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

    [[Page 239]]

                              16. 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 2005 are estimated to be
    $2,036.3 billion, an increase of $238.2 billion or 13.2 percent relative
    to 2004. Receipts are projected to grow at an average annual rate of 6.5
    percent between 2005 and 2009, rising to $2,616.4 billion. This growth
    in receipts is largely due to assumed increases in incomes resulting
    from both real economic growth and inflation. These estimates reflect a
    downward adjustment for revenue uncertainty of $20 billion in 2004 and
    $15 billion in 2005. 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 increase from 15.7
    percent in 2004 to 16.9 percent in 2005. The receipts share of GDP is
    projected to increase annually thereafter, rising to 17.8 percent in
    2009.

                                                             Table 16-1.  RECEIPTS BY SOURCE--SUMMARY
                                                                    (In billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                            Estimate
                         Source                       2003 actual  -----------------------------------------------------------------------------------------
                                                                         2004           2005           2006           2007           2008           2009
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Individual income taxes........................       793.7          765.4          873.8          956.5        1,049.3        1,133.4        1,209.9
    Corporation income taxes.......................       131.8          168.7          230.2          250.0          251.0          252.1          255.7
    Social insurance and retirement receipts.......       713.0          732.4          793.9          834.0          878.7          918.8          960.2
      (On-budget)..................................      (189.1)        (198.4)        (218.8)        (230.9)        (242.4)        (251.2)        (261.2)
      (Off-budget).................................      (523.8)        (534.0)        (575.1)        (603.1)        (636.3)        (667.6)        (698.9)
    Excise taxes...................................        67.5           70.8           73.2           75.8           77.9           80.0           82.2
    Estate and gift taxes..........................        22.0           23.9           21.4           23.9           21.5           22.2           23.6
    Customs duties.................................        19.9           22.6           22.1           24.4           26.2           27.6           30.0
    Miscellaneous receipts.........................        34.5           34.3           36.5           41.2           46.2           51.2           54.8
    Adjustment for revenue uncertainty.............  .............       -20.0          -15.0     .............  .............  .............  .............
                                                    --------------------------------------------------------------------------------------------------------
        Total receipts.............................     1,782.3        1,798.1        2,036.3        2,205.7        2,350.8        2,485.3        2,616.4
          (On-budget)..............................    (1,258.5)      (1,264.1)      (1,461.2)      (1,602.5)      (1,714.5)      (1,817.7)      (1,917.5)
          (Off-budget).............................      (523.8)        (534.0)        (575.1)        (603.1)        (636.3)        (667.6)        (698.9)
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                 Table 16-2.  EFFECT ON RECEIPTS OF CHANGES IN THE SOCIAL SECURITY TAXABLE EARNINGS BASE
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                      Estimate
                                                              ------------------------------------------------------
                                                                  2005       2006       2007       2008       2009
    ----------------------------------------------------------------------------------------------------------------
     Social security (OASDI) taxable earnings base increases:
      $87,900 to $89,700 on Jan. 1, 2005.....................        0.8        2.2        2.5        2.8        3.0
      $89,700 to $93,000 on Jan. 1, 2006.....................  .........        1.6        4.3        4.7        5.2
      $93,000 to $97,500 on Jan. 1, 2007.....................  .........  .........        2.2        5.9        6.5
      $97,500 to $101,400 on Jan. 1, 2008....................  .........  .........  .........        1.9        5.1
      $101,400 to $106,200 on Jan. 1, 2009...................  .........  .........  .........  .........        2.4
    ----------------------------------------------------------------------------------------------------------------

    [[Page 240]]

                               ENACTED LEGISLATION

      Several laws were enacted in 2003 that have an effect on governmental
    receipts. The major legislative changes affecting receipts are described
    below.

                  JOBS AND GROWTH TAX RELIEF RECONCILIATION ACT

      In January 2003, President Bush proposed an economic growth package
    designed to reinvigorate the economic recovery, create jobs and enhance
    long-term economic growth. Congress acted quickly and on May 28, 2003
    President Bush signed the Jobs and Growth Tax Relief Reconciliation Act
    (2003 jobs and growth tax cut), which included all the key features of
    his proposal. In addition to providing $20 billion in temporary fiscal
    assistance to the States, this Act accelerated many of the individual
    income tax reductions provided in the Economic Growth and Tax Relief
    Reconciliation Act of 2001 (2001 tax cut), increased temporarily the
    alternative minimum tax (AMT) exemption amount, reduced temporarily tax
    rates on dividends and capital gains, and increased temporarily
    incentives designed to speed up investment. The major provisions of the
    Act that affect receipts are described below. The year-by-year effect of
    these changes (as well as some of the changes provided in the 2001 tax
    cut) on various provisions of the tax code is shown in Chart 16-1.

                                                              Chart 16-1. MAJOR PROVISIONS OF THE TAX CODE UNDER THE 2001 AND 2003 TAX CUTS
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
              Provision                   2003               2004              2005                2006               2007              2008             2009             2010             2011
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Individual Income             Rates reduced to     ................  ................  ...................  ................  ...............  ...............  ...............  Rates increased
      Tax Rates                    35, 33, 28, and 25                                                                                                                                 to 39.6, 36,
                                   percent                                                                                                                                            31, and 28
                                                                                                                                                                                      percent
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    10 Percent Bracket            Bracket upper        ................  Bracket upper     ...................  ................  Bracket upper    ...............  ...............  Bracket
                                   income level                           income level                                             income level                                       eliminated,
                                   increased to                           reduced to                                               increased to                                       making lowest
                                   $7,000/$14,000 for                     $6,000/$12,000                                           $7,000/$14,000                                     bracket 15
                                   single/joint                           for single/                                              for single/                                        percent
                                   filers and                             joint filers                                             joint filers
                                   inflation-indexed                                                                               and inflation-
                                                                                                                                   indexed
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    15 Percent Bracket            Top of bracket for   ................  Top of bracket    Top of bracket for   Top of bracket    Top of bracket   ...............  ...............  Top of bracket
      for Joint Filers             joint filers                           for joint         joint filers         for joint         for joint                                          for joint
                                   increased to 200                       filers reduced    increased to 187     filers            filers                                             filers reduced
                                   percent of top of                      to 180 percent    percent of top of    increased to      increased to                                       to 167 percent
                                   bracket for single                     of top of         bracket for single   193 percent of    200 percent of                                     of top of
                                   filers                                 bracket for       filers               top of bracket    top of bracket                                     bracket for
                                                                          single filers                          for single        for single                                         single filers
                                                                                                                 filers            filers
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Standard Deduction            Standard deduction   ................  Standard          Standard deduction   Standard          Standard         Standard         ...............  Standard
      for Joint Filers             for joint filers                       deduction for     for joint filers     deduction for     deduction for    deduction for                     deduction for
                                   increased to 200                       joint filers      increased to 184     joint filers      joint filers     joint filers                      joint filers
                                   percent of                             reduced to 174    percent of           increased to      increased to     increased to                      reduced to 167
                                   standard deduction                     percent of        standard deduction   187 percent of    190 percent of   200 percent of                    percent of
                                   for single filers                      standard          for single filers    standard          standard         standard                          standard
                                                                          deduction for                          deduction for     deduction for    deduction for                     deduction for
                                                                          single filers                          single filers     single filers    single filers                     single filers
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Child Credit                  Tax credit for each  ................  Tax credit for    ...................  ................  ...............  Tax credit for   Tax credit for   Tax credit for
                                   qualifying child                       each qualifying                                                           each             each             each
                                   under age 17                           child under age                                                           qualifying       qualifying       qualifying
                                   increased to                           17 reduced to                                                             child under      child under      child under
                                   $1,000                                 $700                                                                      age 17           age 17           age 17 reduced
                                                                                                                                                    increased to     increased to     to $500
                                                                                                                                                    $800             $1,000
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Estate Taxes                  Top rate reduced to  Top rate reduced  Top Rate reduced  Top rate reduced to  Top rate reduced  ...............  Exempt amount    Estate tax       Top rate
                                   49 percent           to 48 percent     to 47 percent     46 percent           to 45 percent                      increased to     repealed         increased to
                                                       Exempt amount                       Exempt amount                                            $3.5 million                      60 percent
                                                        increased to                        increased to $2                                                                          Exempt amount
                                                        $1.5 million                        million                                                                                   reduced to $1
                                                                                                                                                                                      million
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    [[Page 241]]

    Small Business                Deduction increased  ................  ................  Deduction declines   ................  ...............  ...............  ...............  ...............
      Expensing                    to $100,000,                                             to $25,000,
                                   reduced by amount                                        reduced by amount
                                   qualifying                                               qualifying
                                   property exceeds                                         property exceeds
                                   $400,000, and both                                       $200,000, and
                                   amounts inflation-                                       amounts not
                                   indexed                                                  inflation-indexed
                                  Applies to software                                      Does not apply to
                                                                                            software
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Capital Gains                 Tax rate on captial  ................  ................  ...................  ................  Tax on captial   Tax rate on      ...............  ...............
                                   gains reduced to 5/                                                                             gains            captial gains
                                   15 percent                                                                                      eliminated for   increased to
                                                                                                                                   taxpayers in     10/20 percent
                                                                                                                                   10/15 percent
                                                                                                                                   tax brackets
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Dividends                     Tax rate on          ................  ................  ...................  ................  Tax on           Dividends taxed  ...............  ...............
                                   dividends reduced                                                                               dividends        at standard
                                   to 5/15 percent                                                                                 eliminated for   income tax
                                                                                                                                   taxpayers in     rates
                                                                                                                                   10/15 percent
                                                                                                                                   tax brackets
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Bonus Depreciation            Bonus depreciation   ................  Bonus             ...................  ................  ...............  ...............  ...............  ...............
                                   increased to 50                        depreciation
                                   percent of                             expires
                                   qualified property
                                   aquired after
                                    5/5/03
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Alternative Minimum           AMT exemption        ................  AMT exemption     ...................  ................  ...............  ...............  ...............  ...............
      Tax                          amount increased                       amount reduced
                                   to $40,250/$58,000                     to $33,750/
                                   for single/joint                       $45,000 for
                                   filers                                 single /joint
                                                                          filers
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    Accelerate Individual Income Tax Reductions Provided in the 2001 Tax Cut

      Accelerate 10-percent individual income tax rate bracket expansion.--
    The 2001 tax cut created a 10-percent individual income tax bracket,
    which applied 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 and before January 1,
    2011), the first $10,000 of taxable income for heads of household, and
    the first $12,000 of taxable income for married taxpayers filing a joint
    return (increasing to $14,000 for taxable years beginning after December
    31, 2007 and before January 1, 2011). These amounts were adjusted
    annually for inflation after December 31, 2008. The 2003 jobs and growth
    tax cut accelerated the expansions of the 10-percent tax rate bracket
    scheduled to be effective beginning in taxable year 2008, to be
    effective in taxable years 2003 and 2004. For taxable years beginning
    after 2004 and before January 1, 2011, the taxable income levels for the
    10-percent individual income tax rate bracket will revert to the levels
    provided under the 2001 tax cut. The 10-percent bracket will be
    eliminated for taxable years beginning after December 31, 2010.
      Accelerate reduction in individual income tax rates.--Under the 2001
    tax cut, the statutory individual income tax rate brackets of 28, 31, 36
    and 39.6 percent were temporarily replaced with a rate structure of 25,
    28, 33 and 35 percent. The reduced tax rate structure was phased in over
    a period of six years, with reductions scheduled for 2001, 2002, 2004,
    and 2006. The new tax rate structure was fully effective for taxable
    years 2006 through 2010. The 2003 jobs and growth tax cut accelerated
    the reductions in the statutory individual income tax rate structure
    scheduled to be effective beginning in taxable years 2004 and 2006, to
    be effective beginning in taxable year 2003. The statutory individual
    income tax rate brackets will revert to 28, 31, 36 and 39.6 percent,
    effective for taxable years beginning after December 31, 2010.
      Accelerate increase in standard deduction for married taxpayers filing
    a joint return.-- Under the 2001 tax cut, the standard deduction for
    married taxpayers filing a joint return, which was 167 percent of the
    standard deduction for unmarried individuals,

    [[Page 242]]

    was increased to double the standard deduction for single taxpayers over
    a five-year period. Under the phasein, the standard deduction for
    married taxpayers filing a joint return increased 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 2003 jobs and growth tax cut accelerated the increase in the
    standard deduction for married taxpayers filing a joint return to 200
    percent of the standard deduction for single taxpayers, effective for
    taxable years 2003 and 2004. For taxable years 2005 through 2010, the
    standard deduction for married taxpayers filing a joint return will
    revert to the levels provided under the 2001 tax cut. The standard
    deduction for married taxpayers filing a joint return will decline to
    167 percent of the standard deduction for single taxpayers, effective
    for taxable years beginning after December 31, 2010.
      Accelerate expansion of the 15-percent individual income tax rate
    bracket for married taxpayers filing a joint return.--Under the 2001 tax
    cut, the maximum taxable income in the 15-percent individual income tax
    rate bracket for married taxpayers filing a joint return, which was 167
    percent of the corresponding amount for an unmarried individual, was
    increased to twice the corresponding amount for unmarried individuals
    over a four-year period. Under the phasein, the maximum taxable income
    in the 15-percent tax rate bracket for married taxpayers filing a joint
    return increased 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 2003 jobs and growth tax cut accelerated the increase
    in the size of the 15-percent tax rate bracket for married taxpayers
    filing a joint return to twice the corresponding tax rate bracket for
    single taxpayers, effective for taxable years 2003 and 2004. For taxable
    years 2005 through 2010, the size of the 15-percent tax rate bracket for
    married taxpayers filing a joint return will revert to the levels
    provided under the 2001 tax cut. The maximum taxable income in the 15-
    percent tax rate bracket for married taxpayers filing a joint return
    will decline to 167 percent of the corresponding amount for single
    taxpayers, effective for taxable years beginning after December 31,
    2010.
      Accelerate increase in child tax credit.--Under the 2001 tax cut, the
    maximum amount of the tax credit for each qualifying child under the age
    of 17 increased from $500 to $1,000 over a period of 10 years, as
    follows: the credit increased to $600 for taxable years 2001 through
    2004, $700 for taxable years 2005 through 2008, $800 for taxable year
    2009, and $1,000 for taxable year 2010. The 2003 jobs and growth tax cut
    accelerated the increase in the credit to $1,000 per child, effective
    for taxable years 2003 and 2004. For taxable years 2005 through 2010,
    the credit will revert to the levels provided under the 2001 tax cut.
    The credit will decline to $500 for taxable years beginning after
    December 31, 2010.
      For 2003, most eligible taxpayers received the benefit of the increase
    in the credit through an advanced payment of up to $400 per child,
    issued by the Department of Treasury in the form of a check. The amount
    of the advanced payment was based on information provided on each
    taxpayer's 2002 tax return, filed in 2003.

