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

    [[Page 285]]

                              18. TAX EXPENDITURES

      The Congressional Budget Act of 1974 (Public Law 93-344) requires that
    a list of ``tax expenditures'' be included in the budget. Tax
    expenditures are defined in the law as ``revenue losses attributable to
    provisions of the Federal tax laws which allow a special exclusion,
    exemption, or deduction from gross income or which provide a special
    credit, a preferential rate of tax, or a deferral of liability.'' These
    exceptions may be viewed as alternatives to other policy instruments,
    such as spending or regulatory programs. Identification and measurement
    of tax expenditures depends importantly on the baseline tax system
    against which the actual tax system is compared.
      The largest reported tax expenditures tend to be associated with the
    individual income tax. For example, sizeable deferrals, deductions and
    exclusions are provided for pension contributions and earnings, employer
    contributions for medical insurance, capital gains, and payments of
    State and local individual income and property taxes. Reported tax
    expenditures under the corporate income tax tend to be related to timing
    differences in the rate of cost recovery for various investments. As is
    discussed below, the extent to which these provisions are classified as
    tax expenditures varies according to the conceptual baseline used.
      Each tax expenditure estimate in this chapter was calculated assuming
    other parts of the tax code remained unchanged. The estimates would be
    different if all tax expenditures or major groups of tax expenditures
    were changed simultaneously because of potential interactions among
    provisions. For that reason, this chapter does not present a grand total
    for the estimated tax expenditures. Moreover, past tax changes entailing
    broad elimination of tax expenditures were generally accompanied by
    changes in tax rates or other basic provisions, so that the net effects
    on Federal revenues were considerably (if not totally) offset.
      Tax expenditures relating to the individual and corporate income taxes
    are estimated for fiscal years 2003-2009 using three methods of
    accounting: revenue effects, outlay equivalent, and present value. The
    present value approach provides estimates of the revenue effects for tax
    expenditures that generally involve deferrals of tax payments into the
    future.
      The section of the chapter on performance measures and economic
    effects presents information related to assessment of the effect of tax
    expenditures on the achievement of program performance goals. This
    section is a complement to the Government-wide performance plan required
    by the Government Performance and Results Act of 1993.
      The 2004 Budget included a thorough review of important ambiguities in
    the tax expenditure concept. In particular, this review focused on
    defining tax expenditures relative to a comprehensive income tax
    baseline, defining tax expenditures relative to a broad-based
    consumption tax baseline, and defining negative tax expenditures, i.e.,
    provisions of current law that over-tax certain items or activities.
    This review has been updated and is presented in the Appendix.

                       TAX EXPENDITURES IN THE INCOME TAX

                            Tax Expenditure Estimates

      All tax expenditure estimates presented here are based upon current
    tax law enacted as of December 31, 2003. Expired or repealed provisions
    are not listed if their revenue effects result only from taxpayer
    activity occurring before fiscal year 2003. Due to the time required to
    estimate the large number of tax expenditures, the estimates are based
    on Mid-Session economic assumptions; exceptions are the earned income
    tax credit and child credit provisions, which involve outlay components
    and hence are updated to reflect the economic assumptions used elsewhere
    in the budget.
      The total revenue effects for tax expenditures for fiscal years 2003-
    2009 are displayed according to the budget's functional categories in
    Table 18-1. Descriptions of the specific tax expenditure provisions
    follow the tables of estimates and the discussion of general features of
    the tax expenditure concept.
      As in prior years, two baseline concepts--the normal tax baseline and
    the reference tax law baseline--are used to identify tax expenditures.
    These baseline concepts are thoroughly discussed in Special Analysis G
    of the 1985 Budget, where the former is referred to as the pre-1983
    method, and the latter the post-1982 method. For the most part, the two
    concepts coincide. However, items treated as tax expenditures under the
    normal tax baseline, but not the reference tax law baseline, are
    indicated by the designation ``normal tax method'' in the tables. The
    revenue effects for these items are zero using the reference tax rules.
    The alternative baseline concepts are discussed in detail following the
    tables.
      Table 18-2 reports the respective portions of the total revenue
    effects that arise under the individual and corporate income taxes
    separately. The location of the estimates under the individual and
    corporate headings does not imply that these categories of filers
    benefit from the special tax provisions in proportion to the respective
    tax expenditure amounts shown. Rather, these breakdowns show the
    specific tax accounts through which

    [[Page 286]]

    the various provisions are cleared. The ultimate beneficiaries of
    corporate tax expenditures could be shareholders, employees, customers,
    or other providers of capital, depending on economic forces.
      Table 18-3 ranks the major tax expenditures by the size of their FY
    2005-2009 revenue effect.

                     Interpreting Tax Expenditure Estimates

      The estimates shown for individual tax expenditures in Tables 18-1,
    18-2, and 18-3 do not necessarily equal the increase in Federal revenues
    (or the change in the budget balance) that would result from repealing
    these special provisions, for the following reasons:
      Eliminating a tax expenditure may have incentive effects that alter
    economic behavior. These incentives can affect the resulting magnitudes
    of the activity or of other tax provisions or Government programs. For
    example, if capital gains were taxed at ordinary rates, capital gain
    realizations would be expected to decline, potentially resulting in a
    decline in tax receipts. Such behavioral effects are not reflected in
    the estimates.
      Tax expenditures are interdependent even without incentive effects.
    Repeal of a tax expenditure provision can increase or decrease the tax
    revenues associated with other provisions. For example, even if behavior
    does not change, repeal of an itemized deduction could increase the
    revenue costs from other deductions because some taxpayers would be
    moved into higher tax brackets. Alternatively, repeal of an itemized
    deduction could lower the revenue cost from other deductions if
    taxpayers are led to claim the standard deduction instead of itemizing.
    Similarly, if two provisions were repealed simultaneously, the increase
    in tax liability could be greater or less than the sum of the two
    separate tax expenditures, because each is estimated assuming that the
    other remains in force. In addition, the estimates reported in Table 18-
    1 are the totals of individual and corporate income tax revenue effects
    reported in Table 18-2 and do not reflect any possible interactions
    between the individual and corporate income tax receipts. For this
    reason, the estimates in Table 18-1 (as well as those in Table 18-5,
    which are also based on summing individual and corporate estimates)
    should be regarded as approximations.

                             Present-Value Estimates

      The annual value of tax expenditures for tax deferrals is reported on
    a cash basis in all tables except Table 18-4. Cash-based estimates
    reflect the difference between taxes deferred in the current year and
    incoming revenues that are received due to deferrals of taxes from prior
    years. Although such estimates are useful as a measure of cash flows
    into the Government, they do not accurately reflect the true economic
    cost of these provisions. For example, for a provision where activity
    levels have changed, so that incoming tax receipts from past deferrals
    are greater than deferred receipts from new activity, the cash-basis tax
    expenditure estimate can be negative, despite the fact that in present-
    value terms current deferrals do have a real cost to the Government.
    Alternatively, in the case of a newly enacted deferral provision, a
    cash-based estimate can overstate the real effect on receipts to the
    Government because the newly deferred taxes will ultimately be received.
    Present-value estimates, which are a useful complement to the cash-basis
    estimates for provisions involving deferrals, are discussed below.
      Discounted present-value estimates of revenue effects are presented in
    Table 18-4 for certain provisions that involve tax deferrals or other
    long-term revenue effects. These estimates complement the cash-based tax
    expenditure estimates presented in the other tables.
      The present-value estimates represent the revenue effects, net of
    future tax payments, that follow from activities undertaken during
    calendar year 2003 which cause the deferrals or other long-term revenue
    effects. For instance, a pension contribution in 2003 would cause a
    deferral of tax payments on wages in 2003 and on pension earnings on
    this contribution (e.g., interest) in later years. In some future year,
    however, the 2003 pension contribution and accrued earnings will be paid
    out and taxes will be due; these receipts are included in the present-
    value estimate. In general, this conceptual approach is similar to the
    one used for reporting the budgetary effects of credit programs, where
    direct loans and guarantees in a given year affect future cash flows.

    [[Page 287]]

                                 Table 18-1.  ESTIMATES OF TOTAL INCOME TAX EXPENDITURES
                                                (in millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                          Total from corporations and individuals
                                      ------------------------------------------------------------------------------
                                         2003      2004      2005      2006      2007      2008      2009    2005-09
    ----------------------------------------------------------------------------------------------------------------
                 National Defense
           1       Exclusion of           2,210     2,240     2,260     2,290     2,310     2,330     2,350   11,540
                    benefits and
                    allowances to
                    armed forces
                    personnel........

                 International
                  Affairs
           2       Exclusion of           2,620     2,680     2,750     2,810     2,940     3,100     3,270   14,870
                    income earned
                    abroad by U.S.
                    citizens.........
           3       Exclusion of             770       800       840       880       920       960     1,010    4,610
                    certain
                    allowances for
                    Federal employees
                    abroad...........
           4       Extraterritorial       5,150     5,510     5,890     6,290     6,730     7,200     7,700   33,810
                    income exclusion.
           5       Inventory property     1,540     1,620     1,700     1,790     1,880     1,980     2,080    9,430
                    sales source
                    rules exception..
           6       Deferral of income     7,450     7,900     8,400     8,930     9,550    10,210    10,920   48,010
                    from controlled
                    foreign
                    corporations
                    (normal tax
                    method)..........
           7       Deferred taxes for     2,050     2,130     2,190     2,260       960  ........  ........    5,410
                    financial firms
                    on certain income
                    earned overseas..

                 General Science,
                  Space, and
                  Technology
           8       Expensing of          -1,980    -2,350     4,500     8,290     7,110     6,360     5,570   31,830
                    research and
                    experimentation
                    expenditures
                    (normal tax
                    method)..........
           9       Credit for             4,960     4,400     2,550     1,090       460       150        60    4,310
                    increasing
                    research
                    activities.......

                 Energy
          10       Expensing of             210       270       170        80        70        60        40      420
                    exploration and
                    development
                    costs, fuels.....
          11       Excess of                640       620       580       590       610       610       610    3,000
                    percentage over
                    cost depletion,
                    fuels............
          12       Alternative fuel       1,280       890       890       890       890       350  ........    3,020
                    production credit
          13       Exception from            20        20        20        20        20        20        20      100
                    passive loss
                    limitation for
                    working interests
                    in oil and gas
                    properties.......
          14       Capital gains            100       110       120       120       130       130       140      640
                    treatment of
                    royalties on coal
          15       Exclusion of              90       100       110       110       120       130       130      600
                    interest on
                    energy facility
                    bonds............
          16       Enhanced oil             400       400       410       420       430       440       450    2,150
                    recovery credit..
          17       New technology           280       350       370       370       370       370       370    1,850
                    credit...........
          18       Alcohol fuel              30        30        30        30        30        30        30      150
                    credits \1\......
          19       Tax credit and            70        60        10       -20       -70       -60       -70     -210
                    deduction for
                    clean-fuel
                    burning vehicles.
          20       Exclusion from            80        80        80        80        80        80        80      400
                    income of
                    conservation
                    subsidies
                    provided by
                    public utilities.

                 Natural Resources
                  and Environment
          21       Expensing of              10        10        10        10        10        10        10       50
                    exploration and
                    development
                    costs, nonfuel
                    minerals.........
          22       Excess of                250       250       260       260       270       280       280    1,350
                    percentage over
                    cost depletion,
                    nonfuel minerals.
          23       Exclusion of             450       490       530       570       590       630       650    2,970
                    interest on bonds
                    for water,
                    sewage, and
                    hazardous waste
                    facilities.......
          24       Capital gains            100       110       120       120       130       130       140      640
                    treatment of
                    certain timber
                    income...........
          25       Expensing of             340       340       350       370       380       400       410    1,910
                    multiperiod
                    timber growing
                    costs............
          26       Tax incentives for       270       290       300       320       330       340       370    1,660
                    preservation of
                    historic
                    structures.......

                 Agriculture
          27       Expensing of             120       130       130       130       140       150       160      710
                    certain capital
                    outlays..........
          28       Expensing of              90        90        90       100       100       100       100      490
                    certain
                    multiperiod
                    production costs.
          29       Treatment of loans        10        10        10        10        10        10        10       50
                    forgiven for
                    solvent farmers..
          30       Capital gains          1,050     1,100     1,160     1,220     1,280     1,350     1,420    6,430
                    treatment of
                    certain income...
          31       Income averaging          70        80        80        80        80        90        90      420
                    for farmers......
          32       Deferral of gain          10        10        10        10        20        20        20       80
                    on sale of farm
                    refiners.........

                 Commerce and Housing
                   Financial
                    institutions and
                    insurance:
          33        Exemption of          1,300     1,360     1,430     1,500     1,570     1,650     1,730    7,880
                     credit union
                     income..........
          34        Excess bad debt          40        30        20        20        10  ........  ........       50
                     reserves of
                     financial
                     institutions....
          35        Exclusion of         18,900    20,500    22,130    24,010    26,050    28,260    30,660  131,110
                     interest on life
                     insurance
                     savings.........
          36        Special                 120       120       130       130       140       140       140      680
                     alternative tax
                     on small
                     property and
                     casualty
                     insurance
                     companies.......
          37        Tax exemption of        190       210       220       240       250       260       280    1,250
                     certain
                     insurance
                     companies owned
                     by tax-exempt
                     organizations...
          38        Small life               90        90        90        90        90        90        90      450
                     insurance
                     company
                     deduction.......
                   Housing:
          39        Exclusion of            910       990     1,080     1,150     1,200     1,280     1,320    6,030
                     interest on
                     owner-occupied
                     mortgage subsidy
                     bonds...........
          40        Exclusion of            280       310       350       370       380       400       410    1,910
                     interest on
                     rental housing
                     bonds...........
          41        Deductibility of     61,160    62,590    69,740    74,800    78,420    83,030    87,920  393,910
                     mortgage
                     interest on
                     owner-occupied
                     homes...........
          42        Deductibility of     22,090    21,740    19,410    16,110    14,580    13,640    13,110   76,850
                     State and local
                     property tax on
                     owner-occupied
                     homes...........
          43        Deferral of           1,080     1,100     1,120     1,140     1,160     1,190     1,200    5,810
                     income from post
                     1987 installment
                     sales...........
          44        Capital gains        20,260    20,860    21,490    22,140    22,800    23,480    24,190  114,100
                     exclusion on
                     home sales......
          45        Exception from        5,710     4,570     4,390     4,210     4,020     3,840     3,660   20,120
                     passive loss
                     rules for
                     $25,000 of
                     rental loss.....
          46        Credit for low-       6,210     6,550     6,860     7,180     7,470     7,830     8,210   37,550
                     income housing
                     investments.....
          47        Accelerated           1,220       620      -170    -1,110    -2,330    -3,560    -4,900  -12,070
                     depreciation on
                     rental housing
                     (normal tax
                     method).........
                   Commerce:
          48        Cancellation of          20        30        30        30        40        40        40      180
                     indebtedness....
          49        Exceptions from          50        50        50        50        50        50        50      250
                     imputed interest
                     rules...........
          50        Capital gains        25,730    27,300    30,190    32,930    36,410    48,930    29,210  177,670
                     (except
                     agriculture,
                     timber, iron
                     ore, and coal)
                     \2\.............
          51        Capital gains           130       160       210       250       300       350       390    1,500
                     exclusion of
                     small
                     corporation
                     stock...........
          52        Step-up basis of     14,880    16,280    18,240    20,240    22,240    24,190    26,010  110,920
                     capital gains at
                     death...........
          53        Carryover basis         590       390       450       540       550       580       620    2,740
                     of capital gains
                     on gifts........
          54        Ordinary income          40        50        50        50        50        50        50      250
                     treatment of
                     loss from small
                     business
                     corporation
                     stock sale......
          55        Accelerated          -2,290    -3,190    -4,060    -4,690    -6,810   -10,170   -14,430  -40,160
                     depreciation of
                     buildings other
                     than rental
                     housing (normal
                     tax method).....

    [[Page 288]]

          56        Accelerated          48,520    46,800   -10,920   -37,940   -31,040   -28,770   -27,590  -136,26
                     depreciation of                                                                               0
                     machinery and
                     equipment
                     (normal tax
                     method).........
          57        Expensing of          1,030     1,590     4,850     1,650      -490       -30       130    6,110
                     certain small
                     investments
                     (normal tax
                     method).........
          58        Amortization of         110       120       130       150       160       160       160      760
                     start-up costs
                     (normal tax
                     method).........
          59        Graduated             3,030     3,090     3,910     4,650     4,800     4,890     5,040   23,290
                     corporation
                     income tax rate
                     (normal tax
                     method).........
          60        Exclusion of            390       430       470       490       520       550       570    2,600
                     interest on
                     small issue
                     bonds...........

                 Transportation
          61       Deferral of tax on        20        20        20        20        20        20        20      100
                    shipping
                    companies........
          62       Exclusion of           2,130     2,240     2,360     2,490     2,610     2,740     2,880   13,080
                    reimbursed
                    employee parking
                    expenses.........
          63       Exclusion for            320       380       450       520       590       660       730    2,950
                    employer-provided
                    transit passes...

                 Community and
                  Regional
                  Development
          64       Investment credit         30        30        30        30        30        30        30      150
                    for
                    rehabilitation of
                    structures (other
                    than historic)...
          65       Exclusion of             770       840       910       970     1,020     1,080     1,110    5,090
                    interest for
                    airport, dock,
                    and similar bonds
          66       Exemption of              60        60        70        70        70        70        70      350
                    certain mutuals'
                    and cooperatives'
                    income...........
          67       Empowerment zones,     1,070     1,080     1,120     1,210     1,320     1,470     1,730    6,850
                    Enterprise
                    communities, and
                    Renewal
                    communities......
          68       New markets tax          190       290       430       610       830       870       790    3,530
                    credit...........
          69       Expensing of              80        20       -10       -10       -10       -10       -10      -50
                    environmental
                    remediation costs

                 Education, Training,
                  Employment, and
                  Social Services
                   Education:
          70        Exclusion of          1,260     1,260     1,340     1,400     1,410     1,420     1,420    6,990
                     scholarship and
                     fellowship
                     income (normal
                     tax method).....
          71        HOPE tax credit..     3,290     3,420     3,510     3,290     3,330     3,320     3,310   16,760
          72        Lifetime Learning     1,910     2,250     2,180     2,120     2,320     2,320     2,300   11,240
                     tax credit......
          73        Education                70       110       140       190       240       300       370    1,240
                     Individual
                     Retirement
                     Accounts........
          74        Deductibility of        730       760       780       800       820       830       840    4,070
                     student-loan
                     interest........
          75        Deduction for         1,730     1,810     2,580     2,610  ........  ........  ........    5,190
                     higher education
                     expenses........
          76        State prepaid            50       150       320       430       510       590       660    2,510
                     tuition plans...
          77        Exclusion of            260       280       310       320       340       360       380    1,710
                     interest on
                     student-loan
                     bonds...........
          78        Exclusion of            780       850       930       990     1,030     1,100     1,130    5,180
                     interest on
                     bonds for
                     private
                     nonprofit
                     educational
                     facilities......
          79        Credit for               80        90       110       130       130       140       140      650
                     holders of zone
                     academy bonds...
          80        Exclusion of             10        10        10        10        20        20        20       80
                     interest on
                     savings bonds
                     redeemed to
                     finance
                     educational
                     expenses........
          81        Parental personal     3,140     3,130     2,550     2,000     1,760     1,580     1,430    9,320
                     exemption for
                     students age 19
                     or over.........
          82        Deductibility of      3,670     3,390     3,660     4,000     4,230     4,510     4,830   21,230
                     charitable
                     contributions
                     (education).....
          83        Exclusion of            500       530       560       590       620       660       690    3,120
                     employer-
                     provided
                     educational
                     assistance......
          84        Special deduction       140       140  ........  ........  ........  ........  ........  .......
                     for teacher
                     expenses........
                   Training,
                    employment, and
                    social services:
          85        Work opportunity        430       370       170        70        30  ........  ........      270
                     tax credit......
          86        Welfare-to-work          60        60        40        30        20  ........  ........       90
                     tax credit......
          87        Employer provided       590       620       770       870       920       960     1,010    4,530
                     child care
                     exclusion.......
          88        Employer-provided        90       130       140       150       160       170       180      800
                     child care
                     credit..........
          89        Assistance for          250       290       330       380       430       480       540    2,160
                     adopted foster
                     children........
          90        Adoption credit         220       450       500       540       560       570       580    2,750
                     and exclusion...
          91        Exclusion of            780       810       850       890       930       970     1,000    4,640
                     employee meals
                     and lodging
                     (other than
                     military).......
          92        Child credit \3\.    37,970    24,340    29,860    24,810    24,680    24,480    25,430  129,260
          93        Credit for child      2,720     2,950     2,690     2,210     2,030     1,900     1,780   10,610
                     and dependent
                     care expenses...
          94        Credit for               50        50        60        60        60        60        60      300
                     disabled access
                     expenditures....
          95        Deductibility of     30,020    27,370    29,670    32,550    34,500    36,790    39,410  172,920
                     charitable
                     contributions,
                     other than
                     education and
                     health..........
          96        Exclusion of            430       430       440       450       460       470       570    2,390
                     certain foster
                     care payments...
          97        Exclusion of            380       400       420       450       480       510       540    2,400
                     parsonage
                     allowances......

                 Health
          98       Exclusion of         101,920   106,720   112,990   120,940   129,820   139,620   150,300  653,670
                    employer
                    contributions for
                    medical insurance
                    premiums and
                    medical care.....
          99       Deductibility of       2,550     3,740     3,780     4,090     4,370     4,750     5,150   22,140
                    self-employed
                    medical insurance
                    premiums.........
         100       Medical Savings          -30      -140      -570      -960    -1,380    -1,920    -2,180   -7,010
                    Accounts/Health
                    Savings Accounts.
         101       Deductibility of       6,240     6,880     7,900     8,480     9,180    10,200    10,990   46,750
                    medical expenses.
         102       Exclusion of           1,620     1,780     1,930     2,060     2,160     2,290     2,360   10,800
                    interest on
                    hospital
                    construction
                    bonds............
         103       Deductibility of       3,390     3,090     3,350     3,670     3,890     4,150     4,450   19,510
                    charitable
                    contributions
                    (health).........
         104       Tax credit for           160       180       200       220       250       280       310    1,260
                    orphan drug
                    research.........
         105       Special Blue Cross/      350       320       310       280       310       260       290    1,450
                    Blue Shield
                    deduction........
         106       Tax credit for      ........        50        60        60        70        70        80      340
                    health insurance
                    purchased by
                    certain displaced
                    and retired
                    individuals \4\..

                 Income Security
         107       Exclusion of             400       400       400       400       400       400       400    2,000
                    railroad
                    retirement system
                    benefits.........
         108       Exclusion of           6,100     6,460     6,850     7,270     7,710     8,190     8,690   38,710
                    workers'
                    compensation
                    benefits.........
         109       Exclusion of             400       410       430       450       470       490       510    2,350
                    public assistance
                    benefits (normal
                    tax method)......
         110       Exclusion of              60        60        50        50        50        40        40      230
                    special benefits
                    for disabled coal
                    miners...........
         111       Exclusion of             100       110       110       110       110       120       120      570
                    military
                    disability
                    pensions
                   Net exclusion of
                    pension
                    contributions and
                    earnings:........
         112        Employer plans...    59,480    59,380    61,740    66,340    62,650    58,360    60,440  309,530

    [[Page 289]]

         113        401(k) plans.....    51,560    56,740    58,910    61,340    65,750    71,080    75,440  332,520
         114        Individual           20,060    19,810    20,090    20,610    20,150    19,710    19,490  100,050
                     Retirement
                     Accounts........
         115        Low and moderate        880       960     1,100     1,210       730  ........  ........    3,040
                     income savers
                     credit..........
         116        Keogh plans......     6,020     8,730     9,260     9,860    10,530    11,480    12,500   53,630
                   Exclusion of other
                    employee
                    benefits:
         117        Premiums on group     1,800     1,830     1,860     1,890     1,920     1,950     1,990    9,610
                     term life
                     insurance.......
         118        Premiums on             230       240       250       260       270       280       290    1,350
                     accident and
                     disability
                     insurance.......
         119       Small business            40        80       100       130       140       150       150      670
                    retirement plan
                    credit...........
         120       Income of trusts          30        30        30        30        30        30        30  .......
                    to finance
                    supplementary
                    unemployment
                    benefits.........
         121       Special ESOP rules     1,780     1,920     2,060     2,220     2,400     2,580     2,780   12,040
         122       Additional                40        30        40        40        40        40        40      200
                    deduction for the
                    blind............
         123       Additional             1,840     1,710     1,800     1,900     1,960     1,920     1,940    9,520
                    deduction for the
                    elderly..........
         124       Tax credit for the        20        10        10        10        10        10        10       50
                    elderly and
                    disabled.........
         125       Deductibility of         500       690       670       680       640       600       630    3,220
                    casualty losses..
         126       Earned income tax      5,099     4,884     5,006     5,477     5,515     5,603     5,780   27,381
                    credit \5\.......

                 Social Security
                   Exclusion of
                    social security
                    benefits:
         127        Social Security      18,600    19,620    19,040    19,370    20,390    19,710    19,910   98,420
                     benefits for
                     retired workers.
         128        Social Security       3,230     3,570     3,720     3,840     4,080     4,280     4,500   20,420
                     benefits for
                     disabled........
         129        Social Security       4,060     4,380     4,310     4,160     4,190     4,030     4,040   20,730
                     benefits for
                     dependents and
                     survivors.......

                 Veterans Benefits
                  and Services
         130       Exclusion of           3,320     3,330     3,600     3,930     4,170     4,300     4,560   20,560
                    veterans death
                    benefits and
                    disability
                    compensation.....
         131       Exclusion of             100       100       100       110       110       110       120      550
                    veterans pensions
         132       Exclusion of GI          110       120       130       130       160       170       170      760
                    bill benefits....
         133       Exclusion of              40        50        50        50        60        60        60      280
                    interest on
                    veterans housing
                    bonds............

                 General Purpose
                  Fiscal Assistance
         134       Exclusion of          25,480    25,980    26,370    26,440    26,150    26,940    27,750  133,650
                    interest on
                    public purpose
                    State and local
                    bonds............
         135       Deductibility of      49,770    49,470    46,180    39,100    35,930    34,710    34,370  190,290
                    nonbusiness State
                    and local taxes
                    other than on
                    owner-occupied
                    homes............
         136       Tax credit for         1,200     1,150     1,100       800  ........  ........  ........    1,900
                    corporations
                    receiving income
                    from doing
                    business in U.S.
                    possessions......

