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

    [[Page 95]]

                               6. TAX EXPENDITURES

      The Congressional Budget Act of 1974 (Public Law 93-344) requires that
    a list of ``tax expenditures'' be included in the budget. Tax
    expenditures are defined in the law as ``revenue losses attributable to
    provisions of the Federal tax laws which allow a special exclusion,
    exemption, or deduction from gross income or which provide a special
    credit, a preferential rate of tax, or a deferral of liability.'' The
    Act suggests that tax expenditures are exceptions to some norm or
    standard tax concept that is not specified in the law. Hence, different
    analyses may use different baseline tax structures; indeed, the budget
    presentation here provides tax expenditure estimates measured against
    more than one baseline.
      Due, in part, to the degree of arbitrariness in the tax expenditure
    baseline, the Administration believes the meaningfulness of tax
    expenditure estimates is uncertain and that the ``tax expenditure''
    presentation can be improved by consideration of alternative or
    additional tax bases. A description of an ongoing Treasury study to
    reevaluate the tax expenditure concept is presented at the beginning of
    this chapter. The tax expenditure estimates and related discussion
    following the description of this study, however, are based on materials
    and formats developed and included in previous budgets. Tax expenditure
    estimates under the unified transfer (i.e., estate and gift) tax have
    been eliminated from the presentation because there is no generally
    accepted normal baseline for transfer taxes and this tax has been
    repealed under the Economic Growth and Tax Relief Reconciliation Act of
    2001 (EGTRRA).
      The largest reported tax expenditures tend to be associated with the
    individual income tax. For example, sizeable deferrals, 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. Reported tax expenditures under
    the corporate income tax tend to be related to timing differences in 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.
      Each tax expenditure estimate in this chapter was calculated assuming
    other parts of the tax code remained unchanged. The estimates would be
    different if all tax expenditures or major groups of tax expenditures
    were changed simultaneously because of potential interactions among
    provisions. For that reason, 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.
      Tax expenditures relating to the individual and corporate income taxes
    are estimated for fiscal years 2001-2007 using three methods of
    accounting: revenue effects, outlay equivalent, and present value. The
    present value approach provides estimates of the revenue effects for tax
    expenditures that involve deferrals of tax payments into the future or
    have similar long-term effects.
      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.

              FUTURE REVISIONS TO THE TAX EXPENDITURE PRESENTATION

      Policymakers and researchers have long recognized that certain income
    tax code provisions have policy purposes other than simply raising
    revenue and that it is useful to understand better the nature of these
    provisions. It is important to know the amounts of revenue associated
    with them, whether they are achieving desired results, and their
    consequences for the economy. The answers to these questions are
    important simply as a source of information, but also so that
    policymakers and the public can review these features of the income tax
    regularly to see if change is warranted. Thus it was that in 1974 the
    Congress mandated as part of the Congressional Budget Act of 1974 that
    the annual Federal budget presentation include a list of ``tax
    expenditures'', where tax expenditures were defined as:
                ...those revenue losses attributable to provisions of the
              Federal tax laws which allow a special exclusion, exemption,
              or deduction from gross income or which provide a special
              credit, a preferential rate of tax, or a deferral of tax
              liability....
      Though imperfect, the tax expenditure budget has expanded our
    understanding of policy programs operating through the Federal income
    tax and, more generally, the workings of the Federal income tax.
      The complexity of our economy and society on the one hand, and the
    complexity of the income tax on the other, suggest the need for a
    variety of analyses

    [[Page 96]]

    to understand their interaction better. The Treasury Department has
    begun an effort to review the tax expenditure presentation, and will be
    considering possible revisions and improvements in methodology and
    approach. The need for this effort was raised in the President's Fiscal
    Year 2002 budget submission, which noted that the current tax
    expenditure analysis was developed relative to an arbitrary tax base and
    that:
                Because of the breadth of this arbitrary tax base, the
              Administration believes that the concept of ``tax
              expenditure'' is of questionable analytic value. \1\
    ---------------------------------------------------------------------------
      \1\ Analytical Perspectives, Budget of the United States, Fiscal Year
    2002, Chapter 5.
    ---------------------------------------------------------------------------
      This review is intended to improve the quality and range of
    information available regarding the Federal income tax and its effects
    on the economy. The Treasury Department's efforts in this area will
    continue over the coming year, assisted by public debate and comment.

                               The Need for Change

      The definition of the baseline against which tax expenditures are
    measured is crucial to the definition and calculation of tax
    expenditures. For purposes of calculating tax expenditures, the 1974
    Budget Act did not specify the provisions of the baseline tax law,
    which, quoting further from the Fiscal Year 2002 budget, means that:
    ``Deciding whether provisions are exceptions (from the normal baseline),
    therefore, is a matter of judgement.'' As the normal baseline and
    deviations from the baseline are constructed from a set of potentially
    subjective judgements, differences of opinion can arise as to the
    correct classification of specific provisions of the tax code. While the
    normal baseline follows a theoretically appealing measure of a
    comprehensive income tax in many ways, it deviates in other important
    ways. These deviations may reflect judgements along a number of
    dimensions, including administrative concerns, political judgements,
    social policy, and historical methods of taxing income. But these
    deviations inject a degree of subjectivity that can limit the value of
    the underlying analysis.
      One problem with injecting subjective elements into the definition of
    the baseline income tax is that common notions of what constitutes a
    ``normal'' income tax will change over time. For example, although the
    tax exemption for employer-provided pensions is labeled a tax
    expenditure, the growing presence of tax-deferred savings vehicles in
    the tax code suggests that these may today be part of ``normal'' income
    tax circa 2002. It is not clear, however, whether the ``normal'' income
    tax of 2002 is more appropriate than that in place in any other year if
    one is interested in better understanding deviations of the current
    income tax from a more objective standard of a comprehensive income tax.
      A highly subjective baseline also may not inform policymakers and the
    public about those aspects of social or economic policy that are
    implemented through the tax code. The Federal income tax contains many
    provisions for providing income support for lower-income citizens.
    Examples include the Earned Income Tax Credit, the Work Opportunity
    Credit, and the Child Tax Credit. Each of these provisions is
    appropriately labeled a tax expenditure in the current tax expenditure
    presentation. The personal exemption, which cannot be claimed by higher-
    income taxpayers because of a phase-out of the exemption, however, is
    not presently labeled a tax expenditure although it can also be viewed
    as a component of the income support policies effected through the
    income tax. In many other ways, the ``normal tax'' baseline may fail to
    capture the extent to which the tax system serves such programmatic
    purposes.
      Finally, the public and policymakers are interested in the tax
    subsidies and excises imbedded in the tax code and their effects on
    individual behavior and on economic activity. Tax subsidies and excises
    arise when the relative prices of goods, services, or activities are
    distorted by the tax system. A highly subjective ``normal tax'' may shed
    little light on these issues.
      Because of the controversy that accompanies the existing ``normal
    tax'' concept, it may be appropriate to reconsider a comprehensive
    income tax as a baseline for the tax expenditure budget. Comprehensive
    income is a well-accepted theoretical concept, and so avoids some
    subjectivity that plagues the ``normal tax'' baseline. A comprehensive
    measure of income, however, would not eliminate all contentious issues.
    Any practical implementation of a comprehensive tax base would involve
    judgements, e.g., about which items of theoretical income or expense are
    too abstract or difficult to estimate to include in the baseline, but
    that other analysts may see as necessary.

                Focus of the Reconsideration and Revision Effort

      The effort to improve the tax expenditure presentation will focus on
    three aspects. The first relates to the definition of an income tax or
    standard against which tax expenditures are identified and measured as
    discussed above. The study will consider redefining the baseline income
    concept to be more consistent with a comprehensive income tax base, as
    well as other alternative definitions of income.
      The study will also consider issues involved in estimating
    ``negative'' tax expenditures in addition to the conventional positive
    tax expenditures currently reported in the Budget. A negative tax
    expenditure arises whenever a tax provision causes a taxpayer to pay
    more tax than would be consistent with the baseline income tax. Negative
    tax expenditures have not been identified and calculated in the past, in
    part because they did not appear to relate to the original purpose of
    the tax expenditure analysis to identify implicit spending programs
    operating through the tax system. Nevertheless, negative tax
    expenditures provide an important additional perspective and may offer a
    useful source of information to analysts and policy makers.
      Academics and tax specialists have studied intensively whether the
    United States should adopt a con

    [[Page 97]]

    sumption tax at the Federal level, either as a source of additional
    revenue, or in place of some or all of the current sources of Federal
    revenue. Though the existing Federal individual income tax is thought of
    as a tax on income, in many respects it has evolved into a hybrid tax
    containing some elements consistent both with a comprehensive income tax
    and a consumption tax, as well as many elements consistent with neither
    an income nor a consumption tax. Therefore, the third aspect of the
    Treasury's effort will be to consider estimating tax expenditures
    relative to a hypothetical consumption tax, as well as relative to an
    income tax. This would allow a comparison of the Federal income tax vis-
    a-vis the two baseline systems. It would also serve to give additional
    perspective on the tax expenditure analysis by highlighting those
    provisions in the Federal income tax that may give rise to a tax
    expenditure or negative expenditure in one system but not in the other.
      When completed, this review can significantly improve the overall
    understanding of the effects of the Federal income tax on the economy.
    For example, reconsideration of the income tax baseline is intended to
    provide a baseline definition that can better capture the numerous ways
    in which the tax system influences economic behavior relative to a
    comprehensive income tax system. Similarly, the definition and
    calculation of negative tax expenditures can provide useful new
    information about those activities subject to a tax surcharge relative
    to the baseline tax. Viewing these negative tax expenditures alongside
    the traditional tax expenditure presentation can provide important
    context for the overall tax expenditure budget. The calculation of tax
    expenditures and negative tax expenditures relative to a consumption tax
    budget can provide further context for the traditional tax expenditure
    presentation while providing important new information about the effects
    of the tax system on the economy. Finally, a consumption tax base
    analysis can help illuminate some of the central issues that would arise
    in any effort to enact a Federal consumption tax.

                       TAX EXPENDITURES IN THE INCOME TAX

                            Tax Expenditure Estimates

      All tax expenditure estimates presented here are based upon current
    tax law enacted as of December 31, 2001. Expired or repealed provisions
    are not listed if their revenue effects result only from taxpayer
    activity occurring before fiscal year 2001. 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 effects for tax expenditures for fiscal years 2001-
    2007 are displayed according to the budget's functional categories in
    Table 6-1. Descriptions of the specific tax expenditure provisions
    follow the tables of estimates and the 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 effects for these items are zero using the
    reference tax rules. The alternative baseline concepts are discussed in
    detail following the tables.
      Table 6-2 reports the respective portions of the total revenue effects
    that arise under the individual and corporate income taxes separately.
    The location of 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 provisions are cleared. The ultimate
    beneficiaries of corporate tax expenditures could be shareholders,
    employees, customers, or other providers of capital, depending on
    economic forces.
      Table 6-3 ranks the major tax expenditures by the size of their FY
    2003 revenue effect.

                     Interpreting Tax Expenditure Estimates

      The estimates shown for individual tax expenditures in Tables 6-1, 6-
    2, and 6-3 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. Such indirect
    effects are not reflected in the estimates.
      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 assum

    [[Page 98]]

    ing that the other remains in force. In addition, the estimates reported
    in Table 6-1 are the totals of individual and corporate income tax
    revenue effects reported in Table 6-2 and do not reflect any possible
    interactions between the individual and corporate income tax receipts.
    For this reason, the estimates in Table 6-1 (as well as those in Table
    6-5, which are also based on summing individual and corporate estimates)
    should be regarded as approximations.
      The annual value of tax expenditures for tax deferrals is reported on
    a cash basis in all tables except Table 6-4. 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 effect on receipts to the
    Government because the newly deferred taxes will ultimately be received.
    Present-value estimates, which are a useful complement 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 6-4 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 2001 that cause the deferrals or other long-term revenue
    effects. For instance, a pension contribution in 2001 would cause a
    deferral of tax payments on wages in 2001 and on pension earnings on
    this contribution (e.g., interest) in later years. In some future year,
    however, the 2001 pension contribution and accrued earnings will be paid
    out and taxes will be due; these receipts are included in the present-
    value estimate. In general, this conceptual approach is similar to the
    one used for reporting the budgetary effects of credit programs, where
    direct loans and guarantees in a given year affect future cash flows.

    [[Page 99]]

                                                     Table 6-1.  ESTIMATES OF TOTAL INCOME TAX EXPENDITURES
                                                                    (In millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Total from corporations and individuals
                                                                            --------------------------------------------------------------------------------
                                                                               2001      2002      2003      2004      2005      2006      2007    2003-2007
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                 National Defense
           1       Exclusion of benefits and allowances to armed forces         2,160     2,190     2,210     2,240     2,260     2,290     2,310    11,310
                    personnel..............................................

                 International affairs:
           2       Exclusion of income earned abroad by U.S. citizens......     2,450     2,540     2,660     2,690     2,760     2,810     3,170    14,090
           3       Exclusion of certain allowances for Federal employees          760       800       840       880       920       960     1,020     4,620
                    abroad.................................................
           4       Extraterritorial income exclusion.......................     4,490     4,820     5,150     5,510     5,890     6,290     6,730    29,570
           5       Inventory property sales source rules exception.........     1,400     1,470     1,540     1,620     1,700     1,790     1,880     8,530
           6       Deferral of income from controlled foreign corporations      6,600     7,000     7,450     7,900     8,400     8,930     9,550    42,230
                    (normal tax method)....................................
           7       Deferred taxes for financial firms on certain income         1,300       550         0         0         0         0         0         0
                    earned overseas........................................

