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

      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 2006 are estimated to be
    $2,177.6 billion, an increase of $124.7 billion or 6.1 percent relative
    to 2005. Receipts are projected to grow at an average annual rate of 6.7
    percent between 2006 and 2010, rising to $2,820.9 billion. This growth
    in receipts is largely due to assumed increases in incomes resulting
    from both real economic growth and inflation.
      As a share of GDP, receipts are projected to increase from 16.8
    percent in 2005 to 16.9 percent in 2006. The receipts share of GDP is
    projected to increase annually thereafter, rising to 17.7 percent in
    2010.

                                                            Table 17-1.  RECEIPTS BY SOURCE--SUMMARY
                                                                    (in billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                            Estimate
                                                      2004 Actual  -----------------------------------------------------------------------------------------
                                                                         2005           2006           2007           2008           2009           2010
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Individual income taxes........................       809.0          893.7          966.9        1,071.2        1,167.2        1,245.1        1,353.3
    Corporation income taxes.......................       189.4          226.5          220.3          229.8          243.4          252.4          257.6
    Social insurance and retirement receipts.......       733.4          773.7          818.8          866.2          911.7          959.1        1,016.2
      (On-budget)..................................      (198.7)        (212.4)        (225.6)        (237.0)        (247.2)        (258.4)        (273.0)
      (Off-budget).................................      (534.7)        (561.4)        (593.2)        (629.2)        (664.6)        (700.7)        (743.2)
    Excise taxes...................................        69.9           74.0           75.6           77.2           79.0           81.0           82.9
    Estate and gift taxes..........................        24.8           23.8           26.1           23.5           24.3           26.0           20.1
    Customs duties.................................        21.1           24.7           28.3           30.6           31.9           33.9           35.3
    Miscellaneous receipts.........................        32.6           36.4           41.6           45.6           49.5           52.6           55.4
                                                    --------------------------------------------------------------------------------------------------------
      Total receipts...............................     1,880.1        2,052.8        2,177.6        2,344.2        2,507.0        2,650.0        2,820.9
        (On-budget)................................    (1,345.3)      (1,491.5)      (1,584.4)      (1,715.0)      (1,842.4)      (1,949.3)      (2,077.7)
        (Off-budget)...............................      (534.7)        (561.4)        (593.2)        (629.2)        (664.6)        (700.7)        (743.2)

      Total receipts as a percentage of GDP........        16.3           16.8           16.9           17.2           17.5           17.5           17.7
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                 Table 17-2.  EFFECT ON RECEIPTS OF CHANGES IN THE SOCIAL SECURITY TAXABLE EARNINGS BASE
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                      Estimate
                                                              ------------------------------------------------------
                                                                  2006       2007       2008       2009       2010
    ----------------------------------------------------------------------------------------------------------------
    Social security (OASDI) taxable earnings base increases:
      $90,000 to $93,000 on Jan. 1, 2006.....................        1.4        3.8        4.2        4.8        5.4
      $93,000 to $97,200 on Jan. 1, 2007.....................  .........        2.0        5.4        6.1        6.9
      $97,200 to $101,400 on Jan. 1, 2008....................  .........  .........        2.1        5.5        6.3
      $101,400 to $106,200 on Jan. 1, 2009...................  .........  .........  .........        2.4        6.5
      $106,200 to $111,300 on Jan. 1, 2010...................  .........  .........  .........  .........        2.6
    ----------------------------------------------------------------------------------------------------------------

    [[Page 264]]

                               ENACTED LEGISLATION

      Several laws were enacted in 2004 that have an effect on governmental
    receipts. The major legislative changes affecting receipts are described
    below.

                     WORKING FAMILIES TAX RELIEF ACT OF 2004

      The Working Families Tax Relief Act of 2004 (2004 tax relief act),
    which was signed by President Bush on October 4, 2004, was the fourth
    major tax measure enacted during this Administration. In addition to
    extending key parts of the President's tax relief plan for working
    families, which were scheduled to expire at the end of 2004, this Act
    provided tax relief to certain military personnel with families, created
    a uniform definition of a qualifying child for tax purposes, and
    reinstated a number of expired or expiring business-related tax
    incentives. The major provisions of this 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 and 2003 tax cuts) on various
    provisions of the tax code is shown in Chart 17-1.