                 Interest
         137       Deferral of               30        40        40        40        40        40        50      210
                    interest on U.S.
                    savings bonds....

                 Addendum: Aid to
                  State and local
                  governments:
                   Deductibility of:
                    Property taxes on    22,090    21,740    19,410    16,110    14,580    13,640    13,110   76,850
                     owner-occupied
                     homes...........
                    Nonbusiness State    49,770    49,470    46,180    39,100    35,930    34,710    34,370  190,290
                     and local taxes
                     other than on
                     owner-occupied
                     homes...........
                   Exclusion of
                    interest on State
                    and local bonds
                    for:
                    Public purposes..    25,480    25,980    26,370    26,440    26,150    26,940    27,750  133,650
                    Energy facilities        90       100       110       110       120       130       130      600
                    Water, sewage,          450       490       530       570       590       630       650    2,970
                     and hazardous
                     waste disposal
                     facilities......
                    Small-issues.....       390       430       470       490       520       550       570    2,600
                    Owner-occupied          910       990     1,080     1,150     1,200     1,280     1,320    6,030
                     mortgage
                     subsidies.......
                    Rental housing...       280       310       350       370       380       400       410    1,910
                    Airports, docks,        770       840       910       970     1,020     1,080     1,110    5,090
                     and similar
                     facilities......
                    Student loans....       260       280       310       320       340       360       380    1,710
                    Private nonprofit       780       850       930       990     1,030     1,100     1,130    5,180
                     educational
                     facilities......
                    Hospital              1,620     1,780     1,930     2,060     2,160     2,290     2,360   10,800
                     construction....
                    Veterans' housing        40        50        50        50        60        60        60      280
                   Credit for holders        80        90       110       130       130       140       140      650
                    of zone academy
                    bonds............
    ----------------------------------------------------------------------------------------------------------------
    \1\  In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise
      tax receipts (in millions of dollars) as follows: 2003 $1,100; 2004 $1,260; 2005 $1,370; 2006 $1,430; 2007
      $1,470; 2008 $1,510; and 2009 $1,550.
    \2\  If corporate equity were to be included, the revenue loss estimates would be $48,540 in 2003, $51,510 in
      2004, $56,970 in 2005, $62,140 in 2006, $68,690 in 2007, $92,320 in 2008, and $55,110 in 2009. Similarly, if
      the reduced tax rate on dividends were to be included, the revenue loss estimates would be $1,810 in 2003,
      $16,720 in 2004, $13,280 in 2005, $13,880 in 2006, $14,480 in 2007, $15,970 in 2008, and $8,540 in 2009.
    \3\  The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit
      on outlays (in millions of dollars) is as follows: 2003 $6,435; 2004 $7,447; 2005 $11,486; 2006 $8,440; 2007
      $8,237; 2008 $7,956; and 2009 $7,909
    \4\  In addition to the receipts shown outlays of $60 million in 2004, $90 million in 2005, $100 million in
      2006, $120 million in 2007, $130 million in 2008, and $140 million in 2009 are projected.
    \5\  The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the
      credit on outlays (in millions of dollars) is as follows: 2003 $31,961; 2004 $33,551; 2005 $34,148; 2006
      $34,488; 2007 $34,338; 2008 $34,359; and 2009 $35,161.
    Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law
      method.
    All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in
      each year are not included in the table.

    [[Page 290]]

                                                                            Table 18-2.  ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL INCOME TAXES
                                                                                                            (in millions of dollars)
    ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Corporations                                                                          Individuals
                                                                   -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      2003     2004     2005      2006       2007       2008       2009     2005-09      2003       2004       2005       2006       2007       2008       2009     2005-09
    ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                 National Defense
           1       Exclusion of benefits and allowances to armed    .......  .......  .......  .........  .........  .........  .........  .........      2,210      2,240      2,260      2,290      2,310      2,330      2,350     11,540
                    forces personnel..............................

                 International Affairs
           2       Exclusion of income earned abroad by U.S.        .......  .......  .......  .........  .........  .........  .........  .........      2,620      2,680      2,750      2,810      2,940      3,100      3,270     14,870
                    citizens......................................
           3       Exclusion of certain allowances for Federal      .......  .......  .......  .........  .........  .........  .........  .........        770        800        840        880        920        960      1,010      4,610
                    employees abroad..............................
           4       Extraterritorial income exclusion..............    5,150    5,510    5,890      6,290      6,730      7,200      7,700     33,810  .........  .........  .........  .........  .........  .........  .........  .........
           5       Inventory property sales source rules exception    1,540    1,620    1,700      1,790      1,880      1,980      2,080      9,430  .........  .........  .........  .........  .........  .........  .........  .........
           6       Deferral of income from controlled foreign         7,450    7,900    8,400      8,930      9,550     10,210     10,920     48,010  .........  .........  .........  .........  .........  .........  .........  .........
                    corporations (normal tax method)..............
           7       Deferred taxes for financial firms on certain      2,050    2,130    2,190      2,260        960  .........  .........      5,410  .........  .........  .........  .........  .........  .........  .........  .........
                    income earned overseas........................

                 General Science, Space, and Technology
           8       Expensing of research and experimentation         -1,940   -2,300    4,400      8,130      6,970      6,240      5,460     31,200        -40        -50        100        160        140        120        110        630
                    expenditures (normal tax method)..............
           9       Credit for increasing research activities......    4,910    4,360    2,530      1,090        460        150         60      4,290         50         40         20  .........  .........  .........  .........         20

                 Energy
          10       Expensing of exploration and development costs,      180      240      150         70         60         50         30        360         30         30         20         10         10         10         10         60
                    fuels.........................................
          11       Excess of percentage over cost depletion, fuels      530      510      480        490        510        510        510      2,500        110        110        100        100        100        100        100        500
          12       Alternative fuel production credit.............    1,230      850      850        850        850        340  .........      2,890         50         40         40         40         40         10  .........        130
          13       Exception from passive loss limitation for       .......  .......  .......  .........  .........  .........  .........  .........         20         20         20         20         20         20         20        100
                    working interests in oil and gas properties...
          14       Capital gains treatment of royalties on coal...  .......  .......  .......  .........  .........  .........  .........  .........        100        110        120        120        130        130        140        640
          15       Exclusion of interest on energy facility bonds.       20       20       20         20         20         20         20        100         70         80         90         90        100        110        110        500
          16       Enhanced oil recovery credit...................      360      360      370        380        390        400        410      1,950         40         40         40         40         40         40         40        200
          17       New technology credit..........................      280      350      370        370        370        370        370      1,850  .........  .........  .........  .........  .........  .........  .........  .........
          18       Alcohol fuel credits \1\.......................       20       20       20         20         20         20         20        100         10         10         10         10         10         10         10         50
          19       Tax credit and deduction for clean-fuel burning       50       40       10        -20        -60        -50        -60       -180         20         20  .........  .........        -10        -10        -10        -30
                    vehicles......................................
          20       Exclusion from income of conservation subsidies  .......  .......  .......  .........  .........  .........  .........  .........         80         80         80         80         80         80         80        400
                    provided by public utilities..................

                 Natural Resources and Environment
          21       Expensing of exploration and development costs,       10       10       10         10         10         10         10         50  .........  .........  .........  .........  .........  .........  .........  .........
                    nonfuel minerals..............................
          22       Excess of percentage over cost depletion,            230      230      240        240        250        260        260      1,250         20         20         20         20         20         20         20        100
                    nonfuel minerals..............................
          23       Exclusion of interest on bonds for water,            100      100      100        110        110        110        120        550        350        390        430        460        480        520        530      2,420
                    sewage, and hazardous waste facilities........
          24       Capital gains treatment of certain timber        .......  .......  .......  .........  .........  .........  .........  .........        100        110        120        120        130        130        140        640
                    income........................................
          25       Expensing of multiperiod timber growing costs..      230      230      240        250        260        280        290      1,320        110        110        110        120        120        120        120        590
          26       Tax incentives for preservation of historic          210      230      240        250        260        270        290      1,310         60         60         60         70         70         70         80        350
                    structures....................................

                 Agriculture
          27       Expensing of certain capital outlays...........       20       20       20         20         20         30         30        120        100        110        110        110        120        120        130        590
          28       Expensing of certain multiperiod production           20       20       20         20         20         20         20        100         70         70         70         80         80         80         80        390
                    costs.........................................
          29       Treatment of loans forgiven for solvent farmers  .......  .......  .......  .........  .........  .........  .........  .........         10         10         10         10         10         10         10         50
          30       Capital gains treatment of certain income......  .......  .......  .......  .........  .........  .........  .........  .........      1,050      1,100      1,160      1,220      1,280      1,350      1,420      6,430
          31       Income averaging for farmers...................  .......  .......  .......  .........  .........  .........  .........  .........         70         80         80         80         80         90         90        420
          32       Deferral of gain on sale of farm refiners......       10       10       10         10         20         20         20         80  .........  .........  .........  .........  .........  .........  .........  .........

                 Commerce and Housing
                   Financial institutions and insurance:
          33        Exemption of credit union income..............    1,300    1,360    1,430      1,500      1,570      1,650      1,730      7,880  .........  .........  .........  .........  .........  .........  .........  .........
          34        Excess bad debt reserves of financial                40       30       20         20         10  .........  .........         50  .........  .........  .........  .........  .........  .........  .........  .........
                     institutions.................................
          35        Exclusion of interest on life insurance           2,090    2,250    2,410      2,590      2,780      2,980      3,200     13,960     16,810     18,250     19,720     21,420     23,270     25,280     27,460    117,150
                     savings......................................
          36        Special alternative tax on small property and       120      120      130        130        140        140        140        680  .........  .........  .........  .........  .........  .........  .........  .........
                     casualty insurance companies.................
          37        Tax exemption of certain insurance companies        190      210      220        240        250        260        280      1,250  .........  .........  .........  .........  .........  .........  .........  .........
                     owned by tax-exempt organizations............
          38        Small life insurance company deduction........       90       90       90         90         90         90         90        450  .........  .........  .........  .........  .........  .........  .........  .........
                   Housing:
          39        Exclusion of interest on owner-occupied             200      200      210        220        220        230        240      1,120        710        790        870        930        980      1,050      1,080      4,910
                     mortgage subsidy bonds.......................
          40        Exclusion of interest on rental housing bonds.       60       60       70         70         70         70         70        350        220        250        280        300        310        330        340      1,560
          41        Deductibility of mortgage interest on owner-    .......  .......  .......  .........  .........  .........  .........  .........     61,160     62,590     69,740     74,800     78,420     83,030     87,920    393,910
                     occupied homes...............................

    [[Page 291]]

          42        Deductibility of State and local property tax   .......  .......  .......  .........  .........  .........  .........  .........     22,090     21,740     19,410     16,110     14,580     13,640     13,110     76,850
                     on owner-occupied homes......................
          43        Deferral of income from post 1987 installment       280      290      290        300        300        310        310      1,510        800        810        830        840        860        880        890      4,300
                     sales........................................
          44        Capital gains exclusion on home sales.........  .......  .......  .......  .........  .........  .........  .........  .........     20,260     20,860     21,490     22,140     22,800     23,480     24,190    114,100
          45        Exception from passive loss rules for $25,000   .......  .......  .......  .........  .........  .........  .........  .........      5,710      4,570      4,390      4,210      4,020      3,840      3,660     20,120
                     of rental loss...............................
          46        Credit for low-income housing investments.....    3,450    3,640    3,810      3,990      4,150      4,350      4,560     20,860      2,760      2,910      3,050      3,190      3,320      3,480      3,650     16,690
          47        Accelerated depreciation on rental housing           50      -10      -50       -110       -180       -260       -340       -940      1,170        630       -120     -1,000     -2,150     -3,300     -4,560    -11,130
                     (normal tax method)..........................
                   Commerce:
          48        Cancellation of indebtedness..................  .......  .......  .......  .........  .........  .........  .........  .........         20         30         30         30         40         40         40        180
          49        Exceptions from imputed interest rules........  .......  .......  .......  .........  .........  .........  .........  .........         50         50         50         50         50         50         50        250
          50        Capital gains (except agriculture, timber,      .......  .......  .......  .........  .........  .........  .........  .........     25,730     27,300     30,190     32,930     36,410     48,930     29,210    177,670
                     iron ore, and coal) \2\......................
          51        Capital gains exclusion of small corporation    .......  .......  .......  .........  .........  .........  .........  .........        130        160        210        250        300        350        390      1,500
                     stock........................................
          52        Step-up basis of capital gains at death.......  .......  .......  .......  .........  .........  .........  .........  .........     14,880     16,280     18,240     20,240     22,240     24,190     26,010    110,920
          53        Carryover basis of capital gains on gifts.....  .......  .......  .......  .........  .........  .........  .........  .........        590        390        450        540        550        580        620      2,740
          54        Ordinary income treatment of loss from small    .......  .......  .......  .........  .........  .........  .........  .........         40         50         50         50         50         50         50        250
                     business corporation stock sale..............
          55        Accelerated depreciation of buildings other      -2,190   -2,920   -3,740     -4,250     -6,060     -9,050    -12,360    -35,460       -100       -270       -320       -440       -750     -1,120     -2,070     -4,700
                     than rental housing (normal tax method)......
          56        Accelerated depreciation of machinery and        40,600   38,830   -8,720    -32,980    -26,580    -23,990    -22,400   -114,670      7,920      7,970     -2,200     -4,960     -4,460     -4,780     -5,190    -21,590
                     equipment (normal tax method)................
          57        Expensing of certain small investments (normal      420      710    1,790        680       -390       -140        -30      1,910        610        880      3,060        970       -100        110        160      4,200
                     tax method)..................................
          58        Amortization of start-up costs (normal tax          100      110      120        130        140        140        140        670         10         10         10         20         20         20         20         90
                     method)......................................
          59        Graduated corporation income tax rate (normal     3,030    3,090    3,910      4,650      4,800      4,890      5,040     23,290  .........  .........  .........  .........  .........  .........  .........  .........
                     tax method)..................................
          60        Exclusion of interest on small issue bonds....       80       90       90         90        100        100        100        480        310        340        380        400        420        450        470      2,120

                 Transportation
          61       Deferral of tax on shipping companies..........       20       20       20         20         20         20         20        100  .........  .........  .........  .........  .........  .........  .........  .........
          62       Exclusion of reimbursed employee parking         .......  .......  .......  .........  .........  .........  .........  .........      2,130      2,240      2,360      2,490      2,610      2,740      2,880     13,080
                    expenses......................................
          63       Exclusion for employer-provided transit passes.  .......  .......  .......  .........  .........  .........  .........  .........        320        380        450        520        590        660        730      2,950

                 Community and Regional Development
          64       Investment credit for rehabilitation of               20       20       20         20         20         20         20        100         10         10         10         10         10         10         10         50
                    structures (other than historic)..............
          65       Exclusion of interest for airport, dock, and         170      170      180        180        190        190        200        940        600        670        730        790        830        890        910      4,150
                    similar bonds.................................
          66       Exemption of certain mutuals' and cooperatives'       60       60       70         70         70         70         70        350  .........  .........  .........  .........  .........  .........  .........  .........
                    income........................................
          67       Empowerment zones, Enterprise communities, and       280      280      290        310        330        370        420      1,720        790        800        830        900        990      1,100      1,310      5,130
                    Renewal communities...........................
          68       New markets tax credit.........................       50       70      110        150        210        220        200        890        140        220        320        460        620        650        590      2,640
          69       Expensing of environmental remediation costs...       70       20      -10        -10        -10        -10        -10        -50         10  .........  .........  .........  .........  .........  .........  .........

                 Education, Training, Employment, and Social
                  Services
                   Education:
          70        Exclusion of scholarship and fellowship income  .......  .......  .......  .........  .........  .........  .........  .........      1,260      1,260      1,340      1,400      1,410      1,420      1,420      6,990
                     (normal tax method)..........................
          71        HOPE tax credit...............................  .......  .......  .......  .........  .........  .........  .........  .........      3,290      3,420      3,510      3,290      3,330      3,320      3,310     16,760
          72        Lifetime Learning tax credit..................  .......  .......  .......  .........  .........  .........  .........  .........      1,910      2,250      2,180      2,120      2,320      2,320      2,300     11,240
          73        Education Individual Retirement Accounts......  .......  .......  .......  .........  .........  .........  .........  .........         70        110        140        190        240        300        370      1,240
          74        Deductibility of student-loan interest........  .......  .......  .......  .........  .........  .........  .........  .........        730        760        780        800        820        830        840      4,070
          75        Deduction for higher education expenses.......  .......  .......  .......  .........  .........  .........  .........  .........      1,730      1,810      2,580      2,610  .........  .........  .........      5,190
          76        State prepaid tuition plans...................  .......  .......  .......  .........  .........  .........  .........  .........         50        150        320        430        510        590        660      2,510
          77        Exclusion of interest on student-loan bonds...       60       60       60         60         60         60         70        310        200        220        250        260        280        300        310      1,400
          78        Exclusion of interest on bonds for private          170      170      180        190        190        200        200        960        610        680        750        800        840        900        930      4,220
                     nonprofit educational facilities.............
          79        Credit for holders of zone academy bonds......       80       90      110        130        130        140        140        650  .........  .........  .........  .........  .........  .........  .........  .........
          80        Exclusion of interest on savings bonds          .......  .......  .......  .........  .........  .........  .........  .........         10         10         10         10         20         20         20         80
                     redeemed to finance educational expenses.....
          81        Parental personal exemption for students age    .......  .......  .......  .........  .........  .........  .........  .........      3,140      3,130      2,550      2,000      1,760      1,580      1,430      9,320
                     19 or over...................................
          82        Deductibility of charitable contributions           490      510      540        560        590        620        660      2,970      3,180      2,880      3,120      3,440      3,640      3,890      4,170     18,260
                     (education)..................................
          83        Exclusion of employer-provided educational      .......  .......  .......  .........  .........  .........  .........  .........        500        530        560        590        620        660        690      3,120
                     assistance...................................
          84        Special deduction for teacher expenses........  .......  .......  .......  .........  .........  .........  .........  .........        140        140  .........  .........  .........  .........  .........  .........

    [[Page 292]]

                   Training, employment, and social services:
          85        Work opportunity tax credit...................      370      310      140         60         20  .........  .........        220         60         60         30         10         10  .........  .........         50
          86        Welfare-to-work tax credit....................       50       50       30         20         10  .........  .........         60         10         10         10         10         10  .........  .........         30
          87        Employer provided child care exclusion........  .......  .......  .......  .........  .........  .........  .........  .........        590        620        770        870        920        960      1,010      4,530
          88        Employer-provided child care credit...........  .......  .......  .......  .........  .........  .........  .........  .........         90        130        140        150        160        170        180        800
          89        Assistance for adopted foster children........  .......  .......  .......  .........  .........  .........  .........  .........        250        290        330        380        430        480        540      2,160
          90        Adoption credit and exclusion.................  .......  .......  .......  .........  .........  .........  .........  .........        220        450        500        540        560        570        580      2,750
          91        Exclusion of employee meals and lodging (other  .......  .......  .......  .........  .........  .........  .........  .........        780        810        850        890        930        970      1,000      4,640
                     than military)...............................
          92        Child credit \3\..............................  .......  .......  .......  .........  .........  .........  .........  .........     37,970     24,340     29,860     24,810     24,680     24,480     25,430    129,260
          93        Credit for child and dependent care expenses..  .......  .......  .......  .........  .........  .........  .........  .........      2,720      2,950      2,690      2,210      2,030      1,900      1,780     10,610
          94        Credit for disabled access expenditures.......       10       10       20         20         20         20         20        100         40         40         40         40         40         40         40        200
          95        Deductibility of charitable contributions,        1,110    1,170    1,230      1,290      1,360      1,430      1,500      6,810     28,910     26,200     28,440     31,260     33,140     35,360     37,910    166,110
                     other than education and health..............
          96        Exclusion of certain foster care payments.....  .......  .......  .......  .........  .........  .........  .........  .........        430        430        440        450        460        470        570      2,390
          97        Exclusion of parsonage allowances.............  .......  .......  .......  .........  .........  .........  .........  .........        380        400        420        450        480        510        540      2,400

                 Health
          98       Exclusion of employer contributions for medical  .......  .......  .......  .........  .........  .........  .........  .........    101,920    106,720    112,990    120,940    129,820    139,620    150,300    653,670
                    insurance premiums and medical care...........
          99       Deductibility of self-employed medical           .......  .......  .......  .........  .........  .........  .........  .........      2,550      3,740      3,780      4,090      4,370      4,750      5,150     22,140
                    insurance premiums............................
         100       Medical Savings Accounts/Health Savings          .......  .......  .......  .........  .........  .........  .........  .........        -30       -140       -570       -960     -1,380     -1,920     -2,180     -7,010
                    Accounts......................................
         101       Deductibility of medical expenses..............  .......  .......  .......  .........  .........  .........  .........  .........      6,240      6,880      7,900      8,480      9,180     10,200     10,990     46,750
         102       Exclusion of interest on hospital construction       350      360      370        390        400        410        420      1,990      1,270      1,420      1,560      1,670      1,760      1,880      1,940      8,810
                    bonds.........................................
         103       Deductibility of charitable contributions            140      150      160        160        170        180        190        860      3,250      2,940      3,190      3,510      3,720      3,970      4,260     18,650
                    (health)......................................
         104       Tax credit for orphan drug research............      160      180      200        220        250        280        310      1,260  .........  .........  .........  .........  .........  .........  .........  .........
         105       Special Blue Cross/Blue Shield deduction.......      350      320      310        280        310        260        290      1,450  .........  .........  .........  .........  .........  .........  .........  .........
         106       Tax credit for health insurance purchased by     .......  .......  .......  .........  .........  .........  .........  .........  .........         50         60         60         70         70         80        340
                    certain displaced and retired individuals \4\.

                 Income Security
         107       Exclusion of railroad retirement system          .......  .......  .......  .........  .........  .........  .........  .........        400        400        400        400        400        400        400      2,000
                    benefits......................................
         108       Exclusion of workers' compensation benefits....  .......  .......  .......  .........  .........  .........  .........  .........      6,100      6,460      6,850      7,270      7,710      8,190      8,690     38,710
         109       Exclusion of public assistance benefits (normal  .......  .......  .......  .........  .........  .........  .........  .........        400        410        430        450        470        490        510      2,350
                    tax method)...................................
         110       Exclusion of special benefits for disabled coal  .......  .......  .......  .........  .........  .........  .........  .........         60         60         50         50         50         40         40        230
                    miners........................................
         111       Exclusion of military disability pensions......  .......  .......  .......  .........  .........  .........  .........  .........        100        110        110        110        110        120        120        570
                   Net exclusion of pension contributions and
                    earnings:
         112        Employer plans................................  .......  .......  .......  .........  .........  .........  .........  .........     59,480     59,380     61,740     66,340     62,650     58,360     60,440    309,530
         113        401(k) plans..................................  .......  .......  .......  .........  .........  .........  .........  .........     51,560     56,740     58,910     61,340     65,750      71080      75440    332,520
         114        Individual Retirement Accounts................  .......  .......  .......  .........  .........  .........  .........  .........     20,060     19,810     20,090     20,610     20,150     19,710     19,490    100,050
         115        Low and moderate income savers credit.........  .......  .......  .......  .........  .........  .........  .........  .........        880        960      1,100      1,210        730  .........  .........      3,040
         116        Keogh plans...................................  .......  .......  .......  .........  .........  .........  .........  .........      6,020      8,730      9,260      9,860     10,530     11,480     12,500     53,630
                   Exclusion of other employee benefits:
         117        Premiums on group term life insurance.........    1,800    1,830    1,860      1,890      1,920      1,950      1,990      9,610  .........  .........  .........  .........  .........  .........  .........  .........
         118        Premiums on accident and disability insurance.  .......  .......  .......  .........  .........  .........  .........  .........        230        240        250        260        270        280        290      1,350
         119       Small business retirement plan credit..........       20       40       50         70         70         80         80        350         20         40         50         60         70         70         70        320
         120       Income of trusts to finance supplementary        .......  .......  .......  .........  .........  .........  .........  .........         30         30         30         30         30         30         30  .........
                    unemployment benefits.........................
         121       Special ESOP rules.............................     1460     1570     1690       1820       1970       2120       2280      9,880        320        350        370        400        430        460        500      2,160
         122       Additional deduction for the blind.............  .......  .......  .......  .........  .........  .........  .........  .........         40         30         40         40         40         40         40        200
         123       Additional deduction for the elderly...........  .......  .......  .......  .........  .........  .........  .........  .........      1,840      1,710      1,800      1,900      1,960      1,920      1,940      9,520
         124       Tax credit for the elderly and disabled........  .......  .......  .......  .........  .........  .........  .........  .........         20         10         10         10         10         10         10         50
         125       Deductibility of casualty losses...............  .......  .......  .......  .........  .........  .........  .........  .........        500        690        670        680        640        600        630      3,220
         126       Earned income tax credit \5\...................  .......  .......  .......  .........  .........  .........  .........  .........      5,099      4,884      5,006      5,477      5,515      5,603      5,780     27,381

                 Social Security
                   Exclusion of social security benefits:
         127        Social Security benefits for retired workers..  .......  .......  .......  .........  .........  .........  .........  .........     18,600     19,620     19,040     19,370     20,390     19,710     19,910     98,420
         128        Social Security benefits for disabled.........  .......  .......  .......  .........  .........  .........  .........  .........      3,230      3,570      3,720      3,840      4,080      4,280      4,500     20,420
         129        Social Security benefits for dependents and     .......  .......  .......  .........  .........  .........  .........  .........      4,060      4,380      4,310      4,160      4,190      4,030      4,040     20,730
                     survivors....................................

