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

    [[Page 53]]

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

                        FEDERAL RECEIPTS AND COLLECTIONS

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

    [[Page 55]]

                              4.  FEDERAL RECEIPTS

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

      Growth in receipts.--Total receipts in 2003 are estimated to be
    $2,048.1 billion, an increase of $101.9 billion or 5.2 percent relative
    to 2002. Receipts are projected to grow at an average annual rate of 5.9
    percent between 2003 and 2007, rising to $2,571.7 billion. This growth
    in receipts is largely due to assumed increases in incomes resulting
    from both real economic growth and inflation.
      As a share of GDP, receipts are projected to decline from 19.6 percent
    in 2001 to 18.8 percent in 2002 and 2003. The receipts share of GDP is
    projected to increase to 19.1 percent in 2007, despite the phasein of
    legislated tax reductions and the President's proposed tax plan.

                                                             Table 4-1.  RECEIPTS BY SOURCE--SUMMARY
                                                                    (In billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               Estimate
                            Source                           2001 actual -----------------------------------------------------------------------------------
                                                                              2002          2003          2004          2005          2006          2007
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Individual income taxes...............................      994.3         949.2       1,006.4       1,058.6       1,112.0       1,157.3       1,221.7
    Corporation income taxes..............................      151.1         201.4         205.5         212.0         237.1         241.4         250.6
    Social insurance and retirement receipts..............      694.0         708.0         749.2         789.8         835.2         868.7         908.3
      (On-budget).........................................     (186.4)       (190.8)       (203.9)       (216.3)       (227.0)       (235.1)       (243.0)
      (Off-budget)........................................     (507.5)       (517.2)       (545.3)       (573.5)       (608.2)       (633.7)       (665.3)
    Excise taxes..........................................       66.1          66.9          69.0          71.2          73.6          75.3          77.5
    Estate and gift taxes.................................       28.4          27.5          23.0          26.6          23.4          26.4          23.2
    Customs duties........................................       19.4          18.7          19.8          21.9          23.0          24.7          26.2
    Miscellaneous receipts................................       37.8          36.4          40.2          42.8          43.2          44.4          46.2
    Bipartisan economic security plan.....................  ............      -62.0         -65.0         -47.5          -9.5          17.0          18.0
                                                           -------------------------------------------------------------------------------------------------
        Total receipts....................................    1,991.0       1,946.1       2,048.1       2,175.4       2,338.0       2,455.3       2,571.7
          (On-budget).....................................   (1,483.5)     (1,428.9)     (1,502.7)     (1,601.9)     (1,729.8)     (1,821.6)     (1,906.4)
          (Off-budget)....................................     (507.5)       (517.2)       (545.3)       (573.5)       (608.2)       (633.7)       (665.3)
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                  Table 4-2.  EFFECT ON RECEIPTS OF CHANGES IN THE SOCIAL SECURITY TAXABLE EARNINGS BASE
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                      Estimate
                                                              ------------------------------------------------------
                                                                  2003       2004       2005       2006       2007
    ----------------------------------------------------------------------------------------------------------------
     Social security (OASDI) taxable earnings base increases:
      $84,900 to $89,700 on Jan. 1, 2003.....................        2.2        5.8        6.4        7.0        7.7
      $89,700 to $92,400 on Jan. 1, 2004.....................  .........        1.3        3.3        3.6        3.9
      $92,400 to $96,000 on Jan. 1, 2005.....................  .........  .........        1.7        4.5        4.9
      $96,000 to $99,900 on Jan. 1, 2006.....................  .........  .........  .........        1.9        4.9
      $99,900 to $103,800 on Jan. 1, 2007....................  .........  .........  .........  .........        1.9
    ----------------------------------------------------------------------------------------------------------------

    [[Page 56]]

                               ENACTED LEGISLATION

      Several laws were enacted in 2001 that have an effect on governmental
    receipts. The major legislative changes affecting receipts are described
    below.

       ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 (EGTRRA)

      From the Administration's first day in office, President Bush worked
    to deliver on his campaign promise of meaningful tax relief. Congress
    moved with exceptional speed and on June 7, 2001, this Act was signed by
    President Bush. The major provisions of this Act, which are described in
    greater detail below, create a new 10-percent individual income tax rate
    bracket; reduce marginal income tax rates for individuals; eliminate the
    estate tax; reduce the marriage penalty; provide relief from the
    alternative minimum tax (AMT); modify the timing of estimated tax
    payments by corporations; and modify tax benefits for children,
    education, and pension and retirement savings. Almost all of the
    provisions phase in over a number of years and sunset on December 31,
    2010.

                          Individual Income Tax Relief

      Create a new 10-percent individual income tax rate bracket.--Effective
    for taxable years beginning after December 31, 2000 and before January
    1, 2011, the prior law 15-percent individual income tax rate bracket is
    split into two tax rate brackets of 10 and 15 percent. The new 10-
    percent tax rate bracket applies to the first $6,000 of taxable income
    for single taxpayers and married taxpayers filing separate returns
    (increasing to $7,000 for taxable years beginning after December 31,
    2007), the first $10,000 of taxable income for heads of household, and
    the first $12,000 of taxable income for married taxpayers filing a joint
    return (increasing to $14,000 of taxable income for taxable years
    beginning after December 31, 2007). Taxable income above these
    thresholds that was taxed at the 15-percent rate under prior law will
    continue to be taxed at that rate. The income thresholds for the new tax
    rate bracket will be adjusted annually for inflation, effective for
    taxable years beginning after December 31, 2008 and before January 1,
    2011.
      For 2001, most taxpayers received the benefit of the new 10-percent
    tax rate bracket through an advanced credit, issued by the Department of
    Treasury in the form of a check. The amount of the advanced credit was
    equal to 5 percent of taxable income reported on tax returns filed for
    2000, up to a maximum credit of $300 for single taxpayers and married
    taxpayers filing separate returns, $500 for heads of household, and $600
    for married taxpayers filing a joint return. Taxpayers are entitled to a
    similar credit on tax returns filed for 2001 to the extent that it
    exceeds the advanced credit, if any, that they received on the basis of
    tax returns filed for 2000.

      Reduce individual income tax rates.--In addition to splitting the 15-
    percent tax rate bracket of prior law into two tax rate brackets (see
    preceding discussion), this Act replaces the four remaining statutory
    individual income tax rate brackets of prior law (28, 31, 36, and 39.6
    percent) with a rate structure of 25, 28, 33, and 35 percent. The
    reduced tax rate structure is phased in over a period of six years,
    effective for taxable years beginning after December 31, 2000, as
    follows: the 28-percent rate is reduced to 27.5 percent for 2001, 27
    percent for 2002 and 2003, 26 percent for 2004 and 2005, and 25 percent
    for 2006 through 2010; the 31 percent rate is reduced to 30.5 for 2001,
    30 percent for 2002 and 2003, 29 percent for 2004 and 2005, and 28
    percent for 2006 through 2010; the 36 percent rate is reduced to 35.5
    percent for 2001, 35 percent for 2002 and 2003, 34 percent for 2004 and
    2005, and 33 percent for 2006 through 2010; and the 39.6 percent rate is
    reduced to 39.1 percent for 2001, 38.6 percent for 2002 and 2003, 37.6
    percent for 2004 and 2005, and 35 percent for 2006 through 2010. The
    income thresholds for these tax rate brackets are adjusted annually for
    inflation as provided under prior law.
      Repeal phaseout of personal exemptions.--Under prior law, the
    deduction for taxpayer and dependent personal exemptions ($2,900 for
    taxable year 2001), began to be phased out for taxpayers with adjusted
    gross income (AGI) over certain thresholds (for taxable year 2001, the
    thresholds were $132,950 for single taxpayers, $166,200 for heads of
    household, $99,725 for married taxpayers filing separate returns, and
    $199,450 for married taxpayers filing a joint return). For taxable year
    2001, the deduction for personal exemptions was fully phased out above
    AGI of $255,450 for single taxpayers, $288,700 for heads of household,
    $160,975 for married taxpayers filing separate returns, and $321,950 for
    married taxpayers filing a joint return. This Act phases in the repeal
    of the phaseout of personal exemptions over a five-year period,
    effective for taxable years beginning after December 31, 2005. The
    otherwise applicable personal exemption phaseout is reduced by one-third
    for taxable years 2006 and 2007, is reduced by two-thirds for taxable
    years 2008 and 2009, and is repealed for taxable year 2010.
      Repeal limitation on itemized deductions.--Under prior law, the amount
    of otherwise allowable itemized deductions (other than medical expenses,
    investment interest, theft and casualty losses, and wagering losses) was
    reduced by three percent of AGI in excess of certain thresholds (for
    taxable year 2001, the thresholds were $66,475 for married taxpayers
    filing separate returns and $132,950 for all other taxpayers). This Act
    phases in the repeal of the limitation on itemized deductions over a
    five-year period, effective for taxable years beginning after December
    31, 2005. The otherwise applicable limitation on itemized deduc

    [[Page 57]]

    tions is reduced by one-third for taxable years 2006 and 2007, is
    reduced by two-thirds for taxable years 2008 and 2009, and is repealed
    for taxable year 2010.

                            Tax Benefits for Children

      Increase and expand the child tax credit.--Under prior law, taxpayers
    were provided a tax credit of up to $500 for each qualifying child under
    the age of 17. This Act doubles the maximum amount of the credit to
    $1,000 over a 10-year period, effective for taxable years beginning
    after December 31, 2000. The credit increases to $600 for taxable years
    2001 through 2004, $700 for taxable years 2005 through 2008, $800 for
    taxable year 2009, and $1,000 for taxable year 2010.
      Generally, the credit was nonrefundable under prior law; however,
    taxpayers with three or more qualifying children could be eligible for
    an additional refundable child tax credit if they had little or no
    individual income tax liability. The additional credit could be offset
    against social security payroll tax liability, provided that liability
    exceeded the refundable portion of the earned income tax credit (EITC).
    Under this Act, the child credit is refundable to the extent of 10
    percent of the taxpayer's earned income in excess of $10,000 for taxable
    years 2001 through 2004. The percentage increases to 15 percent for
    taxable years 2005 through 2010. The $10,000 earned income threshold is
    indexed annually for inflation beginning in 2002. Families with three or
    more children are allowed a refundable credit for the amount by which
    their social security payroll taxes exceed their earned income credit
    (the prior law rule), if that amount is greater than the refundable
    credit based on their earned income in excess of $10,000. This Act also
    provides that the refundable portion of the child credit does not
    constitute income and shall not be treated as resources for purposes of
    determining eligibility or the amount or nature of benefits or
    assistance under any Federal program or any State or local program
    financed with Federal funds.
      Under prior law, beginning in taxable year 2002, the child tax credit
    would have been allowed only to the extent that an individual's regular
    individual income tax liability exceeded his or her tentative minimum
    tax. In addition, beginning in taxable year 2002, the refundable child
    tax credit would have been reduced by the amount of the individual's
    alternative minimum tax. Effective for taxable years beginning after
    December 31, 2001 and before January 1, 2011, this Act allows the child
    credit to offset both the regular tax and the alternative minimum tax;
    in addition, the refundable credit will not be reduced by the amount of
    the alternative minimum tax.

      Extend and expand adoption tax benefits.--Prior law provided a
    permanent nonrefundable 100-percent tax credit for the first $6,000 of
    qualified expenses incurred in the adoption of a child with special
    needs. A nonrefundable 100-percent tax credit was provided for the first
    $5,000 of qualified expenses incurred before January 1, 2002 in the
    adoption of a child without special needs. The adoption credit
    (including the credit for the adoption of a child with special needs)
    phased out ratably for taxpayers with modified AGI between $75,000 and
    $115,000. In addition, for taxable years beginning after December 31,
    2001, the otherwise allowable adoption credit was allowed only to the
    extent that the taxpayer's regular income tax liability exceeded the
    taxpayer's tentative minimum tax. This Act increases the credit for
    qualified expenses incurred in the adoption of a child, including a
    child with special needs, to $10,000, effective for qualified expenses
    incurred after December 31, 2001 and before January 1, 2011. The $10,000
    amount is indexed annually for inflation, effective for taxable years
    beginning after December 31, 2002. For the adoption of a child with
    special needs finalized after December 31, 2002 and before January 1,
    2011, the credit is provided regardless of whether qualified adoption
    expenses are incurred. Effective for taxable years beginning after
    December 31, 2001 and before January 1, 2011, the credit (including the
    credit for the adoption of a child with special needs) phases out
    ratably for taxpayers with modified AGI between $150,000 and $190,000.
    The start of the phase-out range is indexed annually for inflation
    effective for taxable years beginning after December 31, 2002, but the
    width of the phase-out range remains at $40,000. In addition, for
    taxable years beginning after December 31, 2001 and before January 1,
    2011, the adoption tax credit is allowed against the alternative minimum
    tax.
      Under prior law, up to $5,000 per child in qualified adoption expenses
    paid or reimbursed by an employer under an adoption assistance program
    could be excluded from the gross income of an employee. The maximum
    exclusion was $6,000 for the adoption of a child with special needs. The
    exclusion, which applied to amounts paid or expenses incurred before
    January 1, 2002, was phased out ratably for taxpayers with modified AGI
    (including the full amount of the employer adoption benefit) between
    $75,000 and $115,000. This Act increases the maximum exclusion to
    $10,000 per child, including the adoption of a child with special needs,
    effective for expenses incurred after December 31, 2001 and before
    January 1, 2011. The $10,000 amount is indexed annually for inflation,
    effective for taxable years beginning after December 31, 2002. For the
    adoption of a child with special needs finalized after December 31, 2002
    and before January 1, 2011, the exclusion is provided regardless of
    whether qualified adoption expenses are incurred. Effective for taxable
    years beginning after December 31, 2001 and before January 1, 2011, the
    exclusion (including the exclusion for the adoption of a child with
    special needs) phases out ratably for taxpayers with modified AGI
    between $150,000 and $190,000. The start of the phase-out range is
    indexed annually for inflation effective for taxable years beginning
    after December 31, 2002, but the width of the phase-out range remains at
    $40,000.

      Expand dependent care tax credit.--Under prior law, a taxpayer could
    receive a nonrefundable tax credit for a percentage of a limited amount
    of dependent care

    [[Page 58]]

    expenses ($2,400 for one qualifying dependent and $4,800 for two or more
    qualifying dependents) paid in order to work. The credit rate was phased
    down from 30 percent of expenses (for taxpayers with AGI of $10,000 or
    less) to 20 percent of expenses (for taxpayers with AGI above $28,000).
    Effective for taxable years beginning after December 31, 2002 and before
    January 1, 2011, this Act increases the maximum amount of eligible
    employment related expenses to $3,000 for one qualifying dependent and
    to $6,000 for two or more qualifying dependents. In addition, the
    maximum credit rate is increased to 35 percent for taxpayers with AGI of
    $15,000 or less, and the phase down is modified so that the 20 percent
    rate applies to taxpayers with AGI above $43,000.
      Provide tax credit for employer-provided child care facilities.--A 25-
    percent tax credit is provided to employers for qualified expenses
    incurred to build, acquire, rehabilitate, expand, or operate a child
    care facility for employee use, or to provide child care services to
    children of employees directly or through a third party. A 10-percent
    credit is provided for qualified expenses incurred to provide employees
    with child care resource and referral services. The maximum total credit
    for an employer may not exceed $150,000 per taxable year, and is
    effective for taxable years beginning after December 31, 2001 and before
    January 1, 2011. Any deduction the employer would otherwise be entitled
    to take for the expenses is reduced by the amount of the credit. The
    taxpayer's basis in a facility is reduced to the extent that a credit is
    claimed for expenses of constructing, rehabilitating, expanding, or
    acquiring a facility; in addition, the credit is subject to recapture
    for the first ten years after the qualified child care facility is
    placed in service.

                             Marriage Penalty Relief

      Increase standard deduction for married taxpayers filing a joint
    return.--The basic standard deduction amount for single taxpayers under
    prior law was equal to 60 percent of the basic standard deduction amount
    for married taxpayers filing a joint return. Therefore, two single
    taxpayers had a combined standard deduction that exceeded the standard
    deduction of a married couple filing a joint return. This Act increases
    the standard deduction for married couples filing a joint return to
    double the standard deduction for single taxpayers over a five-year
    period, beginning after December 31, 2004. Under the phasein, the
    standard deduction for married taxpayers filing a joint return increases
    to 174 percent of the standard deduction for single taxpayers in taxable
    year 2005, 184 percent in taxable year 2006, 187 percent in taxable year
    2007, 190 percent in taxable year 2008, and 200 percent in taxable years
    2009 and 2010.
      Expand the 15-percent tax rate bracket for married taxpayers filing a
    joint return.--The size of the 15-percent tax rate bracket for married
    taxpayers filing a joint return is increased to twice the size of the
    corresponding tax rate bracket for single taxpayers. The increase, which
    is phased in over four years, beginning after December 31, 2004, is as
    follows: the 15-percent tax rate bracket for married taxpayers filing a
    joint return increases to 180 percent of the corresponding tax rate
    bracket for single taxpayers in taxable year 2005, 187 percent in
    taxable year 2006, 193 percent in taxable year 2007, and 200 percent in
    taxable years 2008, 2009 and 2010.
      Modify the phaseout of the earned income credit (EITC) for married
    taxpayers filing a joint return and simplify the EITC.-- The maximum
    earned income tax credit is phased in as an individual's earned income
    increases. The credit phases out for individuals with earned income (or,
    if greater, modified AGI) over certain levels. For married taxpayers
    filing a joint return, both the phasein and phaseout of the credit are
    calculated based on the couples' combined income. Under this Act, for
    married taxpayers filing a joint return, the income threshold at which
    the credit begins to phase out is increased, effective for taxable years
    beginning after December 31, 2001 and before January 1, 2011. For
    married taxpayers filing a joint return the phase-out threshold
    increases by $1,000 for taxable years 2002 through 2004, $2,000 for
    taxable years 2005 through 2007, and $3,000 for taxable years 2008
    through 2010. The $3,000 amount is increased annually for inflation
    beginning in taxable year 2009.
      This Act also simplifies EITC eligibility criteria and allows the
    Internal Revenue Service (IRS) to use more cost efficient procedures to
    deny certain questionable EITC claims. In addition, effective for
    taxable years beginning after December 31, 2001 and before January 1,
    2011, the prior law rule that reduced the EITC by the amount of the
    alternative minimum tax is repealed.