                  Provide Alternative Minimum Tax (AMT) Relief

      Increase AMT exemption amount.--An alternative minimum tax is imposed
    on individuals to the extent that the tentative minimum tax exceeds the
    regular tax. An individual's tentative minimum tax generally is equal to
    the sum of: (1) 26 percent of the first $175,000 ($87,500 in the case of
    a married individual filing a separate return) of alternative minimum
    taxable income (taxable income modified to take account of specified
    preferences and adjustments) in excess of an exemption amount and (2) 28
    percent of the remaining alternative minimum taxable income. The
    exemption amounts, as provided under the 2001 tax cut, were: (1) $49,000
    for married taxpayers filing a joint return and surviving spouses for
    taxable years 2001 through 2004, declining in 2005 to the pre-2001 tax
    cut level of $45,000; (2) $35,750 for single taxpayers for taxable years
    2001 through 2004, returning to $33,750 for taxable years beginning in
    2005; and (3) $24,500 for married taxpayers filing a separate return,
    estates and trusts, for taxable years 2001 through 2004, returning to
    $22,500 for taxable years beginning in 2005. The exemption amounts are
    phased out by an amount equal to 25 percent of the amount by which the
    individual's alternative minimum taxable income exceeds: (1) $150,000
    for married taxpayers filing a joint return and surviving spouses, (2)
    $112,500 for single taxpayers, and (3) $75,000 for married taxpayers
    filing a separate return, estates and trusts. Effective for taxable
    years 2003 and 2004, the 2003 jobs and growth tax cut increased the
    alternative minimum tax exemption amount to $58,000 for married
    taxpayers filing a joint return and surviving spouses, to $40,250 for
    single taxpayers, and to $29,000 for married taxpayers filing a separate
    return, estates and trusts. For taxable years beginning after 2004, the
    exemption amounts will return to the levels prior to the 2001 tax cut.

                     Provide Growth Incentives for Business

      Increase and extend the 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 generally is determined under the modified
    accelerated cost recovery system, which assigns applicable recovery
    periods and depreciation methods to different types of property.

    [[Page 243]]

      The Job Creation and Worker Assistance Act of 2002 (2002 economic
    stimulus bill) provided an additional first-year depreciation deduction
    equal to 30 percent of the adjusted basis of the property, for
    qualifying assets (1) acquired after September 10, 2001 and before
    September 11, 2004 (but only if no binding written contract for the
    acquisition of the property was in effect before September 11, 2001) or
    (2) acquired pursuant to a written binding contract that was entered
    into after September 10, 2001 and before September 11, 2004. This first-
    year depreciation deduction was allowed for both regular and alternative
    minimum tax purposes in the year the property was placed in service. The
    basis of the property and the remaining allowable depreciation
    deductions had to be adjusted to reflect the additional first-year
    depreciation deduction. Property qualifying for the additional first-
    year depreciation deduction included tangible property with a
    depreciation recovery period 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 have commenced with the taxpayer after September 10, 2001 (except
    for certain sale-leaseback property) and the property was required to be
    placed in service before January 1, 2005 (January 1, 2006 for certain
    property having longer production periods). The 2003 jobs and growth tax
    cut extended the final acquisition deadlines for property qualifying for
    the 30 percent additional first-year depreciation deduction from
    September 11, 2004 to January 1, 2005. In addition, this Act permitted
    an additional first-year depreciation deduction equal to 50 percent of
    the adjusted basis of the property (in lieu of the 30-percent additional
    deduction) for property acquired after May 5, 2003 and before January 1,
    2005 (provided no binding written contract for the acquisition of the
    property was in effect before May 6, 2003). Qualified property was
    defined in the same manner as for purposes of the 30-percent additional
    first-year depreciation deduction, except the original use of the
    property was required to commence with the taxpayer after May 5, 2003.

      Increase expensing for small business.--In lieu of depreciation, a
    small business taxpayer may elect to deduct up to $25,000 of the cost of
    qualifying property placed in service during the taxable year.
    Qualifying property includes certain tangible property that is acquired
    by purchase for use in the active conduct of a trade or business. The
    amount that a taxpayer may expense is reduced by the amount by which the
    taxpayer's cost of qualifying property exceeds $200,000. The deduction
    is also limited in any taxable year by the amount of taxable income
    derived from the active conduct by the taxpayer of any trade or
    business. An election to expense these costs generally is made on the
    taxpayer's original return for the taxable year to which the election
    relates, and may be revoked only with the consent of the IRS
    Commissioner. The 2003 jobs and growth tax cut increased the maximum
    deduction amount to $100,000, effective for qualifying property
    (expanded to include off-the-shelf computer software) placed in service
    in taxable years beginning in 2003, 2004, and 2005. The amount that a
    taxpayer may expense is reduced by the amount by which the taxpayer's
    cost of qualifying property exceeds $400,000. Both the deduction and
    annual investment limits are indexed annually for inflation, effective
    for taxable years beginning after 2003 and before 2006. Additionally,
    with respect to a taxable year beginning after 2002 and before 2006,
    taxpayers are permitted to make or revoke expensing elections on amended
    returns without the consent of the IRS Commissioner.

                 Modify Taxation of Capital Gains and Dividends

      Reduce individual income tax rates on net capital gains.--Prior to
    enactment of the 2003 jobs and growth tax cut, the maximum tax rate on
    net capital gains (the excess of net long-term gains over net short-term
    losses) was 20 percent for taxpayers in individual income tax rate
    brackets exceeding 15 percent and 10 percent for lower income taxpayers.
    Effective for sales or exchanges of capital assets on or after May 6,
    2003 and before January 1, 2009, this Act reduced the maximum tax rate
    on net capital gains to 15 percent for taxpayers in individual income
    tax rate brackets above 15 percent and to 5 percent (zero, in 2008) for
    lower income taxpayers. After December 31, 2008, net capital gains will
    be taxed at maximum rates of 20 and 10 percent.
      Reduce individual income tax rates on dividends.--Prior to enactment
    of the 2003 jobs and growth tax cut, dividends received by an individual
    shareholder were taxed as ordinary income, at rates as high as 38.6
    percent in 2003. Effective for taxable years beginning after December
    31, 2002 and before January 1, 2009, this Act reduced the maximum tax
    rate on dividends received by an individual shareholder from domestic
    and qualified foreign corporations to 15 percent for taxpayers in
    individual income tax rate brackets above 15 percent and to 5 percent
    (zero, in 2008) for lower income taxpayers. After December 31, 2008,
    dividends will be taxed as ordinary income.

                  Modify Estimated Tax Payments by Corporations

      Modify the timing of estimated tax payments by corporations.--
    Corporations generally are required to pay their income tax liability in
    quarterly estimated payments. For corporations that keep their accounts
    on a calendar year basis, these payments are due on or before April 15,
    June 15, September 15 and December 15 (if these dates fall on a holiday
    or weekend, payment is due on the next business day). The 2003 jobs and
    growth tax cut allowed corporations to delay 25 percent of the estimated
    payment otherwise due on September 15, 2003 until October 1, 2003.

    [[Page 244]]

                           MEDICARE PRESCRIPTION DRUG,

                                IMPROVEMENT, AND

                            MODERNIZATION ACT OF 2003

      President Bush signed this Act, which he referred to as ``the greatest
    advance in health care coverage for America's seniors since the founding
    of Medicare,'' on December 8, 2003. In addition to providing
    prescription drug coverage to more than 40 million seniors and to the
    disabled, other provisions of this Act increased payments to Medicare
    providers, provided new preventive health care benefits to seniors,
    established health care savings accounts, and curtailed the number of
    employers expected to drop retiree health care coverage. The major
    provisions of this Act that affect receipts are described below.

      Create Health Savings Accounts (HSAs).--Effective January 4, 2004,
    eligible individuals, their family members and employers are allowed to
    make tax-free contributions to a Health Savings Account. Eligible
    individuals are those covered by a high-deductible health plan who
    cannot be claimed as a dependent on another person's tax return and who
    are not entitled to benefits under Medicare. A high-deductible plan is
    one that in 2003 had an annual deductible of at least $1,000 in the case
    of self-only coverage and $2,000 in the case of family coverage, and a
    cap on out-of-pocket expenses of $5,000 in the case of self-only
    coverage and $10,000 in the case of family coverage. The annual
    deductible and out-of-pocket expense amounts are indexed annually for
    inflation. Contributions to a HSA made by an eligible individual are
    deductible and employer contributions made on behalf of an individual
    (including contributions made through a cafeteria plan) are excluded
    from gross income and wages for income and employment tax purposes to
    the extent the contribution would be deductible if made by the employee.
    The maximum aggregate annual contribution that may be made to a HSA is
    the lesser of 100 percent of the annual deductible under the high-
    deductible plan, or the maximum deductible permitted under an Archer
    Medical Savings Account (MSA) high-deductible health plan, as adjusted
    for inflation. For 2004, the maximum contribution is $2,600 in the case
    of a self-only plan and $5,150 in the case of family coverage.
    Contributions to an Archer MSA reduce the annual contribution limit for
    HSAs. The annual contribution limits are increased for individuals who
    have attained age 55 by the end of the taxable year; these ``catch-up''
    contributions are greater than the otherwise applicable contribution
    limit by the following amounts: $500 in 2004, $600 in 2005, $700 in
    2006, $800 in 2007, $900 in 2008, and $1,000 in 2009 and subsequent
    years. A married couple can make two catch-up contributions as long as
    both spouses are at least age 55. Distributions from an HSA for
    qualified medical expenses of the individual and his or her spouse or
    dependents generally are tax-free. Qualified expenses include
    prescription and nonprescription drugs, qualified long-term care
    services and long-term care insurance, COBRA coverage, Medicare expenses
    (excluding Medigap), and retiree health expenses for individuals age 65
    and older. Distributions from an HSA that are not for qualified medical
    expenses are included in gross income and are subject to an additional
    10-percent penalty unless made after death, disability, or the
    individual attains the age of Medicare eligibility.
      Exclude from income Federal subsidy payments to employers who continue
    prescription drug coverage for retirees.--To encourage employers to
    continue providing prescription drug benefits to their retirees, this
    Act provided a subsidy to firms with a retiree health plan certified to
    be at least the equivalent of the standard Medicare drug plan. The
    subsidy, which is 28 cents for every dollar between $250 and $5,000
    spent on a drug benefit for an employee, is excluded from the gross
    income of the employer. The exclusion, which applies to the regular tax
    and to the alternative minimum tax, is effective for taxable years
    ending after the date of enactment.

                     MILITARY FAMILY TAX RELIEF ACT OF 2003

      This Act, which doubled military death gratuity payments from $6,000
    to $12,000 and provided tax reductions to military personnel and their
    families, was signed by President Bush on November 11, 2003. The major
    provisions of this Act that affect receipts are described below.