                 Veterans Benefits and Services
         130       Exclusion of veterans death benefits and         .......  .......  .......  .........  .........  .........  .........  .........      3,320      3,330      3,600      3,930      4,170      4,300      4,560     20,560
                    disability compensation.......................
         131       Exclusion of veterans pensions.................  .......  .......  .......  .........  .........  .........  .........  .........        100        100        100        110        110        110        120        550
         132       Exclusion of GI bill benefits..................  .......  .......  .......  .........  .........  .........  .........  .........        110        120        130        130        160        170        170        760
         133       Exclusion of interest on veterans housing bonds       10       10       10         10         10         10         10         50         30         40         40         40         50         50         50        230

    [[Page 293]]

                 General Purpose Fiscal Assistance
         134       Exclusion of interest on public purpose State      5,710    5,880    6,060      6,240      6,420      6,620      6,820     32,160     19,770     20,100     20,310     20,200     19,730     20,320     20,930    101,490
                    and local bonds...............................
         135       Deductibility of nonbusiness State and local     .......  .......  .......  .........  .........  .........  .........  .........     49,770     49,470     46,180     39,100     35,930     34,710     34,370    190,290
                    taxes other than on owner-occupied homes......
         136       Tax credit for corporations receiving income       1,200    1,150    1,100        800  .........  .........  .........      1,900  .........  .........  .........  .........  .........  .........  .........  .........
                    from doing business in U.S. possessions.......

                 Interest
         137       Deferral of interest on U.S. savings bonds.....  .......  .......  .......  .........  .........  .........  .........  .........         30         40         40         40         40         40         50        210

                 Addendum: Aid to State and local governments:
                   Deductibility of:
                    Property taxes on owner-occupied homes........  .......  .......  .......  .........  .........  .........  .........  .........     22,090     21,740     19,410     16,110     14,580     13,640     13,110     76,850
                    Nonbusiness State and local taxes other than    .......  .......  .......  .........  .........  .........  .........  .........     49,770     49,470     46,180     39,100     35,930     34,710     34,370    190,290
                     on owner-occupied homes......................
                   Exclusion of interest on State and local bonds
                    for:
                    Public purposes...............................    5,710    5,880    6,060      6,240      6,420      6,620      6,820     32,160     19,770     20,100     20,310     20,200     19,730     20,320     20,930    101,490
                    Energy facilities.............................       20       20       20         20         20         20         20        100         70         80         90         90        100        110        110        500
                    Water, sewage, and hazardous waste disposal         100      100      100        110        110        110        120        550        350        390        430        460        480        520        530      2,420
                     facilities...................................
                    Small-issues..................................       80       90       90         90        100        100        100        480        310        340        380        400        420        450        470      2,120
                    Owner-occupied mortgage subsidies.............      200      200      210        220        220        230        240      1,120        710        790        870        930        980      1,050      1,080      4,910
                    Rental housing................................       60       60       70         70         70         70         70        350        220        250        280        300        310        330        340      1,560
                    Airports, docks, and similar facilities.......      170      170      180        180        190        190        200        940        600        670        730        790        830        890        910      4,150
                    Student loans.................................       60       60       60         60         60         60         70        310        200        220        250        260        280        300        310      1,400
                    Private nonprofit educational facilities......      170      170      180        190        190        200        200        960        610        680        750        800        840        900        930      4,220
                    Hospital construction.........................      350      360      370        390        400        410        420      1,990      1,270      1,420      1,560      1,670      1,760      1,880      1,940      8,810
                    Veterans' housing.............................       10       10       10         10         10         10         10         50         30         40         40         40         50         50         50        230
                   Credit for holders of zone academy bonds.......       80       90      110        130        130        140        140        650  .........  .........  .........  .........  .........  .........  .........  .........
    ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\  In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as follows: 2003 $1,100; 2004 $1,260; 2005 $1,370; 2006 $1,430; 2007 $1,470; 2008
      $1,510; and 2009 $1,550.
    \2\  If corporate equity were to be included, the revenue loss estimates would be $48,540 in 2003, $51,510 in 2004, $56,970 in 2005, $62,140 in 2006, $68,690 in 2007, $92,320 in 2008, and $55,110 in 2009. Similarly, if the reduced
      tax rate on dividends were to be included, the revenue loss estimates would be $1,810 in 2003, $16,720 in 2004, $13,280 in 2005, $13,880 in 2006, $14,480 in 2007, $15,970 in 2008, and $8,540 in 2009.
    \3\  The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2003 $6,435; 2004 $7,447; 2005 $11,486; 2006 $8,440; 2007 $8,237;
      2008 $7,956; and 2009 $7,909
    \4\  In addition to the receipts shown outlays of $60 million in 2004, $90 million in 2005, $100 million in 2006, $120 million in 2007, $130 million in 2008, and $140 million in 2009 are projected.
    \5\  The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2003 $31,961; 2004 $33,551; 2005 $34,148; 2006 $34,488; 2007
      $34,338; 2008 $34,359; and 2009 $35,161.
    Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method.
    All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.

    [[Page 294]]

                 Table 18-3.  INCOME TAX EXPENDITURES RANKED BY TOTAL 2005-2009 PROJECTED REVENUE EFFECT
                                                (in millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                        Provision                                         2005          2005-2009
    ----------------------------------------------------------------------------------------------------------------
    Exclusion of employer contributions for medical insurance premiums and medical     112,990          653,670
     care.........................................................................
    Deductibility of mortgage interest on owner-occupied homes....................      69,740          393,910
    Net exclusion of pension contributions and earnings: 401(k) plans.............      58,910          332,520
    Net exclusion of pension contributions and earnings: Employer plans...........      61,740          309,530
    Deductibility of nonbusiness state and local taxes other than on owner-             46,180          190,290
     occupied homes...............................................................
    Capital gains (except agriculture, timber, iron ore, and coal)................      30,190          177,670
    Deductibility of charitable contributions, other than education and health....      29,670          172,920
    Exclusion of interest on public purpose State and local bonds.................      26,370          133,650
    Exclusion of interest on life insurance savings...............................      22,130          131,110
    Child credit..................................................................      29,860          129,260
    Capital gains exclusion on home sales.........................................      21,490          114,100
    Step-up basis of capital gains at death.......................................      18,240          110,920
    Net exclusion of pension contributions and earnings: Individual Retirement          20,090          100,050
     Accounts.....................................................................
    Social Security benefits for retired workers..................................      19,040           98,420
    Deductibility of State and local property tax on owner-occupied homes.........      19,410           76,850
    Net exclusion of pension contributions and earnings: Keough Plans.............       9,260           53,630
    Deferral of income from controlled foreign corporations (normal tax method)...       8,400           48,010
    Deductibility of medical expenses.............................................       7,900           46,750
    Exclusion of workers' compensation benefits...................................       6,850           38,710
    Credit for low-income housing investments.....................................       6,860           37,550
    Extraterritorial income exclusion.............................................       5,890           33,810
    Expensing of research and experimentation expenditures (normal tax method)....       4,500           31,830
    Earned income tax credit......................................................       5,006           27,381
    Graduated corporation income tax rate (normal tax method).....................       3,910           23,290
    Deductibility of self-employed medical insurance premiums.....................       3,780           22,140
    Social Security benefits for dependents and survivors.........................       4,310           20,730
    Deductibility of charitable contributions (education).........................       3,660           21,230
    Exclusion of veterans death benefits and disability compensation..............       3,600           20,560
    Social Security benefits for disabled.........................................       3,720           20,420
    Exception from passive loss rules for $25,000 of rental loss..................       4,390           20,120
    Deductibility of charitable contributions (health)............................       3,350           19,510
    HOPE tax credit...............................................................       3,510           16,760
    Exclusion of income earned abroad by U.S. citizens............................       2,750           14,870
    Exclusion of reimbursed employee parking expenses.............................       2,360           13,080
    Special ESOP rules............................................................       2,060           12,040
    Exclusion of benefits and allowances to armed forces personnel................       2,260           11,540
    Lifetime Learning tax credit..................................................       2,180           11,240
    Exclusion of interest on hospital construction bonds..........................       1,930           10,800
    Credit for child and dependent care expenses..................................       2,690           10,610
    Premiums on group term life insurance.........................................       1,860            9,610
    Additional deduction for the elderly..........................................       1,800            9,520
    Inventory property sales source rules exception...............................       1,700            9,430
    Parental personal exemption for students age 19 or over.......................       2,550            9,320
    Exemption of credit union income..............................................       1,430            7,880
    Exclusion of scholarship and fellowship income (normal tax method)............       1,340            6,990
    Empowerment zones, Enterprise communities, and Renewal communities............       1,120            6,850
    Capital gains treatment of certain income.....................................       1,160            6,430
    Expensing of certain small investments (normal tax method)....................       4,850            6,110
    Exclusion of interest on owner-occupied mortgage subsidy bonds................       1,080            6,030
    Deferral of income from post 1987 installment sales...........................       1,120            5,810
    Deferred taxes for financial firms on certain income earned overseas..........       2,190            5,410
    Deduction for higher education expenses.......................................       2,580            5,190
    Exclusion of interest on bonds for private nonprofit educational facilities...         930            5,180
    Exclusion of interest for airport, dock, and similar bonds....................         910            5,090
    Exclusion of employee meals and lodging (other than military).................         850            4,640
    Exclusion of certain allowances for Federal employees abroad..................         840            4,610
    Employer provided child care exclusion........................................         770            4,530
    Credit for increasing research activities.....................................       2,550            4,310
    Deductibility of student-loan interest........................................         780            4,070
    New markets tax credit........................................................         430            3,530
    Deductibility of casualty losses..............................................         670            3,220
    Exclusion of employer-provided educational assistance.........................         560            3,120
    Low and moderate income savers credit.........................................       1,100            3,040
    Alternative fuel production credit............................................         890            3,020
    Excess of percentage over cost depletion, fuels...............................         580            3,000
    Exclusion of interest on bonds for water, sewage, and hazardous waste                  530            2,970
     facilities...................................................................
    Exclusion for employer-provided transit passes................................         450            2,950
    Adoption credit and exclusion.................................................         500            2,750
    Carryover basis of capital gains on gifts.....................................         450            2,740

    [[Page 295]]

    Exclusion of interest on small issue bonds....................................         470            2,600
    State prepaid tuition plans...................................................         320            2,510
    Exclusion of parsonage allowances.............................................         420            2,400
    Exclusion of certain foster care payments.....................................         440            2,390
    Exclusion of public assistance benefits (normal tax method)...................         430            2,350
    Assistance for adopted foster children........................................         330            2,160
    Enhanced oil recovery credit..................................................         410            2,150
    Exclusion of railroad retirement system benefits..............................         400            2,000
    Expensing of multiperiod timber growing costs.................................         350            1,910
    Exclusion of interest on rental housing bonds.................................         350            1,910
    Tax credit for corporations receiving income from doing business in U.S.             1,100            1,900
     possessions..................................................................
    New technology credit.........................................................         370            1,850
    Exclusion of interest on student-loan bonds...................................         310            1,710
    Tax incentives for preservation of historic structures........................         300            1,660
    Capital gains exclusion of small corporation stock............................         210            1,500
    Special Blue Cross/Blue Shield deduction......................................         310            1,450
    Excess of percentage over cost depletion, nonfuel minerals....................         260            1,350
    Premiums on accident and disability insurance.................................         250            1,350
    Tax credit for orphan drug research...........................................         200            1,260
    Tax exemption of certain insurance companies owned by tax-exempt organizations         220            1,250
    Education Individual Retirement Accounts......................................         140            1,240
    Employer-provided child care credit...........................................         140              800
    Exclusion of GI bill benefits.................................................         130              760
    Amortization of start-up costs (normal tax method)............................         130              760
    Expensing of certain capital outlays..........................................         130              710
    Special alternative tax on small property and casualty insurance companies....         130              680
    Small business retirement plan credit.........................................         100              670
    Credit for holders of zone academy bonds......................................         110              650
    Capital gains treatment of royalties on coal..................................         120              640
    Capital gains treatment of certain timber income..............................         120              640
    Exclusion of interest on energy facility bonds................................         110              600
    Exclusion of military disability pensions.....................................         110              570
    Exclusion of veterans pensions................................................         100              550
    Expensing of certain multiperiod production costs.............................          90              490
    Small life insurance company deduction........................................          90              450
    Income averaging for farmers..................................................          80              420
    Expensing of exploration and development costs, fuels.........................         170              420
    Exclusion from income of conservation subsidies provided by public utilities..          80              400
    Exemption of certain mutuals' and cooperatives' income........................          70              350
    Tax credit for health insurance purchased by certain displaced and retired              60              340
     individuals..................................................................
    Credit for disabled access expenditures.......................................          60              300
    Exclusion of interest on veterans housing bonds...............................          50              280
    Work opportunity tax credit...................................................         170              270
    Exceptions from imputed interest rules........................................          50              250
    Ordinary income treatment of loss from small business corporation stock sale..          50              250
    Exclusion of special benefits for disabled coal miners........................          50              230
    Deferral of interest on U.S. savings bonds....................................          40              210
    Additional deduction for the blind............................................          40              200
    Cancellation of indebtedness..................................................          30              180
    Alcohol fuel credits \1\......................................................          30              150
    Investment credit for rehabilitation of structures (other than historic)......          30              150
    Deferral of tax on shipping companies.........................................          20              100
    Exception from passive loss limitation for working interests in oil and gas             20              100
     properties...................................................................
    Welfare-to-work tax credit....................................................          40               90
    Exclusion of interest on savings bonds redeemed to finance educational                  10               80
     expenses.....................................................................
    Deferral of gain on sale of farm refiners.....................................          10               80
    Expensing of exploration and development costs, nonfuel minerals..............          10               50
    Tax credit for the elderly and disabled.......................................          10               50
    Treatment of loans forgiven for solvent farmers...............................          10               50
    Income of trusts to finance supplementary unemployment benefits...............          30       ...............
    Expensing of environmental remediation costs..................................         -10              -50
    Tax credit and deduction for clean-fuel burning vehicles......................          10             -210
    Medical Savings Accounts......................................................        -570           -7,010
    Accelerated depreciation on rental housing (normal tax method)................        -170          -12,070
    Accelerated depreciation of buildings other than rental housing (normal tax         -4,060          -40,160
     method)......................................................................
    Accelerated depreciation of machinery and equipment (normal tax method).......     -10,920         -136,260
    ----------------------------------------------------------------------------------------------------------------

    [[Page 296]]

               Table 18-4.  PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR ACTIVITY IN CALENDAR YEAR 2003
                                                (in millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                                           Present
                                                        Provision                                         Value of
                                                                                                        Revenue Loss
    ----------------------------------------------------------------------------------------------------------------
           1     Deferral of income from controlled foreign corporations (normal tax method)..........     7,630
           2     Deferred taxes for financial firms on income earned overseas.........................     2,080
           3     Expensing of research and experimentation expenditures (normal tax method)...........     2,000
           4     Expensing of exploration and development costs--fuels................................       120
           5     Expensing of multiperiod timber growing costs........................................       200
           6     Expensing of certain multiperiod production costs--agriculture.......................       170
           7     Expensing of certain capital outlays--agriculture....................................       200
           8     Deferral of income on life insurance and annuity contracts...........................    25,060
           9     Expensing of certain small investments (normal tax method)...........................       690
          10     Amortization of start-up costs (normal tax method)...................................        70
          11     Deferral of tax on shipping companies................................................        20
          12     Credit for holders of zone academy bonds.............................................       110
          13     Credit for low-income housing investments............................................     3,470
          14     Deferral for state prepaid tuition plans.............................................     1,510
          15     Exclusion of pension contributions--employer plans...................................   102,470
          16     Exclusion of 401(k) contributions....................................................    81,610
          17     Exclusion of IRA contributions and earnings..........................................    11,030
          18     Exclusion of contributions and earnings for Keogh plans..............................     9,530
          19     Exclusion of interest on public-purpose bonds........................................    19,440
          20     Exclusion of interest on non-public purpose bonds....................................     6,120
          21     Deferral of interest on U.S. savings bonds...........................................       440
    ----------------------------------------------------------------------------------------------------------------

                               Outlay Equivalents

      The concept of ``outlay equivalents'' is another theoretical measure
    of the budget effect of tax expenditures. It is the amount of budget
    outlays that would be required to provide the taxpayer the same after-
    tax income as would be received through the tax provision. The outlay-
    equivalent measure allows the cost of a tax expenditure to be compared
    with a direct Federal outlay on a more even footing. Outlay equivalents
    are reported in Table 18-5.

                              Table 18-5.  OUTLAY EQUVALENT ESTIMATES FOR TAX EXPENDITURES
                                                (in millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                         2003      2004      2005      2006      2007      2008      2009    2005-09
    ----------------------------------------------------------------------------------------------------------------
                 National Defense
           1       Exclusion of           2,570     2,600     2,620     2,650     2,680     2,710     2,740   13,400
                    benefits and
                    allowances to
                    armed forces
                    personnel........

                 International
                  Affairs
           2       Exclusion of           3,470     3,530     3,640     3,700     3,880     4,100     4,320   19,640
                    income earned
                    abroad by U.S.
                    citizens.........
           3       Exclusion of             980     1,030     1,070     1,120     1,180     1,230     1,290    5,890
                    certain
                    allowances for
                    Federal employees
                    abroad...........
           4       Extraterritorial       7,920     8,480     9,060     9,680    10,350    11,080    11,850   52,020
                    income exclusion.
           5       Inventory property     2,370     2,490     2,620     2,750     2,890     3,050     3,200   14,510
                    sales source
                    rules exception..
           6       Deferral of income     7,450     7,900     8,400     8,930     9,550    10,210    10,920   48,010
                    from controlled
                    foreign
                    corporations
                    (normal tax
                    method)..........
           7       Deferred taxes for     2,050     2,130     2,190     2,260       960  ........  ........    5,410
                    financial firms
                    on certain income
                    earned overseas..

                 General Science,
                  Space, and
                  Technology
           8       Expensing of          -1,980    -2,350     4,500     8,290     7,110     6,360     5,570   31,830
                    research and
                    experimentation
                    expenditures
                    (normal tax
                    method)..........
           9       Credit for             7,620     6,760     3,930     1,680       700       230        90    6,630
                    increasing
                    research
                    activities.......

                 Energy
          10       Expensing of             230       290       190        80        70        70        50      460
                    exploration and
                    development
                    costs, fuels.....
          11       Excess of                910       780       760       810       820       810       820    4,020
                    percentage over
                    cost depletion,
                    fuels............
          12       Alternative fuel       1,720     1,190     1,190     1,190     1,190       470  ........    4,040
                    production credit
          13       Exception from            20        20        20        20        20        20        20      100
                    passive loss
                    limitation for
                    working interests
                    in oil and gas
                    properties.......
          14       Capital gains            140       150       150       160       170       180       190      850
                    treatment of
                    royalties on coal
          15       Exclusion of             130       150       160       160       170       190       190      870
                    interest on
                    energy facility
                    bonds............
          16       Enhanced oil             620       630       650       660       680       700       720    3,410
                    recovery credit..
          17       New technology           380       470       490       490       490       500       500    2,470
                    credit...........
          18       Alcohol fuel              30        30        30        30        30        30        30      150
                    credits \1\......
          19       Tax credit and            90        80        20       -30       -90       -90      -100     -290
                    deduction for
                    clean-fuel
                    burning vehicles.
          20       Exclusion from           110       110       110       110       100       100       100      520
                    income of
                    conservation
                    subsidies
                    provided by
                    public utilities.

                 Natural Resources
                  and Environment
          21       Expensing of              10        10        10        10        10        10        10       50
                    exploration and
                    development
                    costs, nonfuel
                    minerals.........
          22       Excess of                320       330       330       360       370       370       390    1,820
                    percentage over
                    cost depletion,
                    nonfuel minerals.
          23       Exclusion of             650       700       760       820       850       900       940    4,270
                    interest on bonds
                    for water,
                    sewage, and
                    hazardous waste
                    facilities.......

    [[Page 297]]

          24       Capital gains            140       150       150       160       170       180       190      850
                    treatment of
                    certain timber
                    income...........
          25       Expensing of             450       450       460       470       490       520       530    2,470
                    multiperiod
                    timber growing
                    costs............
          26       Tax incentives for       270       290       300       320       330       340       370    1,660
                    preservation of
                    historic
                    structures.......

                 Agriculture
          27       Expensing of             150       160       160       160       170       180       190      860
                    certain capital
                    outlays..........
          28       Expensing of             110       110       110       110       110       120       110      560
                    certain
                    multiperiod
                    production costs.
          29       Treatment of loans        10        10        10        10        10        10        10       50
                    forgiven for
                    solvent farmers..
          30       Capital gains          1,400     1,470     1,550     1,630     1,710     1,800     1,890    8,580
                    treatment of
                    certain income...
          31       Income averaging          90        90        90       100       100       100       110      500
                    for farmers......
          32       Deferral of gain          10        20        20        20        20        20        20      100
                    on sale of farm
                    refiners.........

                 Commerce and Housing
                   Financial
                    institutions and
                    insurance:
          33        Exemption of          1,650     1,730     1,820     1,910     2,000     2,100     2,210   10,040
                     credit union
                     income..........
          34        Excess bad debt          50        38        25        25        13  ........  ........       63
                     reserves of
                     financial
                     institutions....
          35        Exclusion of         22,000    23,840    25,730    27,920    30,290    32,860    35,650  152,450
                     interest on life
                     insurance
                     savings.........
          36        Special                 170       170       180       180       200       200       200      960
                     alternative tax
                     on small
                     property and
                     casualty
                     insurance
                     companies.......
          37        Tax exemption of        270       300       310       340       350       370       390    1,760
                     certain
                     insurance
                     companies owned
                     by tax-exempt
                     organizations...
          38        Small life              120       120       120       120       120       120       120      600
                     insurance
                     company
                     deduction.......
                   Housing:
          39        Exclusion of          1,310     1,420     1,550     1,660     1,730     1,840     1,890    8,670
                     interest on
                     owner-occupied
                     mortgage subsidy
                     bonds...........
          40        Exclusion of            400       440       510       530       550       580       590    2,760
                     interest on
                     rental housing
                     bonds...........
          41        Deductibility of     61,160    62,590    69,740    74,800    78,420    83,030    87,920  393,910
                     mortgage
                     interest on
                     owner-occupied
                     homes...........
          42        Deductibility of     22,090    21,740    19,410    16,110    14,580    13,640    13,110   76,850
                     State and local
                     property tax on
                     owner-occupied
                     homes...........
          43        Deferral of           1,060     1,080     1,100     1,120     1,140     1,170     1,190    5,720
                     income from post
                     1987 installment
                     sales...........
          44        Capital gains        26,570    27,367    28,188    29,034    29,905    30,802    31,726  149,655
                     exclusion on
                     home sales......
          45        Exception from        5,710     4,570     4,390     4,210     4,020     3,840     3,660   20,120
                     passive loss
                     rules for
                     $25,000 of
                     rental loss.....
          46        Credit for low-       4,670     4,920     5,160     5,390     5,620     5,880     6,170   28,220
                     income housing
                     investments.....
          47        Accelerated           1,220       620      -170    -1,110    -2,330    -3,560    -4,900  -12,070
                     depreciation on
                     rental housing
                     (normal tax
                     method).........
                   Commerce:
          48        Cancellation of          20        30        30        30        40        40        40      180
                     indebtedness....
          49        Exceptions from          50        50        50        50        50        50        50      250
                     imputed interest
                     rules...........
          50        Capital gains        34,310    36,400    40,260    43,910    48,540    65,240    38,950  236,900
                     (except
                     agriculture,
                     timber, iron
                     ore, and coal)..
          51        Capital gains           170       220       270       340       400       460       530    2,000
                     exclusion of
                     small
                     corporation
                     stock...........
          52        Step-up basis of     19,840    21,710    24,320    26,990    29,650    32,260    34,680  147,900
                     capital gains at
                     death...........
          53        Carryover basis         590       390       450       540       550       580       620    2,740
                     of capital gains
                     on gifts........
          54        Ordinary income          50        60        60        60        60        60        60      300
                     treatment of
                     loss from small
                     business
                     corporation
                     stock sale......
          55        Accelerated          -2,290    -3,190    -4,060    -4,690    -6,810   -10,170   -14,430  -40,160
                     depreciation of
                     buildings other
                     than rental
                     housing (normal
                     tax method).....
          56        Accelerated          48,520    46,800   -10,920   -37,940   -31,040   -28,770   -27,590  -136,26
                     depreciation of                                                                               0
                     machinery and
                     equipment
                     (normal tax
                     method).........
          57        Expensing of          1,030     1,590     4,850     1,650      -490       -30       130    6,110
                     certain small
                     investments
                     (normal tax
                     method).........
          58        Amortization of         110       120       130       150       160       160       160      760
                     start-up costs
                     (normal tax
                     method).........
          59        Graduated             4,670     4,760     6,020     7,150     7,390     7,520     7,760   35,840
                     corporation
                     income tax rate
                     (normal tax
                     method).........
          60        Exclusion of            560       610       670       700       750       790       820    3,730
                     interest on
                     small issue
                     bonds...........

                 Transportation
          61       Deferral of tax on        20        20        20        20        20        20        20      100
                    shipping
                    companies........
          62       Exclusion of           2,750     2,900     3,050     3,210     3,370     3,540     3,710   16,880
                    reimbursed
                    employee parking
                    expenses.........
          63       Exclusion for            400       480       560       650       740       820       910    3,680
                    employer-provided
                    transit passes...