                              Education Incentives

      Increase and expand education savings accounts.--Under prior law,
    taxpayers were permitted to contribute up to $500 per year to an
    education savings account (an ``education IRA'') for beneficiaries under
    age 18. The contribution limit was phased out for taxpayers with
    modified AGI between $95,000 and $110,000 (between $150,000 and $160,000
    for married couples filing a joint return). Contributions to an
    education IRA were not deductible, but earnings on contributions were
    allowed to accumulate tax-free. Distributions were excludable from gross
    income to the extent they did not exceed qualified higher education
    expenses incurred during the year the distribution was made. The
    earnings portion of a distribution not used to cover qualified higher
    education expenses was included in the gross income of the beneficiary
    and was generally subject to an additional 10-percent tax. If any
    portion of a distribution from an education savings account was excluded
    from gross income, an education tax credit could not be claimed with
    respect to the same student for the same taxable year. An excise tax

    [[Page 59]]

    of six percent was imposed on contributions to an education IRA in any
    year in which contributions were also made to a qualified State tuition
    program on behalf of the same beneficiary.
      Effective for taxable years beginning after December 31, 2001 and
    before January 1, 2011, this Act increases the annual contribution limit
    to education IRAs to $2,000 and increases the contribution phase-out
    range for married couples filing a joint return to twice the range for
    single taxpayers ($190,000 to $220,000 of AGI). As under prior law,
    contributions to an education IRA are not deductible, but earnings on
    contributions are allowed to accumulate tax-free. In addition to
    allowing tax-free and penalty-free distributions for qualified higher
    education expenses, this Act expands education savings accounts to allow
    tax-free and penalty-free distributions for qualified elementary,
    secondary and after school expenses. Qualified expenses at public,
    private, and religious educational institutions providing elementary and
    secondary education generally include: tuition; fees; academic tutoring;
    special needs services; books; supplies; computer equipment; and certain
    expenses for room and board, uniforms, and transportation. Under this
    Act: (1) the rule prohibiting contributions after the beneficiary
    attains age 18 does not apply in the case of a special needs
    beneficiary, as defined by Treasury Department regulations, (2) both an
    education tax credit and a tax-free distribution from an education
    savings account are allowed with respect to the same student in the same
    taxable year, provided the credit and the distribution are not used for
    the same expenses, and (3) the excise tax on contributions made to an
    education IRA on behalf of a beneficiary during any taxable year in
    which contributions are made to a qualifying State tuition program on
    behalf of the same beneficiary is repealed.

      Allow tax-free distributions from Qualified State Tuition Plans
    (QSTPs) for certain higher education expenses and allow private colleges
    to offer prepaid tuition plans.--QSTP programs generally take two forms
    - prepaid tuition plans and savings plans. Under a prepaid tuition plan,
    an individual may purchase tuition credits or certificates on behalf of
    a designated beneficiary, which entitle the beneficiary to the waiver or
    payment of qualified higher education expenses at participating
    educational institutions. Under a savings plan, an individual may make
    contributions to an account, which is established for the purpose of
    meeting the qualified higher education expenses of a designated
    beneficiary. Distributions from QSTPs for nonqualified expenses
    generally are subject to a more than de minimis penalty (typically 10
    percent of the earnings portion of the distribution). There is no
    specific dollar cap on annual contributions to a QSTP; in addition,
    there is no limit on contributions to a QSTP based on the contributor's
    income. Contributions to a QSTP are permitted at any time during the
    beneficiary's lifetime and the account can remain open after the
    beneficiary reaches age 30. However, a QSTP must provide adequate
    safeguards to prevent contributions on behalf of a designated
    beneficiary in excess of amounts necessary to provide for qualified
    education expenses.
      Two basic tax benefits were provided to contributions to, and
    beneficiaries of, QSTPs under prior law: (1) earnings on amounts
    invested in a QSTP were not subject to tax until a distribution was made
    (or educational benefits were provided), and (2) distributions made on
    behalf of a beneficiary were taxed at the beneficiary's (rather than the
    contributor's) individual income tax rate.
      Effective for taxable years beginning after December 31, 2001 and
    before January 1, 2011, this Act provides for tax-free withdrawals from
    QSTPs for qualified higher education expenses, including tuition and
    fees; certain expenses for room and board; certain expenses for books,
    supplies, and equipment; and expenses of a special needs beneficiary
    that are necessary in connection with enrollment or attendance at an
    eligible education institution. An education tax credit, a tax-free
    distribution from an education savings account, and a tax-free
    distribution from a QSTP are allowed with respect to the same student in
    the same taxable year, provided the credit and the distributions are not
    used for the same expenses. Effective for taxable years beginning after
    December 31, 2003 and before January 1, 2011, this Act allows private
    educational institutions to establish qualified prepaid tuition plans
    (but not savings plans), provided the institution is eligible to
    participate in Federal financial aid programs under Title IV of the
    Higher Education Act of 1965. In addition, the prior law rule imposing a
    more than de minimis monetary penalty on any refund of earnings not used
    for qualified higher education expenses is repealed and replaced with an
    additional 10-percent tax on any payment includible in gross income;
    however, effective for taxable years beginning before January 1, 2004,
    the 10-percent tax does not apply to any distribution from a private
    prepaid tuition program that is includible in gross income but used for
    qualified higher education expenses.

      Provide deduction for qualified higher education expenses.--An above-
    the-line deduction is provided for qualified higher education expenses,
    effective for expenses paid in taxable years beginning after December
    31, 2001 and before January 1, 2006. Taxpayers with AGI less than or
    equal to $65,000 ($130,000 for married taxpayers filing a joint return)
    are provided a maximum deduction of $3,000 in taxable years 2002 and
    2003, which increases to $4,000 in taxable years 2004 and 2005.
    Taxpayers with AGI greater than $65,000 and less than or equal to
    $80,000 (greater than $130,000 and less than or equal to $160,000 for
    married taxpayers filing a joint return) are provided a maximum
    deduction of $2,000 for taxable years 2004 and 2005. For a given taxable
    year, the deduction may not be claimed for the qualified education
    expenses of a student if an education tax credit is claimed for the same
    student. In addition, the deduction may not be claimed for amounts taken
    into account in determining the amount excludable from income due to a
    distribution

    [[Page 60]]

    from an education IRA or the amount of interest excludable from income
    with respect to education savings bonds. A taxpayer may not claim a
    deduction for the amount of a distribution from a qualified tuition plan
    that is excludable from income; however the deduction may be claimed for
    the amount of a distribution from a qualified tuition plan that is not
    attributable to earnings.
      Extend and expand exclusion for employer-provided educational
    assistance.--Certain amounts paid or incurred by an employer for
    educational assistance provided to an employee are excluded from the
    employee's gross income for income and payroll tax purposes. The
    exclusion is limited to $5,250 of educational assistance with respect to
    an individual during a calendar year and applies whether or not the
    education is job-related. The exclusion, which applied to undergraduate
    courses beginning before January 1, 2002 under prior law, is extended to
    apply to courses beginning after December 31, 2001 and before January 1,
    2011, and is expanded to apply to graduate courses.
      Modify student loan interest deduction.--Prior law allowed certain
    individuals to claim an above-the-line deduction for up to $2,500 in
    annual interest paid on qualified education loans, during the first 60
    months in which interest payments were required. The maximum annual
    interest deduction was phased out ratably for single taxpayers with AGI
    between $40,000 and $55,000 ($60,000 and $75,000 for married taxpayers
    filing a joint return). The deduction did not apply to voluntary
    payments, such as interest payments made during a period of loan
    forbearance. Effective for interest paid on qualified education loans
    after December 31, 2001 and before January 1, 2011, both the limit on
    the number of months during which interest paid is deductible and the
    restriction that voluntary payments of interest are not deductible are
    repealed. In addition, the income phase-out ranges for eligibility for
    the deduction are increased to between $50,000 and $65,000 of AGI for a
    single taxpayer ($100,000 and $130,000 for married taxpayers filing a
    joint return). The income phase-out ranges are adjusted annually for
    inflation after 2002.
      Provide tax relief for awards under certain health education
    programs.--Current law provides tax-free treatment for certain
    scholarship and fellowship grants used to pay qualified tuition and
    related expenses, but not to the extent that any grant represents
    compensation for services. Under this Act, amounts received by an
    individual under the National Health Service Corps Scholarship Program
    or the Armed Forces Health Professions Scholarship and Financial
    Assistance Program may be ``qualified scholarships'' excludable from
    income, without regard to the recipient's future service obligation.
    This change is effective for awards received after December 31, 2001 and
    before January 1, 2011.
      Modify arbitrage restrictions on tax-exempt bonds issued by small
    governmental units for public schools.--To prevent tax exempt entities
    from issuing more Federally subsidized tax-exempt bonds than is
    necessary for the activity being financed, current law includes
    arbitrage restrictions limiting the ability to profit from investment of
    tax-exempt bond proceeds. In general, arbitrage profits may be earned
    only during specified periods or on specified types of investments, and,
    subject to limited exceptions, must be rebated to the Federal
    Government. Under prior law, governmental bonds issued by small
    governmental units were not subject to the rebate. Small governmental
    units are defined as general purpose governmental units that issue no
    more than $5 million of tax-exempt governmental bonds in a calendar year
    ($10 million of governmental bonds if at least $5 million of the bonds
    are used to finance public schools). Effective for bonds issued after
    December 31, 2001 and before January 1, 2011, this Act increases to $15
    million the maximum amount of governmental bonds that small governmental
    units may issue without being subject to the arbitrage rebate
    requirements, if at least $10 million of the bonds are used for public
    schools.
      Allow States to issue tax-exempt private activity bonds for school
    construction.--Effective for taxable years beginning after December 31,
    2001 and before January 1, 2011, the activities for which States may
    issue tax-exempt private activity bonds is expanded to include the
    construction and equipping of public school facilities owned by private,
    for-profit corporations pursuant to public-private partnership
    agreements with a State or local educational agency. Under such
    agreements the for-profit corporation constructs, rehabilitates,
    refurbishes or equips the school facility, which must be operated by a
    public educational agency as part of a system of public schools;
    ownership reverts to the public agency when the bonds are retired.
    Issuance of these bonds is subject to an annual per-State volume limit
    of $10 per resident (a minimum of $5 million is provided for small
    States); this is in addition to the present-law private activity bond
    per-State volume limit equal to the greater of $75 per resident or $225
    million in 2002, and indexed annually thereafter.

          Estate, Gift, and Generation-Skipping Transfer Tax Provisions

      Phase out and repeal estate and generation-skipping transfer taxes,
    and reduce gift tax rates.--Under prior law, the unified estate and gift
    tax rates on taxable transfers began at 18 percent on the first $10,000
    of cumulative taxable transfers and reached 55 percent on cumulative
    transfers in excess of $3 million. A five-percent surtax (which phased
    out the benefit of the graduated rates and increased the top marginal
    tax rate to 60 percent) was imposed on cumulative transfers between $10
    million and $17,184,000. A generation-skipping transfer tax was im

    [[Page 61]]

    posed on transfers made either directly or through a trust or similar
    arrangement to a beneficiary in a generation more than one generation
    below that of the transferor (a ``skip person''). Cumulative generation-
    skipping transfers in excess of $1 million (adjusted annually for
    inflation after 1997) were taxed at the top estate and gift tax rate of
    55 percent.
      Under this Act, estate, gift, and generation-skipping transfer tax
    rates are reduced for decedents dying and gifts made after December 31,
    2001 and before January 1, 2010. Estate and generation-skipping transfer
    taxes are repealed for decedents dying after December 31, 2009 and
    before January 1, 2011, while the maximum tax rate on gifts made after
    December 31, 2009 and before January 1, 2011 is reduced to 35 percent on
    gifts in excess of a lifetime exclusion of $1 million (see discussion of
    unified credit below). The reduction in tax rates begins in 2002 with
    the repeal of the five-percent surtax and the reduction of the 53
    percent and 55 percent rates to 50 percent. The maximum tax rate on
    estates, gifts, and generation-skipping transfers is reduced from 50
    percent in 2002 to 49 percent in 2003, 48 percent in 2004, 47 percent in
    2005, 46 percent in 2006, and 45 percent in 2007 through 2009.

      Increase unified credit exemption amount.--Under prior law, the
    unified credit applicable to cumulative taxable transfers by gift and at
    death effectively exempted from tax transfers totaling $675,000 in 2001,
    $700,000 in 2002 and 2003, $850,000 in 2004, $950,000 in 2005 and $1
    million in 2006 and subsequent years. The tax on generation-skipping
    transfers applied only to cumulative transfers in excess of $1 million,
    adjusted annually for inflation after 1997 ($1,060,000 in 2001). This
    Act increases the unified credit effective exemption amount for estate
    and gift tax purposes to $1 million in 2002. The effective exemption
    amount for gift tax purposes will remain at $1 million; however, the
    effective exemption amount for estate and generation-skipping transfer
    tax purposes will increase to $1.5 million in 2004 and 2005, $2.0
    million in 2006 through 2008, and $3.5 million in 2009.
      Reduce and modify allowance for State death taxes paid.--A credit
    against the Federal estate tax for any estate, inheritance, legacy, or
    succession taxes actually paid to any State or the District of Columbia
    with respect to any property included in the decedent's gross estate,
    was provided under prior law. The allowable credit was limited to the
    lesser of the tax paid or a percentage of the decedent's adjusted
    taxable estate (ranging from 0.8 percent of adjusted taxable estate
    between $40,000 and $90,000, up to 16 percent of adjusted taxable estate
    in excess of $10,040,000). This Act reduces the credit rates by 25
    percent in 2002, 50 percent in 2003, and 75 percent in 2004. For 2005
    through 2009, the credit is replaced by a deduction for taxes paid.
      Modify basis of property received.--Under prior law, the basis of
    property passing from a decedent's estate generally was the fair market
    value of the property on the date of the decedent's death. This step up
    (or step down) in basis eliminated the recognition of income on any
    appreciation of the property that occurred prior to the decedent's
    death, and had the effect of eliminating the tax benefit from any
    unrealized loss. Effective for decedent's dying after December 31, 2009
    and before January 1, 2011, the basis of property passing from a
    decedent's estate will be the lesser of the adjusted basis of the
    decedent or the fair market value of the property on the date of the
    decedent's death. Each decedent's estate generally is permitted to
    increase the basis of assets transferred by up to a total of $1.3
    million for assets passing to any heir plus an additional $3 million for
    property transferred to a surviving spouse. Nonresidents who are not
    U.S. citizens are allowed to increase the basis of property by up to
    $60,000. Each estate is also allowed additional basis equal to the
    decedent's unused capital loss and net operating loss carryforwards and
    built-in capital losses.
      Modify other provisions affecting estate, gift, and generation-
    skipping transfer taxes.--Other modifications provided in this Act: (1)
    expand the estate tax exclusion for qualified conservation easements,
    (2) change the generation-skipping transfer tax rules to ensure that a
    taxpayer does not inadvertently lose the benefit of the generation-
    skipping transfer tax exemption, and (3) expand eligibility for the
    payment of estate and gift taxes in installments.