      Provide an above-the-line deduction for travel expenses of National
    Guard and Reserve members.--National Guard and Reserve members are
    allowed to claim itemized deductions for overnight transportation,
    meals, and lodging expenses that are incurred and not reimbursed when
    they travel away from home to attend National Guard and Reserve
    meetings. Under prior law, such expenses had to be combined with other
    miscellaneous itemized deductions and were deductible only to the extent
    that the aggregate of the taxpayer's miscellaneous itemized deductions
    exceeded two percent of adjusted gross income. This Act provided an
    above-the-line deduction for the nonreimbursed transportation, meals and
    lodging expenses of National Guard and Reserve members who must travel
    more than 100 miles away from home to attend National Guard and Reserve
    meetings. The deduction, which is effective with respect to expenses
    paid or incurred in taxable years beginning after December 31, 2002,
    cannot exceed the general Federal Government per diem rate applicable to
    the locale in which the expenses are incurred.
      Provide special rules for the exclusion of gain on the sale of a
    principal residence by members of the uniformed services or the Foreign
    Service.--Under current law, a taxpayer may exclude from tax up to
    $250,000 ($500,000 for married taxpayers filing a joint return) of the
    gain realized on the sale or exchange of a principal residence. To be
    eligible for the exclusion, the taxpayer must have owned and used the

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    residence as a principal residence for at least two of the five years
    ending on the date of the sale or exchange. A taxpayer who fails to meet
    these requirements by reason of a change of place of employment, health,
    or unforeseen circumstances (to the extent provided under regulations)
    is able to exclude a lesser amount from tax, equal to $250,000/$500,000
    times the portion of the two years that the ownership and use
    requirements are met. This Act modified these rules for members of the
    uniformed services or Foreign Service, effective for sales or exchanges
    after May 6, 1997. Under this Act these individuals may elect to suspend
    the five-year period of current law for a maximum of ten years during
    certain absences due to service. If the election is made, the five-year
    period ending on the date of the sale or exchange of a principal
    residence does not include any period, up to ten years, during which the
    taxpayer or the taxpayer's spouse was on qualified official extended
    duty as a member of the uniformed services or in the Foreign Service of
    the United States. For these purposes qualified official extended duty
    is defined as any period of duty pursuant to a call or order to such
    duty for a period in excess of 90 days or for an indefinite period at a
    place of duty at least 50 miles away from the taxpayer's principal
    residence or under orders compelling residence in Government furnished
    quarters. The election may be made with respect to only one property for
    a suspension period.
      Increase exclusion from income for certain death gratuities paid with
    respect to deceased members of the armed forces.--This Act increased
    from $6,000 to $12,000, certain death gratuities paid to survivors of
    members of the armed forces who die while on active duty, inactive duty
    training, or authorized travel. Survivors of persons who die within 120
    days after discharge or release from active duty, inactive duty
    training, or authorized travel are also paid the death gratuity if the
    death resulted from an injury or disease incurred or aggravated during
    the active duty, inactive duty training or authorized travel. Under
    prior law, only $3,000 of the military death gratuity was excluded from
    gross income. This Act increased the exclusion from gross income for
    military death gratuity payments to $12,000, effective with respect to
    deaths occurring after September 10, 2001.
      Provide exclusion from income for amounts received under Department of
    Defense Homeowners Assistance Program.--The Department of Defense
    Homeowners Assistance Program (HAP) provides payments to certain
    employees and members of the armed forces to offset the adverse effects
    on housing values that result from a military base realignment or
    closure. Under prior law, amounts received under HAP were included in
    gross income. This Act generally exempted from gross income amounts
    received under HAP, up to the reduction in the fair market value of the
    property. This change was effective for payments made after November 11,
    2003.
      Modify other tax provisions.--Other changes provided in this Act
    authorized the expansion of extended tax filing and payment deadlines
    provided to individuals serving in a combat zone to individuals
    participating in a contingency operation, clarified the tax treatment of
    certain dependent care assistance programs provided to members of the
    uniformed services of the United States, allowed service academy
    appointments to be considered scholarships for purposes of qualified
    tuition programs and Coverdell Education Savings Accounts, suspended the
    tax-exempt status of designated terrorist organizations, and provided
    tax relief to families of astronauts who lose their lives in the line of
    duty after December 31, 2002. In addition, for purposes of determining
    the tax-exempt status of veteran's organizations, this Act expanded
    membership requirements to include ancestors or lineal descendants of
    past or present members of the armed forces, or of cadets.

           UNITED STATES-CHILE FREE TRADE AGREEMENT IMPLEMENTATION ACT

      This Act implemented the U.S.-Chile Free Trade Agreement (FTA), as
    signed by the United States and Chile on June 6, 2003. The U.S.-Chile
    FTA increased market access for American goods and services in Chile and
    provided U.S. producers and consumers access to lower-cost Chilean goods
    and services in a manner that was not disruptive to the U.S. economy. It
    also set the standard in Latin America for progressively opening other
    countries' economies and pointed the way to a hemisphere united by
    economic opportunity, freedom, the rule of law, and democracy.

         UNITED STATES-SINGAPORE FREE TRADE AGREEMENT IMPLEMENTATION ACT

      This Act implemented the U.S.-Singapore Free Trade Agreement (FTA), as
    signed by the United States and Singapore on May 6, 2003. The U.S.-
    Singapore FTA provided tariff-free access to Singapore for all U.S.
    goods, including textile and agriculture products; opened opportunities
    for U.S. services businesses; and addressed other barriers to trade. As
    the first U.S. Free Trade Agreement with an Asian-Pacific country,
    provisions in this agreement will serve as the foundation for agreements
    with other countries in the region.

                            ADMINISTRATION PROPOSALS

      The President's policy initiatives include permanent extension of the
    increased expensing for small businesses and reductions in taxes on
    capital gains and dividends provided in the 2003 jobs and growth tax

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    cut, as well as extension through 2010 of the accelerated individual
    income tax reductions provided in that same legislation. They also
    include permanent extension of the provisions of the 2001 tax cut
    scheduled to sunset on December 31, 2010, permanent extension of the
    research and experimentation tax credit, and extension of many other
    expiring provisions. In addition, the President's initiatives include
    incentives for charitable giving, strengthening education, investing in
    health care, protecting the environment, increasing energy production,
    and promoting energy conservation.
      This Budget also includes proposals designed to increase opportunities
    for saving by simplifying and rationalizing the many tax preferred
    savings vehicles provided under current law; simplify the tax code,
    improve tax compliance, and curtail abusive tax avoidance activities;
    and strengthen the employer-based pension system.

              MAKE PERMANENT THE TAX CUTS ENACTED IN 2001 AND 2003

     Extend Through 2010 Certain Provisions of the 2003 Jobs and Growth Tax
                                       Cut

      Extend through 2010 accelerated individual income tax reductions.--The
    Administration proposes to extend through December 31, 2010, the
    accelerated increase in the child credit, the accelerated expansion of
    the 10-percent individual income tax bracket, and the accelerated
    expansions of the standard deduction and 15-percent individual income
    tax bracket for married taxpayers filing a joint return, which expire on
    December 31, 2004.

                      Extend Permanently Certain Provisions

                        of the 2001 Tax Cut and the 2003

                             Jobs and Growth Tax Cut

      Extend permanently reductions in individual income taxes on capital
    gains and dividends.--The maximum individual income tax rate on net
    capital gains and dividends is 15 percent for taxpayers in individual
    income tax rate brackets above 15 percent and 5 percent (zero in 2008)
    for lower income taxpayers. The Administration proposes to extend
    permanently these reduced rates (15 percent and zero), which are
    scheduled to expire on December 31, 2008.
      Extend permanently increased expensing for small business.--Small
    businesses taxpayers are allowed to expense up to $100,000 in annual
    investment expenditures for qualifying property (expanded to include
    off-the-shelf computer software) placed in service in taxable years
    2003, 2004, and 2005. The amount that may be expensed is reduced by the
    amount by which the taxpayer's cost of qualifying property exceeds
    $400,000. Both the deduction and annual investment limits are indexed
    annually for inflation, effective for taxable years beginning after 2003
    and before 2006. Also, with respect to a taxable year beginning after
    2002 and before 2006, taxpayers are permitted to make or revoke
    expensing elections on amended returns without the consent of the IRS
    Commissioner. The Administration proposes to extend permanently each of
    these temporary provisions, applicable for qualifying property
    (including off-the-shelf computer software) placed in service in taxable
    years beginning after 2005.
      Extend permanently 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 extend
    those provisions permanently.

                                 TAX INCENTIVES

                          Simplify and Encourage Saving

      Expand tax-free savings opportunities.--Under current law, individuals
    can contribute to traditional 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 Account (LSA) and a Retirement
    Savings Account (RSA). Regardless of age or income, individuals could
    make annual nondeductible contributions of $5,000 to an LSA and $5,000
    (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, 2004 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 new contributions. New
    traditional IRAs could be created to accommodate rollovers from employer
    plans, but they could not accept new individual

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    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 saving 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 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. ERSA non-discrimination rules would be
    simpler and include a new ERSA non-discrimination safe-harbor. Under one
    of the safe-harbor options, a plan would satisfy the nondiscrimination
    rules with respect to employee deferrals and employee contributions 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, 2004.

      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
    2006. 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.

                              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, 2004, a new refundable tax credit would be provided
    for the cost of health insurance purchased by individuals under age 65.
    The credit would provide a subsidy for a percentage of the health
    insurance premium, up to a maximum includable premium. The maximum
    subsidy percentage would be 90 percent for low-income taxpayers and
    would phase down with income. The maximum credit would be $1,000 for an
    adult and $500 for a child. The credit would be phased out at $30,000
    for single taxpayers and $60,000 for families purchasing a family
    policy.
      Individuals could claim the tax credit for health insurance premiums
    paid as part of the normal tax-filing process. Alternatively, beginning
    July 1, 2006, 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

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    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 a Health Savings Account (HSA) or Archer MSA for the
    same taxable year.

      Provide an above-the-line deduction for high-deductible insurance
    premiums.--Current law provides a tax preference for employer-provided
    health insurance. Current law also provides that individuals may make
    tax-deductible contributions to Health Savings Accounts (HSAs) if
    certain criteria are met, including the individual being covered by a
    high-deductible health insurance plan. Individuals may then make tax-
    free withdrawals from their HSAs for qualified, health-care related out-
    of-pocket expenses. Individuals who do not have employer-provided health
    insurance may also make tax-deductible contributions to HSAs, but the
    premiums from their high-deductible insurance plan are not tax-
    deductible. The Administration proposes to allow all individuals an
    above-the-line deduction for insurance premiums arising from high-
    deductible health insurance plans if the plan qualifies the individual
    for an HSA and if the individual does not have employer-provided
    coverage. This proposal generally eliminates the unequal tax treatment
    of high-deductible insurance premiums between individuals who have
    employer-provided health care and those who do not, and further
    increases the attractiveness of HSAs in general. The deduction would be
    effective for taxable years beginning after December 31, 2004.
      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 more affordable by
    creating an above-the-line deduction for qualified long-term care
    insurance premiums. The Secretary of the Treasury would be authorized to
    require long-term care insurance to meet consumer protection standards
    for quality coverage. 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, 2004 but it 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.
      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, 2004, 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 claim the orphan drug credit for expenses incurred
    prior to FDA designation if designation occurs before the due date
    (including extensions) for filing the tax return for the year in which
    the FDA application was filed. The proposal would be effective for
    qualified expenses incurred after December 31, 2003.

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      Clarity the Health Coverage Tax Credit.--The Health Coverage Tax
    Credit (HCTC) was created under the Trade Adjustment Assistance (TAA)
    Reform Act of 2002 for the purchase of qualified health insurance.
    Eligible persons include certain individuals who are receiving benefits
    under the TAA or the Alternative TAA (ATAA) program and certain
    individuals between the ages of 55 and 64 who are receiving pension
    benefits from the Pension Benefit Guaranty Corporation (PBGC). The tax
    credit is refundable and can be claimed through an advance payment
    mechanism at the time the insurance is purchased. To clarify the statute
    and reduce administrative complexity, the Administration proposes the
    following changes: (1) Modify the definition of ``other specified
    coverage'' for ``eligible ATAA recipients'' to be the same as the
    definition applied to other eligible individuals; (2) clarify that
    certain PBGC pension recipients are eligible for the tax credit; (3)
    allow State-based continuation coverage to qualify without meeting the
    requirements for State-based qualified coverage; (4) for purposes of the
    State-based coverage rules, permit Commonwealths of Puerto Rico and
    Northern Mariana Islands, as well as American Samoa, Guam, and the U.S.
    Virgin Islands to be deemed as States; and (5) clarify the application
    of the confidentiality and disclosure rules to the administration of the
    advance credit.

                    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, 2003. 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 2004. 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 date of enactment, 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.
      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 (as to both type and quality) 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, 2003.

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      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, 2003.
      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, 2003, regardless of when the trust was
    created.

      Modify basis adjustment to stock of S corporations contributing
    appreciated property.--Under current law, each shareholder in an S
    corporation separately accounts for his 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, 2003.
      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.

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      Repeal certain 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 Education

      Extend, increase, and expand the above-the-line deduction for
    qualified out-of-pocket classroom expenses.--Under recently expired law,
    teachers who itemize deductions (do not use the standard deduction) and
    incur unreimbursed, job-related expenses were allowed to deduct those
    expenses to the extent that when combined with other miscellaneous
    itemized deductions they exceeded two percent of AGI. Prior law also
    allowed 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 qualified for the above-the-line deduction.
    Expenses claimed as an above-the-line deduction could not 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.

                             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, 2004.

                         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 2005, 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.

                             Protect the Environment

      Extend permanently expensing of brownfields remediation costs.--
    Taxpayers may elect, with respect to expenditures paid or incurred
    before January 1, 2004, to treat certain environmental remediation
    expenditures that would otherwise be chargeable to capital account as
    deductible in the year paid or incurred. The Administration proposes to
    extend this provision permanently for expenditures paid or incurred
    after December 31, 2003, facilitating its use by businesses to undertake
    projects that may 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.

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    This proposal applies to conservation easements and similar sales of
    partial interests in land, such as development rights and agricultural
    conservation easements, for conservation purposes. 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
    after December 31, 2004 and before January 1, 2008.