                 General science, space, and technology:
           8       Expensing of research and experimentation expenditures       2,020     1,780     2,380     2,880     3,400     3,910     4,160    16,730
                    (normal tax method)....................................
           9       Credit for increasing research activities...............     5,370     6,010     4,590     4,020     2,330       990       410    12,350

                 Energy:
          10       Expensing of exploration and development costs, fuels...        50        60        70        90        90       100       100       450
          11       Excess of percentage over cost depletion, fuels.........       250       260       270       290       300       310       320     1,490
          12       Alternative fuel production credit......................       900       850       410       130       130       130       130       930
          13       Exception from passive loss limitation for working              20        20        20        20        20        20        20       100
                    interests in oil and gas properties....................
          14       Capital gains treatment of royalties on coal............       100       100       110       120       120       130       140       620
          15       Exclusion of interest on energy facility bonds..........        90        90       100       120       130       140       150       640
          16       Enhanced oil recovery credit............................       310       360       440       530       640       760       910     3,280
          17       New technology credit...................................        60        80       100       100       100        90        90       480
          18       Alcohol fuel credits \1\................................        30        30        30        30        30        30        30       150
          19       Tax credit and deduction for clean-fuel burning vehicles        50        50        50        20       -10       -50       -50       -40
          20       Exclusion from income of conservation subsidies provided        70        70        70        70        70        70        60       340
                    by public utilities....................................

                 Natural resources and environment:
          21       Expensing of exploration and development costs, nonfuel         10        10        10        10        10        10        10        50
                    minerals...............................................
          22       Excess of percentage over cost depletion, nonfuel              250       260       270       290       300       300       310     1,470
                    minerals...............................................
          23       Exclusion of interest on bonds for water, sewage, and          400       420       440       480       530       580       630     2,660
                    hazardous waste facilities.............................
          24       Capital gains treatment of certain timber income........       100       100       110       120       120       130       140       620
          25       Expensing of multiperiod timber growing costs...........       360       360       370       380       390       400       410     1,950
          26       Tax incentives for preservation of historic structures..       180       200       210       220       230       240       250     1,150

                 Agriculture:
          27       Expensing of certain capital outlays....................       170       170       170       170       170       170       170       850
          28       Expensing of certain multiperiod production costs.......       120       130       130       130       120       120       120       620
          29       Treatment of loans forgiven for solvent farmers.........        10        10        10        10        10        10        10        50
          30       Capital gains treatment of certain income...............       990     1,040     1,100     1,160     1,220     1,290     1,360     6,130
          31       Income averaging for farmers............................        70        70        70        70        80        80        80       380
          32       Deferral of gain on sale of farm refiners...............        10        10        10        10        10        10        10        50

                 Commerce and housing:
                   Financial institutions and insurance:
          33        Exemption of credit union income.......................     1,000     1,070     1,150     1,230     1,320     1,420     1,530     6,650
          34        Excess bad debt reserves of financial institutions.....        60        50        30        20        10         0         0        60
          35        Exclusion of interest on life insurance savings........    16,290    17,710    19,250    20,940    22,780    24,790    26,930   114,690
          36        Special alternative tax on small property and casualty         10        10        10        10        10        10        10        50
                     insurance companies...................................
          37        Tax exemption of certain insurance companies owned by         220       230       250       260       280       290       300     1,380
                     tax-exempt organizations..............................
          38        Small life insurance company deduction.................       100       100       100       100       100       100       100       500
                   Housing:
          39        Exclusion of interest on owner-occupied mortgage              800       830       870       960     1,050     1,140     1,240     5,260
                     subsidy bonds.........................................
          40        Exclusion of interest on rental housing bonds..........       160       170       180       200       220       240       260     1,100
          41        Deductibility of mortgage interest on owner-occupied       64,510    64,190    66,110    68,070    70,870    73,560    76,870   355,480
                     homes.................................................
          42        Deductibility of State and local property tax on owner-    22,410    22,680    23,580    23,210    20,330    16,300    14,410    97,830
                     occupied homes........................................
          43        Deferral of income from post 1987 installment sales....     1,040     1,050     1,080     1,100     1,120     1,140     1,160     5,600
          44        Capital gains exclusion on home sales..................    19,090    19,670    20,260    20,860    21,490    22,140    22,800   107,550
          45        Exception from passive loss rules for $25,000 of rental     4,800     4,400     4,070     3,780     3,530     3,290     3,090    17,760
                     loss..................................................
          46        Credit for low-income housing investments..............     3,220     3,330     3,460     3,630     3,810     3,980     4,130    19,010
          47        Accelerated depreciation on rental housing (normal tax      5,190     5,440     5,710     5,790     5,800     5,720     5,800    28,820
                     method)...............................................
                   Commerce:
          48        Cancellation of indebtedness...........................        30        30        30        40        40        40        40       190
          49        Exceptions from imputed interest rules.................        80        80        80        80        80        80        80       400
          50        Capital gains (except agriculture, timber, iron ore,       67,800    61,810    60,200    56,990    56,180    50,670    49,880   273,920
                     and coal) (normal tax method).........................
          51        Capital gains exclusion of small corporation stock.....        70       100       130       160       210       250       300     1,050
          52        Step-up basis of capital gains at death................    26,540    27,610    28,710    29,860    31,050    32,300    33,590   155,510
          53        Carryover basis of capital gains on gifts..............       530       600       680       760       900     1,080     1,130     4,550
          54        Ordinary income treatment of loss from small business          40        40        40        50        50        50        50       240
                     corporation stock sale................................
          55        Accelerated depreciation of buildings other than rental     4,540     4,560     4,240     3,960     3,800     4,160     4,880    21,040
                     housing (normal tax method)...........................

    [[Page 100]]

          56        Accelerated depreciation of machinery and equipment        37,860    37,130    36,480    36,790    37,430    38,520    40,930   190,150
                     (normal tax method)...................................
          57        Expensing of certain small investments (normal tax          1,670     1,430     1,420     1,390     1,360     1,480     1,720     7,370
                     method)...............................................
          58        Amortization of start-up costs (normal tax method).....       130       160       200       240       250       270       270     1,230
          59        Graduated corporation income tax rate (normal tax           4,940     5,590     6,210     6,580     7,120     7,450     7,880    35,240
                     method)...............................................
          60        Exclusion of interest on small issue bonds.............       310       310       330       360       390       430       470     1,980

                 Transportation:
          61       Deferral of tax on shipping companies...................        20        20        20        20        20        20        20       100
          62       Exclusion of reimbursed employee parking expenses.......     1,980     2,090     2,190     2,300     2,420     2,550     2,670    12,130
          63       Exclusion for employer-provided transit passes..........       220       280       360       410       470       540       600     2,380

                 Community and regional development:
          64       Investment credit for rehabilitation of structures              30        30        30        30        30        30        30       150
                    (other than historic)..................................
          65       Exclusion of interest for airport, dock, and similar           630       640       680       750       820       890       980     4,120
                    bonds..................................................
          66       Exemption of certain mutuals' and cooperatives' income..        60        60        60        60        70        70        70       330
          67       Empowerment zones, Enterprise communities, and Renewal         380       730     1,130     1,170     1,280     1,410     1,580     6,570
                    communities............................................
          68       New markets tax credit..................................        10        90       190       290       430       610       830     2,350
          69       Expensing of environmental remediation costs............        80       100       100        20       -20       -10       -10        80

                 Education, training, employment, and social services:
                   Education:
          70        Exclusion of scholarship and fellowship income (normal      1,210     1,200     1,210     1,240     1,330     1,380     1,390     6,550
                     tax method)...........................................
          71        HOPE tax credit........................................     4,130     4,110     3,520     2,880     2,930     2,730     2,900    14,960
          72        Lifetime Learning tax credit...........................     2,370     2,290     2,360     3,140     2,980     2,740     2,960    14,180
          73        Education Individual Retirement Accounts...............        30        50        80       130       220       330       470     1,230
          74        Deductibility of student-loan interest.................       390       450       640       660       680       700       720     3,400
          75        Deduction for higher education expenses................         0       430     2,290     2,960     3,710     3,010         0    11,970
          76        State prepaid tuition plans............................       190       270       340       400       460       530       590     2,320
          77        Exclusion of interest on student-loan bonds............       230       230       240       260       290       310       350     1,450
          78        Exclusion of interest on bonds for private nonprofit          540       550       580       640       700       760       830     3,510
                     educational facilities................................
          79        Credit for holders of zone academy bonds...............        30        50        70        80        90        90        90       420
          80        Exclusion of interest on savings bonds redeemed to             10        20        20        20        20        20        20       100
                     finance educational expenses..........................
          81        Parental personal exemption for students age 19 or over     1,010     1,070     1,120     1,170     1,230     1,280     1,340     6,140
          82        Deductibility of charitable contributions (education)..     3,830     3,980     4,200     4,440     4,600     4,840     5,030    23,110
          83        Exclusion of employer-provided educational assistance..       260       410       500       530       560       590       620     2,800
                   Training, employment, and social services:
          84        Work opportunity tax credit............................       300       230       140        60        30        10         0       240
          85        Welfare-to-work tax credit.............................        90        70        40        20        10         0         0        70
          86        Employer provided child care exclusion.................       720       740       770       810       930     1,020     1,080     4,610
          87        Employer-provided child care credit....................         0        40        90       130       150       150       160       680
          88        Assistance for adopted foster children.................       190       220       250       260       270       280       290     1,350
          89        Adoption credit and exclusion..........................       130       140       220       450       500       540       560     2,270
          90        Exclusion of employee meals and lodging (other than           710       740       780       810       850       890       930     4,260
                     military).............................................
          91        Child credit \2\.......................................    19,840    19,760    19,680    19,550    20,550    21,530    21,240   102,550
          92        Credit for child and dependent care expenses...........     2,670     2,610     2,670     2,960     2,700     2,150     1,920    12,400
          93        Credit for disabled access expenditures................        50        50        50        50        60        60        60       280
          94        Deductibility of charitable contributions, other than      30,150    30,810    32,080    33,830    35,190    36,890    38,290   176,280
                     education and health..................................
          95        Exclusion of certain foster care payments..............       500       510       520       530       540       570       610     2,770
          96        Exclusion of parsonage allowances......................       350       370       400       420       450       470       490     2,230

                 Health:
          97       Exclusion of employer contributions for medical             82,800    90,910    99,260   106,940   115,380   124,050   134,960   580,590
                    insurance premiums and medical care....................
          98       Self-employed medical insurance premiums................     1,520     1,730     2,420     3,570     3,870     4,170     4,430    18,460
          99       Workers' compensation insurance premiums................     4,730     4,870     5,080     5,230     5,410     5,570     5,790    27,080
         100       Medical Savings Accounts................................        20        20        20        20        20        20        20       100
         101       Deductibility of medical expenses.......................     4,990     5,260     5,530     5,840     6,280     6,600     7,100    31,350
         102       Exclusion of interest on hospital construction bonds....     1,100     1,130     1,190     1,310     1,440     1,570     1,700     7,210
         103       Deductibility of charitable contributions (health)......     4,010     4,180     4,420     4,690     4,850     5,100     5,320    24,380
         104       Tax credit for orphan drug research.....................       140       150       170       190       220       240       270     1,090
         105       Special Blue Cross/Blue Shield deduction................       270       300       340       310       300       270       300     1,520

                 Income security:
         106       Exclusion of railroad retirement system benefits........       380       390       400       400       400       400       400     2,000
         107       Exclusion of workers' compensation benefits.............     5,560     5,810     6,070     6,320     6,600     6,900     7,200    33,090
         108       Exclusion of public assistance benefits (normal tax            370       380       400       410       430       450       470     2,160
                    method)................................................
         109       Exclusion of special benefits for disabled coal miners..        70        70        60        60        60        50        50       280
         110       Exclusion of military disability pensions...............       110       120       120       120       130       130       140       640
                   Net exclusion of pension contributions and earnings:
         111        Employer plans.........................................    42,070    48,070    53,080    54,500    55,630    58,980    63,320   285,510
         112        401(k) plans...........................................    44,080    52,960    59,510    62,770    65,290    69,230    73,320   330,120

    [[Page 101]]

         113        Individual Retirement Accounts.........................    18,680    18,090    18,660    19,050    18,930    19,230    18,330    94,200
         114        Low and moderate income savers credit..................         0       550     1,960     1,940     1,900     1,800     1,280     8,880
         115        Keogh plans............................................     6,160     6,520     6,770     7,040     7,250     7,490     7,730    36,280
                   Exclusion of other employee benefits:
         116        Premiums on group term life insurance..................     1,750     1,780     1,800     1,830     1,860     1,890     1,920     9,300
         117        Premiums on accident and disability insurance..........       210       220       230       240       250       260       270     1,250
         118        Small business retirement plan credit..................         0        20        50        90       120       130       150       540
         119        Income of trusts to finance supplementary unemployment         20        20        30        30        30        30        30       150
                     benefits..............................................
         120        Special ESOP rules.....................................     1,290     1,340     1,420     1,490     1,570     1,640     1,730     7,850
         121        Additional deduction for the blind.....................        40        40        40        40        40        40        40       200
         122        Additional deduction for the elderly...................     1,970     1,890     1,950     2,060     2,100     2,150     2,050    10,310
         123        Tax credit for the elderly and disabled................        30        30        30        30        30        30        30       150
         124        Deductibility of casualty losses.......................       210       250       310       360       410       450       490     2,020
         125        Earned income tax credit \3\...........................     4,940     4,370     4,800     4,930     5,100     5,180     5,390    25,400

                 Social Security:
                   Exclusion of social security benefits:
         126        Social Security benefits for retired workers...........    17,830    18,000    18,180    18,560    18,850    19,720    20,890    96,200
         127        Social Security benefits for disabled..................     2,690     2,930     3,240     3,630     4,020     4,470     5,020    20,380
         128        Social Security benefits for dependents and survivors..     3,720     3,870     4,060     4,320     4,560     4,820     5,170    22,930

                 Veterans benefits and services:
         129       Exclusion of veterans death benefits and disability          3,150     3,190     3,300     3,490     3,680     3,870     4,080    18,420
                    compensation...........................................
         130       Exclusion of veterans pensions..........................        70        80        80        80        90        90       100       440
         131       Exclusion of GI bill benefits...........................        90        90        90       100       100       110       110       510
         132       Exclusion of interest on veterans housing bonds.........        40        40        40        40        50        50        60       240

                 General purpose fiscal assistance:
         133       Exclusion of interest on public purpose State and local     23,100    23,680    24,270    24,880    25,500    26,140    26,800   127,590
                    bonds..................................................
         134       Deductibility of nonbusiness state and local taxes other    45,520    46,160    48,150    47,730    43,270    34,820    30,890   204,860
                    than on owner-occupied homes...........................
         135       Tax credit for corporations receiving income from doing      2,190     2,240     2,240     2,240     2,200     1,300         0     7,980
                    business in U.S. possessions...........................