                                                           Chart 17-1. Major Provisions of the Tax Code Under the 2001, 2003 and 2004 Tax Cuts
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
              Provision                   2003               2004              2005                2006               2007              2008             2009             2010             2011
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Individual Income Tax       Rates reduced to     ................  ................  ...................  ................  ...............  ...............  ...............  Rates increased
       Rates                       35, 33, 28, and 25                                                                                                                                 to 39.6, 36,
                                   percent                                                                                                                                            31, and 28
                                                                                                                                                                                      percent
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      10 Percent Bracket          Top of bracket       ................  ................  ...................  ................  ...............  ...............  ...............  Bracket
                                   increased to                                                                                                                                       eliminated,
                                   $7,000/$14,000 for                                                                                                                                 making lowest
                                   single/joint                                                                                                                                       bracket 15
                                   filers and                                                                                                                                         percent
                                   inflation-indexed
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      15 Percent Bracket for      Top of bracket for   ................  ................  ...................  ................  ...............  ...............  ...............  Top of bracket
       Joint Filers                joint filers                                                                                                                                       for joint
                                   increased to 200                                                                                                                                   filers reduced
                                   percent of top of                                                                                                                                  to 167 percent
                                   bracket for single                                                                                                                                 of top of
                                   filers                                                                                                                                             bracket for
                                                                                                                                                                                      single filers
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Standard Deduction for      Standard deduction   ................  ................  ...................  ................  ...............  ...............  ...............  Standard
       Joint Filers                for joint filers                                                                                                                                   deduction for
                                   increased to 200                                                                                                                                   joint filers
                                   percent of                                                                                                                                         reduced to 167
                                   standard deduction                                                                                                                                 percent of
                                   for single filers                                                                                                                                  standard
                                                                                                                                                                                      deduction for
                                                                                                                                                                                      single filers
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Child Credit                Tax credit for each  ................  ................  ...................  ................  ...............  ...............  ...............  Tax credit for
                                   qualifying child                                                                                                                                   each
                                   under age 17                                                                                                                                       qualifying
                                   increased to                                                                                                                                       child under
                                   $1,000                                                                                                                                             age 17 reduced
                                                                                                                                                                                      to $500
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Estate Taxes                Top rate reduced to  Top rate reduced  Top Rate reduced  Top rate reduced to  Top rate reduced  ...............  Exempt amount    Estate tax       Top rate
                                   49 percent           to 48 percent     to 47 percent     46 percent           to 45 percent                      increased to     repealed         increased to
                                                       Exempt amount                       Exempt amount                                            $3.5 million                      60 percent
                                                        increased to                        increased to $2                                                                          Exempt amount
                                                        $1.5 million                        million                                                                                   reduced to $1
                                                                                                                                                                                      million
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    [[Page 265]]

      Small Business, Expensing   Deduction increased  ................  ................  ...................  ................  Deduction        ...............  ...............  ...............
                                   to $100,000,                                                                                    declines to
                                   reduced by amount                                                                               $25,000,
                                   qualifying                                                                                      reduced by
                                   property exceeds                                                                                amount
                                   $400,000, and both                                                                              qualifying
                                   amounts inflation-                                                                              property
                                   indexed                                                                                         exceeds
                                  Includes software                                                                                $200,000 and
                                                                                                                                   amounts not
                                                                                                                                   inflation-
                                                                                                                                   indexed
                                                                                                                                  Does not apply
                                                                                                                                   to software
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Capital Gains               Tax rate on capital  ................  ................  ...................  ................  Tax on capital   Tax rate on      ...............  ...............
                                   gains reduced to 5/                                                                             gains            capital 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 Tax     AMT exemption        ................  ................  AMT exemption        ................  ...............  ...............  ...............  ...............
                                   amount increased                                         amount reduced to
                                   to $40,250/$58,000                                       $33,750/$45,000
                                   for single/joint                                         for single /joint
                                   filers                                                   filers
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

                             Tax Relief for Families

      Extend accelerated expansion of the 10-percent individual income tax
    rate bracket.--The Economic Growth and Tax Relief Reconciliation Act
    (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). The 2001 tax cut provided for
    annual inflation adjustments to the width of the 10-percent tax rate
    bracket, effective for taxable years beginning after December 31, 2008.
    The Jobs and Growth Tax Relief Reconciliation Act (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 were scheduled to revert
    to the levels provided under the 2001 tax cut. The 2003 jobs and growth
    tax cut also provided for annual inflation adjustments to the width of
    the 10-percent tax rate bracket for taxable years beginning in 2004. The
    2004 tax relief act extended the expansions of the 10-percent tax rate
    bracket provided under the 2003 jobs and growth tax cut through taxable
    year 2007 and provided for continued annual inflation adjustments to the
    width of 10-percent tax rate bracket for taxable years beginning after
    2004. As provided under the 2001 tax cut, the 10-percent tax rate
    bracket will remain in effect for taxable years 2008 through 2010, and
    will be eliminated for taxable years beginning after December 31, 2010.
      Extend accelerated 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 indi

    [[Page 266]]