           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, 2007. 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, 2004. Electricity
    produced at such facilities from newly eligible sources would be
    eligible for the credit only from January 1, 2004 through December 31,
    2008, 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, 2004
    through December 31, 2006, and at a rate equal to 30 percent of the
    generally applicable rate. The Administration also proposes to modify
    the rules relating to governmental financing of qualified facilities.
    There would be no percentage reduction in the credit for governmental
    financing attributable to tax-exempt bonds. Instead, such financing
    would reduce the credit only to the extent necessary to offset the value
    of the tax exemption. The rules relating to leased facilities would also
    be modified to permit the lessee, rather than the owner, to claim the
    credit.
      Provide tax credit for residential solar energy systems.--Current law
    provides a 10-percent investment tax credit to businesses for qualifying
    equipment that uses solar energy to generate electricity; to heat, cool
    or provide hot water for use in a structure; or to provide solar process
    heat. A credit currently is not provided for nonbusiness purchases of
    solar energy equipment. The Administration proposes a new tax credit for
    individuals who purchase solar energy equipment to generate electricity
    (photovoltaic equipment) or heat water (solar water heating equipment)
    for use in a dwelling unit that the individual uses as a residence,
    provided the equipment is used exclusively for purposes other than
    heating swimming pools. The proposed nonrefundable credit would be equal
    to 15 percent of the cost of the equipment and its installation; each
    individual taxpayer would be allowed a maximum credit of $2,000 for
    photovoltaic equipment and $2,000 for solar water heating equipment. The
    credit would apply to photovoltaic equipment placed in service after
    December 31, 2003 and before January 1, 2009 and to solar water heating
    equipment placed in service after December 31, 2003 and before January
    1, 2007.
      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, 2003.

      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

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    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, 2003 and before January 1, 2009. 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, 2003 and before
    January 1, 2013. 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, 2003 and before January 1, 2012,
    and sold (or used to produce electricity that is sold) before January 1,
    2012. 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,
    2004, in all other cases.
      Provide tax credit for combined heat and power property.--Combined
    heat and power (CHP) systems are used to produce electricity (and/or
    mechanical power) and usable thermal energy from a single primary energy
    source. Depreciation allowances for CHP property vary by asset use and
    capacity. No income tax credit is provided under current law for
    investment in CHP property. CHP systems utilize thermal energy that is
    otherwise wasted in producing electricity by more conventional methods
    and achieve a greater level of overall energy efficiency, thereby
    lessening the consumption of primary fossil fuels, lowering total energy
    costs, and reducing carbon emissions. To encourage increased energy
    efficiency by accelerating planned investments and inducing additional
    investments in such systems, the Administration is proposing a 10-
    percent investment credit for qualified CHP systems with an electrical
    capacity in excess of 50 kilowatts or with a capacity to produce
    mechanical power in excess of 67 horsepower (or an equivalent
    combination of electrical and mechanical energy capacities). A qualified
    CHP system would be required to produce at least 20 percent of its total
    useful energy in the form of thermal energy and at least 20 percent of
    its total useful energy in the form of electrical or mechanical power
    (or a combination thereof) and would also be required to satisfy an
    energy-efficiency standard. For CHP systems with an electrical capacity
    in excess of 50 megawatts (or a mechanical energy capacity in excess of
    67,000 horsepower), the total energy efficiency would have to exceed 70
    percent. For smaller systems, the total energy efficiency would have to
    exceed 60 percent. Investments in qualified CHP assets that are
    otherwise assigned cost recovery periods of less than 15 years would be
    eligible for the credit, provided that the taxpayer 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, 2003 and before January 1,
    2009.
      Extend 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.

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      Permit electric utilities to defer gain from sales of electric
    transmission property.--Under current law, gain on the sale of business
    assets is subject to current income tax unless a special rule provides
    for nonrecognition or deferral of the gain. To encourage restructuring
    of the electric industry, the Administration proposes to permit electric
    utilities to defer the gain from sales of electric transmission property
    (or an ownership interest in an entity providing electric transmission
    services) to an independent transmission company. For this purpose, an
    independent transmission company would include any regional transmission
    organization, independent system operator, or independent transmission
    company approved by the Federal Energy Regulatory Commission (FERC) and
    certain other persons that place their transmission facilities under the
    control of such a FERC-approved transmission provider. (Similar rules
    would apply in determining whether a sale of facilities subject to the
    jurisdiction of the Texas Public Utility Commission qualifies for
    deferral.) A taxpayer electing deferral under the proposal would
    recognize the gain ratably over the eight-year period beginning with the
    year of sale. Deferral would be available only to the extent the
    taxpayer (or an affiliate) reinvests the amount received for the
    transmission property in other electric or gas utility property. The
    proposal would apply to sales or other dispositions occurring after the
    date of enactment and before January 1, 2007.
      Modify tax treatment of certain income of electric cooperatives.--
    Mutual or cooperative electric companies (electric cooperatives)
    generally are exempt from Federal income tax if at least 85 percent of
    the cooperative's income consists of amounts collected from members for
    the sole purpose of meeting losses and expenses (the 85-percent test).
    Taxable electric cooperatives may exclude from taxable income certain
    profits rebated to patrons. To encourage participation by electric
    cooperatives in electric industry restructuring, the Administration
    proposes that income from the following activities be excluded from the
    85-percent test: (1) providing open access transmission service under a
    tariff filed with FERC (or, if applicable, the Public Utility Commission
    of Texas) or an independent transmission provider agreement approved or
    accepted by FERC (or, if applicable, the Public Utility Commission of
    Texas); (2) providing open access distribution service to end-users
    served by distribution facilities not owned by the cooperative or any of
    its members, or to third parties to deliver electric energy generated by
    a facility not owned or leased by the cooperative or any of its members
    if the facility is directly connected to distribution facilities owned
    by the cooperative or any of its members; (3) certain transfers into
    (and distributions and earnings from) a trust, fund or instrument
    established to pay nuclear decommissioning costs; and (4) certain
    voluntary exchanges or involuntary conversions of property related to
    generating, transmitting, distributing or selling electric energy. The
    Administration also proposes that income from sales of electric energy
    to nonmembers be treated as qualifying member income (and, in the case
    of certain taxable electric cooperatives, excluded from taxable income
    whether or not profits are rebated to patrons) to the extent such sales
    do not exceed the cooperative's load losses during a specified ten-year
    recovery period.

                       SIMPLIFY THE TAX LAWS FOR FAMILIES

      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. The
    proposal would be effective for tax years beginning after December 31,
    2004.
      Simplify adoption tax benefits.--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 2004, the
    limitation on qualified adoption expenses for both the credit and the
    exclusion is $10,390. Taxpayers who adopt children with special needs
    may claim the full $10,390 credit or exclusion even if adoption expenses
    are less than this amount. Taxpayers may carry forward unused credit
    amounts

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    for up to five years. When modified adjusted gross income exceeds
    $155,860 (in 2004), 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 for actual 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-
    related phaseout of the adoption tax credit and exclusion. The proposal
    would be effective for taxable years beginning after December 31, 2004.
    The phaseout of adoption tax benefits increases complexity for all
    taxpayers using the adoption tax provisions, including the vast majority
    who are not affected by the phaseouts; raises marginal tax rates for
    taxpayers in the phase-out range; and with the higher phase-out income
    levels under the 2001 tax cut, affects fewer than 10,000 taxpayers. 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 2001 tax cut provisions permanently.

      Eliminate household maintenance test for head-of-household filing
    status--Unmarried taxpayers who reside with children may qualify as
    heads of household or surviving spouses, which entitles them to a more
    generous standard deduction and rate structure than other unmarried
    filers. To qualify for the more generous provisions, the taxpayer must
    provide over half the costs of maintaining the household. The
    ``household maintenance test'' imposes a significant record-keeping
    burden on taxpayers (who must keep receipts for expenditures on food,
    shelter, utilities, etc.), and it is a difficult test for the IRS to
    administer. Under the proposal, unmarried taxpayers who live with
    children or other related dependents could qualify as heads of household
    even if they do not provide over half the costs of maintaining their
    home. Similarly, recently widowed taxpayers who live with their children
    would not have to meet the complicated household maintenance test in
    order to file as surviving spouses. The proposal would be effective for
    taxable years beginning after December 31, 2004.
      Reduce computational complexity of refundable child tax credit.--
    Taxpayers with earned income in excess of $10,750 may qualify for a
    refundable (or ``additional'') child tax credit even if they do not have
    any income tax liability. About seventy-five percent of additional child
    tax credit claimants also claim the EITC. However, the two credits have
    a different definition of earned income and different U.S. residency
    requirements. In addition, some taxpayers have to perform multiple
    computations to determine the amount of the additional child tax credit
    they can claim. First, they must compute the additional child tax credit
    using a formula based on earned income. Then, if they have three or more
    children, they may recalculate the credit using a formula based on
    social security taxes and claim the higher of the two amounts.
      Under the proposal, the additional child tax credit would use the same
    definition of earned income as is used for the EITC. Taxpayers (other
    than members of the Armed Forces stationed overseas) would be required
    to reside with a child in the United States to claim the additional
    child tax credit (as they are currently required to do for the EITC).
    Taxpayers with three or more children would do only one computation
    based on earned income to determine the credit amount. The proposal
    would be effective for taxable years beginning after December 31, 2004.

      Simplify EITC eligibility requirements regarding filing status,
    presence of children, investment income, and work and immigration
    status.--To qualify for the EITC, taxpayers must satisfy requirements
    regarding filing status, the presence of children in their households,
    investment income, and their work and immigration status in the United
    States. These rules are confusing, require significant record-keeping,
    and are costly to administer. Under the proposal, married taxpayers who
    reside with children could claim the EITC without satisfying a
    complicated household maintenance test if they live apart from their
    spouse for the last six months of the year. In addition, certain
    taxpayers who live with children but do not qualify for the larger
    child-related EITC could claim the smaller EITC for very low-income
    childless workers. The proposal also eliminates the investment income
    test for taxpayers who are otherwise EITC eligible. The proposal would
    also improve the administration of the EITC with respect to eligibility
    requirements for undocumented workers. The proposal is effective for
    taxable years beginning after December 31, 2004.
      Simplify the taxation of dependents (including minor children).--Under
    current law the standard deduction of taxpayers who may be claimed as
    dependents of another taxpayer is the lesser of (1) the standard
    deduction for single taxpayers ($4,850 for 2004, indexed annually); or
    (2) the larger of $800 (for 2004) or the individual's earned income plus
    $250 (for 2004). In addition, special rules (called the ``kiddie tax'')
    apply for minors under age 14 with taxable investment income. Only the
    first $800 (in 2004) of the child's taxable investment income over the
    standard deduction is taxed at the child's tax rate. Taxable investment
    income in excess of $800 is taxed as the marginal income of the

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    parents (or guardian). In certain cases, the parents (or guardian) may
    elect to include the dependent's income on their own tax return. The
    proposal would simplify both the standard deduction for all dependents
    and the ``kiddie tax'' provisions for dependents under age 14. The
    standard deduction for dependent filers would be $800 (indexed after
    2005) plus the amount of the dependent's earned income, not to exceed
    the standard deduction for a non-dependent single filer. For dependents
    under age 14, the first $2,500 (indexed after 2005) of taxable
    investment income and all earned income would be taxed at the child's
    own tax rate. Any taxable investment income above $2,500 would be taxed
    at the highest regular income tax rate (regardless of the parents' tax
    rate). Any capital gains included in taxable investment income above
    $2,500 would be taxed at the highest capital gains tax rate generally
    applicable. The election to include the child's investment income on the
    parents' tax return would be eliminated. Both proposals wold be
    effective for tax years beginning after December 31, 2004.
      Consolidate rules for lifetime learning credit, Hope credit, and
    education expense deductions, and simplify other higher education
    provisions.--Current law allows up to $2,500 of interest on student
    loans to be deducted. The phase-out range for this provision is $50,000
    to $65,000 of modified adjusted gross income (AGI) for single taxpayers
    ($100,000 to $130,000 for joint returns). Current law also allows up to
    $4,000 of qualifying higher education expenses to be deducted for single
    taxpayers whose AGI does not exceed $65,000 ($130,000 for joint
    returns). Taxpayers with higher AGI may deduct up to $2,000 of
    qualifying higher education expenses if their AGI does not exceed
    $80,000 ($160,00 for joint returns). The deduction for higher education
    expenses expires after 2005. For calendar year 2004, both the Hope
    credit and lifetime learning credit begin to phase out at $42,000 of
    modified AGI ($83,00 for joint returns). Taxpayers may claim the HOPE
    credit for more than one qualifying student. In contrast, the lifetime
    learning credit is applied on a per-taxpayer rather than a per-student
    basis.
      Under the Administration's proposal the lifetime learning credit would
    be revised to subsume the deductions for student loan interest and
    qualified higher education expenses by allowing the credit on a per-
    student basis, treating up to $2,500 of interest on student loans as a
    qualified expense, raising the beginning of the phase-out range to
    $50,000 ($100,000 for joint returns) and reducing the otherwise allowed
    credits by 5 percent of the extent to which modified AGI exceeds the new
    AGI thresholds. The temporary, above-the-line deduction for higher
    education expenses and the deduction for student loan interest would be
    repealed. The dollar limits of the revised lifetime learning credit and
    the Hope credit would be indexed. The phase-out rules for the Hope
    credit would be conformed to those of the revised lifetime learning
    credit.
      The definition of qualified higher education expenses and qualified
    higher education institution would be made uniform by extending the
    definitions currently used in connection with Hope and lifetime learning
    credits and tuition deductions to other provisions of the IRS Code
    related to higher education. The definition of ``special needs
    services,'' as referenced under current law with regard to distributions
    from Coverdell education savings accounts and qualified tuition
    programs, would be clarified. The exclusion from income for scholarships
    and fellowships would be clarified by reference to the allowance for
    books, supplies, and equipment included in an institution's cost of
    attendance for student aid purposes. The current-law phaseout of the
    maximum contribution that can be made to a Coverdell education savings
    account would be repealed.

