[Analytical Perspectives]
[Federal Receipts and Collections]
[4. Federal Receipts]
[From the U.S. Government Printing Office, www.gpo.gov]
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FEDERAL RECEIPTS AND COLLECTIONS
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ANALYTICAL PERSPECTIVES
4. FEDERAL RECEIPTS
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4. FEDERAL RECEIPTS
Receipts (budget and off-budget) are taxes and other collections from
the public that result from the exercise of the Federal Government's
sovereign or governmental powers. The difference between receipts and
outlays determines the surplus or deficit.
The Federal Government also collects income from the public from
market-oriented activities. Collections from these activities, which are
subtracted from gross outlays, rather than added to taxes and other
governmental receipts, are discussed in the following chapter.
Growth in receipts.--Total receipts in 2004 are estimated to be
$1922.0 billion, an increase of $85.8 billion or 4.7 percent relative to
2003. Receipts are projected to grow at an average annual rate of 7.0
percent between 2004 and 2008, rising to $2,520.9 billion. This growth
in receipts is largely due to assumed increases in incomes resulting
from both real economic growth and inflation. These estimates reflect an
adjustment for revenue uncertainty of -$25 billion in 2003 and -$15
billion in 2004. As this description suggests, these latter amounts
reflect an additional adjustment to receipts beyond what the economic
and tax models forecast and have been made in the interest of cautious
and prudent forecasting.
As a share of GDP, receipts are projected to decline from 17.9 percent
in 2002 to 17.1 percent in 2003 and 17.0 percent in 2004. The receipts
share of GDP is projected to increase annually thereafter, rising to
18.3 percent in 2008.
Table 4-1. RECEIPTS BY SOURCE--SUMMARY
(In billions of dollars)
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Estimate
Source 2002 actual -----------------------------------------------------------------------------------
2003 2004 2005 2006 2007 2008
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Individual income taxes............................... 858.3 849.1 849.9 934.6 1,014.1 1,103.4 1,175.3
Corporation income taxes.............................. 148.0 143.2 169.1 229.3 233.8 237.8 243.7
Social insurance and retirement receipts.............. 700.8 726.6 764.5 810.9 845.8 883.6 922.2
(On-budget)......................................... (185.4) (195.0) (208.4) (221.4) (231.0) (239.1) (249.0)
(Off-budget)........................................ (515.3) (531.6) (556.2) (589.5) (614.8) (644.4) (673.2)
Excise taxes.......................................... 67.0 68.4 70.9 73.3 75.6 77.8 80.0
Estate and gift taxes................................. 26.5 20.2 23.4 21.1 23.2 20.8 21.2
Customs duties........................................ 18.6 19.1 20.7 21.2 23.9 26.0 27.6
Miscellaneous receipts................................ 33.9 34.7 38.5 44.8 46.9 48.8 51.0
Adjustment for revenue uncertainty.................... ............ -25.0 -15.0 ............ ............ ............ ............
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Total receipts.................................... 1,853.2 1,836.2 1,922.0 2,135.2 2,263.2 2,398.1 2,520.9
(On-budget)..................................... (1,337.9) (1,304.7) (1,365.9) (1,545.7) (1,648.4) (1,753.6) (1,847.7)
(Off-budget).................................... (515.3) (531.6) (556.2) (589.5) (614.8) (644.4) (673.2)
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Table 4-2. EFFECT ON RECEIPTS OF CHANGES IN THE SOCIAL SECURITY TAXABLE EARNINGS BASE
(In billions of dollars)
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Estimate
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2004 2005 2006 2007 2008
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Social security (OASDI) taxable earnings base increases:
$87,000 to $88,200 on Jan. 1, 2004..................... 0.5 1.4 1.6 1.7 1.9
$88,200 to $92,100 on Jan. 1, 2005..................... ......... 1.8 4.8 5.3 5.8
$92,100 to $96,000 on Jan. 1, 2006..................... ......... ......... 1.8 4.8 5.3
$96,000 to $99,900 on Jan. 1, 2007..................... ......... ......... ......... 1.8 4.8
$99,900 to $103,500 on Jan. 1, 2008.................... ......... ......... ......... ......... 1.7
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ENACTED LEGISLATION
Several laws were enacted in 2002 that have an effect on governmental
receipts. The major legislative changes affecting receipts are described
below.
JOB CREATION AND WORKER ASSISTANCE ACT OF 2002 (JCWAA)
In the fall of 2001, President Bush called on the Congress to enact an
economic security bill designed to reinvigorate economic growth and
assist workers affected by the economic downturn that followed the
terrorist attacks of September 11, 2001. The Congress responded in early
2002 and on March 9 President Bush signed the Job Creation and Worker
Assistance Act of 2002. In addition to providing increased spending for
extended unemployment benefits and funding for the Temporary Assistance
for Needy Families supplemental grant program, this Act provides tax
incentives to encourage business investment, provides tax incentives to
help an area of New York City referred to as the Liberty Zone recover
from the September 11th terrorist attacks, and extends a number of tax
incentives that had expired or were scheduled to expire. The major
provisions of the Act that affect receipts are described below.
Business Tax Relief
Provide a special depreciation allowance for certain property.--
Taypayers are allowed to recover the cost of certain property used in a
trade or business or for the production of income through annual
depreciation deductions. The amount of the allowable depreciation
deduction for a taxable year is generally determined under the modified
accelerated cost recovery system, which assigns applicable recovery
periods and depreciation methods to different types of property.
Effective for qualifying assets acquired after September 10, 2001 (a
binding written contract for purchase must not have been in effect
before September 11, 2001) and before September 11, 2004, this Act
allows an additional first-year depreciation deduction equal to 30
percent of the adjusted basis of the property. The additional first-year
depreciation deduction is allowed for both regular and alternative
minimum tax purposes in the year the property is placed in service. The
basis of the property and the depreciation deductions allowable in other
years are adjusted to reflect the additional first-year depreciation
deduction. Qualifying property includes tangible property with
depreciation recovery periods of 20 years or less, certain software,
water utility property, and qualified leasehold improvements. To qualify
for the special depreciation allowance, the original use of the property
must commence with the taxpayer after September 10, 2001 (except for
certain sale-leaseback property) and the property must be placed in
service before January 1, 2005 (January 1, 2006 for certain longer
production period property). In addition, the limitation on first-year
allowable depreciation for certain automobiles is increased by $4,600.
Allow five-year carryback of net operating losses.--A net operating
loss (NOL) generally is the amount by which a taxpayer's allowable
deductions exceed the taxpayer's gross income. A carryback of an NOL
generally results in a refund of Federal income taxes paid for the
carryback year. A carryforward of an NOL generally reduces Federal
income tax payments for the carryforward year. Under prior law, an NOL
generally could be carried back two years and carried forward 20 years;
however, NOL deductions could not reduce a taxpayer's alternative
minimum taxable income (AMTI) by more than 90 percent.
For NOLs arising in taxable years ending in 2001 and 2002, this Act
generally extends the carryback period to five years. In addition, this
Act allows NOL deductions attributable to NOL carrybacks arising in
taxable years ending in 2001 and 2002, as well as NOL carryforwards to
these taxable years, to offset 100 percent of a taxpayer's AMTI.
Unemployment Assistance
Allow special Reed Act transfers.--The Federal Unemployment Tax (FUTA)
paid by employers funds the administrative costs of the unemployment
insurance system and related programs. State unemployment taxes are
deposited into the Unemployment Trust Fund and used by States to pay
unemployment benefits. Under current law, FUTA balances in excess of
statutory ceilings are distributed to the States to pay unemployment
benefits or the administrative costs of the system (these are known as
Reed Act distributions). However, the Balanced Budget Act of 1997
limited Reed Act transfers to states to $100 million after each of
fiscal years 1999, 2000, and 2001, and limited the use of these $100
million distributions to paying administrative expenses of unemployment
compensation laws.
Under JCWAA the $100 million limit on distributions from excess
federal funds available at the end of fiscal year 2001, as well as the
limitation on the use of the distributions, are repealed. This allows
the Secretary of the Treasury to transfer excess FUTA balances as of the
close of fiscal year 2001 into the account of each State in the
Unemployment Trust Fund. Total transfers are capped at $8 billion.
Tax Benefits for the New York Liberty Zone
Expand eligibility for the work opportunity tax credit.--This Act
temporarily expands eligibility for the work opportunity tax credit to
include: (1) employees who perform substantially all of their services
in the New York Liberty Zone (a specified area of downtown Manhattan
surrounding the site of the World Trade Center) for a business located
in the New York Liberty Zone, and (2) employees who perform
substantially all
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their services in New York City for a business that relocated from the
New York Liberty Zone to elsewhere in New York City as a result of the
events of September 11, 2001. The credit is available for wages paid or
incurred for work performed by eligible individuals after December 31,
2001 and before January 1, 2004, and applies to wages paid to both new
hires and existing employees. In addition, the portion of each
employer's work opportunity tax credit attributable to this new targeted
group of employees is allowed against the alternative minimum tax (AMT).
Provide a special depreciation allowance to certain property.--Under
this Act, certain qualifying assets used in the New York Liberty Zone
are eligible for an additional first-year depreciation deduction equal
to 30 percent of the adjusted basis of the property. The additional
first-year depreciation deduction is allowed for both regular and
alternative minimum tax purposes in the year the property is placed in
service. The basis of the property and the depreciation deductions
allowable in other years are adjusted to reflect the additional first-
year depreciation deduction. Qualifying assets include tangible property
with depreciation recovery periods of 20 years or less, certain
software, water utility property, and certain real property.
Nonresidential real property and residential rental property are
eligible for the special depreciation deduction only to the extent such
property rehabilitates real property damaged, or replaces real property
destroyed or condemned, as a result of the terrorist attacks of
September 11, 2001. Assets qualifying for the additional first-year
depreciation allowance (described above under Business Tax Relief) and
qualified New York Liberty Zone leasehold improvement property are not
eligible for the New York Liberty Zone special depreciation allowance.
To qualify for the special depreciation allowance, substantially all of
the use of the property must be in the New York Liberty Zone, the
original use of the property in the New York Liberty Zone must commence
with the taxpayer after September 10, 2001 (except for certain sale-
leaseback property), the taxpayer must acquire the property by purchase
after September 10, 2001, a binding written contract for purchase of the
property must not have been in effect before September 11, 2001, and the
property must be placed in service on or before December 31, 2006
(December 31, 2009 for nonresidential real property and residential
rental property).
Authorize issuance of tax-exempt private activity bonds.--Interest on
bonds issued by state and local governments to finance activities
carried out and paid for by private persons (private activity bonds) is
taxable unless the activities are specified in the Internal Revenue
Code. The volume of certain tax-exempt private activity bonds that state
and local governments may issue in each calendar year is limited by
state-wide volume limits. Under this Act, an aggregate of $8 billion of
tax-exempt private activity bonds may be issued during calendar years
2002, 2003 and 2004 for the acquisition, construction, reconstruction
and renovation of nonresidential real property, residential rental
property, and public utility property in the New York City Liberty Zone.
Projects for which the bonds may be issued are limited to those approved
by the Mayor of New York City or the Governor of New York State, each of
whom may designate up to $4 billion of the bonds. In addition, each of
those officials may designate up to $1 billion of the bonds to be used
for the acquisition, construction, reconstruction and renovation of
commercial real property located outside the Zone and within New York
City, provided the property meets specified criteria. These bonds are
not subject to the aggregate annual state private activity bond volume
limit; several additional exceptions and modifications to the general
rules applicable to the issuance of exempt-facility private activity
bonds also apply.
Allow one additional advance refunding for certain previously refunded
bonds.--Refunding bonds are used to redeem previously issued bonds.
Different rules apply to ``current'' and ``advance'' refunding bonds. A
current refunding occurs when the refunded debt is retired within 90
days of issuance of the refunding bonds. Tax-exempt bonds may be
currently refunded an indefinite number of times. An advance refunding
occurs when the refunded debt is not retired within 90 days after the
refunding bonds are issued; instead, the proceeds of the refunding bonds
are invested in an escrow account and held until a future date when the
refunded debt may be retired. In general, governmental bonds and tax-
exempt private activity bonds for charitable organizations (qualified
501 (c)(3) bonds) may be advance refunded one time.
This Act permits certain bonds for facilities located in New York City
to be advance refunded one additional time. Eligible bonds include only
those bonds for which all present-law advance refunding authority was
exhausted before September 12, 2001, and with respect to which the
advance refunding bonds authorized under present law were outstanding on
September 11, 2001. In addition, at least 90 percent of the net proceeds
of the refunded bonds must have been used to finance facilities located
in New York City and the bonds must be: (1) governmental general
obligation bonds of New York City; (2) governmental bonds issued by the
Metropolitan Transportation Authority of the State of New York; (3)
governmental bonds issued by the New York City Municipal Water Finance
Authority; or (4) qualified 501 (c)(3) bonds issued by or on behalf of
New York State or New York City to finance hospital facilities. The
maximum aggregate amount of advance refunding bonds that may be issued
in calendar years 2002, 2003, and 2004 is $9 billion. Eligible advance
refunding bonds must be designated by the Mayor of New York City or the
Governor of New York State, each of whom may designate up to $4.5
billion of the bonds.
Increase expensing for certain business property.--In lieu of
depreciation, taxpayers with a suffi
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ciently small amount of annual investment (those that annually invest
less than $200,000) generally may elect to deduct up to $24,000 ($25,000
for taxable years beginning after 2002) of the cost of qualifying
property placed in service during the taxable year. Effective for
certain qualifying capital assets acquired and placed in service after
September 10, 2001 and before January 1, 2007, this Act increases the
amount that may be deducted by such businesses to the lesser of $35,000
or the cost of the qualifying property. For property to qualify for the
increased expensing: (1) substantially all of the use of the property
must be in the New York Liberty Zone in the active conduct of a trade or
business located in the Liberty Zone, and (2) the original use of the
property in the Liberty Zone must commence with the taxpayer after
September 10, 2001.
Extend replacement period for certain involuntarily converted
property.--A taxpayer generally may elect not to recognize gain on
property that is involuntarily converted if property similar or related
in service or use is acquired within a designated replacement period. In
general, the replacement period begins with the date of the disposition
of the converted property and ends two years after the close of the
first taxable year in which any part of the gain upon conversion is
realized. The replacement period is extended to three years if the
converted property is real property held for productive use in a trade
or business, or for investment. This Act extends the replacement period
to five years for property involuntarily converted within the New York
Liberty Zone as a result of the terrorist attacks of September 11, 2001,
if substantially all of the use of the replacement property is in New
York City.
Modify treatment of qualified leasehold improvement property.--The
depreciation deduction allowed for improvements made on leased property
is determined under the modified accelerated cost recovery system, even
if the recovery period assigned to the property is longer than the term
of the lease. Leasehold improvements are depreciated using the straight-
line method and a recovery period that corresponds to the type of real
property being improved (39 years in the case of nonresidential real
property). Under this Act, qualified leasehold improvement property
placed in service in the New York Liberty Zone after September 10, 2001
and before January 1, 2007, and which is not subject to a written
binding contract in effect before September 11, 2001, is to be
depreciated over five years using the straight-line method. The
alternative depreciation system recovery period for such property is
nine years under this Act. Qualified New York City Liberty Zone
leasehold improvement property is not eligible for the special
depreciation allowance available to qualified New York Liberty Zone
property or the special first-year depreciation allowance created by
this Act and described above under Business Tax Relief.