                 Community and
                  Regional
                  Development
          64       Investment credit         30        30        30        30        30        30        30      150
                    for
                    rehabilitation of
                    structures (other
                    than historic)...
          65       Exclusion of           1,110     1,210     1,310     1,390     1,460     1,550     1,600    7,310
                    interest for
                    airport, dock,
                    and similar bonds
          66       Exemption of              70        80        80        80        80        80        90      410
                    certain mutuals'
                    and cooperatives'
                    income...........
          67       Empowerment zones,     1,070     1,080     1,120     1,210     1,320     1,470     1,730    6,850
                    Enterprise
                    communities, and
                    Renewal
                    communities......
          68       New markets tax          190       290       430       610       830       870       790    3,530
                    credit...........
          69       Expensing of             110        40       -20       -10       -10       -10       -10      -60
                    environmental
                    remediation costs

                 Education, Training,
                  Employment, and
                  Social Services
                   Education:
          70        Exclusion of          1,390     1,380     1,480     1,540     1,550     1,560     1,560    7,690
                     scholarship and
                     fellowship
                     income (normal
                     tax method).....
          71        HOPE tax credit..     4,210     4,390     4,500     4,210     4,270     4,250     4,250   21,480
          72        Lifetime Learning     2,440     2,890     2,800     2,720     2,970     2,970     2,950   14,410
                     tax credit......
          73        Education                90       130       180       240       310       390       470    1,590
                     Individual
                     Retirement
                     Accounts........
          74        Deductibility of        870       900       930       960       980       990       990    4,850
                     student-loan
                     interest........
          75        Deduction for         2,210     2,320     3,310     3,340  ........  ........  ........    6,650
                     higher education
                     expenses........
          76        State prepaid            50       150       320       430       510       590       660    2,510
                     tuition plans...
          77        Exclusion of            370       400       440       460       490       510       550    2,450
                     interest on
                     student-loan
                     bonds...........
          78        Exclusion of          1,120     1,220     1,340     1,420     1,480     1,580     1,630    7,450
                     interest on
                     bonds for
                     private
                     nonprofit
                     educational
                     facilities......
          79        Credit for              110       130       160       180       190       200       200      930
                     holders of zone
                     academy bonds...
          80        Exclusion of             20        20        20        20        20        20        20      100
                     interest on
                     savings bonds
                     redeemed to
                     finance
                     educational
                     expenses........
          81        Parental personal     3,480     3,470     2,820     2,220     1,950     1,750     1,580   10,320
                     exemption for
                     students age 19
                     or over.........

    [[Page 298]]

          82        Deductibility of      3,670     3,390     3,660     4,000     4,230     4,510     4,830   21,230
                     charitable
                     contributions
                     (education).....
          83        Exclusion of            620       660       690       730       770       810       860    3,860
                     employer-
                     provided
                     educational
                     assistance......
          84        Special deduction       180       170  ........  ........  ........  ........  ........  .......
                     for teacher
                     expenses........
                   Training,
                    employment, and
                    social services:
          85        Work opportunity        430       370       170        70        30  ........  ........      270
                     tax credit......
          86        Welfare-to-work          60        60        40        30        20  ........  ........       90
                     tax credit......
          87        Employer provided       790       830     1,030     1,160     1,230     1,280     1,350    6,050
                     child care
                     exclusion.......
          88        Employer-provided       120       170       190       200       220       230       240    1,080
                     child care
                     credit..........
          89        Assistance for          280       330       370       420       480       540       610    2,420
                     adopted foster
                     children........
          90        Adoption credit         280       570       640       690       710       730       750    3,520
                     and exclusion...
          91        Exclusion of            950       990     1,030     1,080     1,130     1,180     1,210    5,630
                     employee meals
                     and lodging
                     (other than
                     military).......
          92        Child credit \2\.    50,520    25,950    39,010    32,280    31,960    31,450    31,450  166,150
          93        Credit for child      3,630     3,930     3,590     2,950     2,710     2,530     2,370   14,150
                     and dependent
                     care expenses...
          94        Credit for               70        70        70        70        70        80        80      370
                     disabled access
                     expenditures....
          95        Deductibility of     30,020    27,370    29,670    32,550    34,500    36,790    39,410  172,920
                     charitable
                     contributions,
                     other than
                     education and
                     health..........
          96        Exclusion of            490       500       510       520       530       540       650    2,750
                     certain foster
                     care payments...
          97        Exclusion of            460       490       520       550       580       620       660    2,930
                     parsonage
                     allowances......

                 Health
          98       Exclusion of         129,010   133,400   141,590   151,940   163,510   176,320   190,300  823,660
                    employer
                    contributions for
                    medical insurance
                    premiums and
                    medical care.....
          99       Deductibility of       3,170     4,640     4,610     4,990     5,310     5,770     6,250   26,930
                    self-employed
                    medical insurance
                    premiums.........
         100       Medical Savings          -40      -180      -730    -1,230    -1,780    -2,460    -2,800   -9,000
                    Accounts/Health
                    Savings Accounts.
         101       Deductibility of       6,700     7,400     8,540     9,170     9,930    11,060    11,930   50,630
                    medical expenses.
         102       Exclusion of           2,330     2,560     2,770     2,960     3,110     3,290     3,390   15,520
                    interest on
                    hospital
                    construction
                    bonds............
         103       Deductibility of       3,390     3,090     3,350     3,670     3,890     4,150     4,450   19,510
                    charitable
                    contributions
                    (health).........
         104       Tax credit for           240       270       300       330       370       420       470    1,890
                    orphan drug
                    research.........
         105       Special Blue Cross/      440       400       390       350       390       330       360    1,820
                    Blue Shield
                    deduction........
         106       Tax credit for      ........        60        80        80        90        90       100      440
                    health insurance
                    purchased by
                    certain displaced
                    and retired
                    individuals \3\..

                 Income Security
         107       Exclusion of             400       400       400       400       400       400       400    2,000
                    railroad
                    retirement system
                    benefits.........
         108       Exclusion of           6,100     6,460     6,850     7,270     7,710     8,190     8,690   38,710
                    workers'
                    compensation
                    benefits.........
         109       Exclusion of             400       410       430       450       470       490       510    2,350
                    public assistance
                    benefits (normal
                    tax method)......
         110       Exclusion of              60        60        50        50        50        40        40      230
                    special benefits
                    for disabled coal
                    miners...........
         111       Exclusion of             100       110       110       110       110       120       120      570
                    military
                    disability
                    pensions.........
                   Net exclusion of
                    pension
                    contributions and
                    earnings:
         112        Employer plans...     72980     72410     75290     80900     76400     71170     73710  377,470
         113        401(k) plans.....     63260     69200     71840     74800     80180     86680     92000  405,500
         114        Individual            26220     26390     26910     27530     27010     26640     26320  134,410
                     Retirement
                     Accounts........
         115        Low and moderate        880       960      1100      1210       730  ........  ........    3,040
                     income savers
                     credit..........
         116        Keogh plans......      7640     11040     11660     12360     13140     14320     15600   67,080
                   Exclusion of other
                    employee
                    benefits:
         117        Premiums on group     2,400     2,440     2,480     2,520     2,560     2,600     2,650   12,810
                     term life
                     insurance.......
         118        Premiums on             310       320       330       350       360       370       390    1,800
                     accident and
                     disability
                     insurance.......
         119       Small business            60       110       140       190       200       210       210      950
                    retirement plan
                    credit...........
         120       Income of trusts          30        30        30        30        30        30        30      150
                    to finance
                    supplementary
                    unemployment
                    benefits.........
         121       Special ESOP rules     2,850     3,060     3,280     3,520     3,800     4,080     4,360   19,040
         122       Additional                40        40        40        40        40        40        50      210
                    deduction for the
                    blind............
         123       Additional             2,220     2,070     2,180     2,290     2,380     2,330     2,350   11,530
                    deduction for the
                    elderly..........
         124       Tax credit for the        30        20        20        20        10        10        10       70
                    elderly and
                    disabled.........
         125       Deductibility of         550       760       740       750       640       600       630    3,360
                    casualty losses..
         126       Earned income tax      5,666     5,427     5,562     6,085     6,127     6,226     6,422   30,422
                    credit \4\.......

                 Social Security
                   Exclusion of
                    social security
                    benefits:
         127        Social Security      18,600    19,620    19,040    19,370    20,390    19,710    19,910   98,420
                     benefits for
                     retired workers.
         128        Social Security       3,230     3,570     3,720     3,840     4,080     4,280     4,500   20,420
                     benefits for
                     disabled........
         129        Social Security       4,060     4,380     4,310     4,160     4,190     4,030     4,040   20,730
                     benefits for
                     dependents and
                     survivors.......

                 Veterans Benefits
                  and Services
         130       Exclusion of           3,320     3,330     3,600     3,930     4,170     4,300     4,560   20,560
                    veterans death
                    benefits and
                    disability
                    compensation.....
         131       Exclusion of             100       100       100       110       110       110       120      550
                    veterans pensions
         132       Exclusion of GI          110       120       130       130       160       170       170      760
                    bill benefits....
         133       Exclusion of              50        70        70        70        80        80        80      380
                    interest on
                    veterans housing
                    bonds............

                 General Purpose
                  Fiscal Assistance
         134       Exclusion of          36,550    37,270    37,830    37,920    37,490    38,620    39,770  191,630
                    interest on
                    public purpose
                    State and local
                    bonds............
         135       Deductibility of      49,770    49,470    46,180    39,100    35,930    34,710    34,370  190,290
                    nonbusiness State
                    and local taxes
                    other than on
                    owner-occupied
                    homes............
         136       Tax credit for         1,710     1,640     1,570     1,140  ........  ........  ........    2,710
                    corporations
                    receiving income
                    from doing
                    business in U.S.
                    possessions......

                 Interest
         137       Deferral of               30        40        40        40        40        40        50      210
                    interest on U.S.
                    savings bonds....

    [[Page 299]]

                 Addendum: Aid to
                  State and local
                  governments:
                   Deductibility of:
                    Property taxes on    22,090    21,740    19,410    16,110    14,580    13,640    13,110   76,850
                     owner-occupied
                     homes...........
                    Nonbusiness State    49,770    49,470    46,180    39,100    35,930    34,710    34,370  190,290
                     and local taxes
                     other than on
                     owner-occupied
                     homes...........
                   Exclusion of
                    interest on State
                    and local bonds
                    for:
                    Public purposes..    36,550    37,270    37,830    37,920    37,490    38,620    39,770  191,630
                    Energy facilities       130       150       160       160       170       190       190      870
                    Water, sewage,          650       700       760       820       850       900       940    4,270
                     and hazardous
                     waste disposal
                     facilities......
                    Small-issues.....       560       610       670       700       750       790       820    3,730
                    Owner-occupied        1,310     1,420     1,550     1,660     1,730     1,840     1,890    8,670
                     mortgage
                     subsidies.......
                    Rental housing...       400       440       510       530       550       580       590    2,760
                    Airports, docks,      1,110     1,210     1,310     1,390     1,460     1,550     1,600    7,310
                     and similar
                     facilities......
                    Student loans....       370       400       440       460       490       510       550    2,450
                    Private nonprofit     1,120     1,220     1,340     1,420     1,480     1,580     1,630    7,450
                     educational
                     facilities......
                    Hospital              2,330     2,560     2,770     2,960     3,110     3,290     3,390   15,520
                     construction....
                    Veterans' housing        50        70        70        70        80        80        80      380
                   Credit for holders       110       130       160       180       190       200       200      930
                    of zone academy
                    bonds............
    ----------------------------------------------------------------------------------------------------------------
    \1\  In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise
      tax receipts (in millions of dollars) as follows: 2002 $1,070; 2003 $1,140; 2004 $1,230; 2005 $1,320; 2006
      $1,370; 2007 $1,400; and 2008 $1,430.
    \2\  The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit
      on outlays (in millions of dollars) is as follows: 2001 $980; 2002 $5,060 2003 $5,870; 2004 $5,860; 2005
      $5,700; 2006 $7,630; 2007 $7,630; and 2008 $7,500
    \3\  In addition to the outlay equivalents shown outlays of $60 million in 2004, $90 million in 2005, $100
      million in 2006, $120 million in 2007, $130 million in 2008, and $140 million in 2009 are projected.
    \4\  The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the
      credit on outlays (in millions of dollars) is as follows: 2002 $27,830; 2003 $30,610; 2004 $31,380; 2005
      $32,090; 2006 $33,450; 2007 $34,480; and 2008 $35,380.
    Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law
      method.
    All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in
      each year are not included in the table.

                            Tax Expenditure Baselines

      A tax expenditure is an exception to baseline provisions of the tax
    structure. The 1974 Congressional Budget Act, which mandated the tax
    expenditure budget, did not specify the baseline provisions of the tax
    law. As noted previously, deciding whether provisions are exceptions,
    therefore, is a matter of judgment. As in prior years, most of this
    year's tax expenditure estimates are presented using two baselines: the
    normal tax baseline and the reference tax law baseline. An exception is
    provided for the reduction in the tax rate on dividends and capital
    gains on corporate shares by the Jobs and Growth Tax Relief
    Reconciliation Act of 2003 (JGTRRA), as dicussed below.
      The normal tax baseline is patterned on a comprehensive income tax,
    which defines income as the sum of consumption and the change in net
    wealth in a given period of time. The normal tax baseline allows
    personal exemptions, a standard deduction, and deductions of the
    expenses incurred in earning income. It is not limited to a particular
    structure of tax rates, or by a specific definition of the taxpaying
    unit.
      The reference tax law baseline is also patterned on a comprehensive
    income tax, but it is closer to existing law. Tax expenditures under the
    reference law baseline are generally tax expenditures under the normal
    tax baseline, but the reverse is not always true.
      Both the normal and reference tax baselines allow several major
    departures from a pure comprehensive income tax. For example:
        Income is taxable only when it is realized in exchange.
              Thus, neither the deferral of tax on unrealized capital gains
              nor the tax exclusion of imputed income (such as the rental
              value of owner-occupied housing or farmers' consumption of
              their own produce) is regarded as a tax expenditure. Both
              accrued and imputed income would be taxed under a
              comprehensive income tax.
        A comprehensive income tax would generally not exclude from
              the tax base amounts for personal exemptions or a standard
              deduction, except perhaps to ease tax administration.
        There generally is a separate corporate income tax.
        Values of assets and debt are not generally adjusted for
              inflation. A comprehensive income tax would adjust the cost
              basis of capital assets and debt for changes in the price
              level during the time the assets or debt are held. Thus, under
              a comprehensive income tax baseline, the failure to take
              account of inflation in measuring depreciation, capital gains,
              and interest income would be regarded as a negative tax
              expenditure (i.e., a tax penalty), and failure to take account
              of inflation in measuring interest costs would be regarded as
              a positive tax expenditure (i.e., a tax subsidy).
      Although the reference law and normal tax baselines are generally
    similar, areas of difference include:

                Tax rates. The separate schedules applying to the various
              taxpaying units are included in the reference law baseline.
              Thus, corporate tax rates below the maximum statutory rate do
              not give rise to a tax expenditure. The normal tax baseline is
              similar, except that, by convention, it specifies the current
              maximum rate as the baseline for the corporate income tax. The
              lower tax rates applied to the first $10 million of corporate
              income are thus regarded as a tax expenditure. Again by
              convention, the alternative minimum tax is treated

    [[Page 300]]

              as part of the baseline rate structure under both the
              reference and normal tax methods.
                Income subject to the tax. Income subject to tax is defined
              as gross income less the costs of earning that income. The
              Federal income tax defines gross income to include: (1)
              consideration received in the exchange of goods and services,
              including labor services or property; and (2) the taxpayer's
              share of gross or net income earned and/or reported by another
              entity (such as a partnership). Under the reference tax rules,
              therefore, gross income does not include gifts--defined as
              receipts of money or property that are not consideration in an
              exchange--or most transfer payments, which can be thought of
              as gifts from the Government.\1\ The normal tax baseline also
              excludes gifts between individuals from gross income. Under
              the normal tax baseline, however, all cash transfer payments
              from the Government to private individuals are counted in
              gross income, and exemptions of such transfers from tax are
              identified as tax expenditures. The costs of earning income
              are generally deductible in determining taxable income under
              both the reference and normal tax baselines.\2\
    ---------------------------------------------------------------------------
      \1\ Gross income does, however, include transfer payments associated
    with past employment, such as Social Security benefits.
      \2\ In the case of individuals who hold ``passive'' equity interests
    in businesses, however, the pro-rata shares of sales and expense
    deductions reportable in a year are limited. A passive business activity
    is defined to be one in which the holder of the interest, usually a
    partnership interest, does not actively perform managerial or other
    participatory functions. The taxpayer may generally report no larger
    deductions for a year than will reduce taxable income from such
    activities to zero. Deductions in excess of the limitation may be taken
    in subsequent years, or when the interest is liquidated. In addition,
    costs of earning income may be limited under the alternative minimum
    tax.
    ---------------------------------------------------------------------------
                Capital recovery. Under the reference tax law baseline no
              tax expenditures arise from accelerated depreciation. Under
              the normal tax baseline, the depreciation allowance for
              property is computed using estimates of economic depreciation.
              The latter represents a change in the calculation of the tax
              expenditure under normal law first made in the 2004 Budget.
              The Appendix provides further details on the new methodology
              and how it differs from the prior methodology.
                Treatment of foreign income. Both the normal and reference
              tax baselines allow a tax credit for foreign income taxes paid
              (up to the amount of U.S. income taxes that would otherwise be
              due), which prevents double taxation of income earned abroad.
              Under the normal tax method, however, controlled foreign
              corporations (CFCs) are not regarded as entities separate from
              their controlling U.S. shareholders. Thus, the deferral of tax
              on income received by CFCs is regarded as a tax expenditure
              under this method. In contrast, except for tax haven
              activities, the reference law baseline follows current law in
              treating CFCs as separate taxable entities whose income is not
              subject to U.S. tax until distributed to U.S. taxpayers. Under
              this baseline, deferral of tax on CFC income is not a tax
              expenditure because U.S. taxpayers generally are not taxed on
              accrued, but unrealized, income.

      In addition to these areas of difference, the Joint Committee on
    Taxation considers a somewhat broader set of tax expenditures under its
    normal tax baseline than is considered here.

      Treatment of JGTRRA's Cut in the Tax Rates on Dividends and Capital
                                      Gains

      Although not in line with previous reference tax law or normal tax law
    baselines, our tables exclude from the list of tax expenditures JGTRRA's
    reductions in the tax rate on dividends. Reference law used for the FY
    2005 Budget includes capital gains as tax expenditure, but only to the
    extent capital gains have not previously been taxed under the corporate
    income tax. Similarly, the lower tax rate on dividends is not included
    as a tax expenditure under reference law because dividends have
    generally already been taxed under the corporate income tax. This
    exception was made as part of Treasury's ongoing reevaluation of the tax
    expenditure concept and to consider gradually changes in the baseline
    tax system to conform more closely with a comprehensive income tax that
    excludes double tax on corporate income. The same treatment is extended
    to the tax rate differential applied to capital gains on corporate
    shares, including JGTRRA's increase in this differential.

        Performance Measures and the Economic Effects of Tax Expenditures

      The Government Performance and Results Act of 1993 (GPRA) directs
    Federal agencies to develop annual and strategic plans for their
    programs and activities. These plans set out performance objectives to
    be achieved over a specific time period. Most of these objectives will
    be achieved through direct expenditure programs. Tax expenditures,
    however, may also contribute to achieving these goals. The report of the
    Senate Governmental Affairs Committee on GPRA\3\ calls on the Executive
    branch to undertake a series of analyses to assess the effect of
    specific tax expenditures on the achievement of agencies' performance
    objectives.
    ---------------------------------------------------------------------------
      \3\ Committee on Government Affairs, United States Senate,
    ``Government Performance and Results Act of 1993'' (Report 103-58,
    1993).
    ---------------------------------------------------------------------------
      The Executive Branch is continuing to focus on the availability of
    data needed to assess the effects of the tax expenditures designed to
    increase savings. Treasury's Office of Tax Analysis and Statistics of
    Income Division (IRS) have developed a new sample of individual income
    tax filers as one part of this effort. This new ``panel'' sample will
    follow the same taxpayers over a period of at least ten years. The first
    year of this panel sample was drawn from tax returns filed in 2000 for
    tax year 1999. The sample will capture the changing demographic and
    economic circumstances of individuals and the effects of changes in tax
    law over an extended period of time. Data from the sample will therefore
    permit more extensive, and better, analyses of many tax provisions than
    can be performed using only annual (``cross-section'') data. In
    particular, data from this panel sample will enhance our ability to
    analyze the

    [[Page 301]]

    effect of tax expenditures designed to increase savings. Other efforts
    by OMB, Treasury, and other agencies to improve data available for the
    analysis of savings tax expenditures will continue over the next several
    years.
      Comparison of tax expenditure, spending, and regulatory policies.  Tax
    expenditures by definition work through the tax system and,
    particularly, the income tax. Thus, they may be relatively advantageous
    policy approaches when the benefit or incentive is related to income and
    is intended to be widely available.\4\ Because there is an existing
    public administrative and private compliance structure for the tax
    system, the incremental administrative and compliance costs for a tax
    expenditure may be low in many cases. In addition, some tax expenditures
    actually simplify the tax system, (for example, the exclusion for up to
    $500,000 of capital gains on home sales). Tax expenditures also
    implicitly subsidize certain activities. Spending, regulatory or tax-
    disincentive policies can also modify behavior, but may have different
    economic effects. Finally, a variety of tax expenditure tools can be
    used--e.g., deductions; credits; exemptions; deferrals; floors;
    ceilings; phase-ins; phase-outs; dependent on income, expenses, or
    demographic characteristics (age, number of family members, etc.). This
    wide range means that tax expenditures can be flexible and can have very
    different economic effects.
    ---------------------------------------------------------------------------
      \4\ Although this section focuses upon tax expenditures under the
    income tax, tax expenditures also arise under the unified transfer,
    payroll, and excise tax systems. Such provisions can be useful when they
    relate to the base of those taxes, such as an excise tax exemption for
    certain types of consumption deemed meritorious.
    ---------------------------------------------------------------------------
      Tax expenditures also have limitations. In many cases they add to the
    complexity of the tax system, which raises both administrative and
    compliance costs. For example, targeting personal exemptions and credits
    can complicate filing and decisionmaking. The income tax system may have
    little or no contact with persons who have no or very low incomes, and
    does not require information on certain characteristics of individuals
    used in some spending programs, such as wealth. These features may
    reduce the effectiveness of tax expenditures for addressing certain
    income-transfer objectives. Tax expenditures also generally do not
    enable the same degree of agency discretion as an outlay program. For
    example, grant or direct Federal service delivery programs can
    prioritize activities to be addressed with specific resources in a way
    that is difficult to emulate with tax expenditures. Finally, tax
    expenditures may not receive the same level of scrutiny afforded to
    other programs.
      Outlay programs have advantages where direct Government service
    provision is particularly warranted--such as equipping and providing the
    armed forces or administering the system of justice. Outlay programs may
    also be specifically designed to meet the needs of low-income families
    who would not otherwise be subject to income taxes or need to file a tax
    return. Outlay programs may also receive more year-to-year oversight and
    fine tuning, through the legislative and executive budget process. In
    addition, many different types of spending programs--including direct
    Government provision; credit programs; and payments to State and local
    governments, the private sector, or individuals in the form of grants or
    contracts--provide flexibility for policy design. On the other hand,
    certain outlay programs--such as direct Government service provision--
    may rely less directly on economic incentives and private-market
    provision than tax incentives, which may reduce the relative efficiency
    of spending programs for some goals. Spending programs also require
    resources to be raised via taxes, user charges, or Government borrowing,
    which can impose further costs by diverting resources from their most
    efficient uses. Finally, spending programs, particularly on the
    discretionary side, may respond less readily to changing activity levels
    and economic conditions than tax expenditures.
      Regulations have more direct and immediate effects than outlay and
    tax-expenditure programs because regulations apply directly and
    immediately to the regulated party (i.e., the intended actor)--generally
    in the private sector. Regulations can also be fine-tuned more quickly
    than tax expenditures, because they can generally be changed by the
    executive branch without legislation. Like tax expenditures, regulations
    often rely largely upon voluntary compliance, rather than detailed
    inspections and policing. As such, the public administrative costs tend
    to be modest, relative to the private resource costs associated with
    modifying activities. Historically, regulations have tended to rely on
    proscriptive measures, as opposed to economic incentives. This reliance
    can diminish their economic efficiency, although this feature can also
    promote full compliance where (as in certain safety-related cases)
    policymakers believe that trade-offs with economic considerations are
    not of paramount importance. Also, regulations generally do not directly
    affect Federal outlays or receipts. Thus, like tax expenditures, they
    may escape the type of scrutiny that outlay programs receive. However,
    major regulations are subjected to a formal regulatory analysis that
    goes well beyond the analysis required for outlays and tax-expenditures.
    To some extent, the GPRA requirement for performance evaluation will
    address this lack of formal analysis.
      Some policy objectives are achieved using multiple approaches. For
    example, minimum wage legislation, the earned income tax credit, and the
    food stamp program are regulatory, tax expenditure, and direct outlay
    programs, respectively, all having the objective of improving the
    economic welfare of low-wage workers.
      Tax expenditures, like spending and regulatory programs, have a
    variety of objectives and effects. These include: encouraging certain
    types of activities (e.g., saving for retirement or investing in certain
    sectors); increasing certain types of after-tax income (e.g., favorable
    tax treatment of Social Security income); reducing private compliance
    costs and Government administrative costs (e.g., the exclusion for up to
    $500,000 of capital gains on home sales); and promoting tax neutrality
    (e.g., accelerated depreciation in the presence of inflation). Some of
    these objectives are well suited to quantitative measurement, while
    others are less well suited.