    viduals, 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 was
    scheduled to revert to the levels provided under the 2001 tax cut. The
    2004 tax relief act extended the expanded standard deduction for married
    taxpayers filing a joint return provided under the 2003 jobs and growth
    tax cut to apply to taxable years 2005 through 2008. As provided under
    the 2001 tax cut, the standard deduction for married taxpayers filing a
    joint return will remain at 200 percent of the standard deduction for
    single taxpayers in 2009 and 2010, but will decline to 167 percent of
    the standard deduction for single taxpayers, effective for taxable years
    beginning after December 31, 2010.
      Extend accelerated 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 was scheduled to revert to the levels provided under the
    2001 tax cut. The 2004 tax relief act extended the expanded 15-percent
    tax rate bracket for married taxpayers filing a joint return provided
    under the 2003 jobs and growth tax cut through taxable year 2007. As
    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 remain at twice the corresponding tax rate bracket for single
    taxpayers in 2008, 2009, and 2010, but will decline to 167 percent of
    the corresponding amount for single taxpayers, effective for taxable
    years beginning after December 31, 2010.
      Extend accelerated 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 was scheduled to revert to the levels provided
    under the 2001 tax cut. The 2004 tax relief act extended the increased
    credit of $1,000 per child for five years, for taxable years 2005
    through 2009. As provided under the 2001 tax cut, the credit will be
    $1,000 per child for taxable year 2010, but will decline to $500 for
    taxable years beginning after December 31, 2010.
      Accelerate increase in refundability of child tax credit.--Prior to
    enactment of the 2001 tax cut, taxpayers with three or more qualifying
    children could be eligible for a refundable additional child tax credit
    if they had social security taxes, even if they had little or no
    individual income tax liability. However, taxpayers with one or two
    children were not eligible for the refundable additional child tax
    credit. The 2001 tax cut extended eligibility for the refundable credit
    to taxpayers with one or two children. Under the 2001 tax cut, the
    additional child tax credit was refundable to the extent of 10 percent
    of the taxpayer's earned income in excess of $10,000 for taxable years
    2001 through 2004; the percentage was scheduled to increase to 15
    percent for taxable years 2005 through 2010. The $10,000 income
    threshold was indexed for inflation beginning in 2002. The 2004 tax
    relief act accelerated to 2004 the increase in refundability to 15
    percent that had been scheduled for 2005 under prior law.

                        Tax Relief for Military Families

      Modify treatment of combat pay for purposes of computing the child tax
    credit and earned income tax crcdit (EITC).--Compensation received by an
    active member of the Armed Forces for service in a combat zone or while
    hospitalized as a result of wounds, disease, or injury incurred while
    serving in a combat zone is not included in gross income for tax
    purposes. The 2004 tax relief act provided that combat pay otherwise
    excluded from gross income is treated as earned income for purposes of
    calculating the refundable portion of the child credit, effective for
    taxable years beginning after December 31, 2003. The 2004 tax relief act
    also provided that a taxpayer could elect to treat combat pay otherwise
    excluded from gross income as earned income for purposes of the EITC,
    effective for taxable years ending after October 4, 2004 and before
    January 1, 2006.

    [[Page 267]]

              Alternative Minimum Tax (AMT) Relief for Individuals

      Extend 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 excess. The AMT exemption amounts, as provided
    under the 2003 jobs and growth tax cut, were: (1) $58,000 for married
    taxpayers filing a joint return and surviving spouses for taxable years
    2003 and 2004, declining in 2005 to $45,000; (2) $40,250 for single
    taxpayers for taxable years 2003 and 2004, declining in 2005 to $33,750;
    and (3) $29,000 for married taxpayers filing a separate return and
    estates and trusts, for taxable years 2003 and 2004, declining in 2005
    to $22,500. 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. The 2004 tax relief act extended for one year, through
    taxable year 2005, the exemption amounts provided under the 2003 jobs
    and growth tax cut for taxable years 2003 and 2004. Effective for
    taxable years beginning after December 31, 2005, the AMT exemption
    amounts will decline to $33,750 for single taxpayers, $45,000 for
    married taxpayers filing a joint return and surviving spouses, and
    $22,500 for married taxpayers filing a separate return and estates and
    trusts.
      Extend ability to offset the AMT with nonrefundable personal
    credits.--A temporary provision of prior law permitted nonrefundable
    personal tax credits to offset both the regular tax and the alternative
    minimum tax for taxable years beginning before January 1, 2004. The 2004
    tax relief act extended minimum tax relief for nonrefundable personal
    credits for two years, to apply to taxable years 2004 and 2005. The
    extension did not apply to the child credit, the saver credit, or the
    adoption credit, which were provided AMT relief through December 31,
    2010 under the 2001 tax cut.

                               Tax Simplification

      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 EITC. Under prior law, each provision
    defined an eligible ``child'' differently, thereby requiring taxpayers
    to wade through pages of bewildering rules and instructions, resulting
    in confusion and error. Under the 2004 tax relief act, effective for
    taxable years beginning after December 31, 2004, a qualifying child must
    meet the following three tests: (1) Relationship--The child must be the
    taxpayer's biological or adopted child, stepchild, sibling, step-
    sibling, foster child, or a descendant of one of these individuals. (2)
    Residence--The child must live with the taxpayer in the same principal
    home in the United States for more than half of the taxable year. (3)
    Age--The child must be under age 19 (under age 24 in the case of a full-
    time student), or totally and permanently disabled. However, prior-law
    requirements that a child be under age 13 for the dependent care credit
    and under age 17 for the child tax credit, were maintained. Neither the
    support nor gross income tests of prior law apply to qualifying children
    who meet these three tests. In addition, taxpayers are no longer
    required to meet a household maintenance test when claiming the child
    and dependent care tax credit. Taxpayers generally can continue to claim
    individuals who do not meet the relationship, residency, or age tests as
    dependents if they meet the dependency requirements under prior law, and
    no other taxpayer is eligible to claim the same individual as a
    qualifying child. A tie-breaking rule applies if a child would be a
    qualifying child with respect to more than one individual and if more
    than one individual claims a benefit with respect to that child.