                        Pension and Retirement Provisions

      Increase contributions to Individual Retirement Accounts (IRAs).--
    There are two types of IRAs under present law - Roth IRAs and
    traditional IRAs. Individuals with AGI below certain thresholds may make
    nondeductible contributions to a Roth IRA (deductible contributions are
    not allowed). The maximum allowable annual contribution to a Roth IRA is
    phased out for single taxpayers with AGI between $95,000 and $110,000
    (between $150,000 and $160,000 for married taxpayers filing a joint
    return). Account earnings are not includible in income, and qualified
    distributions from a Roth IRA are tax-free. Both deductible and non-
    deductible contributions may be made to a traditional IRA. Contributions
    to a traditional IRA are deductible if neither the individual nor the
    individual's spouse is an active participant in an employer-sponsored
    retirement plan. If the individual is an active participant in an
    employer-sponsored retirement plan, the deduction limit is phased out
    between $34,000 and $44,000 of AGI for single taxpayers (between $54,000
    and $64,000 of AGI for married taxpayers filing a joint return). If the
    individual is not an active participant in an employer-sponsored
    retirement plan but the individual's spouse is an active participant,
    the deduction limit is phased out between $150,000 and $160,000 of AGI.
    All taxpayers may make nondeductible contributions to a traditional IRA,
    regardless of income. Account earnings from IRAs are not includible in
    income when

    [[Page 62]]

    earned. However, distributions from traditional IRAs are includible in
    income, except to the extent they are a return of nondeductible
    contributions.
      Under prior law, the maximum annual contribution to an IRA was the
    lesser of $2,000 or the individual's compensation. In the case of
    married taxpayers filing a joint return, annual contributions of up to
    $2,000 were allowed for each spouse, provided the combined compensation
    of the spouses was at least equal to the contributed amount. This Act
    increases the maximum annual contribution to an IRA to $3,000 for
    taxable years 2002 through 2004, $4,000 for taxable years 2005 through
    2007, and $5,000 for taxable year 2008. For taxable years 2009 and 2010,
    the limit is adjusted annually for inflation in $500 increments.
    Effective for taxable years beginning after December 31, 2001,
    individuals who attain age 50 before the end of the year may make
    additional catch-up contributions to an IRA. For these individuals, the
    otherwise maximum contribution limit (before application of the AGI
    phase-out limits) is increased by $500 for taxable years 2002 through
    2005 and by $1,000 for taxable years 2006 through 2010.

      Increase contribution and benefit limits under qualified pension
    plans.--Limits on contributions and benefits under qualified pension
    plans are based on the type of plan. Under prior law, annual additions
    to a defined contribution plan with respect to each plan participant
    were limited to the lesser of (1) 25 percent of compensation or (2)
    $35,000 (for 2001), adjusted for inflation in $5,000 increments. Under
    prior law, the maximum annual benefit payable at an individual's social
    security retirement age under a defined benefit plan was generally the
    lesser of (1) 100 percent of average compensation, or (2) $140,000 (for
    2001), adjusted for inflation in $5,000 increments. The annual
    compensation of each participant that could be taken into account for
    purposes of determining contributions and benefits under a plan
    generally was limited to $170,000 (for 2001), adjusted for inflation in
    $10,000 increments. Maximum annual elective deferrals that an individual
    was allowed to make to a qualified cash or deferred arrangement (401(k)
    plan), a tax-sheltered annuity (section 403(b) annuity), or a salary
    reduction simplified employee pension plan (SEP) under prior law were
    limited to $10,500 (for 2001), adjusted for inflation in increments of
    $500. The maximum amount of annual elective deferrals that an individual
    was allowed to make to a savings incentive match plan (SIMPLE plan)
    under prior law was $6,500 (for 2001), adjusted for inflation in
    increments of $500. Under prior law the maximum annual deferral under an
    eligible deferred compensation plan of a State or local government or a
    tax-exempt organization (a section 457 plan) was the lesser of (1)
    $8,500 (for 2001), adjusted for inflation in increments of $500, or (2)
    33 1/3 percent of compensation. In the three years prior to retirement,
    the limit on contributions to an eligible section 457 plan is generally
    increased to twice the otherwise applicable dollar limit.
      Effective for taxable years beginning after December 31, 2001, the
    contribution limit to a defined contribution plan is increased to the
    lesser of 100 percent of compensation or $40,000 (adjusted annually for
    inflation in $1,000 increments after 2002). Effective for taxable years
    ending after December 31, 2001, the benefit limit for defined benefit
    plans is increased to $160,000 (adjusted annually for inflation for
    plans ending after December 31, 2002, in increments of $1,000) and
    calculated as a benefit payable at age 62. The compensation that may be
    taken into account under a plan is increased to $200,000 in 2002
    (indexed annually thereafter in $5,000 increments). The dollar limit on
    annual elective deferrals under section 401(k) plans, section 403(b)
    annuities and salary reduction SEPs is increased to $11,000 in 2002, and
    increased annually thereafter in $1,000 increments, reaching $15,000 in
    2006 (adjusted annually for inflation in increments of $500 after 2006).
    The dollar limit on annual elective deferrals to a SIMPLE plan is
    increased to $7,000 in 2002, and increased annually thereafter in $1,000
    increments, reaching $10,000 in 2005 (adjusted for inflation in
    increments of $500 after 2006). The dollar limit on contributions to an
    eligible section 457 plan is increased to the lesser of (1) 100 percent
    of includable compensation or (2) $11,000 in 2002, $12,000 in 2003,
    $13,000 in 2004, $14,000 in 2005, and $15,000 in 2006 (adjusted for
    inflation in increments of $500 after 2006).

      Permit catch-up contributions to certain salary reduction
    arrangements.--Effective for taxable years beginning after December 31,
    2001, the otherwise applicable dollar limit on elective deferrals under
    a section 401(k) plan, section 403(b) annuity, SEP or SIMPLE plan, or
    deferrals under a section 457 plan is increased for individuals who
    attain age 50 by the end of the year. The additional amount of elective
    contributions that is permitted to be made by an eligible individual
    participating in such a plan is the lesser of: (1) the applicable dollar
    amount or (2) the participant's compensation for the year after
    reduction by any other elective deferrals of the participant for the
    year. The applicable dollar amount under a 401(k) plan, section 403(b)
    plan, SEP, or section 457 plan is $1,000 for 2002, $2,000 for 2003,
    $3,000 for 2004, $4,000 for 2005, and $5,000 for 2006 through 2010
    (adjusted annually for inflation in $500 increments beginning in 2007).
    The applicable dollar amount under a SIMPLE plan is $500 for 2002,
    $1,000 for 2003, $1,500 for 2004, $2,000 for 2005, and $2,500 for 2006
    through 2010 (adjusted annually for inflation in $500 increments
    beginning in 2007).
      Provide a nonrefundable tax credit to certain individuals for elective
    deferrals and IRA contributions.--For taxable years beginning after
    December 31, 2001 and before January 1, 2007, a nonrefundable tax credit
    is provided for up to $2,000 in contributions made by eligible taxpayers
    to a qualified plan or to a traditional or Roth IRA. The credit, which
    is in addition to any deduction or exclusion that would

    [[Page 63]]

    otherwise apply with respect to the contribution, is available to single
    taxpayers with AGI less than or equal to $25,000 ($37,500 for heads of
    household and $50,000 for married taxpayers filing a joint return). The
    credit is available to individuals who are 18 years of age or older
    (other than individuals who are full-time students or claimed as a
    dependent on another taxpayer's return) and is offset against both the
    regular and alternative minimum tax. The credit rate is 50 percent for
    single taxpayers with AGI less than or equal to $15,000 ($30,000 for
    married taxpayers filing a joint return and $22,500 for heads of
    household), 20 percent for single taxpayers with AGI between $15,000 and
    $16,250 (between $30,000 and $32,500 for married taxpayers filing a
    joint return and between $22,500 and $24,375 for heads of household),
    and 10 percent for single taxpayers with AGI between $16,250 and $25,000
    (between $32,500 and $50,000 for married taxpayers filing a joint return
    and between $24,375 and $37,500 for heads of household).
      Provide tax credit for new retirement plan expenses of small
    businesses.--Effective for taxable years beginning after December 31,
    2001, a nonrefundable tax credit is provided for qualified
    administrative and retirement-education expenses incurred by a small
    business (an employer that did not employ, in the preceding year, more
    than 100 employees with compensation in excess of $5,000) that adopts a
    new qualified defined benefit or defined contribution plan (including a
    section 401(k) plan), SIMPLE plan, or SEP. The credit applies to 50
    percent of the first $1,000 in qualifying expenses for the plan for each
    of the first three years of the plan. The 50 percent of qualifying
    expenses offset by the credit are not deductible; the other 50 percent
    of qualifying expenses (and other expenses) are deductible as under
    prior law.
      Modify other pension and retirement provisions.--In addition to the
    provisions described above, this Act expands coverage in pension and
    retirement plans through provisions that: (1) require accelerated
    vesting for matching employer contributions, (2) modify the definition
    of key employee, (3) eliminate IRS user fees for certain determination
    letter requests regarding employer plans, (4) modify the application of
    the deduction limitation with regard to elective deferral contributions,
    (5) repeal the rules coordinating contributions to eligible section 457
    plans with contributions under other types of plans, (6) increase the
    annual limitation on the amount of deductible contributions made by an
    employer to a profit-sharing or stock bonus plan, (7) modify the
    definition of compensation for purposes of the deduction rules, (8)
    provide the option to treat elective deferrals as after-tax
    contributions, (9) improve notice to employees for pension amendments
    reducing future accruals, (10) increase portability, (11) strengthen
    pension security and enforcement, and (12) reduce regulatory burdens.

                                Other Provisions

      Provide minimum tax relief to individuals.--An alternative minimum tax
    is imposed on individuals to the extent that the tentative minimum tax
    exceeds the regular tax. An individual's tentative minimum tax generally
    is equal to the sum of: (1) 26 percent of the first $175,000 ($87,500 in
    the case of a married individual filing a separate return) of
    alternative minimum taxable income (taxable income modified to take
    account of specified preferences and adjustments) in excess of an
    exemption amount and (2) 28 percent of the remaining alternative minimum
    taxable income. The AMT exemption amounts under prior law were: (1)
    $45,000 for married taxpayers filing a joint return and surviving
    spouses; (2) $33,750 for single taxpayers, and (3) $22,500 for married
    taxpayers filing a separate return, estates and trusts. The exemption
    amounts are phased out by an amount equal to 25 percent of the amount by
    which the individual's alternative minimum taxable income exceeds: (1)
    $150,000 for married taxpayers filing a joint return and surviving
    spouses, (2) $112,500 for single taxpayers, and (3) $75,000 for married
    taxpayers filing a separate return, estates and trusts. The exemption
    amounts, the threshold phase-out amounts, and the rate brackets are not
    indexed for inflation. Effective for taxable years beginning after
    December 31, 2001 and before January 1, 2005, the exemption amount is
    increased to $49,000 for married taxpayers filing a joint return and
    surviving spouses, $35,750 for single taxpayers, and $24,500 for married
    taxpayers filing a separate return, estates and trusts.
      Modify the timing of estimated tax payments by corporations.--
    Corporations generally are required to pay their income tax liability in
    quarterly estimated payments. For corporations that keep their accounts
    on a calendar year basis, these payments are due on or before April 15,
    June 15, September 15 and December 15 (if these dates fall on a holiday
    or weekend, payment is due on the next business day). This Act allowed
    corporations to delay the estimated payment otherwise due on September
    17, 2001 until October 1, 2001; 20 percent of the estimated tax payment
    otherwise due on September 15, 2004 may be delayed until October 1,
    2004.

                   VICTIMS OF TERRORISM TAX RELIEF ACT OF 2001

      This Act provides income and estate tax relief to the survivors of
    victims of (1) the September 11, 2001 terrorist attacks on the United
    States, (2) the April 19, 1995 Oklahoma City bombing, and (3) exposure
    to anthrax on or after September 11, 2001 and before January 1, 2002.
    General relief is also provided for victims of disasters and terrorist
    actions. The tax relief provided in this Act does not apply to any
    individual identified by the Attorney General to have been a participant
    or conspirator in the terrorist attack or attacks to which a specific
    provision applies, or a representative

    [[Page 64]]

    of such individual. The major provisions of this Act are described
    below.

      Provide individual income tax relief to victims of terrorist
    attacks.--Under current law an individual in active service as a member
    of the Armed Forces who dies while serving in a combat zone is not
    subject to income tax for the year of death (as well as for any prior
    taxable year ending on or after the first day the individual served in
    the combat zone). In addition, military and civilian employees of the
    United States are exempt from income taxes if they die as a result of
    wounds or injury incurred outside the United States in terrorist or
    military action. This exemption is available for the year of death and
    for prior taxable years beginning with the taxable year prior to the
    taxable year in which the wounds or injury were incurred. This Act
    extends relief similar to the present-law treatment of military or
    civilian employees of the United States who die as a result of terrorist
    or military activity outside the United States to individuals who die
    from wounds or injury incurred as a result of: (1) the terrorist attacks
    on September 11, 2001 or April 19, 1995, or (2) exposure to anthrax on
    or after September 11, 2001 and before January 1, 2002. These
    individuals (whether killed as a result of an attack or in rescue or
    recovery operations) generally are exempt from income tax for the year
    of death and for prior taxable years beginning with the taxable year
    prior to the taxable year in which the wounds or injury occurred. A
    minimum tax relief benefit of $10,000 will be provided to each eligible
    individual regardless of the income tax liability incurred during the
    eligible tax years.
      Exclude certain death benefits from gross income.--In general, gross
    income includes income from whatever source derived, including payments
    made as a result of the death of an individual. Under this Act, amounts
    paid by an employer by reason of the death of an employee attributable
    to wounds or injury incurred as a result of the terrorist attacks on
    September 11, 2001 or April 19, 1995, or exposure to anthrax on or after
    September 11, 2001 and before January 1, 2002, are excluded from gross
    income. Subject to rules prescribed by the Secretary of the Treasury,
    the exclusion does not apply to amounts that would have been payable if
    the individual had died for a reason other than the specified attacks.
      Provide a reduction in Federal estate taxes.--Under current law a
    reduction in Federal estate taxes is provided for taxable estates of
    U.S. citizens or residents who are active members of the U.S. Armed
    Forces and who are killed in action while serving in a combat zone. This
    estate tax reduction also applies to active service members who die as a
    result of wounds, disease, or injury suffered while serving in a combat
    zone by reason of a hazard to which the service member was subjected as
    an incident of such service. This Act simplifies the estate tax relief
    provided for combat-related deaths and generally treats individuals who
    die from wounds or injury incurred as a result of the terrorist attacks
    that occurred on September 11, 2001 and April 19, 1995, or as a result
    of exposure to anthrax on or after September 11, 2001 and before January
    1, 2002, in the same manner as if they were active members of the U.S.
    Armed Forces killed in action while serving in a combat zone or dying as
    a result of wounds or injury suffered while serving in a combat zone.
    The executor of an estate eligible for the reduction may elect not to
    have the reduction apply if more favorable tax treatment would be
    available under generally applicable rules. The reduction effectively
    shields the first $8.8 million of a victim's estate from Federal estate
    taxes and reduces estate tax rates.
      Treat payments by charitable organizations as exempt payments.--Under
    current law, charitable organizations generally are exempt from
    taxation. Such organizations must be organized and operated exclusively
    for exempt purposes and no part of the net earnings of such
    organizations may inure to the benefit of any private shareholder or
    individual. Such organizations must serve a public rather than a private
    interest and generally must serve a charitable class of persons that is
    indefinite or of sufficient size. Under this Act, charitable
    organizations that make payments on or after September 11, 2001 by
    reason of the death, injury, wounding, or illness of an individual
    incurred as a result of the September 11, 2001 attacks, or as a result
    of exposure to anthrax occurring on or after September 11, 2001 and
    before January 1, 2002, are not required to make a specific assessment
    of need for the payments to be related to the purpose or function
    constituting the basis for the organization's exemption. This rule
    applies provided that the organization makes the payments in good faith
    using a reasonable and objective formula that is consistently applied.
    Such payments must be for public and not private benefit and must serve
    a charitable class. Similarly, if a tax-exempt private foundation makes
    payments under the conditions described above, the payment will not be
    subject to excise taxes on self-dealing, even if made to a person who is
    otherwise disqualified under current law.
      Provide exclusion for certain cancellations of indebtedness.--Gross
    income generally includes income that is realized by a debtor from the
    discharge of indebtedness, subject to certain exceptions for debtors in
    Title 11 bankruptcy cases, insolvent debtors, certain farm indebtedness,
    and certain real property business indebtedness. Under this Act, an
    exclusion from gross income is provided for any amount realized from the
    discharge (in whole or in part) of indebtedness if the indebtedness is
    discharged by reason of the death of an individual incurred as a result
    of the September 11, 2001 terrorist attacks, or as a result of anthrax
    exposure occurring on or after September 11, 2001 and before January 1,
    2002. This exclusion applies to discharges made on or after September
    11, 2001 and before January 1, 2002.

    [[Page 65]]

      Provide general tax relief for victims of terrorist/military actions,
    Presidentially-declared disasters, and certain other disasters.--This
    Act also: (1) clarifies that payments of compensation made under the Air
    Transportation Safety and System Stabilization Act are excludable from
    gross income, (2) provides a specific exclusion from gross income for
    ``qualified disaster relief payments,'' (3) expands the authority of the
    Secretary of the Treasury to prescribe regulations concerning deadlines
    for performing various acts under the Internal Revenue Code and the
    waiver of interest on underpayments of tax liability, (4) expands the
    present-law exclusion from gross income for disability income of U.S.
    civilian employees attributable to a terrorist attack outside the United
    States to apply to disability income received by any individual
    attributable to a terrorist or military action, (5) extends the income
    tax relief provided under current law to U.S. military and civilian
    personnel who die as a result of terrorist or military activity outside
    the United States to such personnel regardless of where the terrorist or
    military action occurs, (6) modifies the tax treatment of structured
    settlement arrangements, (7) modifies the personal exemption deduction
    for certain disability trusts, and (8) expands the availability of
    returns and return information for purposes of investigating terrorist
    incidents, threats, or activities, and for analyzing intelligence
    concerning terrorist incidents, threats, or activities.

