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


[[Page 239]]
 
                          16. FEDERAL RECEIPTS

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

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

                                     

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

                                     

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


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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
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
          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,

[[Page 242]]

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

              Provide Alternative Minimum Tax (AMT) Relief

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

                 Provide Growth Incentives for Business

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

[[Page 243]]

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

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

             Modify Taxation of Capital Gains and Dividends

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

              Modify Estimated Tax Payments by Corporations

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

[[Page 244]]

                       MEDICARE PRESCRIPTION DRUG,

                            IMPROVEMENT, AND

                        MODERNIZATION ACT OF 2003

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

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

                 MILITARY FAMILY TAX RELIEF ACT OF 2003

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

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

[[Page 245]]

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

[[Page 255]]

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

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

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

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

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

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

              STRENGTHEN THE EMPLOYER-BASED PENSION SYSTEM

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

               CLOSE LOOPHOLES AND IMPROVE TAX COMPLIANCE

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

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

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

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

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

          TAX ADMINISTRATION, UNEMPLOYMENT INSURANCE, AND OTHER

                       Improve Tax Administration

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

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

        Strengthen Financial Integrity of Unemployment Insurance

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

                             Other Proposals

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

[[Page 262]]

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

             REAUTHORIZE FUNDING FOR THE HIGHWAY TRUST FUND

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

                       EXTEND EXPIRING PROVISIONS

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

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