      Allow annual reporting and payment of combined State and Federal
    unemployment insurance taxes by employers of household employees.--
    Employers of household employees must separately pay Federal and State
    unemployment insurance for their employees. Because it is burdensome for
    employers of household employees to report and pay these taxes
    separately, the wages of household employees are often improperly
    reported. The Administration proposes to reduce this burden by requiring
    that employers of household employees annually report and pay a combined
    Federal and State unemployment tax to the Federal government. This would
    also reduce the administrative costs incurred by State unemployment
    insurance agencies, which are currently very large relative to the taxes
    collected and are ultimately borne by the Federal government.
    Unemployment benefits for household employees would continue to be paid
    by the States and reimbursed by the Federal government.
      Simplify taxation of capital gains on collectibles, small business
    stock, and other assets.--Under current law, special tax rates apply to
    certain capital gains. Unrecaptured Section 1250 gains, which represent
    the portion of gain on real property previously deducted as straight-
    line depreciation, are taxed at ordinary rates up to a maximum rate of
    25 percent. Collectibles are taxed at ordinary rates with a maximum rate
    of 28 percent. Gains from the sale of certain small business stock
    qualify for a 50-percent exclusion subject to a 28 percent maximum rate,
    resulting in a maximum effective rate of 14 percent (Section 1202).
    Subject to certain requirements, gains on small business stock can be
    deferred if the proceeds of the sale are re-invested in other small
    business stock (Section 1045). Schedule D and the associated forms and
    instructions are more complicated than necessary because of these
    special rates that apply in only a small fraction of cases. The
    Administration proposal would simplify capital gains tax provisions so
    as to allow all gains to be taxed at the basic capital gains or ordinary
    tax rates. Under the proposal, 50 percent of capital gains on
    collectibles would be taxed as short-term gains and the other 50 percent
    would be taxed as long-term gains. In addition, 50 percent of
    unrecaptured Section 1250 gains would be taxed as ordinary income and
    the other

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    50 percent would be taxed as long-term gains. The 50 percent exclusion
    for gain recognized on the sale of certain small business stock under
    section 1202 and the rollover of gain recognized on the sale of certain
    small business stock under section 1045 would be repealed. Modifying
    these three provisions would allow capital gains forms and instructions
    to be simplified, benefitting all taxpayers with capital gains. These
    provisions would be effective on the date of enactment.

                  STRENGTHEN THE EMPLOYER-BASED PENSION SYSTEM

      Ensure fair treatment of older workers in cash balance conversions and
    protect defined benefit plans.--Qualified retirement plans consist of
    defined benefit plans and defined contribution plans. In recent years,
    many plan sponsors have adopted cash balance and other ``hybrid'' plans
    that combine features of defined benefit and defined contribution plans.
    A cash balance plan is a defined benefit plan that provides for annual
    ``pay credits'' to a participant's ``hypothetical account'' and
    ``interest credits'' on the balance in the hypothetical account.
    Questions have been raised about whether such plans satisfy the rules
    relating to age discrimination and the calculation of lump sum
    distributions. The Administration proposes to (1) ensure fairness for
    older workers in cash balance conversions, (2) protect the defined
    benefit system by clarifying the status of cash balance plans, and (3)
    remove the effective ceiling on interest credits in cash balance plans.
    All changes would be effective prospectively.
      Improve the accuracy of pension liability measures.--Current law
    requires that employers use discount rates based on the interest rate on
    30-year Treasury securities when making certain pension calculations.
    Use now of the 30-year Treasury bond interest rate artificially inflates
    pension liabilities and adversely affects employers offering defined
    benefit pension plans and working families who rely on the safe and
    secure benefits these plans provide. Effective for plan years beginning
    after December 31, 2003 and before January 1, 2006, the Administration
    proposes to replace the use of discount rates based on the interest rate
    on 30-year Treasury securities with a rate based on a composite of long-
    term corporate bond rates. Effective for plan years beginning after
    December 31, 2005, the Administration proposes to phase in the permanent
    use of a spot yield curve of high-grade corporate bonds to measure the
    value of pension liabilities and lump sums, with full implementation for
    plan years beginning after December 31, 2007. The yield curve is more
    accurate than any single rate because it ties pension-funding
    requirements to the timing of the payout of pension benefits.
    Additionally, the Administration proposes changes to restrict promises
    of added benefits by severely underfunded pension plans and to provide
    better information on pension finances to workers, retirees, and
    stockholders.

                   CLOSE LOOPHOLES AND IMPROVE TAX COMPLIANCE

      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 limited 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 as well as regulatory
    authority in order to prevent the inappropriate separation of foreign
    taxes from the related foreign income in cases where taxes are imposed
    on any person in respect of income of an entity. 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-to-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 or paid to an unrelated
    party but guaranteed by 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 reduce inappropriately 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) as follows: (1) The current law 1.5 to 1 debt-to-equity
    safe harbor would be eliminated; (2) the

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    adjusted taxable income threshold for the limitation would be reduced
    from 50 percent to 25 percent of adjusted taxable income with respect to
    disqualified interest other than interest paid to unrelated parties on
    debt that is subject to a related-party guarantee, which generally would
    remain subject to the current law 50 percent threshold; and (3) the
    indefinite carryforward for disallowed interest would be limited to ten
    years and the three-year carryforward of excess limitation would be
    eliminated.
      Modify qualification rules for tax-exempt property-casualty insurance
    companies.--A property-casualty insurance company with $350,000 or less
    of annual premiums is exempt from tax. A company with annual premiums
    that exceed $350,000, but that do not exceed $1,200,000, may elect to be
    taxed only on its investment income. Premiums of companies that are
    members of the same controlled group (except for tax-exempt and foreign
    companies) are aggregated for making these determinations. The
    Department of Treasury has become aware that certain entities
    established as insurance companies have limited their premium receipts,
    claimed tax-exempt status, and are accumulating investment income tax-
    free. These actions represent a misuse of the tax-exemption and violate
    the original intent of the exemption, which was to assist small mutual
    insurers. The Administration proposes that the tax exemption for
    property-casualty insurance companies apply only to mutual property-
    casualty insurance companies with no more than $350,000 in annual gross
    income. In addition, the proposal would provide that tax exemption is
    available only for a domestic mutual property-casualty insurance
    company, which is organized within, and subject to regulation within, a
    single State, and which only writes insurance or reinsurance contracts
    on risks located within that same State. The proposal would also clarify
    the rules for determining whether a property-casualty insurance company
    is an insurance company for U.S. tax purposes, and would grant the
    Secretary of the Treasury discretion to develop appropriate reporting
    requirements to assure compliance with these rules. The election that
    allows a small property-casualty insurer to be taxed only on investment
    income would remain available to any property-casualty insurance company
    with annual premiums up to $1,200,000. For purposes of determining
    eligibility for these provisions, the proposal would aggregate amounts
    received by members of the same controlled group, including foreign and
    tax-exempt entities.
      Increase penalties for false or fraudulent statements made to promote
    abusive tax avoidance transactions.--Under current law, a penalty is
    imposed if a person makes or furnishes a false or fraudulent statement
    in connection with promotion of an interest in a tax shelter. The amount
    of the penalty is the lesser of $1,000 or 100 percent of the gross
    income derived by the person from the organization, participation, or
    promotion of the tax shelter. This penalty amount is insufficient to
    deter tax shelter promoters from making false or fraudulent statement
    regarding the purported benefits of an abusive transaction. The
    Administration therefore proposes to increase the penalty to 50 percent
    (or $1,000, if greater) of the income derived by the person making or
    furnishing the false statement in connection with the promotion of a tax
    shelter.
      Prevent abusive overvaluations on donations of patents and other
    intellectual property.--Under current law, a taxpayer may claim a
    deduction for charitable contributions, subject to certain limitations
    based on the type of taxpayer, the property contributed and the type of
    donee organization. In the case of non-cash contributions, the amount of
    the deduction generally equals the fair market value of the contributed
    property on the date of the contribution. The Administration is
    concerned that some taxpayers are claiming substantially inflated
    deductions for donations of patents and similar intellectual property to
    charities. To address these valuation issues, the Administration
    proposes to allow a taxpayer who contributes a patent or other
    intellectual property (other than certain copyrights) to charity to
    deduct up front the lesser of the taxpayer's basis in the donated
    property or the fair market value of the property. In future years, the
    taxpayer would be permitted to deduct additional amounts based on the
    amount of royalties or other revenue, if any, actually received by the
    donee charity from the donated property. No additional deduction would
    be permitted after ten years or after the expiration of a patent. The
    taxpayer would be required to obtain written substantiation from the
    donee of the amount of revenue derived from the donated property during
    the year. The proposed changes would be effective for taxable years
    beginning after December 31, 2003.
      Prevent overvaluations and other abuses in charitable donations of
    used vehicles.--Under current law, a taxpayer may claim a deduction for
    charitable contributions of tangible personal property subject to
    certain limitations based on the type of taxpayer, the type of donee
    organization, and the use of the property by the donee organization.
    Except for inventory property, the amount of the deduction equals the
    fair market value of the contributed property if the use of the property
    by the donee is related to its exempt purpose or function. However, the
    amount of the deduction is limited to the lesser of the taxpayer's basis
    in the property (typically cost) or fair market value when the use of
    the property by the donee is unrelated to the donee's exempt purposes.
    As a practical matter, taxpayers are generally permitted to deduct the
    fair market value of donated vehicles, regardless of whether the vehicle
    is actually used for a charitable purpose or re-sold with the charity
    receiving some revenue from the sale. A taxpayer who donates a used car
    to charity and claims a deduction of less that $5,000 is permitted to
    use established used car pricing guides to determine fair market value,
    but only if the guide lists a sales

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    price for a car of the same make, model, and year, sold in the same
    area, and in the same condition as the donated car. The Administration
    is concerned that the amount of the deduction claimed by taxpayers often
    exceeds the fair market value of the donated vehicles because taxpayers
    often use published values for cars in better condition than the donated
    vehicle. To curtail the problem of excessive donations being claimed for
    donated vehicles, the Administration proposes to allow a charitable
    deduction for contributions of vehicles only if the taxpayer obtains a
    qualified appraisal of the vehicle. The Department of Treasury would be
    permitted to establish an administrative safe harbor in published
    guidance. The proposal would not affect the rules governing charitable
    contributions of inventory property. The proposal would be effective for
    taxable years beginning after December 31, 2003.
      Reform the tax treatment for leasing transactions with tax-indifferent
    parties.--Certain leasing transactions (often referred to as sale-in/
    lease-out or SILO transactions) involving tax-indifferent parties
    (including governments, charities, and foreign entities) do not provide
    financing related to the construction, purchase or refinancing of
    productive assets. Rather, they involve the payment of an accommodation
    fee by a U.S. taxpayer to the tax-indifferent party in exchange for the
    right of the U.S. taxpayer to claim tax benefits from the purported tax
    ownership of the property. These arrangements usually result in no
    change in the tax-indifferent party's use or operation of the property,
    and are designed to ensure that the U.S. taxpayer bears only limited
    economic risk. The U.S. taxpayer enjoys substantial current tax
    deductions, while postponing the recognition of taxable income well into
    the future. The Administration proposes to limit a taxpayer's annual
    deductions or losses related to a lease with a tax-indifferent party to
    the taxable income earned from the transaction for the taxable year.
    This limitation would apply to all deductions related to the lease. Any
    disallowed deductions would be carried forward and treated as deductions
    related to the lease in the next taxable year, subject to the same
    limitations. When a taxpayer completely disposes of its interest in the
    leased property, the taxpayer would be allowed to take previously
    disallowed deductions and losses. The proposal would exclude from these
    rules certain short-term leases with terms of three or fewer years,
    qualified asset leases, and other leases subsequently identified in
    published guidance. The proposal also clarifies that the depreciation
    recovery period for all depreciable or amortizable property leased to a
    tax-indifferent entity is the longer of the property's assigned class
    life or 125 percent of the lease term. For this purpose, the lease term
    would include service contracts and other arrangements that currently
    are used to shorten the stated lease term and thus, the asset's cost
    recovery period.

      Ensure foreign subsidiaries of U.S. companies cannot inappropriately
    avoid U.S. tax on foreign earnings invested in U.S. property through use
    of the exception for bank deposits.--Under current law, U.S.
    shareholders of a controlled foreign corporation must include in income
    their pro rata share of its earnings that are invested in certain U.S.
    property. Deposits with persons carrying on the banking business are
    excluded from the definition of U.S. property subject to this rule.
    Concern has arisen that this exception is being interpreted so as to
    reach results that are not consistent with the underlying policy. Under
    the Administration's proposal, the exception for deposits with persons
    carrying on the banking business would be modified to eliminate this
    potential for abuse.
      Modify tax rules for individuals who give up U.S. citizenship or green
    card status .--If an individual gives up U.S. citizenship, or terminates
    long-term U.S. residency, with a principal purpose of avoiding U.S. tax,
    the individual is subject to an alternative tax regime for 10 years
    following the individual's loss of citizenship or termination of
    residency. The Administration proposes to improve compliance with the
    tax rules applicable to individuals who expatriate by modifying the
    current-law alternative tax regime as follows: (1) The subjective
    ``principal purpose'' test of current law would be replaced with an
    objective test; (2) individuals who expatriate would continue to be
    taxed as U.S. citizens or residents until they give notice of the
    expatriating act or termination of residency; (3) special rules would be
    provided for individuals subject to the alternative tax regime who are
    physically present in the U.S. for more than 30 days in a calendar year
    during the 10-year period following expatriation; (4) certain gifts of
    stock of closely-held foreign corporations by a former citizen or former
    long-term resident would be subject to U.S. gift tax; and (5) annual
    reporting would be required for individuals subject to the alternative
    tax regime following expatriation.
      Expand tax shelter exception for Federal practitioner privelege.--In
    general, a common law privilege of confidentiality exists for attorney-
    client communications with respect to legal advice. Communications
    relating to Federal tax advice between a taxpayer and a Federally
    authorized tax-practitioner (who may not be an attorney) are protected
    by a statutory confidentiality privilege to the same extent that the
    communication would be considered a privileged communication if it were
    between a taxpayer and an attorney. Written communications relating to
    corporate tax shelters are not covered by the statutory privilege. The
    exception to the privilege for communications relating to corporate tax
    shelters should be expanded to all tax shelters, regardless of whether
    or not the participant is a corporation. The Administration therefore
    proposes to modify the Federal tax practitioner privilege by expanding
    the tax shelter exception to cover written communication relating to any
    tax shelter.