                 Interest:
         136       Deferral of interest on U.S. savings bonds..............       290       300       310       330       330       350       360     1,680

                 Addendum: Aid to State and local governments:
                   Deductibility of:
                    Property taxes on owner-occupied homes.................    22,410    22,680    23,580    23,210    20,330    16,300    14,410    97,830
                    Nonbusiness State and local taxes other than on owner-     45,520    46,160    48,150    47,730    43,270    34,820    30,890   204,860
                     occupied homes........................................
                   Exclusion of interest on State and local bonds for:
                    Public purposes........................................    23,100    23,680    24,270    24,880    25,500    26,140    26,800   127,590
                    Energy facilities......................................        90        90       100       120       130       140       150       640
                    Water, sewage, and hazardous waste disposal facilities.       400       420       440       480       530       580       630     2,660
                    Small-issues...........................................       310       310       330       360       390       430       470     1,980
                    Owner-occupied mortgage subsidies......................       800       830       870       960     1,050     1,140     1,240     5,260
                    Rental housing.........................................       160       170       180       200       220       240       260     1,100
                    Airports, docks, and similar facilities................       630       640       680       750       820       890       980     4,120
                    Student loans..........................................       230       230       240       260       290       310       350     1,450
                    Private nonprofit educational facilities...............       540       550       580       640       700       760       830     3,510
                    Hospital construction..................................     1,100     1,130     1,190     1,310     1,440     1,570     1,700     7,210
                    Veterans' housing......................................        40        40        40        40        50        50        60       240
                   Credit for holders of zone academy bonds................        30        50        70        80        90        90        90       420
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \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 tax reasons, 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: 2001 $990; 2002 $1,020; 2003 $1,050; 2004 $1,080; 2005 $1,080; 2006 $1,100; and 2007 $1,120.
    \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: 2001 $980; 2002 $7,390; 2003 $7,390; 2004 $7,210; 2005 $6,950; 2006 $9,380; and 2007 $9,200.
    \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: 2001 $26,120; 2002 $28,280; 2003 $30,630; 2004 $31,080; 2005 $31,720; 2006 $33,130; and 2007 $34,090.
    Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method. All estimates have been rounded to
      the nearest $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.

    [[Page 102]]

                                                                                  Table 6-2.  CORPORATE AND INDIVIDUAL INCOME TAX ESTIMATES OF TAX EXPENDITURES
                                                                                                            (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     Corporations                                                                Individuals
                                                                                      ------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        2003-                                                                         2003-
                                                                                         2001     2002     2003     2004     2005     2006     2007     2007      2001     2002     2003      2004      2005      2006      2007      2007
    ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

                 National Defense
           1       Exclusion of benefits and allowances to armed forces personnel....  .......  .......  .......  .......  .......  .......  .......  ........    2,160    2,190     2,210     2,240     2,260     2,290     2,310    11,310

                 International affairs:
           2       Exclusion of income earned abroad by U.S. citizens................  .......  .......  .......  .......  .......  .......  .......  ........    2,450    2,540     2,660     2,690     2,760     2,810     3,170    14,090
           3       Exclusion of certain allowances for Federal employees abroad......  .......  .......  .......  .......  .......  .......  .......  ........      760      800       840       880       920       960     1,020     4,620
           4       Extraterritorial income exclusion.................................    4,490    4,820    5,150    5,510    5,890    6,290    6,730    29,570  .......  .......  ........  ........  ........  ........  ........  ........
           5       Inventory property sales source rules exception...................    1,400    1,470    1,540    1,620    1,700    1,790    1,880     8,530  .......  .......  ........  ........  ........  ........  ........  ........
           6       Deferral of income from controlled foreign corporations (normal       6,600    7,000    7,450    7,900    8,400    8,930    9,550    42,230  .......  .......  ........  ........  ........  ........  ........  ........
                    tax method)......................................................
           7       Deferred taxes for financial firms on certain income earned           1,300      550  .......  .......  .......  .......  .......         0  .......  .......  ........  ........  ........  ........  ........  ........
                    overseas.........................................................

                 General science, space, and technology:
           8       Expensing of research and experimentation expenditures (normal tax    1,980    1,750    2,330    2,820    3,330    3,830    4,080    16,390       40       30        50        60        70        80        80       340
                    method)..........................................................
           9       Credit for increasing research activities.........................    5,310    5,950    4,540    3,980    2,310      990      410    12,240       60       60        50        40        20  ........  ........       110

                 Energy:
          10       Expensing of exploration and development costs, fuels.............       40       50       60       70       70       80       80       360       10       10        10        20        20        20        20        90
          11       Excess of percentage over cost depletion, fuels...................      220      230      240      250      260      270      280     1,300       30       30        30        40        40        40        40       190
          12       Alternative fuel production credit................................      860      810      390      120      120      120      120       870       40       40        20        10        10        10        10        60
          13       Exception from passive loss limitation for working interests in     .......  .......  .......  .......  .......  .......  .......  ........       20       20        20        20        20        20        20       100
                    oil and gas properties...........................................
          14       Capital gains treatment of royalties on coal......................  .......  .......  .......  .......  .......  .......  .......  ........      100      100       110       120       120       130       140       620
          15       Exclusion of interest on energy facility bonds....................       20       20       20       30       30       30       30       140       70       70        80        90       100       110       120       500
          16       Enhanced oil recovery credit......................................      280      330      400      480      580      690      830     2,980       30       30        40        50        60        70        80       300
          17       New technology credit.............................................       60       80      100      100      100       90       90       480  .......  .......  ........  ........  ........  ........  ........  ........
          18       Alcohol fuel credits \1\..........................................       20       20       20       20       20       20       20       100       10       10        10        10        10        10        10        50
          19       Tax credit and deduction for clean-fuel burning vehicles..........       30       30       20        0      -20      -40      -40       -80       20       20        30        20        10       -10       -10        40
          20       Exclusion from income of conservation subsidies provided by public  .......  .......  .......  .......  .......  .......  .......  ........       70       70        70        70        70        70        60       340
                    utilities........................................................

                 Natural resources and environment:
          21       Expensing of exploration and development costs, nonfuel minerals..       10       10       10       10       10       10       10        50  .......  .......  ........  ........  ........  ........  ........  ........
          22       Excess of percentage over cost depletion, nonfuel minerals........      240      250      260      270      280      280      290     1,380       10       10        10        20        20        20        20        90
          23       Exclusion of interest on bonds for water, sewage, and hazardous         100      110      110      110      110      120      120       570      300      310       330       370       420       460       510     2,090
                    waste facilities.................................................
          24       Capital gains treatment of certain timber income..................  .......  .......  .......  .......  .......  .......  .......  ........      100      100       110       120       120       130       140       620
          25       Expensing of multiperiod timber growing costs.....................      240      240      250      260      260      270      280     1,320      120      120       120       120       130       130       130       630
          26       Tax incentives for preservation of historic structures............      170      180      190      200      210      220      230     1,050       10       20        20        20        20        20        20       100

                 Agriculture:
          27       Expensing of certain capital outlays..............................       20       20       20       20       20       20       20       100      150      150       150       150       150       150       150       750
          28       Expensing of certain multiperiod production costs.................       10       20       20       20       20       20       20       100      110      110       110       110       100       100       100       520
          29       Treatment of loans forgiven for solvent farmers...................  .......  .......  .......  .......  .......  .......  .......  ........       10       10        10        10        10        10        10        50
          30       Capital gains treatment of certain income.........................  .......  .......  .......  .......  .......  .......  .......  ........      990    1,040     1,100     1,160     1,220     1,290     1,360     6,130
          31       Income averaging for farmers......................................  .......  .......  .......  .......  .......  .......  .......  ........       70       70        70        70        80        80        80       380
          32       Deferral of gain on sale of farm refiners.........................       10       10       10       10       10       10       10        50  .......  .......  ........  ........  ........  ........  ........  ........

    [[Page 103]]

                 Commerce and housing:
                   Financial institutions and insurance:
          33        Exemption of credit union income.................................    1,000    1,070    1,150    1,230    1,320    1,420    1,530     6,650  .......  .......  ........  ........  ........  ........  ........  ........
          34        Excess bad debt reserves of financial institutions...............       60       50       30       20       10        0        0        60  .......  .......  ........  ........  ........  ........  ........  ........
          35        Exclusion of interest on life insurance savings..................    1,650    1,770    1,890    2,020    2,160    2,280    2,490    10,840   14,640   15,940    17,360    18,920    20,620    22,510    24,440   103,850
          36        Special alternative tax on small property and casualty insurance        10       10       10       10       10       10       10        50  .......  .......  ........  ........  ........  ........  ........  ........
                     companies.......................................................
          37        Tax exemption of certain insurance companies owned by tax-exempt       220      230      250      260      280      290      300     1,380  .......  .......  ........  ........  ........  ........  ........  ........
                     organizations...................................................
          38        Small life insurance company deduction...........................      100      100      100      100      100      100      100       500  .......  .......  ........  ........  ........  ........  ........  ........
                   Housing:
          39        Exclusion of interest on owner-occupied mortgage subsidy bonds...      200      210      210      220      230      230      240     1,130      600      620       660       740       820       910     1,000     4,130
          40        Exclusion of interest on rental housing bonds....................       40       40       40       50       50       50       50       240      120      130       140       150       170       190       210       860
          41        Deductibility of mortgage interest on owner-occupied homes.......  .......  .......  .......  .......  .......  .......  .......  ........   64,510   64,190    66,110    68,070    70,870    73,560    76,870   355,480
          42        Deductibility of State and local property tax on owner-occupied    .......  .......  .......  .......  .......  .......  .......  ........   22,410   22,680    23,580    23,210    20,330    16,300    14,410    97,830
                     homes...........................................................
          43        Deferral of income from post 1987 installment sales..............      270      270      280      290      290      300      300     1,460      770      780       800       810       830       840       860     4,140
          44        Capital gains exclusion on home sales............................  .......  .......  .......  .......  .......  .......  .......  ........   19,090   19,670    20,260    20,860    21,490    22,140    22,800   107,550
          45        Exception from passive loss rules for $25,000 of rental loss.....  .......  .......  .......  .......  .......  .......  .......  ........    4,800    4,400     4,070     3,780     3,530     3,290     3,090    17,760
          46        Credit for low-income housing investments........................    2,420    2,500    2,600    2,730    2,860    2,990    3,100    14,280      800      830       860       900       950       990     1,030     4,730
          47        Accelerated depreciation on rental housing (normal tax method)...      390      410      440      450      460      470      480     2,300    4,800    5,030     5,270     5,340     5,340     5,250     5,320    26,520
                   Commerce:
          48        Cancellation of indebtedness.....................................  .......  .......  .......  .......  .......  .......  .......  ........       30       30        30        40        40        40        40       190
          49        Exceptions from imputed interest rules...........................  .......  .......  .......  .......  .......  .......  .......  ........       80       80        80        80        80        80        80       400
          50        Capital gains (except agriculture, timber, iron ore, and coal)     .......  .......  .......  .......  .......  .......  .......  ........   67,800   61,810    60,200    56,990    56,180    50,670    49,880   273,920
                     (normal tax method).............................................
          51        Capital gains exclusion of small corporation stock...............  .......  .......  .......  .......  .......  .......  .......  ........       70      100       130       160       210       250       300     1,050
          52        Step-up basis of capital gains at death..........................  .......  .......  .......  .......  .......  .......  .......  ........   26,540   27,610    28,710    29,860    31,050    32,300    33,590   155,510
          53        Carryover basis of capital gains on gifts........................  .......  .......  .......  .......  .......  .......  .......  ........      530      600       680       760       900     1,080     1,130     4,550
          54        Ordinary income treatment of loss from small business corporation  .......  .......  .......  .......  .......  .......  .......  ........       40       40        40        50        50        50        50       240
                     stock sale......................................................
          55        Accelerated depreciation of buildings other than rental housing      2,690    2,620    2,450    2,180    1,990    2,050    2,310    10,980    1,850    1,940     1,790     1,780     1,810     2,110     2,570    10,060
                     (normal tax method).............................................
          56        Accelerated depreciation of machinery and equipment (normal tax     30,750   30,220   29,750   30,200   30,860   31,970   34,070   156,850    7,110    6,910     6,730     6,590     6,570     6,550     6,860    33,300
                     method).........................................................
          57        Expensing of certain small investments (normal tax method).......      530      470      460      460      450      490      570     2,430    1,140      960       960       930       910       990     1,150     4,940
          58        Amortization of start-up costs (normal tax method)...............       90      110      140      160      170      180      180       830       40       50        60        80        80        90        90       400
          59        Graduated corporation income tax rate (normal tax method)........    4,940    5,590    6,210    6,580    7,120    7,450    7,880    35,240  .......  .......  ........  ........  ........  ........  ........  ........
          60        Exclusion of interest on small issue bonds.......................       80       80       80       80       80       90       90       420      230      230       250       280       310       340       380     1,560

                 Transportation:
          61       Deferral of tax on shipping companies.............................       20       20       20       20       20       20       20       100  .......  .......  ........  ........  ........  ........  ........  ........