           RAILROAD RETIREMENT AND SURVIVORS' IMPROVEMENT ACT OF 2001

      The Federally administered railroad retirement system is a two-tier
    system consisting of social security equivalent benefits (frequently
    referred to as Tier I benefits) and a rail industry pension plan
    (frequently referred to as Tier II benefits). This Act modernizes the
    financing of the railroad retirement system and provides enhanced
    benefits to retirees and survivors. Under prior law, the Tier II payroll
    tax levied on the annual taxable wage base of rail industry employees
    was 16.1 percent for employers and 4.9 percent for employees. This Act
    reduces the rate for employers to 15.6 percent in 2002 and to 14.2
    percent in 2003. Starting in 2004, the rates are adjusted annually and
    linked to the level of Tier II reserves. Under current estimates, those
    rates are expected to be 13.1 percent for employers and 4.9 percent for
    employees; the rates necessary to maintain reserves at a level
    sufficient to fund benefits for four years. If the reserve fund falls
    below the level sufficient to fund four years of benefits or increases
    to a level sufficient to fund more than six years of benefits, then
    payroll tax rates would change according to a schedule set in the Act.
    The rate on employers can vary between 8.2 percent and 22.1 percent,
    while the rate on employees can vary between zero and 4.9 percent.

                   INVESTOR AND CAPITAL MARKETS FEE RELIEF ACT

      The Securities and Exchange Commission (SEC) collects fees for
    registrations, mergers, and transactions of securities. Under prior law,
    some of these fees were classified as receipts and others were
    classified as offsetting collections (outlays). The specific fees
    collected included the following: (1) Transaction fees equal to 1/300th
    of a percent (1/800th of a percent beginning in 2008) of the aggregate
    dollars traded through national securities exchanges, national
    securities associations, brokers, and dealers. (2) Registration fees
    equal to $200 per $1 million ($67 per $1 million beginning in 2007) of
    the maximum aggregate price for securities that are proposed to be
    offered. Additional registration fees (subject to appropriation) equal
    to $39 per $1 million for 2002 ($28 for 2003, $9 for 2004, $5 for 2005
    and zero for 2006 and subsequent years) of the aggregate price for
    securities proposed to be offered. (3) Merger fees equal to $200 per $1
    million of the value of securities proposed to be purchased as part of a
    merger. (4) Assessments on transactions of single stock futures equal to
    $.02 per transaction ($.0075 per transaction beginning in 2007).
      This Act reclassifies all of these fees as offsetting collections
    (outlays) and adjusts the fee rates as follows: (1) Transaction fees are
    reduced to $15 per $1 million of the aggregate dollars traded. For 2003
    and each subsequent year, the SEC is required to establish a rate that
    would generate transaction fee collections equal to a target amount for
    that year. (2) Registration fees are reduced to $92 per $1 million of
    the maximum aggregate price for securities that are proposed to be
    offered. For 2003 and each subsequent year, the SEC is required to
    establish a fee rate that would generate collections equal to a target
    amount. (3) Merger fees are reduced to $92 per $1 million of the value
    of securities proposed to be purchased as part of a merger. For 2003 and
    each subsequent year, these fees would be equal to the rate for
    registration fees. (4) Assessments on transactions of single stock
    futures would be reduced to $0.009 per transaction for 2002 through 2006
    and then fall to $0.0042 per transaction for 2007 and subsequent years.

                            ADMINISTRATION PROPOSALS

       The President's plan provides tax incentives for charitable giving,
    education, the disabled, health care, farmers, and the environment. It
    also provides tax incentives designed to increase domestic production of
    oil and gas and promote energy conservation, extends for two years
    provisions that expired in 2001, permanently extends the research and
    experimentation (R&E) tax credit, and permanently extends the provisions
    of the Economic Growth and Tax Relief Reconciliation Act of 2001 that
    sunset on December 31, 2010. In addition, the President intends to work
    with the Congress in a bipartisan manner to enact an economic security
    plan

    [[Page 66]]

    that will provide an immediate and effective stimulus to the Nation's
    economy. In addition, the Treasury Department will be conducting a
    thorough review of means of simplifying the tax code. The Administration
    intends to work with Congress, tax practitioners, tax administrators,
    and taxpayers to produce meaningful simplification. An introduction to
    these efforts is contained at the end of this Chapter.

                        BIPARTISAN ECONOMIC SECURITY PLAN

       The President believes that it is crucial for Congress to quickly
    pass an economic security bill that will reinvigorate economic growth
    and assist workers affected by the economic downturn that has followed
    the terrorist attacks of September 11, 2001. To prevent further job
    losses and help displaced workers get back to work quickly, the
    Administration will continue to work with Congress in a bipartisan
    manner to enact an economic stimulus package and a worker assistance
    package to provide additional temporary, quick, and effective help for
    those who have lost their jobs

                                 TAX INCENTIVES

                    Provide Incentives for Charitable Giving

      Provide charitable contribution deduction for nonitemizers.--Under
    current law, individual taxpayers who do not itemize their deductions
    (nonitemizers) are not able to deduct contributions to qualified
    charitable organizations. The Administration proposes to allow
    nonitemizers to deduct charitable contributions in addition to claiming
    the standard deduction, effective for taxable years beginning after
    December 31, 2001. The deduction would be phased in between 2002 and
    2012, as follows: (1) Single taxpayers would be allowed a maximum
    deduction of $100 in 2002 through 2004, $300 in 2005 through 2011, and
    $500 in 2012 and subsequent years. (2) Married taxpayers filing a joint
    return would be allowed a maximum deduction of $200 in 2002 through
    2004, $600 in 2005 through 2011, and $1,000 in 2012 and subsequent
    years. Deductible contributions would be subject to existing rules
    governing itemized charitable contributions, such as the substantiation
    requirements and the percentage-of-AGI limitations.
      Permit tax-free withdrawals from IRAs for charitable contributions.--
    Under current law, eligible individuals may make deductible or non-
    deductible contributions to a traditional IRA. Pre-tax contributions and
    earnings in a traditional IRA are included in income when withdrawn.
    Effective for distributions after December 31, 2001, the Administration
    proposes to allow individuals who have attained age 59\1/2\ to exclude
    from gross income IRA distributions made directly to a charitable
    organization. The exclusion would apply without regard to the
    percentage-of-AGI limitations that apply to deductible charitable
    contributions. The exclusion would apply only to the extent the
    individual receives no return benefit in exchange for the transfer, and
    no charitable deduction would be allowed with respect to any amount that
    is excludable from income under this provision.
      Raise the cap on corporate charitable contributions.--Current law
    limits deductible charitable contributions by corporations to 10 percent
    of net income (calculated before the deduction of the charitable
    contributions and certain other deductions). The Administration proposes
    to increase the limit on deductible charitable contributions by
    corporations from 10 percent to 15 percent of net income, effective for
    taxable years beginning after December 31, 2001.
      Expand and increase the enhanced charitable deduction for
    contributions of food inventory.--A taxpayer's deduction for charitable
    contributions of inventory generally is limited to the taxpayer's basis
    (typically cost) in the inventory. However, for certain contributions of
    inventory, C corporations may claim an enhanced deduction equal to the
    lesser of: (1) basis plus one half of the fair market value in excess of
    basis, or (2) two times basis. To be eligible for the enhanced
    deduction, the contributed property generally must be inventory of the
    taxpayer, contributed to a charitable organization, and the donee must
    (1) use the property consistent with the donee's exempt purpose solely
    for the care of the ill, the needy, or infants, (2) not transfer the
    property in exchange for money, other property, or services, and (3)
    provide the taxpayer a written statement that the donee's use of the
    property will be consistent with such requirements. To use the enhanced
    deduction, the taxpayer must establish that the fair market value of the
    donated item exceeds basis.
      Under the Administration's proposal, which is designed to encourage
    contributions of food inventory to charitable organizations, any
    taxpayer engaged in a trade or business would be eligible to claim an
    enhanced deduction for donations of food inventory. The enhanced
    deduction for donations of food inventory would be increased to the
    lesser of: (1) fair market value, or (2) two times basis. However, to
    ensure consistent treatment of all businesses claiming an enhanced
    deduction for donations of food inventory, the enhanced deduction for
    qualified food donations by S corporations and non-corporate taxpayers
    would be limited to 15 percent of net income from the trade or business.
    A special provision would allow taxpayers with a zero or low basis in
    the qualified food donation (e.g., taxpayers that use the cash method of
    accounting for purchases and sales, and taxpayers that are not required
    to capitalize indirect costs) to assume a basis equal to 25 percent of
    fair market value. The enhanced deduction would be available only for
    donations of ``apparently wholesome food'' (food intended for human
    consumption that meets all quality and labeling standards imposed by
    Federal, State, and local laws and regulations, even though the food may
    not be readily marketable due to appearance, age, freshness, grade,
    size, surplus, or other conditions). The fair market value of
    ``apparently wholesome food'' that cannot or will not be

    [[Page 67]]

    sold solely due to internal standards of the taxpayer or lack of market,
    would be determined by taking into account the price at which the same
    or substantially the same food items are sold by the taxpayer at the
    time of the contribution or, if not sold at such time, in the recent
    past. These proposed changes in the enhanced deduction for donations of
    food inventory would be effective for taxable years beginning after
    December 31, 2001.

      Reform excise tax based on investment income of private foundations.--
    Under current law, private foundations that are exempt from Federal
    income tax are subject to a two-percent excise tax on their net
    investment income (one-percent if certain requirements are met). The tax
    on private foundations that are not exempt from Federal income tax, such
    as certain charitable trusts, is equal to the excess of the sum of the
    excise tax that would have been imposed if the foundation were tax
    exempt and the amount of the unrelated business income tax that would
    have been imposed if the foundation were tax exempt, over the income tax
    imposed on the foundation. To encourage increased charitable activity
    and simplify the tax laws, the Administration proposes to replace the
    two rates of tax on the net investment income of private foundations
    that are exempt from Federal income tax with a single tax rate of one
    percent. The tax on private foundations not exempt from Federal income
    tax would be equal to the excess of the sum of the one-percent excise
    tax that would have been imposed if the foundation were tax exempt and
    the amount of the unrelated business income tax what would have been
    imposed if the foundation were tax exempt, over the income tax imposed
    on the foundation. The proposed change would be effective for taxable
    years beginning after December 31, 2001.
      Modify tax on unrelated business taxable income of charitable
    remainder trusts.--A charitable remainder annuity trust is a trust that
    is required to pay, at least annually, a fixed dollar amount of at least
    five percent of the initial value of the trust to a noncharity for the
    life of an individual or for a period of 20 years or less, with the
    remainder passing to charity. A charitable remainder unitrust is a trust
    that generally is required to pay, at least annually, a fixed percentage
    of at least five percent of the fair market value of the trust's assets
    determined at least annually to a non-charity for the life of an
    individual or for a period of 20 years or less, with the remainder
    passing to charity. A trust does not qualify as a charitable remainder
    annuity if the annuity for a year is greater than 50 percent of the
    initial fair market value of the trust's assets. A trust does not
    qualify as a charitable remainder unitrust if the percentage of assets
    that are required to be distributed at least annually is greater than 50
    percent. A trust does not qualify as a charitable remainder annuity
    trust or a charitable remainder unitrust unless the value of the
    remainder interest in the trust is at least 10 percent of the value of
    the assets contributed to the trust. Distributions from a charitable
    remainder annuity trust or charitable remainder unitrust, which are
    included in the income of the beneficiary for the year that the amount
    is required to be distributed, are treated in the following order as:
    (1) ordinary income to the extent of the trust's current and previously
    undistributed ordinary income for the trust's year in which the
    distribution occurred, (2) capital gains to the extent of the trust's
    current capital gain and previously undistributed capital gain for the
    trust's year in which the distribution occurred, (3) other income to the
    extent of the trust's current and previously undistributed other income
    for the trust's year in which the distribution occurred, and (4) corpus
    (trust principal).
      Charitable remainder annuity trusts and charitable remainder unitrusts
    are exempt from Federal income tax; however, such trusts lose their
    income tax exemption for any year in which they have unrelated business
    taxable income. Any taxes imposed on the trust are required to be
    allocated to trust corpus. The Administration proposes to levy a 100-
    percent excise tax on the unrelated business taxable income of
    charitable remainder trusts, in lieu of removing the Federal income tax
    exemption for any year in which unrelated business taxable income is
    incurred. This change, which is a more appropriate remedy than loss of
    tax exemption, is proposed to become effective for taxable years
    beginning after December 31, 2001, regardless of when the trust was
    created.

      Modify basis adjustment to stock of S corporations contributing
    appreciated property.--Under current law, each shareholder in an S
    corporation separately accounts for his/her pro rata share of the S
    corporation's charitable contributions in determining his/her income tax
    liability. A shareholder's basis in the stock of the S corporation must
    be reduced by the amount of his/her pro-rata share of the S
    corporation's charitable contribution. In order to preserve the benefit
    of providing a charitable contribution deduction for contributions of
    appreciated property and to prevent the recognition of gain on the
    contributed property on the disposition of the S corporation stock, the
    Administration proposes to allow a shareholder in an S corporation to
    increase his/her basis in the stock of an S corporation by an amount
    equal to the excess of the shareholder's pro rata share of the S
    corporation's charitable contribution over the stockholder's pro rata
    share of the adjusted basis of the contributed property. The proposal
    would be effective for taxable years beginning after December 31, 2001.
      Allow expedited consideration of applications for exempt status.--The
    Administration proposes to allow expedited consideration of applications
    for exempt status by organizations formed for the primary purpose of
    providing social services to the poor and the needy. To be eligible, the
    organization must have applied for a grant under a Federal, State, or
    local program that provides funding for social service programs on or be

    [[Page 68]]

    fore the day that the organization applies to the Secretary of the
    Treasury for determination of its exempt status. Organizations that
    demonstrate that under the terms of the grant program exempt status is
    required before the organization is eligible to apply for a grant would
    also qualify for expedited consideration. Each organization would be
    required to include with its application for exempt status a copy of its
    completed grant application. The proposal would be effective for taxable
    years beginning after December 31, 2001.

                         Strengthen and Reform Education

      Provide refundable tax credit for certain costs of attending a
    different school for pupils assigned to failing public schools.--Under
    the Administration's proposal, a refundable tax credit would be allowed
    for 50 percent of the first $5,000 of qualifying elementary and
    secondary education expenses incurred during the taxable year with
    respect to enrollment of a qualifying student in a qualifying school.
    Qualifying students would be those who, for a given school year, would
    normally attend a public school determined by the State as not having
    made ``adequate yearly progress'' under the terms of the Elementary and
    Secondary Education Act as amended by the No Child Left Behind Act of
    2001. A qualifying student in one school year generally would qualify
    for an additional school year even if the school normally attended made
    adequate yearly progress by the beginning of the second school year. A
    qualifying school would be any public school making adequate yearly
    progress or private elementary or secondary school. Qualifying expenses
    generally would be tuition, required fees, and transportation costs
    incurred by the taxpayer in connection with the attendance at a
    qualifying school. The proposal would be effective with respect to
    expenses incurred beginning with the 2002-2003 school year through the
    2006-2007 school year.
      Allow teachers to deduct out-of-pocket classroom expenses.--Under
    current law, teachers who incur unreimbursed, job-related expenses may
    deduct those expenses to the extent that when combined with other
    miscellaneous itemized deductions they exceed 2 percent of AGI, but only
    if the teacher itemizes deductions (i.e., does not use the standard
    deduction). Effective for expenses incurred in taxable years beginning
    after December 31, 2003, the Administration proposes to allow certain
    teachers and other elementary and secondary school professionals to
    treat up to $400 in qualified out-of-pocket classroom expenses as a non-
    itemized deduction (above-the-line deduction). Unreimbursed expenditures
    for certain books, supplies and equipment related to classroom
    instruction and for certain professional training programs would qualify
    for the deduction.

                              Invest in Health Care

      Provide refundable tax credit for the purchase of health insurance.--
    Current law provides a tax preference for employer-provided group health
    insurance plans, but not for individually purchased health insurance
    coverage except to the extent that deductible medical expenses exceed
    7.5 percent of AGI or the individual has self-employment income. The
    Administration proposes to make health insurance more affordable for
    individuals not covered by an employer plan or a public program.
    Effective for taxable years beginning after December 31, 2002, a new
    refundable tax credit would be provided for the cost of health insurance
    purchased by individuals under age 65. The credit would provide a
    subsidy for a percentage of the health insurance premium, up to a
    maximum includable premium. The maximum subsidy percentage would be 90
    percent for low-income taxpayers and would phase down with income. The
    maximum credit would be $1,000 for an adult and $500 for a child. The
    credit would be phased out at $30,000 for single taxpayers and $60,000
    for families purchasing a family policy.
      Individuals could claim the tax credit for health insurance premiums
    paid as part of the normal tax-filing process. Alternatively, beginning
    July 1, 2003, the tax credit would be available in advance at the time
    the individual purchases health insurance. The advance credit would
    reduce the premium paid by the individual to the health insurer, and the
    health insurer would be reimbursed directly by the Department of
    Treasury for the amount of the advance credit. Eligibility for an
    advance credit would be based on an individual's prior year tax return.
    To qualify for the credit, a health insurance policy would have to
    include coverage for catastrophic medical expenses. Qualifying insurance
    could be purchased in the individual market. Qualifying health insurance
    could also be purchased through private purchasing groups, State-
    sponsored insurance purchasing pools, and high-risk pools. Such groups
    may help reduce health insurance costs and increase coverage options for
    individuals, including older and higher-risk individuals. Individuals
    would not be allowed to claim the credit and make a contribution to an
    Archer Medical Savings Account (MSA) for the same taxable year.

