Analytical Perspectives - 6. Tax Expenditures

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

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6. TAX EXPENDITURES

The Congressional Budget Act of 1974 (Public Law 93-344) requires that
a list of ``tax expenditures'' be included in the budget. Tax
expenditures are defined in the law as ``revenue losses attributable to
provisions of the Federal tax laws which allow a special exclusion,
exemption, or deduction from gross income or which provide a special
credit, a preferential rate of tax, or a deferral of liability.'' The
Act suggests that tax expenditures are exceptions to some norm or
standard tax concept that is not specified in the law. Hence, different
analyses may use different baseline tax structures; indeed, the budget
presentation here provides tax expenditure estimates measured against
more than one baseline.
Due, in part, to the degree of arbitrariness in the tax expenditure
baseline, the Administration believes the meaningfulness of tax
expenditure estimates is uncertain and that the ``tax expenditure''
presentation can be improved by consideration of alternative or
additional tax bases. A description of an ongoing Treasury study to
reevaluate the tax expenditure concept is presented at the beginning of
this chapter. The tax expenditure estimates and related discussion
following the description of this study, however, are based on materials
and formats developed and included in previous budgets. Tax expenditure
estimates under the unified transfer (i.e., estate and gift) tax have
been eliminated from the presentation because there is no generally
accepted normal baseline for transfer taxes and this tax has been
repealed under the Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA).
The largest reported tax expenditures tend to be associated with the
individual income tax. For example, sizeable deferrals, deductions and
exclusions are provided for pension contributions and earnings, employer
contributions for medical insurance, mortgage interest payments on
owner-occupied homes, capital gains, and payments of State and local
individual income and property taxes. Reported tax expenditures under
the corporate income tax tend to be related to timing differences in the
rate of cost recovery for various investments; as is discussed below,
the extent to which these provisions are classified as tax expenditures
varies according to the conceptual baseline used.
Each tax expenditure estimate in this chapter was calculated assuming
other parts of the tax code remained unchanged. The estimates would be
different if all tax expenditures or major groups of tax expenditures
were changed simultaneously because of potential interactions among
provisions. For that reason, this chapter does not present a grand total
for the estimated tax expenditures. Moreover, past tax changes entailing
broad elimination of tax expenditures were generally accompanied by
changes in tax rates or other basic provisions, so that the net effects
on Federal revenues were considerably (if not totally) offset.
Tax expenditures relating to the individual and corporate income taxes
are estimated for fiscal years 2001-2007 using three methods of
accounting: revenue effects, outlay equivalent, and present value. The
present value approach provides estimates of the revenue effects for tax
expenditures that involve deferrals of tax payments into the future or
have similar long-term effects.
The section of the chapter on performance measures and economic
effects presents information related to assessment of the effect of tax
expenditures on the achievement of program performance goals. This
section is a complement to the government-wide performance plan required
by the Government Performance and Results Act of 1993.

FUTURE REVISIONS TO THE TAX EXPENDITURE PRESENTATION

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

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

The Need for Change

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

Focus of the Reconsideration and Revision Effort

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

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

TAX EXPENDITURES IN THE INCOME TAX

Tax Expenditure Estimates

All tax expenditure estimates presented here are based upon current
tax law enacted as of December 31, 2001. Expired or repealed provisions
are not listed if their revenue effects result only from taxpayer
activity occurring before fiscal year 2001. Due to the time required to
estimate the large number of tax expenditures, the estimates are based
on Mid-Session economic assumptions; exceptions are the earned income
tax credit and child credit provisions, which involve outlay components
and hence are updated to reflect the economic assumptions used elsewhere
in the budget.
The total revenue effects for tax expenditures for fiscal years 2001-
2007 are displayed according to the budget's functional categories in
Table 6-1. Descriptions of the specific tax expenditure provisions
follow the tables of estimates and the discussion of general features of
the tax expenditure concept.
As in prior years, two baseline concepts--the normal tax baseline and
the reference tax law baseline--are used to identify tax expenditures.
For the most part, the two concepts coincide. However, items treated as
tax expenditures under the normal tax baseline, but not the reference
tax law baseline, are indicated by the designation ``normal tax method''
in the tables. The revenue effects for these items are zero using the
reference tax rules. The alternative baseline concepts are discussed in
detail following the tables.
Table 6-2 reports the respective portions of the total revenue effects
that arise under the individual and corporate income taxes separately.
The location of the estimates under the individual and corporate
headings does not imply that these categories of filers benefit from the
special tax provisions in proportion to the respective tax expenditure
amounts shown. Rather, these breakdowns show the specific tax accounts
through which the various provisions are cleared. The ultimate
beneficiaries of corporate tax expenditures could be shareholders,
employees, customers, or other providers of capital, depending on
economic forces.
Table 6-3 ranks the major tax expenditures by the size of their FY
2003 revenue effect.

Interpreting Tax Expenditure Estimates

The estimates shown for individual tax expenditures in Tables 6-1, 6-
2, and 6-3 do not necessarily equal the increase in Federal revenues (or
the change in the budget balance) that would result from repealing these
special provisions, for the following reasons:
Eliminating a tax expenditure may have incentive effects that alter
economic behavior. These incentives can affect the resulting magnitudes
of the activity or of other tax provisions or Government programs. For
example, if deductibility of mortgage interest were limited, some
taxpayers would hold smaller mortgages, with a concomitantly smaller
effect on the budget than if no such limits were in force. Such indirect
effects are not reflected in the estimates.
Tax expenditures are interdependent even without incentive effects.
Repeal of a tax expenditure provision can increase or decrease the tax
revenues associated with other provisions. For example, even if behavior
does not change, repeal of an itemized deduction could increase the
revenue costs from other deductions because some taxpayers would be
moved into higher tax brackets. Alternatively, repeal of an itemized
deduction could lower the revenue cost from other deductions if
taxpayers are led to claim the standard deduction instead of itemizing.
Similarly, if two provisions were repealed simultaneously, the increase
in tax liability could be greater or less than the sum of the two
separate tax expenditures, because each is estimated assum

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ing that the other remains in force. In addition, the estimates reported
in Table 6-1 are the totals of individual and corporate income tax
revenue effects reported in Table 6-2 and do not reflect any possible
interactions between the individual and corporate income tax receipts.
For this reason, the estimates in Table 6-1 (as well as those in Table
6-5, which are also based on summing individual and corporate estimates)
should be regarded as approximations.
The annual value of tax expenditures for tax deferrals is reported on
a cash basis in all tables except Table 6-4. Cash-based estimates
reflect the difference between taxes deferred in the current year and
incoming revenues that are received due to deferrals of taxes from prior
years. Although such estimates are useful as a measure of cash flows
into the Government, they do not accurately reflect the true economic
cost of these provisions. For example, for a provision where activity
levels have changed, so that incoming tax receipts from past deferrals
are greater than deferred receipts from new activity, the cash-basis tax
expenditure estimate can be negative, despite the fact that in present-
value terms current deferrals do have a real cost to the Government.
Alternatively, in the case of a newly enacted deferral provision, a
cash-based estimate can overstate the real effect on receipts to the
Government because the newly deferred taxes will ultimately be received.
Present-value estimates, which are a useful complement to the cash-basis
estimates for provisions involving deferrals, are discussed below.