                               Expiring Provisions

      Extend the research and experimentation (R&E) tax credit.--The 20-
    percent tax credit for qualified research and experimentation
    expenditures above a base amount and the alternative incremental credit
    expired with respect to expenditures incurred after June 30, 2004. The
    2004 tax relief act extended these credits for eighteen months, to apply
    to expenditures incurred before January 1, 2006.
      Extend the work opportunity tax credit.--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. Under prior law, the credit was
    available for qualified individuals who began work before January 1,
    2004. The 2004 tax relief act extended the credit for two years, to
    apply to qualified individuals beginning work after December 31, 2003
    and before January 1, 2006.
      Extend the welfare-to-work tax credit.--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

    [[Page 268]]

    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. The 2004 tax relief act
    extended this credit for two years, to apply to qualified individuals
    who begin work after December 31, 2003 and before January 1, 2006. Under
    prior law the credit was available with respect to qualified individuals
    beginning work before January 1, 2004.
      Extend tax incentives for employment and investment on Indian
    reservations.--The 2004 tax relief act extended for one year, through
    December 31, 2005, the employment tax credit for qualified workers
    employed on an Indian reservation and the accelerated depreciation rules
    for qualified property used in the active conduct of a trade or business
    within an Indian reservation. The employment tax credit is not available
    for employees involved in certain gaming activities or who work in a
    building that houses certain gaming activities. Similarly, property used
    to conduct or house certain gaming activities is not eligible for the
    accelerated depreciation recovery periods.
      Extend authority to issue Qualified Zone Academy Bonds.--State and
    local governments are allowed 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. Under prior law, 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 could be carried forward for up to three years and
    unused authority arising in 2000 through 2003 could be carried forward
    for up to two years. The 2004 tax relief act authorized the issuance of
    an additional $400 million of qualified zone academy bonds in each of
    calendar years 2004 and 2005; unused authority can be carried forward
    for up to two years.
      Extend authority to issue Liberty Zone Bonds.--The Job Creation and
    Worker Assistance Act (2002 economic stimulus act) 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, was extended through calendar year 2009 under the 2004 tax
    relief act. The 2004 tax relief act also extended for one year, through
    December 31, 2005, an expired provision that allowed certain bonds used
    to finance projects in New York City to be eligible for one additional
    advance refunding.
      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. Under prior law, the DC Zone incentives were in effect
    for the period from January 1, 1998 through December 31, 2003. The 2004
    tax relief act extended the DC Zone incentives for two years, through
    December 31, 2005.
      Extend the first-time homebuyer credit for the District of Columbia.--
    A one-time, nonrefundable $5,000 credit is available to purchasers of a
    principal residence in the District of Columbia who have not owned a
    residence in the District during the year preceding the purchase. The
    credit phases out for taxpayers with modified adjusted gross income
    between $70,000 and $90,000 ($110,000 and $130,000 for joint returns).
    Under prior law, the credit did not apply to purchases after December
    31, 2003. The credit was extended for two years under the 2004 tax
    relief act, making it available with respect to purchases after December
    31, 2003 and before January 1, 2006.
      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 contributions of computer technology and equipment
    to public libraries and to U.S. schools for educational purposes in
    grades K-12. The 2004 tax relief act extended the augmented deduction,
    which expired with respect to donations made after December 31, 2003, to
    apply to donations made before January 1, 2006.
      Extend the above-the-line deduction for qualified out-of-pocket
    classroom expenses.--Teachers who itemize deductions (do not use the
    standard deduction) and incur unreimbursed, job-related expenses are
    allowed to deduct those expenses to the extent that when combined with
    other miscellaneous itemized deductions they exceed two percent of
    adjusted gross income (AGI). Under prior law, certain teachers and other
    elementary and secondary school professionals were allowed 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

    [[Page 269]]