Miscellaneous and Technical Provisions
Modify interest rate used in determining additional required
contributions to defined benefit plans and Pension Benefit Guaranty
Corporation (PBGC) variable rate premiums.--Minimum and maximum funding
requirements are imposed on defined benefit pension plans under current
law. Minimum funding requirements generally are the amount needed to
fund benefits earned during the year, plus the year's portion of the
amortized cost of other liabilities. If a defined benefit plan is
underfunded under a statutorily specified calculation, additional
contributions are required. The PBGC also insures the benefits owed
under defined benefit pension plans, requiring that employers pay
premiums to the PBGC for this insurance coverage. If a plan is
underfunded, additional premiums (referred to as variable rate
premiums), based on the amount of unfunded vested benefits, are
required. This Act expands the permissible range of the statutory
interest rate used in calculating whether a defined benefit pension plan
is underfunded, thereby affecting both the need for an employer to make
additional contributions to a plan and the amount of those additional
contributions. This Act also increases the interest rate used to
determine the amount of unfunded vested benefits, thereby affecting the
amount of variable rate premiums imposed. These interest rate changes
are effective for plan years beginning after December 31, 2001 and
before January 1, 2004.
Allow teachers to deduct out-of-pocket classroom expenses.--Under a
permanent provision employees who incur unreimbursed, job-related
expenses are allowed to deduct those expenses to the extent that when
combined with other miscellaneous itemized deductions they exceeded 2
percent of adjusted gross income (AGI), but only if the taxpayer
itemizes deductions (i.e., does not use the standard deduction).
Effective for expenses incurred in taxable years beginning after
December 31, 2001 and before January 1, 2004, this Act allows certain
teachers and other elementary and secondary school professionals to
treat up to $250 in qualified out-of-pocket classroom expenses as a non-
itemized deduction (above-the-line deduction). Unreimbursed expenditures
for certain books, supplies and equipment related to classroom
instruction qualify for the deduction.
Modify other tax provisions.--This Act also makes technical
corrections to previously enacted legislation, removes the statutory
impediment to providing copies of specified information returns to
taxpayers electronically, expands the exclusion from income for
qualified foster care payments, limits the use of the non-accrual
experience method of accounting to the amount to be received for the
performance of qualified professional services, and prohibits
shareholders from increasing the basis of their stock in an S
corporation by their pro rata share of income from the discharge of
indebtedness
[[Page 63]]
of the S corporation that is excluded from the S corporation's income.
Expired or Expiring Provisions
Extend alternative minimum tax relief for individuals.--A temporary
provision of prior law, which had permitted nonrefundable personal tax
credits to offset both the regular tax and the alternative minimum tax
(AMT), had expired for taxable years beginning after December 31, 2001.
This Act extends minimum tax relief for nonrefundable personal tax
credits two years, to apply to taxable years 2002 and 2003. The
extension does not apply to the child credit, the earned income tax
credit or the adoption credit, which were provided AMT relief through
December 31, 2010 under the Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA). The refundable portion of the child
credit and the earned income tax credit are also allowed against the AMT
through December 31, 2010.
Extend the work opportunity tax credit.--The work opportunity tax
credit provides an incentive for employers to hire individuals from
certain targeted groups. The credit generally applies to the first
$6,000 of wages paid to several categories of economically disadvantaged
or handicapped workers. The credit rate is 25 percent of qualified wages
for employment of at least 120 hours but less than 400 hours and 40
percent for employment of 400 or more hours. This Act extends the
credit, which had expired with respect to workers hired after December
31, 2001, making it available for workers hired before January 1, 2004.
Extend the welfare-to-work tax credit.--The welfare-to-work tax credit
entitles employers to claim a tax credit for hiring certain recipients
of long-term family assistance. The purpose of the credit is to expand
job opportunities for persons making the transition from welfare to
work. The credit is 35 percent of the first $10,000 of eligible wages in
the first year of employment and 50 percent of the first $10,000 of
eligible wages in the second year of employment. Eligible wages include
cash wages plus the cash value of certain employer-paid health,
dependent care, and educational fringe benefits. The minimum employment
period that employees must work before employers can claim the credit is
400 hours. This Act extends the credit, which had expired with respect
to individuals who began work after December 31, 2001, to apply to
individuals who begin work before January 1, 2004.
Extend Archer Medical Savings Accounts (MSAs)--Self-employed
individuals and employees of small firms are allowed to establish Archer
MSAs; the number of accounts is capped at 750,000. In addition to other
requirements, (1) individuals who establish Archer MSAs must be covered
by a high-deductible health plan (and no other plan) with a deductible
of at least $1,700 but not greater than $2,500 for policies covering a
single person and a deductible of at least $3,350 but not greater than
$5,050 in all other cases, (2) tax-preferred contributions are limited
to 65 percent of the deductible for single policies and 75 percent of
the deductible for other policies, and (3) either an individual or an
employer, but not both, may make a tax-preferred contribution to an
Archer MSA for a particular year. This Act extends the Archer MSA
program, which was scheduled to expire on December 31, 2002, through
December 31, 2003.
Extend tax on failure to comply with mental health parity requirements
applicable to group health plans.--Under prior law, group heath plans
that provided both medical and surgical benefits and mental health
benefits, could not impose aggregate lifetime or annual dollar limits on
mental health benefits that were not imposed on substantially all
medical and surgical benefits. An excise tax of $100 per day (during the
period of noncompliance) was imposed on an employer sponsoring a group
plan that failed to meet these requirements. For a given taxable year,
the tax was limited to the lesser of 10 percent of the employer's group
health insurance expenses for the prior taxable year or $500,000. The
excise tax was applicable to plan years beginning on or after January 1,
1998 and expired with respect to benefits for services provided on or
after December 31, 2002. This Act extends the excise tax to apply to
benefits for services provided before January 1, 2004.
Extend tax credit for purchase of electric vehicles.--Under prior law,
a 10-percent tax credit up to a maximum of $4,000 was provided for the
cost of a qualified electric vehicle. The full amount of the credit was
available for purchases prior to January 1, 2002. The credit began to
phase down in 2002 and was not available for purchases after 2004. This
Act defers the phasedown of the credit for two years. The full amount of
the credit is available for purchases in 2002 and 2003, but begins to
phase down in 2004; the credit is not available for purchases after
December 31, 2006.
Extend deduction for qualified clean-fuel vehicles and qualified
clean-fuel vehicle refueling property.--Under prior law, certain costs
of acquiring clean-fuel vehicles (vehicles that use certain clean-
burning fuels) and property used to store or dispense clean-burning
fuel, could be expensed and deducted when the property was placed in
service. For qualified clean-fuel vehicles, the maximum allowable
deduction was $50,000 for a truck or van with a gross vehicle weight
over 26,000 pounds, or a bus with seating capacity of at least 20
adults; $5,000 for a truck or van with a gross vehicle weight between
10,000 and 26,000 pounds; and $2,000 in the case of any other motor
vehicle. The full amount of the deduction could be claimed for vehicles
placed in service before January 1, 2002, but began to phase down for
vehicles placed in service after December 31, 2001, and was not
available after December 31, 2004. For qualified property used to store
or dis
[[Page 64]]
pense clean-burning fuel, or used to recharge electric vehicles, the
owner was allowed to deduct up to $100,000 of the cost of the property
at each location, provided the property was placed in service before
January 1, 2005. This Act defers the phasedown of the deduction for
clean-fuel vehicles by two years. The full amount of the deduction is
available for vehicles placed in service in 2002 and 2003, begins to
phase down in 2004, and is unavailable after December 31, 2006. The
provision extends the placed-in-service date for clean-fuel vehicle
refueling property by two years, making the deduction available for
property placed in service prior to January 1, 2007.
Extend tax credit for producing electricity from certain sources.--
Under prior law, taxpayers were provided a 1.5-cent-per-kilowatt-hour
tax credit, adjusted for inflation after 1992, for electricity produced
from wind, closed-loop biomass (organic material from a plant grown
exclusively for use at a qualified facility to produce electricity), and
poultry waste. To qualify for the credit, the electricity had be sold to
an unrelated third party and had be produced during the first 10 years
of production at a facility placed in service before January 1, 2002.
This Act extends the credit to apply to electricity produced at a
facility placed in service before January 1, 2004.
Extend suspension of net income limitation on percentage depletion
from marginal oil and gas wells.--Taxpayers are allowed to recover their
investment in oil and gas wells through depletion deductions. For
certain properties, deductions may be determined using the percentage
depletion method; however, in any year, the amount deducted generally
may not exceed 100 percent of the net income from the property. Under
prior law, for taxable years beginning after December 31, 1997 and
before January 1, 2002, domestic oil and gas production from
``marginal'' properties was exempt from the 100-percent of net income
limitation. This Act extends the exemption to apply to taxable years
beginning after December 31, 2001 and before January 1, 2004.
Repeal requirement that registered motor fuels terminals offer dyed
fuel as a condition of registration.--With limited exceptions, excise
taxes are imposed on all highway motor fuels when they are removed from
a registered terminal facility, unless the fuel is indelibly dyed and is
destined for a nontaxable use. Terminal facilities are not permitted to
receive and store non-tax-paid motor fuels unless they are registered
with the Internal Revenue Service (IRS). Effective January 1, 2002, in
order to be registered under prior law, a terminal had to offer for sale
both dyed and undyed fuel (the ``dyed-fuel mandate''). This Act repeals
the dyed-fuel mandate effective January 1, 2002.
Extend authority to issue Qualified Zone Academy Bonds.--Prior law
allowed state and local governments to issue ``qualified zone academy
bonds,'' the interest on which was effectively paid by the Federal
government in the form of an annual income tax credit. The proceeds of
the bonds had to be used for teacher training, purchases of equipment,
curriculum development, or rehabilitation and repairs at certain public
school facilities. A nationwide total of $400 million of qualified zone
academy bonds were authorized to be issued in each of calendar years
1998 through 2001. In addition, unused authority arising in 1998 and
1999 could be carried forward for up to three years and unused authority
arising in 2000 and 2001 could be carried forward for up to two years.
This Act authorizes the issuance of an additional $400 million of
qualified zone academy bonds in each of calendar years 2002 and 2003.
Extend tax incentives for employment and investment on Indian
reservations.--This Act extends for one year, through December 31, 2004,
the employment tax credit for qualified workers employed on an Indian
reservation and the accelerated depreciation rules for qualified
property used in the active conduct of a trade or business within an
Indian reservation.
For a given taxable year, the employment tax credit is equal to 20
percent of the amount by which qualified wages and health insurance
costs paid by an employer exceed the amount paid by the employer in
1993. The amount of qualified wages and health insurance costs taken
into account with respect to any employee for any taxable year may not
exceed $20,000. A qualified employee is an individual who is an enrolled
member of an Indian tribe (or is the spouse of an enrolled member),
lives on or near the reservation where he or she works, performs
services that are all or substantially all within the Indian
reservation, and receives wages from the employer that are less than or
equal to $30,000 (adjusted annually for inflation after 1994) when
determined at an annual rate. The employment tax credit is not available
for employees involved in certain gaming activities or who work in a
building that houses certain gaming activities.
The accelerated depreciation recovery periods for qualified Indian
reservation property are: 2 years for 3-year property, 3 years for 5-
year property, 4 years for 7-year property, 6 years for 10-year
property, 9 years for 15-year property, 12 years for 20-year property,
and 22 years for nonresidential real property. Qualifying property must
be used predominantly in the active conduct of a trade or business
within an Indian reservation, cannot be used outside the reservation on
a regular basis (except for qualified infrastructure property if the
purpose of such property is to connect with qualified infrastructure
property located within the reservation), and cannot be acquired from a
related person. Property used to conduct or house certain gaming
activities is not eligible for the accelerated depreciation recovery
periods.
Extend exceptions provided under subpart F for certain active
financing income.--Under the Sub
[[Page 65]]
part F rules, certain U.S. shareholders of a controlled foreign
corporation (CFC) are subject to U.S. tax currently on certain income
earned by the CFC, whether or not such income is distributed to the
shareholders. The income subject to current inclusion under the subpart
F rules includes, among other things, ``foreign personal holding company
income'' and insurance income. Foreign personal holding company income
generally includes many types of income derived by a financial service
company, such as dividends; interest; royalties; rents; annuities; net
gains from the sale of certain property, including securities,
commodities and foreign currency; and income from notional principal
contracts and securities lending activities. Under prior law, for
taxable years beginning before 2002, certain income derived in the
active conduct of a banking, financing, insurance, or similar business
was excepted from Subpart F. This Act extends the exception for five
years, to apply to taxable years beginning before January 1, 2007.
Suspend temporarily the provision that disallows certain deductions of
mutual life insurance companies.--Life insurance companies may generally
deduct policyholder dividends, while dividends to stockholders are not
deductible. Section 809 of the Internal Revenue Code attempts to
identify amounts returned by mutual life insurance companies to holders
of participating polices in their role as owners of the company, and
generally disallows a deduction for mutual company policyholder
dividends (or otherwise increases taxable income by reducing the amount
of end-of-year reserves) in an amount equal to the amount identified by
section 809. The section 809 imputed amount is termed the company's
differential earnings amount, and equals the product of the individual
company's average equity base and an industry-wide computed differential
earnings rate. The differential earnings rate is initially computed
using the average mutual earnings rate for the second year preceding the
current taxable year, but is later recomputed using the current year's
average mutual earnings rate. Any difference between the differential
earnings amount and the recomputed differential earnings amount is taken
into account in computing taxable income for the following taxable year.
Effective for taxable years beginning in 2001, 2002, and 2003, this Act
provides a zero differential earnings rate for purposes of computing the
differential earnings amount and the recomputed differential earnings
amount, thereby temporarily suspending the income imputation for mutual
life insurance companies provided under section 809.
TRADE ACT OF 2002
This Act authorizes the President to enter into trade agreements with
foreign countries regarding tariff and non-tariff barriers whenever he
determines that these barriers unduly burden or restrict U.S. foreign
trade or adversely affect the U.S. economy. Expedited procedures for
Congressional consideration of the legislation to implement these trade
agreements, without amendment, are also authorized. Other provisions of
the Act reauthorize the Customs Service, reauthorize and expand certain
benefits under the Trade Adjustment Assistance program, extend and
expand trade benefits to Andean countries, reauthorize duty-free
treatment under the Generalized System of Preferences program for
developing countries, and make other trade-related changes. The major
provisions of the Act that affect receipts are described below.
Provide refundable tax credit for the purchase of qualified health
insurance by certain individuals.--A refundable tax credit is provided
to eligible individuals for the cost of qualified health insurance for
the individual and qualifying family members. The credit is equal to 65
percent of the amount paid by certain individuals certified as eligible
for Trade Adjustment Assistance or alternative Trade Adjustment
Assistance, and certain retired workers whose pensions are paid by the
Pension Benefit Guaranty Corporation and who are not eligible for
Medicare. Payment of the credit is available on an advance basis (i.e,
prior to the filing of the taxpayer's return) pursuant to a program to
be established by the Secretary of the Treasury no later than August 1,
2003. The credit first became available for months beginning December
2002.