Present-Value Estimates

Discounted present-value estimates of revenue effects are presented in
Table 6-4 for certain provisions that involve tax deferrals or other
long-term revenue effects. These estimates complement the cash-based tax
expenditure estimates presented in the other tables.
The present-value estimates represent the revenue effects, net of
future tax payments, that follow from activities undertaken during
calendar year 2001 that cause the deferrals or other long-term revenue
effects. For instance, a pension contribution in 2001 would cause a
deferral of tax payments on wages in 2001 and on pension earnings on
this contribution (e.g., interest) in later years. In some future year,
however, the 2001 pension contribution and accrued earnings will be paid
out and taxes will be due; these receipts are included in the present-
value estimate. In general, this conceptual approach is similar to the
one used for reporting the budgetary effects of credit programs, where
direct loans and guarantees in a given year affect future cash flows.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Addendum: Aid to State and local governments:
Deductibility of:
Property taxes on owner-occupied homes................. 22,410 22,680 23,580 23,210 20,330 16,300 14,410 97,830
Nonbusiness State and local taxes other than on owner- 45,520 46,160 48,150 47,730 43,270 34,820 30,890 204,860
occupied homes........................................
Exclusion of interest on State and local bonds for:
Public purposes........................................ 23,100 23,680 24,270 24,880 25,500 26,140 26,800 127,590
Energy facilities...................................... 90 90 100 120 130 140 150 640
Water, sewage, and hazardous waste disposal facilities. 400 420 440 480 530 580 630 2,660
Small-issues........................................... 310 310 330 360 390 430 470 1,980
Owner-occupied mortgage subsidies...................... 800 830 870 960 1,050 1,140 1,240 5,260
Rental housing......................................... 160 170 180 200 220 240 260 1,100
Airports, docks, and similar facilities................ 630 640 680 750 820 890 980 4,120
Student loans.......................................... 230 230 240 260 290 310 350 1,450
Private nonprofit educational facilities............... 540 550 580 640 700 760 830 3,510
Hospital construction.................................. 1,100 1,130 1,190 1,310 1,440 1,570 1,700 7,210
Veterans' housing...................................... 40 40 40 40 50 50 60 240
Credit for holders of zone academy bonds................ 30 50 70 80 90 90 90 420
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The determination of whether a provision is a tax expenditure is made on the basis of a broad concept of ``income'' that is larger in scope than is
``income'' as defined under general U.S. income tax principles. For tax reasons, the tax expenditure estimates include, for example, estimates related
to the exclusion of extraterritorial income, as well as other exclusions, notwithstanding that such exclusions define income under the general rule of
U.S. income taxation.
\2\ In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as
follows: 2001 $990; 2002 $1,020; 2003 $1,050; 2004 $1,080; 2005 $1,080; 2006 $1,100; and 2007 $1,120.
\3\ The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as
follows: 2001 $980; 2002 $7,390; 2003 $7,390; 2004 $7,210; 2005 $6,950; 2006 $9,380; and 2007 $9,200.
\4\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of
dollars) is as follows: 2001 $26,120; 2002 $28,280; 2003 $30,630; 2004 $31,080; 2005 $31,720; 2006 $33,130; and 2007 $34,090.
Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method. All estimates have been rounded to
the nearest $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.

[[Page 102]]

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

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

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

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

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

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

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

[[Page 103]]

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

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

[[Page 104]]

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

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

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

[[Page 105]]

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

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

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

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

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

[[Page 106]]

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

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

Addendum: Aid to State and local governments:
Deductibility of:
Property taxes on owner-occupied homes........................... ....... ....... ....... ....... ....... ....... ....... ........ 22,410 22,680 23,580 23,210 20,330 16,300 14,410 97,830
Nonbusiness State and local taxes other than on owner-occupied ....... ....... ....... ....... ....... ....... ....... ........ 45,520 46,160 48,150 47,730 43,270 34,820 30,890 204,860
homes...........................................................
Exclusion of interest on State and local bonds for:
Public purposes.................................................. 5,860 6,010 6,160 6,310 6,470 6,630 6,800 32,370 17,240 17,670 18,110 18,570 19,030 19,510 20,000 95,220
Energy facilities................................................ 20 20 20 30 30 30 30 140 70 70 80 90 100 110 120 500
Water, sewage, and hazardous waste disposal facilities........... 100 110 110 110 110 120 120 570 300 310 330 370 420 460 510 2,090
Small-issues..................................................... 80 80 80 80 80 90 90 420 230 230 250 280 310 340 380 1,560
Owner-occupied mortgage subsidies................................ 200 210 210 220 230 230 240 1,130 600 620 660 740 820 910 1,000 4,130
Rental housing................................................... 40 40 40 50 50 50 50 240 120 130 140 150 170 190 210 860
Airports, docks, and similar facilities.......................... 160 160 170 170 180 180 190 890 470 480 510 580 640 710 790 3,230
Student loans.................................................... 60 60 60 60 60 60 70 310 170 170 180 200 230 250 280 1,140
Private nonprofit educational facilities......................... 140 140 140 150 150 150 160 750 400 410 440 490 550 610 670 2,760
Hospital construction............................................ 280 290 290 300 310 320 320 1,540 820 840 900 1,010 1,130 1,250 1,380 5,670
Veterans' housing................................................ 10 10 10 10 10 10 10 50 30 30 30 30 40 40 50 190
Credit for holders of zone academy bonds.......................... 30 50 70 80 90 90 90 420 ....... ....... ........ ........ ........ ........ ........ ........
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The determination of whether a provision is a tax expenditure is made on the basis of a broad concept of ``income'' that is larger in scope than is ``income'' as defined under general U.S. income tax principles. For tax reasons,
the tax expenditure estimates include, for example, estimates related to the exclusion of extraterritorial income, as well as other exclusions, notwithstanding that such exclusions define income under the general rule of U.S.
income taxation.
\2\ In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as follows: 2001 $990; 2002 $1,020; 2003 $1,050; 2004 $1,080; 2005 $1,080; 2006
$1,100; and 2007 $1,120.
\3\ The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2001 $980; 2002 $7,390; 2003 $7,390; 2004 $7,210; 2005 $6,950; 2006
$9,380; and 2007 $9,200.
\4\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2001 $26,120; 2002 $28,280; 2003 $30,630; 2004 $31,080; 2005
$31,720; 2006 $33,130; and 2007 $34,090.

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

[[Page 107]]

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

[[Page 108]]

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

[[Page 109]]

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

Outlay Equivalents

The concept of ``outlay equivalents'' is another theoretical measure
of the budget effect of tax expenditures. It is the amount of budget
outlays that would be required to provide the taxpayer the same after-
tax income as would be received through the tax provision. The outlay-
equivalent measure allows the cost of a tax expenditure to be compared
with a direct Federal outlay on a more even footing. Outlay equivalents
are reported in Table 6-5.

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

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

[[Page 110]]

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

[[Page 111]]

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

[[Page 112]]

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

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

Tax Expenditure Baselines

A tax expenditure is an exception to baseline provisions of the tax
structure. The 1974 Congressional Budget Act, which mandated the tax
expenditure budget, did not specify the baseline provisions of the tax
law. As noted previously, deciding whether provisions are exceptions,
therefore, is a matter of judgement. As in prior years, this year's tax
expenditure estimates are presented using two baselines: the normal tax
baseline, which is used by the Joint Committee on Taxation, and the
reference tax law baseline, which has been reported by the
Administration since 1983.
The normal tax baseline is patterned on a comprehensive income tax,
which defines income as the sum of consumption and the change in net
wealth in a given period of time. The normal tax baseline allows
personal exemptions, a standard deduction, and deductions of the
expenses incurred in earning income. It is not limited to a particular
structure of tax rates, or by a specific definition of the taxpaying
unit.
The reference tax law baseline is also patterned on a comprehensive
income tax, but it is closer to existing law. Tax expenditures under the
reference law baseline are generally tax expenditures under the normal
tax baseline, but the reverse is not always true.
Both the normal and reference tax baselines allow several major
departures from a pure comprehensive income tax. For example:
Income is taxable only when it is realized in exchange.
Thus, neither the deferral of tax on unrealized capital gains
nor the tax exclusion of imputed income (such as the rental
value of owner-occupied housing or farmers' consumption of
their own produce) is regarded as a tax expenditure. Both
accrued and imputed income would be taxed under a
comprehensive income tax.
There is a separate corporation income tax. Under a
comprehensive income tax, corporate income would be taxed only
once--at the shareholder level, whether or not distributed in
the form of dividends.
Values of assets and debt are not adjusted for inflation. A
comprehensive income tax would adjust the cost basis of
capital assets and debt for changes in the price level during
the time the assets or debt are held. Thus, under a
comprehensive income tax baseline, the failure to take account
of inflation in measuring depreciation, capital gains, and
interest income would be regarded as a negative tax
expenditure (i.e., a tax penalty), and failure to take account
of inflation in measuring interest costs would be regarded as
a positive tax expenditure (i.e., a tax subsidy).
Although the reference law and normal tax baselines are generally
similar, areas of difference include:
Tax rates. The separate schedules applying to the various
taxpaying units are included in the reference law baseline.
Thus, corporate tax rates below the maximum statutory rate do
not give rise to a tax expenditure. The normal tax baseline is
similar, except that it specifies the current maximum rate as
the baseline for the corporate income tax. The lower tax rates
applied to the first $10 million of corporate income are thus
regarded as a tax expenditure. Similarly, under the reference
law baseline, preferential tax rates for capital gains
generally do not yield a tax expenditure;