    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 2004 tax relief act extended the above-the-line deduction for two
    years, to apply to qualified out-of-pocket expenditures incurred after
    December 31, 2003 and before January 1, 2006.
      Extend Archer Medical Savings Accounts (MSAs).--Self-employed
    individuals and employees of small firms are allowed to establish Archer
    MSAs; the number of accounts is capped at 750,000. In addition to other
    requirements: (1) individuals who establish Archer MSAs must be covered
    by a high-deductible health plan (and no other plan) with a deductible
    of at least $1,750 but not greater than $2,650 for policies covering a
    single person and a deductible of at least $3,500 but not greater than
    $5,250 in all other cases (these amounts are indexed annually for
    inflation); (2) tax-preferred contributions are limited to 65 percent of
    the deductible for single policies and 75 percent of the deductible for
    other policies; and (3) either an individual or an employer, but not
    both, may make a tax-preferred contribution to an Archer MSA for a
    particular year. Under prior law, no new contributions could be made to
    an Archer MSA after December 31, 2003, except for the following: (1)
    those made by or on behalf of individuals who previously had Archer MSA
    contributions and (2) those made by individuals employed by a
    participating employer. The 2004 tax relief act extended the Archer MSA
    program for two years, thereby allowing new Archer MSAs through December
    31, 2005.
      Extend tax on failure to comply with mental health parity requirements
    applicable to group health plans.--Under prior law, group health plans
    that provided both medical and surgical benefits and mental health
    benefits, could not impose aggregate life-time or annual dollar limits
    on mental health benefits that were not imposed on substantially all
    medical and surgical benefits. An excise tax of $100 per day for each
    individual affected (during the period of noncompliance) was imposed on
    an employer sponsoring a group plan that failed to meet these
    requirements. For a given taxable year, the tax was limited to the
    lesser of 10 percent of the employer's group health insurance expenses
    for the prior taxable year or $500,000. The mental health parity
    requirements expired with respect to benefits for services provided on
    or after December 31, 2004. The excise tax imposed on plans that failed
    to meet the requirements expired with respect to benefits for services
    provided after December 31, 2003. The 2004 tax relief act extended the
    mental health parity requirements to apply to benefits for services
    provided before January 1, 2006. The act also extended the excise tax,
    but only with respect to benefits for services provided after October 3,
    2004 and before January 1, 2006. Therefore, the excise tax on failures
    to meet the mental health parity requirements did not apply to benefits
    for services provided after December 31, 2003 and before October 4,
    2004.
      Extend tax credit for the purchase of electric vehicles.--A 10-percent
    tax credit, up to a maximum of $4,000, is provided for the cost of a
    qualified electric vehicle. Under prior law, the full amount of the
    credit was available for purchases prior to January 1, 2004. The credit
    began to phase down in 2004 and was not available for purchases after
    December 31, 2006. The 2004 tax relief act extended the full amount of
    the credit for two years, making it available for purchases in 2004 and
    2005. As provided under prior law, the credit is reduced by 75 percent
    for purchases in 2006 and is not available for purchases after December
    31, 2006.
      Extend deduction for qualified clean-fuel vehicles and qualified
    clean-fuel vehicle refueling property.--Under prior law, certain costs
    of acquiring clean-fuel vehicles (vehicles that use certain clean-
    burning fuels) and property used to store or dispense clean-burning
    fuels, could be expensed and deducted when the property was placed in
    service. For qualified clean-fuel vehicles, the maximum allowable
    deduction was $50,000 for a truck or van with a gross vehicle weight
    over 26,000 pounds, $5,000 for a van or truck with a gross weight
    between 10,000 and 26,000 pounds; and $2,000 in the case of any other
    motor vehicle. The full amount of the deduction could be claimed for
    vehicles placed in service before January 1, 2004, but began to phase
    down for vehicles placed in service after December 31, 2003, and was not
    available after December 31, 2006. The 2004 tax relief act extended the
    full amount of the deduction for two years, making it available for
    vehicles placed in service in 2004 and 2005. As provided under prior
    law, the deduction is reduced by 75 percent for vehicles placed in
    service in 2006 and is not available for vehicles placed in service
    after December 31, 2006.
      Extend suspension of net income limitation on percentage depletion
    from marginal oil and gas wells.--Taxpayers are allowed to recover their
    investment in oil and gas wells through depletion deductions. For
    certain properties, deductions may be determined using the percentage
    depletion method; however, in any year, the amount deducted generally
    may not exceed 100 percent of the net income from the property. Under
    prior law, for taxable years beginning after December 31, 1997 and
    before January 1, 2004, domestic oil and gas production from
    ``marginal'' properties was exempt from the 100-percent-of-net-income
    limitation. The 2004 tax relief act extended the exemption to apply to
    taxable years beginning after December 31, 2003 and before January 1,
    2006.
      Extend tax credit for producing electricity from certain renewable
    sources.--Taxpayers are provided a 1.5-cent-per-kilowatt-hour tax
    credit, adjusted for inflation after 1992, for electricity produced from
    wind,

    [[Page 270]]

    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, under prior law, had to be produced during the first 10
    years of production at a facility placed in service before January 1,
    2004. The 2004 tax relief act extended the credit for two years, to
    apply to electricity produced at facilities placed in service before
    January 1, 2006.
      Extend expensing of brownfields remediation costs.--Taxpayers are
    allowed to elect to treat certain environmental remediation expenditures
    that would otherwise be chargeable to a capital account as deductible in
    the year paid or incurred. The 2004 tax relief act extended this
    provision, which expired with respect to expenditures paid or incurred
    after December 31, 2003, to apply to expenditures paid or incurred
    before January 1, 2006.
      Extend provisions permitting disclosure of tax return information
    relating to terrorist activity.--Prior law permitted disclosure of tax
    return information relating to terrorism in two situations. The first
    was when an executive of a Federal law enforcement or intelligence
    agency had reason to believe that the return information was relevant to
    a terrorist incident, threat or activity and submitted a written
    request. The second was when the Internal Revenue Service (IRS) wished
    to apprise a Federal law enforcement agency of a terrorist incident,
    threat or activity. The 2004 tax relief act extended this disclosure
    authority, which expired on December 31, 2003, through December 31,
    2005.

