[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)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Estimate
                        Source                           2002 actual -----------------------------------------------------------------------------------
                                                                          2003          2004          2005          2006          2007          2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
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     ............  ............  ............  ............
                                                       -------------------------------------------------------------------------------------------------
    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)
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                     

              Table 4-2.  EFFECT ON RECEIPTS OF CHANGES IN THE SOCIAL SECURITY TAXABLE EARNINGS BASE
                                            (In billions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                                  Estimate
                                                          ------------------------------------------------------
                                                              2004       2005       2006       2007       2008
----------------------------------------------------------------------------------------------------------------
 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

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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

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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

[[Page 72]]

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.

[[Page 73]]

                            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.

[[Page 74]]

  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

[[Page 75]]

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

[[Page 76]]

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

[[Page 77]]

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)................
                             -----------------------------------------------------------------------------------
Total individual income          858,345     849,053     849,880     934,556   1,014,055   1,103,361   1,175,348
 taxes......................
                             ===================================================================================
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)..............
                             -----------------------------------------------------------------------------------
  Total Federal funds            148,037     143,186     169,060     229,318     233,821     237,759     243,684
   corporation income taxes.
                             -----------------------------------------------------------------------------------
  Trust funds:
    Hazardous substance                7  ..........  ..........  ..........  ..........  ..........  ..........
     superfund..............
                             -----------------------------------------------------------------------------------
Total corporation income         148,044     143,186     169,060     229,318     233,821     237,759     243,684
 taxes......................
                             ===================================================================================
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.
                             -----------------------------------------------------------------------------------
  Total employment and           668,547     687,832     719,863     763,463     796,274     834,715     872,072
   general retirement.......
                             -----------------------------------------------------------------------------------
    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
                             -----------------------------------------------------------------------------------
  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\ ..........
                             -----------------------------------------------------------------------------------
  Total unemployment              27,619      34,230      40,206      43,071      45,170      44,540      45,912
   insurance................
                             -----------------------------------------------------------------------------------
  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\ ........
                             -----------------------------------------------------------------------------------
  Total other retirement....       4,594       4,531       4,479       4,356       4,316       4,300       4,251
                             -----------------------------------------------------------------------------------
Total social insurance and       700,760     726,593     764,548     810,890     845,760     883,555     922,235
 retirement receipts........
                             ===================================================================================
  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
                             ===================================================================================
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)..............
                             -----------------------------------------------------------------------------------
  Total Federal fund excise       24,017      24,871      24,382      24,908      25,334      25,801      26,328
   taxes....................
                             -----------------------------------------------------------------------------------
  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)..............
                             -----------------------------------------------------------------------------------
  Total trust funds excise        42,972      43,545      46,523      48,388      50,257      51,977      53,631
   taxes....................
                             -----------------------------------------------------------------------------------
Total excise taxes..........      66,989      68,416      70,905      73,296      75,591      77,778      79,959
                             ===================================================================================
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)................
                             -----------------------------------------------------------------------------------
Total estate and gift taxes.      26,507      20,209      23,379      21,098      23,214      20,752      21,165
                             ===================================================================================
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
                             -----------------------------------------------------------------------------------
Total customs duties........      18,602      19,052      20,713      21,200      23,852      26,006      27,560
                             ===================================================================================
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
                             -----------------------------------------------------------------------------------
Total miscellaneous receipts      33,926      34,709      38,540      44,830      46,866      48,843      50,972
                             ===================================================================================
Adjustment for revenue        ..........     -25,000     -15,000  ..........  ..........  ..........  ..........
 uncertainty \4\............
                             ===================================================================================
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
                             -----------------------------------------------------------------------------------
         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
                             -----------------------------------------------------------------------------------
Total 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 (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
----------------------------------------------------------------------------------------------------------------
\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.