[[Page 113]]

only capital gains treatment of otherwise ``ordinary income,''
such as that from coal and iron ore royalties and the sale of
timber and certain agricultural products, is considered a tax
expenditure. The alternative minimum tax is treated as part of
the baseline rate structure under both the reference and
normal tax methods.
Income subject to the tax. Income subject to tax is defined
as gross income less the costs of earning that income. The
Federal income tax defines gross income to include: (1)
consideration received in the exchange of goods and services,
including labor services or property; and (2) the taxpayer's
share of gross or net income earned and/or reported by another
entity (such as a partnership). Under the reference tax rules,
therefore, gross income does not include gifts--defined as
receipts of money or property that are not consideration in an
exchange--or most transfer payments, which can be thought of
as gifts from the Government. \2\ The normal tax baseline also
excludes gifts between individuals from gross income. Under
the normal tax baseline, however, all cash transfer payments
from the Government to private individuals are counted in
gross income, and exemptions of such transfers from tax are
identified as tax expenditures. The costs of earning income
are generally deductible in determining taxable income under
both the reference and normal tax baselines. \3\
---------------------------------------------------------------------------
\2\ Gross income does, however, include transfer paymnents associated
with past employment, such as Social Security benefits.
\3\ In the case of individuals who hold ``passive'' equity interests
in businesses, however, the pro-rata shares of sales and expense
deductions reportable in a year are limited. A passive business activity
is defined to be one in which the holder of the interest, usually a
partnership interst, does not actively perform managerial or other
participatory functions. The taxpayer may generally report no larger
deductions for a year than will reduce taxable income from such
activities to zero. Deductions in excess of the limitation may be taken
in subsequent years, or when the interest is liquidated. In addition,
costs of earning income may be limited under the alternative minimum
tax.
---------------------------------------------------------------------------
Capital recovery. Under the reference tax law baseline no
tax expenditures arise from accelerated depreciation. Under
the normal tax baseline, the depreciation allowance for
machinery and equipment is determined using straight-line
depreciation over tax lives equal to mid-values of the asset
depreciation range (a depreciation system in effect from 1971
through 1980). The normal tax baseline for real property is
computed using 40-year straight-line depreciation.
Treatment of foreign income. Both the normal and reference
tax baselines allow a tax credit for foreign income taxes paid
(up to the amount of U.S. income taxes that would otherwise be
due), which prevents double taxation of income earned abroad.
Under the normal tax method, however, controlled foreign
corporations (CFCs) are not regarded as entities separate from
their controlling U.S. shareholders. Thus, the deferral of tax
on income received by CFCs is regarded as a tax expenditure
under this method. In contrast, except for tax haven
activities, the reference law baseline follows current law in
treating CFCs as separate taxable entities whose income is not
subject to U.S. tax until distributed to U.S. taxpayers. Under
this baseline, deferral of tax on CFC income is not a tax
expenditure because U.S. taxpayers generally are not taxed on
accrued, but unrealized, income.
In addition to these areas of difference, the Joint Committee on
Taxation considers a somewhat broader set of tax expenditures under its
normal tax baseline than is considered here.

Performance Measures and the Economic Effects of Tax Expenditures

The Government Performance and Results Act of 1993 (GPRA) directs
Federal agencies to develop annual and strategic plans for their
programs and activities. These plans set out performance objectives to
be achieved over a specific time period. Most of these objectives will
be achieved through direct expenditure programs. Tax expenditures,
however, may also contribute to achieving these goals. The report of the
Senate Governmental Affairs Committee on GPRA \4\ calls on the Executive
branch to undertake a series of analyses to assess the effect of
specific tax expenditures on the achievement of agencies' performance
objectives.
---------------------------------------------------------------------------
\4\ Committee on Government Affairs, United States Senate,
``Government Performance and Results Act of 1993'' (Report 103-58,
1993).
---------------------------------------------------------------------------
The Executive Branch is continuing to focus on the availability of
data needed to assess the effects of the tax expenditures designed to
increase savings. Treasury's Office of Tax Analysis and Statistics of
Income Division (IRS) have developed a new sample of individual income
tax filers as one part of this effort. This new ``panel'' sample will
follow the same taxpayers over a period of at least ten years. The first
year of this panel sample was drawn from tax returns filed in 2000 for
tax year 1999. The sample will capture the changing demographic and
economic circumstances of individuals and the effects of changes in tax
law over an extended period of time. Data from the sample will therefore
permit more extensive, and better, analyses of many tax provisions than
can be performed using only annual (``cross-section'') data. In
particular, data from this panel sample will enhance our ability to
analyze the effect of tax expenditures designed to increase savings.
Other efforts by OMB, Treasury, and other agencies to improve data
available for the analysis of savings tax expenditures will continue
over the next several years.

Comparison of tax expenditure, spending, and regulatory policies. Tax
expenditures by definition work through the tax system and,
particularly, the income tax. Thus, they may be relatively advantageous
policy approaches when the benefit or incentive is related to income and
is intended to be widely available. Because there is an existing public
administrative and private compliance structure for the tax system, the

[[Page 114]]

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

[[Page 115]]

turn, represent the changes in the economy, society, or environment that
are the ultimate goals of programs.
Thus, for a provision that reduces taxes on certain investment
activity, an increase in the amount of investment would likely be a key
output. The resulting production from that investment, and, in turn, the
associated improvements in national income, welfare, or security, could
be the outcomes of interest. For other provisions, such as those
designed to address a potential inequity or unintended consequence in
the tax code, an important performance measure might be how they change
effective tax rates (the discounted present-value of taxes owed on new
investments or incremental earnings) or excess burden (an economic
measure of the distortions caused by taxes). Effects on the incomes of
members of particular groups may be an important measure for certain
provisions.

An overview of evaluation issues by budget function. The discussion
below considers the types of measures that might be useful for some
major programmatic groups of tax expenditures. The discussion is
intended to be illustrative and not all encompassing. However, it is
premised on the assumption that the data needed to perform the analysis
are available or can be developed. In practice, data availability is
likely to be a major challenge, and data constraints may limit the
assessment of the effectiveness of many provisions. In addition, such
assessments can raise significant challenges in economic modeling.
National defense.--Some tax expenditures are intended to assist
governmental activities. For example, tax preferences for military
benefits reflect, among other things, the view that benefits such as
housing, subsistence, and moving expenses are intrinsic aspects of
military service, and are provided, in part, for the benefit of the
employer, the U.S. Government. Tax benefits for combat service are
intended to reduce tax burdens on military personnel undertaking
hazardous service for the Nation. A portion of the tax expenditure
associated with foreign earnings is targeted to benefit U.S. Government
civilian personnel working abroad by offsetting the living costs that
can be higher than those in the United States. These tax expenditures
should be considered together with direct agency budget costs in making
programmatic decisions.
International affairs.--Tax expenditures are also aimed at goals such
as tax neutrality. These include the exclusion for income earned abroad
by nongovernmental employees and exclusions for income of U.S.-
controlled foreign corporations. Measuring the effectiveness of these
provisions raises challenging issues.
General science, space and technology; energy; natural resources and
the environment; agriculture; and commerce and housing.--A series of tax
expenditures reduces the cost of investment, both in specific
activities--such as research and experimentation, extractive industries,
and certain financial activities--and more generally, through
accelerated depreciation for plant and equipment. These provisions can
be evaluated along a number of dimensions. For example, it could be
useful to consider the strength of the incentives by measuring their
effects on the cost of capital (the interest rate which investments must
yield to cover their costs) and effective tax rates. The impact of these
provisions on the amounts of corresponding forms of investment (e.g.,
research spending, exploration activity, equipment) might also be
estimated. In some cases, such as research, there is evidence that the
investment can provide significant positive externalities--that is,
economic benefits that are not reflected in the market transactions
between private parties. It could be useful to quantify these
externalities and compare them with the size of tax expenditures.
Measures could also indicate the effects on production from these
investments--such as numbers or values of patents, energy production and
reserves, and industrial production. Issues to be considered include the
extent to which the preferences increase production (as opposed to
benefitting existing output) and their cost-effectiveness relative to
other policies. Analysis could also consider objectives that are more
difficult to measure but still are ultimate goals, such as promoting the
Nation's technological base, energy security, environmental quality, or
economic growth. Such an assessment is likely to involve tax analysis as
well as consideration of non-tax matters such as market structure,
scientific, and other information (such as the effects of increased
domestic fuel production on imports from various regions, or the effects
of various energy sources on the environment).
Housing investment also benefits from tax expenditures. The mortgage
interest deduction on personal residences is a tax expenditure because
the value of owner-occupied housing services is not included in a
taxpayer's taxable income. Taxpayers also may exclude up to $500,000 of
the capital gains from the sale of personal residences. Measures of the
effectiveness of these provisions could include their effects on
increasing the extent of home ownership and the quality of housing. In
addition, the mortgage interest deduction offsets the taxable nature of
investment income received by homeowners, so the relationship between
the deduction and such earnings is also relevant to evaluation of this
provision. Similarly, analysis of the extent of accumulated inflationary
gains is likely to be relevant to evaluation of the capital gains for
home sales. Deductibility of State and local property taxes assists with
making housing more affordable as well as easing the cost of providing
community services through these taxes. Provisions intended to promote
investment in rental housing could be evaluated for their effects on
making such housing more available and affordable. These provisions
should then be compared with alternative programs that address housing
supply and demand.

