Analytical Perspectives - 16. Federal Receipts

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

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16. FEDERAL RECEIPTS

Receipts (budget and off-budget) are taxes and other collections from
the public that result from the exercise of the Federal Government's
sovereign or governmental powers. The difference between receipts and
outlays determines the surplus or deficit.
The Federal Government also collects income from the public from
market-oriented activities. Collections from these activities, which are
subtracted from gross outlays, rather than added to taxes and other
governmental receipts, are discussed in the following chapter.

Growth in receipts.--Total receipts in 2005 are estimated to be
$2,036.3 billion, an increase of $238.2 billion or 13.2 percent relative
to 2004. Receipts are projected to grow at an average annual rate of 6.5
percent between 2005 and 2009, rising to $2,616.4 billion. This growth
in receipts is largely due to assumed increases in incomes resulting
from both real economic growth and inflation. These estimates reflect a
downward adjustment for revenue uncertainty of $20 billion in 2004 and
$15 billion in 2005. As this description suggests, these latter amounts
reflect an additional adjustment to receipts beyond what the economic
and tax models forecast and have been made in the interest of cautious
and prudent forecasting.
As a share of GDP, receipts are projected to increase from 15.7
percent in 2004 to 16.9 percent in 2005. The receipts share of GDP is
projected to increase annually thereafter, rising to 17.8 percent in
2009.

Table 16-1. RECEIPTS BY SOURCE--SUMMARY
(In billions of dollars)
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Estimate
Source 2003 actual -----------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 2009
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Individual income taxes........................ 793.7 765.4 873.8 956.5 1,049.3 1,133.4 1,209.9
Corporation income taxes....................... 131.8 168.7 230.2 250.0 251.0 252.1 255.7
Social insurance and retirement receipts....... 713.0 732.4 793.9 834.0 878.7 918.8 960.2
(On-budget).................................. (189.1) (198.4) (218.8) (230.9) (242.4) (251.2) (261.2)
(Off-budget)................................. (523.8) (534.0) (575.1) (603.1) (636.3) (667.6) (698.9)
Excise taxes................................... 67.5 70.8 73.2 75.8 77.9 80.0 82.2
Estate and gift taxes.......................... 22.0 23.9 21.4 23.9 21.5 22.2 23.6
Customs duties................................. 19.9 22.6 22.1 24.4 26.2 27.6 30.0
Miscellaneous receipts......................... 34.5 34.3 36.5 41.2 46.2 51.2 54.8
Adjustment for revenue uncertainty............. ............. -20.0 -15.0 ............. ............. ............. .............
--------------------------------------------------------------------------------------------------------
Total receipts............................. 1,782.3 1,798.1 2,036.3 2,205.7 2,350.8 2,485.3 2,616.4
(On-budget).............................. (1,258.5) (1,264.1) (1,461.2) (1,602.5) (1,714.5) (1,817.7) (1,917.5)
(Off-budget)............................. (523.8) (534.0) (575.1) (603.1) (636.3) (667.6) (698.9)
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Table 16-2. EFFECT ON RECEIPTS OF CHANGES IN THE SOCIAL SECURITY TAXABLE EARNINGS BASE
(In billions of dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
------------------------------------------------------
2005 2006 2007 2008 2009
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Social security (OASDI) taxable earnings base increases:
$87,900 to $89,700 on Jan. 1, 2005..................... 0.8 2.2 2.5 2.8 3.0
$89,700 to $93,000 on Jan. 1, 2006..................... ......... 1.6 4.3 4.7 5.2
$93,000 to $97,500 on Jan. 1, 2007..................... ......... ......... 2.2 5.9 6.5
$97,500 to $101,400 on Jan. 1, 2008.................... ......... ......... ......... 1.9 5.1
$101,400 to $106,200 on Jan. 1, 2009................... ......... ......... ......... ......... 2.4
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ENACTED LEGISLATION

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

JOBS AND GROWTH TAX RELIEF RECONCILIATION ACT

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

Chart 16-1. MAJOR PROVISIONS OF THE TAX CODE UNDER THE 2001 AND 2003 TAX CUTS
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Provision 2003 2004 2005 2006 2007 2008 2009 2010 2011
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Individual Income Rates reduced to ................ ................ ................... ................ ............... ............... ............... Rates increased
Tax Rates 35, 33, 28, and 25 to 39.6, 36,
percent 31, and 28
percent
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
10 Percent Bracket Bracket upper ................ Bracket upper ................... ................ Bracket upper ............... ............... Bracket
income level income level income level eliminated,
increased to reduced to increased to making lowest
$7,000/$14,000 for $6,000/$12,000 $7,000/$14,000 bracket 15
single/joint for single/ for single/ percent
filers and joint filers joint filers
inflation-indexed and inflation-
indexed
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
15 Percent Bracket Top of bracket for ................ Top of bracket Top of bracket for Top of bracket Top of bracket ............... ............... Top of bracket
for Joint Filers joint filers for joint joint filers for joint for joint for joint
increased to 200 filers reduced increased to 187 filers filers filers reduced
percent of top of to 180 percent percent of top of increased to increased to to 167 percent
bracket for single of top of bracket for single 193 percent of 200 percent of of top of
filers bracket for filers top of bracket top of bracket bracket for
single filers for single for single single filers
filers filers
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Standard Deduction Standard deduction ................ Standard Standard deduction Standard Standard Standard ............... Standard
for Joint Filers for joint filers deduction for for joint filers deduction for deduction for deduction for deduction for
increased to 200 joint filers increased to 184 joint filers joint filers joint filers joint filers
percent of reduced to 174 percent of increased to increased to increased to reduced to 167
standard deduction percent of standard deduction 187 percent of 190 percent of 200 percent of percent of
for single filers standard for single filers standard standard standard standard
deduction for deduction for deduction for deduction for deduction for
single filers single filers single filers single filers single filers
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Child Credit Tax credit for each ................ Tax credit for ................... ................ ............... Tax credit for Tax credit for Tax credit for
qualifying child each qualifying each each each
under age 17 child under age qualifying qualifying qualifying
increased to 17 reduced to child under child under child under
$1,000 $700 age 17 age 17 age 17 reduced
increased to increased to to $500
$800 $1,000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Estate Taxes Top rate reduced to Top rate reduced Top Rate reduced Top rate reduced to Top rate reduced ............... Exempt amount Estate tax Top rate
49 percent to 48 percent to 47 percent 46 percent to 45 percent increased to repealed increased to
Exempt amount Exempt amount $3.5 million 60 percent
increased to increased to $2 Exempt amount
$1.5 million million reduced to $1
million
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Small Business Deduction increased ................ ................ Deduction declines ................ ............... ............... ............... ...............
Expensing to $100,000, to $25,000,
reduced by amount reduced by amount
qualifying qualifying
property exceeds property exceeds
$400,000, and both $200,000, and
amounts inflation- amounts not
indexed inflation-indexed
Applies to software Does not apply to
software
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Capital Gains Tax rate on captial ................ ................ ................... ................ Tax on captial Tax rate on ............... ...............
gains reduced to 5/ gains captial gains
15 percent eliminated for increased to
taxpayers in 10/20 percent
10/15 percent
tax brackets
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Dividends Tax rate on ................ ................ ................... ................ Tax on Dividends taxed ............... ...............
dividends reduced dividends at standard
to 5/15 percent eliminated for income tax
taxpayers in rates
10/15 percent
tax brackets
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Bonus Depreciation Bonus depreciation ................ Bonus ................... ................ ............... ............... ............... ...............
increased to 50 depreciation
percent of expires
qualified property
aquired after
5/5/03
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Alternative Minimum AMT exemption ................ AMT exemption ................... ................ ............... ............... ............... ...............
Tax amount increased amount reduced
to $40,250/$58,000 to $33,750/
for single/joint $45,000 for
filers single /joint
filers
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Accelerate Individual Income Tax Reductions Provided in the 2001 Tax Cut

Accelerate 10-percent individual income tax rate bracket expansion.--
The 2001 tax cut created a 10-percent individual income tax bracket,
which applied to the first $6,000 of taxable income for single taxpayers
and married taxpayers filing separate returns (increasing to $7,000 for
taxable years beginning after December 31, 2007 and before January 1,
2011), the first $10,000 of taxable income for heads of household, and
the first $12,000 of taxable income for married taxpayers filing a joint
return (increasing to $14,000 for taxable years beginning after December
31, 2007 and before January 1, 2011). These amounts were adjusted
annually for inflation after December 31, 2008. The 2003 jobs and growth
tax cut accelerated the expansions of the 10-percent tax rate bracket
scheduled to be effective beginning in taxable year 2008, to be
effective in taxable years 2003 and 2004. For taxable years beginning
after 2004 and before January 1, 2011, the taxable income levels for the
10-percent individual income tax rate bracket will revert to the levels
provided under the 2001 tax cut. The 10-percent bracket will be
eliminated for taxable years beginning after December 31, 2010.
Accelerate reduction in individual income tax rates.--Under the 2001
tax cut, the statutory individual income tax rate brackets of 28, 31, 36
and 39.6 percent were temporarily replaced with a rate structure of 25,
28, 33 and 35 percent. The reduced tax rate structure was phased in over
a period of six years, with reductions scheduled for 2001, 2002, 2004,
and 2006. The new tax rate structure was fully effective for taxable
years 2006 through 2010. The 2003 jobs and growth tax cut accelerated
the reductions in the statutory individual income tax rate structure
scheduled to be effective beginning in taxable years 2004 and 2006, to
be effective beginning in taxable year 2003. The statutory individual
income tax rate brackets will revert to 28, 31, 36 and 39.6 percent,
effective for taxable years beginning after December 31, 2010.
Accelerate increase in standard deduction for married taxpayers filing
a joint return.-- Under the 2001 tax cut, the standard deduction for
married taxpayers filing a joint return, which was 167 percent of the
standard deduction for unmarried individuals,