Extend and expand Andean trade preferences.--This Act extends and
enhances the Andean Trade Preference Act (ATPA), which expired on
December 4, 2001, through December 31, 2006. The ATPA, which was enacted
in 1991, was designed to provide economic alternatives for Bolivia,
Columbia, Ecuador, and Peru in their fight against narcotics production
and trafficking.
Extend Generalized System of Preferences (GSP).--Under GSP, duty-free
access is provided to over 4,000 items from eligible developing
countries that meet certain worker rights, intellectual property
protection, and other criteria. This Act extends this program, which had
expired after September 30, 2001, through December 31, 2006.
Modify miscellaneous trade provisions.--Other trade-related changes
made by this Act include: (1) modification of benefits provided under
the Caribbean Basin Trade Partnership Act and the Africa Growth and
Opportunity Act, (2) an increase in the aggregate value of goods that
U.S. residents traveling abroad may bring into the United States duty
free, and (3) the provision of duty-free treatment to certain steam or
vapor generating boilers used in nuclear facilities.
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ADMINISTRATION PROPOSALS
The President's plan provides tax incentives for charitable giving,
strengthening education, investing in health care, and protecting the
environment. It also provides tax incentives designed to increase energy
production and promote energy conservation, temporarily extends
provisions that are scheduled to expire, permanently extends the
research and experimentation (R&E) tax credit, and permanently extends
the provisions of the Economic Growth and Tax Relief Reconciliation Act
of 2001 (EGTRRA) that sunset on December 31, 2010. In addition, the
President intends to work with the Congress to enact an economic growth
package that will increase the momentum of the economic recovery and
enhance long-term growth.
Last year's Budget announced the Administration's tax simplification
project, which is focusing on immediately achievable reforms of the
current tax system. Several proposals in this year's Budget result from
this project. They include the proposals relating to: creating a uniform
definition of a qualifying child, eliminating the phaseout of adoption
tax benefits, repealing the restrictions on the use of qualified
501(c)(3) bonds in refinancing taxable debt and working capital debt and
in providing residential rental housing, simplifying use of the orphan
drug tax credit for pre-designation costs, excluding from income the
value of employer-provided computers, consolidating IRAs into Lifetime
Savings Accounts and Retirement Savings Accounts (LSAs/RSAs),
consolidating defined contribution retirement plans into Employer
Retirement Savings Accounts (ERSAs), allowing section 179 expensing
elections to be made or revoked on amended returns, and conforming and
simplifying the work opportunity tax credit and the welfare to work tax
credit. Additional tax simplification proposals are under development
and review and will be released during the coming year.
ECONOMIC GROWTH PACKAGE
The President believes that it is crucial for the Congress to pass an
economic growth package quickly that will reinvigorate the economic
recovery and provide new jobs, reduce tax burdens, and strengthen
investor confidence. The provisions of the Administration's proposal
that affect receipts are described below.
Accelerate 10-percent individual income tax rate bracket expansion.--
Under EGTRRA, effective for taxable years beginning before January 1,
2011, the 15-percent individual income tax rate bracket of prior law is
split into two tax rate brackets of 10 and 15 percent. The 10-percent
tax rate bracket applies to the first $6,000 of taxable income for
single taxpayers and married taxpayers filing separate returns
(increasing to $7,000 for taxable years beginning after December 31,
2007), the first $10,000 of taxable income for heads of household, and
the first $12,000 of taxable income for married taxpayers filing joint
returns (increasing to $14,000 of taxable income for taxable years
beginning after December 31, 2007). Taxable income above these
thresholds that was taxed at the 15-percent rate under prior law
continues to be taxed at that rate. The income thresholds for the new
tax rate brackets are adjusted annually for inflation, effective for
taxable years beginning after December 31, 2008 and before January 1,
2011.
To spur consumer confidence and economic growth, the Administration
proposes to accelerate the expansion of the 10-percent bracket scheduled
for 2008 to 2003. Effective for taxable years beginning after December
31, 2002, the 10-percent tax rate bracket would apply to the first
$7,000 of taxable income for single taxpayers and married taxpayers
filing separate returns, the first $10,000 of taxable income for heads
of household, and the first $14,000 of taxable income for married
taxpayers filing joint returns. The income thresholds for the 10-percent
tax rate brackets would be adjusted annually for inflation, effective
for taxable years beginning after December 31, 2003. As a result of the
Administration's proposal to extend the EGTRRA provisions permanently,
the expanded 10-percent individual income tax rate bracket would also
apply to taxable years beginning after December 31, 2010.
Accelerate reduction in individual income tax rates.--In addition to
splitting the 15-percent tax rate bracket of prior law into two tax rate
brackets (see preceding discussion), EGTRRA replaces the four remaining
statutory individual income tax rate brackets of prior law (28, 31, 36,
and 39.6 percent) with a rate structure of 25, 28, 33, and 35 percent.
The reduced tax rate structure is phased in over a period of six years,
effective for taxable years beginning after December 31, 2000, as
follows: the 28-percent rate is reduced to 27.5 percent for 2001, 27
percent for 2002 and 2003, 26 percent for 2004 and 2005, and 25 percent
for 2006 through 2010; the 31 percent rate is reduced to 30.5 percent
for 2001, 30 percent for 2002 and 2003, 29 percent for 2004 and 2005,
and 28 percent for 2006 through 2010; the 36 percent rate is reduced to
35.5 percent for 2001, 35 percent for 2002 and 2003, 34 percent for 2004
and 2005, and 33 percent for 2006 through 2010; and the 39.6 percent
rate is reduced to 39.1 percent for 2001, 38.6 percent for 2002 and
2003, 37.6 percent for 2004 and 2005, and 35 percent for 2006 through
2010. The income thresholds for these tax rate brackets are adjusted
annually for inflation.
To improve the incentives to work, save and invest, the Administration
proposes to accelerate the reductions in income tax rates scheduled for
2004 and 2006 to 2003. Effective for taxable years beginning after
December 31, 2002, the 27-percent rate would be reduced to 25 percent,
the 30-percent rate would be reduced to 28 percent, the 35-percent rate
would be reduced to 33 percent, and the 38.6-percent rate would be
reduced to 35 percent. These rates would remain in effect for taxable
years beginning after December 31, 2010
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as a result of the Administration's proposal to extend the EGTRRA
provisions permanently.
Accelerate 15-percent individual income tax rate bracket expansion for
married taxpayers filing joint returns.--The maximum taxable income in
the 15-percent tax rate bracket for a married couple filing a joint
return is 167 percent of the corresponding amount for an unmarried
individual filing a single return. Therefore, a two-earner couple may
have a greater individual income tax liability if they file a joint
return than what it would be if they were not married and each filed a
separate return. Under EGTRRA, the size of the 15-percent tax rate
bracket for married taxpayers filing joint returns is increased over a
four-year period, beginning after December 31, 2004. The increase is as
follows: the maximum taxable income in the 15-percent tax rate bracket
for married taxpayers filing joint returns increases to 180 percent of
the corresponding amount for single taxpayers in taxable year 2005, 187
percent in taxable year 2006, 193 percent in taxable year 2007, and 200
percent in taxable years 2008, 2009, and 2010.
The Administration proposes to reduce the marriage penalty by
increasing the maximum taxable amount in the 15-percent tax rate bracket
for married taxpayers filing joint returns to 200 percent of the
corresponding amount for single taxpayers, effective for taxable years
beginning after December 31, 2002. As a result of the Administration's
proposal to extend EGTRRA permanently, the expanded 15-percent tax rate
bracket for married taxpayers would also apply to taxable years
beginning after December 31, 2010.
Accelerate increase in standard deduction for married taxpayers filing
joint returns.--The basic standard deduction amount for a married couple
filing a joint return is 167 percent of the basic standard deduction for
an unmarried individual filing a single return. Therefore, two single
taxpayers have a combined standard deduction that exceeds the standard
deduction of a married couple filing a joint return. Under EGTRRA, the
standard deduction for married couples filing joint returns is increased
to double the standard deduction for single taxpayers over a five-year
period, beginning after December 31, 2004. The standard deduction for
married taxpayers filing joint returns increases to 174 percent of the
standard deduction for single taxpayers in taxable year 2005, 184
percent in taxable year 2006, 187 percent in taxable year 2007, 190
percent in taxable year 2008, and 200 percent in taxable years 2009 and
2010.
The Administration proposes to reduce the marriage penalty by
increasing the standard deduction for married taxpayers filing joint
returns to 200 percent of the standard deduction for single taxpayers,
effective for taxable years beginning after December 31, 2002. As a
result of the Administration's proposal to extend EGTRRA permanently,
the increase in the standard deduction for married taxpayers would also
apply to taxable years beginning after December 31, 2010.
Accelerate increase in child tax credit.--Current law provides
taxpayers a tax credit of up to $600 for each qualifying child under the
age of 17. The credit increases to $700 for taxable years 2005 through
2008, $800 for taxable year 2009, and $1,000 for taxable year 2010. The
credit declines to $500 in taxable year 2011. The credit is reduced by
$50 for each $1,000 (or fraction thereof) by which the taxpayer's
modified adjusted gross income exceeds $110,000 ($75,000 if the taxpayer
is not married and $55,000 if the taxpayer is married but filing a
separate return). These income thresholds are not adjusted for
inflation. For taxable years before January 1, 2011, the credit offsets
both the regular and the alternative minimum tax.
The child tax credit is refundable to the extent of 10 percent of the
taxpayer's earned income in excess of $10,500. The percentage increases
to 15 percent for taxable years 2005 through 2010. The $10,500 earned
income threshold is indexed annually for inflation. Families with three
or more children are allowed a refundable credit for the amount by which
their social security payroll taxes exceed the refundable portion of
their earned income tax credit, if that amount is greater than the
refundable credit based on their earned income in excess of $10,500. For
taxable years beginning after December 31, 2010, the credit is
nonrefundable unless the taxpayer has three or more children and social
security taxes in excess of the refundable portion of the earned income
tax credit.
To assist families with the costs of raising children, the
Administration proposes to increase the amount of the child tax credit
by $400 to $1,000 per child. The proposal would be effective for taxable
years beginning after December 31, 2002. For 2003, the increased amount
of the child tax credit would be paid in advance beginning in July on
the basis of information on the taxpayer's 2002 tax return filed in
2003. Advance payments would be made in a manner similar to the
distribution of advance payment checks in 2001. The Administration is
also proposing to extend the EGTRRA provisions permanently. Thus, in
taxable years beginning after December 31, 2010, the credit would be
$1,000, would offset the alternative minimum tax, and would be partially
refundable for families with one or two children.
Eliminate the double taxation of corporate earnings.--For corporate
stock held in taxable accounts, corporate profits may be taxed twice,
once at the shareholder level and once at the corporate level. If the
distribution is made through multiple corporations, profits may be taxed
more than twice. In contrast, most other forms of capital income (i.e.,
interest payments, partnership income, and sole-proprietorship income)
are taxed only once. The double taxation of corporate earnings
contributes to a number of economic distortions. These include a tax
bias that (a) discourages investing
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in corporations in favor of investing in unincorporated forms of
business and in consumer durables, (b) discourages financing corporate
investment with equity in favor of financing with debt, and (c)
discourages distributing earnings as dividends in favor of distributing
earnings via share repurchases or retaining and reinvesting them. By
reducing or eliminating these tax biases, the Administration's proposal
allows markets, rather than taxes, to determine business investment and
financing decisions. The Administration's proposal, which would be
effective for taxable years beginning in 2003, would relieve the double
tax on corporate profits by granting tax relief to shareholders.
Shareholders would exclude from taxable income dividends that have been
taxed at the corporate level. Excludable dividends would come from an
excludable dividend account (EDA), which would reflect income on which
the corporation had paid tax at the highest corporate tax rate. Relief
from double taxation also would be extended to retained earnings through
a shareholder basis adjustment. Shareholders would receive an increase
in basis for amounts of taxed corporate earnings that are not paid out
as a dividend. This would relieve the capital gains tax on the retained
corporate earnings. The basis adjustment would treat the shareholder as
if he or she had received a dividend and reinvested it in the
corporation.
Increase expensing for small business.--In lieu of depreciation, a
taxpayer with less than $200,000 in annual investment may elect to
deduct up to $25,000 ($24,000 in 2001 and 2002) of the cost of
qualifying property placed in service during the taxable year. The
amount that a small business may expense is reduced by the amount by
which the cost of qualifying property exceeds $200,000. An election for
the increased deduction must generally be made on the taxpayer's initial
tax return to which the election applies and the election can only be
revoked with the consent of the Commissioner. The Administration
proposes to increase the deduction to $75,000 for taxpayers with less
than $325,000 in annual investment (with both limits indexed annually
for inflation) and include off-the-shelf computer software as qualifying
property. Additionally, the Administration proposes to allow expensing
elections to be made or revoked on amended returns. The proposal would
be effective for taxable years beginning on or after January 1, 2003.
Provide minimum tax relief to individuals.--To ensure that the
benefits from the acceleration of the individual income tax reductions
are not reduced by the AMT, the Administration proposes to increase the
AMT exemption amount in 2003 and 2004 by $8,000 for married taxpayers
and by $4,000 for single taxpayers, and maintain those exemption levels
through 2005.
TAX INCENTIVES
Provide Incentives for Charitable Giving
Provide charitable contribution deduction for nonitemizers.--Under
current law, individual taxpayers who do not itemize their deductions
(nonitemizers) are not able to deduct contributions to qualified
charitable organizations. The Administration proposes to allow
nonitemizers to deduct charitable contributions of cash in addition to
claiming the standard deduction, effective for taxable years beginning
after December 31, 2002. Nonitemizers would be allowed to deduct cash
contributions that exceed $250 ($500 for married taxpayers filing
jointly), up to a maximum deduction of $250 ($500 for married taxpayers
filing jointly). The deduction floor and limits would be indexed for
inflation after 2003. Deductible contributions would be subject to
existing rules governing itemized charitable contributions, such as the
substantiation requirements.
Permit tax-free withdrawals from IRAs for charitable contributions.--
Under current law, eligible individuals may make deductible or non-
deductible contributions to a traditional IRA. Pre-tax contributions and
earnings in a traditional IRA are included in income when withdrawn.
Effective for distributions after December 31, 2002, the Administration
proposes to allow individuals who have attained age 65 to exclude from
gross income IRA distributions made directly to a charitable
organization. The exclusion would apply without regard to the
percentage-of-AGI limitations that apply to deductible charitable
contributions. The exclusion would apply only to the extent the
individual receives no return benefit in exchange for the transfer, and
no charitable deduction would be allowed with respect to any amount that
is excludable from income under this provision.
Expand and increase the enhanced charitable deduction for
contributions of food inventory.--A taxpayer's deduction for charitable
contributions of inventory generally is limited to the taxpayer's basis
(typically cost) in the inventory. However, for certain contributions of
inventory, C corporations may claim an enhanced deduction equal to the
lesser of: (1) basis plus one half of the fair market value in excess of
basis, or (2) two times basis. To be eligible for the enhanced
deduction, the contributed property generally must be inventory of the
taxpayer contributed to a charitable organization and the donee must (1)
use the property consistent with the donee's exempt purpose solely for
the care of the ill, the needy, or infants, (2) not transfer the
property in exchange for money, other property, or services, and (3)
provide the taxpayer a written statement that the donee's use of the
property will be consistent with such requirements. To use the enhanced
deduction, the taxpayer must establish that the fair market value of the
donated item exceeds basis.