    [[Page 302]]

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

    [[Page 303]]

    taxes. Provisions intended to promote investment in rental housing could
    be evaluated for their effects on making such housing more available and
    affordable. These provisions should then be compared with alternative
    programs that address housing supply and demand.
      Transportation.--Employer-provided parking is a fringe benefit that,
    for the most part, is excluded from taxation. The tax expenditure
    estimates reflect the cost of parking that is leased by employers for
    employees; an estimate is not currently available for the value of
    parking owned by employers and provided to their employees. The
    exclusion for employer-provided transit passes is intended to promote
    use of this mode of transportation, which has environmental and
    congestion benefits. The tax treatments of these different benefits
    could be compared with alternative transportation policies.
      Community and regional development.--A series of tax expenditures is
    intended to promote community and regional development by reducing the
    costs of financing specialized infrastructure, such as airports, docks,
    and stadiums. Empowerment zone and enterprise community provisions are
    designed to promote activity in disadvantaged areas. These provisions
    can be compared with grants and other policies designed to spur economic
    development.
      Education, training, employment, and social services.--Major
    provisions in this function are intended to promote post-secondary
    education, to offset costs of raising children, and to promote a variety
    of charitable activities. The education incentives can be compared with
    loans, grants, and other programs designed to promote higher education
    and training. The child credits are intended to adjust the tax system
    for the costs of raising children; as such, they could be compared to
    other Federal tax and spending policies, including related features of
    the tax system, such as personal exemptions (which are not defined as a
    tax expenditure). Evaluation of charitable activities requires
    consideration of the beneficiaries of these activities, who are
    generally not the parties receiving the tax reduction.
      Health.--Individuals also benefit from favorable treatment of
    employer-provided health insurance. Measures of these benefits could
    include increased coverage and pooling of risks. The effects of
    insurance coverage on final outcome measures of actual health (e.g.,
    infant mortality, days of work lost due to illness, or life expectancy)
    or intermediate outcomes (e.g., use of preventive health care or health
    care costs) could also be investigated.
      Income security, Social Security, and veterans benefits and
    services.--Major tax expenditures in the income security function
    benefit retirement savings, through employer-provided pensions,
    individual retirement accounts, and Keogh plans. These provisions might
    be evaluated in terms of their effects on boosting retirement incomes,
    private savings, and national savings (which would include the effect on
    private savings as well as public savings or deficits). Interactions
    with other programs, including Social Security, also may merit analysis.
    As in the case of employer-provided health insurance, analysis of
    employer-provided pension programs requires imputing the value of
    benefits funded at the firm level to individuals.
      Other provisions principally affect the incomes of members of certain
    groups, rather than affecting incentives. For example, tax-favored
    treatment of Social Security benefits, certain veterans benefits, and
    deductions for the blind and elderly provide increased incomes to
    eligible parties. The earned-income tax credit, in contrast, should be
    evaluated for its effects on labor force participation as well as the
    income it provides lower-income workers.
      General purpose fiscal assistance and interest.--The tax-exemption for
    public purpose State and local bonds reduces the costs of borrowing for
    a variety of purposes (borrowing for non-public purposes is reflected
    under other budget functions). The deductibility of certain State and
    local taxes reflected under this function primarily relates to personal
    income taxes (property tax deductibility is reflected under the commerce
    and housing function). Tax preferences for Puerto Rico and other U.S.
    possessions are also included here. These provisions can be compared
    with other tax and spending policies as means of benefitting fiscal and
    economic conditions in the States, localities, and possessions. Finally,
    the tax deferral for interest on U.S. savings bonds benefits savers who
    invest in these instruments. The extent of these benefits and any
    effects on Federal borrowing costs could be evaluated.
      The above illustrative discussion, although broad, is nevertheless
    incomplete, omitting important details both for the provisions mentioned
    and the many that are not explicitly cited. Developing a framework that
    is sufficiently comprehensive, accurate, and flexible to reflect the
    objectives and effects of the wide range of tax expenditures will be a
    significant challenge. OMB, Treasury, and other agencies will work
    together, as appropriate, to address this challenge. As indicated above,
    over the next few years the Executive Branch's focus will be on the
    availability of the data needed to assess the effects of the tax
    expenditures designed to increase savings.

                      Descriptions of Income Tax Provisions

      Descriptions of the individual and corporate income tax expenditures
    reported upon in this chapter follow. These descriptions relate to
    current law as of December 31, 2003, and do not reflect proposals made
    elsewhere in the Budget.

                                National Defense

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

    [[Page 304]]

                              International Affairs

      2. Income earned abroad.-- U.S. citizens who lived abroad, worked in
    the private sector, and satisfied a foreign residency requirement in
    2001 may exclude up to $78,000 in foreign earned income from U.S. taxes.
    The exclusion increases to $80,000 in 2002 (and thereafter). In
    addition, if these taxpayers receive a specific allowance for foreign
    housing from their employers, they may also exclude the value of that
    allowance. If they do not receive a specific allowance for housing
    expenses, they may deduct against their U.S. taxes that portion of such
    expenses that exceeds one-sixth the salary of a civil servant at grade
    GS-14, step 1 ($72,381 in 2003).
      3. Exclusion of certain allowances for Federal employees abroad.--U.S.
    Federal civilian employees and Peace Corps members who work outside the
    continental United States are allowed to exclude from U.S. taxable
    income certain special allowances they receive to compensate them for
    the relatively high costs associated with living overseas. The
    allowances supplement wage income and cover expenses like rent,
    education, and the cost of travel to and from the United States.
      4. Extraterritorial income exclusion.\5\--For purposes of calculating
    U.S. tax liability, a taxpayer may exclude from gross income the
    qualifying foreign trade income attributable to foreign trading gross
    receipts. The exclusion generally applies to income from the sale or
    lease of qualifying foreign trade property and certain types of services
    income. The FSC Repeal and Extraterritorial Income Exclusion Act of 2000
    created the extraterritorial income exclusion to replace the foreign
    sales corporation provisions, which the Act repealed. The exclusion is
    generally available for transactions entered into after September 30,
    2000.
    ---------------------------------------------------------------------------
      \5\ The determination of whether a provision is a tax expenditure is
    made on the basis of a broad concept of ``income'' that is larger in
    scope than is ``income'' as defined under general U.S. income tax
    principles. For that reason, the tax expenditure estimates include, for
    example, estimates related to the exclusion of extraterritorial income,
    as well as other exclusions, notwithstanding that such exclusions define
    income under the general rule of U.S. income taxation.
    ---------------------------------------------------------------------------
      5. Sales source rule exceptions.--The worldwide income of U.S. persons
    is taxable by the United States and a credit for foreign taxes paid is
    allowed. The amount of foreign taxes that can be credited is limited to
    the pre-credit U.S. tax on the foreign source income. The sales source
    rules for inventory property allow U.S. exporters to use more foreign
    tax credits by allowing the exporters to attribute a larger portion of
    their earnings abroad than would be the case if the allocation of
    earnings was based on actual economic activity.
      6. Income of U.S.-controlled foreign corporations.--The income of
    foreign corporations controlled by U.S. shareholders is not subject to
    U.S. taxation. The income becomes taxable only when the controlling U.S.
    shareholders receive dividends or other distributions from their foreign
    stockholding. Under the normal tax method, the currently attributable
    foreign source pre-tax income from such a controlling interest is
    considered to be subject to U.S. taxation, whether or not distributed.
    Thus, the normal tax method considers the amount of controlled foreign
    corporation income not yet distributed to a U.S. shareholder as tax-
    deferred income.
      7. Exceptions under subpart F for active financing income.--Financial
    firms can defer taxes on income earned overseas in an active business.
    Taxes on income earned through December 31, 2006 can be deferred.

                     General Science, Space, and Technology

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

                                     Energy

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

    [[Page 305]]

    duct a percentage of gross income from mineral production at rates of 22
    percent for uranium; 15 percent for oil, gas and oil shale; and 10
    percent for coal. The deduction is limited to 50 percent of net income
    from the property, except for oil and gas where the deduction can be 100
    percent of net property income. Production from geothermal deposits is
    eligible for percentage depletion at 65 percent of net income, but with
    no limit on output and no limitation with respect to qualified
    producers. Unlike depreciation or cost depletion, percentage depletion
    deductions can exceed the cost of the investment.
      12. Alternative fuel production credit.--A nontaxable credit of $3 per
    oil-equivalent barrel of production (in 1979 dollars) is provided for
    several forms of alternative fuels. The credit is generally available if
    the price of oil stays below $29.50 (in 1979 dollars). The credit
    generally expires on December 31, 2002.
      13. Oil and gas exception to passive loss limitation.--Owners of
    working interests in oil and gas properties are exempt from the
    ``passive income'' limitations. As a result, the working interest-
    holder, who manages on behalf of himself and all other owners the
    development of wells and incurs all the costs of their operation, may
    aggregate negative taxable income from such interests with his income
    from all other sources.
      14. Capital gains treatment of royalties on coal.--Sales of certain
    coal under royalty contracts can be treated as capital gains rather than
    ordinary income.
      15. Energy facility bonds.--Interest earned on State and local bonds
    used to finance construction of certain energy facilities is tax-exempt.
    These bonds are generally subject to the State private-activity bond
    annual volume cap.
      16. Enhanced oil recovery credit.--A credit is provided equal to 15
    percent of the taxpayer's costs for tertiary oil recovery on U.S.
    projects. Qualifying costs include tertiary injectant expenses,
    intangible drilling and development costs on a qualified enhanced oil
    recovery project, and amounts incurred for tangible depreciable
    property.
      17. New technology credits.--A credit of 10 percent is available for
    investment in solar and geothermal energy facilities. In addition, a
    credit of 1.5 cents is provided per kilowatt hour of electricity
    produced from renewable resources such as wind, biomass, and poultry
    waste facilities. The renewable resources credit applies only to
    electricity produced by a facility placed in service on or before
    December 31, 2004.
      18. Alcohol fuel credits.--An income tax credit is provided for
    ethanol that is derived from renewable sources and used as fuel. The
    credit equals 53 cents per gallon in 2001 and 2002; 52 cents per gallon
    in 2003 and 2004; and 51 cents per gallon in 2005, 2006, and 2007. To
    the extent that ethanol is mixed with taxable motor fuel to create
    gasohol, taxpayers may claim an exemption of the Federal excise tax
    rather than the income tax credit. In addition, small ethanol producers
    are eligible for a separate 10 cents per gallon credit.
      19. Credit and deduction for clean-fuel vehicles and property.--A tax
    credit of 10 percent (not to exceed $4,000) is provided for purchasers
    of electric vehicles. Purchasers of other clean-fuel burning vehicles
    and owners of clean-fuel refueling property may deduct part of their
    expenditures. The credit and deduction are phased out from 2004 through
    2007,.
      20. Exclusion of utility conservation subsidies.--Non-business
    customers can exclude from gross income subsidies received from public
    utilities for expenditures on energy conservation measures.

                        Natural Resources and Environment

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

                                   Agriculture

      27. Expensing certain capital outlays.--Farmers, except for certain
    agricultural corporations and partnerships, are allowed to expense
    certain expenditures for feed and fertilizer, as well as for soil and
    water conservation measures. Expensing is allowed, even though these
    expenditures are for inventories held beyond the end of the year, or for
    capital improvements that would otherwise be capitalized.
      28. Expensing multiperiod livestock and crop production costs.--The
    production of livestock and crops with a production period of less than
    two years is exempt from the uniform cost capitalization rules. Farmers
    establishing orchards, constructing farm facilities for their own use,
    or producing any goods for sale with a production period of two years or
    more may elect not to capitalize costs. If they do, they must apply

    [[Page 306]]

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

                              Commerce and Housing

      This category includes a number of tax expenditure provisions that
    also affect economic activity in other functional categories. For
    example, provisions related to investment, such as accelerated
    depreciation, could be classified under the energy, natural resources
    and environment, agriculture, or transportation categories.
      33. Credit union income.--The earnings of credit unions not
    distributed to members as interest or dividends are exempt from income
    tax.
      34. Bad debt reserves.--Small (less than $500 million in assets)
    commercial banks, mutual savings banks, and savings and loan
    associations may deduct additions to bad debt reserves in excess of
    actually experienced losses.
      35. Deferral of income on life insurance and annuity contracts.--
    Favorable tax treatment is provided for investment income within
    qualified life insurance and annuity contracts. Investment income earned
    on qualified life insurance contracts held until death is permanently
    exempt from income tax. Investment income distributed prior to the death
    of the insured is tax-deferred, if not tax-exempt. Investment income
    earned on annuities is treated less favorably than income earned on life
    insurance contracts, but it benefits from tax deferral without annual
    contribution or income limits generally applicable to other tax-favored
    retirement income plans.

      36. Small property and casualty insurance companies.-- Insurance
    companies that have annual net premium incomes of less than $350,000 are
    exempt from tax; those with $350,000 to $2.1 million of net premium
    incomes may elect to pay tax only on the income earned by their
    investment portfolio.
      37. Insurance companies owned by exempt organizations.--Generally, the
    income generated by life and property and casualty insurance companies
    is subject to tax, albeit by special rules. Insurance operations
    conducted by such exempt organizations as fraternal societies and
    voluntary employee benefit associations, however, are exempt from tax.
      38. Small life insurance company deduction.--Small life insurance
    companies (gross assets of less than $500 million) can deduct 60 percent
    of the first $3 million of otherwise taxable income. The deduction
    phases out for otherwise taxable income between $3 million and $15
    million.
      39. Mortgage housing bonds.--Interest earned on State and local bonds
    used to finance homes purchased by first-time, low-to-moderate-income
    buyers is tax-exempt. The amount of State and local tax-exempt bonds
    that can be issued to finance these and other private activity is
    limited. The combined volume cap for private activity bonds, including
    mortgage housing bonds, rental housing bonds, student loan bonds, and
    industrial development bonds was $62.50 per capita ($187.5 million
    minimum) per State in 2001, and $75 per capita ($225 million minimum) in
    2002. The Community Renewal Tax Relief Act of 2000 accelerated the
    scheduled increase in the state volume cap and indexed the cap for
    inflation, beginning in 2003. States may issue mortgage credit
    certificates (MCCs) in lieu of mortgage revenue bonds. MCCs entitle home
    buyers to income tax credits for a specified percentage of interest on
    qualified mortgages. The total amount of MCCs issued by a State cannot
    exceed 25 percent of its annual ceiling for mortgage-revenue bonds.
      40. Rental housing bonds.--Interest earned on State and local
    government bonds used to finance multifamily rental housing projects is
    tax-exempt. At least 20 percent (15 percent in targeted areas) of the
    units must be reserved for families whose income does not exceed 50
    percent of the area's median income; or 40 percent for families with
    incomes of no more than 60 percent of the area median income. Other tax-
    exempt bonds for multifamily rental projects are generally issued with
    the requirement that all tenants must be low or moderate income
    families. Rental housing bonds are subject to the volume cap discussed
    in the mortgage housing bond section above.
      41. Interest on owner-occupied homes.--Owner-occupants of homes may
    deduct mortgage interest on their primary and secondary residences as
    itemized nonbusiness deductions. The mortgage interest deduction is
    limited to interest on debt no greater than the owner's basis in the
    residence and, for debt incurred

    [[Page 307]]

    after October 13, 1987, it is limited to no more than $1 million.
    Interest on up to $100,000 of other debt secured by a lien on a
    principal or second residence is also deductible, irrespective of the
    purpose of borrowing, provided the debt does not exceed the fair market
    value of the residence. Mortgage interest deductions on personal
    residences are tax expenditures because the value of owner-occupied
    housing services is not included in a taxpayer's taxable income. The
    Appendix provides an alternative calculation of the tax expenditure
    based on the implicit rental income on owner-occupied housing, which is
    generally viewed as a more accurate measure of the tax expenditure
    relative to a comprehensive income tax base.
      42. Taxes on owner-occupied homes.--Owner-occupants of homes may
    deduct property taxes on their primary and secondary residences even
    though they are not required to report the value of owner-occupied
    housing services as gross income.
      43. Installment sales.--Dealers in real and personal property (i.e.,
    sellers who regularly hold property for sale or resale) cannot defer
    taxable income from installment sales until the receipt of the loan
    repayment. Nondealers (i.e., sellers of real property used in their
    business) are required to pay interest on deferred taxes attributable to
    their total installment obligations in excess of $5 million. Only
    properties with sales prices exceeding $150,000 are includable in the
    total. The payment of a market rate of interest eliminates the benefit
    of the tax deferral. The tax exemption for nondealers with total
    installment obligations of less than $5 million is, therefore, a tax
    expenditure.
      44. Capital gains exclusion on home sales.--A homeowner can exclude
    from tax up to $500,000 ($250,000 for singles) of the capital gains from
    the sale of a principal residence. The exclusion may not be used more
    than once every two years.
      45. Passive loss real estate exemption.--In general, passive losses
    may not offset income from other sources. Losses up to $25,000
    attributable to certain rental real estate activity, however, are exempt
    from this rule.
      46. Low-income housing credit.--Taxpayers who invest in certain low-
    income housing are eligible for a tax credit. The credit rate is set so
    that the present value of the credit is equal to 70 percent for new
    construction and 30 percent for (1) housing receiving other Federal
    benefits (such as tax-exempt bond financing), or (2) substantially
    rehabilitated existing housing. The credit is allowed in equal amounts
    over 10 years. State agencies determine who receives the credit; States
    are limited in the amount of credit they may authorize annually. The
    Community Renewal Tax Relief Act of 2000 increased the per-resident
    limit to $1.50 in 2001 and to $1.75 in 2002 and indexed the limit for
    inflation, beginning in 2003. The Act also created a $2 million minimum
    annual cap for small States beginning in 2002; the cap is indexed for
    inflation, beginning in 2003.
      47. Accelerated depreciation of rental property.--The tax depreciation
    allowance provisions are part of the reference law rules, and thus do
    not give rise to tax expenditures under the reference method. Under the
    normal tax method, however, economic depreciation is assumed. This
    calculation is described in more detail in the Appendix.
      48. Cancellation of indebtedness.--Individuals are not required to
    report the cancellation of certain indebtedness as current income. If
    the canceled debt is not reported as current income, however, the basis
    of the underlying property must be reduced by the amount canceled.
      49. Imputed interest rules.--Holders (issuers) of debt instruments are
    generally required to report interest earned (paid) in the period it
    accrues, not when paid. In addition, the amount of interest accrued is
    determined by the actual price paid, not by the stated principal and
    interest stipulated in the instrument. In general, any debt associated
    with the sale of property worth less than $250,000 is excepted from the
    general interest accounting rules. This general $250,000 exception is
    not a tax expenditure under reference law but is under normal law.
    Exceptions above $250,000 are a tax expenditure under reference law;
    these exceptions include the following: (1) sales of personal residences
    worth more than $250,000, and (2) sales of farms and small businesses
    worth between $250,000 and $1 million.
      50. Capital gains (other than agriculture, timber, iron ore, and
    coal).--Capital gains on assets held for more than 1 year are taxed at a
    lower rate than ordinary income. Under the revised reference law
    baseline used for the FY 2005 Budget, the lower rate on capital gains is
    considered a tax expenditure under the reference law method, but only
    for capital gains that have not been previously taxed under the
    corporate income tax. As discussed above, this treatment excludes the
    double tax on corporate income and is more consistent with a
    comprehensive income tax base.
      Prior to passage of the Jobs Growth Tax Relief Reconciliation Act
    (JGTRRA), the top capital gains tax rate for most assets held for more
    than 1 year was 20 percent. For assets acquired after December 31, 2000,
    the top capital gains tax rate for assets held for more than 5 years was
    18 percent. Since January 1, 2001, taxpayers may mark-to-market existing
    assets to start the 5-year holding period. Losses from the mark-to-
    market are not recognized.
      For assets held for more than 1 year by taxpayers in the 15-percent
    ordinary tax bracket, the top capital gains tax rate was 10 percent.
    After December 31, 2000, the top capital gains tax rate for assets held
    by these taxpayers for more than 5 years was 8 percent.
      JGTRRA reduced the previous 20 percent and 18 percent rates on net
    capital gains to 15 percent and the previous 10 percent and 8 percent
    rates to 5 percent (0 percent, in 2008). The lower rates apply to assets
    held for more than one year. The lower rates apply to assets sold after
    May 6, 2003 through 2008.

    [[Page 308]]

      51.  Capital gains exclusion for small business stock.--An exclusion
    of 50 percent is provided for capital gains from qualified small
    business stock held by individuals for more than 5 years. A qualified
    small business is a corporation whose gross assets do not exceed $50
    million as of the date of issuance of the stock.
      52. Step-up in basis of capital gains at death.--Capital gains on
    assets held at the owner's death are not subject to capital gains taxes.
    The cost basis of the appreciated assets is adjusted upward to the
    market value at the owner's date of death. After repeal of the estate
    tax for 2010 under the Economic Growth and Tax Relief Reconciliation Act
    (EGTRRA) of 2001, the basis for property acquired from a decedent will
    be the lesser of fair market value or the decedent's basis. Certain
    types of additions to basis will be allowed so that assets in most
    estates that are not currently subject to estate tax will not be subject
    to capital gains tax in the hands of the heirs.
      53. Carryover basis of capital gains on gifts.--When a gift is made,
    the donor's basis in the transferred property (the cost that was
    incurred when the transferred property was first acquired) carries-over
    to the donee. The carryover of the donor's basis allows a continued
    deferral of unrealized capital gains. Even though the estate tax is
    repealed for 2010 under EGTRRA, the gift tax is retained with a lifetime
    exemption of $1 million.
      54. Ordinary income treatment of losses from sale of small business
    corporate stock shares.--Up to $100,000 in losses from the sale of small
    business corporate stock (capitalization less than $1 million) may be
    treated as ordinary losses. Such losses would, thus, not be subject to
    the $3,000 annual capital loss write-off limit.
      55. Accelerated depreciation of non-rental-housing buildings.--The tax
    depreciation allowance provisions are part of the reference law rules,
    and thus do not give rise to tax expenditures under reference law. Under
    normal law, however, economic depreciation is assumed. This calculation
    is described in more detail in the Appendix.
      56. Accelerated depreciation of machinery and equipment.--The tax
    depreciation allowance provisions are part of the reference law rules,
    and thus do not give rise to tax expenditures under reference law. Under
    the normal tax baseline, this tax depreciation allowance is measured
    relative to economic depreciation. This calculation is described in more
    detail in the Appendix.
      57. Expensing of certain small investments.--In 2002, qualifying
    investments in tangible property up to $24,000 could be expensed rather
    than depreciated over time. The expensing limit increases to $25,000 in
    2003. To the extent that qualifying investment during the year exceeds
    $200,000, the amount eligible for expensing is decreased. In 2002, the
    amount expensed was completely phased out when qualifying investments
    exceeded $224,000.
      58. Business start-up costs.--When taxpayers enter into a new
    business, certain start-up expenses, such as the cost of legal services,
    are normally incurred. Taxpayers may elect to amortize these outlays
    over 60 months even though they are similar to other payments made for
    nondepreciable intangible assets that are not recoverable until the
    business is sold. The normal tax method treats this amortization as a
    tax expenditure; the reference tax method does not.
      59. Graduated corporation income tax rate schedule.--The corporate
    income tax schedule is graduated, with rates of 15 percent on the first
    $50,000 of taxable income, 25 percent on the next $25,000, and 34
    percent on the next $9.925 million. Compared with a flat 34-percent
    rate, the lower rates provide an $11,750 reduction in tax liability for
    corporations with taxable income of $75,000. This benefit is recaptured
    for corporations with taxable incomes exceeding $100,000 by a 5-percent
    additional tax on corporate incomes in excess of $100,000 but less than
    $335,000.
      The corporate tax rate is 35 percent on income over $10 million.
    Compared with a flat 35-percent tax rate, the 34-percent rate provides a
    $100,000 reduction in tax liability for corporations with taxable
    incomes of $10 million. This benefit is recaptured for corporations with
    taxable incomes exceeding $15 million by a 3-percent additional tax on
    income over $15 million but less than $18.33 million. Because the
    corporate rate schedule is part of reference tax law, it is not
    considered a tax expenditure under the reference method. A flat
    corporation income tax rate is taken as the baseline under the normal
    tax method; therefore the lower rates is considered a tax expenditure
    under this concept.
      60. Small issue industrial development bonds.--Interest earned on
    small issue industrial development bonds (IDBs) issued by State and
    local governments to finance manufacturing facilities is tax-exempt.
    Depreciable property financed with small issue IDBs must be depreciated,
    however, using the straight-line method. The annual volume of small
    issue IDBs is subject to the unified volume cap discussed in the
    mortgage housing bond section above.

                                 Transportation

      61. Deferral of tax on U.S. shipping companies.--Certain companies
    that operate U.S. flag vessels can defer income taxes on that portion of
    their income used for shipping purposes, primarily construction,
    modernization and major repairs to ships, and repayment of loans to
    finance these investments. Once indefinite, the deferral has been
    limited to 25 years since January 1, 1987.
      62. Exclusion of employee parking expenses.--Employee parking expenses
    that are paid for by the employer or that are received in lieu of wages
    are excludable from the income of the employee. Since 2002, the maximum
    amount of the parking exclusion is $185 (indexed) per month. The tax
    expenditure estimate does not include parking at facilities owned by the
    employer.

    [[Page 309]]

      63. Exclusion of employee transit pass expenses.--Transit passes,
    tokens, fare cards, and vanpool expenses paid for by an employer or
    provided in lieu of wages to defray an employee's commuting costs are
    excludable from the employee's income. Since 2002, the maximum amount of
    the exclusion is $100 (indexed) per month.

                       Community and Regional Development

      64. Rehabilitation of structures.--A 10-percent investment tax credit
    is available for the rehabilitation of buildings that are used for
    business or productive activities and that were erected before 1936 for
    other than residential purposes. The taxpayer's recoverable basis must
    be reduced by the amount of the credit.
      65. Airport, dock, and similar facility bonds.--Interest earned on
    State and local bonds issued to finance high-speed rail facilities and
    government-owned airports, docks, wharves, and sport and convention
    facilities is tax-exempt. These bonds are not subject to a volume cap.
      66. Exemption of income of mutuals and cooperatives.--The incomes of
    mutual and cooperative telephone and electric companies are exempt from
    tax if at least 85 percent of their revenues are derived from patron
    service charges.
      67. Empowerment zones, enterprise communities, and renewal
    communities.--Qualifying businesses in designated economically depressed
    areas can receive tax benefits such as an employer wage credit,
    increased expensing of investment in equipment, special tax-exempt
    financing, accelerated depreciation, and certain capital gains
    incentives. The Job Creation and Worker Assistance Act of 2002 expanded
    the existing provisions by adding the ``New York City Liberty Zone.'' In
    addition, certain first-time buyers of a principal residence in the
    District of Columbia can receive a tax credit on homes purchased on or
    before December 31, 2003, and investors in certain D.C. property can
    receive a capital gains break. The Community Renewal Tax Relief Act of
    2000 created the renewal communities tax benefits, which begin on
    January 1, 2002 and expires on December 31, 2009. The Act also created
    additional empowerment zones, increased the tax benefits for empowerment
    zones, and extended the expiration date of (1) empowerment zones from
    December 31, 2004 to December 31, 2009, and (2) the D.C. home-buyer
    credit from December 31, 2001 to December 31, 2003.
      68. New markets tax credit.--Taxpayers who invest in a community
    development entity (CDE) after December 31, 2000 are eligible for a tax
    credit. The total equity investment available for the credit across all
    CDEs is $1.0 billion in 2001, $1.5 billion in 2002 and 2003, $2.0
    billion in 2004 and 2005, and $3.5 billion in 2006 and 2007. The amount
    of the credit equals (1) 5 percent in the year of purchase and the
    following 2 years, and (2) 6 percent in the following 4 years. A CDE is
    any domestic firm whose primary mission is to serve or provide
    investment capital for low-income communities/individuals; a CDE must be
    accountable to residents of low-income communities. The Community
    Renewal Tax Relief Act of 2000 created the new markets tax credit.
      69. Expensing of environmental remediation costs.--Taxpayers who clean
    up certain hazardous substances at a qualified site may expense the
    clean-up costs, rather than capitalize the costs, even though the
    expenses will generally increase the value of the property significantly
    or appreciably prolong the life of the property. The expensing only
    applies to clean-up costs incurred on or before December 31, 2003. The
    Community Renewal Tax Relief Act of 2000 extended the expiration date
    from December 31, 2001 to December 31, 2003. The Act also expanded the
    number of qualified sites.