    [[Page 104]]

          62       Exclusion of reimbursed employee parking expenses.................  .......  .......  .......  .......  .......  .......  .......  ........    1,980    2,090     2,190     2,300     2,420     2,550     2,670    12,130
          63       Exclusion for employer-provided transit passes....................  .......  .......  .......  .......  .......  .......  .......  ........      220      280       360       410       470       540       600     2,380

                 Community and regional development:
          64       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)........................................................
          65       Exclusion of interest for airport, dock, and similar bonds........      160      160      170      170      180      180      190       890      470      480       510       580       640       710       790     3,230
          66       Exemption of certain mutuals' and cooperatives' income............       60       60       60       60       70       70       70       330  .......  .......  ........  ........  ........  ........  ........  ........
          67       Empowerment zones, Enterprise communities, and Renewal communities      100      220      300      300      320      350      390     1,660      280      510       830       870       960     1,060     1,190     4,910
          68       New markets tax credit............................................        0       20       50       70      110      150      210       590       10       70       140       220       320       460       620     1,760
          69       Expensing of environmental remediation costs......................       70       80       80       20      -20      -10      -10        60       10       20        20  ........  ........  ........  ........        20

                 Education, training, employment, and social services:
                   Education:
          70        Exclusion of scholarship and fellowship income (normal tax         .......  .......  .......  .......  .......  .......  .......  ........    1,210    1,200     1,210     1,240     1,330     1,380     1,390     6,550
                     method).........................................................
          71        HOPE tax credit..................................................  .......  .......  .......  .......  .......  .......  .......  ........    4,130    4,110     3,520     2,880     2,930     2,730     2,900    14,960
          72        Lifetime Learning tax credit.....................................  .......  .......  .......  .......  .......  .......  .......  ........    2,370    2,290     2,360     3,140     2,980     2,740     2,960    14,180
          73        Education Individual Retirement Accounts.........................  .......  .......  .......  .......  .......  .......  .......  ........       30       50        80       130       220       330       470     1,230
          74        Deductibility of student-loan interest...........................  .......  .......  .......  .......  .......  .......  .......  ........      390      450       640       660       680       700       720     3,400
          75        Deduction for higher education expenses..........................  .......  .......  .......  .......  .......  .......  .......  ........        0      430     2,290     2,960     3,710     3,010         0    11,970
          76        State prepaid tuition plans......................................  .......  .......  .......  .......  .......  .......  .......  ........      190      270       340       400       460       530       590     2,320
          77        Exclusion of interest on student-loan bonds......................       60       60       60       60       60       60       70       310      170      170       180       200       230       250       280     1,140
          78        Exclusion of interest on bonds for private nonprofit educational       140      140      140      150      150      150      160       750      400      410       440       490       550       610       670     2,760
                     facilities......................................................
          79        Credit for holders of zone academy bonds.........................       30       50       70       80       90       90       90       420  .......  .......  ........  ........  ........  ........  ........  ........
          80        Exclusion of interest on savings bonds redeemed to finance         .......  .......  .......  .......  .......  .......  .......  ........       10       20        20        20        20        20        20       100
                     educational expenses............................................
          81        Parental personal exemption for students age 19 or over..........  .......  .......  .......  .......  .......  .......  .......  ........    1,010    1,070     1,120     1,170     1,230     1,280     1,340     6,140
          82        Deductibility of charitable contributions (education)............      590      680      770      830      840      900      950     4,290    3,240    3,300     3,430     3,610     3,760     3,940     4,080    18,820
          83        Exclusion of employer-provided educational assistance............  .......  .......  .......  .......  .......  .......  .......  ........      260      410       500       530       560       590       620     2,800
                   Training, employment, and social services:
          84        Work opportunity tax credit......................................      260      190      120       50       20       10        0       200       40       40        20        10        10         0         0        40
          85        Welfare-to-work tax credit.......................................       80       60       30       20       10        0        0        60       10       10        10         0         0         0         0        10
          86        Employer provided child care exclusion...........................  .......  .......  .......  .......  .......  .......  .......  ........      720      740       770       810       930     1,020     1,080     4,610
          87        Employer-provided child care credit..............................        0       40       90      130      150      150      160       680  .......  .......  ........  ........  ........  ........  ........  ........
          88        Assistance for adopted foster children...........................  .......  .......  .......  .......  .......  .......  .......  ........      190      220       250       260       270       280       290     1,350
          89        Adoption credit and exclusion....................................  .......  .......  .......  .......  .......  .......  .......  ........      130      140       220       450       500       540       560     2,270
          90        Exclusion of employee meals and lodging (other than military)....  .......  .......  .......  .......  .......  .......  .......  ........      710      740       780       810       850       890       930     4,260
          91        Child credit \2\.................................................  .......  .......  .......  .......  .......  .......  .......  ........   19,840   19,760    19,680    19,550    20,550    21,530    21,240   102,550
          92        Credit for child and dependent care expenses.....................  .......  .......  .......  .......  .......  .......  .......  ........    2,670    2,610     2,670     2,960     2,700     2,150     1,920    12,400
          93        Credit for disabled access expenditures..........................       10       10       10       10       20       20       20        80       40       40        40        40        40        40        40       200
          94        Deductibility of charitable contributions, other than education        730      850      950    1,040    1,040    1,110    1,180     5,320   29,420   29,960    31,130    32,790    34,150    35,780    37,110   170,960
                     and health......................................................
          95        Exclusion of certain foster care payments........................  .......  .......  .......  .......  .......  .......  .......  ........      500      510       520       530       540       570       610     2,770

    [[Page 105]]

          96        Exclusion of parsonage allowances................................  .......  .......  .......  .......  .......  .......  .......  ........      350      370       400       420       450       470       490     2,230

                 Health:
          97       Exclusion of employer contributions for medical insurance premiums  .......  .......  .......  .......  .......  .......  .......  ........   82,800   90,910    99,260   106,940   115,380   124,050   134,960   580,590
                    and medical care.................................................
          98       Self-employed medical insurance premiums..........................  .......  .......  .......  .......  .......  .......  .......  ........    1,520    1,730     2,420     3,570     3,870     4,170     4,430    18,460
          99       Workers' compensation insurance premiums..........................  .......  .......  .......  .......  .......  .......  .......  ........    4,730    4,870     5,080     5,230     5,410     5,570     5,790    27,080
         100       Medical Savings Accounts..........................................  .......  .......  .......  .......  .......  .......  .......  ........       20       20        20        20        20        20        20       100
         101       Deductibility of medical expenses.................................  .......  .......  .......  .......  .......  .......  .......  ........    4,990    5,260     5,530     5,840     6,280     6,600     7,100    31,350
         102       Exclusion of interest on hospital construction bonds..............      280      290      290      300      310      320      320     1,540      820      840       900     1,010     1,130     1,250     1,380     5,670
         103       Deductibility of charitable contributions (health)................      710      820      920    1,010    1,010    1,080    1,150     5,170    3,300    3,360     3,500     3,680     3,840     4,020     4,170    19,210
         104       Tax credit for orphan drug research...............................      140      150      170      190      220      240      270     1,090  .......  .......  ........  ........  ........  ........  ........  ........
         105       Special Blue Cross/Blue Shield deduction..........................      270      300      340      310      300      270      300     1,520  .......  .......  ........  ........  ........  ........  ........  ........

                 Income security:
         106       Exclusion of railroad retirement system benefits..................  .......  .......  .......  .......  .......  .......  .......  ........      380      390       400       400       400       400       400     2,000
         107       Exclusion of workers' compensation benefits.......................  .......  .......  .......  .......  .......  .......  .......  ........    5,560    5,810     6,070     6,320     6,600     6,900     7,200    33,090
         108       Exclusion of public assistance benefits (normal tax method).......  .......  .......  .......  .......  .......  .......  .......  ........      370      380       400       410       430       450       470     2,160
         109       Exclusion of special benefits for disabled coal miners............  .......  .......  .......  .......  .......  .......  .......  ........       70       70        60        60        60        50        50       280
         110       Exclusion of military disability pensions.........................  .......  .......  .......  .......  .......  .......  .......  ........      110      120       120       120       130       130       140       640
                   Net exclusion of pension contributions and earnings:
         111        Employer plans...................................................  .......  .......  .......  .......  .......  .......  .......  ........   42,070   48,070    53,080    54,500    55,630    58,980    63,320   285,510
         112        401(k) plans.....................................................  .......  .......  .......  .......  .......  .......  .......  ........   44,080   52,960    59,510    62,770    65,290    69,230    73,320   330,120
         113        Individual Retirement Accounts...................................  .......  .......  .......  .......  .......  .......  .......  ........   18,680   18,090    18,660    19,050    18,930    19,230    18,330    94,200
         114        Low and moderate income savers credit............................  .......  .......  .......  .......  .......  .......  .......  ........        0      550     1,960     1,940     1,900     1,800     1,280     8,880
         115        Keogh plans......................................................  .......  .......  .......  .......  .......  .......  .......  ........    6,160    6,520     6,770     7,040     7,250     7,490     7,730    36,280
                   Exclusion of other employee benefits:
         116        Premiums on group term life insurance............................  .......  .......  .......  .......  .......  .......  .......  ........    1,750    1,780     1,800     1,830     1,860     1,890     1,920     9,300
         117        Premiums on accident and disability insurance....................  .......  .......  .......  .......  .......  .......  .......  ........      210      220       230       240       250       260       270     1,250
         118       Small business retirement plan credit.............................        0       10       30       50       70       80       90       320        0       10        20        40        50        50        60       220
         119       Income of trusts to finance supplementary unemployment benefits...       20       20       30       30       30       30       30       150  .......  .......  ........  ........  ........  ........  ........  ........
         120       Special ESOP rules................................................      980    1,020    1,080    1,140    1,200    1,260    1,330     6,010      310      320       340       350       370       380       400     1,840
         121       Additional deduction for the blind................................  .......  .......  .......  .......  .......  .......  .......  ........       40       40        40        40        40        40        40       200
         122       Additional deduction for the elderly..............................  .......  .......  .......  .......  .......  .......  .......  ........    1,970    1,890     1,950     2,060     2,100     2,150     2,050    10,310
         123       Tax credit for the elderly and disabled...........................  .......  .......  .......  .......  .......  .......  .......  ........       30       30        30        30        30        30        30       150
         124       Deductibility of casualty losses..................................  .......  .......  .......  .......  .......  .......  .......  ........      210      250       310       360       410       450       490     2,020
         125       Earned income tax credit \3\......................................  .......  .......  .......  .......  .......  .......  .......  ........    4,940    4,370     4,800     4,930     5,100     5,180     5,390    25,400

                 Social Security:
                   Exclusion of social security benefits:
         126        Social Security benefits for retired workers.....................  .......  .......  .......  .......  .......  .......  .......  ........   17,830   18,000    18,180    18,560    18,850    19,720    20,890    96,200
         127        Social Security benefits for disabled............................  .......  .......  .......  .......  .......  .......  .......  ........    2,690    2,930     3,240     3,630     4,020     4,470     5,020    20,380
         128        Social Security benefits for dependents and survivors............  .......  .......  .......  .......  .......  .......  .......  ........    3,720    3,870     4,060     4,320     4,560     4,820     5,170    22,930

                 Veterans benefits and services:
         129       Exclusion of veterans death benefits and disability compensation..  .......  .......  .......  .......  .......  .......  .......  ........    3,150    3,190     3,300     3,490     3,680     3,870     4,080    18,420
         130       Exclusion of veterans pensions....................................  .......  .......  .......  .......  .......  .......  .......  ........       70       80        80        80        90        90       100       440
         131       Exclusion of GI bill benefits.....................................  .......  .......  .......  .......  .......  .......  .......  ........       90       90        90       100       100       110       110       510
         132       Exclusion of interest on veterans housing bonds...................       10       10       10       10       10       10       10        50       30       30        30        30        40        40        50       190

    [[Page 106]]

                 General purpose fiscal assistance:
         133       Exclusion of interest on public purpose State and local bonds.....    5,860    6,010    6,160    6,310    6,470    6,630    6,800    32,370   17,240   17,670    18,110    18,570    19,030    19,510    20,000    95,220
         134       Deductibility of nonbusiness state and local taxes other than on    .......  .......  .......  .......  .......  .......  .......  ........   45,520   46,160    48,150    47,730    43,270    34,820    30,890   204,860
                    owner-occupied homes.............................................
         135       Tax credit for corporations receiving income from doing business      2,190    2,240    2,240    2,240    2,200    1,300        0     7,980  .......  .......  ........  ........  ........  ........  ........  ........
                    in U.S. possessions..............................................

                 Interest:
         136       Deferral of interest on U.S. savings bonds........................  .......  .......  .......  .......  .......  .......  .......  ........      290      300       310       330       330       350       360     1,680

                 Addendum: Aid to State and local governments:
                   Deductibility of:
                    Property taxes on owner-occupied homes...........................  .......  .......  .......  .......  .......  .......  .......  ........   22,410   22,680    23,580    23,210    20,330    16,300    14,410    97,830
                    Nonbusiness State and local taxes other than on owner-occupied     .......  .......  .......  .......  .......  .......  .......  ........   45,520   46,160    48,150    47,730    43,270    34,820    30,890   204,860
                     homes...........................................................
                   Exclusion of interest on State and local bonds for:
                    Public purposes..................................................    5,860    6,010    6,160    6,310    6,470    6,630    6,800    32,370   17,240   17,670    18,110    18,570    19,030    19,510    20,000    95,220
                    Energy facilities................................................       20       20       20       30       30       30       30       140       70       70        80        90       100       110       120       500
                    Water, sewage, and hazardous waste disposal facilities...........      100      110      110      110      110      120      120       570      300      310       330       370       420       460       510     2,090
                    Small-issues.....................................................       80       80       80       80       80       90       90       420      230      230       250       280       310       340       380     1,560
                    Owner-occupied mortgage subsidies................................      200      210      210      220      230      230      240     1,130      600      620       660       740       820       910     1,000     4,130
                    Rental housing...................................................       40       40       40       50       50       50       50       240      120      130       140       150       170       190       210       860
                    Airports, docks, and similar facilities..........................      160      160      170      170      180      180      190       890      470      480       510       580       640       710       790     3,230
                    Student loans....................................................       60       60       60       60       60       60       70       310      170      170       180       200       230       250       280     1,140
                    Private nonprofit educational facilities.........................      140      140      140      150      150      150      160       750      400      410       440       490       550       610       670     2,760
                    Hospital construction............................................      280      290      290      300      310      320      320     1,540      820      840       900     1,010     1,130     1,250     1,380     5,670
                    Veterans' housing................................................       10       10       10       10       10       10       10        50       30       30        30        30        40        40        50       190
                   Credit for holders of zone academy bonds..........................       30       50       70       80       90       90       90       420  .......  .......  ........  ........  ........  ........  ........  ........
    ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    \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 tax reasons,
      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: 2001 $990; 2002 $1,020; 2003 $1,050; 2004 $1,080; 2005 $1,080; 2006
      $1,100; and 2007 $1,120.
    \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: 2001 $980; 2002 $7,390; 2003 $7,390; 2004 $7,210; 2005 $6,950; 2006
      $9,380; and 2007 $9,200.
    \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: 2001 $26,120; 2002 $28,280; 2003 $30,630; 2004 $31,080; 2005
      $31,720; 2006 $33,130; and 2007 $34,090.

    Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method. All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in each
      year are not included in the table.

    [[Page 107]]

                    Table 6-3.  INCOME TAX EXPENDITURES RANKED BY TOTAL 2003 PROJECTED REVENUE EFFECT
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                        Provision                                         2003          2003-2007
    ----------------------------------------------------------------------------------------------------------------
    Exclusion of employer contributions for medical insurance premiums and medical      99,260          580,590
     care.........................................................................
    Deductibility of mortgage interest on owner-occupied homes....................      66,110          355,480
    Capital gains (except agriculture, timber, iron ore, and coal) (normal tax          60,200          273,920
     method)......................................................................
    Net exclusion of pension contributions and earnings: 401(k) plans.............      59,510          330,120
    Net exclusion of pension contributions and earnings: Employer plans...........      53,080          285,510
    Deductibility of nonbusiness state and local taxes other than on owner-             48,150          204,860
     occupied homes...............................................................
    Accelerated depreciation of machinery and equipment (normal tax method).......      36,480          190,150
    Deductibility of charitable contributions, other than education and health....      32,080          176,280
    Step-up basis of capital gains at death.......................................      28,710          155,510
    Exclusion of interest on public purpose State and local bonds.................      24,270          127,590
    Deductibility of State and local property tax on owner-occupied homes.........      23,580           97,830
    Capital gains exclusion on home sales.........................................      20,260          107,550
    Child credit..................................................................      19,680          102,550
    Exclusion of interest on life insurance savings...............................      19,250          114,690
    Net exclusion of pension contributions and earnings: Individual Retirement          18,660           94,200
     Accounts.....................................................................
    Exclusion of Social Security benefits for retired workers.....................      18,180           96,200
    Deferral of income from controlled foreign corporations (normal tax method)...       7,450           42,230
    Net exclusion of pension contributions and earnings: Keogh plans..............       6,770           36,280
    Graduated corporation income tax rate (normal tax method).....................       6,210           35,240
    Exclusion of workers' compensation benefits...................................       6,070           33,090
    Accelerated depreciation on rental housing (normal tax method)................       5,710           28,820
    Deductibility of medical expenses.............................................       5,530           31,350
    Extraterritorial income exclusion.............................................       5,150           29,570
    Workers' compensation insurance premiums......................................       5,080           27,080
    Earned income tax credit......................................................       4,800           25,400
    Credit for increasing research activities.....................................       4,590           12,350
    Deductibility of charitable contributions (health)............................       4,420           24,380
    Accelerated depreciation of buildings other than rental housing (normal tax          4,240           21,040
     method)......................................................................
    Deductibility of charitable contributions (education).........................       4,200           23,110
    Exception from passive loss rules for $25,000 of rental loss..................       4,070           17,760
    Exclusion of Social Security benefits for dependents and survivors............       4,060           22,930
    HOPE tax credit...............................................................       3,520           14,960
    Credit for low-income housing investments.....................................       3,460           19,010
    Exclusion of veterans death benefits and disability compensation..............       3,300           18,420
    Exclusion of Social Security benefits for disabled............................       3,240           20,380
    Credit for child and dependent care expenses..................................       2,670           12,400
    Exclusion of income earned abroad by U.S. citizens............................       2,660           14,090
    Self-employed medical insurance premiums......................................       2,420           18,460
    Expensing of research and experimentation expenditures (normal tax method)....       2,380           16,730
    Lifetime Learning tax credit..................................................       2,360           14,180
    Deduction for higher education expenses.......................................       2,290           11,970
    Tax credit for corporations receiving income from doing business in U.S.             2,240            7,980
     possessions..................................................................
    Exclusion of benefits and allowances to armed forces personnel................       2,210           11,310
    Exclusion of reimbursed employee parking expenses.............................       2,190           12,130
    Net exclusion of pension contributions and earnings: Low and moderate income         1,960            8,880
     savers credit................................................................
    Additional deduction for the elderly..........................................       1,950           10,310
    Net exclusion of pension contributions and earnings: Premiums on group term          1,800            9,300
     life insurance...............................................................
    Inventory property sales source rules exception...............................       1,540            8,530
    Special ESOP rules............................................................       1,420            7,850
    Expensing of certain small investments (normal tax method)....................       1,420            7,370
    Exclusion of scholarship and fellowship income (normal tax method)............       1,210            6,550
    Exclusion of interest on hospital construction bonds..........................       1,190            7,210
    Exemption of credit union income..............................................       1,150            6,650
    Empowerment zones, Enterprise communities, and Renewal communities............       1,130            6,570
    Parental personal exemption for students age 19 or over.......................       1,120            6,140
    Capital gains treatment of certain income.....................................       1,100            6,130
    Deferral of income from post 1987 installment sales...........................       1,080            5,600
    Exclusion of interest on owner-occupied mortgage subsidy bonds................         870            5,260
    Exclusion of certain allowances for Federal employees abroad..................         840            4,620
    Exclusion of employee meals and lodging (other than military).................         780            4,260
    Employer provided child care exclusion........................................         770            4,610
    Carryover basis of capital gains on gifts.....................................         680            4,550
    Exclusion of interest for airport, dock, and similar bonds....................         680            4,120
    Deductibility of student-loan interest........................................         640            3,400
    Exclusion of interest on bonds for private nonprofit educational facilities...         580            3,510
    Exclusion of certain foster care payments.....................................         520            2,770
    Exclusion of employer-provided educational assistance.........................         500            2,800
    Enhanced oil recovery credit..................................................         440            3,280
    Exclusion of interest on bonds for water, sewage, and hazardous waste                  440            2,660
     facilities...................................................................

    [[Page 108]]

    Alternative fuel production credit............................................         410              930
    Exclusion of parsonage allowances.............................................         400            2,230
    Exclusion of public assistance benefits (normal tax method)...................         400            2,160
    Exclusion of railroad retirement system benefits..............................         400            2,000
    Expensing of multiperiod timber growing costs.................................         370            1,950
    Exclusion for employer-provided transit passes................................         360            2,380
    State prepaid tuition plans...................................................         340            2,320
    Special Blue Cross/Blue Shield deduction......................................         340            1,520
    Exclusion of interest on small issue bonds....................................         330            1,980
    Deductibility of casualty losses..............................................         310            2,020
    Deferral of interest on U.S. savings bonds....................................         310            1,680
    Excess of percentage over cost depletion, fuels...............................         270            1,490
    Excess of percentage over cost depletion, nonfuel minerals....................         270            1,470
    Tax exemption of certain insurance companies owned by tax-exempt organizations         250            1,380
    Assistance for adopted foster children........................................         250            1,350
    Exclusion of interest on student-loan bonds...................................         240            1,450
    Net exclusion of pension contributions and earnings: Premiums on accident and          230            1,250
     disability insurance.........................................................
    Adoption credit and exclusion.................................................         220            2,270
    Tax incentives for preservation of historic structures........................         210            1,150
    Amortization of start-up costs (normal tax method)............................         200            1,230
    New markets tax credit........................................................         190            2,350
    Exclusion of interest on rental housing bonds.................................         180            1,100
    Tax credit for orphan drug research...........................................         170            1,090
    Expensing of certain capital outlays..........................................         170              850
    Work opportunity tax credit...................................................         140              240
    Capital gains exclusion of small corporation stock............................         130            1,050
    Expensing of certain multiperiod production costs.............................         130              620
    Exclusion of military disability pensions.....................................         120              640
    Capital gains treatment of royalties on coal..................................         110              620
    Capital gains treatment of certain timber income..............................         110              620
    Exclusion of interest on energy facility bonds................................         100              640
    Small life insurance company deduction........................................         100              500
    New technology credit.........................................................         100              480
    Expensing of environmental remediation costs..................................         100               80
    Employer-provided child care credit...........................................          90              590
    Exclusion of GI bill benefits.................................................          90              510
    Education Individual Retirement Accounts......................................          80            1,230
    Exclusion of veterans pensions................................................          80              440
    Exceptions from imputed interest rules........................................          80              400
    Expensing of exploration and development costs, fuels.........................          70              450
    Credit for holders of zone academy bonds......................................          70              420
    Income averaging for farmers..................................................          70              380
    Exclusion from income of conservation subsidies provided by public utilities..          70              340
    Exemption of certain mutuals' and cooperatives' income........................          60              330
    Exclusion of special benefits for disabled coal miners........................          60              280
    Small business retirement plan credit.........................................          50              540
    Credit for disabled access expenditures.......................................          50              280
    Tax credit and deduction for clean-fuel burning vehicles......................          50              -40
    Ordinary income treatment of loss from small business corporation stock sale..          40              240
    Exclusion of interest on veterans housing bonds...............................          40              240
    Additional deduction for the blind............................................          40              200
    Welfare-to-work tax credit....................................................          40               70
    Cancellation of indebtedness..................................................          30              190
    Alcohol fuel credits..........................................................          30              150
    Investment credit for rehabilitation of structures (other than historic)......          30              150
    Income of trusts to finance supplementary unemployment benefits...............          30              150
    Tax credit for the elderly and disabled.......................................          30              150
    Excess bad debt reserves of financial institutions............................          30               60
    Exception from passive loss limitation for working interests in oil and gas             20              100
     properties...................................................................
    Deferral of tax on shipping companies.........................................          20              100
    Exclusion of interest on savings bonds redeemed to finance educational                  20              100
     expenses.....................................................................
    Medical Savings Accounts......................................................          20              100
    Expensing of exploration and development costs, nonfuel minerals..............          10               50
    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
    Deferred taxes for financial firms on certain income earned overseas..........           0                0
    ----------------------------------------------------------------------------------------------------------------

    [[Page 109]]

                Table 6-4.  PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR ACTIVITY IN CALENDAR YEAR 2001
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                                           Present
                                                       Provision                                          Value of
                                                                                                        Revenue Loss
    ----------------------------------------------------------------------------------------------------------------
           1     Deferral of income from controlled foreign corporations (normal tax method)..........     6,760
           2     Deferred taxes for financial firms on income earned overseas.........................     1,170
           3     Expensing of research and experimentation expenditures (normal tax method)...........     1,700
           4     Expensing of exploration and development costs - fuels...............................       130
           5     Expensing of exploration and development costs - nonfuels............................         0
           6     Expensing of multiperiod timber growing costs........................................       220
           7     Expensing of certain multiperiod production costs - agriculture......................       230
           8     Expensing of certain capital outlays - agriculture...................................       260
           9     Deferral of income on life insurance and annuity contracts...........................    22,920
          10     Accelerated depreciation of rental housing (normal tax method).......................     4,750
          11     Accelerated depreciation of buildings other than rental housing (normal tax method)..       540
          12     Accelerated depreciation of machinery and equipment (normal tax method)..............    31,210
          13     Expensing of certain small investments (normal tax method)...........................       990
          14     Amortization of start-up costs (normal tax method)...................................        20
          15     Deferral of tax on shipping companies................................................        20
          16     Credit for holders of zone academy bonds.............................................       120
          17     Credit for low-income housing investments............................................     2,850
          18     Deferral for state prepaid tuition plans.............................................       190
          19     Exclusion of pension contributions - employer plans..................................    97,290
          20     Exclusion of 401(k) contributions....................................................    69,980
          21     Exclusion of IRA contributions and earnings..........................................     6,090
          22     Exclusion of contributions and earnings for Keogh plans..............................     9,780
          23     Exclusion of interest on public-purpose bonds........................................    20,730
          24     Exclusion of interest on non-public purpose bonds....................................     5,560
          25     Deferral of interest on U.S. savings bonds...........................................       330
    ----------------------------------------------------------------------------------------------------------------

                               Outlay Equivalents

      The concept of ``outlay equivalents'' is another theoretical measure
    of the budget effect of tax expenditures. It is the amount of budget
    outlays 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 a tax expenditure to be compared
    with a direct Federal outlay on a more even footing. Outlay equivalents
    are reported in Table 6-5.

                                         Table 6-5.  OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX
                                                                    (In millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                            Outlay Equivalents
                                                                            --------------------------------------------------------------------------------
                                                                               2001      2002      2003      2004      2005      2006      2007    2003-2007
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                 National Defense
           1       Exclusion of benefits and allowances to armed forces         2,510     2,540     2,570     2,600     2,620     2,650     2,680    13,120
                    personnel..............................................

                 International affairs:
           2       Exclusion of income earned abroad by U.S. citizens......     3,270     3,380     3,540     3,570     3,670     3,720     4,210    18,710
           3       Exclusion of certain allowances for Federal employees        1,020     1,060     1,130     1,170     1,230     1,270     1,350     6,150
                    abroad.................................................
           4       Extraterritorial income exclusion.......................     6,910     7,410     7,930     8,470     9,060     9,680    10,350    45,490
           5       Inventory property sales source rules exception.........     2,150     2,260     2,370     2,490     2,620     2,750     2,890    13,120
           6       Deferral of income from controlled foreign corporations      6,600     7,000     7,450     7,900     8,400     8,930     9,550    42,230
                    (normal tax method)....................................
           7       Deferred taxes for financial firms on certain income         1,300       550  ........  ........  ........  ........  ........         0
                    earned overseas........................................
                 General science, space, and technology:
           8       Expensing of research and experimentation expenditures       2,020     1,780     2,380     2,880     3,400     3,910     4,160    16,730
                    (normal tax method)....................................
           9       Credit for increasing research activities...............     8,270     9,240     7,060     6,190     3,580     1,530       640    18,990
                 Energy:
          10       Expensing of exploration and development costs, fuels...        80        80       100       120       120       130       130       600
          11       Excess of percentage over cost depletion, fuels.........       290       300       310       320       340       340       360     1,670
          12       Alternative fuel production credit......................     1,210     1,130       540       170       170       170       170     1,220
          13       Exception from passive loss limitation for working              20        20        20        20        20        20        20       100
                    interests in oil and gas properties....................
          14       Capital gains treatment of royalties on coal............       130       140       150       150       160       170       180       810
          15       Exclusion of interest on energy facility bonds..........       130       130       150       170       180       200       210     1,170
          16       Enhanced oil recovery credit............................       370       440       530       640       770       920     1,110     3,970
          17       New technology credit...................................        90       130       150       150       150       150       150       750
          18       Alcohol fuel credits \1\................................        30        30        30        30        30        30        30       150
          19       Tax credit and deduction for clean-fuel burning vehicles        70        70        70        30       -20       -60       -60       -40
          20       Exclusion from income of conservation subsidies provided        90        90        90        90        90        90        90       450
                    by public utilities....................................