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Under the Administration's proposal, which is designed to encourage
contributions of food inventory to charitable organizations, any
taxpayer engaged in a trade or business would be eligible to claim an
enhanced deduction for donations of food inventory. The enhanced
deduction for donations of food inventory would be increased to the
lesser of: (1) fair market value, or (2) two times basis. However, to
ensure consistent treatment of all businesses claiming an enhanced
deduction for donations of food inventory, the enhanced deduction for
qualified food donations by S corporations and non-corporate taxpayers
would be limited to 10 percent of net income from the trade or business.
A special provision would allow taxpayers with a zero or low basis in
the qualified food donation (e.g., taxpayers that use the cash method of
accounting for purchases and sales, and taxpayers that are not required
to capitalize indirect costs) to assume a basis equal to 25 percent of
fair market value. The enhanced deduction would be available only for
donations of ``apparently wholesome food'' (food intended for human
consumption that meets all quality and labeling standards imposed by
Federal, state, and local laws and regulations, even though the food may
not be readily marketable due to appearance, age, freshness, grade,
size, surplus, or other conditions). The fair market value of
``apparently wholesome food'' that cannot or will not be sold solely due
to internal standards of the taxpayer or lack of market, would be
determined by taking into account the price at which the same or
substantially the same food items are sold by the taxpayer at the time
of the contribution or, if not sold at such time, in the recent past.
These proposed changes in the enhanced deduction for donations of food
inventory would be effective for taxable years beginning after December
31, 2002.
Reform excise tax based on investment income of private foundations.--
Under current law, private foundations that are exempt from Federal
income tax are subject to a two-percent excise tax on their net
investment income (one-percent if certain requirements are met). The
excise tax on private foundations that are not exempt from Federal
income tax, such as certain charitable trusts, is equal to the excess of
the sum of the excise tax that would have been imposed if the foundation
were tax exempt and the amount of the unrelated business income tax that
would have been imposed if the foundation were tax exempt, over the
income tax imposed on the foundation. To encourage increased charitable
activity and simplify the tax laws, the Administration proposes to
replace the two rates of tax on the net investment income of private
foundations that are exempt from Federal income tax with a single tax
rate of one percent. The excise tax on private foundations not exempt
from Federal income tax would be equal to the excess of the sum of the
one-percent excise tax that would have been imposed if the foundation
were tax exempt and the amount of the unrelated business income tax what
would have been imposed if the foundation were tax exempt, over the
income tax imposed on the foundation. The proposed change would be
effective for taxable years beginning after December 31, 2002.
Modify tax on unrelated business taxable income of charitable
remainder trusts.--A charitable remainder annuity trust is a trust that
is required to pay, at least annually, a fixed dollar amount of at least
five percent of the initial value of the trust to a noncharity for the
life of an individual or for a period of 20 years or less, with the
remainder passing to charity. A charitable remainder unitrust is a trust
that generally is required to pay, at least annually, a fixed percentage
of at least five percent of the fair market value of the trust's assets
determined at least annually to a non-charity for the life of an
individual or for a period of 20 years or less, with the remainder
passing to charity. A trust does not qualify as a charitable remainder
annuity trust if the annuity for a year is greater than 50 percent of
the initial fair market value of the trust's assets. A trust does not
qualify as a charitable remainder unitrust if the percentage of assets
that are required to be distributed at least annually is greater than 50
percent. A trust does not qualify as a charitable remainder annuity
trust or a charitable remainder unitrust unless the value of the
remainder interest in the trust is at least 10 percent of the value of
the assets contributed to the trust. Distributions from a charitable
remainder annuity trust or charitable remainder unitrust, which are
included in the income of the beneficiary for the year that the amount
is required to be distributed, are treated in the following order as:
(1) ordinary income to the extent of the trust's current and previously
undistributed ordinary income for the trust's year in which the
distribution occurred, (2) capital gains to the extent of the trust's
current capital gain and previously undistributed capital gain for the
trust's year in which the distribution occurred, (3) other income to the
extent of the trust's current and previously undistributed other income
for the trust's year in which the distribution occurred, and (4) corpus
(trust principal).
Charitable remainder annuity trusts and charitable remainder unitrusts
are exempt from Federal income tax; however, such trusts lose their
income tax exemption for any year in which they have unrelated business
taxable income. Any taxes imposed on the trust are required to be
allocated to trust corpus. The Administration proposes to levy a 100-
percent excise tax on the unrelated business taxable income of
charitable remainder trusts, in lieu of removing the Federal income tax
exemption for any year in which unrelated business taxable income is
incurred. This change, which is a more appropriate remedy than loss of
tax exemption, is proposed to become effective for taxable years
beginning after December 31, 2002, regardless of when the trust was
created.
Modify basis adjustment to stock of S corporations contributing
appreciated property.--Under current law, each shareholder in an S
corporation sepa
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rately accounts for his or her pro rata share of the S corporation's
charitable contributions in determining his or her income tax liability.
A shareholder's basis in the stock of the S corporation must be reduced
by the amount of his or her pro rata share of the S corporation's
charitable contribution. In order to preserve the benefit of providing a
charitable contribution deduction for contributions of appreciated
property and to prevent the recognition of gain on the contributed
property on the disposition of the S corporation stock, the
Administration proposes to allow a shareholder in an S corporation to
increase his or her basis in the stock of an S corporation by an amount
equal to the excess of the shareholder's pro rata share of the S
corporation's charitable contribution over the stockholder's pro rata
share of the adjusted basis of the contributed property. The proposal
would be effective for taxable years beginning after December 31, 2002.
Repeal the $150 million limitation on qualified 501(c)(3) bonds.--
Current law contains a $150 million limitation on the volume of
outstanding, non-hospital, tax-exempt bonds for the benefit of any one
501(c)(3) organization. The limitation was repealed in 1997 for bonds
issued after August 5, 1997, at least 95 percent of the net proceeds of
which are used to finance capital expenditures incurred after that date.
However, the limitation continues to apply to bonds more than five
percent of the net proceeds of which finance or refinance working
capital expenditures, or capital expenditures incurred on or before
August 5, 1997. In order to simplify the tax laws and provide consistent
treatment of bonds for 501(c)(3) organizations, the Administration
proposes to repeal the $150 million limitation in its entirety.
Repeal restrictions on the use of qualified 501(c)(3) bonds for
residential rental property.--Tax-exempt, 501(c)(3) organizations
generally may utilize tax-exempt financing for charitable purposes.
However, existing law contains a special limitation under which
501(c)(3) organizations may not use tax-exempt financing to acquire
existing residential rental property for charitable purposes unless the
property is rented to low-income tenants or is substantially
rehabilitated. In order to simplify the tax laws and provide consistent
treatment of bonds for 501(c)(3) organizations, the Administration
proposes to repeal the residential rental property limitation.
Strengthen and Reform Education
Provide refundable tax credit for certain costs of attending a
different school for pupils assigned to failing public schools.--Under
the Administration's proposal, a refundable tax credit would be allowed
for 50 percent of the first $5,000 of qualifying elementary and
secondary education expenses incurred during the taxable year with
respect to enrollment of a qualifying student in a qualifying school.
Qualifying students would be those who, for a given school year, would
normally attend a public school determined by the State as not having
made ``adequate yearly progress'' under the terms of the Elementary and
Secondary Education Act as amended by the No Child Left Behind Act of
2001. A qualifying student in one school year generally would qualify
for an additional school year even if the school normally attended made
adequate yearly progress by the beginning of the second school year. A
qualifying school would be any public school making adequate yearly
progress or private elementary or secondary school. Qualifying expenses
generally would be tuition, required fees, and transportation costs
incurred by the taxpayer in connection with the attendance at a
qualifying school. The proposal would be effective with respect to
expenses incurred beginning with the 2003-2004 school year through the
2007-2008 school year.
Extend, increase and expand the above-the-line deduction for qualified
out-of-pocket classroom expenses.--Under current law, teachers who
itemize deductions (do not use the standard deduction) and incur
unreimbursed, job-related expenses are allowed to deduct those expenses
to the extent that when combined with other miscellaneous itemized
deductions they exceed two percent of AGI. Current law also allows
certain teachers and other elementary and secondary school professionals
to treat up to $250 in annual qualified out-of-pocket classroom expenses
as a non-itemized deduction (above-the-line deduction), effective for
expenses incurred in taxable years beginning after December 31, 2001 and
before January 1, 2004. Unreimbursed expenditures for certain books,
supplies and equipment related to classroom instruction qualify for the
above-the-line deduction. Expenses claimed as an above-the-line
deduction cannot be claimed as an itemized deduction. The Administration
proposes to extend the above-the-line deduction to apply to qualified
out-of-pocket expenditures incurred after December 31, 2003, to increase
the deduction to $400, and to expand the deduction to apply to
unreimbursed expenditures for certain professional training programs.
Invest in Health Care
Provide refundable tax credit for the purchase of health insurance.--
Current law provides a tax preference for employer-provided group health
insurance plans, but not for individually purchased health insurance
coverage except to the extent that deductible medical expenses exceed
7.5 percent of AGI, the individual has self-employment income, or the
individual is eligible under the Trade Act of 2002 to purchase certain
types of qualified health insurance. The Administration proposes to make
health insurance more affordable for individuals not covered by an
employer plan or a public program. Effective for taxable years beginning
after December 31, 2003, a new refundable tax credit would be provided
for the cost of health insurance purchased by individuals under age 65.
The credit would provide a subsidy for a percentage of the
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health insurance premium, up to a maximum includable premium. The
maximum subsidy percentage would be 90 percent for low-income taxpayers
and would phase down with income. The maximum credit would be $1,000 for
an adult and $500 for a child. The credit would be phased out at $30,000
for single taxpayers and $60,000 for families purchasing a family
policy.
Individuals could claim the tax credit for health insurance premiums
paid as part of the normal tax-filing process. Alternatively, beginning
July 1, 2005, the tax credit would be available in advance at the time
the individual purchases health insurance. The advance credit would
reduce the premium paid by the individual to the health insurer, and the
health insurer would be reimbursed directly by the Department of
Treasury for the amount of the advance credit. Eligibility for an
advance credit would be based on an individual's prior year tax return.
To qualify for the credit, a health insurance policy would have to
include coverage for catastrophic medical expenses. Qualifying insurance
could be purchased in the individual market. Qualifying health insurance
could also be purchased through private purchasing groups, state-
sponsored insurance purchasing pools, and high-risk pools. Such groups
may help reduce health insurance costs and increase coverage options for
individuals, including older and higher-risk individuals. Individuals
would not be allowed to claim the credit and make a contribution to an
Archer MSA for the same taxable year.
Provide an above-the-line deduction for long-term care insurance
premiums.--Current law provides a tax preference for employer-paid long-
term care insurance. However, the vast majority of the long-term care
insurance market consists of individually purchased policies, for which
no tax preference is provided except to the extent that deductible
medical expenses exceed 7.5 percent of AGI or the individual has self-
employment income. Premiums on qualified long-term care insurance are
deductible as a medical expense, subject to annual dollar limitations
that increase with age. The Administration proposes to make
individually-purchased long-term care insurance (the vast majority of
the long-term care insurance market) more affordable by creating an
above-the-line deduction for qualified long-term care insurance
premiums. To qualify for the deduction, the long-term care insurance
would be required to meet certain standards providing consumer
protections. The deduction would be available to taxpayers who
individually purchase qualified long-term care insurance and to those
who pay at least 50 percent of the cost of employer-provided coverage.
The deduction would be effective for taxable years beginning after
December 31, 2003 but would be phased in over four years. The deduction
would be subject to current law annual dollar limitations on qualified
long-term care insurance premiums.
Allow up to $500 in unused benefits in a health flexible spending
arrangement to be carried forward to the next year.--Under current law,
unused benefits in a health flexible spending arrangement under a
cafeteria plan for a particular year revert to the employer at the end
of the year. Effective for plan years beginning after December 31, 2003,
the Administration proposes to allow up to $500 in unused benefits in a
health flexible spending arrangement at the end of a particular year to
be carried forward to the next plan year.
Provide additional choice with regard to unused benefits in a health
flexible spending arrangement.--In addition to the proposed carryforward
of unused benefits (see preceding discussion), the Administration
proposes to allow up to $500 in unused benefits in a health flexible
spending arrangement at the end of a particular year to be distributed
to the participant as taxable income, contributed to an Archer MSA, or
contributed as a deferral to an employer's funded retirement plan.
Amounts distributed to the participant would be subject to income tax
withholding and employment taxes. Amounts contributed to an Archer MSA
or retirement plan would be subject to the normal rules applicable to
elective contributions to the receiving plan or account. The proposal
would be effective for plan years beginning after December 31, 2003.
Permanently extend and reform Archer Medical Savings Accounts.--
Current law allows only self-employed individuals and employees of small
firms to establish Archer MSAs, and caps the number of accounts at
750,000. In addition to other requirements, (1) individuals who
establish MSAs must be covered by a high-deductible health plan (and no
other plan) with a deductible of at least $1,700 but not greater than
$2,500 for policies covering a single person and a deductible of at
least $3,350 but not greater than $5,050 in all other cases, (2) tax-
preferred contributions are limited to 65 percent of the deductible for
single policies and 75 percent of the deductible for other policies, and
(3) either an individual or an employer, but not both, may make a tax-
preferred contribution to an MSA for a particular year. The
Administration proposes to permanently extend the MSA program, which is
scheduled to expire on December 31, 2003, and to modify the program to
make it more consistent with currently available health plans. Effective
after December 31, 2003, the Administration proposes to remove the
750,000 cap on the number of accounts. In addition, the program would be
reformed by (1) expanding eligibility to include all individuals and
employees of firms of all sizes covered by a high-deductible health
plan, (2) modifying the definition of high deductible to permit a
deductible as low as $1,000 for policies covering a single person and
$2,000 in all other cases, (3) increasing allowable tax-preferred
contributions to 100 percent of the deductible, (4) allowing tax-
preferred contributions by both employers and employees for a particular
year, up to the applicable maximum, (5) allowing contributions to MSAs
under cafeteria plans, and (6) permitting qualified plans to provide,
without counting against the deductible, up to $100 of coverage for
allow
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able preventive services per covered individual each year. Individuals
would not be allowed to make a contribution to an MSA and claim the
proposed refundable tax credit for health insurance premiums for the
same taxable year.
Provide an additional personal exemption to home caregivers of family
members.--Current law provides a tax deduction for certain long-term
care expenses. In addition, taxpayers are allowed to claim exemptions
for themselves (and their spouses, if married) and dependents who they
support. However, neither provision may meet the needs of taxpayers who
provide long-term care in their own home for close family members.