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was increased to double the standard deduction for single taxpayers over
a five-year period. Under the phasein, the standard deduction for
married taxpayers filing a joint return increased to 174 percent of the
standard deduction for single taxpayers in taxable year 2005, 184
percent in taxable year 2006, 187 percent in taxable year 2007, 190
percent in taxable year 2008, and 200 percent in taxable years 2009 and
2010. The 2003 jobs and growth tax cut accelerated the increase in the
standard deduction for married taxpayers filing a joint return to 200
percent of the standard deduction for single taxpayers, effective for
taxable years 2003 and 2004. For taxable years 2005 through 2010, the
standard deduction for married taxpayers filing a joint return will
revert to the levels provided under the 2001 tax cut. The standard
deduction for married taxpayers filing a joint return will decline to
167 percent of the standard deduction for single taxpayers, effective
for taxable years beginning after December 31, 2010.
Accelerate expansion of the 15-percent individual income tax rate
bracket for married taxpayers filing a joint return.--Under the 2001 tax
cut, the maximum taxable income in the 15-percent individual income tax
rate bracket for married taxpayers filing a joint return, which was 167
percent of the corresponding amount for an unmarried individual, was
increased to twice the corresponding amount for unmarried individuals
over a four-year period. Under the phasein, the maximum taxable income
in the 15-percent tax rate bracket for married taxpayers filing a joint
return increased to 180 percent of the corresponding amount for single
taxpayers in taxable year 2005, 187 percent in taxable year 2006, 193
percent in taxable year 2007, and 200 percent in taxable years 2008,
2009 and 2010. The 2003 jobs and growth tax cut accelerated the increase
in the size of the 15-percent tax rate bracket for married taxpayers
filing a joint return to twice the corresponding tax rate bracket for
single taxpayers, effective for taxable years 2003 and 2004. For taxable
years 2005 through 2010, the size of the 15-percent tax rate bracket for
married taxpayers filing a joint return will revert to the levels
provided under the 2001 tax cut. The maximum taxable income in the 15-
percent tax rate bracket for married taxpayers filing a joint return
will decline to 167 percent of the corresponding amount for single
taxpayers, effective for taxable years beginning after December 31,
2010.
Accelerate increase in child tax credit.--Under the 2001 tax cut, the
maximum amount of the tax credit for each qualifying child under the age
of 17 increased from $500 to $1,000 over a period of 10 years, as
follows: the credit increased to $600 for taxable years 2001 through
2004, $700 for taxable years 2005 through 2008, $800 for taxable year
2009, and $1,000 for taxable year 2010. The 2003 jobs and growth tax cut
accelerated the increase in the credit to $1,000 per child, effective
for taxable years 2003 and 2004. For taxable years 2005 through 2010,
the credit will revert to the levels provided under the 2001 tax cut.
The credit will decline to $500 for taxable years beginning after
December 31, 2010.
For 2003, most eligible taxpayers received the benefit of the increase
in the credit through an advanced payment of up to $400 per child,
issued by the Department of Treasury in the form of a check. The amount
of the advanced payment was based on information provided on each
taxpayer's 2002 tax return, filed in 2003.

Provide Alternative Minimum Tax (AMT) Relief

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

Provide Growth Incentives for Business

Increase and extend the special depreciation allowance for certain
property.--Taypayers are allowed to recover the cost of certain property
used in a trade or business or for the production of income through
annual depreciation deductions. The amount of the allowable depreciation
deduction for a taxable year generally is determined under the modified
accelerated cost recovery system, which assigns applicable recovery
periods and depreciation methods to different types of property.

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The Job Creation and Worker Assistance Act of 2002 (2002 economic
stimulus bill) provided an additional first-year depreciation deduction
equal to 30 percent of the adjusted basis of the property, for
qualifying assets (1) acquired after September 10, 2001 and before
September 11, 2004 (but only if no binding written contract for the
acquisition of the property was in effect before September 11, 2001) or
(2) acquired pursuant to a written binding contract that was entered
into after September 10, 2001 and before September 11, 2004. This first-
year depreciation deduction was allowed for both regular and alternative
minimum tax purposes in the year the property was placed in service. The
basis of the property and the remaining allowable depreciation
deductions had to be adjusted to reflect the additional first-year
depreciation deduction. Property qualifying for the additional first-
year depreciation deduction included tangible property with a
depreciation recovery period of 20 years or less, certain software,
water utility property, and qualified leasehold improvements. To qualify
for the special depreciation allowance, the original use of the property
must have commenced with the taxpayer after September 10, 2001 (except
for certain sale-leaseback property) and the property was required to be
placed in service before January 1, 2005 (January 1, 2006 for certain
property having longer production periods). The 2003 jobs and growth tax
cut extended the final acquisition deadlines for property qualifying for
the 30 percent additional first-year depreciation deduction from
September 11, 2004 to January 1, 2005. In addition, this Act permitted
an additional first-year depreciation deduction equal to 50 percent of
the adjusted basis of the property (in lieu of the 30-percent additional
deduction) for property acquired after May 5, 2003 and before January 1,
2005 (provided no binding written contract for the acquisition of the
property was in effect before May 6, 2003). Qualified property was
defined in the same manner as for purposes of the 30-percent additional
first-year depreciation deduction, except the original use of the
property was required to commence with the taxpayer after May 5, 2003.

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

Modify Taxation of Capital Gains and Dividends

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

Modify Estimated Tax Payments by Corporations

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

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MEDICARE PRESCRIPTION DRUG,

IMPROVEMENT, AND

MODERNIZATION ACT OF 2003

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

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

MILITARY FAMILY TAX RELIEF ACT OF 2003

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

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

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

UNITED STATES-CHILE FREE TRADE AGREEMENT IMPLEMENTATION ACT

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

UNITED STATES-SINGAPORE FREE TRADE AGREEMENT IMPLEMENTATION ACT

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

ADMINISTRATION PROPOSALS

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

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

MAKE PERMANENT THE TAX CUTS ENACTED IN 2001 AND 2003

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

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

Extend Permanently Certain Provisions

of the 2001 Tax Cut and the 2003

Jobs and Growth Tax Cut

Extend permanently reductions in individual income taxes on capital
gains and dividends.--The maximum individual income tax rate on net
capital gains and dividends is 15 percent for taxpayers in individual
income tax rate brackets above 15 percent and 5 percent (zero in 2008)
for lower income taxpayers. The Administration proposes to extend
permanently these reduced rates (15 percent and zero), which are
scheduled to expire on December 31, 2008.
Extend permanently increased expensing for small business.--Small
businesses taxpayers are allowed to expense up to $100,000 in annual
investment expenditures for qualifying property (expanded to include
off-the-shelf computer software) placed in service in taxable years
2003, 2004, and 2005. The amount that may be expensed is reduced by the
amount by which the taxpayer's cost of qualifying property exceeds
$400,000. Both the deduction and annual investment limits are indexed
annually for inflation, effective for taxable years beginning after 2003
and before 2006. Also, with respect to a taxable year beginning after
2002 and before 2006, taxpayers are permitted to make or revoke
expensing elections on amended returns without the consent of the IRS
Commissioner. The Administration proposes to extend permanently each of
these temporary provisions, applicable for qualifying property
(including off-the-shelf computer software) placed in service in taxable
years beginning after 2005.
Extend permanently provisions expiring in 2010.--Most of the
provisions of the Economic Growth and Tax Relief Reconciliation Act of
2001 sunset on December 31, 2010. The Administration proposes to extend
those provisions permanently.

TAX INCENTIVES

Simplify and Encourage Saving

Expand tax-free savings opportunities.--Under current law, individuals
can contribute to traditional IRAs, nondeductible IRAs, and Roth IRAs,
each subject to different sets of rules. For example, contributions to
traditional IRAs are deductible, while distributions are taxed;
contributions to Roth IRAs are taxed, but distributions are excluded
from income. In addition, eligibility to contribute is subject to
various age and income limits. While primarily intended for retirement
saving, withdrawals for certain education, medical, and other non-
retirement expenses are penalty free. The eligibility and withdrawal
restrictions for these accounts complicate compliance and limit
incentives to save.
The Administration proposes to replace current law IRAs with two new
savings accounts: a Lifetime Savings Account (LSA) and a Retirement
Savings Account (RSA). Regardless of age or income, individuals could
make annual nondeductible contributions of $5,000 to an LSA and $5,000
(or earnings if less) to an RSA. Distributions from an LSA would be
excluded from income and, unlike current law, could be made at anytime
for any purpose without restriction. Distributions from an RSA would be
excluded from income after attaining age 58 or in the event of death or
disability. All other distributions would be included in income (to the
extent they exceed basis) and subject to an additional tax.
Distributions would be deemed to come from basis first. The proposal
would be effective for contributions made after December 31, 2004 and
future year contribution limits would be indexed for inflation.
Existing Roth IRAs would be renamed RSAs and would be subject to the
new rules for RSAs. Existing traditional and nondeductible IRAs could be
converted into an RSA by including the conversion amount (excluding
basis) in gross income, similar to a current-law Roth conversion.
However, no income limit would apply to the ability to convert.
Taxpayers who convert IRAs to RSAs could spread the included conversion
amount over several years. Existing traditional or nondeductible IRAs
that are not converted to RSAs could not accept new contributions. New
traditional IRAs could be created to accommodate rollovers from employer
plans, but they could not accept new individual

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contributions. Individuals wishing to roll an amount directly from an
employer plan to an RSA could do so by including the rollover amount
(excluding basis) in gross income (i.e., ``converting'' the rollover,
similar to a current law Roth conversion).