    [[Page 110]]

                 Natural resources and environment:
          21       Expensing of exploration and development costs, nonfuel         10        10        10        10        10        10        10        50
                    minerals...............................................
          22       Excess of percentage over cost depletion, nonfuel              340       360       370       380       380       400       410     1,940
                    minerals...............................................
          23       Exclusion of interest on bonds for water, sewage, and          570       600       630       690       760       840       910     3,830
                    hazardous waste facilities.............................
          24       Capital gains treatment of certain timber income........       130       140       150       150       160       170       180       810
          25       Expensing of multiperiod timber growing costs...........       460       470       480       500       510       520       540     2,550
          26       Tax incentives for preservation of historic structures..       190       200       210       220       230       240       250     1,150
                 Agriculture:
          27       Expensing of certain capital outlays....................       210       210       210       210       210       210       210     1,050
          28       Expensing of certain multiperiod production costs.......       150       160       160       150       150       140       140       740
          29       Treatment of loans forgiven for solvent farmers.........        10        10        10        10        10        10        10        50
          30       Capital gains treatment of certain income...............     1,320     1,380     1,460     1,550     1,630     1,720     1,810     8,170
          31       Income averaging for farmers............................        80        90        90        90        90       100       100       470
          32       Deferral of gain on sale of farm refiners...............        10        10        10        10        10        10        10        50
                 Commerce and housing:
                   Financial institutions and insurance:
          33        Exemption of credit union income.......................     1,330     1,430     1,530     1,640     1,770     1,890     2,030     8,860
          34        Excess bad debt reserves of financial institutions.....        80        70        40        30        10         0         0        80
          35        Exclusion of interest on life insurance savings........    16,290    17,710    19,250    20,940    22,780    24,790    26,930   114,690
          36        Special alternative tax on small property and casualty         10        10        10        10        10        10        10        50
                     insurance companies...................................
          37        Tax exemption of certain insurance companies owned by         300       310       340       350       380       390       410     1,870
                     tax-exempt organizations..............................
          38        Small life insurance company deduction.................       130       130       130       130       130       130       130       650
                   Housing:
          39        Exclusion of interest on owner-occupied mortgage            1,150     1,190     1,250     1,380     1,510     1,640     1,780     7,560
                     subsidy bonds.........................................
          40        Exclusion of interest on rental housing bonds..........       230       250       260       290       320       350       370     1,590
          41        Deductibility of mortgage interest on owner-occupied       64,510    64,190    66,110    68,070    70,870    73,560    76,870   355,480
                     homes.................................................
          42        Deductibility of State and local property tax on owner-    22,410    22,680    23,580    23,210    20,330    16,300    14,410    97,830
                     occupied homes........................................
          43        Deferral of income from post 1987 installment sales....     1,020     1,040     1,060     1,080     1,100     1,120     1,140     5,500
          44        Capital gains exclusion on home sales..................    23,870    24,580    25,320    26,080    26,860    27,670    28,500   134,430
          45        Exception from passive loss rules for $25,000 of rental     4,800     4,400     4,070     3,780     3,530     3,290     3,090    17,760
                     loss..................................................
          46        Credit for low-income housing investments..............     4,360     4,510     4,700     4,930     5,170     5,400     5,610    25,810
          47        Accelerated depreciation on rental housing (normal tax      5,190     5,440     5,710     5,790     5,800     5,720     5,800    28,820
                     method)...............................................
                   Commerce:
          48        Cancellation of indebtedness...........................        30        30        30        40        40        40        40       190
          49        Exceptions from imputed interest rules.................        80        80        80        80        80        80        80       400
          50        Capital gains (except agriculture, timber, iron ore,       90,400    82,420    80,260    75,980    74,910    67,560    66,510   365,220
                     and coal) (normal tax method).........................
          51        Capital gains exclusion of small corporation stock.....        90       130       170       220       270       340       400     1,400
          52        Step-up basis of capital gains at death................    35,390    36,810    38,280    39,810    41,400    43,060    44,780   207,330
          53        Carryover basis of capital gains on gifts..............       530       600       680       760       900     1,080     1,130     4,550
          54        Ordinary income treatment of loss from small business          50        50        50        60        60        60        60       290
                     corporation stock sale................................
          55        Accelerated depreciation of buildings other than rental     4,540     4,560     4,240     3,960     3,800     4,160     4,880    21,040
                     housing (normal tax method)...........................
          56        Accelerated depreciation of machinery and equipment        37,860    37,130    36,480    36,790    37,430    38,520    40,930   190,150
                     (normal tax method)...................................
          57        Expensing of certain small investments (normal tax          1,670     1,430     1,420     1,390     1,360     1,480     1,720     7,370
                     method)...............................................
          58        Amortization of start-up costs (normal tax method).....       130       160       200       240       250       270       270     1,230
          59        Graduated corporation income tax rate (normal tax           7,590     8,590     9,560    10,130    10,950    11,460    12,130    54,230
                     method)...............................................
          60        Exclusion of interest on small issue bonds.............       440       440       470       520       560       610       670     2,830
                 Transportation:
          61       Deferral of tax on shipping companies...................        20        20        20        20        20        20        20       100
          62       Exclusion of reimbursed employee parking expenses.......     2,560     2,690     2,830     2,970     3,130     3,280     3,450    15,660
          63       Exclusion for employer-provided transit passes..........       310       390       500       570       660       750       840     3,320
                 Community and regional development:
          64       Investment credit for rehabilitation of structures              20        30        30        30        30        30        30       150
                    (other than historic)..................................
          65       Exclusion of interest for airport, dock, and similar           900       920       980     1,080     1,180     1,280     1,400     5,920
                    bonds..................................................
          66       Exemption of certain mutuals' and cooperatives' income..        60        60        60        60        70        70        70       330
          67       Empowerment zones and enterprise communities............       380       730     1,120     1,170     1,280     1,410     1,580     6,560
          68       New markets tax credit..................................        20        90       190       300       420       610       830     2,350
          69       Expensing of environmental remediation costs............       110       120       130        40       -20       -20       -20       110
                 Education, training, employment, and social services:
                   Education:
          70        Exclusion of scholarship and fellowship income (normal      1,330     1,320     1,330     1,360     1,460     1,520     1,530     7,200
                     tax method)...........................................
          71        HOPE tax credit........................................     5,300     5,270     4,510     3,690     3,760     3,500     3,720    19,180
          72        Lifetime Learning tax credit...........................     3,030     2,940     3,030     4,020     3,830     3,520     3,800    18,200
          73        Education Individual Retirement Accounts...............        40        60        90       150       260       390       550     1,440
          74        Deductibility of student-loan interest.................       460       540       760       790       810       840       850     4,050
          75        Deduction for higher education expenses................         0       560     2,940     3,790     4,760     3,860         0    15,350
          76        State prepaid tuition plans............................       250       340       430       510       590       680       760     2,970
          77        Exclusion of interest on student-loan bonds............       330       330       340       370       410       440       510     2,070
          78        Exclusion of interest on bonds for private nonprofit          770       780       830       920     1,010     1,090     1,190     5,040
                     educational facilities................................

    [[Page 111]]

          79        Credit for holders of zone academy bonds...............        40        70       100       120       120       120       120       580
          80        Exclusion of interest on savings bonds redeemed to             10        20        20        20        20        20        20       100
                     finance educational expenses..........................
          81        Parental personal exemption for students age 19 or over     1,120     1,180     1,250     1,300     1,360     1,420     1,480     6,810
          82        Deductibility of charitable contributions (education)..     5,420     5,610     5,910     6,260     6,460     6,800     7,070    32,500
          83        Exclusion of employer-provided educational assistance..       320       510       620       660       690       730       770     3,470
                   Training, employment, and social services:
          84        Work opportunity tax credit............................       300       230       140        60        30        10         0       240
          85        Welfare-to-work tax credit.............................        90        70        40        20        10         0         0        70
          86        Exclusion of employer provided child care..............       950       990     1,020     1,080     1,240     1,360     1,450     6,150
          87        Employer-provided child care...........................         0        60       120       170       190       210       220       790
          88        Assistance for adopted foster children.................       220       250       280       290       300       310       320     1,500
          89        Adoption credit and exclusion..........................       160       180       280       570       640       690       710     2,890
          90        Exclusion of employee meals and lodging (other than           870       910       950       990     1,030     1,080     1,130     5,180
                     military).............................................
          91        Child credit \2\.......................................    26,460    26,350    26,240    26,070    27,400    28,700    28,320   136,730
          92        Credit for child and dependent care expenses...........     3,560     3,480     3,560     3,950     3,600     2,860     2,550    16,520
          93        Credit for disabled access expenditures................        60        70        70        70        80        80        80       380
          94        Deductibility of charitable contributions, other than      42,130    42,750    44,450    46,820    48,580    50,980    52,760   243,590
                     education and health..................................
          95        Exclusion of certain foster care payments..............       580       590       600       610       630       660       700     3,200
          96        Exclusion of parsonage allowances......................       400       420       460       480       510       540       560     2,550
                 Health:
          97       Exclusion of employer contributions for medical            106,750   117,750   128,760   138,400   149,240   160,370   173,450   750,220
                    insurance premiums and medical care....................
          98       Self-employed medical insurance premiums................     1,900     2,140     3,000     4,420     4,790     5,160     5,470    22,840
          99       Workers' compensation insurance premiums................     5,900     6,070     6,330     6,510     6,730     6,920     7,190    33,680
         100       Medical Savings Accounts................................        20        20        30        30        30        30        20       140
         101       Deductibility of medical expenses.......................     4,990     5,260     5,530     5,840     6,280     6,600     7,100    31,350
         102       Exclusion of interest on hospital construction bonds....     1,580     1,620     1,700     1,880     2,070     2,250     2,440    10,340
         103       Deductibility of charitable contributions (health)......     5,710     5,920     6,250     6,630     6,830     7,210     7,490    34,410
         104       Tax credit for orphan drug research.....................       200       230       260       290       320       360       400     1,630
         105       Special Blue Cross/Blue Shield deduction................       340       380       430       390       380       340       380     1,920
                 Income security:
         106       Exclusion of railroad retirement system benefits........       380       390       400       400       400       400       400     2,000
         107       Exclusion of workers' compensation benefits.............     5,560     5,810     6,070     6,320     6,600     6,900     7,200    33,090
         108       Exclusion of public assistance benefits (normal tax            370       380       400       410       430       450       470     2,160
                    method)................................................
         109       Exclusion of special benefits for disabled coal miners..        70        70        60        60        60        50        50       280
         110       Exclusion of military disability pensions...............       110       120       120       120       130       130       140       640
                   Net exclusion of pension contributions and earnings:
         111        Employer plans.........................................    52,590    59,350    65,130    66,460    67,840    71,930    77,220   348,580
         112        401(k) plans...........................................    55,100    65,380    73,020    76,550    79,620    84,430    89,410   403,030
         113        Individual Retirement Accounts.........................    23,980    24,250    25,280    25,590    25,630    25,890    25,450   127,840
         114        Low and moderate income savers credit..................         0       660     2,330     2,290     2,240     2,120     1,500    10,480
         115        Keogh plans............................................     7,880     8,330     8,620     8,930     9,150     9,410     9,680    45,790
                   Exclusion of other employee benefits:
         116        Premiums on group term life insurance..................     2,330     2,370     2,400     2,440     2,480     2,520     2,560    12,400
         117        Premiums on accident and disability insurance..........       280       290       310       320       330       350       360     1,670
         118        Small business retirement plan credit..................         0        30        70       120       160       180       200       730
         119        Income of trusts to finance supplementary unemployment         20        20        30        30        30        30        30       150
                     benefits..............................................
         120        Special ESOP rules.....................................     1,710     1,780     1,880     1,980     2,080     2,180     2,300    10,420
         121        Additional deduction for the blind.....................        50        50        50        50        50        50        50       250
         122        Additional deduction for the elderly...................     2,390     2,280     2,360     2,490     2,550     2,600     2,480    12,480
         123        Tax credit for the elderly and disabled................        40        40        40        40        40        40        40       200
         124        Deductibility of casualty losses.......................       230       280       340       390       450       500       490     2,170
         125        Earned income tax credit \3\...........................     5,480     4,850     5,330     5,480     5,670     5,750     5,990    28,220
                 Social Security:
                   Exclusion of social security benefits:
         126        Social Security benefits for retired workers...........    17,830    18,000    18,180    18,560    18,850    19,720    20,890    96,200
         127        Social Security benefits for disabled..................     2,690     2,930     3,240     3,630     4,020     4,470     5,020    20,380
         128        Social Security benefits for dependents and survivors..     3,720     3,870     4,060     4,320     4,560     4,820     5,170    22,930
                 Veterans benefits and services:
         129       Exclusion of veterans death benefits and disability          3,150     3,190     3,300     3,490     3,680     3,870     4,080    18,420
                    compensation...........................................
         130       Exclusion of veterans pensions..........................        70        80        80        80        90        90       100       440
         131       Exclusion of GI bill benefits...........................        90        90        90       100       100       110       110       510
         132       Exclusion of interest on veterans housing bonds.........        50        50        50        50        70        70        80       320
                 General purpose fiscal assistance:
         133       Exclusion of interest on public purpose State and local     33,100    33,930    34,780    35,660    36,540    37,460    38,410   182,850
                    bonds..................................................
         134       Deductibility of nonbusiness state and local taxes other    45,520    46,160    48,150    47,730    43,270    34,820    30,890   204,860
                    than on owner-occupied homes...........................
         135       Tax credit for corporations receiving income from doing      3,130     3,190     3,190     3,190     3,140     1,860         0    11,380
                    business in U.S. possessions...........................
                 Interest:
         136       Deferral of interest on U.S. savings bonds..............       290       300       310       330       330       350       360     1,680