Effective for taxable years beginning after December 31, 2003, the
Administration proposes to provide an additional personal exemption to
taxpayers who care for certain qualified family members who reside with
the taxpayer in the household maintained by the taxpayer. A taxpayer is
considered to maintain a household only if he or she furnishes over half
of the annual cost of maintaining the household. Qualified family
members would include any individual with long-term care needs who is
(1) the spouse of the taxpayer or an ancestor of the taxpayer or the
spouse of such an ancestor and (2) a member of the taxpayer's household
for the entire year. An individual would be considered to have long-term
care needs if he or she were certified by a licensed physician (prior to
the filing of a return claiming the exemption) as, for at least 180
consecutive days, unable to perform at least two activities of daily
living without substantial assistance from another individual due to a
loss of functional capacity; or, alternatively, (1) requiring
substantial supervision to be protected from threats to his or her own
health and safety due to severe cognitive impairment and (2) being
unable to perform at least one activity of daily living or being unable
to engage in age appropriate activities.
Allow the orphan drug tax credit for certain pre-designation
expenses.--Current law provides a 50-percent credit for expenses related
to human clinical testing of drugs for the treatment of certain rare
diseases and conditions (``orphan drugs''). A taxpayer may claim the
credit only for expenses incurred after the Food and Drug Administration
(FDA) designates a drug as a potential treatment for a rare disease or
condition. This creates an incentive to defer clinical testing for
orphan drugs until the taxpayer receives the FDA's approval and
increases complexity for taxpayers by treating pre-designation and post-
designation clinical expenses differently. The Administration proposes
to allow taxpayers to defer claiming the orphan drug tax credit until
the drug receives FDA designation as a potential treatment for a rare
disease or condition. The taxpayer would be permitted to claim the
credit for pre-designation costs either in the year of approval, or to
file an amended return to claim the credit for prior years. The proposal
would be effective for qualified expenses incurred after December 31,
2002.
Encourage Telecommuting
Exclude from income the value of employer-provided computers, software
and peripherals.--Under current law, the value of computers and related
equipment and services provided by an employer to an employee for home
use is generally allocated between business and personal use. The
business-use portion is excluded from the employee's income whereas the
personal-use portion is subject to income and payroll taxes. In order to
simplify recordkeeping, improve compliance, and encourage telecommuting,
the Administration proposes to allow individuals to exclude from income
the value of employer-provided computers and related equipment and
services necessary to perform work for the employer at home. The
employee would be required to make substantial use of the equipment to
perform work for the employer. Substantial business use would include
standby use for periods when work from home may be required by the
employer, such as during work closures caused by the threat of
terrorism, inclement weather, or natural disasters. The proposal would
be effective for taxable years beginning after December 31, 2003.
Increase Housing Opportunities
Provide tax credit for developers of affordable single-family
housing.--The Administration proposes to provide annual tax credit
authority to states (including U.S. possessions) designed to promote the
development of affordable single-family housing in low-income urban and
rural neighborhoods. Beginning in calendar year 2004, first-year credit
authority equal to the amount provided for low-income rental housing tax
credits would be made available to each state. That amount is equal to
the greater of $2 million or $1.75 per capita (indexed annually for
inflation after 2002). State housing agencies would award first-year
credits to single-family housing units comprising a project located in a
census tract with median income equal to 80 percent or less of area
median income. Units in condominiums and cooperatives could qualify as
single-family housing. Credits would be awarded as a fixed amount for
individual units comprising a project. The present value of the credits,
determined on the date of a qualifying sale, could not exceed 50 percent
of the cost of constructing a new home or rehabilitating an existing
property. The taxpayer (developer or investor partnership) owning the
housing unit immediately prior to the sale to a qualified buyer would be
eligible to claim credits over a five-year period beginning on the date
of sale. Eligible homebuyers would be required to have incomes equal to
80 percent or less of area median income. Certain technical features of
the provision would follow similar features of current law with respect
to the low-income housing tax credit and mortgage revenue bonds.
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Encourage Saving
Establish Individual Development Accounts (IDAs).--The Administration
proposes to allow eligible individuals to make contributions to a new
savings vehicle, the Individual Development Account, which would be set
up and administered by qualified financial institutions, nonprofit
organizations, or Indian tribes (qualified entities). Citizens or legal
residents of the United States between the ages of 18 and 60 who cannot
be claimed as a dependent on another taxpayer's return, are not
students, and who meet certain income limitations would be eligible to
establish and contribute to an IDA. A single taxpayer would be eligible
to establish and contribute to an IDA if his or her modified AGI in the
preceding taxable year did not exceed $20,000 ($30,000 for heads of
household, and $40,000 for married taxpayers filing a joint return).
These thresholds would be indexed annually for inflation beginning in
2005. Qualified entities that set up and administer IDAs would be
required to match, dollar-for-dollar, the first $500 contributed by an
eligible individual to an IDA in a taxable year. Qualified entities
would be allowed a 100 percent tax credit for up to $500 in annual
matching contributions to each IDA, and a $50 tax credit for each IDA
maintained at the end of a taxable year with a balance of not less that
$100 (excluding the taxable year in which the account was established).
Matching contributions and the earnings on those contributions would be
deposited in a separate ``parallel account.'' Contributions to an IDA by
an eligible individual would not be deductible, and earnings on those
contributions would be included in income. Matching contributions by
qualified entities and the earnings on those contributions would be tax-
free. Withdrawals from the parallel account may be made only for
qualified purposes (higher education, the first-time purchase of a home,
business start-up, and qualified rollovers). Withdrawals from the IDA
for other than qualified purposes may result in the forfeiture of some
or all matching contributions and the earnings on those contributions.
The proposal would be effective for contributions made after December
31, 2004 and before January 1, 2012, to the first 900,000 IDA accounts
opened before January 1, 2010.
Protect the Environment
Permanently extend expensing of brownfields remediation costs.--
Taxpayers may elect to treat certain environmental remediation
expenditures that would otherwise be chargeable to capital account as
deductible in the year paid or incurred. Under current law, the ability
to deduct such expenditures expires with respect to expenditures paid or
incurred after December 31, 2003. The Administration proposes to
permanently extend this provision, facilitating its use by businesses to
undertake projects that may extend beyond the current expiration date
and be uncertain in overall duration.
Exclude 50 percent of gains from the sale of property for conservation
purposes.--The Administration proposes to create a new incentive for
private, voluntary land protection. This incentive is a cost-effective,
non-regulatory approach to conservation. Under the proposal, when land
(or an interest in land or water) is sold for conservation purposes,
only 50 percent of any gain would be included in the seller's income.
This proposal applies to conservation easements and similar sales of
partial interest in land for conservation purposes, such as development
rights and agricultural conservation easements. To be eligible for the
exclusion, the sale may be either to a government agency or to a
qualified conservation organization, and the buyer must supply a letter
of intent that the acquisition will serve conservation purposes. In
addition, the taxpayer or a member of the taxpayer's family must have
owned the property for the three years immediately preceding the sale.
Antiabuse provisions will ensure that the conservation purposes continue
to be served. The provision would be effective for sales taking place on
or after January 1, 2004.
Increase Energy Production and Promote Energy Conservation
Extend and modify the tax credit for producing electricity from
certain sources.--Taxpayers are provided a 1.5-cent-per-kilowatt-hour
tax credit, adjusted for inflation after 1992, for electricity produced
from wind, closed-loop biomass (organic material from a plant grown
exclusively for use at a qualified facility to produce electricity), and
poultry waste. To qualify for the credit, the electricity must be sold
to an unrelated third party and must be produced during the first 10
years of production at a facility placed in service before January 1,
2004. The Administration proposes to extend the credit for electricity
produced from wind and biomass to facilities placed in service before
January 1, 2006. In addition, eligible biomass sources would be expanded
to include certain biomass from forest-related resources, agricultural
sources, and other specified sources. Special rules would apply to
biomass facilities placed in service before January 1, 2003. Electricity
produced at such facilities from newly eligible sources would be
eligible for the credit only from January 1, 2003 through December 31,
2005, and at a rate equal to 60 percent of the generally applicable
rate. Electricity produced from newly eligible biomass co-fired in coal
plants would also be eligible for the credit only from January 1, 2003
through December 31, 2005, and at a rate equal to 30 percent of the
generally applicable rate. The Administration also proposes to modify
the rules relating to governmental financing of qualified facilities.
There would be no percentage reduction in the credit for governmental
financing attributable to tax-exempt bonds. Instead, such financing
would reduce the credit only to the extent necessary to offset the value
of the tax exemption. The rules relating to leased facilities would also
be modified to permit the lessee, rather than the owner, to claim the
credit.
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Provide tax credit for residential solar energy systems.--Current law
provides a 10-percent investment tax credit to businesses for qualifying
equipment that uses solar energy to generate electricity; to heat, cool
or provide hot water for use in a structure; or to provide solar process
heat. A credit currently is not provided for nonbusiness purchases of
solar energy equipment. The Administration proposes a new tax credit for
individuals who purchase solar energy equipment to generate electricity
(photovoltaic equipment) or heat water (solar water heating equipment)
for use in a dwelling unit that the individual uses as a residence,
provided the equipment is used exclusively for purposes other than
heating swimming pools. The proposed nonrefundable credit would be equal
to 15 percent of the cost of the equipment and its installation; each
individual taxpayer would be allowed a maximum credit of $2,000 for
photovoltaic equipment and $2,000 for solar water heating equipment. The
credit would apply to photovoltaic equipment placed in service after
December 31, 2002 and before January 1, 2008 and to solar water heating
equipment placed in service after December 31, 2002 and before January
1, 2006.
Modify treatment of nuclear decommissioning funds.--Under current law,
deductible contributions to nuclear decommissioning funds are limited to
the amount included in the taxpayer's cost of service for ratemaking
purposes. For deregulated utilities, this limitation may result in the
denial of any deduction for contributions to a nuclear decommissioning
fund. The Administration proposes to repeal this limitation.
Also under current law, deductible contributions are not permitted to
exceed the amount the IRS determines to be necessary to provide for
level funding of an amount equal to the taxpayer's post-1983
decommissioning costs. The Administration proposes to permit funding of
all decommissioning costs through deductible contributions. Any portion
of these additional contributions relating to pre-1984 costs that
exceeds the amount previously deducted (other than under the nuclear
decommissioning fund rules) or excluded from the taxpayer's gross income
on account of the taxpayer's liability for decommissioning costs, would
be allowed as a deduction ratably over the remaining useful life of the
nuclear power plant.
The Administration's proposal would also permit taxpayers to make
deductible contributions to a qualified fund after the end of the
nuclear power plant's estimated useful life and would provide that
nuclear decommissioning costs are deductible when paid. These changes in
the treatment of nuclear decommissioning funds are proposed to be
effective for taxable years beginning after December 31, 2002.
Provide tax credit for purchase of certain hybrid and fuel cell
vehicles.--Under current law, a 10-percent tax credit up to $4,000 is
provided for the cost of a qualified electric vehicle. The full amount
of the credit is available for purchases prior to 2004. The credit
begins to phase down in 2004 and is not available after 2006. A
qualified electric vehicle is a motor vehicle that is powered primarily
by an electric motor drawing current from rechargeable batteries, fuel
cells, or other portable sources of electric current, the original use
of which commences with the taxpayer, and that is acquired for use by
the taxpayer and not for resale. Electric vehicles and hybrid vehicles
(those that have more than one source of power on board the vehicle)
have the potential to reduce petroleum consumption, air pollution and
greenhouse gas emissions. To encourage the purchase of such vehicles,
the Administration is proposing the following tax credits: (1) A credit
of up to $4,000 would be provided for the purchase of qualified hybrid
vehicles after December 31, 2002 and before January 1, 2008. The amount
of the credit would depend on the percentage of maximum available power
provided by the rechargeable energy storage system and the amount by
which the vehicle's fuel economy exceeds the 2000 model year city fuel
economy. (2) A credit of up to $8,000 would be provided for the purchase
of new qualified fuel cell vehicles after December 31, 2002 and before
January 1, 2008. A minimum credit of $4,000 would be provided, which
would increase as the vehicle's fuel efficiency exceeded the 2000 model
year city fuel economy, reaching a maximum credit of $8,000 if the
vehicle achieved at least 300 percent of the 2000 model year city fuel
economy.
Provide tax credit for energy produced from landfill gas.--Taxpayers
that produce gas from biomass (including landfill methane) are eligible
for a tax credit equal to $3 per barrel-of-oil equivalent (the amount of
gas that has a British thermal unit content of 5.8 million), adjusted by
an inflation adjustment factor for the calendar year in which the sale
occurs. To qualify for the credit, the gas must be produced domestically
from a facility placed in service by the taxpayer before July 1, 1998,
pursuant to a written binding contract in effect before January 1, 1997.
In addition, the gas must be sold to an unrelated person before January
1, 2008. The Administration proposes to extend the credit to apply to
landfill methane produced from a facility (or portion of a facility)
placed in service after December 31, 2002 and before January 1, 2011,
and sold (or used to produce electricity that is sold) before January 1,
2011. The credit for fuel produced at landfills subject to EPA's 1996
New Source Performance Standards/Emissions Guidelines would be limited
to two-thirds of the otherwise applicable amount beginning on January 1,
2008, if any portion of the facility for producing fuel at the landfill
was placed in service before July 1, 1998, and beginning on January 1,
2003, in all other cases.
Provide tax credit for combined heat and power property.--Combined
heat and power (CHP) systems are used to produce electricity (and/or
mechanical power) and usable thermal energy from a single primary energy
source. Depreciation allowances for CHP property vary by asset use and
capacity. No income tax credit is provided under current law for
investment
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in CHP property. CHP systems utilize thermal energy that is otherwise
wasted in producing electricity by more conventional methods and achieve
a greater level of overall energy efficiency, thereby lessening the
consumption of primary fossil fuels, lowering total energy costs, and
reducing carbon emissions. To encourage increased energy efficiency by
accelerating planned investments and inducing additional investments in
such systems, the Administration is proposing a 10-percent investment
credit for qualified CHP systems with an electrical capacity in excess
of 50 kilowatts or with a capacity to produce mechanical power in excess
of 67 horsepower (or an equivalent combination of electrical and
mechanical energy capacities). A qualified CHP system would be required
to produce at least 20 percent of its total useful energy in the form of
thermal energy and at least 20 percent of its total useful energy in the
form of electrical or mechanical power (or a combination thereof) and
would also be required to satisfy an energy-efficiency standard. For CHP
systems with an electrical capacity in excess of 50 megawatts (or a
mechanical energy capacity in excess of 67,000 horsepower), the total
energy efficiency would have to exceed 70 percent. For smaller systems,
the total energy efficiency would have to exceed 60 percent. Investments
in qualified CHP assets that are otherwise assigned cost recovery
periods of less than 15 years would be eligible for the credit, provided
that the taxpayer elects to treat such property as having a 22-year
class life (and thus depreciates the property using a 15-year recovery
period). The credit, which would be treated as an energy credit under
the investment credit component of the general business credit, and
could not be used in conjunction with any other credit for the same
equipment, would apply to investments in CHP property placed in service
after December 31, 2002 and before January 1, 2008.
Provide excise tax exemption (credit) for ethanol.--Under current law
an income tax credit and an excise tax exemption are provided for
ethanol and renewable source methanol used as a fuel. In general, the
income tax credit for ethanol is 52 cents per gallon, but small ethanol
producers (those producing less than 30 million gallons of ethanol per
year) qualify for a credit of 62 cents per gallon on the first 15
million gallons of ethanol produced in a year. A credit of 60 cents per
gallon is allowed for renewable source methanol. As an alternative to
the income tax credit, gasohol blenders may claim a gasoline tax
exemption of 52 cents for each gallon of ethanol and 60 cents for each
gallon of renewable source methanol that is blended into qualifying
gasohol. The rates for the ethanol credit and exemption are each reduced
by 1 cent per gallon in 2005. The income tax credit expires on December
31, 2007 and the excise tax exemption expires on September 30, 2007.