Consolidate employer-based savings accounts.--Current law provides
multiple types of tax-preferred employer-based savings accounts to
encourage saving for retirement. The accounts have similar goals but are
subject to different sets of rules regulating eligibility, contribution
limits, tax treatment, and withdrawal restrictions. For example, 401(k)
plans for private employers, SIMPLE 401(k) plans for small employers,
403(b) plans for 501(c)(3) organizations and public schools, and 457
plans for State and local governments are all subject to different
rules. To qualify for tax benefits, plans must satisfy multiple
requirements. Among the requirements, the plan may not discriminate in
favor of highly compensated employees with regard either to coverage or
to amount or availability of contributions or benefits. Rules covering
employer-based savings accounts are among the lengthiest and most
complicated sections of the tax code and associated regulations. This
complexity imposes substantial costs on employers, participants, and the
government, and likely has inhibited the adoption of retirement plans by
employers, especially small employers.
The Administration proposes to consolidate 401(k), SIMPLE 401(k),
403(b), and 457 plans, as well as SIMPLE IRAs and SARSEPs, into a single
type of plan--Employee Retirement Savings Accounts (ERSAs) that would be
available to all employers. ERSA non-discrimination rules would be
simpler and include a new ERSA non-discrimination safe-harbor. Under one
of the safe-harbor options, a plan would satisfy the nondiscrimination
rules with respect to employee deferrals and employee contributions if
it provided a 50-percent match on elective contributions up to six
percent of compensation. By creating a simplified and uniform set of
rules, the proposal would substantially reduce complexity. The proposal
would be effective for taxable years beginning after December 31, 2004.

Establish Individual Development Accounts (IDAs).--The Administration
proposes to allow eligible individuals to make contributions to a new
savings vehicle, the Individual Development Account, which would be set
up and administered by qualified financial institutions, nonprofit
organizations, or Indian tribes (qualified entities). Citizens or legal
residents of the United States between the ages of 18 and 60 who cannot
be claimed as a dependent on another taxpayer's return, are not
students, and who meet certain income limitations would be eligible to
establish and contribute to an IDA. A single taxpayer would be eligible
to establish and contribute to an IDA if his or her modified AGI in the
preceding taxable year did not exceed $20,000 ($30,000 for heads of
household, and $40,000 for married taxpayers filing a joint return).
These thresholds would be indexed annually for inflation beginning in
2006. Qualified entities that set up and administer IDAs would be
required to match, dollar-for-dollar, the first $500 contributed by an
eligible individual to an IDA in a taxable year. Qualified entities
would be allowed a 100 percent tax credit for up to $500 in annual
matching contributions to each IDA, and a $50 tax credit for each IDA
maintained at the end of a taxable year with a balance of not less that
$100 (excluding the taxable year in which the account was established).
Matching contributions and the earnings on those contributions would be
deposited in a separate ``parallel account.'' Contributions to an IDA by
an eligible individual would not be deductible, and earnings on those
contributions would be included in income. Matching contributions by
qualified entities and the earnings on those contributions would be tax-
free. Withdrawals from the parallel account may be made only for
qualified purposes (higher education, the first-time purchase of a home,
business start-up, and qualified rollovers). Withdrawals from the IDA
for other than qualified purposes may result in the forfeiture of some
or all matching contributions and the earnings on those contributions.
The proposal would be effective for contributions made after December
31, 2004 and before January 1, 2012, to the first 900,000 IDA accounts
opened before January 1, 2010.

Invest in Health Care

Provide refundable tax credit for the purchase of health insurance.--
Current law provides a tax preference for employer-provided group health
insurance plans, but not for individually purchased health insurance
coverage except to the extent that deductible medical expenses exceed
7.5 percent of AGI, the individual has self-employment income, or the
individual is eligible under the Trade Act of 2002 to purchase certain
types of qualified health insurance. The Administration proposes to make
health insurance more affordable for individuals not covered by an
employer plan or a public program. Effective for taxable years beginning
after December 31, 2004, a new refundable tax credit would be provided
for the cost of health insurance purchased by individuals under age 65.
The credit would provide a subsidy for a percentage of the health
insurance premium, up to a maximum includable premium. The maximum
subsidy percentage would be 90 percent for low-income taxpayers and
would phase down with income. The maximum credit would be $1,000 for an
adult and $500 for a child. The credit would be phased out at $30,000
for single taxpayers and $60,000 for families purchasing a family
policy.
Individuals could claim the tax credit for health insurance premiums
paid as part of the normal tax-filing process. Alternatively, beginning
July 1, 2006, the tax credit would be available in advance at the time
the individual purchases health insurance. The advance credit would
reduce the premium paid by the individual to the health insurer, and the
health insurer would be reimbursed directly by the Department of
Treasury for the amount of the advance credit. Eligibility for

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an advance credit would be based on an individual's prior year tax
return. To qualify for the credit, a health insurance policy would have
to include coverage for catastrophic medical expenses. Qualifying
insurance could be purchased in the individual market. Qualifying health
insurance could also be purchased through private purchasing groups,
State-sponsored insurance purchasing pools, and high-risk pools. Such
groups may help reduce health insurance costs and increase coverage
options for individuals, including older and higher-risk individuals.
Individuals would not be allowed to claim the credit and make a
contribution to a Health Savings Account (HSA) or Archer MSA for the
same taxable year.

Provide an above-the-line deduction for high-deductible insurance
premiums.--Current law provides a tax preference for employer-provided
health insurance. Current law also provides that individuals may make
tax-deductible contributions to Health Savings Accounts (HSAs) if
certain criteria are met, including the individual being covered by a
high-deductible health insurance plan. Individuals may then make tax-
free withdrawals from their HSAs for qualified, health-care related out-
of-pocket expenses. Individuals who do not have employer-provided health
insurance may also make tax-deductible contributions to HSAs, but the
premiums from their high-deductible insurance plan are not tax-
deductible. The Administration proposes to allow all individuals an
above-the-line deduction for insurance premiums arising from high-
deductible health insurance plans if the plan qualifies the individual
for an HSA and if the individual does not have employer-provided
coverage. This proposal generally eliminates the unequal tax treatment
of high-deductible insurance premiums between individuals who have
employer-provided health care and those who do not, and further
increases the attractiveness of HSAs in general. The deduction would be
effective for taxable years beginning after December 31, 2004.
Provide an above-the-line deduction for long-term care insurance
premiums.--Current law provides a tax preference for employer-paid long-
term care insurance. However, the vast majority of the long-term care
insurance market consists of individually purchased policies, for which
no tax preference is provided except to the extent that deductible
medical expenses exceed 7.5 percent of AGI or the individual has self-
employment income. Premiums on qualified long-term care insurance are
deductible as a medical expense, subject to annual dollar limitations
that increase with age. The Administration proposes to make
individually-purchased long-term care insurance more affordable by
creating an above-the-line deduction for qualified long-term care
insurance premiums. The Secretary of the Treasury would be authorized to
require long-term care insurance to meet consumer protection standards
for quality coverage. The deduction would be available to taxpayers who
individually purchase qualified long-term care insurance and to those
who pay at least 50 percent of the cost of employer-provided coverage.
The deduction would be effective for taxable years beginning after
December 31, 2004 but it would be phased in over four years. The
deduction would be subject to current law annual dollar limitations on
qualified long-term care insurance premiums.
Provide an additional personal exemption to home caregivers of family
members.--Current law provides a tax deduction for certain long-term
care expenses. In addition, taxpayers are allowed to claim exemptions
for themselves (and their spouses, if married) and dependents who they
support. However, neither provision may meet the needs of taxpayers who
provide long-term care in their own home for close family members.
Effective for taxable years beginning after December 31, 2004, the
Administration proposes to provide an additional personal exemption to
taxpayers who care for certain qualified family members who reside with
the taxpayer in the household maintained by the taxpayer. A taxpayer is
considered to maintain a household only if he or she furnishes over half
of the annual cost of maintaining the household. Qualified family
members would include any individual with long-term care needs who is
(1) the spouse of the taxpayer or an ancestor of the taxpayer or the
spouse of such an ancestor and (2) a member of the taxpayer's household
for the entire year. An individual would be considered to have long-term
care needs if he or she were certified by a licensed physician (prior to
the filing of a return claiming the exemption) as, for at least 180
consecutive days, unable to perform at least two activities of daily
living without substantial assistance from another individual due to a
loss of functional capacity; or, alternatively, (1) requiring
substantial supervision to be protected from threats to his or her own
health and safety due to severe cognitive impairment and (2) being
unable to perform at least one activity of daily living or being unable
to engage in age appropriate activities.
Allow the orphan drug tax credit for certain pre-designation
expenses.--Current law provides a 50-percent credit for expenses related
to human clinical testing of drugs for the treatment of certain rare
diseases and conditions (``orphan drugs''). A taxpayer may claim the
credit only for expenses incurred after the Food and Drug Administration
(FDA) designates a drug as a potential treatment for a rare disease or
condition. This creates an incentive to defer clinical testing for
orphan drugs until the taxpayer receives the FDA's approval and
increases complexity for taxpayers by treating pre-designation and post-
designation clinical expenses differently. The Administration proposes
to allow taxpayers to claim the orphan drug credit for expenses incurred
prior to FDA designation if designation occurs before the due date
(including extensions) for filing the tax return for the year in which
the FDA application was filed. The proposal would be effective for
qualified expenses incurred after December 31, 2003.