    [[Page 112]]

                 Addendum: Aid to State and local governments:
                   Deductibility of:
                    Property taxes on owner-occupied homes.................    22,410    22,680    23,580    23,210    20,330    16,300    14,410    97,830
                    Nonbusiness State and local taxes other than on owner-     45,520    46,160    48,150    47,730    43,270    34,820    30,890   204,860
                     occupied homes........................................
                   Exclusion of interest on State and local bonds for:
                    Public purposes........................................    33,100    33,930    34,780    35,660    36,540    37,460    38,410   182,850
                    Energy facilities......................................       130       130       150       170       180       200       210     1,170
                    Water, sewage, and hazardous waste disposal facilities.       570       600       630       690       760       840       910     3,830
                    Small-issues...........................................       440       440       470       520       560       610       670     2,830
                    Owner-occupied mortgage subsidies......................     1,150     1,190     1,250     1,380     1,510     1,640     1,780     7,560
                    Rental housing.........................................       230       250       260       290       320       350       370     1,590
                    Airports, docks, and similar facilities................       900       920       980     1,080     1,180     1,280     1,400     5,920
                    Student loans..........................................       330       330       340       370       410       440       510     2,070
                    Private nonprofit educational facilities...............       770       780       830       920     1,010     1,090     1,190     5,040
                    Hospital construction..................................     1,580     1,620     1,700     1,880     2,070     2,250     2,440    10,340
                    Veterans' housing......................................        50        50        50        50        70        70        80       320
                   Credit for holders of zone academy bonds................        40        70       100       120       120       120       120       580
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as
      follows: 2001 $990; 2002 $1,020; 2003 $1,050; 2004 $1,080; 2005 $1,080; 2006 $1,100; and 2007 $1,120.
    \2\ 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: 2001 $980; 2002 $7,390; 2003 $7,390; 2004 $7,210; 2005 $6,950; 2006 $9,380; and 2007 $9,200.
    \3\ 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: 2001 $26,120; 2002 $28,280; 2003 $30,630; 2004 $31,080; 2005 $31,720; 2006 $33,130 and 2007 $34,090.

    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 baseline provisions of the tax
    structure. The 1974 Congressional Budget Act, which mandated the tax
    expenditure budget, did not specify the baseline provisions of the tax
    law. As noted previously, 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 it 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 measuring interest costs would be regarded as
              a positive tax expenditure (i.e., a tax subsidy).
      Although the reference law and normal tax baselines are generally
    similar, areas of difference include:
                Tax rates. The separate schedules applying to the various
              taxpaying units are included in the reference law baseline.
              Thus, corporate tax rates below the maximum statutory rate do
              not give rise to a tax expenditure. The normal tax baseline is
              similar, except that it specifies the current maximum rate as
              the baseline for the corporate income tax. The lower tax rates
              applied to the first $10 million of corporate income are thus
              regarded as a tax expenditure. Similarly, under the reference
              law baseline, preferential tax rates for capital gains
              generally do not yield a tax expenditure;

    [[Page 113]]

              only capital gains treatment of otherwise ``ordinary income,''
              such as that from coal and iron ore royalties and the sale of
              timber and certain agricultural products, is considered a tax
              expenditure. The alternative minimum tax is treated as part of
              the baseline rate structure under both the reference and
              normal tax methods.
                Income subject to the tax. Income subject to tax is defined
              as gross income less the costs of earning that income. The
              Federal income tax defines gross income to include: (1)
              consideration received in the exchange of goods and services,
              including labor services or property; and (2) the taxpayer's
              share of gross or net income earned and/or reported by another
              entity (such as a partnership). Under the reference tax rules,
              therefore, gross income does not include gifts--defined as
              receipts of money or property that are not consideration in an
              exchange--or most transfer payments, which can be thought of
              as gifts from the Government. \2\ The normal tax baseline also
              excludes gifts between individuals from gross income. Under
              the normal tax baseline, however, all cash transfer payments
              from the Government to private individuals are counted in
              gross income, and exemptions of such transfers from tax are
              identified as tax expenditures. The costs of earning income
              are generally deductible in determining taxable income under
              both the reference and normal tax baselines. \3\
    ---------------------------------------------------------------------------
      \2\ Gross income does, however, include transfer paymnents associated
    with past employment, such as Social Security benefits.
      \3\ In the case of individuals who hold ``passive'' equity interests
    in businesses, however, the pro-rata shares of sales and expense
    deductions reportable in a year are limited. A passive business activity
    is defined to be one in which the holder of the interest, usually a
    partnership interst, 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. Tax expenditures,
    however, may also contribute to achieving these goals. The report of the
    Senate Governmental Affairs Committee on GPRA \4\ calls on the Executive
    branch to undertake a series of analyses to assess the effect of
    specific tax expenditures on the achievement of agencies' performance
    objectives.
    ---------------------------------------------------------------------------
      \4\ Committee on Government Affairs, United States Senate,
    ``Government Performance and Results Act of 1993'' (Report 103-58,
    1993).
    ---------------------------------------------------------------------------
      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 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 was 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 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. Because there is an existing public
    administrative and private compliance structure for the tax system, the

    [[Page 114]]

    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.
      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 activities to be addressed with specific 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 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 tax
    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,
    which can impose further costs by diverting resources from their most
    efficient uses. 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 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 revenue effect. Outputs are quantitative or qualitative
    measures of goods and services, or changes in income and investment,
    directly produced by these inputs. Outcomes, in

    [[Page 115]]

    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 combat service are
    intended to reduce tax burdens on military personnel undertaking
    hazardous service for the Nation. A portion of the tax expenditure
    associated with foreign earnings is targeted to benefit U.S. Government
    civilian personnel working abroad by offsetting the living costs that
    can be higher than those in the United States. These tax expenditures
    should be considered together with direct agency budget costs in making
    programmatic decisions.
      International affairs.--Tax expenditures are also aimed at goals such
    as 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 expenditures.
    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 preferences 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. The mortgage
    interest deduction on personal residences is a tax expenditure because
    the value of owner-occupied housing services is not included in a
    taxpayer's taxable income. Taxpayers also may exclude up to $500,000 of
    the capital gains from the sale of personal residences. 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
    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

    [[Page 116]]

    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 value of
    benefits funded 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, omitting important details 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 as of December 31, 2001, and do not reflect proposals made
    elsewhere in the Budget.

                                National Defense

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

                              International Affairs

      2. Income earned abroad.--U.S. citizens who lived abroad, worked in
    the private sector, and satisfied a foreign residency requirement in
    2001 may exclude up to $78,000 in foreign earned income from U.S. taxes.

    [[Page 117]]

    The exclusion increases to $80,000 in 2002 (and thereafter). 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 ($67,765 in 2001).
      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. 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 FSC Repeal and Extraterritorial Income Exclusion Act of 2000
    created the extraterritorial income exclusion to replace the foreign
    sales corporation provisions, which the Act repealed. 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 extimates include, for
    example, estimtes 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.
    ---------------------------------------------------------------------------
      5. Sales source rule exceptions.--The worldwide income of U.S. persons
    is taxable by the United States and a credit for foreign taxes paid is
    allowed. The amount of foreign taxes that can be credited is limited to
    the pre-credit U.S. tax on the foreign source income. The sales source
    rules for inventory property allow U.S. exporters to use more foreign
    tax credits by allowing the exporters to attribute a larger portion of
    their earnings abroad than would be the case if the allocation of
    earnings was based on actual economic activity.
      6. Income of U.S.-controlled foreign corporations.--The income of
    foreign corporations controlled by U.S. shareholders is not subject to
    U.S. taxation. The income becomes taxable only when the controlling U.S.
    shareholders receive dividends or other distributions from their foreign
    stockholding. Under the normal tax method, the currently attributable
    foreign source pre-tax income from such a controlling interest is
    considered to be subject to U.S. taxation, whether or not distributed.
    Thus, the normal tax method considers the amount of controlled foreign
    corporation income not distributed to a U.S. shareholder as tax-deferred
    income.
      7. Exceptions under subpart F for active financing income.--Financial
    firms can defer taxes on income earned overseas in an active business.
    Taxes on income earned through December 31, 2001 can be deferred.

                     General Science, Space, and Technology

      8. Expensing R&E expenditures.--Research and experimentation (R&E)
    projects can be viewed as investments because, if successful, their
    benefits accrue for several years. It is often difficult, however, to
    identify whether a specific R&E project is successful and, if
    successful, what its expected life will be. Under the normal tax method,
    the expensing of R&E expenditures is viewed as a tax expenditure. The
    baseline assumed for the normal tax method is that all R&E expenditures
    are successful and have an expected life of five years.
      9. R&E credit.--The research and experimentation (R&E) credit 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

      10. Exploration and development costs.--For successful investments in
    domestic oil and gas wells, intangible drilling costs (e.g., wages, the
    costs of using machinery for grading and drilling, the cost of
    unsalvageable materials used in constructing wells) may be expensed
    rather than amortized over the productive life of the property.
    Integrated oil companies may deduct only 70 percent of such costs and
    must amortize the remaining 30 percent over five years. The same rule
    applies to the exploration and development costs of surface stripping
    and the construction of shafts and tunnels for other fuel minerals.
      11. Percentage depletion.--Independent fuel mineral producers and
    royalty owners are generally allowed to take percentage depletion
    deductions rather than cost depletion on limited quantities of output.
    Under cost depletion, outlays are deducted over the productive life of
    the property based on the fraction of the resource extracted. Under
    percentage depletion, taxpayers deduct a percentage of gross income from
    mineral production at rates of 22 percent for uranium; 15 percent for
    oil, gas and oil shale; and 10 percent for coal. The deduction is
    limited to 50 percent of net income from the property, except for oil
    and gas where the deduction can be 100 percent of net property income.
    Production

    [[Page 118]]

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

                        Natural Resources and Environment

      21. Exploration and development costs.--Certain capital outlays
    associated with exploration and development of nonfuel minerals may be
    expensed rather than depreciated over the life of the asset.
      22. Percentage depletion.--Most nonfuel mineral extractors may use
    percentage depletion rather than cost depletion, with percentage
    depletion rates ranging from 22 percent for sulfur to 5 percent for sand
    and gravel.
      23. Sewage, water, 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.
      24. Capital gains treatment of certain timber.--Certain timber sold
    under a royalty contract can be treated as a capital gain rather than
    ordinary income.
      25. Expensing multiperiod timber growing costs.--Most of the
    production costs of growing timber may be expensed rather than
    capitalized and deducted when the timber is sold. In most other
    industries, these costs are capitalized under the uniform capitalization
    rules.
      26. 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

      27. 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.
      28. 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.
      29. 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

    [[Page 119]]

    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.
      30. Capital gains treatment of certain income.--Certain agricultural
    income, such as unharvested crops, can be treated as capital gains
    rather than ordinary income.
      31. Income averaging for farmers.--Taxpayers can lower their tax
    liability by averaging, over the prior three-year period, their taxable
    income from farming.
      32. 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.
      33. Credit union income.--The earnings of credit unions not
    distributed to members as interest or dividends are exempt from income
    tax.
      34. 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.
      35. 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.
      36. 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.
      37. 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.
      38. 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.
      39. 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 $62.50 per capita ($187.5 million
    minimum) per State 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 home
    buyers to income tax credits for a specified percentage of interest on
    qualified mortgages. The total amount of MCCs issued by a State cannot
    exceed 25 percent of its annual ceiling for mortgage-revenue bonds.
      40. Rental housing bonds.--Interest earned on State and local
    government bonds used to finance multifamily rental housing projects is
    tax-exempt. At least 20 percent (15 percent in targeted areas) of the
    units must be reserved for families whose income does not exceed 50
    percent of the area's median income; or 40 percent for families with
    incomes of no more than 60 percent of the area median income. Other tax-
    exempt bonds for multifamily rental projects are generally issued with
    the requirement that all tenants must be low or moderate income
    families. Rental housing bonds are subject to the volume cap discussed
    in the mortgage housing bond section above.
      41. 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 value
    of owner-occupied housing services is not included in a taxpayer's
    taxable income.
      42. Taxes on owner-occupied homes.--Owner-occupants of homes may
    deduct property taxes on their primary and secondary residences even
    though they are

    [[Page 120]]

    not required to report the value of owner-occupied housing services as
    gross income.
      43. 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.
      44. 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.
      45. 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.
      46. 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. 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.
      47. 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.
      48. 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.
      49. 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.
      50. 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, the top capital gains tax rate for assets held
    by these taxpayers for more than 5 years is 8 percent.
      51. 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.
      52. 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. After repeal of the estate
    tax under EGTRRA for 2010, the basis for property acquired from a
    decedent will be the lesser of fair market value or the decedent's
    basis. Certain types of additions to basis will be allowed so that
    assets in most estates that are not currently subject to estate tax will
    not be subject to capital gains tax in the hands of the heirs.
      53. 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. Even though the estate tax is
    repealed for 2010 under EGTRRA, the gift tax is retained with a lifetime
    exemption of $1 million.

    [[Page 121]]

      54. 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.
      55. 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.
      56. 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. Under
    the normal tax baseline, this tax depreciation allowance is measured
    relative to straight-line depreciation using Asset Depreciation Range
    (ADR) lives. Statutory depreciation of machinery and equipment is
    accelerated relative to this baseline, thereby creating a tax
    expenditure under the normal tax rules.
      57. Expensing of certain small investments.--In 2001, qualifying
    investments in tangible property up to $24,000 can be expensed rather
    than depreciated over time. The expensing limit increases 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 2001, the
    amount expensed is completely phased out when qualifying investments
    exceed $224,000.
      58. 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.
      59. 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.
      60. 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

      61. 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.
      62. 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 2001, the maximum
    amount of the parking exclusion is $180 (indexed) per month. The tax
    expenditure estimate does not include parking at facilities owned by the
    employer.
      63. Exclusion of employee transit pass expenses.--Transit passes,
    tokens, fare cards, and vanpool expenses paid for by an employer or
    provided in lieu of wages to defray an employee's commuting costs are
    excludable from the employee's income. In 2001, 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

      64. 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.
      65. 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.