Neither the credit nor the exemption apply during any period in which
motor fuel taxes dedicated to the Highway Trust Fund are limited to 4.3
cents per gallon. The Administration proposes to extend both the income
tax credit and the excise tax exemption through December 31, 2010. The
current law rule providing that neither the credit nor the exemption
apply during any period in which motor fuel taxes dedicated to the
Highway Trust Fund are limited to 4.3 cents per gallon would be
retained.
Promote Trade
Implement free trade agreements with Chile and Singapore.--Free trade
agreements are expected to be completed with Chile and Singapore in
2003, with ten-year implementation to begin in fiscal year 2004. These
agreements will benefit U.S. producers and consumers, as well as
strengthen the economies of Chile and Singapore. In addition, these
agreements will establish precedents in our market opening efforts in
two important and dynamic regions--Latin America and Southeast Asia.
Improve Tax Administration
Modify the IRS Restructuring and Reform Act of 1998 (RRA98).--The
proposed modification to RRA98 is comprised of six parts. The first part
modifies employee infractions subject to mandatory termination and
permits a broader range of available penalties. It strengthens taxpayer
privacy while reducing employee anxiety resulting from unduly harsh
discipline or unfounded allegations. The second part adopts measures to
curb frivolous submissions and filings that are intended to impede or
delay tax administration. The third part allows the IRS to terminate
installment agreements when taxpayers fail to make timely tax deposits
and file tax returns on current liabilities. The fourth part streamlines
jurisdiction over collection due process cases in the Tax Court, thereby
simplifying procedures and reducing the cycle time for certain
collection due process cases. The fifth part permits taxpayers to enter
into installment agreements that do not guarantee full payment of
liability over the life of the agreement. It allows the IRS to enter
into agreements with taxpayers who desire to resolve their tax
obligations but cannot make payments large enough to satisfy their
entire liability and for whom an offer in compromise is not a viable
alternative. The sixth part eliminates the requirement that the IRS
Chief Counsel provide an opinion for any accepted offer-in-compromise of
unpaid tax (including interest and penalties) equal to or exceeding
$50,000. This proposal requires that the Treasury Secretary establish
standards to determine when an opinion is appropriate.
Initiate IRS cost saving measures.--The Administration has two
proposals to improve IRS efficiency and performance from current
resources. The first proposal modifies the way that Financial Management
Services (FMS) recovers its transaction fees for processing IRS levies
by permitting FMS to retain a portion of the amount collected before
transmitting the balance to the IRS, thereby reducing government
transaction costs. The offset amount would be included as part of the
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15-percent limit on levies against income and would also be credited
against the taxpayer's liability. The second proposal extends the April
filing date for electronically filed tax returns by at least ten days to
help encourage the growth of electronic filing.
Repeal section 132 of the Revenue Act of 1978 and amend the tax code
to authorize the Secretary of the Treasury to issue rules to address
inappropriate nonqualified deferred compensation arrangements.--Section
132 currently prohibits the Internal Revenue Service from issuing new
regulations on many aspects of nonqualified deferred compensation
arrangements, restricting the ability of the IRS to respond effectively
to these arrangements. Under the Administration's proposal, that
prohibition would be removed and the Secretary of the Treasury would be
given express authority to issue new rules. It is expected that new
guidance would address when an individual's access to compensation is
considered subject to substantial limitation, the extent to which
company assets may be designated as available to meet deferred
compensation obligations, and when an arrangement is treated as funded.
Permit private collection agencies to engage in specific, limited
activities to support IRS collection efforts.--The resource and
collection priorities of the IRS do not permit it to continually pursue
all outstanding tax liabilities. Many taxpayers are aware of their
outstanding tax liabilities but have failed to pay them. The use of
private collection agencies, or PCAs, to support IRS collection efforts
would enable the Government to reach these taxpayers to obtain payment
while allowing the IRS to focus its own enforcement resources on more
complex cases and issues. PCAs would not have any enforcement power, and
they would be strictly prohibited from threatening enforcement action or
violating any taxpayer confidentiality protection or other taxpayer
right. The IRS would be required to closely monitor PCA activities and
performance, including the protection of taxpayer rights. PCAs would be
compensated out of the revenue collected through their activities,
although compensation would be based on quality of service, taxpayer
satisfaction, and case resolution, in addition to collection results.
Combat abusive tax avoidance transactions.--Although the vast majority
of taxpayers and practitioners do their best to comply with the law,
some actively promote or engage in transactions structured to generate
tax benefits never intended by Congress. Such abusive transactions harm
the public fisc, erode the public's respect for the tax laws, and
consume valuable IRS resources. The Administration has proposed a number
of regulatory and legislative changes designed to significantly enhance
the current enforcement regime and curtail the use of abusive tax
avoidance transactions. These proposed changes include (1) the
modification of the definition of a reportable transaction, (2) the
issuance of a coordinated set of disclosure, registration and investor
list maintenance rules, (3) the imposition of new or increased penalties
for the failure to disclose and register reportable transactions and for
the failure to report an interest in a foreign financial account, (4)
the prevention of ``income separation'' transactions structured to
create immediate tax losses or to convert current ordinary income into
deferred capital gain, and (5) the denial of foreign tax credits with
respect to any foreign withholding taxes if the underlying property was
not held for a specified minimum period of time. A number of
administrative proposals already have been carried out by the Treasury
Department and the IRS.
Limit related party interest deductions.--Current law (section 163(j)
of the Internal Revenue Code) denies U.S. tax deductions for certain
interest expenses paid to a related party where (1) the corporation's
debt-equity ratio exceeds 1.5 to 1.0, and (2) net interest expenses
exceed 50 percent of the corporation's adjusted taxable income (computed
by adding back net interest expense, depreciation, amortization,
depletion, and any net operating loss deduction). If these thresholds
are exceeded, no deduction is allowed for interest in excess of the 50-
percent limit that is paid to a related party and that is not subject to
U.S. tax. Any interest that is disallowed in a given year is carried
forward indefinitely and may be deductible in a subsequent taxable year.
A three-year carryforward for any excess limitation (the amount by which
interest expense for a given year falls short of the 50-percent limit)
is also allowed. Because of the opportunities available under current
law to inappropriately reduce U.S. tax on income earned on U.S.
operations through the use of foreign related-party debt, the
Administration proposes to tighten the interest disallowance rules of
section 163(j).
Reform Unemployment Insurance
Reform unemployment insurance administrative financing.--Current law
funds the administrative costs of the unemployment insurance system and
related programs out of the Federal Unemployment Tax (FUTA) paid by
employers. FUTA is set at 0.8 percent of the first $7,000 in covered
wages, which includes a 0.2 percent surtax scheduled to expire in 2007.
State unemployment taxes are deposited into the Unemployment Trust Fund
and used by States to pay unemployment benefits. Under current law, FUTA
balances in excess of statutory ceilings are distributed to the States
to pay unemployment benefits or the administrative costs of the system
(these are known as Reed Act transfers). The Administration has a
comprehensive proposal to reform the administrative financing of this
system. It proposes to eliminate the FUTA surtax in 2005, and make
additional rate cuts to achieve a net FUTA tax rate of 0.2 percent in
2009. The proposal will transfer administrative funding control to the
States in 2006 and allow them to use their benefit taxes to pay these
costs. In addition, the Administration supports special distributions of
$2.7 billion in Reed Act funds on Octo
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ber 1, 2006 and October 1, 2007, to be used for administrative expenses
in the transition.
OTHER PROPOSALS
Deposit full amount of excise tax imposed on gasohol in the Highway
Trust Fund.--Under current law, an 18.4-cents-per-gallon excise tax is
imposed on gasoline. In general, 18.3 cents per gallon of the gasoline
excise tax is deposited in the Highway Trust Fund and 0.1 cent per
gallon is deposited in the Leaking Underground Storage Tank (LUST) Trust
Fund. In the case of gasohol, which is taxed at a reduced rate, 2.5
cents per gallon is retained in the General Fund of the Treasury, 0.1
cent per gallon is deposited in the LUST Trust Fund, and the balance of
the reduced rate is deposited in the Highway Trust Fund. The
Administration believes that it is appropriate that the entire amount of
the excise tax on gasohol (except for the 0.1 cent per gallon deposited
in the LUST Trust Fund) be deposited in the Highway Trust Fund.
Effective for collections after September 30, 2003, the Administration
proposes to transfer the 2.5 cents per gallon of the gasohol excise tax
that is currently retained in the General Fund of the Treasury to the
Highway Trust Fund.
Increase Indian gaming activity fees.--The National Indian Gaming
Commission regulates and monitors gaming operations conducted on Indian
lands. Since 1998, the Commission has been prohibited from collecting
more than $8 million in annual fees from gaming operations to cover the
costs of its oversight responsibilities. The Administration proposes to
amend the current fee structure so that the Commission can adjust its
activities to the growth in the Indian gaming industry.
SIMPLIFY THE TAX LAWS
Establish uniform definition of a qualifying child.--The tax code
provides assistance to families with children through the dependent
exemption, head-of-household filing status, child tax credit, child and
dependent care tax credit, and earned income tax credit (EITC). However,
because each provision defines an eligible ``child'' differently,
taxpayers must wade through pages of bewildering rules and instructions,
resulting in confusion and error. The Administration proposes to
harmonize the definition of qualifying child across these five related
tax benefits, thereby reducing both compliance and administrative costs.
Under the Administration's proposal, a qualifying child must meet the
following three tests: (1) Relationship--The child must be the
taxpayer's biological or adopted child, stepchild, sibling, or step-
sibling, a descendant of one of these individuals, or a foster child.
(2) Residence--The child must live with the taxpayer in the same
principal home in the United States for more than half of the year. (3)
Age--The child must be under age 19, a full-time student if over 18 and
under 24, or totally and permanently disabled. Neither the support nor
gross income tests of current law would apply to qualifying children who
meet these three tests. In addition, taxpayers would no longer be
required to meet a household maintenance test when claiming the child
and dependent care tax credit. Current law requirements that a child be
under age 13 for the dependent care credit and under age 17 for the
child tax credit, would be maintained. Taxpayers generally could
continue to claim individuals who do not meet the proposed relationship,
residency, or age tests as dependents if they meet the requirements
under current law, and no other taxpayer claims the same individual.
Simplify adoption tax provisions.--Under current law, for taxable
years beginning before January 1, 2011, the following tax benefits are
provided to taxpayers who adopt children: (1) a nonrefundable tax credit
for qualified expenses incurred in the adoption of a child, up to a
certain limit, and (2) the exclusion from gross income of qualified
adoption expenses paid or reimbursed by an employer under an adoption
assistance program, up to a certain limit. Taxpayers may not claim the
credit for expenses that are excluded from gross income. In 2003, the
limitation on qualified adoption expenses for both the credit and the
exclusion is $10,160. Taxpayers who adopt children with special needs
may claim the full $10,160 credit or exclusion even if adoption expenses
are less than this amount. Taxpayers may carry forward unused credit
amounts for up to five years. When modified adjusted gross income
exceeds $152,390 (in 2003), both the credit amount and the amount
excluded from gross income are reduced pro-rata over the next $40,000 of
modified adjusted gross income. The maximum credit and exclusion and the
income at which the phase-out range begins are indexed annually for
inflation. For taxable years beginning after December 31, 2010,
taxpayers will be able to claim the credit only if they incur expenses
for the adoption of children with special needs. For these taxpayers the
qualified expense limit will be $6,000, the credit will be reduced pro-
rata between $75,000 and $115,000 of modified adjusted gross income, and
the credit amount and phase-out range will not be indexed annually for
inflation. Taxpayers may not exclude employer-provided adoption
assistance from gross income for taxable years beginning after December
31, 2010.
To reduce marginal tax rates and simplify computations of tax
liabilities, the Administration is proposing to eliminate the income
phaseout of the adoption tax credit and exclusion. The proposal would be
effective for taxable years beginning after December 31, 2002. The
broader eligibility criteria, larger qualifying expense limitations, and
the employer exclusion would apply in taxable years beginning after
December 31, 2010 as a result of the Administration's proposal to extend
the EGTRRA provisions permanently.
Expand tax-free savings opportunities.--Under current law, individuals
can contribute to traditional
[[Page 78]]
IRAs, nondeductible IRAs, and Roth IRAs, each subject to different sets
of rules. For example, contributions to traditional IRAs are deductible,
while distributions are taxed; contributions to Roth IRAs are taxed, but
distributions are excluded from income. In addition, eligibility to
contribute is subject to various age and income limits. While primarily
intended for retirement saving, withdrawals for certain education,
medical, and other non-retirement expenses are penalty free. The
eligibility and withdrawal restrictions for these accounts complicate
compliance and limit incentives to save.
The Administration proposes to replace current law IRAs with two new
savings accounts: a Lifetime Savings Accounts (LSA) and a Retirement
Savings Account (RSA). Regardless of age or income, individuals could
make annual nondeductible contributions of $7,500 to an LSA and $7,500
(or earnings if less) to an RSA. Distributions from an LSA would be
excluded from income and, unlike current law, could be made at anytime
for any purpose without restriction. Distributions from an RSA would be
excluded from income after attaining age 58 or in the event of death or
disability. All other distributions would be included in income (to the
extent they exceed basis) and subject to an additional tax.
Distributions would be deemed to come from basis first. The proposal
would be effective for contributions made after December 31, 2002 and
future year contribution limits would be indexed for inflation.
Existing Roth IRAs would be renamed RSAs and would be subject to the
new rules for RSAs. Existing traditional and nondeductible IRAs could be
converted into an RSA by including the conversion amount (excluding
basis) in gross income, similar to a current-law Roth conversion.
However, no income limit would apply to the ability to convert.
Taxpayers who convert IRAs to RSAs could spread the included conversion
amount over several years. Existing traditional or nondeductible IRAs
that are not converted to RSAs could not accept any new contributions.
New traditional IRAs could be created to accommodate rollovers from
employer plans, but they could not accept any new individual
contributions. Individuals wishing to roll an amount directly from an
employer plan to an RSA could do so by including the rollover amount
(excluding basis) in gross income (i.e., ``converting'' the rollover,
similar to a current law Roth conversion).
Consolidate employer-based savings accounts.--Current law provides
multiple types of tax-preferred employer-based savings accounts to
encourage savings for retirement. The accounts have similar goals but
are subject to different sets of rules regulating eligibility,
contribution limits, tax treatment, and withdrawal restrictions. For
example, 401(k) plans for private employers, SIMPLE 401(k) plans for
small employers, 403(b) plans for 501(c)(3) organizations and public
schools, and 457 plans for State and local governments are all subject
to different rules. To qualify for tax benefits, plans must satisfy
multiple requirements. Among the requirements, the plan may not
discriminate in favor of highly compensated employees (HCEs) with regard
either to coverage or to amount or availability of contributions or
benefits. Rules covering employer-based savings accounts are among the
lengthiest and most complicated sections of the tax code and associated
regulations. This complexity imposes substantial costs on employers,
participants, and the government, and likely has inhibited the adoption
of retirement plans by employers, especially small employers.