Transportation.--Employer-provided parking is a fringe benefit that,
for the most part, is excluded from taxation. The tax expenditure
estimates reflect the cost

[[Page 116]]

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

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

Descriptions of Income Tax Provisions

Descriptions of the individual and corporate income tax expenditures
reported upon in this chapter follow. These descriptions relate to
current law as of December 31, 2001, and do not reflect proposals made
elsewhere in the Budget.

National Defense

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

International Affairs

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

[[Page 117]]

The exclusion increases to $80,000 in 2002 (and thereafter). In
addition, if these taxpayers receive a specific allowance for foreign
housing from their employers, they may also exclude the value of that
allowance. If they do not receive a specific allowance for housing
expenses, they may deduct against their U.S. taxes that portion of such
expenses that exceeds one-sixth the salary of a civil servant at grade
GS-14, step 1 ($67,765 in 2001).
3. Exclusion of certain allowances for Federal employees abroad.--U.S.
Federal civilian employees and Peace Corps members who work outside the
continental United States are allowed to exclude from U.S. taxable
income certain special allowances they receive to compensate them for
the relatively high costs associated with living overseas. The
allowances supplement wage income and cover expenses like rent,
education, and the cost of travel to and from the United States.
4. Extraterritorial income exclusion \5\.--For purposes of calculating
U.S. tax liability, a taxpayer may exclude from gross income the
qualifying foreign trade income attributable to foreign trading gross
receipts. The exclusion generally applies to income from the sale or
lease of qualifying foreign trade property and certain types of services
income. The FSC Repeal and Extraterritorial Income Exclusion Act of 2000
created the extraterritorial income exclusion to replace the foreign
sales corporation provisions, which the Act repealed. The exclusion is
generally available for transactions entered into after September 30,
2000.
---------------------------------------------------------------------------
\5\ The determination of whether a provision is a tax expenditure is
made on the basis of a broad concept of ``income'' that is larger in
scope than is ``income'' as defined under general U.S. income tax
principles. For that reason, the tax expenditure extimates include, for
example, estimtes related to the exclusion of extraterritorial income,
as well as other exclusions, notwithstanding that such exclusions define
income under the general rule of U.S. income taxation.
---------------------------------------------------------------------------
5. Sales source rule exceptions.--The worldwide income of U.S. persons
is taxable by the United States and a credit for foreign taxes paid is
allowed. The amount of foreign taxes that can be credited is limited to
the pre-credit U.S. tax on the foreign source income. The sales source
rules for inventory property allow U.S. exporters to use more foreign
tax credits by allowing the exporters to attribute a larger portion of
their earnings abroad than would be the case if the allocation of
earnings was based on actual economic activity.
6. Income of U.S.-controlled foreign corporations.--The income of
foreign corporations controlled by U.S. shareholders is not subject to
U.S. taxation. The income becomes taxable only when the controlling U.S.
shareholders receive dividends or other distributions from their foreign
stockholding. Under the normal tax method, the currently attributable
foreign source pre-tax income from such a controlling interest is
considered to be subject to U.S. taxation, whether or not distributed.
Thus, the normal tax method considers the amount of controlled foreign
corporation income not distributed to a U.S. shareholder as tax-deferred
income.
7. Exceptions under subpart F for active financing income.--Financial
firms can defer taxes on income earned overseas in an active business.
Taxes on income earned through December 31, 2001 can be deferred.

General Science, Space, and Technology

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

Energy

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

[[Page 118]]

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

Natural Resources and Environment

21. Exploration and development costs.--Certain capital outlays
associated with exploration and development of nonfuel minerals may be
expensed rather than depreciated over the life of the asset.
22. Percentage depletion.--Most nonfuel mineral extractors may use
percentage depletion rather than cost depletion, with percentage
depletion rates ranging from 22 percent for sulfur to 5 percent for sand
and gravel.
23. Sewage, water, solid and hazardous waste facility bonds.--Interest
earned on State and local bonds used to finance the construction of
sewage, water, or hazardous waste facilities is tax-exempt. These bonds
are generally subject to the State private-activity bond annual volume
cap.
24. Capital gains treatment of certain timber.--Certain timber sold
under a royalty contract can be treated as a capital gain rather than
ordinary income.
25. Expensing multiperiod timber growing costs.--Most of the
production costs of growing timber may be expensed rather than
capitalized and deducted when the timber is sold. In most other
industries, these costs are capitalized under the uniform capitalization
rules.
26. Historic preservation.--Expenditures to preserve and restore
historic structures qualify for a 20-percent investment credit, but the
depreciable basis must be reduced by the full amount of the credit
taken.

Agriculture

27. Expensing certain capital outlays.--Farmers, except for certain
agricultural corporations and partnerships, are allowed to expense
certain expenditures for feed and fertilizer, as well as for soil and
water conservation measures. Expensing is allowed, even though these
expenditures are for inventories held beyond the end of the year, or for
capital improvements that would otherwise be capitalized.
28. Expensing multiperiod livestock and crop production costs.--The
production of livestock and crops with a production period of less than
two years is exempt from the uniform cost capitalization rules. Farmers
establishing orchards, constructing farm facilities for their own use,
or producing any goods for sale with a production period of two years or
more may elect not to capitalize costs. If they do, they must apply
straight-line depreciation to all depreciable property they use in
farming.
29. Loans forgiven solvent farmers.--Farmers are forgiven the tax
liability on certain forgiven debt. Normally, a debtor must include the
amount of loan forgiveness as income or reduce his recoverable basis in

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the property to which the loan relates. If the debtor elects to reduce
basis and the amount of forgiveness exceeds his basis in the property,
the excess forgiveness is taxable. For insolvent (bankrupt) debtors,
however, the amount of loan forgiveness reduces carryover losses, then
unused credits, and then basis; any remainder of the forgiven debt is
excluded from tax. Farmers with forgiven debt are considered insolvent
for tax purposes, and thus qualify for income tax forgiveness.
30. Capital gains treatment of certain income.--Certain agricultural
income, such as unharvested crops, can be treated as capital gains
rather than ordinary income.
31. Income averaging for farmers.--Taxpayers can lower their tax
liability by averaging, over the prior three-year period, their taxable
income from farming.
32. Deferral of gain on sales of farm refiners.--A taxpayer who sells
stock in a farm refiner to a farmers' cooperative can defer recognition
of gain if the taxpayer reinvests the proceeds in qualified replacement
property.