    [[Page 122]]

      66. 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.
      67. 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.
    home-buyer credit from December 31, 2001 to December 31, 2003.
      68. 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.
      69. 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 will generally increase the value of the property significantly
    or appreciably prolong the life of the property. The expensing only
    applies to clean-up costs incurred on or before December 31, 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

      70. Scholarship and fellowship income.--Scholarships and fellowships
    are excluded from taxable income to the extent they pay for tuition and
    course-related expenses of the grantee. Similarly, tuition reductions
    for employees of educational institutions and their families are not
    included in taxable income. From an economic point of view, scholarships
    and fellowships are either gifts not conditioned on the performance of
    services, or they are rebates of educational costs. Thus, under the
    reference law method, this exclusion is not a tax expenditure because
    this method does not include either gifts or price reductions in a
    taxpayer's gross income. The exclusion, however, is considered a tax
    expenditure under the normal tax method, which includes gift-like
    transfers of government funds in gross income (many scholarships are
    derived directly or indirectly from government funding).
      71. HOPE tax credit.--The non-refundable HOPE tax credit allows a
    credit for 100 percent of an eligible student's first $1,000 of tuition
    and fees and 50 percent of the next $1,000 of tuition and fees. The
    credit only covers tuition and fees paid during the first two years of a
    student's post-secondary education. The credit is phased out ratably for
    taxpayers with modified AGI between $80,000 and $100,000 ($40,000 and
    $50,000 for singles) (indexed beginning in 2002).
      72. Lifetime learning tax credit.--The non-refundable Lifetime
    Learning tax credit allows a credit for 20 percent of an eligible
    student's tuition and fees. For tuition and fees paid before January 1,
    2003, the maximum credit per return is $1,000. For tuition and fees paid
    after December 31, 2002, the maximum credit per return is $2,000. The
    credit is phased out ratably for taxpayers with modified AGI between
    $80,000 and $100,000 ($40,000 and $50,000 for singles) (indexed
    beginning in 2002). The credit applies to both undergraduate and
    graduate students.
      73. Deduction for higher education expenses.--EGTRRA provides a new
    above-the-line deduction for qualified higher education expenses. The
    maximum annual deduction is $3,000 beginning in 2002 for taxpayers with
    adjusted gross income up to $130,000 on a joint return ($65,000 for
    singles). The maximum deduction increases to $4,000 in 2004. Taxpayers
    with adjusted gross income up to $160,000 on a joint return ($80,000 for
    singles) may deduct up to $2,000 beginning in 2004. No deduction is
    allowed for expenses paid after December 31, 2005.
      74. 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 in 2001
    is $500 per beneficiary. In 2001, the maximum contribution is phased
    down ratably for taxpayers with modified AGI between $150,000 and
    $160,000 ($95,000 and $110,000 for singles). EGTRRA increases the
    maximum contribution to $2,000 and the phase-out range for joint filers
    to $190,000 through $220,000 of modified AGI, double the range of
    singles. EGTRRA also allows elementary and secondary school expenses to
    be paid tax-free from such accounts.

    [[Page 123]]

      75. Student-loan interest.--Taxpayers may claim an above-the-line
    deduction of up to $2,500 on interest paid on an education loan.
    Interest may only be deducted for the first five years in which interest
    payments are required. In 2001, 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). EGTRRA increased the income
    thresholds for the phase down to $100,000 and $130,000 ($50,000 and
    $65,000 for singles) (indexed) and repealed the five year rule for
    interest payments made after December 21, 2001.
      76. 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. In
    2001 taxes on the earnings from these plans are paid by the
    beneficiaries and are deferred until tuition is actually paid. Beginning
    in 2002, investment income is not taxed when earned, and is tax-exempt
    when withdrawn to pay for qualified expenses. These changes were the
    result of EGTRRA.
      77. 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.
      78. 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.
      79. 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.
      80. 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
    $83,650 and $113,650 ($55,750 and $70,750 for singles) in 2001.
      81. 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.
      82. Charitable contributions to educational institutions.--Taxpayers
    may deduct contributions to nonprofit educational institutions.
    Taxpayers who donate capital assets to educational institutions can
    deduct the assets' current value without being taxed on any appreciation
    in value. An individual's total charitable contribution generally may
    not exceed 50 percent of adjusted gross income; a corporation's total
    charitable contributions generally may not exceed 10 percent of pre-tax
    income.
      83. Employer-provided educational assistance.--Employer-provided
    educational assistance is excluded from an employee's gross income even
    though the employer's costs for this assistance are a deductible
    business expense. EGTRRA permanently extended this exclusion and
    extended the exclusion to also include graduate education (beginning in
    2002).
      84. Work opportunity tax credit.--Employers can claim a tax credit for
    qualified wages paid to individuals who begin work on or before December
    31, 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.
      85. Welfare-to-work tax credit.--An employer is eligible for a tax
    credit on the first $20,000 of eligible wages paid to qualified long-
    term family assistance recipients during the first two years of
    employment. The credit is 35 percent of the first $10,000 of wages in
    the first year of employment and 50 percent of the first $10,000 of
    wages in the second year of employment. The maximum credit is $8,500 per
    employee. The credit applies to wages paid to employees who are hired on
    or before December 31, 2001.
      86. Employer-provided child care exclusion.--Employer-provided child
    care is excluded from an employee's gross income even though the
    employer's costs for the child care are a deductible business expense.
      87. Employer-provided child care credit.--Employers can deduct
    expenses for supporting child care or child care resource and referral
    services. EGTRRA provides a tax credit to employers for qualified
    expenses beginning in 2002. The credit is equal to 25 percent of
    qualified expenses for employee child care and 10 percent of qualified
    expenses for child care resource and referral services. Employer
    deductions for such expenses are reduced by the amount of the credit.
    The maximum total credit is limited to $150,000 per taxable year.
      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) for
    2001. The credit is phased-out ratably for taxpayers with modified AGI

    [[Page 124]]

    between $75,000 and $115,000 in 2001. EGTRRA increased the maximum
    credit for non-special needs children to $10,000, set a flat credit
    amount of $10,000 for special needs children, and increased the start
    point of the phase-out to $150,000 beginning in 2002. The credit amounts
    and the phase-out thresholds are indexed for inflation beginning in
    2003. 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 the credit and the exclusion were made
    permanent by EGTRRA.
      90. Employer-provided meals and lodging.--Employer-provided meals and
    lodging are excluded from an employee's gross income even though the
    employer's costs for these items are a deductible business expense.
      91. Child credit.--Taxpayers with children under age 17 can qualify
    for a $600 refundable per child credit. The maximum credit is increased
    to $700 in 2005, $800 in 2009, and $1,000 in 2010. 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).
      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. EGTRRA increased the maximum expenditure
    limit to $3,000 for one dependent and $6,000 for two or more dependents
    beginning in 2003. The credit is equal to 30 percent of qualified
    expenditures (35 percent beginning in 2003) for taxpayers with incomes
    of $10,000 or less ($15,000 or less beginning in 2003). The credit is
    reduced to a minimum of 20 percent by one percentage point for each
    $2,000 of income in excess of $10,000 ($15,000 beginning in 2003).
      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
    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

    [[Page 125]]

    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 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.--Individual taxpayers can make tax-preferred
    contributions to certain types of employer-provided 401(k) plans (and
    401(k)-type plans like 403(b) plans and the Federal government's Thrift
    Savings Plan). In 2001, an employee could exclude up to $10,500
    (indexed) of wages from AGI under a qualified arrangement with an
    employer's 401(k) plan. EGTRRA increases the exclusion amount to $11,000
    in 2002, $12,000 in 2003, $13,000 in 2004, $14,000 in 2005 and $15,000
    in 2006 (indexed thereafter). The tax on the investment income earned by
    401(k)-type plans is deferred until withdrawn.
      EGTRRA also allows employees to make after-tax contributions to 401(k)
    and 401(k)-type plans beginning in 2002. These contributions are not
    excluded from AGI, but the investment income of such after-tax
    contributions is not taxed when earned or withdrawn.
      113. Individual Retirement Accounts.--Individual taxpayers can take
    advantage of several different Individual Retirement Accounts (IRAs):
    deductible IRAs, non-deductible IRAs, and Roth IRAs. In 2001, employees
    can make annual contributions to an IRA up to $2,000 (or 100 percent of
    compensation, if less). The annual contributions limit applies to the
    total of a taxpayer's deductible, non-deductible, and Roth IRAs
    contributions. EGTRRA increases the IRA contribution limit to $3,000 in
    2002, $4,000 in 2005, and $5,000 in 2008 (indexed thereafter) and allows
    taxpayers over age 50 to make additional ``catch-up'' contributions of
    $1,000 (by 2006).
      Taxpayers whose AGI is below $53,000 ($33,000 for non-joint filers) in
    2001 can claim a deduction for IRA contributions. In 2001, the IRA
    deduction is phased out for taxpayers with AGI between $53,000 and
    $63,000 ($33,000 and $43,000 for non-joint). The phase-out range
    increases annually until it reaches $80,000 to $100,000 in 2007 ($50,000
    to $60,000 in 2005 for non-joint filers). Taxpayers whose AGI is above
    the phase-out range can also claim a deduction for their IRA
    contributions depending on whether they (or their spouse) are an active
    participant in an employer-provided retirement plan. The tax on the
    investment income earned by 401(k) plans, non-deductible IRAs, and
    deductible IRAs is deferred until the money is withdrawn.
      Taxpayers with incomes below $150,000 ($90,000 for nonjoint filers)
    can make contributions to Roth IRAs. 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). Investment income of a Roth IRA is
    not taxed when earned nor when withdrawn. Withdrawals from a Roth IRA
    are penalty 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.
      Taxpayers can contribute to a non-deductible IRA regardless of their
    income and whether they are an active participant in an employer-
    provided retirement plan. The tax on investment income earned by non-
    deductible IRAs is deferred until the money is withdrawn.
      114. Low and moderate income savers' credit.--EGTRRA provides an
    additional incentive for lower-income taxpayers to save through a
    nonrefundable credit of up to 50 percent on IRA contributions. This
    credit is in addition to any deduction or exclusion. The credit is
    completely phased out by $50,000 for joint filers and $25,000 for single
    filers. This temporary credit is in effect from 2002 through 2006.

    [[Page 126]]

      115. 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 $35,000 in 2001. Total plan
    contributions are limited to 15 percent of a firm's total wages. EGTRRA
    increases the percent of pay limit to 100 percent of the income of the
    self-employed by 2005 and increases the dollar limit on contributions to
    $40,000 beginning in 2002. EGTRRA also increased the plan limit to 25
    percent of a firm's total wages and excluded employee contributions from
    this limit beginning in 2002. The tax on the investment income earned by
    Keogh plans is deferred until withdrawn.
      116. 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.
      117. Small business retirement plan credit.--EGTRRA provides
    businesses with 100 or fewer employees a credit for 50 percent of the
    qualified startup costs associated with a new qualified retirement plan.
    The credit is limited to $500 annually and may only be claimed for
    expenses incurred during the first three years from the start of the
    qualified plan. Qualified startup expenses include expenses related to
    the establishment and administration of the plan, and the retirement-
    related education of employees. The credit applies to costs incurred
    beginning in 2002.
      118. 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.
      119. Employer-provided supplementary unemployment benefits.--Employers
    may establish trusts to pay supplemental unemployment benefits to
    employees separated from employment. Interest payments to such trusts
    are exempt from taxation.
      120. 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.
      121. Additional deduction for the blind.--Taxpayers who are blind may
    take an additional $1,100 standard deduction if single, or $900 if
    married.
      122. Additional deduction for the elderly.--Taxpayers who are 65 years
    or older may take an additional $1,100 standard deduction if single, or
    $900 if married.
      123. Tax credit for the elderly and disabled.--Individuals who are 65
    years of age or older, or who are permanently disabled, can take a tax
    credit equal to 15 percent of the sum of their earned and retirement
    income. Income is limited to no more than $5,000 for single individuals
    or married couples filing a joint return where only one spouse is 65
    years of age or older, and up to $7,500 for joint returns where both
    spouses are 65 years of age or older. These limits are reduced by one-
    half of the taxpayer's adjusted gross income over $7,500 for single
    individuals and $10,000 for married couples filing a joint return.
      124. 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.
      125. 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 $7,140 of earned income in 2001. The credit is 40
    percent of the first $10,020 of income for a family with two or more
    qualifying children. The credit is phased out beginning when the
    taxpayer's income exceeds $13,090 at the rate of 15.98 percent (21.06
    percent if two or more qualifying children are present). It is
    completely phased out when the taxpayer's modified adjusted gross income
    reaches $28,281 ($32,121 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 2001, the credit is 7.65
    percent of the first $4,760 of earned income. When the taxpayer's income
    exceeds $5,950, the credit is phased out at the rate of 7.65 percent. It
    is completely phased out at $10,710 of modified adjusted gross income.
      For workers with or without children, the income levels at which the
    credit begins to phase-out and the maximum amounts of income on which
    the credit can be taken are adjusted for inflation. For married
    taxpayers filing a joint return, EGTRRA increases the base amount for
    the phase-out by $1,000 in 2002 through 2004, $2,000 in 2005 through
    2007, and $3,000 in 2008 (indexed thereafter). 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

    [[Page 127]]

    amount that offsets tax liabilities is shown as a tax expenditure.

                                 Social Security

      126. 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.
      127. 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.
      128. 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

      129. Veterans death benefits and disability compensation.--All
    compensation due to death or disability paid by the Veterans
    Administration is excluded from taxable income.
      130. Veterans pension payments.--Pension payments made by the Veterans
    Administration are excluded from gross income.
      131. G.I. Bill benefits.--G.I. Bill benefits paid by the Veterans
    Administration are excluded from gross income.
      132. 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

      133. 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.
      134. 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.
      135. 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

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