      Provide an above-the-line deduction for long-term care insurance
    premiums.--Current law provides a tax preference for employer-paid long-
    term care insurance. However, the vast majority of the long-term care
    insurance market consists of individually purchased policies, for which
    no tax preference is provided except to the extent that deductible
    medical expenses exceed 7.5 percent of AGI or the individual has self-
    employment income. Premiums on qualified long-term care insurance are
    deductible as a medical expense, subject to annual dollar limitations
    that increase with age. The Administration proposes to make
    individually-

    [[Page 69]]

    purchased long-term care insurance (the vast majority of the long-term
    care insurance market) more affordable by creating an above-the-line
    deduction for qualified long-term care insurance premiums. To qualify
    for the deduction, the long-term care insurance would be required to
    meet certain standards providing consumer protections. The deduction
    would be available to taxpayers who individually purchase qualified
    long-term care insurance and to those who pay at least 50 percent of the
    cost of employer-provided coverage. The deduction would be effective for
    taxable years beginning after December 31, 2003 but would be phased in
    over five years. The deduction would be subject to current law annual
    dollar limitations on qualified long-term care insurance premiums.
      Allow up to $500 in unused benefits in a health flexible spending
    arrangement to be carried forward to the next year.--Under current law,
    unused benefits in a health flexible spending arrangement under a
    cafeteria plan for a particular year revert to the employer at the end
    of the year. Effective for plan years beginning after December 31, 2003,
    the Administration proposes to allow up to $500 in unused benefits in a
    health flexible spending arrangement at the end of a particular year to
    be carried forward to the next plan year.
      Provide additional choice with regard to unused benefits in a health
    flexible spending arrangement.--In addition to the proposed carryforward
    of unused benefits (see preceding discussion), the Administration
    proposes to allow up to $500 in unused benefits in a health flexible
    spending arrangement at the end of a particular year to be distributed
    to the participant as taxable income, contributed to an Archer MSA, or
    contributed to the employer's 401(k), 403(b), or governmental 457(b)
    retirement plan. Amounts distributed to the participant would be subject
    to income tax withholding and employment taxes. Amounts contributed to
    an Archer MSA or retirement plan would be subject to the normal rules
    applicable to elective contributions to the receiving plan or account.
    The proposal would be effective for plan years beginning after December
    31, 2003.
      Permanently extend and reform Archer Medical Savings Accounts.--
    Current law allows only self-employed individuals and employees of small
    firms to establish Archer MSAs, and caps the number of accounts at
    750,000. In addition to other requirements, (1) individuals who
    establish MSAs must be covered by a high-deductible health plan (and no
    other plan) with a deductible of at least $1,650 but not greater than
    $2,500 for policies covering a single person and a deductible of at
    least $3,300 but not greater than $4,950 in all other cases, (2) tax-
    preferred contributions are limited to 65 percent of the deductible for
    single policies and 75 percent of the deductible for other policies, and
    (3) either an individual or an employer, but not both, may make a tax-
    preferred contribution to an MSA for a particular year. The
    Administration proposes to permanently extend the MSA program, which is
    scheduled to expire on December 31, 2002, and to modify the program to
    make it more consistent with currently available health plans. Effective
    after December 31, 2002, the Administration proposes to remove the
    750,000 cap on the number of accounts. In addition, the program would be
    reformed by (1) expanding eligibility to include all individuals and
    employees of firms of all sizes covered by a high-deductible health
    plan, (2) modifying the definition of high deductible to permit a
    deductible as low as $1,000 for policies covering a single person and
    $2,000 in all other cases, (3) increasing allowable tax-preferred
    contributions to 100 percent of the deductible, (4) allowing tax-
    preferred contributions by both employers and employees for a particular
    year, up to the applicable maximum, (5) allowing contributions to MSAs
    under cafeteria plans, and (6) permitting qualified plans to provide,
    without counting against the deductible, up to $100 of coverage for
    allowable preventive services per covered individual each year.
    Individuals would not be allowed to make a contribution to an MSA and
    claim the proposed refundable tax credit for health insurance premiums
    for the same taxable year.
      Provide an additional personal exemption to home caretakers of family
    members.--Current law provides a tax deduction for certain long-term
    care expenses. In addition, taxpayers are allowed to claim exemptions
    for themselves (and their spouses, if married) and dependents who they
    support. However, neither provision may meet the needs of taxpayers who
    provide long-term care in their own home for close family members.
    Effective for taxable years beginning after December 31, 2003, the
    Administration proposes to provide an additional personal exemption to
    taxpayers who care for certain qualified family members who reside with
    the taxpayer in the household maintained by the taxpayer. A taxpayer is
    considered to maintain a household only if he/she furnishes over half of
    the annual cost of maintaining the household. Qualified family members
    would include any individual with long-term care needs who (1) is the
    spouse of the taxpayer or an ancestor of the taxpayer or the spouse of
    such an ancestor and (2) is a member of the taxpayer's household for the
    entire year. An individual would be considered to have long-term care
    needs if he or she were certified by a licensed physician (prior to the
    filing of a return claiming the exemption) as being unable for at least
    180 consecutive days to perform at least two activities of daily living
    without substantial assistance from another individual due to a loss of
    functional capacity. Alternatively, an individual would be considered to
    have long-term care needs if he or she were certified by a licensed
    physician as, for at least 180 consecutive days, (1) requiring
    substantial supervision to be protected from threats to his or her own
    health and safety due to severe cognitive impairment and (2) being
    unable to perform at least one activity of daily living or being unable
    to engage in age appropriate activities.

    [[Page 70]]

                       Assist Americans With Disabilities

      Exclude from income the value of employer-provided computers, software
    and peripherals.--The Administration proposes to allow individuals with
    disabilities to exclude from income the value of employer-provided
    computers, software or other office equipment that are necessary for the
    individual to perform work for the employer at home. To qualify for the
    exclusion, the employee would be required to make substantial use of the
    equipment (relative to overall use) performing work for his or her
    employer. However, unlike current law, which limits the exclusion to the
    extent that the equipment is used to perform work for the employer, the
    proposed exclusion would apply to all use of such equipment, including
    use by the employee for personal or non-employer-related trade or
    business purposes. Employees would be required to provide their employer
    with a certification from a licensed physician that they meet
    eligibility criteria. The proposal would be effective for taxable years
    beginning after December 31, 2003.

              Help Farmers and Fishermen Manage Economic Downturns

      Establish Farm, Fish and Ranch Risk Management (FFARRM) savings
    accounts.--Current law does not provide for the elective deferral of
    farm or fishing income. However, farmers can elect to average their
    farming income over a three-year period, and farmers may carry back net
    operating losses over the five previous years. In addition, taxes can be
    deferred on certain forms of income, including disaster payments, crop
    insurance and proceeds from emergency livestock sales. The
    Administration proposes to allow up to 20 percent of taxable income
    attributable to an eligible farming or fishing business to be
    contributed to a FFARRM savings account each year and deducted from
    income. Earnings on contributions would be taxable as earned and
    distributions from the account (except those attributable to earnings on
    contributions) would be included in gross income. Any amount not
    distributed within five years of deposit would be deemed to have been
    distributed and included in gross income; in addition, such
    distributions would be subject to a 10-percent surtax. The proposal
    would be effective for taxable years beginning after December 31, 2003.

                         Increase Housing Opportunities

      Provide tax credit for developers of affordable single-family
    housing.--The Administration proposes to provide annual tax credit
    authority to States (including U.S. possessions) designed to promote the
    development of affordable single-family housing in low-income urban and
    rural neighborhoods. Beginning in calendar year 2003, first-year credit
    authority of $1.75 per capita (indexed annually for inflation
    thereafter) would be made available to each State. State housing
    agencies would award first-year credits to single-family housing units
    comprising a project located in a census tract with median income equal
    to 80 percent or less of area median income. Units in condominiums and
    cooperatives could qualify as single-family housing. Credits would be
    awarded as a fixed amount for individual units comprising a project. The
    present value of the credits, determined on the date of a qualifying
    sale, could not exceed 50 percent of the cost of constructing a new home
    or rehabilitating an existing property. The taxpayer (developer or
    investor partnership) owning the housing unit immediately prior to the
    sale to a qualified buyer would be eligible to claim credits over a 5-
    year period beginning on the date of sale. Eligible homebuyers would be
    required to have incomes equal to 80 percent or less of area median
    income. Technical features of the provision would follow similar
    features of current law with respect to the low-income housing tax
    credit and mortgage revenue bonds.

                                Encourage Saving

      Establish Individual Development Accounts (IDAs).--The Administration
    proposes to allow eligible individuals to make contributions to a new
    savings vehicle, the Individual Development Account, which would be set
    up and administered by qualified financial institutions, nonprofit
    organizations, or Indian tribes (qualified entities). Citizens or legal
    residents of the United States between the ages of 18 and 60 who cannot
    be claimed as a dependent on another taxpayer's return, are not
    students, and who meet certain income limitations would be eligible to
    establish and contribute to an IDA. A single taxpayer would be eligible
    to establish and contribute to an IDA if his/her modified AGI in the
    preceding taxable year did not exceed $20,000 ($30,000 for heads of
    household, and $40,000 for married taxpayers filing a joint return).
    These thresholds would be indexed annually for inflation beginning in
    2004. Qualified entities that set up and administer IDAs would be
    required to match, dollar-for-dollar, the first $500 contributed by an
    eligible individual to an IDA in a taxable year. Qualified entities
    would be allowed a 100 percent tax credit for up to $500 in annual
    matching contributions to each IDA, and a $50 tax credit for each IDA
    maintained at the end of a taxable year with a balance of not less that
    $100 (excluding the taxable year in which the account was established).
    Matching contributions and the earnings on those contributions would be
    deposited in a separate ``parallel account.'' Contributions to an IDA by
    an eligible individual would not be deductible, and earnings on those
    contributions would be included in income. Matching contributions by
    qualified entities and the earnings on those contributions would be tax-
    free. Withdrawals from the parallel account may be made only for
    qualified purposes (higher education, the first-time purchase of a home,
    business start-up, and qualified rollovers). Withdrawals from the IDA
    for other than qualified purposes may result in the forfeiture of some
    or all matching contributions and the earnings on those contributions.
    The proposal would be effective for contributions

    [[Page 71]]

    made after December 31, 2002 and before January 1, 2010, to the first
    900,000 IDA accounts opened before January 1, 2008.

                             Protect the Environment

      Permanently extend expensing of brownfields remediation costs.--
    Taxpayers may elect to treat certain environmental remediation
    expenditures that would otherwise be chargeable to capital account as
    deductible in the year paid or incurred. Under current law, the ability
    to deduct such expenditures expires with respect to expenditures paid or
    incurred after December 31, 2003. The Administration proposes to
    permanently extend this provision, facilitating its use by businesses to
    undertake projects that may extend beyond the current expiration date
    and be uncertain in overall duration.
      Exclude 50 percent of gains from the sale of property for conservation
    purposes.--The Administration proposes to create a new incentive for
    private, voluntary land protection. This incentive is a cost-effective,
    non-regulatory approach to conservation. Under the proposal, when land
    (or an interest in land or water) is sold for conservation purposes,
    only 50 percent of any gain would be included in the seller's income. To
    be eligible for the exclusion, the sale may be either to a government
    agency or to a qualified conservation organization, and the buyer must
    supply a letter of intent that the acquisition will serve conservation
    purposes. In addition, the taxpayer or a member of the taxpayer's family
    must have owned the property for the three years immediately preceding
    the sale. The provision would be effective for sales taking place after
    December 31, 2003.

           Increase Energy Production and Promote Energy Conservation

      Extend and modify the tax credit for producing electricity from
    certain sources.--Taxpayers are provided a 1.5-cent-per-kilowatt-hour
    tax credit, adjusted for inflation after 1992, for electricity produced
    from wind, closed-loop biomass (organic material from a plant grown
    exclusively for use at a qualified facility to produce electricity), and
    poultry waste. To qualify for the credit, the electricity must be sold
    to an unrelated third party and must be produced during the first 10
    years of production at a facility placed in service before January 1,
    2002. The Administration proposes to extend the credit for electricity
    produced from wind and biomass to facilities placed in service before
    January 1, 2005. In addition, eligible biomass sources would be expanded
    to include certain biomass from forest-related resources, agricultural
    sources, and other specified sources. Special rules would apply to
    biomass facilities placed in service before January 1, 2002. Electricity
    produced at such facilities from newly eligible sources would be
    eligible for the credit only from January 1, 2002 through December 31,
    2004, and at a rate equal to 60 percent of the generally applicable
    rate. Electricity produced from newly eligible biomass co-fired in coal
    plants would also be eligible for the credit only from January 1, 2002
    through December 31, 2004, and at a rate equal to 30 percent of the
    generally applicable rate. The Administration also proposes to modify
    the rules relating to governmental financing of qualified facilities.
    There would be no percentage reduction in the credit for governmental
    financing attributable to tax-exempt bonds. Instead, such financing
    would reduce the credit only to the extent necessary to offset the value
    of the tax exemption. The rules relating to leased facilities would also
    be modified to permit the lessee, rather than the owner, to claim the
    credit.
      Provide tax credit for residential solar energy systems.--Current law
    provides a 10-percent investment tax credit to businesses for qualifying
    equipment that uses solar energy to generate electricity; to heat, cool
    or provide hot water for use in a structure; or to provide solar process
    heat. A credit currently is not provided for nonbusiness purchases of
    solar energy equipment. The Administration proposes a new tax credit for
    individuals who purchase solar energy equipment to generate electricity
    (photovoltaic equipment) or heat water (solar water heating equipment)
    for use in a dwelling unit that the individual uses as a residence,
    provided the equipment is used exclusively for purposes other than
    heating swimming pools. The proposed nonrefundable credit would be equal
    to 15 percent of the cost of the equipment and its installation; each
    individual taxpayer would be allowed a maximum credit of $2,000 for
    photovoltaic equipment and $2,000 for solar water heating equipment. The
    credit would apply to photovoltaic equipment placed in service after
    December 31, 2001 and before January 1, 2008 and to solar water heating
    equipment placed in service after December 31, 2001 and before January
    1, 2006.
      Modify treatment of nuclear decommissioning funds.--Under current law,
    deductible contributions to nuclear decommissioning funds are limited to
    the amount included in the taxpayer's cost of service for ratemaking
    purposes. For deregulated utilities, this limitation may result in the
    denial of any deduction for contributions to a nuclear decommissioning
    fund. The Administration proposes to repeal this limitation.
      Also under current law, deductible contributions are not permitted to
    exceed the amount the IRS determines to be necessary to provide for
    level funding of an amount equal to the taxpayer's post-1983
    decommissioning costs. The Administration proposes to permit funding of
    all decommissioning costs through deductible contributions. Any portion
    of these additional contributions relating to pre-1983 costs that
    exceeds the amount previously deducted (other than under the nuclear
    decommissioning fund rules) or excluded from the taxpayer's gross income
    on account of the taxpayer's liability for decommissioning costs, would
    be allowed as a deduction ratably over the remaining useful life of the
    nuclear power plant.

    [[Page 72]]

      The Administration's proposal would also permit taxpayers to make
    deductible contributions to a qualified fund after the end of the
    nuclear power plant's estimated useful life and would provide that
    nuclear decommissioning costs are deductible when paid. These changes in
    the treatment of nuclear decommissioning funds are proposed to be
    effective for taxable years beginning after December 31, 2001.