              Education, Training, Employment, and Social Services

      70. Scholarship and fellowship income.--Scholarships and fellowships
    are excluded from taxable income to the extent they pay for tuition and
    course-related expenses of the grantee. Similarly, tuition reductions
    for employees of educational institutions and their families are not
    included in taxable income. From an economic point of view, scholarships
    and fellowships are either gifts not conditioned on the performance of
    services, or they are rebates of educational costs. Thus, under the
    reference law method, this exclusion is not a tax expenditure because
    this method does not include either gifts or price reductions in a
    taxpayer's gross income. The exclusion, however, is considered a tax
    expenditure under the normal tax method, which includes gift-like
    transfers of Government funds in gross income (many scholarships are
    derived directly or indirectly from Government funding).
      71. HOPE tax credit.-- The non-refundable HOPE tax credit allows a
    credit for 100 percent of an eligible student's first $1,000 of tuition
    and fees and 50 percent of the next $1,000 of tuition and fees. The
    credit only covers tuition and fees paid during the first two years of a
    student's post-secondary education. In 2003, the credit is phased out
    ratably for taxpayers with modified AGI between $83,000 and $103,000
    ($41,000 and $51,000 for singles), indexed.
      72. Lifetime Learning tax credit.--The non-refundable Lifetime
    Learning tax credit allows a credit for 20 percent of an eligible
    student's tuition and fees. For tuition and fees paid after December 31,
    2002, the maximum credit per return is $2,000. The credit is phased out
    ratably for taxpayers with modified AGI between $83,000 and $103,000
    ($41,000 and $51,000 for singles) (indexed beginning in 2002). The
    credit applies to both undergraduate and graduate students.
      73. Deduction for Higher Education Expenses.--The maximum annual
    deduction for qualified higher education expenses is $3,000 in 2003 for
    taxpayers with adjusted gross income up to $130,000 on a joint return
    ($65,000 for singles). The maximum deduction increases to $4,000 in
    2004. Taxpayers with adjusted gross income up to $160,000 on a joint
    return ($80,000 for

    [[Page 310]]

    singles) may deduct up to $2,000 beginning in 2004. No deduction is
    allowed for expenses paid after December 31, 2005.
      74. Education Individual Retirement Accounts.--Contributions to an
    education IRA are not tax-deductible. Investment income earned by
    education IRAs is not taxed when earned, and investment income from an
    education IRA is tax-exempt when withdrawn to pay for a student's
    tuition and fees. The maximum contribution to an education IRA in 2003
    is $200 per beneficiary. The maximum contribution is phased down ratably
    for taxpayers with modified AGI between $159,000 and $220,000 ($95,000
    and $110,000 for singles). EGTRRA increases the maximum contribution to
    $2,000 and the phase-out range for joint filers to $190,000 through
    $220,000 of modified AGI, double the range of singles.
      75. Student-loan interest.--Taxpayers may claim an above-the-line
    deduction of up to $2,500 on interest paid on an education loan.
    Interest may only be deducted for the first five years in which interest
    payments are required. In 2003, the maximum deduction is phased down
    ratably for taxpayers with modified AGI between $100,000 and $130,000
    ($50,000 and $65,000 for singles), indexed.
      76. State prepaid tuition plans.--Some States have adopted prepaid
    tuition plans and prepaid room and board plans, which allow persons to
    pay in advance for college expenses for designated beneficiaries. In
    2001 taxes on the earnings from these plans are paid by the
    beneficiaries and are deferred until tuition is actually paid. Beginning
    in 2002, investment income is not taxed when earned, and is tax-exempt
    when withdrawn to pay for qualified expenses. These changes were the
    result of EGTRRA.
      77. Student-loan bonds.--Interest earned on State and local bonds
    issued to finance student loans is tax-exempt. The volume of all such
    private activity bonds that each State may issue annually is limited.
      78. Bonds for private nonprofit educational institutions.--Interest
    earned on State and local Government bonds issued to finance the
    construction of facilities used by private nonprofit educational
    institutions is not taxed.
      79. Credit for holders of zone academy bonds.--Financial institutions
    that own zone academy bonds receive a non-refundable tax credit (at a
    rate set by the Treasury Department) rather than interest. The credit is
    included in gross income. Proceeds from zone academy bonds may only be
    used to renovate, but not construct, qualifying schools and for certain
    other school purposes. The total amount of zone academy bonds that may
    be issued is limited to $1.6 billion--$400 million in each year from
    1998 to 2003.
      80. U.S. savings bonds for education.--Interest earned on U.S. savings
    bonds issued after December 31, 1989 is tax-exempt if the bonds are
    transferred to an educational institution to pay for educational
    expenses. The tax exemption is phased out for taxpayers with AGI between
    $87,750 and $117.750 ($58,500 and $73,500 for singles) in 2003.
      81. Dependent students age 19 or older.--Taxpayers may claim personal
    exemptions for dependent children age 19 or over who (1) receive
    parental support payments of $1,000 or more per year, (2) are full-time
    students, and (3) do not claim a personal exemption on their own tax
    returns.
      82. Charitable contributions to educational institutions.--Taxpayers
    may deduct contributions to nonprofit educational institutions.
    Taxpayers who donate capital assets to educational institutions can
    deduct the assets' current value without being taxed on any appreciation
    in value. An individual's total charitable contribution generally may
    not exceed 50 percent of adjusted gross income; a corporation's total
    charitable contributions generally may not exceed 10 percent of pre-tax
    income.
      83. Employer-provided educational assistance.--Employer-provided
    educational assistance is excluded from an employee's gross income even
    though the employer's costs for this assistance are a deductible
    business expense. EGTRRA permanently extended this exclusion and
    extended the exclusion to also include graduate education (beginning in
    2002).
      84. Special deduction for teacher expenses.--Educators in both public
    and private elementary and secondary schools, who work at least 900
    hours during a school year as a teacher, instructor, counselor,
    principal or aide, may subtract up to $250 of qualified expenses when
    figuring their adjusted gross income (AGI).
      85. Work opportunity tax credit.--Employers can claim a tax credit for
    qualified wages paid to individuals who begin work on or before December
    31, 2004 and who are certified as members of various targeted groups.
    The amount of the credit that can be claimed is 25 percent for
    employment of less than 400 hours and 40 percent for employment of 400
    hours or more. The maximum credit per employee is $2,400 and can only be
    claimed on the first year of wages an individual earns from an employer.
    Employers must reduce their deduction for wages paid by the amount of
    the credit claimed.
      86. Welfare-to-work tax credit.--An employer is eligible for a tax
    credit on the first $20,000 of eligible wages paid to qualified long-
    term family assistance recipients during the first two years of
    employment. The credit is 35 percent of the first $10,000 of wages in
    the first year of employment and 50 percent of the first $10,000 of
    wages in the second year of employment. The maximum credit is $8,500 per
    employee. The credit applies to wages paid to employees who are hired on
    or before December 31, 2004.
      87. Employer-provided child care exclusion.--Employer-provided child
    care is excluded from an employee's gross income even though the
    employer's costs for the child care are a deductible business expense.
      88. Employer-provided child care credit.--Employers can deduct
    expenses for supporting child care or child care resource and referral
    services. EGTRRA

    [[Page 311]]

    provides a tax credit to employers for qualified expenses beginning in
    2002. The credit is equal to 25 percent of qualified expenses for
    employee child care and 10 percent of qualified expenses for child care
    resource and referral services. Employer deductions for such expenses
    are reduced by the amount of the credit. The maximum total credit is
    limited to $150,000 per taxable year.
      89. Assistance for adopted foster children.--Taxpayers who adopt
    eligible children from the public foster care system can receive monthly
    payments for the children's significant and varied needs and a
    reimbursement of up to $2,000 for nonrecurring adoption expenses. These
    payments are excluded from gross income.
      90. Adoption credit and exclusion.--Taxpayers can receive a
    nonrefundable tax credit for qualified adoption expenses. The maximum
    credit is $10,160 per child for 2003. The credit is phased-out ratably
    for taxpayers with modified AGI between $152,390 and $192,390 in 2003.
    The credit amounts and the phase-out thresholds are indexed for
    inflation beginning in 2003. Unused credits may be carried forward and
    used during the five subsequent years. Taxpayers may also exclude
    qualified adoption expenses from income, subject to the same maximum
    amounts and phase-out as the credit. The same expenses cannot qualify
    for tax benefits under both programs; however, a taxpayer may use the
    benefits of the exclusion and the tax credit for different expenses.
    Stepchild adoptions are not eligible for either benefit.
      91. Employer-provided meals and lodging.--Employer-provided meals and
    lodging are excluded from an employee's gross income even though the
    employer's costs for these items are a deductible business expense.
      92. Child credit.--Taxpayers with children under age 17 can qualify
    for a $1,000 refundable per child credit. The maximum credit is equal to
    $700 in 2005, $800 in 2009, and $1,000 in 2010, and declines to $500 in
    2011 and later years. The credit is phased out for taxpayers at the rate
    of $50 per $1,000 of modified AGI above $110,000 ($75,000 for singles).
      93. Child and dependent care expenses.--Married couples with child and
    dependent care expenses may claim a tax credit when one spouse works
    full time and the other works at least part time or goes to school. The
    credit may also be claimed by single parents and by divorced or
    separated parents who have custody of children. Expenditures up to a
    maximum $3,000 for one dependent and $6,000 for two or more dependents
    are eligible for the credit. The credit is equal to 35 percent of
    qualified expenditures for taxpayers with incomes of $15,000. The credit
    is reduced to a minimum of 20 percent by one percentage point for each
    $2,000 of income in excess of $15,000.
      94. Disabled access expenditure credit.--Small businesses (less than
    $1 million in gross receipts or fewer than 31 full-time employees) can
    claim a 50-percent credit for expenditures in excess of $250 to remove
    access barriers for disabled persons. The credit is limited to $5,000.
      95. Charitable contributions, other than education and health.--
    Taxpayers may deduct contributions to charitable, religious, and certain
    other nonprofit organizations. Taxpayers who donate capital assets to
    charitable organizations can deduct the assets' current value without
    being taxed on any appreciation in value. An individual's total
    charitable contribution generally may not exceed 50 percent of adjusted
    gross income; a corporation's total charitable contributions generally
    may not exceed 10 percent of pre-tax income.
      96. Foster care payments.--Foster parents provide a home and care for
    children who are wards of the State, under contract with the State.
    Compensation received for this service is excluded from the gross
    incomes of foster parents; the expenses they incur are nondeductible.
      97. Parsonage allowances.--The value of a minister's housing allowance
    and the rental value of parsonages are not included in a minister's
    taxable income.

                                     Health

      98. Employer-paid medical insurance and expenses.--Employer-paid
    health insurance premiums and other medical expenses (including long-
    term care) are deducted as a business expense by employers, but they are
    not included in employee gross income. The self-employed also may deduct
    part of their family health insurance premiums.
      99. Self-employed medical insurance premiums.--Self-employed taxpayers
    may deduct a percentage of their family health insurance premiums.
    Taxpayers without self-employment income are not eligible for the
    special percentage deduction. The deductible percentage is 60 percent in
    2001, 70 percent in 2002, and 100 percent in 2003 and thereafter.
      100. Medical and health savings accounts.--Some employees may deduct
    annual contributions to a medical savings account (MSA); employer
    contributions to MSAs (except those made through cafeteria plans) for
    qualified employees are also excluded from income. An employee may
    contribute to an MSA in a given year only if the employer does not
    contribute to the MSA in that year. MSAs are only available to self-
    employed individuals or employees covered under an employer-sponsored
    high deductible health plan of a small employer. The maximum annual MSA
    contribution is 75 percent of the deductible under the high deductible
    plan for family coverage (65 percent for individual coverage). Earnings
    from MSAs are excluded from taxable income. Distributions from an MSA
    for medical expenses are not taxable. The number of taxpayers who may
    benefit annually from MSAs is generally limited to 750,000. No new MSAs
    may be established after December 31, 2003. The Medicare Prescription
    Drug, Improvemnet, and Modernization Act of 2003 introduced health
    savings accounts (HSA) which provides a tax-favored savings for health
    care expenses. The definition of a high-

    [[Page 312]]

    deductible health plan is less restrictive for HSAs than for MSAs.
      101. Medical care expenses.--Personal expenditures for medical care
    (including the costs of prescription drugs) exceeding 7.5 percent of the
    taxpayer's adjusted gross income are deductible.
      102. Hospital construction bonds.--Interest earned on State and local
    government debt issued to finance hospital construction is excluded from
    income subject to tax.
      103. Charitable contributions to health institutions.--Individuals and
    corporations may deduct contributions to nonprofit health institutions.
    Tax expenditures resulting from the deductibility of contributions to
    other charitable institutions are listed under the education, training,
    employment, and social services function.
      104. Orphan drugs.--Drug firms can claim a tax credit of 50 percent of
    the costs for clinical testing required by the Food and Drug
    Administration for drugs that treat rare physical conditions or rare
    diseases.
      105. Blue Cross and Blue Shield.--Blue Cross and Blue Shield health
    insurance providers in existence on August 16, 1986 and certain other
    nonprofit health insurers are provided exceptions from otherwise
    applicable insurance company income tax accounting rules that
    substantially reduce (or even eliminate) their tax liabilities.
      106. Tax credit for health insurance purchased by certain displaced
    and retired individuals.--The Trade Act of 2002 provided a refundable
    tax credit of 65 percent for the purchase of health insurance covergae
    by individuals eligible for Trade Adjustment Assitance and certain PBGC
    pension recipients.

                                 Income Security

      107. Railroad retirement benefits.--Railroad retirement benefits are
    not generally subject to the income tax unless the recipient's gross
    income reaches a certain threshold. The threshold is discussed more
    fully under the Social Security function.
      108. Workers' compensation benefits.--Workers compensation provides
    payments to disabled workers. These benefits, although income to the
    recipients, are not subject to the income tax.
      109. Public assistance benefits.--Public assistance benefits are
    excluded from tax. The normal tax method considers cash transfers from
    the Government as taxable and, thus, treats the exclusion for public
    assistance benefits as a tax expenditure.
      110. Special benefits for disabled coal miners.--Disability payments
    to former coal miners out of the Black Lung Trust Fund, although income
    to the recipient, are not subject to the income tax.
      111. Military disability pensions.--Most of the military pension
    income received by current disabled retired veterans is excluded from
    their income subject to tax.
      112. Employer-provided pension contributions and earnings.--Certain
    employer contributions to pension plans are excluded from an employee's
    gross income even though the employer can deduct the contributions. In
    addition, the tax on the investment income earned by the pension plans
    is deferred until the money is withdrawn.
      113. 401(k) plans.--Individual taxpayers can make tax-preferred
    contributions to certain types of employer-provided 401(k) plans (and
    401(k)-type plans like 403(b) plans and the Federal government's Thrift
    Savings Plan). In 2001, an employee could exclude up to $12,000 of wages
    from AGI under a qualified arrangement with an employer's 401(k) plan.
    This increases to $13,000 in 2004, $14,000 in 2005 and $15,000 in 2006
    (indexed thereafter). The tax on the investment income earned by 401(k)-
    type plans is deferred until withdrawn.
      Employees are allowed to make after-tax contributions to 401(k) and
    401(k)-type plans. These contributions are not excluded from AGI, but
    the investment income of such after-tax contributions is not taxed when
    earned or withdrawn.
      114. Individual Retirement Accounts.--Individual taxpayers can take
    advantage of several different Individual Retirement Accounts (IRAs):
    deductible IRAs, non-deductible IRAs, and Roth IRAs. The annual
    contributions limit applies to the total of a taxpayer's deductible,
    non-deductible, and Roth IRAs contributions. The IRA contribution limit
    to $3,000 in 2003, $4,000 in 2005, and $5,000 in 2008 (indexed
    thereafter) and allows taxpayers over age 50 to make additional ``catch-
    up'' contributions of $1,000 (by 2006).
      Taxpayers whose AGI is below $70,000 ($50,000 for non-joint filers) in
    2003 can claim a deduction for IRA contributions. The IRA deduction is
    phased out for taxpayers with AGI between $60,000 and $70,000 ($40,000
    and $50,000 for non-joint). The phase-out range increases annually until
    it reaches $80,000 to $100,000 in 2007 ($50,000 to $60,000 in 2005 for
    non-joint filers). Taxpayers whose AGI is above the phase-out range can
    also claim a deduction for their IRA contributions depending on whether
    they (or their spouse) are an active participant in an employer-provided
    retirement plan. The tax on the investment income earned by 401(k)
    plans, non-deductible IRAs, and deductible IRAs is deferred until the
    money is withdrawn.
      Taxpayers with incomes below $160,000 ($110,000 for nonjoint filers)
    can make contributions to Roth IRAs. The maximum contribution to a Roth
    IRA is phased out for taxpayers with AGI between $150,000 and $160,000
    ($95,000 and $110,000 for singles). Investment income of a Roth IRA is
    not taxed when earned nor when withdrawn. Withdrawals from a Roth IRA
    are penalty free if: (1) the Roth IRA was opened at least 5 years before
    the withdrawal, and (2) the taxpayer either (a) is at least 59\1/2\, (b)
    dies, (c) is disabled, or (d) purchases a first-time house.
      Taxpayers can contribute to a non-deductible IRA regardless of their
    income and whether they are an active participant in an employer-
    provided retirement plan. The tax on investment income earned by non-
    deductible IRAs is deferred until the money is withdrawn.

    [[Page 313]]

      115. Low and moderate income savers' credit.--EGTRRA provides an
    additional incentive for lower-income taxpayers to save through a
    nonrefundable credit of up to 50 percent on IRA contributions. This
    credit is in addition to any deduction or exclusion. The credit is
    completely phased out by $50,000 for joint filers and $25,000 for single
    filers. This temporary credit is in effect from 2002 through 2006.
      116. Keogh plans.--Self-employed individuals can make deductible
    contributions to their own retirement (Keogh) plans equal to 25 percent
    of their income, up to a maximum of $40,000 in 2001. Total plan
    contributions are limited to 25 percent of a firm's total wages. The tax
    on the investment income earned by Keogh plans is deferred until
    withdrawn.
      117. Employer-provided life insurance benefits.--Employer-provided
    life insurance benefits are excluded from an employee's gross income
    even though the employer's costs for the insurance are a deductible
    business expense.
      118. Small business retirement plan credit.--EGTRRA provides
    businesses with 100 or fewer employees a credit for 50 percent of the
    qualified startup costs associated with a new qualified retirement plan.
    The credit is limited to $500 annually and may only be claimed for
    expenses incurred during the first three years from the start of the
    qualified plan. Qualified startup expenses include expenses related to
    the establishment and administration of the plan, and the retirement-
    related education of employees. The credit applies to costs incurred
    beginning in 2002.
      119. Employer-provided accident and disability benefits.--Employer-
    provided accident and disability benefits are excluded from an
    employee's gross income even though the employer's costs for the
    benefits are a deductible business expense.
      120. Employer-provided supplementary unemployment benefits.--Employers
    may establish trusts to pay supplemental unemployment benefits to
    employees separated from employment. Interest payments to such trusts
    are exempt from taxation.
      121. Employer Stock Ownership Plan (ESOP) provisions.--ESOPs are a
    special type of tax-exempt employee benefit plan. Employer-paid
    contributions (the value of stock issued to the ESOP) are deductible by
    the employer as part of employee compensation costs. They are not
    included in the employees' gross income for tax purposes, however, until
    they are paid out as benefits. The following special income tax
    provisions for ESOPs are intended to increase ownership of corporations
    by their employees: (1) annual employer contributions are subject to
    less restrictive limitations; (2) ESOPs may borrow to purchase employer
    stock, guaranteed by their agreement with the employer that the debt
    will be serviced by his payment (deductible by him) of a portion of
    wages (excludable by the employees) to service the loan; (3) employees
    who sell appreciated company stock to the ESOP may defer any taxes due
    until they withdraw benefits; and (4) dividends paid to ESOP-held stock
    are deductible by the employer.
      122. Additional deduction for the blind.--Taxpayers who are blind may
    take an additional $1,150 standard deduction if single, or $950 if
    married in 2003.
      123. Additional deduction for the elderly.--Taxpayers who are 65 years
    or older may take an additional $1,150 standard deduction if single, or
    $950 if married in 2003.
      124. Tax credit for the elderly and disabled.--Individuals who are 65
    years of age or older, or who are permanently disabled, can take a tax
    credit equal to 15 percent of the sum of their earned and retirement
    income. Income is limited to no more than $5,000 for single individuals
    or married couples filing a joint return where only one spouse is 65
    years of age or older, and up to $7,500 for joint returns where both
    spouses are 65 years of age or older. These limits are reduced by one-
    half of the taxpayer's adjusted gross income over $7,500 for single
    individuals and $10,000 for married couples filing a joint return.
      125. Casualty losses.--Neither the purchase of property nor insurance
    premiums to protect its value are deductible as costs of earning income;
    therefore, reimbursement for insured loss of such property is not
    reportable as a part of gross income. Taxpayers, however, may deduct
    uninsured casualty and theft losses of more than $100 each, but only to
    the extent that total losses during the year exceed 10 percent of AGI.
      126. Earned income tax credit (EITC).--The EITC may be claimed by low
    income workers. For a family with one qualifying child, the credit is 34
    percent of the first $7,490 of earned income in 2003. The credit is 40
    percent of the first $10,510 of income for a family with two or more
    qualifying children. The credit is phased out beginning when the
    taxpayer's income exceeds $13,730 at the rate of 15.98 percent (21.06
    percent if two or more qualifying children are present). It is
    completely phased out when the taxpayer's modified adjusted gross income
    reaches $29,666 ($33,692 if two or more qualifying children are
    present).
      The credit may also be claimed by workers who do not have children
    living with them. Qualifying workers must be at least age 25 and may not
    be claimed as a dependent on another taxpayer's return. The credit is
    not available to workers age 65 or older. In 2003, the credit is 7.65
    percent of the first $4,990 of earned income. When the taxpayer's income
    exceeds $6,240, the credit is phased out at the rate of 7.65 percent. It
    is completely phased out at $11,230 of modified adjusted gross income.
      For workers with or without children, the income levels at which the
    credit begins to phase-out and the maximum amounts of income on which
    the credit can be taken are adjusted for inflation. For married
    taxpayers filing a joint return, The base amount for the phase-out
    increases by $2,000 in 2005 through 2007, and $3,000 in 2008 (indexed
    thereafter).
      Earned income tax credits in excess of tax liabilities owed through
    the individual income tax system are re

    [[Page 314]]

    fundable to individuals. This portion of the credit is shown as an
    outlay, while the amount that offsets tax liabilities is shown as a tax
    expenditure.

                                 Social Security

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

                         Veterans Benefits and Services

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

                               General Government

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

                                    Interest

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

                                    Appendix:

               TREASURY REVIEW OF THE TAX EXPENDITURE PRESENTATION

      This appendix provides an initial presentation of the Treasury
    Department review of the tax expenditure budget, which was first
    prepared for the 2004 Budget. The review focuses on three issues: (1)
    using comprehensive income as a baseline tax system, (2) using a
    consumption tax as a baseline tax system, and (3) defining negative tax
    expenditures (provisions that cause taxpayers to pay too much tax).
      The first section of this appendix compares major tax expenditures in
    the current budget to those implied by a comprehensive income baseline.
    This comparison includes a discussion of negative tax expenditures. The
    second section compares the major tax expenditures in the current budget
    to those implied by a consumption tax baseline, and also discusses
    negative tax expenditures. The final section addresses concerns that
    have been raised over the measurement of some current tax expenditures
    by describing a new estimate of the tax expenditure caused by
    accelerated depreciation and alternative estimates of the tax
    expenditures resulting from the tax exemption of the return earned on
    owner-occupied housing and preferential treatment of capital gains. The
    final section also provides an estimate of the negative tax expenditure
    caused by the double tax on corporate profits.

    [[Page 315]]

        DIFFERENCES BETWEEN OFFICIAL TAX EXPENDITURES AND THOSE BASED ON
                              COMPREHENSIVE INCOME

      As discussed in the main body of the tax expenditure chapter, official
    tax expenditures are measured relative to normal law or reference law
    baselines that deviate from a uniform tax on a comprehensive concept of
    income. Consequently, tax expenditures identified in the budget can
    differ from those that would be identified if a comprehensive income tax
    were chosen as the baseline tax system. This appendix addresses this
    issue by comparing major tax expenditures listed in the current tax
    expenditure budget with those implied by a comprehensive income
    baseline. Most large tax expenditures would continue to be tax
    expenditures were the baseline taken to be comprehensive income,
    although some would be much smaller. A comprehensive income baseline
    would also result in a number of additional tax provisions being counted
    as tax expenditures.
      Current budgetary practice excludes from the list of official tax
    expenditures those provisions that over-tax certain items of income.
    This exclusion conforms to the view that tax expenditures are
    substitutes for direct Government spending programs. However, this
    treatment gives a one-sided picture of how current law deviates from the
    baseline tax system. Relative to comprehensive income, a number of
    current tax provisions would be negative tax expenditures. Some of these
    also might be negative tax expenditures under the reference law or
    normal law baselines, expanded to admit negative tax expenditures.