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

Provide Incentives for Charitable Giving

Provide charitable contribution deduction for nonitemizers.--Under
current law, individual taxpayers who do not itemize their deductions
(nonitemizers) are not able to deduct contributions to qualified
charitable organizations. The Administration proposes to allow
nonitemizers to deduct charitable contributions of cash in addition to
claiming the standard deduction, effective for taxable years beginning
after December 31, 2003. Nonitemizers would be allowed to deduct cash
contributions that exceed $250 ($500 for married taxpayers filing
jointly), up to a maximum deduction of $250 ($500 for married taxpayers
filing jointly). The deduction floor and limits would be indexed for
inflation after 2004. Deductible contributions would be subject to
existing rules governing itemized charitable contributions, such as the
substantiation requirements.
Permit tax-free withdrawals from IRAs for charitable contributions.--
Under current law, eligible individuals may make deductible or non-
deductible contributions to a traditional IRA. Pre-tax contributions and
earnings in a traditional IRA are included in income when withdrawn.
Effective for distributions after date of enactment, the Administration
proposes to allow individuals who have attained age 65 to exclude from
gross income IRA distributions made directly to a charitable
organization. The exclusion would apply without regard to the
percentage-of-AGI limitations that apply to deductible charitable
contributions. The exclusion would apply only to the extent the
individual receives no return benefit in exchange for the transfer, and
no charitable deduction would be allowed with respect to any amount that
is excludable from income under this provision.
Expand and increase the enhanced charitable deduction for
contributions of food inventory.--A taxpayer's deduction for charitable
contributions of inventory generally is limited to the taxpayer's basis
(typically cost) in the inventory. However, for certain contributions of
inventory, C corporations may claim an enhanced deduction equal to the
lesser of: (1) basis plus one half of the fair market value in excess of
basis, or (2) two times basis. To be eligible for the enhanced
deduction, the contributed property generally must be inventory of the
taxpayer contributed to a charitable organization and the donee must (1)
use the property consistent with the donee's exempt purpose solely for
the care of the ill, the needy, or infants, (2) not transfer the
property in exchange for money, other property, or services, and (3)
provide the taxpayer a written statement that the donee's use of the
property will be consistent with such requirements. To use the enhanced
deduction, the taxpayer must establish that the fair market value of the
donated item exceeds basis.
Under the Administration's proposal, which is designed to encourage
contributions of food inventory to charitable organizations, any
taxpayer engaged in a trade or business would be eligible to claim an
enhanced deduction for donations of food inventory. The enhanced
deduction for donations of food inventory would be increased to the
lesser of: (1) fair market value, or (2) two times basis. However, to
ensure consistent treatment of all businesses claiming an enhanced
deduction for donations of food inventory, the enhanced deduction for
qualified food donations by S corporations and non-corporate taxpayers
would be limited to 10 percent of net income from the trade or business.
A special provision would allow taxpayers with a zero or low basis in
the qualified food donation (e.g., taxpayers that use the cash method of
accounting for purchases and sales, and taxpayers that are not required
to capitalize indirect costs) to assume a basis equal to 25 percent of
fair market value. The enhanced deduction would be available only for
donations of ``apparently wholesome food'' (food intended for human
consumption that meets all quality and labeling standards imposed by
Federal, state, and local laws and regulations, even though the food may
not be readily marketable due to appearance, age, freshness, grade,
size, surplus, or other conditions). The fair market value of
``apparently wholesome food'' that cannot or will not be sold solely due
to internal standards of the taxpayer or lack of market, would be
determined by taking into account the price at which the same or
substantially the same food items (as to both type and quality) are sold
by the taxpayer at the time of the contribution or, if not sold at such
time, in the recent past. These proposed changes in the enhanced
deduction for donations of food inventory would be effective for taxable
years beginning after December 31, 2003.

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Reform excise tax based on investment income of private foundations.--
Under current law, private foundations that are exempt from Federal
income tax are subject to a two-percent excise tax on their net
investment income (one-percent if certain requirements are met). The
excise tax on private foundations that are not exempt from Federal
income tax, such as certain charitable trusts, is equal to the excess of
the sum of the excise tax that would have been imposed if the foundation
were tax exempt and the amount of the unrelated business income tax that
would have been imposed if the foundation were tax exempt, over the
income tax imposed on the foundation. To encourage increased charitable
activity and simplify the tax laws, the Administration proposes to
replace the two rates of tax on the net investment income of private
foundations that are exempt from Federal income tax with a single tax
rate of one percent. The excise tax on private foundations not exempt
from Federal income tax would be equal to the excess of the sum of the
one-percent excise tax that would have been imposed if the foundation
were tax exempt and the amount of the unrelated business income tax what
would have been imposed if the foundation were tax exempt, over the
income tax imposed on the foundation. The proposed change would be
effective for taxable years beginning after December 31, 2003.
Modify tax on unrelated business taxable income of charitable
remainder trusts.--A charitable remainder annuity trust is a trust that
is required to pay, at least annually, a fixed dollar amount of at least
five percent of the initial value of the trust to a noncharity for the
life of an individual or for a period of 20 years or less, with the
remainder passing to charity. A charitable remainder unitrust is a trust
that generally is required to pay, at least annually, a fixed percentage
of at least five percent of the fair market value of the trust's assets
determined at least annually to a non-charity for the life of an
individual or for a period of 20 years or less, with the remainder
passing to charity. A trust does not qualify as a charitable remainder
annuity trust if the annuity for a year is greater than 50 percent of
the initial fair market value of the trust's assets. A trust does not
qualify as a charitable remainder unitrust if the percentage of assets
that are required to be distributed at least annually is greater than 50
percent. A trust does not qualify as a charitable remainder annuity
trust or a charitable remainder unitrust unless the value of the
remainder interest in the trust is at least 10 percent of the value of
the assets contributed to the trust. Distributions from a charitable
remainder annuity trust or charitable remainder unitrust, which are
included in the income of the beneficiary for the year that the amount
is required to be distributed, are treated in the following order as:
(1) ordinary income to the extent of the trust's current and previously
undistributed ordinary income for the trust's year in which the
distribution occurred, (2) capital gains to the extent of the trust's
current capital gain and previously undistributed capital gain for the
trust's year in which the distribution occurred, (3) other income to the
extent of the trust's current and previously undistributed other income
for the trust's year in which the distribution occurred, and (4) corpus
(trust principal).
Charitable remainder annuity trusts and charitable remainder unitrusts
are exempt from Federal income tax; however, such trusts lose their
income tax exemption for any year in which they have unrelated business
taxable income. Any taxes imposed on the trust are required to be
allocated to trust corpus. The Administration proposes to levy a 100-
percent excise tax on the unrelated business taxable income of
charitable remainder trusts, in lieu of removing the Federal income tax
exemption for any year in which unrelated business taxable income is
incurred. This change, which is a more appropriate remedy than loss of
tax exemption, is proposed to become effective for taxable years
beginning after December 31, 2003, regardless of when the trust was
created.

Modify basis adjustment to stock of S corporations contributing
appreciated property.--Under current law, each shareholder in an S
corporation separately accounts for his or her pro rata share of the S
corporation's charitable contributions in determining his or her income
tax liability. A shareholder's basis in the stock of the S corporation
must be reduced by the amount of his or her pro rata share of the S
corporation's charitable contribution. In order to preserve the benefit
of providing a charitable contribution deduction for contributions of
appreciated property and to prevent the recognition of gain on the
contributed property on the disposition of the S corporation stock, the
Administration proposes to allow a shareholder in an S corporation to
increase his or her basis in the stock of an S corporation by an amount
equal to the excess of the shareholder's pro rata share of the S
corporation's charitable contribution over the stockholder's pro rata
share of the adjusted basis of the contributed property. The proposal
would be effective for taxable years beginning after December 31, 2003.
Repeal the $150 million limitation on qualified 501(c)(3) bonds.--
Current law contains a $150 million limitation on the volume of
outstanding, non-hospital, tax-exempt bonds for the benefit of any one
501(c)(3) organization. The limitation was repealed in 1997 for bonds
issued after August 5, 1997, at least 95 percent of the net proceeds of
which are used to finance capital expenditures incurred after that date.
However, the limitation continues to apply to bonds more than five
percent of the net proceeds of which finance or refinance working
capital expenditures, or capital expenditures incurred on or before
August 5, 1997. In order to simplify the tax laws and provide consistent
treatment of bonds for 501(c)(3) organizations, the Administration
proposes to repeal the $150 million limitation in its entirety.

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Repeal certain restrictions on the use of qualified 501(c)(3) bonds
for residential rental property.--Tax-exempt, 501(c)(3) organizations
generally may utilize tax-exempt financing for charitable purposes.
However, existing law contains a special limitation under which
501(c)(3) organizations may not use tax-exempt financing to acquire
existing residential rental property for charitable purposes unless the
property is rented to low-income tenants or is substantially
rehabilitated. In order to simplify the tax laws and provide consistent
treatment of bonds for 501(c)(3) organizations, the Administration
proposes to repeal the residential rental property limitation.

Strengthen Education

Extend, increase, and expand the above-the-line deduction for
qualified out-of-pocket classroom expenses.--Under recently expired law,
teachers who itemize deductions (do not use the standard deduction) and
incur unreimbursed, job-related expenses were allowed to deduct those
expenses to the extent that when combined with other miscellaneous
itemized deductions they exceeded two percent of AGI. Prior law also
allowed certain teachers and other elementary and secondary school
professionals to treat up to $250 in annual qualified out-of-pocket
classroom expenses as a non-itemized deduction (above-the-line
deduction), effective for expenses incurred in taxable years beginning
after December 31, 2001 and before January 1, 2004. Unreimbursed
expenditures for certain books, supplies and equipment related to
classroom instruction qualified for the above-the-line deduction.
Expenses claimed as an above-the-line deduction could not be claimed as
an itemized deduction. The Administration proposes to extend the above-
the-line deduction to apply to qualified out-of-pocket expenditures
incurred after December 31, 2003, to increase the deduction to $400, and
to expand the deduction to apply to unreimbursed expenditures for
certain professional training programs.