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      Extend the statute of limitations for undisclosed reportable
    transactions.--In general, taxes cannot be assessed or collected unless
    an assessment is made within three years after a return is filed. If a
    taxpayer omits an item of gross income totaling more than 25 percent of
    the amount of gross income shown on the return, the statute of
    limitations is extended to six years. Extending the statute of
    limitations for transactions that are not disclosed properly on a return
    will encourage taxpayers to make the required disclosures and will
    provide the IRS with the time necessary to examine these transactions.
    The Administration proposes to extend the statue of limitations for
    taxpayers who fail to disclose reportable transactions until one year
    after the earlier of the date on which the taxpayer provides the
    required disclosures or the date on which the taxpayer's material
    advisor satisfies certain requirements relating to the maintenance of
    lists. The statute would be extended only with respect to any
    underpayment arising from the undisclosed transaction, and the proposal
    would not shorten any otherwise applicable statute of limitation.
      Require increased reporting for noncash charitable contributions.--
    Under current law, any individual, closely-held corporation, or personal
    service corporation claiming a charitable contribution deduction for a
    contribution of property (other than publicly-traded securities) of more
    than $5,000 ($10,000 in the case of nonpublicly traded stock) must
    obtain a qualified appraisal for the property contributed. However, C
    corporations (other than personal service corporations and closely-held
    corporations) are not required to obtain a qualified appraisal. In order
    to reduce valuation abuses and assist the IRS in administering the tax
    laws, the Administration proposes to require all taxpayers to obtain a
    qualified appraisal for property (other than inventory property and
    publicly-traded securities) donated to charity if the deduction claimed
    exceeds $5,000. In addition, if the deduction claimed exceeds $500,000,
    the taxpayer would be required to provide a copy of the qualified
    appraisal or an executive summary of the qualified appraisal to the IRS.
    The proposal would be effective for taxable years beginning after
    December 31, 2003.
      Clarify and simplify qualified tuition programs.--Current law provides
    special tax treatment for contributions to and distributions from
    qualified tuition programs under Section 529. The purpose of these
    programs is to encourage saving for the higher education expenses of
    designated beneficiaries. However, current law is unclear in certain
    situations with regard to the transfer tax consequences of changing the
    designated beneficiary of a qualified tuition program. In addition,
    current law may afford significant potential for transfer tax abuse
    through the use of these programs. The Administration's proposal would
    simplify the tax consequences under these programs, promote the
    educational purposes for which these programs were intended, and
    significantly reduce the opportunities for tax abuse.
      Under the Administration's proposal, contributions to qualified
    tuition programs would be treated as completed gifts to the designated
    beneficiary. There would be no gift tax consequences to a distribution
    from, or a change in the designated beneficiary of, a qualified tuition
    program. As long as the funds are used for qualified higher education
    expenses, the income tax benefits under current law would be available,
    regardless of the identity of the designated beneficiary. The income
    portion of distributions not used for qualified higher education
    expenses would continue to be subject to income tax, as well as a 10
    percent penalty, if applicable. The principal portion of any
    distribution from a qualified tuition program that is not used for
    higher education expenses would be subject to a new excise tax (payable
    from the account) once the cumulative amount of these distributions
    exceeds a stated amount per beneficiary. In addition, the excise tax
    would not apply to certain distributions made as a result of the
    beneficiary's death, disability, or receipt of a scholarship. New
    limitations would restrict designated beneficiaries to individuals under
    35 years of age and would prohibit distributions to or for the benefit
    of any person other than the designated beneficiary of the program. The
    proposal also includes revised reporting requirements and special rules
    for trusts or other entities contributing to a qualified tuition
    program. The proposal would be effective for contributions made to
    qualified tuition programs after the date of enactment.

              TAX ADMINISTRATION, UNEMPLOYMENT INSURANCE, AND OTHER

                           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 re

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    quirement 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
    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 to April 30th, provided
    that any tax due also is paid electronically. This proposal would
    encourage more taxpayers to file electronically and allow the IRS to
    process more returns and payments efficiently.
      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 IRS 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 Treasury Secretary 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.
      Increase continuous levy for certain Federal payments.--Under current
    law, the IRS is authorized to levy continuously up to 15 percent of
    specified Federal payments to collect outstanding tax obligations. Many
    Federal payments, such as salary, retirement, and benefit payments are
    regularly recurring payments that can be levied continuously until the
    outstanding tax obligation is satisfied. Other Federal payments, such as
    those to vendors for goods or services, are not regularly recurring and
    present fewer opportunities for collection. The Administration therefore
    proposes to allow the IRS to levy continuously up to 100 percent of
    Federal payments to vendors.
      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 pursue continually
    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
    rights. The IRS would be required to monitor closely 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.

            Strengthen Financial Integrity of Unemployment Insurance

      Strengthen the financial integrity of the unemployment insurance
    system by reducing tax avoidance and improper benefit payments.--Under
    current law, State unemployment insurance (UI) taxes are deposited into
    the Federal Unemployment Trust Fund and used by States to pay
    unemployment benefits. In order to receive full credit against Federal
    unemployment taxes, Federal law requires that employers' State tax rates
    be based in part on the unemployment experience of each employer. In
    general, the more unemployment benefits paid to former employees, the
    higher the tax rate of the employer. This feature of State tax law is
    commonly known as ``experience rating.'' The Administration has a three-
    pronged proposal to strengthen the financial integrity of the UI system,
    including: Curtailing tax avoidance by certain unscrupulous employers
    who successfully manipulate their ``experience rating;'' reducing UI
    benefit overpayments; and improving collection of past overpayments. The
    proposal would require States to amend their UI tax laws to deter
    schemes to manipulate experience rates through such means as transfers
    of businesses to shell companies. In addition, the proposal would help
    reduce UI benefit overpayments by providing State UI agencies with
    access to information from the National Directory of New Hires for the
    quick detection of individuals who illegally collect unemployment
    benefits after returning to work. Finally, the proposal would help
    States collect more delinquent UI benefit overpayments through offsets
    of individuals' Federal income tax refunds. Many States already do this
    through their own State income tax system. These efforts to strengthen
    the financial integrity of the UI system will also help keep State UI
    taxes down and improve the solvency of State trust funds.

                                 Other Proposals

      Increase Indian gaming activity fees.--The National Indian Gaming
    Commission regulates and mon

    [[Page 262]]

    itors 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.

                 REAUTHORIZE FUNDING FOR THE HIGHWAY TRUST FUND

      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.
      Impose additional registration requirements on the transfer of tax-
    exempt fuel by pipeline, vessel, or barge.--Fuel tax evasion results in
    a substantial amount of lost revenue to the Highway Trust Fund. To
    prevent or reduce evasion of highway fuel taxes and to improve their
    collection, the Administration proposes the following changes, effective
    November 1, 2004: (1) To qualify for the fuel tax exemption provided to
    bulk transfers of taxable fuel to registered terminals or refineries,
    the fuel would have to be transferred by registered pipeline, vessel, or
    barge; (2) proof of registration would be required to be displayed on
    any vessel or barge used to transport taxable fuel; and (3) new
    penalties would be imposed for failure to comply with registration and
    display of proof of registration requirements. The penalty for failure
    to register would be $1,000 per day; the penalty for failure to display
    proof of registration would be $500 per day.
      Repeal installment method for payment of heavy highway vehicle use
    tax.--The Administration proposes to repeal the current law provision
    that allows owners of heavy highway vehicles to pay the highway use tax
    in quarterly installments. Effective July 1, 2004, owners would be
    required to pay the annual tax in full with their returns. Installment
    payments have provided an opportunity for tax evasion by allowing owners
    to register vehicles for the entire tax year after payment of only the
    first installment of the annual tax.
      Allow tax-exempt financing for private highway projects and rail-truck
    transfer facilities.--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. The
    Administration proposes to provide authority to issue an aggregate of
    $15 billion of tax-exempt private activity bonds beginning in 2004 for
    the development of highway facilities and surface freight transfer
    facilities. Highway facilities eligible for financing would consist of
    any surface transportation project eligible for Federal assistance under
    Title 13 of the United States Code, or any project for an international
    bridge or tunnel for which an international entity authorized under
    Federal or State law is responsible. Surface freight transfer facilities
    would consist of facilities for the transfer of freight from truck to
    rail or rail to truck, including any temporary storage facilities
    directly related to those transfers. The Secretary of Transportation
    would allocate the $15 billion, which would not be subject to the
    aggregate annual state private activity bond volume limit, among
    competing projects.

                           EXTEND EXPIRING PROVISIONS

      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 subjects 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 new saver credit, the earned income credit or the adoption
    credit, which were provided AMT relief through December 31, 2010 under
    the 2001 tax cut. 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 $40,250 for single taxpayers, $58,000 for married taxpayers
    filing a joint return and surviving spouses, and $29,000 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

    [[Page 263]]

    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.
      The design of the AMT causes it increasingly to extend to middle-
    income taxpayers. The AMT's original focus, however, was on high-income
    taxpayers who have arranged their affairs to eliminate most or all
    Federal income taxes. Although temporary changes have and will continue
    to address this issue for the near term, long-term change is needed. The
    Treasury Department has been directed to study the AMT with the goal of
    producing a long-term solution.

      Extend permanently the research and experimentation (R&E) tax
    credit.--The Administration proposes to extend permanently 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.
      In addition, the Administration is concerned that features of the R&E
    credit may limit its effectiveness in encouraging taxpayers to invest in
    R&E. Consequently, the Treasury Department has been directed to study
    how the credit can be restructured to make it more effective. The
    Administration will work closely with the Congress to develop and enact
    reforms to rationalize the R&E credit and to improve its incentive
    effect.

      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. Section
    809 has been criticized as being theoretically unsound, overly complex,
    inaccurate in its measurement of income, unfair, and increasingly
    irrelevant. The 2002 economic stimulus bill suspended the operation of
    section 809 for three years, 2001 through 2003. The Administration
    proposes to repeal section 809.
      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 periods 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 retroactively (provided specified
    filing deadlines are met) to individuals who begin work after December
    31, 2003 and before January 1, 2006.

      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 tax

    [[Page 264]]

    payers 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.
      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 the 2002 economic stimulus bill, 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 up
    to 100 percent of a taxpayer's AMTI.
      Extent permanently IRS user fees.--The Administration proposes to
    extend permanently 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 December 31, 2004.
      Extend provisions permitting disclosure of tax return information
    relating to terrorist activity.--Current law permits disclosure of tax
    return information relating to terrorism in two situations. The first is
    when an executive of a Federal law enforcement or intelligence agency
    has reason to believe that the return information is relevant to a
    terrorist incident, threat or activity and submits a written request.
    The second is when the IRS wishes to apprise a Federal law enforcement
    agency of a terrorist incident, threat or activity. The Administration
    proposes to extend this disclosure authority, which expired on December
    31, 2003, through December 31, 2004.
      Extend abandoned mine reclamation fees.--Collections from abandoned
    mine reclamation fees are allocated to States and Tribes 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 at a reduced rate. The
    Administration also proposes to modify the authorization language to
    allocate more of the receipts collected toward restoration of abandoned
    coal mine land.
      Extend authority to issue Liberty Zone Bonds.--The 2002 economic
    stimulus bill provided authority to issue an aggregate of $8 billion of
    tax-exempt private activity bonds 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. Authority to issue
    these bonds, which are not subject to the aggregate annual State private
    activity bond volume limit, is proposed to be extended through calendar
    year 2009.
      Extend excise tax on coal at current rates.--Excise taxes levied on
    coal mined and sold for use in the United States are deposited in the
    Black Lung Disability Trust Fund. Amounts deposited in the Fund are used
    to cover the cost of program administration and compensation, medical,
    and survivor benefits to eligible miners and their survivors, when mine
    employment terminated prior to 1970 or when no mine operator can be
    assigned liability. Current tax rates on coal sold by a producer are
    $1.10 per ton of coal from underground mines and $.55 per ton of coal
    from surface mines; however, these rates may not exceed 4.4 percent of
    the price at which the coal is sold. Effective for coal sold after
    December 31, 2013, the tax rates on

    [[Page 265]]

    coal from underground mines and surface mines will decline to $.50 per
    ton and $.25 per ton, respectively, and will be capped at 2 percent of
    the price at which the coal is sold. The Administration proposes to
    repeal the reduction in these tax rates effective for sales after
    December 31, 2013, and keep current rates in effect until the Black Lung
    Disability Trust Fund debt is repaid.

                                  PROMOTE TRADE

      Implement free trade agreements with Morocco, Australia, and Central
    American countries.--Free trade agreements are expected to be completed
    with Morocco, Australia, and Central American countries in 2004, with
    ten-year implementation to begin in fiscal year 2005. These agreements
    will benefit U.S. producers and consumers, as well as strengthen the
    economies of Morocco, Australia, and Central America.