Commerce and Housing

This category includes a number of tax expenditure provisions that
also affect economic activity in other functional categories. For
example, provisions related to investment, such as accelerated
depreciation, could be classified under the energy, natural resources
and environment, agriculture, or transportation categories.
33. Credit union income.--The earnings of credit unions not
distributed to members as interest or dividends are exempt from income
tax.
34. Bad debt reserves.--Small (less than $500 million in assets)
commercial banks, mutual savings banks, and savings and loan
associations may deduct additions to bad debt reserves in excess of
actually experienced losses.
35. Deferral of income on life insurance and annuity contracts.--
Favorable tax treatment is provided for investment income within
qualified life insurance and annuity contracts. Investment income earned
on qualified life insurance contracts held until death is permanently
exempt from income tax. Investment income distributed prior to the death
of the insured is tax-deferred, if not tax-exempt. Investment income
earned on annuities is treated less favorably than income earned on life
insurance contracts, but it benefits from tax deferral without annual
contribution or income limits generally applicable to other tax-favored
retirement income plans.
36. Small property and casualty insurance companies.--Insurance
companies that have annual net premium incomes of less than $350,000 are
exempt from tax; those with $350,000 to $2.1 million of net premium
incomes may elect to pay tax only on the income earned by their
investment portfolio.
37. Insurance companies owned by exempt organizations.--Generally, the
income generated by life and property and casualty insurance companies
is subject to tax, albeit by special rules. Insurance operations
conducted by such exempt organizations as fraternal societies and
voluntary employee benefit associations, however, are exempt from tax.
38. Small life insurance company deduction.--Small life insurance
companies (gross assets of less than $500 million) can deduct 60 percent
of the first $3 million of otherwise taxable income. The deduction
phases out for otherwise taxable income between $3 million and $15
million.
39. Mortgage housing bonds.--Interest earned on State and local bonds
used to finance homes purchased by first-time, low-to-moderate-income
buyers is tax-exempt. The amount of State and local tax-exempt bonds
that can be issued to finance these and other private activity is
limited. The combined volume cap for private activity bonds, including
mortgage housing bonds, rental housing bonds, student loan bonds, and
industrial development bonds is $62.50 per capita ($187.5 million
minimum) per State in 2001, and $75 per capita ($225 million minimum) in
2002. The Community Renewal Tax Relief Act of 2000 accelerated the
scheduled increase in the state volume cap and indexed the cap for
inflation, beginning in 2003. States may issue mortgage credit
certificates (MCCs) in lieu of mortgage revenue bonds. MCCs entitle home
buyers to income tax credits for a specified percentage of interest on
qualified mortgages. The total amount of MCCs issued by a State cannot
exceed 25 percent of its annual ceiling for mortgage-revenue bonds.
40. Rental housing bonds.--Interest earned on State and local
government bonds used to finance multifamily rental housing projects is
tax-exempt. At least 20 percent (15 percent in targeted areas) of the
units must be reserved for families whose income does not exceed 50
percent of the area's median income; or 40 percent for families with
incomes of no more than 60 percent of the area median income. Other tax-
exempt bonds for multifamily rental projects are generally issued with
the requirement that all tenants must be low or moderate income
families. Rental housing bonds are subject to the volume cap discussed
in the mortgage housing bond section above.
41. Interest on owner-occupied homes.--Owner-occupants of homes may
deduct mortgage interest on their primary and secondary residences as
itemized nonbusiness deductions. The mortgage interest deduction is
limited to interest on debt no greater than the owner's basis in the
residence and, for debt incurred after October 13, 1987, it is limited
to no more than $1 million. Interest on up to $100,000 of other debt
secured by a lien on a principal or second residence is also deductible,
irrespective of the purpose of borrowing, provided the debt does not
exceed the fair market value of the residence. Mortgage interest
deductions on personal residences are tax expenditures because the value
of owner-occupied housing services is not included in a taxpayer's
taxable income.
42. Taxes on owner-occupied homes.--Owner-occupants of homes may
deduct property taxes on their primary and secondary residences even
though they are

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not required to report the value of owner-occupied housing services as
gross income.
43. Installment sales.--Dealers in real and personal property (i.e.,
sellers who regularly hold property for sale or resale) cannot defer
taxable income from installment sales until the receipt of the loan
repayment. Nondealers (i.e., sellers of real property used in their
business) are required to pay interest on deferred taxes attributable to
their total installment obligations in excess of $5 million. Only
properties with sales prices exceeding $150,000 are includable in the
total. The payment of a market rate of interest eliminates the benefit
of the tax deferral. The tax exemption for nondealers with total
installment obligations of less than $5 million is, therefore, a tax
expenditure.
44. Capital gains exclusion on home sales.--A homeowner can exclude
from tax up to $500,000 ($250,000 for singles) of the capital gains from
the sale of a principal residence. The exclusion may not be used more
than once every two years.
45. Passive loss real estate exemption.--In general, passive losses
may not offset income from other sources. Losses up to $25,000
attributable to certain rental real estate activity, however, are exempt
from this rule.
46. Low-income housing credit.--Taxpayers who invest in certain low-
income housing are eligible for a tax credit. The credit rate is set so
that the present value of the credit is equal to 70 percent for new
construction and 30 percent for (1) housing receiving other Federal
benefits (such as tax-exempt bond financing), or (2) substantially
rehabilitated existing housing. The credit is allowed in equal amounts
over 10 years. State agencies determine who receives the credit; States
are limited in the amount of credit they may authorize annually. The
Community Renewal Tax Relief Act of 2000 increased the per-resident
limit to $1.50 in 2001 and to $1.75 in 2002 and indexed the limit for
inflation, beginning in 2003. The Act also created a $2 million minimum
annual cap for small States beginning in 2002; the cap is indexed for
inflation, beginning in 2003.
47. Accelerated depreciation of rental property.--The tax depreciation
allowance provisions are part of the reference law rules, and thus do
not give rise to tax expenditures under the reference method. Under the
normal tax method, however, a 40-year tax life for depreciable real
property is the norm. Thus, a statutory depreciation period for rental
property of 27.5 years is a tax expenditure. In addition, tax
expenditures arise from pre-1987 tax allowances for rental property.
48. Cancellation of indebtedness.--Individuals are not required to
report the cancellation of certain indebtedness as current income. If
the canceled debt is not reported as current income, however, the basis
of the underlying property must be reduced by the amount canceled.
49. Imputed interest rules.--Holders (issuers) of debt instruments are
generally required to report interest earned (paid) in the period it
accrues, not when paid. In addition, the amount of interest accrued is
determined by the actual price paid, not by the stated principal and
interest stipulated in the instrument. In general, any debt associated
with the sale of property worth less than $250,000 is excepted from the
general interest accounting rules. This general $250,000 exception is
not a tax expenditure under reference law but is under normal law.
Exceptions above $250,000 are a tax expenditure under reference law;
these exceptions include the following: (1) sales of personal residences
worth more than $250,000, and (2) sales of farms and small businesses
worth between $250,000 and $1 million.
50. Capital gains (other than agriculture, timber, iron ore, and
coal).--Capital gains on assets held for more than 1 year are taxed at a
lower rate than ordinary income. The lower rate on capital gains is
considered a tax expenditure under the normal tax method but not under
the reference law method.
For most assets held for more than 1 year, the top capital gains tax
rate is 20 percent. For assets acquired after December 31, 2000, the top
capital gains tax rate for assets held for more than 5 years is 18
percent. On January 1, 2001, taxpayers may mark-to-market existing
assets to start the 5-year holding period. Losses from the mark-to-
market are not recognized.
For assets held for more than 1 year by taxpayers in the 15-percent
ordinary tax bracket, the top capital gains tax rate is 10 percent.
After December 31, 2000, the top capital gains tax rate for assets held
by these taxpayers for more than 5 years is 8 percent.
51. Capital gains exclusion for small business stock.--An exclusion of
50 percent is provided for capital gains from qualified small business
stock held by individuals for more than 5 years. A qualified small
business is a corporation whose gross assets do not exceed $50 million
as of the date of issuance of the stock.
52. Step-up in basis of capital gains at death.--Capital gains on
assets held at the owner's death are not subject to capital gains taxes.
The cost basis of the appreciated assets is adjusted upward to the
market value at the owner's date of death. After repeal of the estate
tax under EGTRRA for 2010, the basis for property acquired from a
decedent will be the lesser of fair market value or the decedent's
basis. Certain types of additions to basis will be allowed so that
assets in most estates that are not currently subject to estate tax will
not be subject to capital gains tax in the hands of the heirs.
53. Carryover basis of capital gains on gifts.--When a gift is made,
the donor's basis in the transferred property (the cost that was
incurred when the transferred property was first acquired) carries-over
to the donee. The carryover of the donor's basis allows a continued
deferral of unrealized capital gains. Even though the estate tax is
repealed for 2010 under EGTRRA, the gift tax is retained with a lifetime
exemption of $1 million.