Encourage Telecommuting

Exclude from income the value of employer-provided computers,
software, and peripherals.--Under current law, the value of computers
and related equipment and services provided by an employer to an
employee for home use is generally allocated between business and
personal use. The business-use portion is excluded from the employee's
income whereas the personal-use portion is subject to income and payroll
taxes. In order to simplify recordkeeping, improve compliance, and
encourage telecommuting, the Administration proposes to allow
individuals to exclude from income the value of employer-provided
computers and related equipment and services necessary to perform work
for the employer at home. The employee would be required to make
substantial use of the equipment to perform work for the employer.
Substantial business use would include standby use for periods when work
from home may be required by the employer, such as during work closures
caused by the threat of terrorism, inclement weather, or natural
disasters. The proposal would be effective for taxable years beginning
after December 31, 2004.

Increase Housing Opportunities

Provide tax credit for developers of affordable single-family
housing.--The Administration proposes to provide annual tax credit
authority to states (including U.S. possessions) designed to promote the
development of affordable single-family housing in low-income urban and
rural neighborhoods. Beginning in calendar year 2005, first-year credit
authority equal to the amount provided for low-income rental housing tax
credits would be made available to each state. That amount is equal to
the greater of $2 million or $1.75 per capita (indexed annually for
inflation after 2002). State housing agencies would award first-year
credits to single-family housing units comprising a project located in a
census tract with median income equal to 80 percent or less of area
median income. Units in condominiums and cooperatives could qualify as
single-family housing. Credits would be awarded as a fixed amount for
individual units comprising a project. The present value of the credits,
determined on the date of a qualifying sale, could not exceed 50 percent
of the cost of constructing a new home or rehabilitating an existing
property. The taxpayer (developer or investor partnership) owning the
housing unit immediately prior to the sale to a qualified buyer would be
eligible to claim credits over a five-year period beginning on the date
of sale. Eligible homebuyers would be required to have incomes equal to
80 percent or less of area median income. Certain technical features of
the provision would follow similar features of current law with respect
to the low-income housing tax credit and mortgage revenue bonds.

Protect the Environment

Extend permanently expensing of brownfields remediation costs.--
Taxpayers may elect, with respect to expenditures paid or incurred
before January 1, 2004, to treat certain environmental remediation
expenditures that would otherwise be chargeable to capital account as
deductible in the year paid or incurred. The Administration proposes to
extend this provision permanently for expenditures paid or incurred
after December 31, 2003, facilitating its use by businesses to undertake
projects that may be uncertain in overall duration.
Exclude 50 percent of gains from the sale of property for conservation
purposes.--The Administration proposes to create a new incentive for
private, voluntary land protection. This incentive is a cost-effective,
non-regulatory approach to conservation. Under the proposal, when land
(or an interest in land or water) is sold for conservation purposes,
only 50 percent of any gain would be included in the seller's income.

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This proposal applies to conservation easements and similar sales of
partial interests in land, such as development rights and agricultural
conservation easements, for conservation purposes. To be eligible for
the exclusion, the sale may be either to a government agency or to a
qualified conservation organization, and the buyer must supply a letter
of intent that the acquisition will serve conservation purposes. In
addition, the taxpayer or a member of the taxpayer's family must have
owned the property for the three years immediately preceding the sale.
Antiabuse provisions will ensure that the conservation purposes continue
to be served. The provision would be effective for sales taking place
after December 31, 2004 and before January 1, 2008.

Increase Energy Production and Promote Energy Conservation

Extend and modify the tax credit for producing electricity from
certain sources.--Taxpayers are provided a 1.5-cent-per-kilowatt-hour
tax credit, adjusted for inflation after 1992, for electricity produced
from wind, closed-loop biomass (organic material from a plant grown
exclusively for use at a qualified facility to produce electricity), and
poultry waste. To qualify for the credit, the electricity must be sold
to an unrelated third party and must be produced during the first 10
years of production at a facility placed in service before January 1,
2004. The Administration proposes to extend the credit for electricity
produced from wind and biomass to facilities placed in service before
January 1, 2007. In addition, eligible biomass sources would be expanded
to include certain biomass from forest-related resources, agricultural
sources, and other specified sources. Special rules would apply to
biomass facilities placed in service before January 1, 2004. Electricity
produced at such facilities from newly eligible sources would be
eligible for the credit only from January 1, 2004 through December 31,
2008, and at a rate equal to 60 percent of the generally applicable
rate. Electricity produced from newly eligible biomass co-fired in coal
plants would also be eligible for the credit only from January 1, 2004
through December 31, 2006, and at a rate equal to 30 percent of the
generally applicable rate. The Administration also proposes to modify
the rules relating to governmental financing of qualified facilities.
There would be no percentage reduction in the credit for governmental
financing attributable to tax-exempt bonds. Instead, such financing
would reduce the credit only to the extent necessary to offset the value
of the tax exemption. The rules relating to leased facilities would also
be modified to permit the lessee, rather than the owner, to claim the
credit.
Provide tax credit for residential solar energy systems.--Current law
provides a 10-percent investment tax credit to businesses for qualifying
equipment that uses solar energy to generate electricity; to heat, cool
or provide hot water for use in a structure; or to provide solar process
heat. A credit currently is not provided for nonbusiness purchases of
solar energy equipment. The Administration proposes a new tax credit for
individuals who purchase solar energy equipment to generate electricity
(photovoltaic equipment) or heat water (solar water heating equipment)
for use in a dwelling unit that the individual uses as a residence,
provided the equipment is used exclusively for purposes other than
heating swimming pools. The proposed nonrefundable credit would be equal
to 15 percent of the cost of the equipment and its installation; each
individual taxpayer would be allowed a maximum credit of $2,000 for
photovoltaic equipment and $2,000 for solar water heating equipment. The
credit would apply to photovoltaic equipment placed in service after
December 31, 2003 and before January 1, 2009 and to solar water heating
equipment placed in service after December 31, 2003 and before January
1, 2007.
Modify treatment of nuclear decommissioning funds.--Under current law,
deductible contributions to nuclear decommissioning funds are limited to
the amount included in the taxpayer's cost of service for ratemaking
purposes. For deregulated utilities, this limitation may result in the
denial of any deduction for contributions to a nuclear decommissioning
fund. The Administration proposes to repeal this limitation.
Also under current law, deductible contributions are not permitted to
exceed the amount the IRS determines to be necessary to provide for
level funding of an amount equal to the taxpayer's post-1983
decommissioning costs. The Administration proposes to permit funding of
all decommissioning costs through deductible contributions. Any portion
of these additional contributions relating to pre-1984 costs that
exceeds the amount previously deducted (other than under the nuclear
decommissioning fund rules) or excluded from the taxpayer's gross income
on account of the taxpayer's liability for decommissioning costs, would
be allowed as a deduction ratably over the remaining useful life of the
nuclear power plant.
The Administration's proposal would also permit taxpayers to make
deductible contributions to a qualified fund after the end of the
nuclear power plant's estimated useful life and would provide that
nuclear decommissioning costs are deductible when paid. These changes in
the treatment of nuclear decommissioning funds are proposed to be
effective for taxable years beginning after December 31, 2003.

Provide tax credit for purchase of certain hybrid and fuel cell
vehicles.--Under current law, a 10-percent tax credit up to $4,000 is
provided for the cost of a qualified electric vehicle. The full amount
of the credit is available for purchases prior to 2004. The credit
begins to phase down in 2004 and is not available after 2006. A
qualified electric vehicle is a motor vehicle that is powered primarily
by an electric motor drawing current from rechargeable batteries, fuel
cells, or other portable sources of electric current, the original use
of which commences with the taxpayer, and that is acquired for use by
the taxpayer and not for resale. Electric vehicles and hybrid vehicles
(those that have

