employees' gross income for tax purposes, however, until
they are paid out as benefits. The following special income tax
provisions for ESOPs are intended to increase ownership of corporations
by their employees: (1) annual employer contributions are subject to
less restrictive limitations; (2) ESOPs may borrow to purchase employer
stock, guaranteed by their agreement with the employer that the debt
will be serviced by his payment (deductible by him) of a portion of
wages (excludable by the employees) to service the loan; (3) employees
who sell appreciated company stock to the ESOP may defer any taxes due
until they withdraw benefits; and (4) dividends paid to ESOP-held stock
are deductible by the employer.
118. Additional deduction for the blind.--Taxpayers who are blind may
take an additional $1,000 standard deduction if single, or $800 if
married.
119. Additional deduction for the elderly.--Taxpayers who are 65 years
or older may take an additional $1,000 standard deduction if single, or
$800 if married.
120. Tax credit for the elderly and disabled.--Individuals who are 65
years of age or older, or who are permanently disabled, can take a tax
credit equal to 15 percent of the sum of their earned and retirement

[[Page 90]]

income. Income is limited to no more than $5,000 for single individuals
or married couples filing a joint return where only one spouse is 65
years of age or older, and up to $7,500 for joint returns where both
spouses are 65 years of age or older. These limits are reduced by one-
half of the taxpayer's adjusted gross income over $7,500 for single
individuals and $10,000 for married couples filing a joint return.
121. Casualty losses.--Neither the purchase of property nor insurance
premiums to protect its value are deductible as costs of earning income;
therefore, reimbursement for insured loss of such property is not
reportable as a part of gross income. Taxpayers, however, may deduct
uninsured casualty and theft losses of more than $100 each, but only to
the extent that total losses during the year exceed 10 percent of AGI.
122. Earned income tax credit (EITC).--The EITC may be claimed by low
income workers. For a family with one qualifying child, the credit is 34
percent of the first $6,920 of earned income in 2000. The credit is 40
percent of the first $9,720 of income for a family with two or more
qualifying children. When the taxpayer's income exceeds $12,690, the
credit is phased out at the rate of 15.98 percent (21.06 percent if two
or more qualifying children are present). It is completely phased out at
$27,413 of modified adjusted gross income ($31,152 if two or more
qualifying children are present).
The credit may also be claimed by workers who do not have children
living with them. Qualifying workers must be at least age 25 and may not
be claimed as a dependent on another taxpayer's return. The credit is
not available to workers age 65 or older. In 2000, the credit is 7.65
percent of the first $4,610 of earned income. When the taxpayer's income
exceeds $5,770, the credit is phased out at the rate of 7.65 percent. It
is completely phased out at $10,380 of modified adjusted gross income.
For workers with or without children, the income level at which the
credit's phase-outs begin and the maximum amounts of income on which the
credit can be taken are adjusted for inflation. Earned income tax
credits in excess of tax liabilities owed through the individual income
tax system are refundable to individuals. This portion of the credit is
shown as an outlay, while the amount that offsets tax liabilities is
shown as a tax expenditure.

Social Security

123. Social Security benefits for retired workers.--Social security
benefits that exceed the beneficiary's contributions out of taxed income
are deferred employee compensation and the deferral of tax on that
compensation is a tax expenditure. These additional retirement benefits
are paid for partly by employers' contributions that were not included
in employees' taxable compensation. Portions (reaching as much as 85
percent) of recipients' social security and tier 1 railroad retirement
benefits are included in the income tax base, however, if the
recipient's provisional income exceeds certain base amounts. Provisional
income is equal to adjusted gross income plus foreign or U.S. possession
income and tax-exempt interest, and one half of social security and tier
1 railroad retirement benefits. The tax expenditure is limited to the
portion of the benefits received by taxpayers who are below the base
amounts at which 85 percent of the benefits are taxable.
124. Social Security benefits for the disabled.--Benefit payments from
the Social Security Trust Fund, for disability and for dependents and
survivors, are excluded from a beneficiary's gross incomes.
125. Social Security benefits for dependents and survivors.--Benefit
payments from the Social Security Trust Fund for dependents and
survivors are excluded from a beneficiary's gross income.

Veterans Benefits and Services

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

General Government

130. Public purpose State and local bonds.--Interest earned on State
and local government bonds issued to finance public-purpose construction
(e.g., schools, roads, sewers), equipment acquisition, and other public
purposes is tax-exempt. Interest on bonds issued by Indian tribal
governments for essential governmental purposes is also tax-exempt.
131. Deductibility of certain nonbusiness State and local taxes.--
Taxpayers may deduct State and local income taxes and property taxes
even though these taxes primarily pay for services that, if purchased
directly by taxpayers, would not be deductible.
132. Business income earned in U.S. possessions.--U.S. corporations
operating in a U.S. possession (e.g., Puerto Rico) can claim a credit
against some or all of their U.S. tax liability on possession business
income. The credit expires December 31, 2005.