    Treatment of Major Tax Expenditures from the Current Budget under a
    Comprehensive Income Tax Baseline

      Comprehensive income, also called Haig-Simons income, is the real,
    inflation adjusted, accretion to one's economic power arising between
    two points in time, e.g., the beginning and ending of the year. It
    includes all accretions to wealth, whether or not realized, whether or
    not related to a market transaction, and whether a return to capital or
    labor. Inflation adjusted capital gains (and losses) would be included
    in comprehensive income as they accrue. Business, investment, and
    casualty losses, including losses caused by depreciation, would be
    deducted. Implicit returns, such as those accruing to homeowners, also
    would be included in comprehensive income. A comprehensive income tax
    baseline would tax all sources of income once. Thus, it would not
    include a separate tax on corporate income that leads to the double
    taxation of corporate income.
      While comprehensive income can be defined on the sources side of the
    consumer's balance sheet, it sometimes is instructive to use the
    identity between the sources of wealth and the uses of wealth to
    redefine it as the sum of consumption during the period plus the change
    in net worth between the beginning and the end of the period.
      Comprehensive income is widely held to be the idealized base for an
    income tax even though it is not a perfectly defined concept.\6\ It
    suffers from conceptual ambiguities, some of which are discussed below,
    as well as practical problems in measurement and tax administration,
    e.g., how to implement a practicable deduction for economic depreciation
    or include in income the return earned on consumer durable goods,
    including housing, automobiles, and major appliances.
    ---------------------------------------------------------------------------
      \6\ See, e.g., David F. Bradford, Untangling the Income Tax
    (Cambridge, MA: Harvard University Press, 1986), pp. 15-31, and Richard
    Goode, ``The Economic Definition of Income'' in Joseph Pechman, ed.,
    Comprehensive Income Taxation (Washington, D.C.: The Brookings
    Institution, 1977), pp. 1-29.
    ---------------------------------------------------------------------------
      Furthermore, comprehensive income does not necessarily represent an
    ideal tax base; efficiency or equity might be improved by deviating from
    comprehensive income as a tax base, e.g., by reducing the tax on capital
    income in order to further spur economic growth or by subsidizing
    certain types of activities in order to correct for market failures or
    to improve the after-tax distribution of income. In addition, some
    elements of comprehensive income would be difficult or impossible to
    include in a tax system that is administrable.
      Classifying items under a comprehensive income baseline is difficult,
    in part because of the ambiguity of the baseline. It also is difficult
    because of interactions between tax provisions (or their absence). These
    interactions mean that it may not always be appropriate to consider each
    item in isolation. Nonetheless, Appendix Table 1 attempts such a
    classification for each of the thirty largest tax expenditures from the
    Budget.
      We classify fourteen of the thirty items as tax expenditures under a
    comprehensive tax base (those in panel A). Most of these give
    preferential tax treatment to the return on certain types of savings or
    investment. They are a result of the explicitly hybrid nature of the
    existing tax system, and arise out of policy decisions that reflect
    discomfort with the high tax rate on capital income that would otherwise
    arise under the current structure of the income tax. Even these
    relatively clear cut items, however, can raise ambiguities particularly
    in light of the absence of integration of the corporate and individual
    tax systems. Consider, for example, the tax expenditures related to
    retirement savings. Considered alone, these items clearly would be tax
    expenditures under a comprehensive income tax baseline. However, much of
    the income earned in these accounts is subject to the corporate income
    tax, and would not be taxed again under a comprehensive income tax. If
    account is taken simultaneously of the corporate income tax and the
    individual income tax, then much of what is measured in these tax
    expenditures might not be considered preferential tax treatment under a
    comprehensive income tax baseline. But, if the corporate level income
    tax is separately itemized as a surcharge, or a negative tax
    expenditure, then the preferential treatments of retirement saving would
    remain tax expenditures.

    [[Page 316]]

      The exclusion of worker's compensation benefits also would be a tax
    expenditure under comprehensive income principles. Under comprehensive
    income tax principles, if the worker were to buy the insurance himself,
    he would be able to deduct the premium (since it represents a reduction
    in net worth) but should include in income the benefit when paid (since
    it represents an increase in net worth).\7\ If the employer pays the
    premium, the proper treatment would allow the employer a deduction and
    allow the employee to disregard the premium, but he would take the
    proceeds, if any, into income. Current law allows the employer to deduct
    the premium and excludes both the premium and the benefits from the
    employee's tax base.
    ---------------------------------------------------------------------------
      \7\ Suppose a taxpayer buys a one year term unemployment insurance
    policy at the beginning of the year. At that time he exchanges one
    asset, cash, for another, the insurance policy, so there is no change in
    net worth. But, at the end of the year, the policy expires and so is
    worthless, hence the taxpayer has a reduction in net worth equal to the
    premium. If the policy pays off during the year (i.e., the taxpayer has
    a work related injury), then the taxpayer would include the proceeds in
    income because they represent an increase in his net worth.
    ---------------------------------------------------------------------------
      Panel B deals with items that probably are tax expenditures, but that
    raise some issues. The step-up of basis at death lowers the income tax
    on capital gains for those who inherit assets below what it would be
    otherwise. From that perspective it would be a tax expenditure under a
    comprehensive income baseline. Nonetheless, there are ambiguities. Under
    a comprehensive income baseline, all real inflation adjusted gains would
    be taxed as accrued, so there would be no deferred unrealized gains on
    assets held at death.
      The lack of full taxation of Social Security benefits also is listed
    in panel B. Consider first Social Security retirement benefits. To the
    extent that Social Security is viewed as a pension, a comprehensive
    income tax would include in income all contributions to Social Security
    retirement funds (payroll taxes) and tax accretions to value as they
    arise (inside build-up).\8\ Benefits paid out of prior contributions and
    the inside build-up, however, would not be included in the tax base
    because the fall in the value of the individual's Social Security
    account would be offset by an increase in cash. In contrast, to the
    extent that Social Security is viewed as a transfer program, all
    contributions should be deductible from the income tax base and all
    benefits received should be included in the income tax base.
    ---------------------------------------------------------------------------
      \8\ As a practical matter, this may be impossible to do. Valuing
    claims subject to future contingencies is very difficult, as discussed
    in Bradford, Untangling the Income Tax, pp. 23-24.
    ---------------------------------------------------------------------------
      A similar analysis applies to Social Security benefits paid to
    dependents and survivors. If these benefits represent transfers from the
    Government, then they should be included in the tax base. If the
    taxpaying unit consists of the worker plus dependents and survivors,
    then to the extent that Social Security benefits represent payments from
    a pension, the annual pension earnings should be taxed in the same way
    that earnings accruing to retirees are taxed. However, benefits paid to
    dependents and survivors might be viewed as a gift or transfer from the
    decedent, in which case the dependents and survivors should pay tax on
    the full amount of the benefit received. (In this case the decedent or
    his estate should pay tax on the pension income as well, to the extent
    that the gift represents consumption rather than a reduction in net
    worth).
      In addition, dependent and survivors benefits might be viewed in part
    as providing life insurance. In that case, the annual premiums paid each
    year, or the portion of Social Security taxes attributable to the
    premiums, should be deducted from income, since they represent a decline
    in net worth, while benefits should be included in income.
    Alternatively, taxing premiums and excluding benefits also would
    represent appropriate income tax policy.
      In contrast to any of these treatments, current law excludes one-half
    of contributions (employer-paid payroll taxes) from the base of the
    income tax, makes no attempt to tax accretions, and subjects some, but
    not all, benefits to taxation. The difference between current law's
    treatment of Social Security benefits and their treatment under a
    comprehensive income tax would qualify as a tax expenditure, but such a
    tax expenditure differs in concept from that included in the official
    budget.
      The tax expenditures in the official budget\9\ reflect exemptions for
    lower income beneficiaries from the tax on 85 percent of Social Security
    benefits.\10\ Historically, payroll taxes paid by the employee
    represented no more than 15 percent of the expected value of the
    retirement benefits received by a lower-earnings Social Security
    beneficiary. The 85 percent inclusion rate is therefore intended to tax
    the remaining amount of the retirement benefit payment arising from the
    payroll tax contributions made by employers and the implicit return on
    the employee and employer contributions. Thus, the tax expenditure
    conceived and measured in the current budget is not intended to capture
    the deviation from comprehensive income baseline, which would
    additionally account for the deferral of tax on these components (less
    an inflation adjustment attributable to the employee's payroll tax
    contributions). Rather, it is intended to approximate the taxation of
    private pensions with employee contributions made from after-tax
    income,\11\ on the assumption that Social Security is comparable to such
    pensions. Hence, the official tax expenditure understates the tax
    advantage accorded Social Security retirement benefits relative to a
    comprehensive income baseline.
    ---------------------------------------------------------------------------
      \9\ This includes the tax expenditure for benefits paid to workers,
    that for benefits paid to survivors and dependents, and that for
    benefits paid to dependents.
      \10\ The current budget does not include as a tax expenditure the
    absence of income taxation on the employer's contributions (payroll
    taxes) to Social Security retirement at the time these contributions are
    made.
      \11\ Private pensions allow the employee to defer tax on all inside
    build-up. They also allow the employee to defer tax on contributions
    made by the employer, but not on contributions made directly by the
    employee. Applying these tax rules to Social Security would require the
    employee to include in his taxable income benefits paid out of inside
    build-up and out of the employer's contributions, but would allow the
    employee to exclude from his taxable income benefits paid out of his own
    contributions.
    ---------------------------------------------------------------------------
      To the extent that the benefits paid to dependents and survivors
    should be taxed as private pensions, the same conclusion applies: the
    official tax expenditure understates the tax advantage.
      To the extent that the personal and dependent care exemptions and the
    standard deduction properly remove from taxable income all expenditures
    that do not

    [[Page 317]]

    yield consumption value, then the child care credit and the earned
    income tax credit would be tax expenditures. In contrast, a competing
    perspective views these credits as appropriate modifications that
    account for differing taxpaying capacity. Even accepting this competing
    perspective, however, one might question why these programs come in the
    form of credits rather than deductions.
      The next category (panel C) includes items whose treatment is less
    certain. The proper treatment of some of these items under a
    comprehensive income tax is ambiguous, while others perhaps serve as
    proxies for what would be a tax expenditure under a comprehensive income
    base.\12\ Consider, for example, the items relating to charitable
    contributions. Under existing law, charitable contributions are
    deductible, and this deduction is considered on its face a tax
    expenditure in the current budget.\13\
    ---------------------------------------------------------------------------
      \12\ See, for example, Goode, The Economic Definition of Income, pp.
    16-17, and Bradford, Untangling the Income Tax, pp. 19-21, and pp.30-31.
      \13\ The item also includes gifts of appreciated property, at least
    part of which represents a tax expenditure relative to an ideal income
    tax, even if one assumes that charitable donations are not consumption.
    ---------------------------------------------------------------------------
      The treatment of charitable donations, however, is ambiguous under a
    comprehensive income tax. If charitable contributions are a consumption
    item for the giver, then they are properly included in his taxable
    income; a deduction for contributions would then be a tax expenditure
    relative to a comprehensive income tax baseline. In contrast, charitable
    contributions could represent a transfer of purchasing power from the
    giver to the receiver. As such, they would represent a reduction in the
    giver's net worth, not an item of consumption, and so properly would be
    deductible, implying that current law's treatment is not a tax
    expenditure. At the same time, the value of the charitable benefits
    received is income to the recipient. Under current law, such income
    generally is not taxed, and so represents a tax expenditure whose size
    might be approximated by the size of the donor's contribution.\14\
    ---------------------------------------------------------------------------
      \14\ If recipients tend to be in lower tax brackets, then the tax
    expenditure is smaller than when measured at the donor's tax rates.
    ---------------------------------------------------------------------------
      Medical expenditures may or may not be an element of income (or
    consumption), depending on one's point of view. Some argue that medical
    expenditures don't represent discretionary spending, and so aren't
    consumption. Instead, they are a reduction of net worth and should be
    excluded from the tax base. Others argue that there is no way to
    logically distinguish medical care from other consumption items.
    Moreover, clearly there is choice in health care decisions, e.g.,
    whether to go to the best doctor, whether to have voluntary surgical
    procedures, and whether to exercise and eat nutritiously so as to
    improve and maintain one's health and minimize medical expenditures.
      The exemption of full taxation of Social Security benefits paid to the
    disabled also raises some issues. Social Security benefits for the
    disabled most closely resemble either Government transfers or insurance.
    A comprehensive income tax would require the worker to include the
    benefit fully in his income and would allow him to deduct associated
    Social Security taxes. If viewed as insurance, he also could include the
    premium (i.e., tax) and exclude the benefit. The deviation between such
    treatment and current law's treatment (described above) would be a tax
    expenditure under a comprehensive income baseline.
      In contrast, as described above, the official tax expenditure measures
    the benefit of exemption for low income beneficiaries from the tax on 85
    percent of Social Security benefits. This measurement does not
    correspond closely to that required under a comprehensive income base.
    If the payment of the benefit is viewed as a transfer and divorced from
    the treatment of Social Security taxes, then the current tax expenditure
    understates the tax expenditure measured relative to a comprehensive
    income baseline. If the payment of the benefit is viewed as a transfer
    but the inability to deduct the employee's share of the Social Security
    tax is simultaneously considered, then it is less likely that the
    current tax expenditure overstates the tax expenditure relative to a
    comprehensive income baseline, and in some cases it may generate a
    negative tax expenditure. Negative tax expenditures arise when the
    actual tax treatment imposes a higher tax burden than would the baseline
    tax system, and are discussed in more detail below. If the benefit is
    viewed as insurance and the tax as a premium, then the current tax
    expenditure overstates the tax expenditure relative to a comprehensive
    income baseline. Indeed, in the insurance model, the ability to exclude
    from tax only \1/2\ of the premium might suggest that \1/2\ of the
    payout should be taxed, so that the current tax rules impose a greater
    tax burden than that implied by a comprehensive income tax, i.e., a
    negative tax expenditure.
      The deduction of nonbusiness state and local taxes other than on
    owner-occupied homes also is included here. These taxes include both
    income taxes and property taxes. The stated justification for this tax
    expenditure is that ``Taxpayers may deduct State and local income taxes
    and property taxes even though these taxes primarily pay for services
    that, if purchased directly by taxpayers, would not be deductible.''\15\
    The idea is that these taxes represent consumption expenditures, and so
    are elements of income.
    ---------------------------------------------------------------------------
      \15\ Fiscal Year 2003 Budget of the United States Government,
    Analytical Perspectives (Washington, D.C.: U.S. Government Printing
    Office, 2002) p. 127.
    ---------------------------------------------------------------------------
      In contrast to the view in the official budget, the deduction for
    State and local taxes might not be a tax expenditure if the baseline
    were comprehensive income. Properly measured comprehensive income would
    include the value of State and local government benefits received, but
    would allow a deduction for State and local taxes paid.\16\ Thus, in
    this sense the deductibility of State and local taxes is consistent with
    comprehensive income tax principles; it should not be a tax expenditure.
    However, imputing the value of State and local services may be difficult
    and, as a rough correction, the tax system might disallow the deduction
    for State and local taxes.\17\ So, if the value of services

    [[Page 318]]

    from State and local governments is excluded from the tax base, as it
    generally is under current law, a deduction for taxes might be viewed as
    a tax expenditure relative to a comprehensive income baseline.\18\
    ---------------------------------------------------------------------------
      \16\ U.S. Treasury, Blueprints for Basic Tax Reform (Washington, D.C.:
    U.S. Government Printing Office, 1977) p. 92.
      \17\ Home mortgage interest and property taxes on owner-occupied
    housing raise the same ambiguity. Classifying them as probably not tax
    expenditures arguably is inconsistent. It reflects the judgment that no
    comprehensive tax is likely to tax the value of State and local
    services, while it appears somewhat easier to impute and tax the rental
    income from owner-occupied housing.
      \18\ Under the normal tax method employed by the Joint Committee on
    Taxation, the value of some public assistance benefits provided by State
    Governments is included as a tax expenditure, thereby raising a
    potential double counting issue.
    ---------------------------------------------------------------------------
      Mortgage interest would be deductible from the base of a comprehensive
    income tax, since comprehensive income would include implicit rental
    income on owner-occupied housing. Similarly, property taxes on owner-
    occupied housing would be deductible, since they represent a reduction
    in net worth. One could argue, however, that because current law does
    not impute rental income nor does it impute the value of Government
    services, the home mortgage interest deduction and the deduction for
    property taxes move away from rather than towards the outcome observed
    under a comprehensive income tax base, and so might be considered tax
    expenditures. Alternatively, they might be viewed as proxies for the
    correct tax expenditures. They are, however, extremely crude proxies for
    the implicit rental income earned on owner-occupied housing. The
    interest deduction proxy, for example, understates the extent of the tax
    expenditure associated with ignoring implicit rental income to the
    extent a house is unencumbered by a mortgage that approximates the
    house's market value, and does not include the effects on net income of
    such costs as depreciation, maintenance, and repairs.
      The final category (panel D) includes items that would not be tax
    expenditures under a comprehensive income tax base. Most versions of a
    comprehensive income tax would assign tax liability to individuals.
    There would be no separate corporation income tax. Hence, the issue of
    graduated corporate tax rates would not arise.\19\ A tax based on
    comprehensive income would allow all losses to be deducted. Hence, the
    exception from the passive loss rules would not be a tax
    expenditure.\20\
    ---------------------------------------------------------------------------
      \19\ As discussed below, the double tax on corporate profits would be
    a major negative tax expenditure.
      \20\ In contrast, the passive loss rules themselves, which restrict
    the deduction of losses, would be a negative tax expenditure when
    compared to a comprehensive tax base.

    Major Tax Expenditures under a Comprehensive Income Tax That Are
    ---------------------------------------------------------------------------
    Excluded from the Current Budget

      While most of the major tax expenditures in the current budget also
    would be tax expenditures under a comprehensive income base, there also
    are tax expenditures relative to a comprehensive income base that are
    not found on the existing tax expenditure list. These additional tax
    expenditures include the imputed return from consumer durables and
    owner-occupied housing, the difference between capital gains (and
    losses) as they accrue and capital gains as they are realized, private
    gifts and inheritances received, in-kind benefits from such Government
    programs as food-stamps, Medicaid, and public housing, the value of
    payouts from insurance policies,\21\ and benefits received from private
    charities. Under some ideas of comprehensive income, the value of
    leisure and of household production of goods and services also would be
    included as tax expenditures. The personal exemption and standard
    deduction also might be considered tax expenditures, although they can
    be viewed differently, e.g., as elements of the basic tax rate schedule.
    The foreign tax credit also might be a tax expenditure, since a
    deduction for foreign taxes, rather than a credit, would seem to measure
    the income of U.S. residents properly.
    ---------------------------------------------------------------------------
      \21\ To the extent that premiums are deductible.

    ---------------------------------------------------------------------------
    Negative Tax Expenditures

      Under current budgetary practice, negative tax expenditures, tax
    provisions that raise rather than lower taxes, are excluded from the
    official tax expenditure list. This exclusion conforms with the view
    that tax expenditures are intended to be similar to Government spending
    programs.
      If attention is expanded from a focus on spending-like programs to
    include any deviation from the baseline tax system, negative tax
    expenditures would be of interest. Relative to a comprehensive income
    baseline, there are a number of important negative tax expenditures,
    some of which also might be viewed as negative tax expenditures under an
    expanded interpretation of the normal or reference law baseline. Among
    the more important negative tax expenditures is the corporation income
    tax, or more generally the double tax on corporate profits, which would
    be eliminated under a comprehensive income tax. The Jobs and Growth Tax
    Relief and Reconciliation Act of 2003 (JGTRRA) reduced the tax rate on
    dividends and capital gains to 15 percent, thus reducing the double tax
    compared to prior law. Nonetheless, as discussed later in the Appendix,
    current law still imposes a substantial double tax on corporate profits.
    The passive loss rules, restrictions on the deductibility of capital
    losses, and NOL carry-forward requirements each would generate a
    negative tax expenditure, since a comprehensive income tax would allow
    full deductibility of losses. If human capital were considered an asset,
    then its cost (e.g., certain education and training expenses, including
    perhaps the cost of college and professional school) should be
    amortizable, but it is not under current law.\22\ Some restricted
    deductions under the individual AMT might be negative tax expenditures
    as might the phase-out of personal exemptions and of itemized
    deductions. The inability to deduct consumer interest also might

    [[Page 319]]

    be a negative tax expenditure, as an interest deduction may be required
    to properly measure income, as seen by the equivalence between borrowing
    and reduced lending.\23\ As discussed above, the current treatment of
    Social Security payments to the disabled also might represent a negative
    tax expenditure, if viewed as payments on an insurance policy.
    ---------------------------------------------------------------------------
      \22\ Current law offers favorable treatment to some education costs,
    thereby creating (positive) tax expenditures. Current law allows
    expensing of that part of the cost of education and career training that
    is related to foregone earnings and this would be a tax expenditure
    under a comprehensive income baseline. In addition, some education has
    consumption value, and under a comprehensive income definition would be
    taxable to that extent, but is not taxable under current law.
      \23\ See Bradford, Untangling the Income Tax, p. 41.
    ---------------------------------------------------------------------------
      Current tax law also fails to index for inflation interest receipts,
    capital gains, depreciation, and inventories. This failure leads to
    negative tax expenditures because comprehensive income would be indexed
    for inflation. Current law, however, also fails to index for inflation
    the deduction for interest payments; this represents a (positive) tax
    expenditure.
      The issue of indexing also highlights that even if one wished to focus
    only on tax policies that are similar to spending programs, accounting
    for some negative tax expenditures may be required. For example, the net
    subsidy created by accelerated depreciation is properly measured by the
    difference between depreciation allowances specified under existing tax
    law and economic depreciation, which is indexed for inflation.\24\
    ---------------------------------------------------------------------------
      \24\ Accelerated depreciation can be described as the equivalent of an
    interest free loan from the Government to the taxpayer. Under federal
    budget accounting principles, such a loan would be treated as an outlay
    equal to the present value of the foregone interest.
    ---------------------------------------------------------------------------

       DIFFERENCES BETWEEN OFFICIAL TAX EXPENDITURES AND TAX EXPENDITURES
                         RELATIVE TO A CONSUMPTION BASE

      This section compares tax expenditures listed in the official tax
    expenditure budget with those implied by a comprehensive consumption tax
    baseline. It first discusses some of the difficulties encountered in
    trying to compare current tax provisions to those that would be observed
    under a comprehensive consumption tax. Next, it discusses which of the
    thirty largest official tax expenditures would be tax expenditures under
    the consumption tax baseline, concluding that about one-half of the top
    thirty official tax expenditures would remain tax expenditures under a
    consumption tax baseline. Most of those that fall off the list are tax
    incentives for saving and investment.
      The section next discusses some major differences between current law
    and a comprehensive consumption tax baseline that are excluded from the
    current list of tax expenditures. These differences include the
    consumption value of owner-occupied housing and other consumer durables,
    benefits from in-kind Government transfers, and gifts. It concludes with
    a discussion of negative tax expenditures relative to a consumption tax
    baseline

    Ambiguities in Determining Tax Expenditures Relative to a Consumption
    Baseline

      A broad-based consumption tax is a combination of an income tax plus a
    deduction for net saving. This follows from the definition of
    comprehensive income as consumption plus the change in net worth. It
    therefore seems straightforward to say that current law's deviations
    from a consumption base are the sum of (a) tax expenditures on an income
    base associated with exemptions and deductions for certain types of
    income, plus (b) overpayments of tax, or negative tax expenditures, to
    the extent net saving is not deductible from the tax base. In reality,
    however, the situation is more complicated. A number of issues arise,
    some of which also are problems in defining a comprehensive income tax,
    but seem more severe, or at least only more obvious, for the consumption
    tax baseline.
      It is not always clear how to treat certain items under a consumption
    tax. One problem is determining whether a particular expenditure is an
    item of consumption. Spending on medical care and charitable donations
    are two examples. Another problem relates to foreign source income. It
    is sometimes argued that a credit for foreign income taxes is
    inappropriate against the base of a consumption tax. Does that mean that
    the current foreign tax credit is a tax expenditure for a consumption
    tax base? The classification below suggests that medical spending and
    charitable contributions might be included in the definition of
    consumption, but also considers an alternative view. It makes no
    judgment about the treatment of foreign taxes, but provides a brief
    discussion of the issues.
      There may be more than one way to treat various items under a
    consumption tax. For example, a consumption tax might ignore borrowing
    and lending by excluding from the borrower's tax base the proceeds from
    loans, denying the borrower a deduction for payments of interest and
    principal, and excluding interest and principal payments received from
    the lender's tax base. On the other hand, a consumption tax might
    include borrowing and lending in the tax base by requiring the borrower
    to add the proceeds from loans in his tax base, allowing the lender to
    deduct loans from his tax base, allowing the borrower to deduct payments
    of principal and interest, and requiring the lender to include receipt
    of principal and interest payments. In present value terms, the two
    approaches are equivalent for both the borrower and the lender; in
    particular both allow the tax base to measure consumption and both
    impose a zero effective tax rate on interest income. But which approach
    is taken obviously has different implications (at least on an annual
    flow basis) for the treatment of many important items of income and
    expense, such as the home mortgage interest deduction. The
    classification below suggests that the deduction for home mortgage
    interest could well be a tax expenditure, but takes note of alternative
    views.
      Some exclusions of income are equivalent in many respects to
    consumption tax treatment that immediately deducts the cost of an
    investment while taxing the future cash-flow. For example, exempting
    invest

    [[Page 320]]

    ment income is equivalent to consumption tax treatment as far as the
    normal rate of return on new investment is concerned. This is because
    expensing generates a tax reduction that offsets in present value terms
    the tax paid on the investment's future normal returns. Expensing gives
    the income from a marginal investment a zero effective tax rate.
    However, a yield exemption approach differs from a consumption tax as
    far as the distribution of income and Government revenue is concerned.
    Pure profits in excess of the normal rate of return would be taxed under
    a consumption tax, because they are an element of cash-flow, but would
    not be taxed under a yield exemption tax system. Should exemption of
    certain kinds of investment income, and certain investment tax credits,
    be regarded as the equivalent of consumption tax treatment? The
    classification that follows takes a fairly broad view of this
    equivalence and considers many tax provisions that reduce or eliminate
    the tax on capital income to be roughly consistent with a broad-based
    consumption tax.
      Looking at provisions one at a time can be misleading. The hybrid
    character of the existing tax system leads to many provisions that might
    make good sense in the context of a consumption tax, but that generate
    inefficiencies because of the problem of the ``uneven playing field''
    when evaluated within the context of the existing tax rules. It is not
    clear how these should be classified. For example, many saving
    incentives are targeted to specific tax favored sources of capital
    income, and so potentially distort economic choices in ways that would
    not occur under a broad-based consumption tax. As another example, under
    a consumption VAT based on the destination principle, there would be a
    rebate of the VAT on exports and a tax on imports. Does this mean that
    the extraterritorial income exclusion (the successor of the Foreign
    Sales Corporation provision) is not a tax expenditure? Resolution comes
    down to judgments about how broad is broad enough to be considered
    general, or whether it even matters at all that a provision is targeted
    in some way. The classification that follows views many savings
    incentives, even if targeted, as roughly consistent with a broad based
    consumption tax.
      Capital gains would not be a part of a comprehensive consumption tax
    base. Proceeds from asset sales and sometimes borrowing would be part of
    the cash-flow tax base, but, for transactions between domestic investors
    at a flat tax rate, would cancel out in the economy as a whole. How
    should existing tax expenditures related to capital gains be classified?
    The classification below generally views available capital gains tax
    breaks as consistent with a broad-based consumption tax because they
    lower the tax rate on capital income toward the zero rate that is
    consistent with a consumption-based tax.
      Such considerations suggest that trying to compute the current tax's
    deviations from ``the'' base of a consumption tax is impossible because
    deviations cannot be uniquely determined, making it very difficult to do
    a consistent accounting of the differences between the current tax base
    and a consumption tax base. Nonetheless, Appendix Table 2 attempts a
    classification based on the criteria outlined above.