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more than one source of power on board the vehicle) have the potential
to reduce petroleum consumption, air pollution and greenhouse gas
emissions. To encourage the purchase of such vehicles, the
Administration is proposing the following tax credits: (1) A credit of
up to $4,000 would be provided for the purchase of qualified hybrid
vehicles after December 31, 2003 and before January 1, 2009. The amount
of the credit would depend on the percentage of maximum available power
provided by the rechargeable energy storage system and the amount by
which the vehicle's fuel economy exceeds the 2000 model year city fuel
economy. (2) A credit of up to $8,000 would be provided for the purchase
of new qualified fuel cell vehicles after December 31, 2003 and before
January 1, 2013. A minimum credit of $4,000 would be provided, which
would increase as the vehicle's fuel efficiency exceeded the 2000 model
year city fuel economy, reaching a maximum credit of $8,000 if the
vehicle achieved at least 300 percent of the 2000 model year city fuel
economy.
Provide tax credit for energy produced from landfill gas.--Taxpayers
that produce gas from biomass (including landfill methane) are eligible
for a tax credit equal to $3 per barrel-of-oil equivalent (the amount of
gas that has a British thermal unit content of 5.8 million), adjusted by
an inflation adjustment factor for the calendar year in which the sale
occurs. To qualify for the credit, the gas must be produced domestically
from a facility placed in service by the taxpayer before July 1, 1998,
pursuant to a written binding contract in effect before January 1, 1997.
In addition, the gas must be sold to an unrelated person before January
1, 2008. The Administration proposes to extend the credit to apply to
landfill methane produced from a facility (or portion of a facility)
placed in service after December 31, 2003 and before January 1, 2012,
and sold (or used to produce electricity that is sold) before January 1,
2012. The credit for fuel produced at landfills subject to EPA's 1996
New Source Performance Standards/Emissions Guidelines would be limited
to two-thirds of the otherwise applicable amount beginning on January 1,
2008, if any portion of the facility for producing fuel at the landfill
was placed in service before July 1, 1998, and beginning on January 1,
2004, in all other cases.
Provide tax credit for combined heat and power property.--Combined
heat and power (CHP) systems are used to produce electricity (and/or
mechanical power) and usable thermal energy from a single primary energy
source. Depreciation allowances for CHP property vary by asset use and
capacity. No income tax credit is provided under current law for
investment in CHP property. CHP systems utilize thermal energy that is
otherwise wasted in producing electricity by more conventional methods
and achieve a greater level of overall energy efficiency, thereby
lessening the consumption of primary fossil fuels, lowering total energy
costs, and reducing carbon emissions. To encourage increased energy
efficiency by accelerating planned investments and inducing additional
investments in such systems, the Administration is proposing a 10-
percent investment credit for qualified CHP systems with an electrical
capacity in excess of 50 kilowatts or with a capacity to produce
mechanical power in excess of 67 horsepower (or an equivalent
combination of electrical and mechanical energy capacities). A qualified
CHP system would be required to produce at least 20 percent of its total
useful energy in the form of thermal energy and at least 20 percent of
its total useful energy in the form of electrical or mechanical power
(or a combination thereof) and would also be required to satisfy an
energy-efficiency standard. For CHP systems with an electrical capacity
in excess of 50 megawatts (or a mechanical energy capacity in excess of
67,000 horsepower), the total energy efficiency would have to exceed 70
percent. For smaller systems, the total energy efficiency would have to
exceed 60 percent. Investments in qualified CHP assets that are
otherwise assigned cost recovery periods of less than 15 years would be
eligible for the credit, provided that the taxpayer elects to treat such
property as having a 22-year class life (and thus depreciates the
property using a 15-year recovery period). The credit, which would be
treated as an energy credit under the investment credit component of the
general business credit, and could not be used in conjunction with any
other credit for the same equipment, would apply to investments in CHP
property placed in service after December 31, 2003 and before January 1,
2009.
Extend excise tax exemption (credit) for ethanol.--Under current law
an income tax credit and an excise tax exemption are provided for
ethanol and renewable source methanol used as a fuel. In general, the
income tax credit for ethanol is 52 cents per gallon, but small ethanol
producers (those producing less than 30 million gallons of ethanol per
year) qualify for a credit of 62 cents per gallon on the first 15
million gallons of ethanol produced in a year. A credit of 60 cents per
gallon is allowed for renewable source methanol. As an alternative to
the income tax credit, gasohol blenders may claim a gasoline tax
exemption of 52 cents for each gallon of ethanol and 60 cents for each
gallon of renewable source methanol that is blended into qualifying
gasohol. The rates for the ethanol credit and exemption are each reduced
by 1 cent per gallon in 2005. The income tax credit expires on December
31, 2007 and the excise tax exemption expires on September 30, 2007.
Neither the credit nor the exemption apply during any period in which
motor fuel taxes dedicated to the Highway Trust Fund are limited to 4.3
cents per gallon. The Administration proposes to extend both the income
tax credit and the excise tax exemption through December 31, 2010. The
current law rule providing that neither the credit nor the exemption
apply during any period in which motor fuel taxes dedicated to the
Highway Trust Fund are limited to 4.3 cents per gallon would be
retained.

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

SIMPLIFY THE TAX LAWS FOR FAMILIES

Establish uniform definition of a qualifying child.--The tax code
provides assistance to families with children through the dependent
exemption, head-of-household filing status, child tax credit, child and
dependent care tax credit, and earned income tax credit (EITC). However,
because each provision defines an eligible ``child'' differently,
taxpayers must wade through pages of bewildering rules and instructions,
resulting in confusion and error. The Administration proposes to
harmonize the definition of qualifying child across these five related
tax benefits, thereby reducing both compliance and administrative costs.
Under the Administration's proposal, a qualifying child must meet the
following three tests: (1) Relationship--The child must be the
taxpayer's biological or adopted child, stepchild, sibling, or step-
sibling, a descendant of one of these individuals, or a foster child.
(2) Residence--The child must live with the taxpayer in the same
principal home in the United States for more than half of the year. (3)
Age--The child must be under age 19, a full-time student if over 18 and
under 24, or totally and permanently disabled. Neither the support nor
gross income tests of current law would apply to qualifying children who
meet these three tests. In addition, taxpayers would no longer be
required to meet a household maintenance test when claiming the child
and dependent care tax credit. Current law requirements that a child be
under age 13 for the dependent care credit and under age 17 for the
child tax credit, would be maintained. Taxpayers generally could
continue to claim individuals who do not meet the proposed relationship,
residency, or age tests as dependents if they meet the requirements
under current law, and no other taxpayer claims the same individual. The
proposal would be effective for tax years beginning after December 31,
2004.
Simplify adoption tax benefits.--Under current law, for taxable years
beginning before January 1, 2011, the following tax benefits are
provided to taxpayers who adopt children: (1) a nonrefundable tax credit
for qualified expenses incurred in the adoption of a child, up to a
certain limit, and (2) the exclusion from gross income of qualified
adoption expenses paid or reimbursed by an employer under an adoption
assistance program, up to a certain limit. Taxpayers may not claim the
credit for expenses that are excluded from gross income. In 2004, the
limitation on qualified adoption expenses for both the credit and the
exclusion is $10,390. Taxpayers who adopt children with special needs
may claim the full $10,390 credit or exclusion even if adoption expenses
are less than this amount. Taxpayers may carry forward unused credit
amounts

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for up to five years. When modified adjusted gross income exceeds
$155,860 (in 2004), both the credit amount and the amount excluded from
gross income are reduced pro-rata over the next $40,000 of modified
adjusted gross income. The maximum credit and exclusion and the income
at which the phase-out range begins are indexed annually for inflation.
For taxable years beginning after December 31, 2010, taxpayers will be
able to claim the credit only for actual expenses for the adoption of
children with special needs. For these taxpayers the qualified expense
limit will be $6,000, the credit will be reduced pro-rata between
$75,000 and $115,000 of modified adjusted gross income, and the credit
amount and phase-out range will not be indexed annually for inflation.
Taxpayers may not exclude employer-provided adoption assistance from
gross income for taxable years beginning after December 31, 2010.
To reduce marginal tax rates and simplify computations of tax
liabilities, the Administration is proposing to eliminate the income-
related phaseout of the adoption tax credit and exclusion. The proposal
would be effective for taxable years beginning after December 31, 2004.
The phaseout of adoption tax benefits increases complexity for all
taxpayers using the adoption tax provisions, including the vast majority
who are not affected by the phaseouts; raises marginal tax rates for
taxpayers in the phase-out range; and with the higher phase-out income
levels under the 2001 tax cut, affects fewer than 10,000 taxpayers. The
broader eligibility criteria, larger qualifying expense limitations, and
the employer exclusion would apply in taxable years beginning after
December 31, 2010 as a result of the Administration's proposal to extend
the 2001 tax cut provisions permanently.

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

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

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

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

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

STRENGTHEN THE EMPLOYER-BASED PENSION SYSTEM

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

CLOSE LOOPHOLES AND IMPROVE TAX COMPLIANCE

Combat abusive tax avoidance transactions.--Although the vast majority
of taxpayers and practitioners do their best to comply with the law,
some actively promote or engage in transactions structured to generate
tax benefits never intended by Congress. Such abusive transactions harm
the public fisc, erode the public's respect for the tax laws, and
consume limited IRS resources. The Administration has proposed a number
of regulatory and legislative changes designed to significantly enhance
the current enforcement regime and curtail the use of abusive tax
avoidance transactions. These proposed changes include (1) the
modification of the definition of a reportable transaction, (2) the
issuance of a coordinated set of disclosure, registration, and investor
list maintenance rules, (3) the imposition of new or increased penalties
for the failure to disclose and register reportable transactions and for
the failure to report an interest in a foreign financial account, (4)
the prevention of ``income separation'' transactions structured to
create immediate tax losses or to convert current ordinary income into
deferred capital gain, and (5) the denial of foreign tax credits with
respect to any foreign withholding taxes if the underlying property was
not held for a specified minimum period of time as well as regulatory
authority in order to prevent the inappropriate separation of foreign
taxes from the related foreign income in cases where taxes are imposed
on any person in respect of income of an entity. A number of
administrative proposals already have been carried out by the Treasury
Department and the IRS.
Limit related party interest deductions.--Current law (section 163(j)
of the Internal Revenue Code) denies U.S. tax deductions for certain
interest expenses paid to a related party where (1) the corporation's
debt-to-equity ratio exceeds 1.5 to 1.0, and (2) net interest expenses
exceed 50 percent of the corporation's adjusted taxable income (computed
by adding back net interest expense, depreciation, amortization,
depletion, and any net operating loss deduction). If these thresholds
are exceeded, no deduction is allowed for interest in excess of the 50-
percent limit that is paid to a related party or paid to an unrelated
party but guaranteed by a related party, and that is not subject to U.S.
tax. Any interest that is disallowed in a given year is carried forward
indefinitely and may be deductible in a subsequent taxable year. A
three-year carryforward for any excess limitation (the amount by which
interest expense for a given year falls short of the 50-percent limit)
is also allowed. Because of the opportunities available under current
law to reduce inappropriately U.S. tax on income earned on U.S.
operations through the use of foreign related-party debt, the
Administration proposes to tighten the interest disallowance rules of
section 163(j) as follows: (1) The current law 1.5 to 1 debt-to-equity
safe harbor would be eliminated; (2) the