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54. Ordinary income treatment of losses from sale of small business
corporate stock shares.--Up to $100,000 in losses from the sale of small
business corporate stock (capitalization less than $1 million) may be
treated as ordinary losses. Such losses would, thus, not be subject to
the $3,000 annual capital loss write-off limit.
55. Accelerated depreciation of non-rental-housing buildings.--The tax
depreciation allowance provisions are part of the reference law rules,
and thus do not give rise to tax expenditures under reference law. Under
normal law, however, a 40-year life for non-rental-housing buildings is
the norm. Thus, the 39-year depreciation period for property placed in
service after February 25, 1993, the 31.5-year depreciation period for
property placed in service from 1987 to February 25, 1993, and the pre-
1987 depreciation periods create a tax expenditure.
56. Accelerated depreciation of machinery and equipment.--The tax
depreciation allowance provisions are part of the reference law rules,
and thus do not give rise to tax expenditures under reference law. Under
the normal tax baseline, this tax depreciation allowance is measured
relative to straight-line depreciation using Asset Depreciation Range
(ADR) lives. Statutory depreciation of machinery and equipment is
accelerated relative to this baseline, thereby creating a tax
expenditure under the normal tax rules.
57. Expensing of certain small investments.--In 2001, qualifying
investments in tangible property up to $24,000 can be expensed rather
than depreciated over time. The expensing limit increases to $25,000 in
2003. To the extent that qualifying investment during the year exceeds
$200,000, the amount eligible for expensing is decreased. In 2001, the
amount expensed is completely phased out when qualifying investments
exceed $224,000.
58. Business start-up costs.--When taxpayers enter into a new
business, certain start-up expenses, such as the cost of legal services,
are normally incurred. Taxpayers may elect to amortize these outlays
over 60 months even though they are similar to other payments made for
nondepreciable intangible assets that are not recoverable until the
business is sold. The normal tax method treats this amortization as a
tax expenditure; the reference tax method does not.
59. Graduated corporation income tax rate schedule.--The corporate
income tax schedule is graduated, with rates of 15 percent on the first
$50,000 of taxable income, 25 percent on the next $25,000, and 34
percent on the next $9.925 million. Compared with a flat 34-percent
rate, the lower rates provide an $11,750 reduction in tax liability for
corporations with taxable income of $75,000. This benefit is recaptured
for corporations with taxable incomes exceeding $100,000 by a 5-percent
additional tax on corporate incomes in excess of $100,000 but less than
$335,000.
The corporate tax rate is 35 percent on income over $10 million.
Compared with a flat 35-percent tax rate, the 34-percent rate provides a
$100,000 reduction in tax liability for corporations with taxable
incomes of $10 million. This benefit is recaptured for corporations with
taxable incomes exceeding $15 million by a 3-percent additional tax on
income over $15 million but less than $18.33 million. Because the
corporate rate schedule is part of reference tax law, it is not
considered a tax expenditure under the reference method. A flat
corporation income tax rate is taken as the baseline under the normal
tax method; therefore the lower rates is considered a tax expenditure
under this concept.
60. Small issue industrial development bonds.--Interest earned on
small issue industrial development bonds (IDBs) issued by State and
local governments to finance manufacturing facilities is tax-exempt.
Depreciable property financed with small issue IDBs must be depreciated,
however, using the straight-line method. The annual volume of small
issue IDBs is subject to the unified volume cap discussed in the
mortgage housing bond section above.

Transportation

61. Deferral of tax on U.S. shipping companies.--Certain companies
that operate U.S. flag vessels can defer income taxes on that portion of
their income used for shipping purposes, primarily construction,
modernization and major repairs to ships, and repayment of loans to
finance these investments. Once indefinite, the deferral has been
limited to 25 years since January 1, 1987.
62. Exclusion of employee parking expenses.--Employee parking expenses
that are paid for by the employer or that are received in lieu of wages
are excludable from the income of the employee. In 2001, the maximum
amount of the parking exclusion is $180 (indexed) per month. The tax
expenditure estimate does not include parking at facilities owned by the
employer.
63. Exclusion of employee transit pass expenses.--Transit passes,
tokens, fare cards, and vanpool expenses paid for by an employer or
provided in lieu of wages to defray an employee's commuting costs are
excludable from the employee's income. In 2001, the maximum amount of
the exclusion is $65 (indexed) per month. In 2002, the maximum amount of
the exclusion increases to $100 (indexed) per month.

Community and Regional Development

64. Rehabilitation of structures.--A 10-percent investment tax credit
is available for the rehabilitation of buildings that are used for
business or productive activities and that were erected before 1936 for
other than residential purposes. The taxpayer's recoverable basis must
be reduced by the amount of the credit.
65. Airport, dock, and similar facility bonds.--Interest earned on
State and local bonds issued to finance high-speed rail facilities and
government-owned airports, docks, wharves, and sport and convention
facilities is tax-exempt. These bonds are not subject to a volume cap.

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66. Exemption of income of mutuals and cooperatives.--The incomes of
mutual and cooperative telephone and electric companies are exempt from
tax if at least 85 percent of their revenues are derived from patron
service charges.
67. Empowerment zones, enterprise communities, and renewal
communities.--Qualifying businesses in designated economically depressed
areas can receive tax benefits such as an employer wage credit,
increased expensing of investment in equipment, special tax-exempt
financing, accelerated depreciation, and certain capital gains
incentives. In addition, certain first-time buyers of a principal
residence in the District of Columbia can receive a tax credit on homes
purchased on or before December 31, 2003, and investors in certain D.C.
property can receive a capital gains break. The Community Renewal Tax
Relief Act of 2000 created the renewal communities tax benefits, which
begin on January 1, 2002 and expire on December 31, 2009. The Act also
created additional empowerment zones, increased the tax benefits for
empowerment zones, and extended the expiration date of (1) empowerment
zones from December 31, 2004 to December 31, 2009, and (2) the D.C.
home-buyer credit from December 31, 2001 to December 31, 2003.
68. New markets tax credit.--Taxpayers who invest in a community
development entity (CDE) after December 31, 2000 are eligible for a tax
credit. The total equity investment available for the credit across all
CDEs is $1.0 billion in 2001, $1.5 billion in 2002 and 2003, $2.0
billion in 2004 and 2005, and $3.5 billion in 2006 and 2007. The amount
of the credit equals (1) 5 percent in the year of purchase and the
following 2 years, and (2) 6 percent in the following 4 years. A CDE is
any domestic firm whose primary mission is to serve or provide
investment capital for low-income communities/individuals; a CDE must be
accountable to residents of low-income communities. The Community
Renewal Tax Relief Act of 2000 created the new markets tax credit.
69. Expensing of environmental remediation costs.--Taxpayers who clean
up certain hazardous substances at a qualified site may expense the
clean-up costs, rather than capitalize the costs, even though the
expenses will generally increase the value of the property significantly
or appreciably prolong the life of the property. The expensing only
applies to clean-up costs incurred on or before December 31, 2003. The
Community Renewal Tax Relief Act of 2000 extended the expiration date
from December 31, 2001 to December 31, 2003. The Act also expanded the
number of qualified sites.

Education, Training, Employment, and Social Services

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

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75. Student-loan interest.--Taxpayers may claim an above-the-line
deduction of up to $2,500 on interest paid on an education loan.
Interest may only be deducted for the first five years in which interest
payments are required. In 2001, the maximum deduction is phased down
ratably for taxpayers with modified AGI between $60,000 and $75,000
($40,000 and $55,000 for singles). EGTRRA increased the income
thresholds for the phase down to $100,000 and $130,000 ($50,000 and
$65,000 for singles) (indexed) and repealed the five year rule for
interest payments made after December 21, 2001.
76. State prepaid tuition plans.--Some States have adopted prepaid
tuition plans and prepaid room and board plans, which allow persons to
pay in advance for college expenses for designated beneficiaries. In
2001 taxes on the earnings from these plans are paid by the
beneficiaries and are deferred until tuition is actually paid. Beginning
in 2002, investment income is not taxed when earned, and is tax-exempt
when withdrawn to pay for qualified expenses. These changes were the
result of EGTRRA.
77. Student-loan bonds.--Interest earned on State and local bonds
issued to finance student loans is tax-exempt. The volume of all such
private activity bonds that each State may issue annually is limited.
78. Bonds for private nonprofit educational institutions.--Interest
earned on State and local government bonds issued to finance the
construction of facilities used by private nonprofit educational
institutions is not taxed.
79. Credit for holders of zone academy bonds.--Financial institutions
that own zone academy bonds receive a non-refundable tax credit (at a
rate set by the Treasury Department) rather than interest. The credit is
included in gross income. Proceeds from zone academy bonds may only be
used to renovate, but not construct, qualifying schools and for certain
other school purposes. The total amount of zone academy bonds that may
be issued is limited to $1.6 billion--$400 million in each year from
1998 to 2001.
80. U.S. savings bonds for education.--Interest earned on U.S. savings
bonds issued after December 31, 1989 is tax-exempt if the bonds are
transferred to an educational institution to pay for educational
expenses. The tax exemption is phased out for taxpayers with AGI between
$83,650 and $113,650 ($55,750 and $70,750 for singles) in 2001.
81. Dependent students age 19 or older.--Taxpayers may claim personal
exemptions for dependent children age 19 or over who (1) receive
parental support payments of $1,000 or more per year, (2) are full-time
students, and (3) do not claim a personal exemption on their own tax
returns.
82. Charitable contributions to educational institutions.--Taxpayers
may deduct contributions to nonprofit educational institutions.
Taxpayers who donate capital assets to educational institutions can
deduct the assets' current value without being taxed on any appreciation
in value. An individual's total charitable contribution generally may
not exceed 50 percent of adjusted gross income; a corporation's total
charitable contributions generally may not exceed 10 percent of pre-tax
income.
83. Employer-provided educational assistance.--Employer-provided
educational assistance is excluded from an employee's gross income even
though the employer's costs for this assistance are a deductible
business expense. EGTRRA permanently extended this exclusion and
extended the exclusion to also include graduate education (beginning in
2002).
84. Work opportunity tax credit.--Employers can claim a tax credit for
qualified wages paid to individuals who begin work on or before December
31, 2001 and who are certified as members of various targeted groups.
The amount of the credit that can be claimed is 25 percent for
employment of less than 400 hours and 40 percent for employment of 400
hours or more. The maximum credit per employee is $2,400 and can only be
claimed on the first year of wages an individual earns from an employer.
Employers must reduce their deduction for wages paid by the amount of
the credit claimed.
85. Welfare-to-work tax credit.--An employer is eligible for a tax
credit on the first $20,000 of eligible wages paid to qualified long-
term family assistance recipients during the first two years of
employment. The credit is 35 percent of the first $10,000 of wages in
the first year of employment and 50 percent of the first $10,000 of
wages in the second year of employment. The maximum credit is $8,500 per
employee. The credit applies to wages paid to employees who are hired on
or before December 31, 2001.
86. Employer-provided child care exclusion.--Employer-provided child
care is excluded from an employee's gross income even though the
employer's costs for the child care are a deductible business expense.
87. Employer-provided child care credit.--Employers can deduct
expenses for supporting child care or child care resource and referral
services. EGTRRA provides a tax credit to employers for qualified
expenses beginning in 2002. The credit is equal to 25 percent of
qualified expenses for employee child care and 10 percent of qualified
expenses for child care resource and referral services. Employer
deductions for such expenses are reduced by the amount of the credit.
The maximum total credit is limited to $150,000 per taxable year.
88. Assistance for adopted foster children.--Taxpayers who adopt
eligible children from the public foster care system can receive monthly
payments for the children's significant and varied needs and a
reimbursement of up to $2,000 for nonrecurring adoption expenses. These
payments are excluded from gross income.
89. Adoption credit and exclusion.--Taxpayers can receive a
nonrefundable tax credit for qualified adoption expenses. The maximum
credit is $5,000 per child ($6,000 for special needs adoptions) for
2001. The credit is phased-out ratably for taxpayers with modified AGI