                       AMERICAN JOBS CREATION ACT OF 2004

      The American Jobs Creation Act of 2004 (2004 jobs creation act) was
    signed by President Bush on October 22, 2004. This Act repealed the
    extraterritorial income exclusion of prior law, which had been declared
    a prohibited export subsidy by the World Trade Organization. This Act
    also provided a deduction against domestic manufacturing income,
    provided certain tax relief to U.S. businesses and industries, reformed
    and simplified the taxation of overseas operations of U.S. multinational
    firms, reformed the Federal tobacco subsidy program, provided a
    temporary itemized deduction for State and local general sales taxes,
    and included revenue-raising provisions. The major provisions of this
    Act that affect receipts are described below.

                             Extraterritorial Income

      Repeal exclusion for extraterritorial income (ETI).--Under the ETI
    provisions of prior law, certain income attributable to foreign trading
    gross receipts was excluded from gross income for U.S. tax purposes. The
    2004 jobs creation act repealed the ETI provisions, effective for
    transactions after December 31, 2004. Certain transitional tax rules
    apply to transactions occurring in 2005 and 2006, providing taxpayers
    with 80 percent and 60 percent, respectively, of the tax benefit that
    would have been otherwise allowable under the prior law ETI provisions.
    Moreover, the ETI provisions of prior law remain in effect for
    transactions in the ordinary course of a trade or business if such
    transactions are pursuant to a binding contract between the taxpayer and
    an unrelated person and the contract was in effect on September 17, 2003
    and at all times thereafter.
      Provide deduction for domestic manufacturing.--The 2004 jobs creation
    act provided a deduction equal to a portion of the taxpayer's qualified
    production activities income, phased in over six years. When fully
    effective for taxable years beginning after 2009, the deduction would be
    nine percent (three percent for taxable years 2005 and 2006 and six
    percent for taxable years 2007, 2008, and 2009) of the lesser of: (1)
    qualified production activities income for the taxable year; or (2)
    taxable income (determined without regard to the deduction) for the
    year. However, the deduction for a taxable year generally is limited to
    an amount equal to 50 percent of W-2 wages of the employer for the
    taxable year.
      In general, qualified production activities income equals domestic
    production gross receipts in excess of: (1) the cost of goods sold that
    are allocable to such receipts; (2) other deductions, expenses, or
    losses directly allocable to such receipts; and (3) a proper share of
    other deductions, expenses, and losses that are not directly allocable
    to such receipts or another class of income. Domestic production gross
    receipts generally are gross receipts derived from: (1) any sale, lease,
    rental, license, exchange, or other disposition of (a) qualifying
    production property (generally any tangible personal property, computer
    software or sound recordings) manufactured, produced, grown, or
    extracted by the taxpayer in whole or in significant part within the
    United States; (b) any qualified film produced by the taxpayer
    (generally any motion picture film or videotape for which 50 percent or
    more of the total compensation relating to the production of such film
    is for specified services performed in the United States); and (c)
    electricity, natural gas, or potable water produced by the taxpayer in
    the United States; (2) construction activities performed in the United
    States; or (3) engineering or architectural services performed in the
    United States for construction projects in the United States. In
    general, domestic production gross receipts do not include any receipts
    derived from: (1) the sale of food or beverages prepared at a retail
    establishment; (2) the transmission or distribution of electricity,
    natural gas, or potable water; or (3) the leasing, licensing, or rental
    of property used by a related person.

                             Business Tax Incentives

      Extend temporarily increased expensing for small businesses.--In lieu
    of depreciation, a small business taxpayer may elect to deduct up to
    $25,000