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

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

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

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

TAX ADMINISTRATION, UNEMPLOYMENT INSURANCE, AND OTHER

Improve Tax Administration

Modify the IRS Restructuring and Reform Act of 1998 (RRA98).--The
proposed modification to RRA98 is comprised of six parts. The first part
modifies employee infractions subject to mandatory termination and
permits a broader range of available penalties. It strengthens taxpayer
privacy while reducing employee anxiety resulting from unduly harsh
discipline or unfounded allegations. The second part adopts measures to
curb frivolous submissions and filings that are intended to impede or
delay tax administration. The third part allows the IRS to terminate
installment agreements when taxpayers fail to make timely tax deposits
and file tax returns on current liabilities. The fourth part streamlines
jurisdiction over collection due process cases in the Tax Court, thereby
simplifying procedures and reducing the cycle time for certain
collection due process cases. The fifth part permits taxpayers to enter
into installment agreements that do not guarantee full payment of
liability over the life of the agreement. It allows the IRS to enter
into agreements with taxpayers who desire to resolve their tax
obligations but cannot make payments large enough to satisfy their
entire liability and for whom an offer in compromise is not a viable
alternative. The sixth part eliminates the re

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quirement that the IRS Chief Counsel provide an opinion for any accepted
offer-in-compromise of unpaid tax (including interest and penalties)
equal to or exceeding $50,000. This proposal requires that the Treasury
Secretary establish standards to determine when an opinion is
appropriate.
Initiate IRS cost saving measures.--The Administration has two
proposals to improve IRS efficiency and performance from current
resources. The first proposal modifies the way that Financial Management
Services (FMS) recovers its transaction fees for processing IRS levies
by permitting FMS to retain a portion of the amount collected before
transmitting the balance to the IRS, thereby reducing government
transaction costs. The offset amount would be included as part of the
15-percent limit on levies against income and would also be credited
against the taxpayer's liability. The second proposal extends the April
filing date for electronically filed tax returns to April 30th, provided
that any tax due also is paid electronically. This proposal would
encourage more taxpayers to file electronically and allow the IRS to
process more returns and payments efficiently.
Repeal section 132 of the Revenue Act of 1978 and amend the tax code
to authorize the Secretary of the Treasury to issue rules to address
inappropriate nonqualified deferred compensation arrangements.--Section
132 currently prohibits the IRS from issuing new regulations on many
aspects of nonqualified deferred compensation arrangements, restricting
the ability of the IRS to respond effectively to these arrangements.
Under the Administration's proposal, that prohibition would be removed
and the Treasury Secretary would be given express authority to issue new
rules. It is expected that new guidance would address when an
individual's access to compensation is considered subject to substantial
limitation, the extent to which company assets may be designated as
available to meet deferred compensation obligations, and when an
arrangement is treated as funded.
Increase continuous levy for certain Federal payments.--Under current
law, the IRS is authorized to levy continuously up to 15 percent of
specified Federal payments to collect outstanding tax obligations. Many
Federal payments, such as salary, retirement, and benefit payments are
regularly recurring payments that can be levied continuously until the
outstanding tax obligation is satisfied. Other Federal payments, such as
those to vendors for goods or services, are not regularly recurring and
present fewer opportunities for collection. The Administration therefore
proposes to allow the IRS to levy continuously up to 100 percent of
Federal payments to vendors.
Permit private collection agencies to engage in specific, limited
activities to support IRS collection efforts.--The resource and
collection priorities of the IRS do not permit it to pursue continually
all outstanding tax liabilities. Many taxpayers are aware of their
outstanding tax liabilities, but have failed to pay them. The use of
private collection agencies, or PCAs, to support IRS collection efforts
would enable the Government to reach these taxpayers to obtain payment
while allowing the IRS to focus its own enforcement resources on more
complex cases and issues. PCAs would not have any enforcement power, and
they would be strictly prohibited from threatening enforcement action or
violating any taxpayer confidentiality protection or other taxpayer
rights. The IRS would be required to monitor closely PCA activities and
performance, including the protection of taxpayer rights. PCAs would be
compensated out of the revenue collected through their activities,
although compensation would be based on quality of service, taxpayer
satisfaction, and case resolution, in addition to collection results.

Strengthen Financial Integrity of Unemployment Insurance

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

Other Proposals

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

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itors gaming operations conducted on Indian lands. Since 1998, the
Commission has been prohibited from collecting more than $8 million in
annual fees from gaming operations to cover the costs of its oversight
responsibilities. The Administration proposes to amend the current fee
structure so that the Commission can adjust its activities to the growth
in the Indian gaming industry.

REAUTHORIZE FUNDING FOR THE HIGHWAY TRUST FUND

Deposit full amount of excise tax imposed on gasohol in the Highway
Trust Fund.--Under current law, an 18.4-cents-per-gallon excise tax is
imposed on gasoline. In general, 18.3 cents per gallon of the gasoline
excise tax is deposited in the Highway Trust Fund and 0.1 cent per
gallon is deposited in the Leaking Underground Storage Tank (LUST) Trust
Fund. In the case of gasohol, which is taxed at a reduced rate, 2.5
cents per gallon is retained in the General Fund of the Treasury, 0.1
cent per gallon is deposited in the LUST Trust Fund, and the balance of
the reduced rate is deposited in the Highway Trust Fund. The
Administration believes that it is appropriate that the entire amount of
the excise tax on gasohol (except for the 0.1 cent per gallon deposited
in the LUST Trust Fund) be deposited in the Highway Trust Fund.
Effective for collections after September 30, 2003, the Administration
proposes to transfer the 2.5 cents per gallon of the gasohol excise tax
that is currently retained in the General Fund of the Treasury to the
Highway Trust Fund.
Impose additional registration requirements on the transfer of tax-
exempt fuel by pipeline, vessel, or barge.--Fuel tax evasion results in
a substantial amount of lost revenue to the Highway Trust Fund. To
prevent or reduce evasion of highway fuel taxes and to improve their
collection, the Administration proposes the following changes, effective
November 1, 2004: (1) To qualify for the fuel tax exemption provided to
bulk transfers of taxable fuel to registered terminals or refineries,
the fuel would have to be transferred by registered pipeline, vessel, or
barge; (2) proof of registration would be required to be displayed on
any vessel or barge used to transport taxable fuel; and (3) new
penalties would be imposed for failure to comply with registration and
display of proof of registration requirements. The penalty for failure
to register would be $1,000 per day; the penalty for failure to display
proof of registration would be $500 per day.
Repeal installment method for payment of heavy highway vehicle use
tax.--The Administration proposes to repeal the current law provision
that allows owners of heavy highway vehicles to pay the highway use tax
in quarterly installments. Effective July 1, 2004, owners would be
required to pay the annual tax in full with their returns. Installment
payments have provided an opportunity for tax evasion by allowing owners
to register vehicles for the entire tax year after payment of only the
first installment of the annual tax.
Allow tax-exempt financing for private highway projects and rail-truck
transfer facilities.--Interest on bonds issued by state and local
governments to finance activities carried out and paid for by private
persons (private activity bonds) is taxable unless the activities are
specified in the Internal Revenue Code. The volume of certain tax-exempt
private activity bonds that state and local governments may issue in
each calendar year is limited by state-wide volume limits. The
Administration proposes to provide authority to issue an aggregate of
$15 billion of tax-exempt private activity bonds beginning in 2004 for
the development of highway facilities and surface freight transfer
facilities. Highway facilities eligible for financing would consist of
any surface transportation project eligible for Federal assistance under
Title 13 of the United States Code, or any project for an international
bridge or tunnel for which an international entity authorized under
Federal or State law is responsible. Surface freight transfer facilities
would consist of facilities for the transfer of freight from truck to
rail or rail to truck, including any temporary storage facilities
directly related to those transfers. The Secretary of Transportation
would allocate the $15 billion, which would not be subject to the
aggregate annual state private activity bond volume limit, among
competing projects.

EXTEND EXPIRING PROVISIONS

Extend minimum tax relief for individuals.--A temporary provision of
current law permits nonrefundable personal tax credits to offset both
the regular tax and the alternative minimum tax for taxable years
beginning before January 1, 2004. The Administration is concerned that
the AMT may limit the benefit of personal tax credits and impose
financial and compliance burdens on taxpayers who have few, if any, tax
preference items and who were not the originally intended subjects of
the AMT. The Administration proposes to extend minimum tax relief for
nonrefundable personal credits for two years, to apply to taxable years
2004 and 2005. The proposed extension does not apply to the child
credit, the new saver credit, the earned income credit or the adoption
credit, which were provided AMT relief through December 31, 2010 under
the 2001 tax cut. The refundable portion of the child credit and the
earned income tax credit are also allowed against the AMT through
December 31, 2010.
A temporary provision of current law increased the AMT exemption
amounts to $40,250 for single taxpayers, $58,000 for married taxpayers
filing a joint return and surviving spouses, and $29,000 for married
taxpayers filing a separate return and estates and trusts. Effective for
taxable years beginning after December 31, 2004, the AMT exemption
amounts will decline to $33,750 for single taxpayers, $45,000 for
married taxpayers filing a joint return and surviving

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spouses, and $22,500 for married taxpayers filing a separate return and
estates and trusts. The Administration proposes to extend the temporary,
higher exemption amounts through taxable year 2005.
The design of the AMT causes it increasingly to extend to middle-
income taxpayers. The AMT's original focus, however, was on high-income
taxpayers who have arranged their affairs to eliminate most or all
Federal income taxes. Although temporary changes have and will continue
to address this issue for the near term, long-term change is needed. The
Treasury Department has been directed to study the AMT with the goal of
producing a long-term solution.

Extend permanently the research and experimentation (R&E) tax
credit.--The Administration proposes to extend permanently the 20-
percent tax credit for qualified research and experimentation
expenditures above a base amount and the alternative incremental credit,
which are scheduled to expire on June 30, 2004.
In addition, the Administration is concerned that features of the R&E
credit may limit its effectiveness in encouraging taxpayers to invest in
R&E. Consequently, the Treasury Department has been directed to study
how the credit can be restructured to make it more effective. The
Administration will work closely with the Congress to develop and enact
reforms to rationalize the R&E credit and to improve its incentive
effect.