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between $75,000 and $115,000 in 2001. EGTRRA increased the maximum
credit for non-special needs children to $10,000, set a flat credit
amount of $10,000 for special needs children, and increased the start
point of the phase-out to $150,000 beginning in 2002. The credit amounts
and the phase-out thresholds are indexed for inflation beginning in
2003. Unused credits may be carried forward and used during the five
subsequent years. Taxpayers may also exclude qualified adoption expenses
from income, subject to the same maximum amounts and phase-out as the
credit. The same expenses cannot qualify for tax benefits under both
programs; however, a taxpayer may use the benefits of the exclusion and
the tax credit for different expenses. Stepchild adoptions are not
eligible for either benefit. Both the credit and the exclusion were made
permanent by EGTRRA.
90. Employer-provided meals and lodging.--Employer-provided meals and
lodging are excluded from an employee's gross income even though the
employer's costs for these items are a deductible business expense.
91. Child credit.--Taxpayers with children under age 17 can qualify
for a $600 refundable per child credit. The maximum credit is increased
to $700 in 2005, $800 in 2009, and $1,000 in 2010. The credit is phased
out for taxpayers at the rate of $50 per $1,000 of modified AGI above
$110,000 ($75,000 for singles).
92. Child and dependent care expenses.--Married couples with child and
dependent care expenses may claim a tax credit when one spouse works
full time and the other works at least part time or goes to school. The
credit may also be claimed by single parents and by divorced or
separated parents who have custody of children. Expenditures up to a
maximum $2,400 for one dependent and $4,800 for two or more dependents
are eligible for the credit. EGTRRA increased the maximum expenditure
limit to $3,000 for one dependent and $6,000 for two or more dependents
beginning in 2003. The credit is equal to 30 percent of qualified
expenditures (35 percent beginning in 2003) for taxpayers with incomes
of $10,000 or less ($15,000 or less beginning in 2003). The credit is
reduced to a minimum of 20 percent by one percentage point for each
$2,000 of income in excess of $10,000 ($15,000 beginning in 2003).
93. Disabled access expenditure credit.--Small businesses (less than
$1 million in gross receipts or fewer than 31 full-time employees) can
claim a 50-percent credit for expenditures in excess of $250 to remove
access barriers for disabled persons. The credit is limited to $5,000.
94. Charitable contributions, other than education and health.--
Taxpayers may deduct contributions to charitable, religious, and certain
other nonprofit organizations. Taxpayers who donate capital assets to
charitable organizations can deduct the assets' current value without
being taxed on any appreciation in value. An individual's total
charitable contribution generally may not exceed 50 percent of adjusted
gross income; a corporation's total charitable contributions generally
may not exceed 10 percent of pre-tax income.
95. Foster care payments.--Foster parents provide a home and care for
children who are wards of the State, under contract with the State.
Compensation received for this service is excluded from the gross
incomes of foster parents; the expenses they incur are nondeductible.
96. Parsonage allowances.--The value of a minister's housing allowance
and the rental value of parsonages are not included in a minister's
taxable income.

Health

97. Employer-paid medical insurance and expenses.--Employer-paid
health insurance premiums and other medical expenses (including long-
term care) are deducted as a business expense by employers, but they are
not included in employee gross income. The self-employed also may deduct
part of their family health insurance premiums.
98. Self-employed medical insurance premiums.--Self-employed taxpayers
may deduct a percentage of their family health insurance premiums.
Taxpayers without self-employment income are not eligible for the
special percentage deduction. The deductible percentage is 60 percent in
2001, 70 percent in 2002, and 100 percent in 2003 and thereafter.
99. Workers compensation insurance premiums.--Workers compensation
insurance premiums are paid by employers and deducted as a business
expense, but the premiums are not included in employee gross income.
100. Medical savings accounts.--Some employees may deduct annual
contributions to a medical savings account (MSA); employer contributions
to MSAs (except those made through cafeteria plans) for qualified
employees are also excluded from income. An employee may contribute to
an MSA in a given year only if the employer does not contribute to the
MSA in that year. MSAs are only available to self-employed individuals
or employees covered under an employer-sponsored high deductible health
plan of a small employer. The maximum annual MSA contribution is 75
percent of the deductible under the high deductible plan for family
coverage (65 percent for individual coverage). Earnings from MSAs are
excluded from taxable income. Distributions from an MSA for medical
expenses are not taxable. The number of taxpayers who may benefit
annually from MSAs is generally limited to 750,000. No new MSAs may be
established after December 31, 2002. The Community Renewal Tax Relief
Act of 2000 extended the expiration date from December 31, 2000 to
December 31, 2002.
101. Medical care expenses.--Personal expenditures for medical care
(including the costs of prescription drugs) exceeding 7.5 percent of the
taxpayer's adjusted gross income are deductible.
102. Hospital construction bonds.--Interest earned on State and local
government debt issued to finance

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hospital construction is excluded from income subject to tax.
103. Charitable contributions to health institutions.--Individuals and
corporations may deduct contributions to nonprofit health institutions.
Tax expenditures resulting from the deductibility of contributions to
other charitable institutions are listed under the education, training,
employment, and social services function.
104. Orphan drugs.--Drug firms can claim a tax credit of 50 percent of
the costs for clinical testing required by the Food and Drug
Administration for drugs that treat rare physical conditions or rare
diseases.
105. Blue Cross and Blue Shield.--Blue Cross and Blue Shield health
insurance providers in existence on August 16, 1986 and certain other
nonprofit health insurers are provided exceptions from otherwise
applicable insurance company income tax accounting rules that
substantially reduce (or even eliminate) their tax liabilities.