                            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 of the Internal Revenue Code 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 must 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. Thus, the Administration believes
    the necessary repeal of the ETI provisions must be coupled with other
    tax law changes that promote the competitiveness of American
    manufacturers and other job-creating sectors of the U.S. economy. Tax
    law changes that would provide a benefit to these contributors to the
    U.S. economy include corporate tax rate reduction, alternative minimum
    tax reform, extension of net operating loss carryback rules, expansion
    and permanence of the research credit, improvements in depreciation
    rules, business tax simplification, and rationalization of the
    international tax rules. The Administration intends to work closely with
    the Congress on prompt enactment of legislation that brings our tax law
    into compliance with WTO rules and makes changes to the tax law to
    enhance the competitiveness of American businesses and the workers they
    employ. The Administration believes this legislation should achieve
    these objectives on as close to a budget neutral basis as possible.

                                                          Table 16-3.  EFFECT OF PROPOSALS ON RECEIPTS
                                                                    (in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       2004       2005       2006       2007       2008       2009     2005-09     2005-14
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Make Permanent The Tax Cuts Enacted in 2001 and 2003 (assumed
     in the baseline):
      Extend through 2010 certain provisions of the 2003 jobs
        and growth tax cut:
          Child tax credit \1\....................................  .........     -2,166     -8,930     -9,023     -9,067     -8,325    -37,511      -42,079
          Marriage penalty relief.................................  .........     -5,318     -6,634     -3,883     -1,850       -423    -18,108      -18,108
          10-percent individual income tax rate bracket...........  .........     -4,005     -5,981     -6,435     -4,036     -2,956    -23,413      -27,343
                                                                   -----------------------------------------------------------------------------------------
            Total extend through 2010 certain provisions of the
              2003 jobs and growth tax cut........................  .........    -11,489    -21,545    -19,341    -14,953    -11,704    -79,032      -87,530
      Extend permanently certain provisions of the 2001 tax
        cut and the 2003 jobs and growth tax cut:
          Dividends tax rate structure............................  .........        498        486        485        642    -17,272    -15,161      -81,280
          Capital gains tax rate structure........................  .........  .........  .........  .........     -5,268     -7,366    -12,634      -49,970
          Expensing for small business............................  .........        226     -3,336     -5,711     -4,102     -3,205    -16,128      -24,798
          Marginal individual income tax rate reductions..........  .........  .........  .........  .........  .........  .........  .........     -395,269
          Child tax credit \2\....................................  .........  .........  .........  .........  .........  .........  .........      -72,786
          Marriage penalty relief \3\.............................  .........  .........  .........  .........  .........  .........  .........      -32,426
          Education incentives....................................  .........        -11        -16        -22        -24        -37       -110       -6,758
          Repeal of estate and generation-skipping
            transfer taxes, and modification of gift taxes........  .........     -1,000     -1,609     -1,732     -1,977     -2,244     -8,562     -180,111
          Modifications of pension plans..........................  .........  .........  .........  .........  .........  .........  .........       -1,804
          Other incentives for families and children..............  .........  .........  .........  .........  .........  .........  .........       -3,531
                                                                   -----------------------------------------------------------------------------------------
            Total extend permanently certain provisions of the
             2001
              tax cut and the 2003 jobs and growth tax cut........  .........       -287     -4,475     -6,980    -10,729    -30,124    -52,595     -848,733
                                                                   -----------------------------------------------------------------------------------------
                Total make permanent the tax cuts enacted in
                  2001 and 2003...................................  .........    -11,776    -26,020    -26,321    -25,682    -41,828   -131,627     -936,263

    Tax Incentives:
        Simplify and encourage saving:
          Expand tax-free savings opportunities...................  .........      3,949      8,192      5,488      2,798        685     21,112        5,558
          Consolidate employer-based savings accounts.............  .........       -214       -318       -337       -358       -380     -1,607      -11,763
          Establish Individual Development Accounts (IDAs)........  .........       -134       -286       -326       -300       -255     -1,301       -1,380
                                                                   -----------------------------------------------------------------------------------------

    [[Page 266]]

              Total simplify and encourage saving.................  .........      3,601      7,588      4,825      2,140         50     18,204       -7,585
        Invest in health care:
          Provide refundable tax credit for the purchase of health
            insurance \4\.........................................  .........        -24     -1,417     -1,059       -854       -632     -3,986       -4,700
          Provide an above-the-line deduction for high-deductible
            insurance premiums....................................  .........       -173     -1,764     -2,014     -2,292     -2,501     -8,744      -24,775
          Provide an above-the-line deduction for long-term care
            insurance premiums....................................  .........        -68       -489       -805     -1,572     -2,435     -5,369      -21,428
          Provide an additional personal exemption to home
           caregivers
            of family members.....................................  .........        -71       -460       -398       -398       -415     -1,742       -3,759
          Allow the orphan drug tax credit for certain pre-
           designation
            expenses..............................................  .........  .........  .........  .........  .........  .........         -1           -2
          Clarify the Health Coverage Tax Credit \5\..............  .........  .........  .........  .........  .........  .........  .........  ...........
                                                                   -----------------------------------------------------------------------------------------
              Total invest in health care.........................  .........       -336     -4,130     -4,276     -5,116     -5,983    -19,841      -54,662
        Provide incentives for charitable giving:
          Provide charitable contribution deduction for             .........     -1,248     -1,103     -1,111     -1,144     -1,173     -5,779      -12,036
           nonitemizers...........................................
          Permit tax-free withdrawals from IRAs for charitable
            contributions.........................................        -68       -450       -341       -327       -330       -329     -1,777       -3,498
          Expand and increase the enhanced charitable deduction
            for contributions of food inventory...................  .........        -42        -87        -96       -106       -116       -447       -1,224
          Reform excise tax based on investment income of private
            foundations...........................................  .........       -133        -83        -84        -86        -90       -476       -1,009
          Modify tax on unrelated business taxable income of
            charitable remainder trusts...........................  .........         -8         -5         -6         -6         -6        -31          -68
          Modify basis adjustment to stock of S corporations
            contributing appreciated property.....................  .........        -21        -13        -15        -18        -21        -88         -239
          Repeal the $150 million limitation on qualified
            501(c)(3) bonds.......................................  .........         -8        -10        -11        -10        -10        -49          -94
          Repeal certain restrictions on the use of qualified
            501(c)(3) bonds for residential rental property.......  .........         -5         -6        -12        -18        -25        -66         -299
                                                                   -----------------------------------------------------------------------------------------
              Total provide incentives for charitable giving......        -68     -1,915     -1,648     -1,662     -1,718     -1,770     -8,713      -18,467
        Strengthen education:
          Extend, increase, and expand the above-the-line
           deduction
            for qualified out-of-pocket classroom expenses........        -23       -229       -240       -249       -260       -263     -1,241       -2,611
        Encourage telecommuting:
          Exclude from income the value of employer-provided
            computers, software, and peripherals..................  .........        -27        -45        -43        -48        -55       -218         -668
        Increase housing opportunities:
          Provide tax credit for developers of affordable single-
           family
            housing...............................................  .........         -7        -81       -327       -776     -1,352     -2,543      -16,409
        Protect the environment:
          Extend permanently expensing of brownfields remediation
            costs.................................................       -178       -243       -212       -201       -191       -181     -1,028       -1,858
          Exclude 50 percent of gains from the sale of property
           for
            conservation purposes.................................  .........        -45        -88       -101        -58  .........       -292         -292
                                                                   -----------------------------------------------------------------------------------------
              Total protect the environment.......................       -178       -288       -300       -302       -249       -181     -1,320       -2,150
        Increase energy production and promote energy
          conservation:
          Extend and modify the tax credit for producing
           electricity
            from certain sources..................................  .........       -401       -337       -305       -278       -139     -1,460       -2,175
          Provide tax credit for residential solar energy systems.  .........        -12        -11        -17        -23        -10        -73          -73
          Modify treatment of nuclear decommissioning funds.......  .........       -193       -147       -154       -162       -169       -825       -1,767
          Provide tax credit for purchase of certain hybrid and
           fuel
            cell vehicles.........................................  .........        -79       -223       -376       -556       -542     -1,776       -2,211
          Provide tax credit for energy produced from landfill gas  .........        -34        -67        -91       -104       -117       -413         -737
          Provide tax credit for combined heat and power property.  .........       -154       -107        -64        -62        -13       -400         -349
          Extend excise tax exemption (credit) for ethanol \5\....  .........  .........  .........  .........  .........  .........  .........  ...........
          Permit electric utilities to defer gain from sales of
           electric
            transmission property.................................        -11       -475       -615       -532       -227        100     -1,749          361
          Modify tax treatment of certain income of electric
            cooperatives..........................................  .........        -14        -20        -21        -22        -23       -100         -235
                                                                   -----------------------------------------------------------------------------------------
              Total increase energy production and promote
                energy conservation...............................        -11     -1,362     -1,527     -1,560     -1,434       -913     -6,796       -7,186
                                                                   -----------------------------------------------------------------------------------------
                  Total tax incentives............................       -280       -563       -383     -3,594     -7,461    -10,467    -22,468     -109,738

    [[Page 267]]

    Simplify the Tax Laws for Families:
        Establish uniform definition of a qualifying child \6\....  .........        -38        -34        -29        -20         -9       -130         -142
        Simplify adoption tax benefits............................  .........         -4        -39        -40        -42        -43       -168         -411
        Eliminate household maintenance test for head-of-household
          filing status...........................................  .........       -123       -297       -284       -285       -281     -1,270       -2,555
        Reduce computational complexity of refundable child
          tax credit \7\..........................................  .........  .........  .........  .........  .........  .........  .........           21
        Simplify EITC eligibility requirements regarding filing
         status,
          presence of children, investment income, and work and
          immigration status \8\..................................  .........         64        -36        -35        -32        -33        -72         -272
        Simplify the taxation of dependents.......................  .........        -11        -25        -20        -25        -43       -124         -498
        Consolidate rules for lifetime learning credit, Hope
         credit, and
          education expense deductions, and simplify other higher
          education provisions....................................  .........        -19        -94       -311       -294       -282     -1,000       -2,558
        Allow annual reporting and payment of combined State and
          Federal unemployment insurance taxes by employers
          of household employees..................................  .........        -20         -1         -1         -1         -1        -24          -30
        Simplify taxation of capital gains on collectibles, small
          business stock, and other assets........................  .........         -4          5         11         -1        -17         -6          -35
                                                                   -----------------------------------------------------------------------------------------
            Total simplify the tax laws for families..............  .........       -155       -521       -709       -700       -709     -2,794       -6,480

    Strengthen the Employer-Based Pension System:
        Ensure fair treatment of older workers in cash balance      .........  .........  .........  .........  .........  .........  .........        2,373
         conversions and protect defined benefit plans............
        Improve the accuracy of pension liability measures........      8,537     12,297      7,340      3,042     -1,586     -5,467     15,626      -15,869
                                                                   -----------------------------------------------------------------------------------------
            Total strengthen the employer-based pension system....      8,537     12,297      7,340      3,042     -1,586     -5,467     15,626      -13,496

    Close Loopholes and Improve Tax Compliance:
        Combat abusive tax avoidance transactions.................  .........         46         63         85        113        128        435        1,071
        Limit related party interest deductions...................  .........        -51         93        146        203        265        656        3,116
        Modify qualification rules for tax-exempt property-
         casualty
          insurance companies.....................................  .........         67        114        116        119        121        537        1,184
        Prevent abusive overvaluations on donations of patents and
          other intellectual property.............................  .........        432        270        273        277        287      1,539        3,207
        Prevent overvaluations and other abuses in charitable
          donations of used vehicles..............................  .........        158        102        105        108        112        585        1,197
        Reform the treatment for leasing transactions with tax-           340      1,591      2,712      3,285      3,565      3,766     14,919       33,385
         indifferent parties......................................
        Ensure foreign subsidiaries of U.S. companies cannot
          inappropriately avoid U.S. tax on foreign earnings
           invested
          in U.S. property through use of the exception for bank
          deposits................................................  .........         24         21         22         22         23        112          234
        Modify tax rules for individuals who give up U.S.
         citizenship
          or green card status....................................          1         23         20         22         24         25        114          272
        Require increased reporting for noncash charitable
          contributions...........................................  .........         49         31         32         33         34        179          367
        Clarify and simplify qualified tuition programs...........  .........          7         12         13         13         17         62          194
                                                                   -----------------------------------------------------------------------------------------
            Total close loopholes and improve tax compliance......        341      2,346      3,438      4,099      4,477      4,778     19,138       44,227

    Tax Administration, Unemployment Insurance, and Other:
        Improve tax administration:
          Implement IRS administrative reforms....................  .........         52         47         46         47         49        241          505
          Increase continuous levy for certain Federal payments...  .........         10         18         19         20         20         87          202
          Permit private collection agencies to engage in
           specific,
            limited activities to support IRS collection efforts..  .........  .........         47        151        190        153        541        1,531
                                                                   -----------------------------------------------------------------------------------------
              Total improve tax administration....................  .........         62        112        216        257        222        869        2,238
        Strengthen financial integrity of unemployment
          insurance:
          Strengthen the financial integrity of the unemployment
            insurance system by reducing tax avoidance and
            improper benefit payments \9\.........................  .........  .........         -2        108        142        120        368         -216
        Other proposals:
          Increase Indian gaming activity fees....................  .........  .........          4          4          5          5         18           43
                                                                   -----------------------------------------------------------------------------------------
              Total tax administration, unemployment insurance,
                and other.........................................  .........         62        114        328        404        347      1,255        2,065

    [[Page 268]]