      Provide tax credit for purchase of certain hybrid and fuel cell
    vehicles.--Under current law, a 10-percent tax credit up to $4,000 is
    provided for the cost of a qualified electric vehicle. The full amount
    of the credit is available for purchases prior to 2002. The credit
    begins to phase down in 2002 and is not available after 2004. A
    qualified electric vehicle is a motor vehicle that is powered primarily
    by an electric motor drawing current from rechargeable batteries, fuel
    cells, or other portable sources of electric current, the original use
    of which commences with the taxpayer, and that is acquired for use by
    the taxpayer and not for resale. Electric vehicles and hybrid vehicles
    (those that have more than one source of power on board the vehicle)
    have the potential to reduce petroleum consumption, air pollution and
    greenhouse gas emissions. To encourage the purchase of such vehicles,
    the Administration is proposing the following tax credits: (1) A credit
    of up to $4,000 would be provided for the purchase of qualified hybrid
    vehicles after December 31, 2001 and before January 1, 2008. The amount
    of the credit would depend on the percentage of maximum available power
    provided by the rechargeable energy storage system and the amount by
    which the vehicle's fuel economy exceeds the 2000 model year city fuel
    economy. (2) A credit of up to $8,000 would be provided for the purchase
    of new qualified fuel cell vehicles after December 31, 2001 and before
    January 1, 2008. A minimum credit of $4,000 would be provided, which
    would increase as the vehicle's fuel efficiency exceeded the 2000 model
    year city fuel economy, reaching a maximum credit of $8,000 if the
    vehicle achieved at least 300 percent of the 2000 model year city fuel
    economy.
      Provide tax credit for energy produced from landfill gas.--Taxpayers
    that produce gas from biomass (including landfill methane) are eligible
    for a tax credit equal to $3 per barrel-of-oil equivalent (the amount of
    gas that has a British thermal unit content of 5.8 million), adjusted by
    an inflation adjustment factor for the calendar year in which the sale
    occurs. To qualify for the credit, the gas must be produced domestically
    from a facility placed in service by the taxpayer before July 1, 1998,
    pursuant to a written binding contract in effect before January 1, 1997.
    In addition, the gas must be sold to an unrelated person before January
    1, 2008. The Administration proposes to extend the credit to apply to
    landfill methane produced from a facility (or portion of a facility)
    placed in service after December 31, 2001 and before January 1, 2011,
    and sold (or used to produce electricity that is sold) before January 1,
    2011. The credit for fuel produced at landfills subject to EPA's 1996
    New Source Performance Standards/Emissions Guidelines would be limited
    to two-thirds of the otherwise applicable amount beginning on January 1,
    2008, if any portion of the facility for producing fuel at the landfill
    was placed in service before July 1, 1998, and beginning on January 1,
    2002, in all other cases.
      Provide tax credit for combined heat and power property.--Combined
    heat and power (CHP) systems are used to produce electricity (and/or
    mechanical power) and usable thermal energy from a single primary energy
    source. Depreciation allowances for CHP property vary by asset use and
    capacity. No income tax credit is provided under current law for
    investment in CHP property. CHP systems utilize thermal energy that is
    otherwise wasted in producing electricity by more conventional methods
    and achieve a greater level of overall energy efficiency, thereby
    lessening the consumption of primary fossil fuels, lowering total energy
    costs, and reducing carbon emissions. To encourage increased energy
    efficiency by accelerating planned investments and inducing additional
    investments in such systems, the Administration is proposing a 10-
    percent investment credit for qualified CHP systems with an electrical
    capacity in excess of 50 kilowatts or with a capacity to produce
    mechanical power in excess of 67 horsepower (or an equivalent
    combination of electrical and mechanical energy capacities). A qualified
    CHP system would be required to produce at least 20 percent of its total
    useful energy in the form of thermal energy and at least 20 percent of
    its total useful energy in the form of electrical or mechanical power
    (or a combination thereof) and would also be required to satisfy an
    energy-efficiency standard. For CHP systems with an electrical capacity
    in excess of 50 megawatts (or a mechanical energy capacity in excess of
    67,000 horsepower), the total energy efficiency would have to exceed 70
    percent. For smaller systems, the total energy efficiency would have to
    exceed 60 percent. Investments in qualified CHP assets that are
    otherwise assigned cost recovery periods of less than 15 years would be
    eligible for the credit, provided that the taxpayer elected to treat
    such property as having a 22-year class life. The credit, which would be
    treated as an energy credit under the investment credit component of the
    general business credit, and could not be used in conjunction with any
    other credit for the same equipment, would apply to investments in CHP
    property placed in service after December 31, 2001 and before January 1,
    2007.
      Provide excise tax exemption (credit) for ethanol.--Under current law
    an income tax credit and an excise tax exemption are provided for
    ethanol and renewable source methanol used as a fuel. In general, the
    income tax credit for ethanol is 53 cents per gallon, but small ethanol
    producers (those producing less than 30 million gallons of ethanol per
    year) qualify for a credit of 63 cents per gallon on the first 15
    million gallons of ethanol produced in a year. A credit of 60

    [[Page 73]]

    cents per gallon is allowed for renewable source methanol. As an
    alternative to the income tax credit, gasohol blenders may claim a
    gasoline tax exemption of 53 cents for each gallon of ethanol and 60
    cents for each gallon of renewable source methanol that is blended into
    qualifying gasohol. The rates for the ethanol credit and exemption are
    each reduced by 1 cent per gallon in 2003 and by an additional 1 cent
    per gallon in 2005. The income tax credit expires on December 31, 2007
    and the excise tax exemption expires on September 30, 2007. Neither the
    credit nor the exemption apply during any period in which motor fuel
    taxes dedicated to the Highway Trust Fund are limited to 4.3 cents per
    gallon. The Administration proposes to extend both the income tax credit
    and the excise tax exemption through December 31, 2010. The current law
    rule providing that neither the credit nor the exemption apply during
    any period in which motor fuel taxes dedicated to the Highway Trust Fund
    are limited to 4.3 cents per gallon would be retained.

                                  Promote Trade

      Extend and expand Andean trade preferences.--The Administration
    proposes to renew and enhance the Andean Trade Preference Act (ATPA),
    which expired on December 4, 2001, through December 31, 2005. The ATPA,
    which was enacted in 1991, was designed to provide economic alternatives
    for Bolivia, Columbia, Ecuador, and Peru in their fight against
    narcotics production and trafficking.
      Initiate a new trade preference program for Southeast Europe.--The
    Administration is proposing the Southeast Europe Trade Preference Act
    (SETPA), which would initiate a new five-year trade preference program
    for Southeast Europe, beginning October 1, 2002. The program is designed
    to rebuild the economies of Southeast Europe that were harmed by recent
    ethnic conflict in the area and will fulfill a commitment made by the
    United States, along with our European partners, when we signed the
    Stability Pact for Southeast Europe.
      Implement free trade agreements with Chile and Singapore.--Free trade
    agreements are expected to be completed with Chile and Singapore in
    2002, with ten-year implementation to begin in fiscal year 2003. These
    agreements will benefit U.S. producers and consumers, as well as
    strengthen the economies of Chile and Singapore. In addition, these
    agreements will establish precedents in our market opening efforts in
    two important and dynamic regions - Latin America and Southeast Asia.

                           Improve Tax Administration

      Modify the IRS Restructuring and Reform Act of 1998 (RRA98).--The
    proposed modification to RRA98 is comprised of six parts. The first part
    modifies employee infractions subject to mandatory termination and
    permits a broader range of available penalties. It strengthens taxpayer
    privacy while reducing employee anxiety resulting from unduly harsh
    discipline or unfounded allegations. The second part adopts measures to
    curb frivolous submissions and filings that are intended to impede or
    delay tax administration. The third part allows IRS to terminate
    installment agreements when taxpayers fail to make timely tax deposits
    and file tax returns on current liabilities. The fourth part streamlines
    jurisdiction over collection due process cases in the Tax Court, thereby
    reducing the cycle time for certain collection due process cases. The
    fifth part permits taxpayers to enter into installment agreements that
    do not guarantee full payment of liability over the life of the
    agreement. It allows the IRS to enter into agreements with taxpayers
    that desire to resolve their tax obligations but cannot make payments
    large enough to satisfy their entire liability and for whom an offer in
    compromise is not a viable alternative. The sixth part eliminates the
    requirement that the IRS Chief Counsel provide an opinion for any
    accepted offer-in-compromise of unpaid tax (including interest and
    penalties) equal to or exceeding $50,000. This proposal requires that
    the Treasury Secretary establish standards to determine when an opinion
    is appropriate.
      Initiate IRS cost savings measures.--The Administration has six
    proposals to improve IRS efficiency and performance from current
    resources. The first proposal permits the IRS to use certificates of
    mailing as an alternative to certified mail for notices and letters that
    currently require such mailing. The second proposal eliminates the
    requirement that notices of an intent to levy and right to a pre-levy
    hearing be sent with return receipt requested, but retains the
    requirement that such notices be sent by certified or registered mail or
    by first-class mail evidenced by a certificate of mailing. These two
    proposals reduce postal costs while retaining proof of first-class
    mailing. The third proposal eliminates the requirement that dual notices
    be sent to joint filers who reside at the same address. The fourth
    proposal treats as nullities certain tax returns that the Criminal
    Investigation Division determines contain insufficient information to
    compute tax, contain false information, or lack a valid signature. Under
    this proposal, such returns that have been filed to impede or delay tax
    administration are excluded from deficiency procedures. The fifth
    proposal modifies the way that Financial Management Services (FMS)
    recovers its transaction fees for processing IRS levies by permitting
    FMS to retain a portion of the amount collected before transmitting the
    balance to the IRS. The offset amount would be included as part of the
    15-percent limit on levies against income and would also be credited
    against the taxpayer's liability, thereby reducing Government
    transactions costs. Finally, the sixth proposal extends the April filing
    date for electronically filed tax returns by at least ten days to help
    encourage the growth of electronic filing.

    [[Page 74]]

                          Reform Unemployment Insurance

      Reform unemployment insurance administrative financing.--Current law
    funds the administrative costs of the unemployment insurance system and
    related programs out of the Federal Unemployment Tax (FUTA) paid by
    employers. FUTA is set at 0.8 percent of the first $7,000 in covered
    wages, which includes a 0.2 percent surtax scheduled to expire in 2007.
    State unemployment taxes are deposited into the Unemployment Trust Fund
    and used by States to pay unemployment benefits. Under current law, FUTA
    balances in excess of statutory ceilings are distributed to the States
    to pay unemployment benefits or the administrative costs of the system
    (these are known as Reed Act transfers). The Administration supports an
    immediate distribution of $9 billion in Reed Act funds as part of a
    bipartisan economic security plan. This would take the place of the
    smaller Reed Act transfer projected for October 1, 2002. In addition,
    the Administration has a comprehensive proposal to reform the
    administrative financing of this system. It proposes to eliminate the
    FUTA surtax in 2003, and make additional rate cuts to achieve a net FUTA
    tax rate of 0.2 percent in 2007. The proposal will transfer
    administrative funding control to the States in 2005 and allow them to
    use their benefit taxes to pay these costs. Federal administrative
    grants to the States will be significantly reduced. During the
    transition to State financing, special Reed Act distributions will be
    made to the States, and additional Federal funds for administrative
    expenses will be provided.

                               EXPIRING PROVISIONS

              Extend Provisions that Expired in 2001 for Two Years

      Extend the work opportunity tax credit.--The work opportunity tax
    credit provides an incentive for employers to expand the number of entry
    level positions for individuals from certain targeted groups. The credit
    generally applies to the first $6,000 of wages paid to several
    categories of economically disadvantaged or handicapped workers. The
    credit rate is 25 percent of qualified wages for employment of at least
    120 hours but less than 400 hours and 40 percent for employment of 400
    or more hours. The Administration proposes to extend the credit for two
    years, making the credit available for workers hired after December 31,
    2001 and before January 1, 2004.
      Extend the welfare-to-work tax credit.--The welfare-to-work tax credit
    entitles employers to claim a tax credit for hiring certain recipients
    of long-term family assistance. The purpose of the credit is to expand
    job opportunities for persons making the transition from welfare to
    work. The credit is 35 percent of the first $10,000 of eligible wages in
    the first year of employment and 50 percent of the first $10,000 of
    eligible wages in the second year of employment. Eligible wages include
    cash wages plus the cash value of certain employer-paid health,
    dependent care, and educational fringe benefits. The minimum employment
    period that employees must work before employers can claim the credit is
    400 hours. The Administration proposes to extend the credit for two
    years, to apply to individuals who begin work after December 31, 2001
    and before January 1, 2004.
      Extend minimum tax relief for individuals.--A temporary provision of
    prior law permits nonrefundable personal tax credits to be offset
    against both the regular tax and the alternative minimum tax. The
    temporary provision expires after taxable year 2001. The Administration
    is concerned that the AMT may limit the benefit of personal tax credits
    and impose financial and compliance burdens on taxpayers who have few,
    if any, tax preference items and who were not the originally intended
    targets of the AMT. The Administration proposes to extend minimum tax
    relief for nonrefundable personal tax credits two years, to apply to
    taxable years 2002 and 2003. The proposed extension does not apply to
    the child credit, the earned income tax credit or the adoption credit,
    which were provided AMT relief through December 31, 2010 under the
    Economic Growth and Tax Relief Reconciliation Act of 2001, as explained
    above. The refundable portion of the child credit and the earned income
    tax credit are also allowed against the AMT through December 31, 2010.
      Extend exceptions provided under subpart F for certain active
    financing income.--Under the Subpart F rules, certain U.S. shareholders
    of a controlled foreign corporation (CFC) are subject to U.S. tax
    currently on certain income earned by the CFC, whether or not such
    income is distributed to the shareholders. The income subject to current
    inclusion under the subpart F rules includes, among other things,
    ``foreign personal holding company income'' and insurance income.
    Foreign personal holding company income generally includes many types of
    income derived by a financial service company, such as dividends;
    interest; royalties; rents; annuities; net gains from the sale of
    certain property, including securities, commodities and foreign
    currency; and income from notional principal contracts and securities
    lending activities. For taxable years beginning before 2002, certain
    income derived in the active conduct of a banking, financing, insurance,
    or similar business is excepted from Subpart F. The Administration
    proposes to extend the exception for two years, to apply to taxable
    years beginning in 2002 and 2003.
      Extend suspension of net income limitation on percentage depletion
    from marginal oil and gas wells.--Taxpayers are allowed to recover their
    investment in oil and gas wells through depletion deductions. For
    certain properties, deductions may be determined using the percentage
    depletion method; however, in any year, the amount deducted generally
    may not exceed 100 percent of the net income from the property. For
    taxable years beginning after December 31, 1997 and

    [[Page 75]]

    before January 1, 2002, domestic oil and gas production from
    ``marginal'' properties is exempt from the 100-percent of net income
    limitation. The Administration proposes to extend the exemption to apply
    to taxable years beginning after December 31, 2001 and before January 1,
    2004.
      Extend Generalized System of Preferences (GSP).--Under GSP, duty-free
    access is provided to over 4,000 items from eligible developing
    countries that meet certain worker rights, intellectual property
    protection, and other criteria. The Administration proposes to extend
    this program, which expired after September 30, 2001, through September
    30, 2003.
      Extend authority to issue Qualified Zone Academy Bonds.--Prior law
    allows State and local governments to issue ``qualified zone academy
    bonds,'' the interest on which is effectively paid by the Federal
    government in the form of an annual income tax credit. The proceeds of
    the bonds must be used for teacher training, purchases of equipment,
    curriculum development, or rehabilitation and repairs at certain public
    school facilities. A nationwide total of $400 million of qualified zone
    academy bonds was authorized to be issued in each of calendar years 1998
    through 2001. In addition, unused authority arising in 1998 and 1999 may
    be carried forward for up to three years and unused authority arising in
    2000 and 2001 may be carried forward for up to two years. The
    Administration proposes to authorize the issuance of an additional $400
    million of qualified zone academy bonds in each of calendar years 2002
    and 2003.

                     Permanently Extend Expiring Provisions

      Permanently extend provisions expiring in 2010.--As explained in the
    discussion of the Economic Growth and Tax Relief Reconciliation Act of
    2001, most of the provisions of the Act sunset on December 31, 2010. The
    Administration proposes to permanently extend these provisions.
      Permanently extend the research and experimentation (R&E) tax
    credit.--The Administration proposes to permanently extend the 20-
    percent tax credit for qualified research and experimentation
    expenditures above a base amount and the alternative incremental credit,
    which are scheduled to expire on June 30, 2004.