Repeal the disallowance of certain deductions of mutual life insurance
companies.--Life insurance companies may generally deduct policyholder
dividends, while dividends to stockholders are not deductible. Section
809 of the Internal Revenue Code attempts to identify amounts returned
by mutual life insurance companies to holders of participating policies
in their role as owners of the company, and generally disallows a
deduction for mutual company policyholder dividends (or otherwise
increases taxable income by reducing the amount of end-of-year reserves)
in an amount equal to the amount identified under section 809. Section
809 has been criticized as being theoretically unsound, overly complex,
inaccurate in its measurement of income, unfair, and increasingly
irrelevant. The 2002 economic stimulus bill suspended the operation of
section 809 for three years, 2001 through 2003. The Administration
proposes to repeal section 809.
Extend and modify the work opportunity tax credit and the welfare-to-
work tax credit.--Under present law, the work opportunity tax credit
provides incentives for hiring individuals from certain targeted groups.
The credit generally applies to the first $6,000 of wages paid to
several categories of economically disadvantaged or handicapped workers.
The credit rate is 25 percent of qualified wages for employment of at
least 120 hours but less than 400 hours and 40 percent for employment of
400 or more hours. The credit is available for a qualified individual
who begins work before January 1, 2004.
Under present law, the welfare-to-work tax credit provides an
incentive for hiring certain recipients of long-term family assistance.
The credit is 35 percent of up to $10,000 of eligible wages in the first
year of employment and 50 percent of wages up to $10,000 in the second
year of employment. Eligible wages include cash wages plus the cash
value of certain employer-paid health, dependent care, and educational
fringe benefits. The minimum employment period that employees must work
before employers can claim the credit is 400 hours. This credit is
available for qualified individuals who begin work before January 1,
2004.
The Administration proposes to simplify employment incentives by
combining the credits into one credit and making the rules for computing
the combined credit simpler. The credits would be combined by creating a
new welfare-to-work targeted group under the work opportunity tax
credit. The minimum employment periods and credit rates for the first
year of employment under the present work opportunity tax credit would
apply to welfare-to-work employees. The maximum amount of eligible wages
would continue to be $10,000 for welfare-to-work employees and $6,000
for other targeted groups. In addition, the second year 50-percent
credit currently available under the welfare-to-work credit would
continue to be available for welfare-to-work employees under the
modified work opportunity tax credit. Qualified wages would be limited
to cash wages. The work opportunity tax credit would also be simplified
by eliminating the need to determine family income for qualifying ex-
felons (one of the present targeted groups). The modified work
opportunity tax credit would apply retroactively (provided specified
filing deadlines are met) to individuals who begin work after December
31, 2003 and before January 1, 2006.

Extend the District of Columbia (DC) Enterprise Zone.--The DC
Enterprise Zone includes the DC Enterprise Community and District of
Columbia census tracts with a poverty rate of at least 20 percent.
Businesses in the zone are eligible for: (1) A wage credit equal to 20
percent of the first $15,000 in annual wages paid to qualified employees
who reside within the District of Columbia; (2) $35,000 in increased
section 179 expensing; and (3) in certain circumstances, tax-exempt bond
financing. In addition, a capital gains exclusion is allowed for certain
investments held more than five years and made within the DC Zone, or
within any District of Columbia census tract with a poverty rate of at
least 10 percent. The DC Zone incentives apply for the period from
January 1, 1998 through December 31, 2003. The Administration proposes
to extend the DC Zone incentives for two years, making the incentives
applicable through December 31, 2005.
Extend the first-time homebuyer credit for the District of Columbia.--
A one-time, nonrefundable $5,000 credit is available to purchasers of a
principal residence in the District of Columbia who have not owned a
residence in the District during the year preceding the purchase. The
credit phases out for tax

[[Page 264]]

payers with modified adjusted gross income between $70,000 and $90,000
($110,000 and $130,000 for joint returns). The credit does not apply to
purchases after December 31, 2003. The Administration proposes to extend
the credit for two years, making the credit available with respect to
purchases after December 31, 2003 and before January 1, 2006.
Extend authority to issue Qualified Zone Academy Bonds.--Current law
allows State and local governments to issue ``qualified zone academy
bonds,''' the interest on which is effectively paid by the Federal
government in the form of an annual income tax credit. The proceeds of
the bonds have to be used for teacher training, purchases of equipment,
curriculum development, or rehabilitation and repairs at certain public
school facilities. A nationwide total of $400 million of qualified zone
academy bonds were authorized to be issued in each of calendar years
1998 through 2003. In addition, unused authority arising in 1998 and
1999 can be carried forward for up to three years and unused authority
arising in 2000 through 2003 can be carried forward for up to two years.
The Administration proposes to authorize the issuance of an additional
$400 million of qualified zone academy bonds in each of calendar years
2004 and 2005; unused authority could be carried forward for up to two
years. Reporting of issuance would be required.
Extend deduction for corporate donations of computer technology.--The
charitable contribution deduction that may be claimed by corporations
for donations of inventory property generally is limited to the lesser
of fair market value or the corporation's basis in the property.
However, corporations are provided augmented deductions, not subject to
this limitation, for certain contributions. Under current law, an
augmented deduction is provided for contributions of computer technology
and equipment to public libraries and to U.S. schools for educational
purposes in grades K-12. The Administration proposes to extend the
deduction, which expires with respect to donations made after December
31, 2003, to apply to donations made before January 1, 2006.
Allow net operating losses to offset 100 percent of alternative
minimum taxable income.--Under current law (and under law in effect
prior to 2001) net operating loss (NOL) deductions cannot reduce a
taxpayer's alternative minimum taxable income (AMTI) by more than 90
percent. Under the 2002 economic stimulus bill, this limitation was
temporarily waived. The Administration's proposal would extend this
waiver through 2005. NOL carrybacks arising in taxable years ending in
2003, 2004, and 2005, or carryforwards to these years, would offset up
to 100 percent of a taxpayer's AMTI.
Extent permanently IRS user fees.--The Administration proposes to
extend permanently IRS authority to charge fees for written responses to
questions from individuals, corporations, and organizations related to
their tax status or the effects of particular transactions for tax
purposes. Under current law, these fees are scheduled to expire
effective with requests made after December 31, 2004.
Extend provisions permitting disclosure of tax return information
relating to terrorist activity.--Current law permits disclosure of tax
return information relating to terrorism in two situations. The first is
when an executive of a Federal law enforcement or intelligence agency
has reason to believe that the return information is relevant to a
terrorist incident, threat or activity and submits a written request.
The second is when the IRS wishes to apprise a Federal law enforcement
agency of a terrorist incident, threat or activity. The Administration
proposes to extend this disclosure authority, which expired on December
31, 2003, through December 31, 2004.
Extend abandoned mine reclamation fees.--Collections from abandoned
mine reclamation fees are allocated to States and Tribes for reclamation
grants. Current fees of 35 cents per ton for surface mined coal, 15
cents per ton for underground mined coal, and 10 cents per ton for
lignite coal are scheduled to expire on September 30, 2004. Abandoned
land problems are expected to exist in certain States after all the
money from the collection of fees under current law is expended. The
Administration proposes to extend these fees at a reduced rate. The
Administration also proposes to modify the authorization language to
allocate more of the receipts collected toward restoration of abandoned
coal mine land.
Extend authority to issue Liberty Zone Bonds.--The 2002 economic
stimulus bill provided authority to issue an aggregate of $8 billion of
tax-exempt private activity bonds during calendar years 2002, 2003, and
2004 for the acquisition, construction, reconstruction, and renovation
of nonresidential real property, residential rental property, and public
utility property in the New York City Liberty Zone. Authority to issue
these bonds, which are not subject to the aggregate annual State private
activity bond volume limit, is proposed to be extended through calendar
year 2009.
Extend excise tax on coal at current rates.--Excise taxes levied on
coal mined and sold for use in the United States are deposited in the
Black Lung Disability Trust Fund. Amounts deposited in the Fund are used
to cover the cost of program administration and compensation, medical,
and survivor benefits to eligible miners and their survivors, when mine
employment terminated prior to 1970 or when no mine operator can be
assigned liability. Current tax rates on coal sold by a producer are
$1.10 per ton of coal from underground mines and $.55 per ton of coal
from surface mines; however, these rates may not exceed 4.4 percent of
the price at which the coal is sold. Effective for coal sold after
December 31, 2013, the tax rates on

[[Page 265]]

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

PROMOTE TRADE

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

RESPOND TO FOREIGN SALES

CORPORATION/EXTRATERRITORIAL

INCOME DECISIONS

World Trade Organization (WTO) panels have ruled that the
extraterritorial income (ETI) exclusion provisions and the foreign sales
corporation (FSC) provisions of the Internal Revenue Code constitute
prohibited export subsidies under the WTO rules. To comply with the WTO
ruling and honor the United States' WTO obligations, the current-law ETI
provisions must be repealed. At the same time, meaningful changes to our
tax law are required to preserve the competitiveness of U.S. businesses
operating in the global marketplace. Thus, the Administration believes
the necessary repeal of the ETI provisions must be coupled with other
tax law changes that promote the competitiveness of American
manufacturers and other job-creating sectors of the U.S. economy. Tax
law changes that would provide a benefit to these contributors to the
U.S. economy include corporate tax rate reduction, alternative minimum
tax reform, extension of net operating loss carryback rules, expansion
and permanence of the research credit, improvements in depreciation
rules, business tax simplification, and rationalization of the
international tax rules. The Administration intends to work closely with
the Congress on prompt enactment of legislation that brings our tax law
into compliance with WTO rules and makes changes to the tax law to
enhance the competitiveness of American businesses and the workers they
employ. The Administration believes this legislation should achieve
these objectives on as close to a budget neutral basis as possible.

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

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

[[Page 266]]

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

[[Page 267]]

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

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

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

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

[[Page 268]]

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

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

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

[[Page 269]]

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

[[Page 270]]

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