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    of the cost of qualifying property placed in service during the taxable
    year. Qualifying property includes certain tangible property acquired by
    purchase for use in the active conduct of a trade or business. The
    amount that a taxpayer can 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 must be made on
    the taxpayer's original return for the taxable year to which the
    election relates, and can be revoked only with the consent of the IRS
    Commissioner. Effective for taxable years 2003 through 2005, the 2003
    jobs and growth tax cut: (1) increased the maximum deduction to
    $100,000; (2) increased the annual investment limit to $400,000; (3)
    expanded the definition of qualifying property to include off-the-shelf
    computer software; and (4) allowed taxpayers to make or revoke expensing
    elections on amended returns without the consent of the IRS
    Commissioner. The 2003 jobs and growth tax cut also provided for the
    indexation of the maximum deduction amount and investment limit,
    effective for taxable years beginning after 2003 and before 2006. The
    2004 jobs creation act extended for two years, effective for taxable
    years 2006 and 2007, the changes provided in the 2003 jobs and growth
    tax cut.
      Modify recovery period for depreciation of certain leasehold
    improvements.--A taxpayer generally must capitalize the cost of property
    used in a trade or business and recover such cost over time through
    annual deductions for depreciation or amortization. Tangible property
    generally is depreciated under the modified accelerated cost recovery
    system (MACRS). Under this system, depreciation is determined by
    applying specified recovery periods, placed-in-service conventions, and
    depreciation methods to the cost of various types of depreciable
    property. Depreciation allowances for improvements made on leased
    property are determined under MACRS, even if the recovery period
    assigned to the property is longer than the term of the lease.
    Therefore, if the leasehold improvement constitutes an addition or
    improvement to nonresidential real property, the improvement is
    depreciated using the straight-line method over a 39-year recovery
    period, beginning at the midpoint of the month the addition or
    improvement was placed in service. The 2004 jobs creation act reduced
    the recovery period for qualified leasehold improvement property from 39
    years to 15 years, effective for such property placed in service after
    October 22, 2004 and before January 1, 2006. For purposes of this
    provision, qualified leasehold improvement property is defined as any
    improvement to an interior portion of a building that is nonresidential
    real property: (1) made under or pursuant to a lease either by the
    lessee (or sublessee) or by the lessor of that portion of the building
    occupied exclusively by the lessee (or sublessee), and (2) placed in
    service more than three years after the date the building was first
    placed in service. Qualified leasehold improvement property does not
    include any improvement for which the expenditure is attributable to the
    enlargement of the building, any elevator or escalator, any structural
    component benefiting a common area, or the internal structural framework
    of the building.
      Modify recovery period for depreciation of certain restaurant
    improvements.--Under MACRS, the cost of nonresidential real property is
    depreciated using the straight-line method over a 39-year recovery
    period. The 2004 jobs creation act reduced the recovery period for
    qualified restaurant property to 15 years, effective for such property
    placed in service after October 22, 2004 and before January 1, 2006. For
    purposes of this provision, qualified restaurant property is defined as
    any improvement to a building if (1) such improvement is placed in
    service more than three years after the date such building was first
    placed in service and (2) more than 50 percent of the building's square
    footage is devoted to the preparation of, and seating for on-premises
    consumption of, prepared meals.
      Modify income forecast method of depreciation.--Under the income
    forecast method, a property's depreciation deduction for a taxable year
    is determined by multiplying the adjusted basis of the property
    (determined before adjustments for depreciation) by a fraction, the
    numerator of which is the income generated by the property during the
    year and the denominator of which is the total forecasted or estimated
    income expected to be generated prior to the close of the tenth taxable
    year after the year the property was placed in service. Any costs that
    are not recovered by the end of the tenth taxable year after the
    property was placed in service may be taken into account as depreciation
    in such year. The cost of certain motion picture films, sound
    recordings, copyrights, books, and patents are eligible to be recovered
    using the income forecast method. The 2004 jobs creation act stated
    that, solely for purposes of computing the allowable deduction for
    property under the income forecast method of depreciation,
    participations and residuals may be included in the adjusted basis of
    the property beginning in the year such property is placed in service,
    but only if such participations and residuals relate to income to be
    derived from the property before the close of the tenth taxable year
    following the year the property is placed in service. Participations and
    residuals are defined as costs the amount of which, by contract, varies
    with the amount of income earned in connection with such property. This
    act also stated that: (1) the amount of income from the property to be
    taken into account under the income forecast method is the gross income
    from such property (disregarding distribution costs), and (2) on a
    property-by-property basis, the taxpayer may deduct the costs of
    participations and residuals as they are paid, rather than accounting
    for them as a capitalized cost under the income forecast method. These
    changes were effective for property placed in service after October 22,
    2004.

    [[Page 272]]