Interest

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

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TAX EXPENDITURES IN THE UNIFIED TRANSFER TAX

Exceptions to the general terms of the Federal unified transfer tax
favor particular transferees or dispositions of transferors, similar to
Federal direct expenditure or loan programs. The transfer tax provisions
identified as tax expenditures satisfy the reference law criteria for
inclusion in the tax expenditure budget that were described above. There
is no generally accepted normal tax baseline for transfer taxes.

Unified Transfer Tax Reference Rules

The reference tax rules for the unified transfer tax from which
departures represent tax expenditures include:
Definition of the taxpaying unit. The payment of the tax is
the liability of the transferor whether the transfer of cash
or property was made by gift or bequest.
Definition of the tax base. The base for the tax is the
transferor's cumulative, taxable lifetime gifts made plus the
net estate at death. Gifts in the tax base are all annual
transfers in excess of $10,000 (indexed) to any donee except
the donor's spouse. Excluded are, however, payments on behalf
of family members' educational and medical expenses, as well
as the cost of ceremonial gatherings and celebrations that are
not in honor of the donor.
Property valuation. In general, property is valued at its
fair market value at the time it is transferred. This is not
necessarily the case in the valuation of property for transfer
tax purposes. Executors of estates are provided the option to
value assets at the time of the testator's death or up to six
months later.
Tax rate schedule. A single graduated tax rate schedule
applies to all taxable transfers. This is reflected in the
name of the ``unified transfer tax'' that has replaced the
former separate gift and estate taxes. The tax rates vary from
18 percent on the first $10,000 of aggregate taxable
transfers, to 55 percent on amounts exceeding $3 million. A
lifetime credit is provided against the tax in determining the
final amount of transfer taxes that are due and payable. For
decedents dying in 2000, this credit allows each taxpayer to
make a $675,000 tax-free transfer of assets that otherwise
would be liable to the unified transfer tax. This figure is
scheduled to increase in steps to $1 million in 2006. \6\
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\6\ An additional tax, at a flat rate of 55 percent, is imposed on
lifetime, generation-skipping transfers in excess of $1 million
(indexed). It is considered a generation-skipping transfer whenever the
transferee is at least two generations younger than the transferor, as
it would be in the case of transfers to grandchildren or great-
grandchildren. The liability of this tax is on the recipients of the
transfer.
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Time when tax is due and payable. Donors are required to
pay the tax annually as gifts are made. The generation-
skipping transfer tax is payable by the donees whenever they
accede to the gift. The net estate tax liability is due and
payable within nine months after the decedent's death. The
Internal Revenue Service may grant an extension of up to 10
years for a reasonable cause. Interest is charged on the
unpaid tax liability at a rate equal to the cost of Federal
short-term borrowing, plus three percentage points.

Tax Expenditures by Function

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

Natural Resources and Environment

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

Agriculture

2. Special-use valuation of farms.--In 2000, up to $750,000 (indexed)
in farmland owned and operated by a decedent and/or a member of the
family may be valued for estate tax purposes on the basis of its
``continued use'' as farmland if: (1) the value of the farmland is at
least 25 percent of the gross estate; (2) the entire value of all farm
property is at least 50 percent of the gross estate; and (3) family
heirs to the farm agree to continue to operate the property as a farm
for at least 10 years.
3. Tax deferral of closely held farms.--The tax on a decedent's farm
can be deferred for up to 14 years if the value of the farm is at least
35 percent of the gross estate. For the first 4 years of deferral, no
tax need be paid. During the last 10 years of deferral, the tax
liability must be paid in equal annual installments. Throughout the 14-
year period, interest is charged. A 2-percent interest rate (non-
deductible) is applied to the first $1 million (indexed) of deferred
taxable value.

Commerce and Housing

4. Special-use valuation of closely-held businesses.--The special-use
valuation rule available for family farms is also available for nonfarm
family businesses. To be eligible for the special-use valuation, the

[[Page 92]]

same three conditions previously described must be met.
5. Tax deferral of closely-held businesses.--The tax-deferral rule
available for family farms is also available for nonfarm family
businesses. To be eligible for the tax deferral, the value of stock in
closely-held corporations must exceed 35 percent of the decedent's gross
estate, less debt and funeral expenses.
6. Exclusion for family-owned businesses.--Certain family-owned
businesses that are bequeathed to qualified heirs can be excluded from
taxable estates. The exclusion cannot exceed $675,000. The combined
value of the exclusion and the exemption value of the unified credit
cannot exceed $1.3 million. The exclusion is recaptured if certain
conditions are not maintained for 10 years.

Education, Training, Employment, and Social Services

7. Charitable contributions to educational institutions.--Bequests to
educational institutions can be deducted under the estate tax.
8. Charitable contributions, other than education and health.--
Bequests to charitable, religious, and certain other nonprofit
organizations can be deducted under the estate tax.

Health

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

General Government

10. State and local death taxes.--A credit against the Federal estate
tax is allowed for State taxes on bequests. The amount of this credit is
determined by a rate schedule that reaches a maximum of 16 percent of
the taxable estate in excess of $60,000.

[[Page 93]]

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

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

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

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

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

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