The Administration proposes to consolidate 401(k), SIMPLE 401(k),
403(b), and 457 plans, as well as SIMPLE IRAs and SARSEPs, into a single
type of plan--Employee Retirement Savings Accounts (ERSAs)--that would
be available to all employers. Defined-contribution plan qualification
rules would be simplified, while maintaining their intent. In
particular, top-heavy rules would be repealed and ERSA non-
discrimination rules would be simplified and include a new ERSA non-
discrimination safe-harbor. For example, under one of the safe-harbor
options, a plan would satisfy the nondiscrimination rules if it provided
a 50-percent match on elective contributions up to six percent of
compensation. By creating a simplified and uniform set of rules, the
proposal would substantially reduce complexity. The proposal would be
effective for taxable years beginning after December 31, 2003.
EXPIRING PROVISIONS
Temporarily Extend Expiring Provisions
Extend and modify the work opportunity tax credit and the welfare-to-
work tax credit.--Under present law, the work opportunity tax credit
provides incentives for hiring individuals from certain targeted groups.
The credit generally applies to the first $6,000 of wages paid to
several categories of economically disadvantaged or handicapped workers.
The credit rate is 25 percent of qualified wages for employment of at
least 120 hours but less than 400 hours and 40 percent for employment of
400 or more hours. The credit is available for a qualified individual
who begins work before January 1, 2004.
Under present law, the welfare-to-work tax credit provides an
incentive for hiring certain recipients of long-term family assistance.
The credit is 35 percent of up to $10,000 of eligible wages in the first
year of employment and 50 percent of wages up to $10,000 in the second
year of employment. Eligible wages include cash wages plus the cash
value of certain employer-paid health, dependent care, and educational
fringe benefits. The minimum employment period that employees must work
before employers can claim the credit is 400 hours. This credit is
available for qualified individuals who begin work before January 1,
2004.
The Administration proposes to simplify employment incentives by
combining the credits into one credit and making the rules for computing
the combined credit simpler. The credits would be combined by creating a
new welfare-to-work targeted group under the work opportunity tax
credit. The minimum employment peri
[[Page 79]]
ods and credit rates for the first year of employment under the present
work opportunity tax credit would apply to welfare-to-work employees.
The maximum amount of eligible wages would continue to be $10,000 for
welfare-to-work employees and $6,000 for other targeted groups. In
addition, the second year 50-percent credit currently available under
the welfare-to-work credit would continue to be available for welfare-
to-work employees under the modified work opportunity tax credit.
Qualified wages would be limited to cash wages. The work opportunity tax
credit would also be simplified by eliminating the need to determine
family income for qualifying ex-felons (one of the present targeted
groups). The modified work opportunity tax credit would apply to
individuals who begin work after December 31, 2003 and before January 1,
2006.
Extend minimum tax relief for individuals.--A temporary provision of
current law permits nonrefundable personal tax credits to offset both
the regular tax and the alternative minimum tax, for taxable years
beginning before January 1, 2004. The Administration is concerned that
the AMT may limit the benefit of personal tax credits and impose
financial and compliance burdens on taxpayers who have few, if any, tax
preference items and who were not the originally intended targets of the
AMT. The Administration proposes to extend minimum tax relief for
nonrefundable personal credits for two years, to apply to taxable years
2004 and 2005. The proposed extension does not apply to the child
credit, the earned income credit or the adoption credit, which were
provided AMT relief through December 31, 2010 under the Economic Growth
and Tax Relief Reconciliation Act of 2001. The refundable portion of the
child credit and the earned income tax credit are also allowed against
the AMT through December 31, 2010.
A temporary provision of current law increased the AMT exemption
amounts to $35,750 for single taxpayers, $49,000 for married taxpayers
filing a joint return and surviving spouses, and $24,500 for married
taxpayers filing a separate return and estates and trusts. Effective for
taxable years beginning after December 31, 2004, the AMT exemption
amounts will decline to $33,750 for single taxpayers, $45,000 for
married taxpayers filing a joint return and surviving spouses, and
$22,500 for married taxpayers filing a separate return and estates and
trusts. The Administration proposes to extend the temporary, higher
exemption amounts through taxable year 2005.
Extend the District of Columbia (DC) Enterprise Zone.--The DC
Enterprise Zone includes the DC Enterprise Community and District of
Columbia census tracts with a poverty rate of at least 20 percent.
Businesses in the zone are eligible for: (1) a wage credit equal to 20
percent of the first $15,000 in annual wages paid to qualified employees
who reside within the District of Columbia; (2) $35,000 in increased
section 179 expensing; and (3) in certain circumstances, tax-exempt bond
financing. In addition, a capital gains exclusion is allowed for certain
investments held more than five years and made within the DC Zone, or
within any District of Columbia census tract with a poverty rate of at
least 10 percent. The DC Zone incentives apply for the period from
January 1, 1998 through December 31, 2003. The Administration proposes
to extend the DC Zone incentives for two years, making the incentives
applicable through December 31, 2005.
Extend the first-time homebuyer credit for the District of Columbia.--
A one-time, nonrefundable $5,000 credit is available to purchasers of a
principal residence in the District of Columbia who have not owned a
residence in the District during the year preceding the purchase. The
credit phases out for taxpayers with modified adjusted gross income
between $70,000 and $90,000 ($110,000 and $130,000 for joint returns).
The credit does not apply to purchases after December 31, 2003. The
Administration proposes to extend the credit for two years, making the
credit available with respect to purchases after December 31, 2003 and
before January 1, 2006.
Extend authority to issue Qualified Zone Academy Bonds.--Current law
allows State and local governments to issue ``qualified zone academy
bonds,'' the interest on which is effectively paid by the Federal
government in the form of an annual income tax credit. The proceeds of
the bonds have to be used for teacher training, purchases of equipment,
curriculum development, or rehabilitation and repairs at certain public
school facilities. A nationwide total of $400 million of qualified zone
academy bonds were authorized to be issued in each of calendar years
1998 through 2003. In addition, unused authority arising in 1998 and
1999 can be carried forward for up to three years and unused authority
arising in 2000 through 2003 can be carried forward for up to two years.
The Administration proposes to authorize the issuance of an additional
$400 million of qualified zone academy bonds in each of calendar years
2004 and 2005; unused authority could be carried forward for up to two
years. Reporting of issuance would be required.
Extend deduction for corporate donations of computer technology.--The
charitable contribution deduction that may be claimed by corporations
for donations of inventory property generally is limited to the lesser
of fair market value or the corporation's basis in the property.
However, corporations are provided augmented deductions, not subject to
this limitation, for certain contributions. Under current law, an
augmented deduction is provided for contributions of computer technology
and equipment to public libraries and to U.S. schools for educational
purposes in grades K-12. The Administration proposes to extend the
deduction, which expires with respect to donations made after December
31, 2003, to apply to donations made before January 1, 2006.
[[Page 80]]
Allow net operating losses to offset 100 percent of alternative
minimum taxable income.--Under current law (and under law in effect
prior to 2001) net operating loss (NOL) deductions cannot reduce a
taxpayer's alternative minimum taxable income (AMTI) by more than 90
percent. Under JCWAA this limitation was temporarily waived. The
Administration's proposal would extend this waiver through 2005. NOL
carrybacks arising in taxable years ending in 2003, 2004, and 2005, or
carryforwards to these years, would offset 100 percent of a taxpayer's
AMTI.
Extend IRS user fees.--The Administration proposes to extend for two
years, through September 30, 2005, IRS authority to charge fees for
written responses to questions from individuals, corporations, and
organizations related to their tax status or the effects of particular
transactions for tax purposes. Under current law, these fees are
scheduled to expire effective with requests made after September 30,
2003.
Extend abandoned mine reclamation fees.--Collections from abandoned
mine reclamation fees are allocated to States for reclamation grants.
Current fees of 35 cents per ton for surface mined coal, 15 cents per
ton for underground mined coal, and 10 cents per ton for lignite coal
are scheduled to expire on September 30, 2004. Abandoned land problems
are expected to exist in certain States after all the money from the
collection of fees under current law is expended. The Administration
proposes to extend these fees until the most significant abandoned mine
land problems are fixed. The Administration also proposes to modify the
authorization language to allocate more of the receipts collected toward
restoration of abandoned coal mine land.
Permanently Extend Expiring Provisions
Permanently extend provisions expiring in 2010.--Most of the
provisions of the Economic Growth and Tax Relief Reconciliation Act of
2001 sunset on December 31, 2010. The Administration proposes to
permanently extend these provisions.
Permanently extend the research and experimentation (R&E) tax
credit.--The Administration proposes to permanently extend the 20-
percent tax credit for qualified research and experimentation
expenditures above a base amount and the alternative incremental credit,
which are scheduled to expire on June 30, 2004.
Repeal the disallowance of certain deductions of mutual life insurance
companies.--Life insurance companies may generally deduct policyholder
dividends, while dividends to stockholders are not deductible. Section
809 of the Internal Revenue Code attempts to identify amounts returned
by mutual life insurance companies to holders of participating policies
in their role as owners of the company, and generally disallows a
deduction for mutual company policyholder dividends (or otherwise
increases taxable income by reducing the amount of end-of-year reserves)
in an amount equal to the amount identified under section 809. The
section 809 imputed amount is termed the company's differential earnings
amount, and equals the product of the individual company's average
equity base and an industry-wide computed differential earnings rate.
The average equity base is computed using the company's surplus and
capital, adjusted for non-admitted financial assets, the excess of
statutory reserves over tax reserves, certain other reserves, and by 50
percent of the provision for policyholder dividends payable in the
following year. The differential earnings rate equals the excess of an
imputed stock earnings rate (the average stock earnings rate for the
prior three years of the 50 largest domestic stock life insurance
companies, adjusted by a factor roughly equal to 0.90555) over the
average earnings rate of all domestic mutual life insurance companies.
The differential earnings rate equals zero if the average mutual
earnings rate exceeds the imputed stock earnings rate. The differential
earnings rate is initially computed using the average mutual earnings
rate for the second year preceding the current taxable year, but is
later recomputed using the current year's average mutual earnings rate.
Any difference between the differential earnings amount and the
recomputed differential earnings amount is taken into account in
computing taxable income for the following taxable year. Section 809 has
been criticized as being theoretically unsound, overly complex,
inaccurate in its measurement of income, unfair, and increasingly
irrelevant. The Job Creation and Worker Assistance Act of 2002 suspended
the operation of section 809 for three years, 2001 through 2003. The
Administration proposes to permanently repeal section 809.
[[Page 81]]
RESPOND TO FOREIGN SALES
CORPORATION/EXTRATERRITORIAL
INCOME DECISIONS
World Trade Organization (WTO) panels have ruled that the
extraterritorial income (ETI) exclusion provisions and the foreign sales
corporation (FSC) provisions constitute prohibited export subsidies
under the WTO rules. To comply with the WTO ruling and honor the United
States' WTO obligations, the current-law ETI provisions would be
repealed. At the same time, meaningful changes to our tax law are
required to preserve the competitiveness of U.S. businesses operating in
the global marketplace. The Administration is proposing reform of the
U.S. international tax rules, with a particular focus on reforming those
aspects of the current-law rules that can operate to tax active forms of
business income earned abroad before it has been repatriated and that
can operate to limit the use of the foreign tax credit in a manner that
causes the double taxation of income earned abroad. The Administration
intends to work closely with the Congress to reform the U.S.
international tax rules to ensure the competitiveness of American
workers and businesses.
Table 4-3. EFFECT OF PROPOSALS ON RECEIPTS
(In millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimate
----------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 2008 2004-2008 2004-2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
Economic Growth Package:
Accelerate 10-percent individual income tax rate bracket -978 -7,782 -6,112 -6,117 -6,495 -4,275 -30,781 -47,194
expansion...................................................
Accelerate reduction in individual income tax rates.......... -5,808 -35,693 -17,470 -4,939 ......... ......... -58,102 -58,102
Accelerate marriage penalty relief........................... -2,776 -27,134 -14,680 -7,642 -3,595 -1,735 -54,786 -55,210
Accelerate increase in child tax credit \1\.................. -13,527 -5,060 -10,735 -8,534 -8,532 -8,502 -41,363 -53,306
Eliminate the double taxation of corporate earnings.......... -3,801 -24,874 -22,062 -28,218 -31,126 -33,952 -140,232 -360,324
Increase expensing for small business........................ -1,023 -1,652 -1,776 -1,912 -1,601 -1,431 -8,372 -14,583
Provide minimum tax relief to individuals.................... -3,141 -8,534 -10,353 -6,931 ......... ......... -25,818 -25,818
----------------------------------------------------------------------------------------
Total economic growth package.............................. -31,054 -110,729 -83,188 -64,293 -51,349 -49,895 -359,454 -614,537
Tax Incentives:
Provide incentives for charitable giving:
Provide charitable contribution deduction for nonitemizers. -199 -1,358 -1,067 -1,128 -1,177 -1,214 -5,944 -12,571
Permit tax-free withdrawals from IRAs for charitable -66 -437 -361 -376 -382 -388 -1,944 -4,076
contributions.............................................
Expand and increase the enhanced charitable deduction for -19 -54 -59 -66 -72 -79 -330 -872
contributions of food inventory...........................
Reform excise tax based on investment income of private -16 -264 -172 -178 -186 -198 -998 -2,192
foundations...............................................
Modify tax on unrelated business taxable income of -1 -3 -4 -4 -4 -4 -19 -51
charitable remainder trusts...............................
Modify basis adjustment to stock of S corporations ......... -12 -11 -14 -16 -19 -72 -216
contributing appreciated property.........................
Repeal the $150 million limitation on qualified 501(c)(3) -2 -6 -9 -10 -9 -9 -43 -82
bonds.....................................................
Repeal restrictions on the use of qualified 501(c)(3) bonds ......... -2 -6 -11 -17 -24 -60 -276
for residential rental property...........................
Strengthen and reform education:
Provide refundable tax credit for certain costs of ......... -13 -29 -38 -42 -46 -168 -192
attending a different school for pupils assigned to
failing public schools \2\................................
Extend, increase and expand the above-the-line deduction ......... -23 -229 -240 -249 -260 -1,001 -2,352
for qualified out-of-pocket classroom expenses............
Invest in health care:
Provide refundable tax credit for the purchase of health ......... -324 -1,449 -889 -409 -139 -3,210 -1,550
insurance \3\.............................................
Provide an above-the-line deduction for long-term care ......... -112 -559 -984 -1,923 -3,063 -6,641 -28,255
insurance premiums........................................
Allow up to $500 in unused benefits in a health flexible ......... -367 -640 -723 -782 -830 -3,342 -8,385
spending arrangement to be carried forward to the next
year......................................................
Provide additional choice with regard to unused benefits in ......... -19 -33 -39 -45 -52 -188 -595
a health flexible spending arrangement....................
Permanently extend and reform Archer MSAs.................. ......... -26 -284 -432 -486 -549 -1,777 -5,134
Provide an additional personal exemption to home caregivers ......... -70 -465 -437 -422 -417 -1,811 -3,892
of family members.........................................
Allow the orphan drug tax credit for certain pre- ......... ......... ......... -1 -1 -1 -3 -8
designation expenses......................................