Income Security

106. Railroad retirement benefits.--Railroad retirement benefits are
not generally subject to the income tax unless the recipient's gross
income reaches a certain threshold. The threshold is discussed more
fully under the Social Security function.
107. Workers' compensation benefits.--Workers compensation provides
payments to disabled workers. These benefits, although income to the
recipients, are not subject to the income tax.
108. Public assistance benefits.--Public assistance benefits are
excluded from tax. The normal tax method considers cash transfers from
the government as taxable and, thus, treats the exclusion for public
assistance benefits as a tax expenditure.
109. Special benefits for disabled coal miners.--Disability payments
to former coal miners out of the Black Lung Trust Fund, although income
to the recipient, are not subject to the income tax.
110. Military disability pensions.--Most of the military pension
income received by current disabled retired veterans is excluded from
their income subject to tax.
111. Employer-provided pension contributions and earnings.--Certain
employer contributions to pension plans are excluded from an employee's
gross income even though the employer can deduct the contributions. In
addition, the tax on the investment income earned by the pension plans
is deferred until the money is withdrawn.
112. 401(k) plans.--Individual taxpayers can make tax-preferred
contributions to certain types of employer-provided 401(k) plans (and
401(k)-type plans like 403(b) plans and the Federal government's Thrift
Savings Plan). In 2001, an employee could exclude up to $10,500
(indexed) of wages from AGI under a qualified arrangement with an
employer's 401(k) plan. EGTRRA increases the exclusion amount to $11,000
in 2002, $12,000 in 2003, $13,000 in 2004, $14,000 in 2005 and $15,000
in 2006 (indexed thereafter). The tax on the investment income earned by
401(k)-type plans is deferred until withdrawn.
EGTRRA also allows employees to make after-tax contributions to 401(k)
and 401(k)-type plans beginning in 2002. These contributions are not
excluded from AGI, but the investment income of such after-tax
contributions is not taxed when earned or withdrawn.
113. Individual Retirement Accounts.--Individual taxpayers can take
advantage of several different Individual Retirement Accounts (IRAs):
deductible IRAs, non-deductible IRAs, and Roth IRAs. In 2001, employees
can make annual contributions to an IRA up to $2,000 (or 100 percent of
compensation, if less). The annual contributions limit applies to the
total of a taxpayer's deductible, non-deductible, and Roth IRAs
contributions. EGTRRA increases the IRA contribution limit to $3,000 in
2002, $4,000 in 2005, and $5,000 in 2008 (indexed thereafter) and allows
taxpayers over age 50 to make additional ``catch-up'' contributions of
$1,000 (by 2006).
Taxpayers whose AGI is below $53,000 ($33,000 for non-joint filers) in
2001 can claim a deduction for IRA contributions. In 2001, the IRA
deduction is phased out for taxpayers with AGI between $53,000 and
$63,000 ($33,000 and $43,000 for non-joint). The phase-out range
increases annually until it reaches $80,000 to $100,000 in 2007 ($50,000
to $60,000 in 2005 for non-joint filers). Taxpayers whose AGI is above
the phase-out range can also claim a deduction for their IRA
contributions depending on whether they (or their spouse) are an active
participant in an employer-provided retirement plan. The tax on the
investment income earned by 401(k) plans, non-deductible IRAs, and
deductible IRAs is deferred until the money is withdrawn.
Taxpayers with incomes below $150,000 ($90,000 for nonjoint filers)
can make contributions to Roth IRAs. The maximum contribution to a Roth
IRA is phased out for taxpayers with AGI between $150,000 and $160,000
($95,000 and $110,000 for singles). Investment income of a Roth IRA is
not taxed when earned nor when withdrawn. Withdrawals from a Roth IRA
are penalty free if: (1) the Roth IRA was opened at least 5 years before
the withdrawal, and (2) the taxpayer either (a) is at least 59-1/2, (b)
dies, (c) is disabled, or (d) purchases a first-time house.
Taxpayers can contribute to a non-deductible IRA regardless of their
income and whether they are an active participant in an employer-
provided retirement plan. The tax on investment income earned by non-
deductible IRAs is deferred until the money is withdrawn.
114. Low and moderate income savers' credit.--EGTRRA provides an
additional incentive for lower-income taxpayers to save through a
nonrefundable credit of up to 50 percent on IRA contributions. This
credit is in addition to any deduction or exclusion. The credit is
completely phased out by $50,000 for joint filers and $25,000 for single
filers. This temporary credit is in effect from 2002 through 2006.

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115. Keogh plans.--Self-employed individuals can make deductible
contributions to their own retirement (Keogh) plans equal to 25 percent
of their income, up to a maximum of $35,000 in 2001. Total plan
contributions are limited to 15 percent of a firm's total wages. EGTRRA
increases the percent of pay limit to 100 percent of the income of the
self-employed by 2005 and increases the dollar limit on contributions to
$40,000 beginning in 2002. EGTRRA also increased the plan limit to 25
percent of a firm's total wages and excluded employee contributions from
this limit beginning in 2002. The tax on the investment income earned by
Keogh plans is deferred until withdrawn.
116. Employer-provided life insurance benefits.--Employer-provided
life insurance benefits are excluded from an employee's gross income
even though the employer's costs for the insurance are a deductible
business expense.
117. Small business retirement plan credit.--EGTRRA provides
businesses with 100 or fewer employees a credit for 50 percent of the
qualified startup costs associated with a new qualified retirement plan.
The credit is limited to $500 annually and may only be claimed for
expenses incurred during the first three years from the start of the
qualified plan. Qualified startup expenses include expenses related to
the establishment and administration of the plan, and the retirement-
related education of employees. The credit applies to costs incurred
beginning in 2002.
118. Employer-provided accident and disability benefits.--Employer-
provided accident and disability benefits are excluded from an
employee's gross income even though the employer's costs for the
benefits are a deductible business expense.
119. Employer-provided supplementary unemployment benefits.--Employers
may establish trusts to pay supplemental unemployment benefits to
employees separated from employment. Interest payments to such trusts
are exempt from taxation.
120. Employer Stock Ownership Plan (ESOP) provisions.--ESOPs are a
special type of tax-exempt employee benefit plan. Employer-paid
contributions (the value of stock issued to the ESOP) are deductible by
the employer as part of employee compensation costs. They are not
included in the employees' gross income for tax purposes, however, until
they are paid out as benefits. The following special income tax
provisions for ESOPs are intended to increase ownership of corporations
by their employees: (1) annual employer contributions are subject to
less restrictive limitations; (2) ESOPs may borrow to purchase employer
stock, guaranteed by their agreement with the employer that the debt
will be serviced by his payment (deductible by him) of a portion of
wages (excludable by the employees) to service the loan; (3) employees
who sell appreciated company stock to the ESOP may defer any taxes due
until they withdraw benefits; and (4) dividends paid to ESOP-held stock
are deductible by the employer.
121. Additional deduction for the blind.--Taxpayers who are blind may
take an additional $1,100 standard deduction if single, or $900 if
married.
122. Additional deduction for the elderly.--Taxpayers who are 65 years
or older may take an additional $1,100 standard deduction if single, or
$900 if married.
123. Tax credit for the elderly and disabled.--Individuals who are 65
years of age or older, or who are permanently disabled, can take a tax
credit equal to 15 percent of the sum of their earned and retirement
income. Income is limited to no more than $5,000 for single individuals
or married couples filing a joint return where only one spouse is 65
years of age or older, and up to $7,500 for joint returns where both
spouses are 65 years of age or older. These limits are reduced by one-
half of the taxpayer's adjusted gross income over $7,500 for single
individuals and $10,000 for married couples filing a joint return.
124. Casualty losses.--Neither the purchase of property nor insurance
premiums to protect its value are deductible as costs of earning income;
therefore, reimbursement for insured loss of such property is not
reportable as a part of gross income. Taxpayers, however, may deduct
uninsured casualty and theft losses of more than $100 each, but only to
the extent that total losses during the year exceed 10 percent of AGI.
125. Earned income tax credit (EITC).--The EITC may be claimed by low
income workers. For a family with one qualifying child, the credit is 34
percent of the first $7,140 of earned income in 2001. The credit is 40
percent of the first $10,020 of income for a family with two or more
qualifying children. The credit is phased out beginning when the
taxpayer's income exceeds $13,090 at the rate of 15.98 percent (21.06
percent if two or more qualifying children are present). It is
completely phased out when the taxpayer's modified adjusted gross income
reaches $28,281 ($32,121 if two or more qualifying children are
present).
The credit may also be claimed by workers who do not have children
living with them. Qualifying workers must be at least age 25 and may not
be claimed as a dependent on another taxpayer's return. The credit is
not available to workers age 65 or older. In 2001, the credit is 7.65
percent of the first $4,760 of earned income. When the taxpayer's income
exceeds $5,950, the credit is phased out at the rate of 7.65 percent. It
is completely phased out at $10,710 of modified adjusted gross income.
For workers with or without children, the income levels at which the
credit begins to phase-out and the maximum amounts of income on which
the credit can be taken are adjusted for inflation. For married
taxpayers filing a joint return, EGTRRA increases the base amount for
the phase-out by $1,000 in 2002 through 2004, $2,000 in 2005 through
2007, and $3,000 in 2008 (indexed thereafter). Earned income tax credits
in excess of tax liabilities owed through the individual income tax
system are refundable to individuals. This portion of the credit is
shown as an outlay, while the

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

Social Security

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

Veterans Benefits and Services

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

General Government

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

Interest

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