                               TAX SIMPLIFICATION

      In addition to the proposals summarized above, the Administration is
    developing both short-term and longer-term tax simplification proposals.
    The project to develop short-term proposals, which is described below,
    focuses on immediately achievable reforms of the current tax system,
    while the longer-term project focuses on more fundamental reforms of the
    tax system.
      As many recent studies and proposals have highlighted, the U.S. income
    tax system is extraordinarily complex. Many taxpayers and businesses
    face significant challenges in understanding the tax laws, keeping
    required records, and filling out numerous complicated and detailed tax
    forms, which often require working through lengthy abstruse instructions
    and cumbersome calculations. Fortunately, our tax system is not
    complicated for everyone. Millions of taxpayers who have relatively
    uncomplicated financial and family circumstances and are able to file
    form 1040EZ, for example, avoid most of the complexity of the tax
    system. But for many others, coping with the tax system is daunting. The
    need to deal with complexities in the tax system is not limited to
    multinational corporations or high-income investors with complex
    financial assets; many taxpayers facing overwhelmingly complicated tax
    situations are lower- and middle-income families, single mothers,
    elderly people, small business owners and entrepreneurs.
      Tax complexity is costly to taxpayers and the economy. Credible
    estimates of the cost to taxpayers of complying with the income tax
    range from $70 billion to $125 billion per year. Additional costs may be
    imposed on the economy if taxpayers avoid certain investments, savings
    vehicles, business transactions, etc., because of the tax complexities
    they would involve or because of uncertainty about how the tax system
    would apply to them. Extensive tax planning engaged in by some taxpayers
    and businesses is a wasteful use of resources. Complexity makes it more
    costly for the IRS to administer the tax system. It makes it more
    difficult for the IRS to train its staff, to give correct answers to
    increased numbers of taxpayers seeking help in understanding the tax
    laws, and to check and audit tax returns. These costs are a significant
    burden on the economy. Tax simplification can cut these costs and
    contribute to greater economic efficiency.
      Tax complexity also may have other undesirable effects. Complexity may
    undermine confidence in the tax system. If taxpayers conclude that the
    tax system is so complex that no one can really figure it out, it will
    destroy confidence that the tax system is accomplishing its objectives,
    that other taxpayers are paying their fair share of tax, and that the
    IRS can administer the system fairly. It may thereby undermine
    compliance with the tax system and confidence in the government in
    general. Reducing tax complexity is, therefore, an important policy
    objective.
      But tax simplification is not simple. Complexity in the tax system has
    not arisen merely because the writers of the tax laws have been
    inattentive or because of a desire to provide jobs for tax accountants
    and lawyers. Many legitimate factors contribute to tax complexity. The
    modern, highly-productive U.S. economy is very complex, and many
    taxpayers and companies have complex financial and economic situations.
    Appli

    [[Page 76]]

    cation of the tax system to these complex financial and economic
    arrangements is also unavoidably complex. Many taxpayers have complex
    family arrangements or have special circumstances that affect their
    needs or their ability to pay taxes. Many special provisions have been
    added to the tax system to recognize the special circumstances of
    certain groups of taxpayers and adjust their tax burdens accordingly.
    The tax system has also been used extensively to provide incentives or
    benefits for taxpayers engaging in certain kinds of activities ranging
    from saving for retirement to saving energy that are deemed to be
    socially beneficial. While all of these tax provisions are well intended
    and presumptively have beneficial effects, they also contribute to
    complexity in the tax system. At some point, the complexity itself
    detracts from the ability of the tax system to function effectively and
    to accomplish these other objectives.
      Because of the multiple objectives involved in shaping any particular
    tax provision, the effort to simplify the tax system frequently involves
    tradeoffs. There may be a few places in the tax code where it is
    possible to draft less complex provisions that will accomplish all of
    the policy objectives equally well or even better. Such complexities may
    have arisen because of insufficient time to draft less complex
    provisions as a tax bill was being passed or because a series of
    provisions has been enacted, revised, and added to over time without an
    effort to consider the whole set of provisions and how they could be
    combined and simplified to better achieve their objectives. In many
    cases, however, simplification will result in some compromise in
    achieving other policy objectives, less precise targeting of a tax
    benefit, treatment of a type of income or expense in a way that is less
    consistent with its true economic nature, etc. In many areas, therefore,
    developing simplification proposals involves identifying areas of the
    tax system and specific simplification schemes for which the
    simplification that can be achieved is regarded as more valuable than
    the resulting decrease in achievement of other policy goals.
      The purpose of tax simplification, therefore, may be stated succinctly
    as implementing changes that will reduce the compliance burden on
    taxpayers and/or administrative costs of the IRS while enhancing or
    resulting in acceptably small sacrifices in the achievement of other
    policy objectives such as efficiency, fairness, revenue, and
    enforceability.
      The Administration has established the following objectives for the
    simplification project and principles for developing the simplification
    proposals.

                          Objectives of Simplification

        To reduce burdens on taxpayers and the IRS.
         Greater economic growth.
        Increased voluntary compliance, including use of the tax
              benefits provided by the law.
        Lower administrative and compliance costs.
        Fewer errors made by taxpayers and the IRS.
        Fewer inquiries taxpayers must make and the IRS must handle.
        Fewer disputes between the IRS and taxpayers.
        Increased predictability (i.e., transparency) of the tax
              law.
        Improvement of taxpayers' confidence in the system.
        Similar treatment of similarly situated taxpayers.
        Similar treatment of transactions with similar economic
              results.
        Fewer complex and expensive tax planning strategies.

             Principles for Developing Tax Simplification Proposals

         Reduce or eliminate rules or requirements when the cost of
              compliance and/or enforcement outweighs the benefits of the
              rules or requirements.
        Improve the readability of the law.
        Reduce overly technical and overly vague language in the
              law.
        Avoid highly detailed conditions and requirements.
        Eliminate duplicative or overlapping provisions.
        Eliminate differing definitions of similar terms or
              concepts.
        Reduce the amount of subjectivity necessary to apply the tax
              law by providing clear rules and clear distinctions.
        Reduce structural complexity.
        Reduce the number of phase-out provisions or coordinate the
              amounts in different phase-out provisions.
        Reduce the number and/or complexity of computations.
        Reduce record keeping and information gathering
              requirements; coordinate record keeping and information
              gathering requirements with business practices.
        Reduce inconsistencies in the law so that similarly situated
              taxpayers are treated the same.
        Reduce distortions among economic activities.
        Eliminate provisions or rules no longer needed because other
              provisions or rules have changed or because the provisions or
              rules are outdated.
        Reduce the number of temporary or sunset provisions.
      Highest priority will be given to simplification proposals that will
    yield the largest benefits, i.e., that will affect the most people and
    have the largest effects in reducing compliance burdens and
    administrative costs.
      Examples of areas in the tax system where the Administration's tax
    simplification project is focusing include the following:

      Individual AMT.--The AMT was enacted to ensure that taxpayers with
    substantial amounts of economic income do not avoid significant tax
    liability by using combinations of exclusions, deductions, and tax
    credits. Structural defects in the AMT, including lack of index

    [[Page 77]]

    ing for inflation or adjustment for family size, have resulted in the
    tax affecting millions of taxpayers to whom it was not intended to
    apply. Millions of additional taxpayers must complete AMT schedules or
    forms to determine that they are not subject to the AMT.
      The number of taxpayers affected by the AMT and the amount of revenue
    raised by the AMT are rising rapidly, making simplification of the AMT
    an increasingly important objective of tax policy. This year, 2 million
    individual filers will be subject to the AMT and therefore required to
    file the 65-line AMT form. The temporary increase in the AMT exemption
    under EGTRRA will reduce the increase in the number of AMT taxpayers
    through 2004. Nevertheless, that number will increase to 5 million in
    2004, and more than double, increasing to 12 million in 2005 when the
    temporary provision expires. In 2005, 47 percent of taxpayers with AGI
    between $100,000 and $200,000 (in 2002 dollars) and 75 percent of
    taxpayers with AGI between $200,000 and $500,000 (in 2002 dollars) will
    pay AMT. By 2010, these percentages will increase to 90 percent and 96
    percent, respectively. By 2012, the number of AMT taxpayers will be 39
    million (assuming EGTRRA is extended), which is 34 percent of all
    taxpayers with individual income tax liability.

      Family-related provisions.-- Taxpayers with family responsibilities
    face confusing and sometimes conflicting rules. Many taxpayers are
    entitled to both the EITC and the additional child tax credit. Both
    credits are based on earned income and the number of children in the
    family. But the two credits use different definitions of earned income,
    and different definitions of qualifying children. Further, many
    taxpayers with three or more children must compute the additional child
    tax credit twice to determine which formula yields the larger credit.
    Similarly, some taxpayers can offset the costs of child care assistance
    using either a child and dependent care tax credit or an exclusion from
    income, but they must make multiple computations to determine which of
    the two is most advantageous. Conforming eligibility criteria and
    reducing the number of computations taxpayers must make would help
    simplify family-related tax provisions, thus reducing burdens on
    families.
      Uniform definition of a child.--The tax code provides assistance to
    families with children through the dependent exemption, head-of-
    household filing status, child tax credit, child and dependent care tax
    credit, and EITC. But to obtain these benefits, taxpayers must wade
    through pages of bewildering rules and instructions because each
    provision defines ``qualifying child'' differently. For example, to
    claim the dependent exemption and the child tax credit, a taxpayer must
    demonstrate that he or she provides most of the support of the child. To
    claim the EITC, the taxpayer must demonstrate that he or she resides
    with the child for a specified period of time. Replacing the support
    test, which is difficult to understand and to administer, with a uniform
    residency test would reduce both compliance and administrative costs.
      Income based phaseouts.--Various tax provisions are phased out in
    order to target the effects of the provisions and to limit the
    associated revenue loss. The major provisions subject to income-based
    phaseouts are the EITC, the child tax credit, the child and dependent
    care tax credit, IRAs, the HOPE and Lifetime Learning tax credits, the
    deduction for higher-education expenses, the deduction for student loan
    interest, the exclusion for interest on education savings bonds, and the
    adoption credit and exclusion. Two additional phase-out provisions are
    scheduled to be reduced beginning in 2006 and eliminated completely in
    2010: the overall limitation on itemized deductions; and the phaseout of
    personal exemptions. Phaseouts are complicated and increase marginal tax
    rates, sometimes significantly. Complexity is increased even more by the
    fact that different benefits are phased out differently. As a result,
    taxpayers must often consider multiple phase-out provisions.
      Education incentives.--The various tax code provisions providing
    incentives for higher education use differing definitions of the various
    elements that make up qualifying higher education expenses. The
    definitional differences add to the complexity taxpayers face when they
    use the education incentives. The array of education incentives from
    which taxpayers may choose means further complexity.
      Individual Retirement Accounts.--The current multiple sets of IRA
    income limits are complex and contain marriage penalties. The income
    limits complicate participation in IRAs by disallowing participation
    among certain workers depending on type of IRA, income level, filing
    status, and both spouses' coverage under an employer retirement plan.
    Taxpayers need to make year-end calculations to determine their
    eligibility for a deduction or contribution. Taxpayers in the income
    range over which eligibility for the benefits phases out need to make
    calculations to determine the deductible portion of contributions to a
    traditional IRA, or the allowable amount of contributions to a Roth IRA.
    Taxpayers face uncertainty at the start of the year, because they need
    to forecast their year-end income to estimate their eligibility.
      Individual capital gains.--Under current law, long-term capital gains
    in excess of any short-term losses are taxed separately from other
    income, and may be taxed at 8, 10, 18, 20, 25 or 28 percent rates.
    Special rules apply to collectibles, recapture of certain depreciation
    deductions, certain small business stock, principal residences, certain
    investments in Enterprise Zones and similar qualified zones, and certain
    like-kind exchanges. These multiple capital gains rates and exclusions
    result in complicated tax forms and schedules, and the need for careful
    tax planning.

    [[Page 78]]

      Excise taxes.--A number of excise taxes no longer have a policy
    rationale, and in several cases involve a significant number of
    taxpayers but generate relatively little revenue. Some excise taxes
    could be restructured to better accomplish policy objectives, reflect
    recent technological changes, and reduce compliance burdens for both
    taxpayers and the IRS. Other changes would both improve excise tax
    compliance and simplify their administration.
      Tax-exempt bonds.--Two areas of the statutory tax-exempt bond rules
    are particularly complex: the definition of a private activity bond and
    the arbitrage-related provisions. The definition of a private activity
    bond could be simplified without undoing the policy objective of
    limiting the issuance of these bonds in tax-exempt form. Compliance with
    arbitrage rules can be burdensome for issuers even in cases in which
    bond proceeds are used for traditional governmental purposes.
    Simplifying changes could be made while still avoiding incentives for
    premature or over issuance of tax-exempt bonds.
      Corporate AMT.--The corporate AMT is a separate tax regime within the
    Federal income tax system. Under present law, corporations with average
    gross receipts of at least $7.5 million for the prior three years are
    required to calculate their tax liability twice: once using the rules of
    the regular tax system and a second time using the corporate AMT rules.
    Under the corporate AMT rules, many of the advantageous deductions and
    credits allowed under the regular tax rules are not allowed, but income
    under the AMT is taxed at a lower rate than under the regular corporate
    tax (20 percent, rather than 35 percent). If tax liability calculated
    under the AMT rules exceeds regular tax liability, the corporation is
    required to pay AMT in addition to its regular tax. Because payment of
    AMT represents a prepayment of regular tax, the amount of AMT paid
    generates AMT credits that can be used to offset regular tax in
    subsequent years (subject to certain limitations).
      The corporate AMT rules increase compliance burdens by causing
    corporations to devote additional resources to tax planning and record
    keeping. Because the AMT rules limit the use of tax preferences only for
    corporations that are AMT payers, corporations that engage in tax-
    preferred activities incur expenditures to develop strategies to
    minimize the effect of the AMT rules. In addition, the AMT requires
    corporations to keep extensive records of numerous adjustments and
    preferences. For example, depreciation allowances for newly invested
    property generally are calculated one way under the regular tax and a
    different way under the AMT. Although a corporation may not have AMT
    liability, it is required to calculate the AMT to determine whether it
    owes AMT. The AMT tax regime is difficult and burdensome for
    corporations to comply with and for IRS to administer.

      Depreciation.--There are several sources of complexity in tax
    depreciation. One source is ambiguity in determining an asset's class
    life, which determines the asset's annual depreciation allowance. New
    types of assets, assets used in multiple activities, and building-
    related expenditures are sometimes difficult to classify and so lead to
    disputes between taxpayers and the IRS. New assets may be particularly
    difficult to fit within existing classification guidelines, which
    generally have not been updated since the mid-1980s.
      Placed-in-service conventions also can add to complexity and create
    uncertainty. Generally, an asset does not receive a full year's
    depreciation during the tax year in which it is initially placed in
    service. Instead, the asset receives a fraction of the annual
    depreciation allowances, as determined by the date on which statutory
    convention deems the asset to have been placed in service. The placed-
    in-service conventions sometimes require taxpayers to wait until the end
    of the taxable year to determine the proper depreciation allowance for
    property that may have been placed in service at various dates
    throughout the year.

      Capitalization.-- Substantial ambiguity exists over whether many items
    of cost may be deducted currently or instead must be capitalized. Case
    law holds that the determination of whether an item of cost must be
    capitalized is based on each particular taxpayer's facts and
    circumstances. While no one factor has been held to be determinative,
    the current legal standard relies heavily on whether the item creates a
    significant future benefit, but the degree of future benefit required
    for capitalization is ambiguous. Thus, taxpayers and the IRS may end up
    in dispute over whether certain costs, which traditionally have been
    deducted, should instead be capitalized. The present uncertain legal
    environment has elevated capitalization to the top of the list of
    contested audit issues for businesses.
      Tax accounting.--There are many sources of complexity in tax
    accounting. These include issues related to accrual and inventory
    accounting, uniform capitalization rules, and the percentage of
    completion method. Compliance problems generally are more severe for
    small companies.
      Accrual accounting and inventory accounting can be complex and add to
    the burden of complying with the tax law, especially for small
    taxpayers. Some of this complexity arises from the additional record
    keeping required to measure taxes on an accrual basis when the taxpayer
    uses cash accounting for financial reporting. Additional complexity
    arises from legal ambiguities about whether certain taxpayers are
    required to keep inventory accounts. Recently implemented IRS Revenue
    Procedures provide substantial simplification and certainty by exempting
    many small taxpayers from the record-keeping burdens of accrual and
    inventory accounting. For small businesses that do not qualify for tax
    relief under these Procedures, however, accrual and inventory accounting
    may continue to impose complexity and record keeping costs.

    [[Page 79]]

      The LIFO (Last In First Out, a method of accounting for inventories)
    conformity requirement, that requires firms to use the LIFO method for
    financial reporting when they use LIFO for tax accounting, also adds to
    complexity. Conformity violations are more a matter of how information
    is provided than of what information is provided, creating complications
    and traps for the unwary.
      The uniform capitalization (UNICAP) rules require that both direct and
    indirect costs be added to basis or included in inventory. Measuring and
    accounting for all capitalizable costs can be difficult, especially for
    small taxpayers. Yet, for many taxpayers the UNICAP rules have only a
    small effect on tax liability, compared to simpler methods, and so add
    to complexity without substantially affecting tax results.
      The percentage of completion method used for determining income from a
    long-term contract requires the taxpayer to estimate costs and receipts
    over the life of the contract, with timing errors corrected by a look-
    back adjustment once the contract is completed. The calculations and
    record keeping required can be burdensome, especially for small
    taxpayers. Moreover, in some cases simpler tax accounting methods would
    cause only a small reduction in tax liability.

      International tax rules.--There is much that can be done to reduce the
    complexity of our international tax rules. This area of the tax law is
    singled out by businesses as one of the biggest sources of
    administrative complexity and compliance costs. Moreover, the global
    economy has changed dramatically since the U.S. international tax rules
    were developed. It is time to re-examine the rules with a view toward
    significant rationalization. The focus of efforts in this area will be
    to reduce the instances in which the international tax rules impose
    conditions or requirements on U.S. taxpayers that are not consistent
    with the way businesses operate in the global marketplace and that
    require efforts that otherwise are unnecessary or non-economic.