Encourage telecommuting:
Exclude from income the value of employer-provided ......... -35 -51 -53 -54 -56 -249 -554
computers, software and peripherals.......................
Increase housing opportunities:
Provide tax credit for developers of affordable single- ......... -7 -78 -315 -750 -1,316 -2,466 -16,133
family housing............................................
[[Page 82]]
Encourage saving:
Establish Individual Development Accounts (IDAs)........... ......... ......... -124 -267 -319 -300 -1,010 -1,347
Protect the environment:
Permanently extend expensing of brownfields remediation ......... -185 -282 -268 -257 -248 -1,240 -2,356
costs.....................................................
Exclude 50 percent of gains from the sale of property for ......... -21 -44 -46 -48 -50 -209 -531
conservation purposes.....................................
Increase energy production and promote energy conservation:
Extend and modify the tax credit for producing electricity -124 -264 -355 -209 -90 -92 -1,010 -1,492
from certain sources......................................
Provide tax credit for residential solar energy systems.... -4 -7 -10 -18 -25 -11 -71 -71
Modify treatment of nuclear decommissioning funds.......... -14 -251 -180 -191 -201 -212 -1,035 -2,260
Provide tax credit for purchase of certain hybrid and fuel -44 -154 -316 -524 -793 -631 -2,418 -3,202
cell vehicles.............................................
Provide tax credit for energy produced from landfill gas... -5 -28 -65 -88 -99 -112 -392 -707
Provide tax credit for combined heat and power property.... -45 -71 -66 -64 -77 -14 -292 -250
Provide excise tax exemption (credit) for ethanol \4\...... ......... ......... ......... ......... ......... ......... ......... ..........
Promote trade:
Implement free trade agreements with Chile and Singapore ......... -25 -51 -68 -80 -92 -316 -913
\5\.......................................................
Improve tax administration:
Implement IRS administrative reforms....................... ......... 78 54 56 57 59 304 624
Permit private collection agencies to engage in specific, ......... 46 128 111 94 97 476 1,008
limited activities to support IRS collection efforts......
Combat abusive tax avoidance transactions.................. 12 45 83 98 99 103 428 1,007
Limit related party interest deductions.................... 10 104 190 239 293 351 1,177 3,987
Reform unemployment insurance:
Reform unemployment insurance administrative financing \5\. ......... ......... -1,068 -1,439 -3,368 -2,016 -7,891 -13,401
----------------------------------------------------------------------------------------
Total tax incentives....................................... -517 -3,865 -7,612 -8,616 -11,840 -11,832 -43,765 -107,290
Other Proposals:
Deposit full amount of excise tax imposed on gasohol in the ......... ......... ......... 558 576 590 1,724 4,912
Highway Trust Fund \5\......................................
Increase Indian gaming activity fees......................... ......... ......... 3 4 4 5 16 41
----------------------------------------------------------------------------------------
Total other proposals...................................... ......... ......... 3 562 580 595 1,740 4,953
Simplify the Tax Laws:
Establish uniform definition of a qualifying child........... -2 -43 -23 -24 -28 -19 -137 -211
Simplify adoption tax provisions............................. -4 -36 -37 -39 -40 -42 -194 -429
Expand tax-free savings opportunities........................ 1,390 10,572 4,803 1,915 -648 -1,822 14,820 2,002
Consolidate employer-based savings accounts.................. -5 -185 -253 -263 -276 -292 -1,269 -3,011
----------------------------------------------------------------------------------------
Total simplify the tax laws................................ 1,379 10,308 4,490 1,589 -992 -2,175 13,220 -1,649
Expiring Provisions:
Temporarily extend expiring provisions:
Combined work opportunity/welfare-to-work tax credit....... ......... -54 -201 -268 -181 -96 -800 -873
Minimum tax relief for individuals......................... ......... -260 -7,286 -10,343 ......... ......... -17,889 -17,889
DC tax incentives.......................................... ......... -53 -116 -58 -1 -4 -232 -357
Authority to issue Qualified Zone Academy Bonds............ ......... -6 -18 -34 -52 -64 -174 -514
Deduction for corporate donations of computer technology... ......... -74 -127 -52 ......... ......... -253 -253
Net operating loss offset of 100 percent of AMTI........... -639 -3,028 -2,274 -1,442 420 367 -5,957 -4,890
IRS user fees.............................................. ......... 68 81 6 ......... ......... 155 155
Abandoned mine reclamation fees............................ ......... ......... 308 313 319 325 1,265 2,978
Permanently extend expiring provisions:
Provisions expiring in 2010:
Marginal individual income tax rate reductions........... ......... ......... ......... ......... ......... ......... ......... -286,952
Child tax credit \6\..................................... ......... ......... ......... ......... ......... ......... ......... -46,893
Marriage penalty relief \7\.............................. ......... ......... ......... ......... ......... ......... ......... -20,654
Education incentives..................................... -2 -11 -19 -27 -33 -42 -132 -4,685
Repeal of estate and generation-skipping transfer taxes, 46 -292 -810 -1,319 -1,540 -1,736 -5,697 -125,991
and modification of gift taxes..........................
Modifications of IRAs and pension plans.................. ......... ......... ......... ......... ......... ......... ......... -11,236
Other incentives for families and children............... ......... ......... ......... ......... ......... ......... ......... -2,029
Other provisions:
Research and experimentation (R&E) tax credit............ ......... -1,005 -3,278 -5,187 -6,291 -7,129 -22,890 -67,922
[[Page 83]]
Suspension of disallowance of certain deductions of ......... -123 -137 -65 -36 -24 -385 -472
mutual life insurance companies.........................
----------------------------------------------------------------------------------------
Total expiring provisions................................ -595 -4,838 -13,877 -18,476 -7,395 -8,403 -52,989 -588,477
Total effect of proposals.............................. -30,787 -109,124 -100,184 -89,234 -70,996 -71,710 -441,248 -1,307,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $300 million for 2003, $1,074 million for 2004,
$4,783 million for 2005, $4,272 million for 2006, $4,195 million for 2007, $4,142 million for 2008, $18,466 million for 2004-2008, and $25,239 million
for 2004-2013.
\2\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $213 million for 2004, $543 million for 2005, $714
million for 2006, $796 million for 2007, $886 million for 2008, $3,152 million for 2004-2008, and $3,626 million for 2004-2013.
\3\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $3,546 million for 2005, $8,166 million for 2006,
$9,251 million for 2007, $9,827 million for 2008, $30,790 million for 2004-2008, and $87,608 million for 2004-2013.
\4\ Policy proposal with a receipt effect of zero.
\5\ Net of income offsets.
\6\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $20,781 million for 2004-2013.
\7\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $3,744 million for 2004-2013.
[[Page 84]]
Table 4-4. RECEIPTS BY SOURCE
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
Source 2002 -----------------------------------------------------------------------
Actual 2003 2004 2005 2006 2007 2008
----------------------------------------------------------------------------------------------------------------
Individual income taxes
(federal funds):
Existing law.............. 858,345 877,211 953,641 1,028,720 1,094,670 1,162,565 1,235,568
Proposed Legislation .......... -28,158 -103,761 -94,164 -80,615 -59,204 -60,220
(PAYGO)................
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Total individual income 858,345 849,053 849,880 934,556 1,014,055 1,103,361 1,175,348
taxes......................
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Corporation income taxes:
Federal funds:
Existing law............ 148,037 145,799 173,659 233,213 240,064 244,618 252,020
Proposed Legislation .......... -2,613 -4,599 -3,895 -6,243 -6,859 -8,336
(PAYGO)..............
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Total Federal funds 148,037 143,186 169,060 229,318 233,821 237,759 243,684
corporation income taxes.
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Trust funds:
Hazardous substance 7 .......... .......... .......... .......... .......... ..........
superfund..............
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Total corporation income 148,044 143,186 169,060 229,318 233,821 237,759 243,684
taxes......................
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Social insurance and
retirement receipts (trust
funds):
Employment and general
retirement:
Old-age and survivors 440,541 454,405 475,436 503,931 525,531 550,896 575,470
insurance (Off-budget).
Disability insurance 74,780 77,160 80,732 85,572 89,241 93,548 97,722
(Off-budget)...........
Hospital insurance...... 149,049 152,275 159,784 170,037 177,525 186,262 194,827
Railroad retirement:
Social Security 1,652 1,643 1,674 1,695 1,718 1,730 1,750
equivalent account...
Rail pension and 2,525 2,349 2,237 2,228 2,259 2,279 2,303
supplemental annuity.
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Total employment and 668,547 687,832 719,863 763,463 796,274 834,715 872,072
general retirement.......
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On-budget............... 153,226 156,267 163,695 173,960 181,502 190,271 198,880
Off-budget.............. 515,321 531,565 556,168 589,503 614,772 644,444 673,192
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Unemployment insurance:
Deposits by States \1\ . 20,911 27,312 33,195 37,076 39,002 40,078 41,146
Proposed Legislation .......... .......... .......... .......... .......... -563 -234
(PAYGO)..............
Federal unemployment 6,613 6,777 6,872 7,212 7,849 8,560 7,182
receipts \1\ ..........
Proposed Legislation .......... .......... .......... -1,336 -1,800 -3,650 -2,288
(PAYGO)..............
Railroad unemployment 95 141 139 119 119 115 106
receipts \1\ ..........
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Total unemployment 27,619 34,230 40,206 43,071 45,170 44,540 45,912
insurance................
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Other retirement:
Federal employees' 4,533 4,479 4,433 4,314 4,277 4,264 4,218
retirement--employee
share..................
Non-Federal employees 61 52 46 42 39 36 33
retirement \2\ ........
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Total other retirement.... 4,594 4,531 4,479 4,356 4,316 4,300 4,251
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Total social insurance and 700,760 726,593 764,548 810,890 845,760 883,555 922,235
retirement receipts........
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On-budget................. 185,439 195,028 208,380 221,387 230,988 239,111 249,043
Off-budget................ 515,321 531,565 556,168 589,503 614,772 644,444 673,192
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Excise taxes:
Federal funds:
Alcohol taxes........... 7,764 7,840 7,979 8,087 8,168 8,262 8,384
Proposed Legislation .......... .......... -57 -78 -19 .......... ..........
(PAYGO)..............
Tobacco taxes........... 8,274 8,158 8,015 7,923 7,824 7,725 7,633
Transportation fuels tax 814 869 939 1,009 290 293 296
Proposed Legislation .......... .......... -643 -711 .......... .......... ..........
(PAYGO)..............
Telephone and teletype 5,829 6,205 6,611 7,002 7,408 7,827 8,265
services...............
Other Federal fund 1,336 1,815 1,745 1,770 1,822 1,880 1,948
excise taxes...........
Proposed Legislation .......... -16 -207 -94 -159 -186 -198
(PAYGO)..............
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Total Federal fund excise 24,017 24,871 24,382 24,908 25,334 25,801 26,328
taxes....................
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Trust funds:
Highway................. 32,603 32,815 34,269 35,337 36,524 37,586 38,568
[[Page 85]]
Proposed Legislation .......... .......... 643 698 717 724 720
(PAYGO)..............
Airport and airway...... 9,031 9,381 10,218 10,910 11,537 12,157 12,803
Aquatic resources....... 386 393 417 430 441 452 464
Black lung disability 567 561 574 603 622 634 648
insurance..............
Inland waterway......... 95 88 89 90 91 91 92
Vaccine injury 109 124 124 126 127 129 130
compensation...........
Leaking underground 181 183 189 194 198 204 207
storage tank...........
Proposed Legislation .......... .......... .......... .......... .......... .......... -1
(PAYGO)..............
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Total trust funds excise 42,972 43,545 46,523 48,388 50,257 51,977 53,631
taxes....................
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Total excise taxes.......... 66,989 68,416 70,905 73,296 75,591 77,778 79,959
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Estate and gift taxes:
Federal funds............. 26,507 20,209 23,913 22,025 24,561 22,226 22,525
Proposed Legislation .......... .......... -534 -927 -1,347 -1,474 -1,360
(PAYGO)................
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Total estate and gift taxes. 26,507 20,209 23,379 21,098 23,214 20,752 21,165
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Customs duties:
Federal funds............. 17,884 18,252 19,892 20,341 22,937 25,032 26,536
Proposed Legislation .......... .......... -34 -69 -91 -107 -123
(PAYGO)................
Trust funds............... 718 800 855 928 1,006 1,081 1,147
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Total customs duties........ 18,602 19,052 20,713 21,200 23,852 26,006 27,560
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MISCELLANEOUS RECEIPTS:1 \3\
Miscellaneous taxes....... 92 95 97 99 100 102 104
Proposed Legislation .......... .......... .......... 3 4 4 5
(PAYGO)................
United Mine Workers of 124 152 116 109 103 96 90
America combined benefit
fund.....................
Deposit of earnings, 23,683 23,565 27,078 33,283 35,206 36,993 39,134
Federal Reserve System...
Defense cooperation....... 12 6 7 7 7 8 8
Fees for permits and 7,280 8,359 8,720 8,495 8,590 8,763 8,737
regulatory and judicial
services.................
Proposed Legislation .......... .......... .......... 308 313 319 325
(PAYGO)................
Fines, penalties, and 2,812 2,597 2,609 2,623 2,640 2,662 2,681
forfeitures..............
Gifts and contributions... 246 210 200 197 198 199 198
Refunds and recoveries.... -323 -275 -287 -294 -295 -303 -310
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Total miscellaneous receipts 33,926 34,709 38,540 44,830 46,866 48,843 50,972
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Adjustment for revenue .......... -25,000 -15,000 .......... .......... .......... ..........
uncertainty \4\............
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Total budget receipts....... 1,853,173 1,836,218 1,922,025 2,135,188 2,263,159 2,398,054 2,520,923
On-budget................. 1,337,852 1,304,653 1,365,857 1,545,685 1,648,387 1,753,610 1,847,731
Off-budget................ 515,321 531,565 556,168 589,503 614,772 644,444 673,192
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MEMORANDUM
Federal funds............. 1,108,949 1,065,477 1,112,176 1,274,830 1,366,039 1,461,380 1,543,891
Trust funds............... 464,990 474,018 511,003 530,431 553,840 576,262 602,856
Interfund transactions.... -236,087 -234,842 -257,322 -259,576 -271,492 -284,032 -299,016
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Total on-budget............. 1,337,852 1,304,653 1,365,857 1,545,685 1,648,387 1,753,610 1,847,731
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Off-budget (trust funds).... 515,321 531,565 556,168 589,503 614,772 644,444 673,192
===================================================================================
Total....................... 1,853,173 1,836,218 1,922,025 2,135,188 2,263,159 2,398,054 2,520,923
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\1\ Deposits by States cover the benefit part of the program. Federal unemployment receipts cover administrative
costs at both the Federal and State levels. Railroad unemployment receipts cover both the benefits and
adminstrative costs of the program for the railroads.
\2\ Represents employer and employee contributions to the civil service retirement and disability fund for
covered employees of Government-sponsored, privately owned enterprises and the District of Columbia municipal
government.
\3\ Includes both Federal and trust funds.
\4\ These amounts reflect an additional adjustment to receipts beyond what the economic and tax models forecast
and have been made in the interest of cautious and prudent forecasting.