    Reauthorize Funding for the Highway Trust Fund:
        Deposit full amount of excise tax imposed on gasohol in
         the
          Highway Trust Fund \9\..................................  .........  .........        648        666        681        699      2,694        6,443
        Impose additional registration requirements on the
          transfer of tax-exempt fuel by pipeline, vessel,
          or barge \9\............................................  .........         76         93         96         91         87        443          747
        Repeal installment method for payment of heavy highway
          vehicle use tax \9\.....................................        407         30         31         32         31         32        156          341
        Allow tax-exempt financing for private highway projects
         and
          rail-truck transfer facilities..........................  .........        -20        -49        -77        -94        -97       -337         -619
                                                                   -----------------------------------------------------------------------------------------
            Total reauthorize funding for the Highway Trust Fund..        407         86        723        717        709        721      2,956        6,912

    Expiring Provisions:
          Minimum tax relief for individuals......................        -86     -9,383    -13,881  .........  .........  .........    -23,264      -23,264
          Research & Experimentation (R&E) tax credit.............       -672     -3,610     -5,187     -6,291     -7,129     -7,775    -29,992      -78,351
          Repeal the disallowance of certain deductions
            of mutual life insurance companies....................  .........        -85        -51        -48        -45        -43       -272         -471
          Combined work opportunity/welfare-to-work tax credit....        -12       -187       -268       -162        -86        -46       -749         -768
          DC tax incentives.......................................        -47        -97        -54         -7         -9        -24       -191         -363
          Authority to issue Qualified Zone Academy Bonds.........         -2         -9        -15        -22        -28        -30       -104         -254
          Deduction for corporate donations of computer technology  .........       -180        -46  .........  .........  .........       -226         -226
          Net operating loss offset of 100 percent of alternative
            minimum taxable income................................     -1,326       -755       -101        203        154        129       -370           82
          IRS user fees...........................................  .........         32         44         45         46         47        214          464
          Disclosure of tax return information related to
           terrorist
            activity \5\..........................................  .........  .........  .........  .........  .........  .........  .........  ...........
          Abandoned mine reclamation fees.........................  .........        239        245        252        256        262      1,254        2,550
          Authority to issue Liberty Zone Bonds...................  .........         -8        -27        -45        -62        -79       -221         -616
          Excise tax on coal \9\..................................  .........  .........  .........  .........  .........  .........  .........          180
                                                                   -----------------------------------------------------------------------------------------
              Total extend other expiring provisions..............     -2,145    -14,043    -19,341     -6,075     -6,903     -7,559    -53,921     -101,037

    Promote Trade:
          Implement free trade agreements with Morocco,
            Australia, and Central American countries \9\.........  .........       -389       -583       -675       -749       -831     -3,227       -8,305
                                                                   -----------------------------------------------------------------------------------------
        Total budget proposals \10\...............................      6,860    -12,135    -35,233    -29,188    -37,491    -61,015   -175,062   -1,122,115
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    * $500,000 or less.
    \1\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $4,265 million for 2006, $4,131 million for 2007,
      $4,003 million for 2008, $3,936 million for 2009, $16,335 million for 2005-2009 and $18,906 million for 2005-2014.
    \2\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $28,903 million for 2005-2014.
    \3\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $5,676 million for 2005-2014.
    \4\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $82 million for 2005, $3,760 million for 2006, $5,041
      million for 2007, $6,388 million for 2008, $7,133 million for 2009, $22,404 million for 2005-2009 and $65,355 million for 2005-2014.
    \5\ Policy proposal with a receipt effect of zero.
    \6\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $36 million for 2006, $36 million for 2007, $36
      million for 2008, $37 million for 2009, $145 million for 2005-2009 and $333 million for 2005-2014.
    \7\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is -$181 million for 2006, -$183 million for 2007, -$185
      million for 2008, -$187 million for 2009, -$736 million for 2005-2009 and -$1,701 million for 2005-2014.
    \8\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is -$440 million for 2005, $131 million for 2006, $130
      million for 2007, $119 million for 2008, $134 million for 2009, $74 million for 2005-2009 and $643 million for 2005-2014.
    \9\ Net of income offsets.
    \10\ Includes proposals assumed in the baseline.

    [[Page 269]]

                                             Table 16-4. RECEIPTS BY SOURCE
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                             Estimate
               Source                2003    -----------------------------------------------------------------------
                                    Actual       2004        2005        2006        2007        2008        2009
    ----------------------------------------------------------------------------------------------------------------
    Individual income taxes
     (federal funds):
      Existing law..............     793,699     765,770     892,318     992,132   1,073,730   1,161,925   1,259,118
        Proposed Legislation....  ..........        -371     -18,481     -35,680     -24,444     -28,575     -49,244
                                 -----------------------------------------------------------------------------------
    Total individual income          793,699     765,399     873,837     956,452   1,049,286   1,133,350   1,209,874
     taxes......................
                                 ===================================================================================
    Corporation income taxes:
      Federal funds:
        Existing law............     131,877     162,051     221,930     248,159     254,285     259,375     265,722
          Proposed Legislation..  ..........       6,690       8,266       1,854      -3,243      -7,262     -10,041
                                 -----------------------------------------------------------------------------------
      Total Federal funds            131,877     168,741     230,196     250,013     251,042     252,113     255,681
       corporation income taxes.
                                 -----------------------------------------------------------------------------------
      Trust funds:
        Hazardous substance              -99  ..........  ..........  ..........  ..........  ..........  ..........
         superfund..............
                                 -----------------------------------------------------------------------------------
    Total corporation income         131,778     168,741     230,196     250,013     251,042     252,113     255,681
     taxes......................
                                 ===================================================================================
    Social insurance and
     retirement receipts (trust
     funds):
      Employment and general
       retirement:
        Old-age and survivors        447,806     456,513     491,627     515,586     543,900     570,695     597,465
         insurance (Off-budget).
        Disability insurance          76,036      77,491      83,474      87,551      92,361      96,910     101,457
         (Off-budget)...........
        Hospital insurance......     147,186     150,540     165,173     173,748     183,790     193,294     202,831
        Railroad retirement:
          Social Security              1,620       1,658       1,680       1,705       1,738       1,771       1,794
           equivalent account...
          Rail pension and             2,333       2,227       2,116       2,127       2,165       2,202       2,240
           supplemental annuity.
                                 -----------------------------------------------------------------------------------
      Total employment and           674,981     688,429     744,070     780,717     823,954     864,872     905,787
       general retirement.......
                                 -----------------------------------------------------------------------------------
        On-budget...............     151,139     154,425     168,969     177,580     187,693     197,267     206,865
        Off-budget..............     523,842     534,004     575,101     603,137     636,261     667,605     698,922
                                 -----------------------------------------------------------------------------------
      Unemployment insurance:
        Deposits by States \1\ .      26,702      32,418      38,146      40,970      41,912      42,557      43,197
          Proposed Legislation..  ..........  ..........         -21         -33         103         143         114
        Federal unemployment           6,520       6,679       6,988       7,581       7,972       6,523       6,473
         receipts \1\ ..........
          Proposed Legislation..  ..........  ..........           1          30          31          33          34
        Railroad unemployment            144         130         103         109         125         126         111
         receipts \1\ ..........
                                 -----------------------------------------------------------------------------------
      Total unemployment              33,366      39,227      45,217      48,657      50,143      49,382      49,929
       insurance................
                                 -----------------------------------------------------------------------------------
      Other retirement:
        Federal employees'             4,578       4,690       4,619       4,591       4,553       4,509       4,406
         retirement--employee
         share..................
        Non-Federal employees             53          46          42          39          36          33          30
         retirement \2\ ........
                                 -----------------------------------------------------------------------------------
      Total other retirement....       4,631       4,736       4,661       4,630       4,589       4,542       4,436
                                 -----------------------------------------------------------------------------------
    Total social insurance and       712,978     732,392     793,948     834,004     878,686     918,796     960,152
     retirement receipts........
                                 ===================================================================================
      On-budget.................     189,136     198,388     218,847     230,867     242,425     251,191     261,230
      Off-budget................     523,842     534,004     575,101     603,137     636,261     667,605     698,922
                                 ===================================================================================
    Excise taxes:
      Federal funds:
        Alcohol taxes...........       7,893       8,051       8,170       8,270       8,358       8,471       8,597
          Proposed Legislation..  ..........         -58         -79         -21  ..........  ..........  ..........
        Tobacco taxes...........       7,934       7,990       7,907       7,850       7,793       7,719       7,635
        Transportation fuels tax         920       1,004       1,058         310         318         325         331
          Proposed Legislation..  ..........        -701        -750  ..........  ..........  ..........  ..........
        Telephone and teletype         5,788       6,319       6,798       7,183       7,596       8,040       8,509
         services...............
        Other Federal fund             1,269       1,484       1,528       1,563       1,599       1,635       1,689
         excise taxes...........
          Proposed Legislation..  ..........          58         -54         -62         -84         -86         -90
                                 -----------------------------------------------------------------------------------
      Total Federal fund excise       23,804      24,147      24,578      25,093      25,580      26,104      26,671
       taxes....................
                                 -----------------------------------------------------------------------------------
      Trust funds:
        Highway.................      33,726      34,270      35,680      36,920      37,869      38,763      39,669

    [[Page 270]]

          Proposed Legislation..  ..........       1,242         887       1,015       1,031       1,039       1,040
        Airport and airway......       8,684       9,751      10,677      11,332      11,944      12,595      13,304
        Aquatic resources.......         392         415         428         440         454         469         482
        Black lung disability            506         542         540         552         572         594         611
         insurance..............
        Inland waterway.........          90          94          95          96          96          97          98
        Vaccine injury                   138         127         128         130         130         132         133
         compensation...........
        Leaking underground              184         188         197         202         208         211         217
         storage tank...........
          Proposed Legislation..  ..........  ..........  ..........           1           1  ..........  ..........
                                 -----------------------------------------------------------------------------------
      Total trust funds excise        43,720      46,629      48,632      50,688      52,305      53,900      55,554
       taxes....................
                                 -----------------------------------------------------------------------------------
    Total excise taxes..........      67,524      70,776      73,210      75,781      77,885      80,004      82,225
                                 ===================================================================================
    Estate and gift taxes:
      Federal funds.............      21,959      23,909      23,097      25,710      23,474      24,261      25,640
        Proposed Legislation....  ..........  ..........      -1,655      -1,853      -1,984      -2,090      -2,034
                                 -----------------------------------------------------------------------------------
    Total estate and gift taxes.      21,959      23,909      21,442      23,857      21,490      22,171      23,606
                                 ===================================================================================
    Customs duties:
      Federal funds.............      19,039      20,831      21,320      23,774      25,614      27,150      29,596
        Proposed Legislation....  ..........         885        -179        -426        -538        -627        -724
      Trust funds...............         823         879         954       1,035       1,107       1,123       1,148
                                 -----------------------------------------------------------------------------------
    Total customs duties........      19,862      22,595      22,095      24,383      26,183      27,646      30,020
                                 ===================================================================================
    MISCELLANEOUS RECEIPTS: \3\
      Miscellaneous taxes.......          93          98         101         100         101         103         105
        Proposed Legislation....  ..........  ..........  ..........           4           4           5           5
      United Mine Workers of             190         153         143         136         128         124         123
       America combined benefit
       fund.....................
      Deposit of earnings,            21,878      22,880      25,262      29,779      34,646      39,672      43,080
       Federal Reserve System...
      Defense cooperation.......           9           7           7           7           8           8           8
      Confiscated Assets........       1,917  ..........  ..........  ..........  ..........  ..........  ..........
      Fees for permits and             7,707       8,724       8,374       8,449       8,639       8,612       8,796
       regulatory and judicial
       services.................
        Proposed Legislation....  ..........  ..........         271         289         297         302         309
      Fines, penalties, and            2,850       3,398       2,850       2,875       2,898       2,920       2,942
       forfeitures..............
        Proposed Legislation....  ..........        -885        -341        -351        -362        -373        -384
      Gifts and contributions...         211         204         184         196         180         186         187
      Refunds and recoveries....        -313        -298        -306        -308        -316        -324        -332
                                 -----------------------------------------------------------------------------------
    Total miscellaneous receipts      34,542      34,281      36,545      41,176      46,223      51,235      54,839
                                 ===================================================================================
    Adjustment for revenue        ..........     -20,000     -15,000  ..........  ..........  ..........  ..........
     uncertainty \4\............
                                 ===================================================================================
    Total budget receipts.......   1,782,342   1,798,093   2,036,273   2,205,666   2,350,795   2,485,315   2,616,397
      On-budget.................   1,258,500   1,264,089   1,461,172   1,602,529   1,714,534   1,817,710   1,917,475
      Off-budget................     523,842     534,004     575,101     603,137     636,261     667,605     698,922
                                 -----------------------------------------------------------------------------------
             MEMORANDUM
      Federal funds.............   1,025,170   1,018,566   1,195,990   1,319,965   1,420,122   1,513,425   1,601,537
      Trust funds...............     467,557     501,441     550,348     615,937     650,879     681,480     714,622
      Interfund transactions....    -234,227    -255,918    -285,166    -333,373    -356,467    -377,195    -398,684
                                 -----------------------------------------------------------------------------------
    Total on-budget.............   1,258,500   1,264,089   1,461,172   1,602,529   1,714,534   1,817,710   1,917,475
                                 -----------------------------------------------------------------------------------
    Off-budget (trust funds)....     523,842     534,004     575,101     603,137     636,261     667,605     698,922
                                 ===================================================================================
    Total.......................   1,782,342   1,798,093   2,036,273   2,205,666   2,350,795   2,485,315   2,616,397
    ----------------------------------------------------------------------------------------------------------------
    \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.