    Treatment of Major Tax Expenditures under a Comprehensive Consumption
    Baseline

      As noted above, the major difference between a comprehensive
    consumption tax and a comprehensive income tax is in the treatment of
    saving, or in the taxation of capital income. Consequently, many current
    tax expenditures related to preferential taxation of capital income
    would not be tax expenditures under a consumption tax. However,
    preferential treatment of items of income that is unrelated to
    moderately broad-based saving or investment incentives would remain tax
    expenditures under a consumption baseline. In addition, several official
    tax expenditures relating to items of income and expense are difficult
    to properly classify, while others may serve as proxies for properly
    measured tax expenditures.
      Appendix Table 2 shows the thirty largest official tax expenditures
    from the Budget classified according to whether they would be considered
    a tax expenditure under a consumption tax. One of the thirty items
    clearly would be a tax expenditure (shown in panel A) under a
    consumption tax, while an additional four (those in panel B) probably
    would be tax expenditures.
      Exclusion of workers' compensation benefits allows an exclusion from
    income that is unrelated to investment, and so should be included in the
    base of a comprehensive consumption tax.
      The official tax expenditures for Social Security benefits reflects
    exceptions for low income taxpayers from the general rule that 85
    percent of Social Security benefits are included in the recipient's tax
    base. The 85 percent inclusion is intended as a simplified mechanism for
    taxing Social Security benefits as if the Social Security program were a
    private pension with employee contributions made from after-tax income.
    Under these tax rules, income earned on contributions made by both
    employers and employees benefits from tax deferral, but employer
    contributions also benefit because the employee may exclude them from
    his taxable income, while the employee's own contributions are included
    in his taxable income. These tax rules give the equivalent of
    consumption tax treatment, a zero effective tax rate on the return, to
    the extent that the original pension contributions are made by the
    employer, but give less generous treatment to the extent that the
    original contributions are made by the employee. Income earned on
    employee contributions is taxed at a low, but positive, effective tax
    rate. Based on historical calculations, the 85 percent inclusion
    reflects roughly the outcome of applying these tax rules to a lower-
    income earner when one-half of the contributions are from the employer
    and one-half from the employee.
      The current tax expenditure measures a tax benefit relative to a
    baseline that is somewhere between a com

    [[Page 321]]

    prehensive income tax and a consumption tax. The properly measured tax
    expenditure relative to a consumption tax baseline would include only
    those Social Security benefits that are accorded treatment more
    favorable than that implied by a consumption tax, which would correspond
    to including 50 percent of Social Security benefits in the recipient's
    tax base.
      A similar analysis would apply to exclusion of Social Security
    benefits of dependents and retirees.
      The child credit and the earned income tax credit can be viewed as
    social welfare programs unrelated to measuring and taxing consumption.
    As such, they would be tax expenditures relative to a consumption
    baseline.
      The treatment of the items in panels C is less uncertain. Several of
    these items relate to the costs of medical care or to charitable
    contributions. As discussed in the previous section of the appendix,
    there is disagreement within the tax policy community over the extent to
    which medical care and charitable giving represent consumption items.
    While widely held to be consumption, a competing view is that they
    represent reductions in net worth that should be excluded from the tax
    base because they do not yield direct satisfaction to taxpayer who makes
    the expenditure.
      There also is the issue of how to tax medical insurance premiums.
    Under current law, employees do not have to include insurance premiums
    paid for by employers in their income. The self-employed also may
    exclude (via a deduction) medical insurance premiums from their taxable
    income. From some perspectives, these premiums should be in the tax base
    because they appear to represent consumption. Yet an alternative
    perspective would support excluding the premium from tax as long as the
    consumption tax base included the value of any medical services paid for
    by the insurance policy, because the premium equals the expected value
    of insurance benefits received. But even from this alternative
    perspective, the official tax expenditure might continue to be a tax
    expenditure under a consumption tax baseline because current law
    excludes the value of medical services paid with insurance benefits from
    the employee's taxable income.
      If medical spending is not consumption, one approach to measuring the
    consumption base would ignore insurance, but allow the consumer to
    deduct the value of all medical services obtained. An alternative
    approach would allow a deduction for the premium but include the value
    of any insurance benefits received, while continuing to allow a
    deduction for a value of all medical services obtained. In either case,
    the official tax expenditure for the exclusion of employer provided
    medical insurance and expenses would not be a tax expenditure relative
    to a consumption tax baseline.
      Consider next the deductibility of home mortgage interest. A
    consumption tax seeks to tax the consumption value of housing services
    consumed no matter how the house is financed. From this perspective,
    home mortgage interest should not be deductible. However, what governs
    the proper treatment of interest under a consumption tax is whether
    financial flows are in or out of the consumption tax base. A result
    equivalent to disallowing the interest deduction would require that the
    loan be taken into income and would permit the associated interest and
    principal payments to be deducted. If the loans are taken into income
    (as they would be under some types of consumption taxes), then the
    associated interest and principal payments should be deductible,
    otherwise not. Without specifying how financial flows are treated, it is
    unclear how to treat the home mortgage interest deduction. Nonetheless,
    given that loans are not taken into income under current law, and this
    treatment's equivalency to disallowing the interest deduction,
    classifying the deduction of home mortgage interest as a tax expenditure
    might be reasonable.
      Ambiguities arise about the proper treatment of State and local taxes
    under a consumption tax, as they do under an income tax. These taxes are
    not of themselves consumption items, but might serve as proxies for the
    value of Government services consumed.
      The extraterritorial income exclusion replaces the previous Foreign
    Sales Corporation program. It provides an exclusion from income for
    certain exports. To the extent that the program is viewed as a component
    of a destination based VAT it might not be a tax expenditure. In
    addition, to the extent that the exclusion is an investment subsidy, it
    might be consistent with consumption tax principles (i.e., a low tax
    rate on capital income).
      The taxation of Social Security benefits for the disabled also is
    difficult to classify. As discussed in this appendix above, these
    benefits generally ought to be taxed because they represent purchasing
    power. However, the associated Social Security taxes ought to be fully
    deductible, but they are not. Hence the proper treatment is unclear.
    Moreover, if the insurance model is applied, the taxation of Social
    Security benefits might be a negative tax expenditure.
      The credit for low income housing acts to lower the tax burden on
    qualified investment, and so from one perspective would not be a tax
    expenditure under a consumption tax baseline. However, in some cases the
    credit is too generous; it can give a negative tax on income from
    qualified investment rather than the zero tax called for under
    consumption tax principles. In addition, the credit is very narrowly
    targeted. Consequently, it could be considered a tax expenditure
    relative to a consumption tax baseline.
      The final panel (D) shows items that are not likely to be tax
    expenditures under a consumption base. Most of these relate to tax
    provisions that eliminate or reduce the tax on various types of capital
    income because a zero tax on capital income is consistent with
    consumption tax principles. But in those cases where a tax remains, a
    negative tax expenditure under the consumption tax is created.
      The graduated corporate income tax rates would not be a tax
    expenditure under a comprehensive consumption baseline. A consumption
    tax would have no tax

    [[Page 322]]

    on corporate income or profits, hence the issue of whether the rate
    structure on corporate income provides a special benefit to corporations
    with low income would not arise.
      The exception from the passive loss rules probably would not be a tax
    expenditure because proper measurement of income, and hence of
    consumption, requires full deduction of losses.

    Major Tax Expenditures under a Consumption Tax That Are Excluded from
    the Current Budget

      Several differences between current law and a consumption tax are left
    off the official tax expenditure list. Additional tax expenditures
    include the imputed consumption value from consumer durables and owner-
    occupied housing, private gifts and inheritances received, possibly
    benefits paid by insurance policies, in-kind benefits from such
    Government programs as food-stamps, Medicaid, and public housing, and
    benefits received from charities. Under some ideas of a comprehensive
    consumption tax, the value of leisure and of household production of
    goods and services would be included as a tax expenditure.
      A consumption tax implemented as a tax on cash flows would tax all
    proceeds from sales of capital assets when consumed, rather than just
    capital gains; because of expensing, taxpayers effectively would have a
    zero basis. The proceeds from borrowing would be in the base of a
    consumption tax that also allowed a deduction for repayment of principal
    and interest, but are excluded from the current tax base. The deduction
    of business interest expense might be a tax expenditure, since under
    some forms of consumption taxation interest is neither deducted from the
    borrower's tax base nor included in the lender's tax base. The personal
    exemption and standard deduction also might be considered tax
    expenditures, although they can be viewed differently, e.g., as elements
    of the basic tax rate schedule.

    Negative Tax Expenditures

      Importantly, current law also deviates from a consumption tax norm in
    ways that increase, rather than decrease, tax liability. These could be
    called negative tax expenditures. The official budget excludes negative
    tax expenditures on the theory that tax expenditures are intended to
    substitute for Government spending programs. Yet excluding negative tax
    expenditures would give a very one-sided look at the differences between
    the existing tax system and a consumption tax.
      A large item on this list would be the inclusion of capital income in
    the current individual income tax base, including the income earned on
    inside-build up in Social Security accounts. The revenue from the
    corporation income tax, or more generally a measure of the double tax on
    corporate profits, also would be a negative tax expenditure.
    Depreciation allowances, even if accelerated, would be a negative tax
    expenditure since consumption tax treatment generally would require
    expensing. Depending on the treatment of loans, the borrower's inability
    to deduct payments of principal and the lender's inability to deduct
    loans might be a negative tax expenditure. The passive loss rules,
    restrictions on the deductibility of capital losses, and NOL
    carryforward provisions also would generate negative tax expenditures,
    because the change in net worth requires a deduction for losses. If
    human capital were considered an asset, then its cost (e.g., certain
    education and training expenses, including perhaps costs of college and
    professional school) should be expensed, but it is not under current
    law. Certain restrictions under the individual AMT as well as the phase-
    out of personal exemptions and of itemized deductions also might be
    considered negative tax expenditures. Under some views, the current tax
    treatment of Social Security benefits paid to the disabled would be a
    negative tax expenditure.

                 REVISED ESTIMATES OF SELECTED TAX EXPENDITURES

    Accelerated Depreciation

      Under the reference tax law baseline no tax expenditures arise from
    accelerated depreciation. In the past, official tax expenditure
    estimates of accelerated depreciation under the normal tax law baseline
    compared tax allowances based on the historic cost of an asset with
    allowances calculated using the straight-line method over relatively
    long recovery periods. Normal law allowances also were determined by the
    historical cost of the asset and so did not adjust for inflation,
    although such an adjustment is required when measuring economic
    depreciation, the age related fall in the real value of the asset.
      Beginning with the 2004 Budget, the tax expenditures for accelerated
    depreciation under the normal law concept have been recalculated using
    as a baseline depreciation rates and replacement cost indexes from the
    National Income and Product Accounts.\25\ The revised estimates are
    intended to approximate the degree of acceleration provided by current
    law over a baseline determined by real, inflation adjusted, and economic
    depreciation. Current law depreciation allowances for machinery and
    equipment include the benefits of a temporary expensing provision.\26\
    The estimates are shown in tables in the body of the main text, e.g.,
    Table 18.1.
    ---------------------------------------------------------------------------
      \25\ See Barbara Fraumeni, ``The Measurement of Depreciation in the
    U.S. National Income and Product Accounts,'' in Survey of Current
    Business 77 No. 7 (Washington, D.C.: Department of Commerce, Bureau of
    Economic Analysis, July, 1997), pp. 7-42, and the National Income and
    Product Accounts of the United States, Table 7.6, ``Chain-type Quantity
    and Price Indexes for Private Fixed Investment by Type,'' U.S.
    Department of Commerce, Bureau of Economic Analysis.
      \26\ The temporary provision allows 30 percent of the cost of a
    qualifying investment to be deducted immediately rather than capitalized
    and depreciated over time. It is generally effective for qualifying
    investments made after September 10, 2001 and before September 11, 2004.
    The Jobs and Growth Tax Relief Reconciliation Act of 2003 raised the
    deduction to 50 percent depreciation (up from 30 percent) of the cost
    new equipment purchased after May 5, 2003 and placed into service before
    January 1, 2005. Qualifying investments generally are limited to
    tangible property with depreciation recovery periods of 20 years or
    less, certain software, and leasehold improvements, but this set of
    assets corresponds closely to machinery and equipment.

    ---------------------------------------------------------------------------

    [[Page 323]]

      The revised tax expenditure estimates differ substantially from
    estimates calculated under the old methodology. In general, the new tax
    expenditure estimates are smaller than the old estimates.\27\ In part
    this is because the new baseline uses depreciation allowances that are
    faster than those in the old baseline. In addition, the new baseline
    calculates depreciation on a replacement cost basis rather on the
    historic cost basis previously used; this translates into larger
    depreciation allowances to the extent that asset prices rise over time.
    In many years the new tax expenditures are negative, indicating that
    current law's tax depreciation allowances are smaller than those implied
    by economic depreciation. Because these estimates are on a cash flow,
    rather than a present value, basis, the negative value does not
    necessarily indicate that tax depreciation is decelerated relative to
    economic depreciation over the life of an investment. Even when tax
    depreciation is accelerated over the life of an investment, negative
    annual cash flow estimates could obtain in the later years of an
    investment's economic life. This type of vintage effect contributes
    importantly to the negative tax expenditures calculated for equipment in
    2005-2009 because the temporary expensing provision expires at the end
    of 2004. Calculations that compare the present value of tax depreciation
    (without the temporary expensing) with the present value of inflation
    indexed economic depreciation over each investment's economic life show
    that for many types of assets tax depreciation is accelerated, but only
    slightly, assuming a moderate rate of inflation.\28\
    ---------------------------------------------------------------------------
      \27\ Estimates under the old methodology are no longer shown in the
    tables.
      \28\ U.S. Department of the Treasury, Report to the Congress on
    Depreciation Recovery Periods and Methods (Washington, D.C.: U.S.
    Government Printing Office, July, 2000), p. 32.

    ---------------------------------------------------------------------------
    Owner-Occupied Housing

      A homeowner receives a flow of housing services equal in gross value
    to the rent that could have been earned had the owner chosen to rent the
    house to others. Comprehensive income would include in its base the
    implicit net rental income earned on investment in owner-occupied
    housing. Current law, however, excludes from its tax base such net
    rental income. This exclusion is a tax expenditure relative to a
    comprehensive income base.
      In contrast to a comprehensive income baseline, the official list of
    tax expenditures does not include the exclusion of implicit rental
    income on owner-occupied housing. Instead, it includes as tax
    expenditures deductions for home mortgage interest and for property
    taxes. These are poor proxies for the exclusion of implicit net rental
    income. To the extent that a homeowner owns his house outright,
    unencumbered by a mortgage, he would have no home mortgage interest
    deduction, yet he still would enjoy the benefits of receiving tax free
    the implicit rental income earned on his house. When measuring the net
    income from an investment in owner-occupied housing, mortgage interest
    and property taxes generally would be deductible. The official tax
    expenditures do not allow for depreciation and other costs incurred by
    the homeowner that must be deducted in determining his net rental
    income.
      Appendix Table 3 shows an estimate of the tax expenditure caused by
    the exclusion of implicit net rental income from investment in owner-
    occupied housing. This estimate starts with the NIPA calculated value of
    gross rent on owner-occupied housing, and subtracts interest, taxes,
    economic depreciation, and other costs in arriving at an estimate of
    net-rental income from owner-occupied housing.\29\
    ---------------------------------------------------------------------------
      \29\ National Income and Production Accounts, Table 2.4.
    ---------------------------------------------------------------------------
      The tax expenditure estimate is substantial, growing from $24 billion
    in 2005 to $35 billion in 2009. Nonetheless, it is only about one-third
    as large as the official tax expenditure for the deduction of home
    mortgage interest. In part this discrepancy reflects depreciation and
    other expenses that must be subtracted from gross rents in arriving at
    net rental income. In part, it also might reflect homeowners' ability to
    borrow against their homes to fund other spending, leading to a
    relatively high debt/equity ratio for housing.

    Accrued Capital Gains

      Under a comprehensive income baseline, all real gains would be taxed
    as accrued. These gains would be taxed as ordinary income rather than at
    preferential rates. There would be no deferred unrealized gains on
    assets held at death, nor gains carried over on gifts, or other
    preferential treatments. Indeed, all of the provisions related to
    capitals gains listed in the tax expenditure budget would be dropped.
    Instead, in their place the difference between the ordinary tax on real
    gains accrued and the actual tax paid would be calculated. For 1999, for
    instance, the tax on real accrued gains on corporate equity is estimated
    at $594 billion. This compares to an estimated tax on realized gains of
    $62 billion, for forgone revenues of $562 billion. However, this tax
    expenditure may easily turn into a penalty given the limits on capital
    losses. For 2000, for instance, real accrued losses in corporate equity
    amounted to $1.4 trillion. Yet, taxpayers paid an estimated $70 billion
    in capital gains taxes. This roughly translates into an overpayment of
    taxes to the tune of $464 billion.

    Double Tax on Corporate Profits

      A comprehensive income tax would tax all sources of income once. Taxes
    would not vary by type or source of income.
      In contrast to this benchmark, current law taxes income that
    shareholders earn on investment in corporate stocks at least twice, and
    at combined rates that generally are higher than those imposed on other
    sources of income. Corporate profits are taxed once at the company level
    under the corporation income tax. They are taxed again at the
    shareholder level when received as a dividend or recognized as a capital
    gain. Corporate profits can be taxed more then twice when they pass
    through multiple corporations before being distributed to noncorporate
    shareholders. Corporate level taxes cas

    [[Page 324]]

    cade because corporations are taxed on capital gains they realize on the
    sale of stock shares and on some dividend income received. Compared to a
    comprehensive income tax current law's double (or more) tax on corporate
    profits is an example of a negative tax expenditure because it subjects
    income to a larger tax burden than implied by a comprehensive income
    baseline.
      Appendix Table 3 provides an estimate of the negative tax expenditure
    caused by the multiple levels of tax on corporate profits. This negative
    tax expenditure is measured as the shareholder level tax on dividends
    paid and capital gains realized out of earnings that have been fully
    taxed at the corporate level. It also includes the corporate tax paid on
    inter-corporate dividends and on corporate capital gains attributable to
    the sale of stock shares. The estimate includes the reduction in the
    dividends and capital gains tax rates enacted in JGTRRA.
      The negative tax expenditure is large in magnitude; it exceeds $33
    billion in the years 2005 through in 2009. It is comparable in size (but
    opposite in sign) to all but the largest official tax expenditures.
    JGTRRA reduced but did not eliminate the double tax on corporate
    profits.

                         Appendix Table 1.  COMPARISON OF CURRENT TAX EXPENDITURES WITH THOSE IMPLIED BY A COMPREHENSIVE INCOME TAX \1\
                                                                    (In millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               2005 Revenue
                                                                  Description                                                                     Effect
    --------------------------------------------------------------------------------------------------------------------------------------------------------

    A.  Tax Expenditure Under a Comprehensive Income Tax
    Net exclusion of pension contributions and earnings: Employer plans....................................................................      61,740
    Net exclusion of pension contributions and earnings: 401(k) plans......................................................................      58,910
    Capital gains (except agriculture, timber, iron ore, and coal).........................................................................      30,190
    Exclusion of interest on public purpose State and local bonds..........................................................................      26,370
    Exclusion of interest on life insurance savings........................................................................................      22,130
    Capital gains exclusion on home sales..................................................................................................      21,490
    Net exclusion of pension contributions and earnings: Individual Retirement Accounts....................................................      20,090
    Net exclusion of pension contributions and earnings: Keogh plans.......................................................................       9,260
    Deferral of income from controlled foreign corporations (normal tax method)............................................................       8,400
    Credit for low-income housing investments..............................................................................................       6,860
    Exclusion of workers' compensation benefits............................................................................................       6,850
    Extraterritorial income exclusion......................................................................................................       5,890
    Expensing of certain small investments (normal tax method).............................................................................       4,850
    Expensing of research and experimentation expenditures (normal tax method).............................................................       4,500

    B.  Possibly a Tax Expenditure Under a Comprehensive Income Tax, But With Some Qualifications
    Child credit...........................................................................................................................      29,860
    Exclusion of Social Security benefits for retired workers..............................................................................      19,040
    Step-up basis of capital gains at death................................................................................................      18,240
    Earned income tax credit...............................................................................................................       5,006
    Exclusion of Social security benefits of dependents and survivors......................................................................       4,310

    C.  Uncertain
    Exclusion of employer contributions for medical insurance premiums and medical care....................................................     112,990
    Deductibility of mortgage interest on owner-occupied homes.............................................................................      69,740
    Deductibility of nonbusiness State and local taxes other than on owner-occupied homes..................................................      46,180
    Deductibility of charitable contributions, other than education and health.............................................................      29,670
    Deductibility of State and local property tax on owner-occupied homes..................................................................      19,410
    Deductibility of medical expenses......................................................................................................       7,900
    Deductibility of self-employed medical insurance premiums..............................................................................       3,780
    Social Security benefits for disabled..................................................................................................       3,720
    Deductibility of charitable contributions (education)..................................................................................       3,660

    D.  Probably Not a Tax Expenditure Under a Comprehensive Income Tax
    Exception from passive loss rules for $25,000 of rental loss...........................................................................       4,390
    Graduated corporation income tax rate (normal tax method)..............................................................................       3,910
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ The measurement of certain tax expenditures under a comprehensive income tax baseline may differ from the official budget estimate even when the
      provision would be a tax expenditure under both baselines.

    Source: Table 18-2, Tax Expenditure Budget.

    [[Page 325]]

                       Appendix Table 2.  COMPARISON OF CURRENT TAX EXPENDITURES WITH THOSE IMPLIED BY A COMPREHENSIVE CONSUMPTION TAX \1\
                                                                    (In millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               2005 Revenue
                                                                  Description                                                                     Effect
    --------------------------------------------------------------------------------------------------------------------------------------------------------

    A.  Tax Expenditure Under a Consumption Base
    Exclusion of workers' compensation benefits............................................................................................       6,850

    B.  Probably a Tax Expenditure Under a Consumption Base,
    Child credit...........................................................................................................................      29,860
    Exclusion of Social Security benefits for retired workers..............................................................................      19,040
    Earned income tax credit...............................................................................................................       5,006
    Exclusion of Social security benefits of dependents and survivors......................................................................       4,310

    C.  Uncertain
    Exclusion of employer contributions for medical insurance premiums and medical care....................................................     112,990
    Deductibility of mortgage interest on owner-occupied homes.............................................................................      69,740
    Deductibility of nonbusiness state and local taxes other than on owner-occupied homes..................................................      46,180
    Deductibility of charitable contributions, other than education and health.............................................................      29,670
    Deductibility of State and local property tax on owner-occupied homes..................................................................      19,410
    Deductibility of medical expenses......................................................................................................       7,900
    Credit for low-income housing investments..............................................................................................       6,860
    Extraterritorial income exclusion......................................................................................................       5,890
    Deductibility of self-employed medical insurance premiums..............................................................................       3,780
    Deductibility of charitable contributions (education)..................................................................................       3,660
    Social Security benefits for disabled..................................................................................................       3,720

    D.  Not a Tax Expenditure under a Consumption Base
    Net exclusion of pension contributions and earnings: Employer plans....................................................................      61,740
    Net exclusion of pension contributions and earnings: 401(k) plans......................................................................      58,910
    Capital gains (except agriculture, timber, iron ore, and coal) (normal tax method).....................................................      30,190
    Exclusion of interest on public purpose State and local bonds..........................................................................      26,370
    Exclusion of interest on life insurance savings........................................................................................      22,130
    Capital gains exclusion on home sales..................................................................................................      21,490
    Net exclusion of pension contributions and earnings: Individual Retirement Accounts....................................................      20,090
    Step-up basis of capital gains at death................................................................................................      18,240
    Net exclusion of pension contributions and earnings: Keogh plans.......................................................................       9,260
    Deferral of income from controlled foreign corporations (normal tax method)............................................................       8,400
    Expensing of certain small investments (normal tax method).............................................................................       4,850
    Expensing of research and experimentation expenditures (normal tax method).............................................................       4,500
    Exception from passive loss rules for $25,000 of rental loss...........................................................................       4,390
    Graduated corporation income tax rate (normal tax method)..............................................................................       3,910
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ The measurement of certain tax expenditures under a consumption tax baseline may differ from the official budget estimate even when the provision
      would be a tax expenditure under both baselines.

    Source: Table 6-2, Tax Expenditure Budget.

                                Appendix Table 3.  REVISED TAX EXPENDITURE ESTIMATES \1\
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                            Revenue Loss
                     Provision                 ---------------------------------------------------------------------
                                                  2003      2004      2005      2006      2007      2008      2009
    ----------------------------------------------------------------------------------------------------------------
    Imputed Rent On Owner-Occupied Housing....    18,340    20,540    24,100    25,160    28,250    31,400    34,710
    Double Tax on corporate profit \2\........   -24,020   -26,740   -34,940   -33,340   -33,260   -33,660   -34,280
    ----------------------------------------------------------------------------------------------------------------
    \1\ Calculations described in the appendix text.

    \2\ This is a negative tax expenditure, a tax provision that overtaxes income relative to the treatment
      specified by the baseline tax system.

    [[Page 327]]

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

                            DIMENSIONS OF THE BUDGET

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