                                                           Table 4-3.  EFFECT OF PROPOSALS ON RECEIPTS
                                                                    (In millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             Estimate
                                                                     ---------------------------------------------------------------------------------------
                                                                        2002      2003      2004       2005       2006       2007     2003-2007   2003-2012
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Bipartisan Economic Security Plan \1\...........................  -62,000   -65,000   -47,500     -9,500     17,000     18,000     -87,000      -43,500

    Tax Incentives:

      Provide incentives for charitable giving:

        Provide charitable contribution deduction for nonitemizers..     -570    -1,429    -1,437     -2,288     -3,567     -3,591     -12,312      -32,636
        Permit tax-free withdrawals from IRAs for charitable              -93      -192      -205       -219       -230       -238      -1,084       -2,632
         contributions..............................................
        Raise the cap on corporate charitable contributions.........      -24      -169      -121       -127       -139       -156        -712       -1,730
        Expand and increase the enhanced charitable deduction for         -10       -49       -54        -59        -66        -72        -300         -789
         contributions of food inventory............................
        Reform excise tax based on investment income of private          -122      -177      -181       -189       -198       -205        -950       -2,101
         foundations................................................
        Modify tax on unrelated business taxable income of                 -1        -3        -3         -4         -4         -4         -18          -48
         charitable remainder trusts................................
        Modify basis adjustment to stock of S corporations                 -8       -11       -13        -17        -21        -25         -87         -282
         contributing appreciated property..........................
        Allow expedited consideration of applications for exempt      ........  ........  ........  .........  .........  .........  ..........  ...........
         status \2\.................................................
      Strengthen and reform education:

        Provide refundable tax credit for certain costs of attending  ........      -10       -24        -38        -52        -62        -186         -219
         a different school for pupils assigned to failing public
         schools \3\................................................
        Allow teachers to deduct out-of-pocket classroom expenses...  ........  ........      -16       -163       -191       -207        -577       -1,718
      Invest in health care:

        Provide refundable tax credit for the purchase of health      ........     -245    -1,689     -2,811     -2,774     -2,951     -10,470      -29,116
         insurance \4\..............................................
        Provide an above-the-line deduction for long-term care        ........     -328      -406       -605     -1,222     -2,158      -4,719      -20,730
         insurance premiums.........................................
        Allow up to $500 in unused benefits in a health flexible      ........  ........     -441       -723       -782       -830      -2,776       -7,819
         spending arrangement to be carried forward to the next year
        Provide additional choice with regard to unused benefits in   ........  ........      -23        -39        -45        -52        -159         -566
         a health flexible spending arrangement.....................
        Permanently extend and reform Archer MSAs...................  ........  ........      -43       -468       -530       -607      -1,648       -5,691
        Provide an additional personal exemption to home caretakers   ........     -314      -383       -362       -345       -348      -1,752       -3,957
         of family members..........................................
      Assist Americans with disabilities:

        Exclude from income the value of employer-provided            ........  ........       -2         -6         -6         -6         -20          -52
         computers, software and peripherals........................
      Help farmers and fishermen manage economic downturns:

        Establish FFARRM savings accounts...........................  ........  ........     -133       -350       -244       -171        -898       -1,233
      Increase housing opportunities:

        Provide tax credit for developers of affordable single-       ........       -7       -76       -302       -715     -1,252      -2,352      -15,257
         family housing.............................................
      Encourage saving:

        Establish Individual Development Accounts (IDAs)............  ........     -124      -267       -319       -300       -255      -1,265       -1,722

    [[Page 80]]

      Protect the environment:

        Permanently extend expensing of brownfields remediation       ........  ........     -193       -306       -299       -289      -1,087       -2,390
         costs......................................................
        Exclude 50 percent of gains from the sale of property for     ........       -2       -44        -90        -94        -98        -328         -918
         conservation purposes......................................
      Increase energy production and promote energy conservation:

        Extend and modify tax credit for producing electricity from       -92      -227      -303       -212       -143       -146      -1,031       -1,779
         certain sources............................................
        Provide tax credit for residential solar energy systems.....       -3        -6        -7         -8        -17        -24         -62          -72
        Modify treatment of nuclear decommissioning funds...........      -89      -156      -168       -178       -188       -199        -889       -2,042
        Provide tax credit for purchase of certain hybrid and fuel        -21       -80      -181       -349       -530       -763      -1,903       -3,027
         cell vehicles..............................................
        Provide tax credit for energy produced from landfill gas....      -12       -34       -59        -86       -120       -140        -439       -1,130
        Provide tax credit for combined heat and power property.....      -97      -208      -235       -238       -296       -139      -1,116       -1,091
        Provide excise tax exemption (credit) for ethanol \2\.......  ........  ........  ........  .........  .........  .........  ..........  ...........
      Promote trade:

        Extend and expand Andean trade preferences \5\..............     -130      -192      -213       -226        -58   .........       -689         -689
        Initiate a new trade preference program for Southeast Europe  ........      -19       -23        -25         -7   .........        -74          -74
         \5\........................................................
        Implement free trade agreements with Chile and Singapore \5\  ........      -21       -86       -109       -131       -155        -502       -1,560
      Improve tax administration:

        Implement IRS administrative reforms........................  ........       60        49         50         52         54         265          559
      Reform unemployment insurance:

        Reform unemployment insurance administrative financing \5\..  ........   -1,002    -1,451     -2,902     -2,982     -4,429     -12,766       -6,924
    Expiring Provisions:

      Extend provisions that expired in 2001 for two years:

        Work opportunity tax credit.................................      -43      -153      -200       -127        -60        -29        -569         -576
        Welfare-to-work tax credit..................................       -9       -37       -57        -48        -32        -22        -196         -209
        Minimum tax relief for individuals..........................     -122      -353      -256   .........  .........  .........       -609         -609
        Exceptions provided under Subpart F for certain active           -864    -1,502      -630   .........  .........  .........     -2,132       -2,132
         financing income...........................................
        Suspension of net income limitation on percentage depletion       -25       -44       -18   .........  .........  .........        -62          -62
         from marginal oil and gas wells............................
        Generalized System of Preferences (GSP) \5\.................     -370      -415   ........  .........  .........  .........       -415         -415
        Authority to issue qualified zone academy bonds.............       -4       -13       -25        -35        -37        -37        -147         -332
      Permanently extend expiring provisions:

        Provisions expiring in 2010:

          Marginal individual income tax rate reductions............  ........  ........  ........  .........  .........  .........  ..........    -183,769
          Child tax credit \6\......................................  ........  ........  ........  .........  .........  .........  ..........     -31,697
          Marriage penalty relief \7\...............................  ........  ........  ........  .........  .........  .........  ..........     -12,976
          Education incentives......................................       -1        -5       -10        -15        -20        -26         -76       -2,810
          Repeal of estate and generation-skipping transfer taxes,        178      -550    -1,097     -1,485     -1,987     -2,178      -7,297     -103,659
           and modification of gift taxes...........................
          Modifications of IRAs and pension plans...................  ........  ........  ........  .........  .........  .........  ..........      -6,490
          Other incentives for families and children................  ........  ........  ........  .........  .........  .........  ..........      -1,298
        Research and experimentation (R&E) tax credit...............  ........  ........     -906     -2,949     -4,654     -5,623     -14,132      -51,051
                                                                     ---------------------------------------------------------------------------------------
        Total effect of proposals...................................  -64,532   -73,017   -59,130    -27,927     -6,034     -9,433    -175,541     -591,020

    --------------------------------------------------------------------------------------------------------------------------------------------------------
     \1\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $27,000 million for 2002, $8,000 for 2003, $1,500
      million for 2004, $9,500 million for 2003-2007, and $9,500 million for 2003-2012.

     \2\ Policy proposal with a receipt effect of zero.

     \3\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $165 million for 2003, $449 million for 2004, $699
      million for 2005, $975 million for 2006, $1,213 million for 2007, $3,501 million for 2003-2007, and $4,155 million for 2003-2012.

     \4\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $667 million for 2003, $5,185 million for 2004,
      $6,292 million for 2005, $6,560 million for 2006, $6,441 million for 2007, $25,145 million for 2003-2007, and $59,873 million for 2003-2012.

     \5\ Net of income offsets.

     \6\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlays effect is $8,745 million for 2003-2012.

     \7\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlays effect is $1,527 million for 2003-2012,

    [[Page 81]]

                                              Table 4-4. RECEIPTS BY SOURCE
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                             Estimate
               Source                2001    -----------------------------------------------------------------------
                                    Actual       2002        2003        2004        2005        2006        2007
    ----------------------------------------------------------------------------------------------------------------
    Individual income taxes
     (federal funds):
      Existing law..............     994,339     949,885   1,009,047   1,063,560   1,119,913   1,167,409   1,233,065
        Proposed Legislation      ..........        -646      -2,693      -4,966      -7,904     -10,133     -11,378
         (PAYGO)................
                                 -----------------------------------------------------------------------------------
    Total individual income          994,339     949,239   1,006,354   1,058,594   1,112,009   1,157,276   1,221,687
     taxes......................
                                 ===================================================================================
    Corporation income taxes:
      Federal funds:
        Existing law............     151,071     202,547     207,960     215,170     241,952     248,397     258,890
          Proposed Legislation    ..........      -1,102      -2,471      -3,182      -4,865      -6,949      -8,275
           (PAYGO)..............
                                 -----------------------------------------------------------------------------------
      Total Federal funds            151,071     201,445     205,489     211,988     237,087     241,448     250,615
       corporation income taxes.
                                 -----------------------------------------------------------------------------------
      Trust funds:
        Hazardous substance                4  ..........  ..........  ..........  ..........  ..........  ..........
         superfund..............
                                 -----------------------------------------------------------------------------------
    Total corporation income         151,075     201,445     205,489     211,988     237,087     241,448     250,615
     taxes......................
                                 ===================================================================================
    Social insurance and
     retirement receipts (trust
     funds):
      Employment and general
       retirement:
        Old-age and survivors        434,057     442,131     466,185     490,228     519,907     541,680     568,723
         insurance (Off-budget).
        Disability insurance          73,462      75,067      79,158      83,244      88,286      91,984      96,576
         (Off-budget)...........
        Hospital insurance......     149,651     151,677     159,310     167,667     178,255     185,997     195,448
        Railroad retirement:
          Social Security              1,614       1,704       1,721       1,749       1,771       1,795       1,818
           equivalent account...
          Rail pension and             2,658       2,556       2,412       2,307       2,299       2,332       2,366
           supplemental annuity.
                                 -----------------------------------------------------------------------------------
      Total employment and           661,442     673,135     708,786     745,195     790,518     823,788     864,931
       general retirement.......
                                 -----------------------------------------------------------------------------------
        On-budget...............     153,923     155,937     163,443     171,723     182,325     190,124     199,632
        Off-budget..............     507,519     517,198     545,343     573,472     608,193     633,664     665,299
                                 -----------------------------------------------------------------------------------
      Unemployment insurance:
        Deposits by States \1\ .      20,824      23,254      29,887      34,564      36,363      36,744      36,914
          Proposed Legislation    ..........  ..........          -1          -5        -462          63        -289
           (PAYGO)..............
        Federal unemployment           6,937       6,934       7,065       7,237       7,410       7,580       7,749
         receipts \1\ ..........
          Proposed Legislation    ..........  ..........      -1,252      -1,809      -3,165      -3,790      -5,247
           (PAYGO)..............
        Railroad unemployment             51         100         150         156         120          94         103
         receipts \1\ ..........
                                 -----------------------------------------------------------------------------------
      Total unemployment              27,812      30,288      35,849      40,143      40,266      40,691      39,230
       insurance................
                                 -----------------------------------------------------------------------------------
      Other retirement:
        Federal employees'             4,647       4,550       4,527       4,424       4,337       4,221       4,068
         retirement--employee
         share..................
        Non-Federal employees             66          62          50          46          42          39          36
         retirement \2\ ........
                                 -----------------------------------------------------------------------------------
      Total other retirement....       4,713       4,612       4,577       4,470       4,379       4,260       4,104
                                 -----------------------------------------------------------------------------------
    Total social insurance and       693,967     708,035     749,212     789,808     835,163     868,739     908,265
     retirement receipts........
                                 ===================================================================================
      On-budget.................     186,448     190,837     203,869     216,336     226,970     235,075     242,966
      Off-budget................     507,519     517,198     545,343     573,472     608,193     633,664     665,299
                                 ===================================================================================
    Excise taxes:
      Federal funds:
        Alcohol taxes...........       7,624       7,627       7,664       7,748       7,831       7,877       7,923
        Tobacco taxes...........       7,396       8,045       8,115       7,974       7,875       7,782       7,692
        Transportation fuels tax       1,150       1,138       1,180       1,216       1,266         304         312
        Telephone and teletype         5,769       5,984       6,345       6,753       7,179       7,612       8,050
         services...............
        Ozone depleting                   32          22          13           7  ..........  ..........  ..........
         chemicals and products.
        Other Federal fund             2,151       1,963       1,867       1,854       1,911       1,976       2,030
         excise taxes...........
          Proposed Legislation    ..........        -122        -177        -181        -189        -198        -205
           (PAYGO)..............
                                 -----------------------------------------------------------------------------------
      Total Federal fund excise       24,122      24,657      25,007      25,371      25,873      25,353      25,802
       taxes....................
                                 -----------------------------------------------------------------------------------
      Trust funds:
        Highway.................      31,469      31,926      32,952      34,121      35,414      36,919      38,038
          Proposed Legislation    ..........  ..........  ..........          -7         -17         -29         -38
           (PAYGO)..............

    [[Page 82]]

        Airport and airway......       9,191       8,939       9,680      10,269      10,878      11,518      12,178
        Aquatic resources.......         358         385         393         414         424         435         443
        Black lung disability            522         554         573         597         616         628         638
         insurance..............
        Inland waterway.........         113          97          98          98          99         100         101
        Hazardous substance                2  ..........  ..........  ..........  ..........  ..........  ..........
         superfund..............
        Vaccine injury                   112         123         125         125         127         128         129
         compensation...........
        Leaking underground              179         190         193         199         204         214         218
         storage tank...........
                                 -----------------------------------------------------------------------------------
      Total trust funds excise        41,946      42,214      44,014      45,816      47,745      49,913      51,707
       taxes....................
                                 -----------------------------------------------------------------------------------
    Total excise taxes..........      66,068      66,871      69,021      71,187      73,618      75,266      77,509
                                 ===================================================================================
    Estate and gift taxes:
      Federal funds.............      28,400      27,484      23,559      27,638      24,769      28,121      24,992
        Proposed Legislation      ..........           6        -560      -1,050      -1,343      -1,736      -1,794
         (PAYGO)................
                                 -----------------------------------------------------------------------------------
    Total estate and gift taxes.      28,400      27,490      22,999      26,588      23,426      26,385      23,198
                                 ===================================================================================
    Customs duties:
      Federal funds.............      18,583      18,538      19,781      21,424      22,549      23,964      25,283
        Proposed Legislation      ..........        -668        -863        -430        -482        -262        -207
         (PAYGO)................
      Trust funds...............         786         796         887         905         977       1,041       1,075
                                 -----------------------------------------------------------------------------------
    Total customs duties........      19,369      18,666      19,805      21,899      23,044      24,743      26,151
                                 ===================================================================================
    MISCELLANEOUS RECEIPTS: \3\
      Miscellaneous taxes.......          94         109         111         113         115         117         119
      United Mine Workers of             150         143         138         132         127         123         117
       America combined benefit
       fund.....................
      Deposit of earnings,            26,124      25,596      29,025      31,512      32,084      33,214      34,832
       Federal Reserve System...
      Defense cooperation.......           7           6           6           6           6           6           6
      Fees for permits and             8,483       7,905       8,463       8,650       8,478       8,607       8,794
       regulatory and judicial
       services.................
      Fines, penalties, and            2,724       2,685       2,523       2,509       2,517       2,525       2,534
       forfeitures..............
      Gifts and contributions...         284         244         219         185         186         179         180
      Refunds and recoveries....         -54        -298        -305        -317        -325        -327        -335
                                 -----------------------------------------------------------------------------------
    Total miscellaneous receipts      37,812      36,390      40,180      42,790      43,188      44,444      46,247
                                 ===================================================================================
    Proposed bipartisan economic  ..........     -62,000     -65,000     -47,500      -9,500      17,000      18,000
     security plan (PAYGO)......
                                 ===================================================================================
    Total budget receipts.......   1,991,030   1,946,136   2,048,060   2,175,354   2,338,035   2,455,301   2,571,672
      On-budget.................   1,483,511   1,428,938   1,502,717   1,601,882   1,729,842   1,821,637   1,906,373
      Off-budget................     507,519     517,198     545,343     573,472     608,193     633,664     665,299
                                 -----------------------------------------------------------------------------------
             MEMORANDUM
      Federal funds.............   1,255,504   1,195,158   1,255,629   1,338,515   1,453,879   1,535,377   1,610,437
      Trust funds...............     445,470     465,179     497,771     518,623     542,161     564,491     587,613
      Interfund transactions....    -217,463    -231,399    -250,683    -255,256    -266,198    -278,231    -291,677
                                 -----------------------------------------------------------------------------------
    Total on-budget.............   1,483,511   1,428,938   1,502,717   1,601,882   1,729,842   1,821,637   1,906,373
                                 -----------------------------------------------------------------------------------
    Off-budget (trust funds)....     507,519     517,198     545,343     573,472     608,193     633,664     665,299
                                 ===================================================================================
    Total.......................   1,991,030   1,946,136   2,048,060   2,175,354   2,338,035   2,455,301   2,571,672
    ----------------------------------------------------------------------------------------------------------------
    \1\ Deposits by States cover the benefit part of the program. Federal unemployment receipts cover administrative
      costs at both the Federal and State levels. Railroad unemployment receipts cover both the benefits and
      adminstrative costs of the program for the railroads.
    \2\ Represents employer and employee contributions to the civil service retirement and disability fund for
      covered employees of Government-sponsored, privately owned enterprises and the District of Columbia municipal
      government.
    \3\ Includes both Federal and trust funds.