      Reform and simplify taxation of S Corporations.--In general, S
    corporations do not pay Federal income tax. Instead, an S corporation
    passes through its items of income and loss to its shareholders. Each
    shareholder separately accounts for his or her share of these items on
    his or her individual income tax return. A small business corporation
    (except those designated ineligible under current law) may elect to be
    an S corporation with the consent of all its shareholders, and may
    terminate its election with the consent of shareholders holding more
    than 50 percent of the stock. Under prior law, a small business
    corporation was defined as a domestic corporation with only one class of
    stock and no more than 75 shareholders, all of whom were individuals
    (and certain trusts, estates, charities, and qualified retirement plans)
    and citizens or residents of the United States. For purposes of the 75
    shareholder limitation, a husband and wife were treated as one
    shareholder. Ineligible small businesses included financial institutions
    using the reserve method of accounting for bad debts, insurance
    companies, corporations electing the benefits of the Puerto Rico and
    possessions tax credit, and Domestic International Sales Corporations
    (DISCs) or former DISCs. The 2004 jobs creation act contained a number
    of provisions, generally effective for taxable years beginning after
    December 31, 2004, that eased S corporation eligibility requirements and
    affected the tax treatment of some S corporation shareholders. Major
    changes: (1) increased the limitation on the number of shareholders from
    75 to 100; (2) allowed all members of a family to be treated as one
    shareholder for purposes of the limitation on the number of
    shareholders; (3) allowed an individual retirement account (IRA) to be a
    shareholder of a bank S corporation, but only to the extent of stock
    held on October 22, 2004; (4) provided for the transfer of suspended
    losses when stock in an S corporation is transferred between spouses or
    as part of a divorce; and (5) required the filing of information returns
    by qualified subchapter S subsidiaries.
      Repeal certain excise taxes on rail diesel fuel and inland waterway
    barge fuels.--Under prior law, diesel fuel used in trains and fuels used
    in barges operating on the designated inland waterways system were
    subject to a permanent 4.3-cents-per-gallon excise tax that was
    deposited in the General Fund of the Treasury. Under the 2004 jobs
    creation act, this tax declined to 3.3 cents per gallon on January 1,
    2005, will decline to 2.3 cents per gallon on July 1, 2005, and will be
    repealed effective January 1, 2007.
      Provide tax credit for railroad track maintenance.--The 2004 jobs
    creation act provided a 50-percent business tax credit for qualified
    expenditures incurred by eligible taxpayers for railroad track
    maintenance. The credit, which is effective for expenditures paid or
    incurred during taxable years beginning after December 31, 2004 and
    before January 1, 2008, is limited to the product of $3,500 times the
    number of miles of railroad track owned or leased by an eligible
    taxpayer as of the close of the taxable year. Qualified expenditures are
    amounts expended for maintaining railroad track (including roadbed,
    bridges, and related track structures) owned or leased as of January 1,
    2005, by eligible taxpayers. Eligible taxpayers include: (1) certain
    types of railroads and (2) a person who transports property using the
    rail facilities of such railroads, or anyone who furnishes railroad-
    related property or services to such a person.
      Suspend temporarily occupational taxes related to distilled spirits,
    wine and beer.--Special occupational taxes are imposed on producers and
    others engaged in the marketing of distilled spirits, wine, and beer.
    These taxes are payable annually, on July 1 of each year. Under the 2004
    jobs creation act, these occupational taxes were suspended for the
    three-year period, July 1, 2005 through June 30, 2008.

               Tax Relief for Agriculture and Small Manufacturers

      Restructure incentives for alcohol-blended fuels.--Under prior law an
    income tax credit and an excise tax exemption were provided for ethanol
    and renewable source methanol used as a fuel. In general, the income tax
    credit for ethanol was 52 cents per gallon, but small ethanol producers
    (those producing less than 30 million gallons of ethanol per year)
    qualified 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
    was allowed for renewable source methanol. As an alternative to the
    income tax credit, blenders of alcohol fuels could claim a gasoline tax
    exemption of 52 cents for each gallon of ethanol and 60 cents for each
    gallon of renewable source methanol blended into qualifying gasohol. The
    rates for the ethanol income tax credit and exemption were each reduced
    by 1 cent per gallon in 2005. The income tax credit was scheduled to
    expire on December 31, 2007 and the excise tax exemption was scheduled
    to expire on September 30, 2007. Neither the credit nor the exemption
    applied during any period in which motor fuel taxes dedicated to the
    Highway Trust Fund were limited to 4.3 cents per gallon.
      Under prior law, 2.5 cents per gallon of the tax on alcohol-blended
    fuels was retained in the General Fund of the Treasury, 0.1 cent per
    gallon was deposited in the Leaking Underground Storage Tank (LUST)
    Trust Fund, and the balance of the reduced rate was deposited in the
    Highway Trust Fund.
      The incentives for alcohol-blended fuels provided under prior law were
    restructured under the 2004 jobs creation act. The major changes
    provided in the act: (1) repealed the gasoline excise tax exemption for
    most alcohol-blended fuels, thereby levying the full amount of the
    gasoline excise tax on alcohol-blended fuels sold or used after December
    31, 2004; (2) replaced the gasoline excise tax exemption for alcohol-
    blended fuels with two refundable excise tax credits (the alcohol fuel
    mixture credit and the biodiesel mixture credit), to be paid

    [[Page 273]]

    from the General Fund of the Treasury rather than from the Highway Trust
    Fund; (3) provided that the full amount of the excise tax on alcohol-
    blended fuels (except for the 0.1 cent per gallon deposited in the LUST
    Trust Fund) is deposited in the Highway Trust Fund, effective for fuels
    sold or used after September 30, 2004; (4) extended the prior law income
    tax credit for alcohol-blended fuels through December 31, 2010; and (5)
    provided a new income tax credit for biodiesel fuel and biodiesel fuel
    mixtures. The refundable alcohol fuel mixture excise tax credit,
    effective for fuels sold or used after December 31, 2004 and before
    January 1, 2011, is 51 cents for each gallon of ethanol (60 cents for
    each gallon of renewable source methanol) used by a taxpayer in
    producing an alcohol fuel mixture. The refundable biodiesel mixture
    excise tax credit, effective for fuels sold or used after December 31,
    2004 and before January 1, 2007, is 50 cents for each gallon of
    biodiesel fuel ($1.00 for each gallon of agri-biodiesel fuel) used by a
    taxpayer in producing a qualified biodiesel fuel mixture. The income tax
    credit for biodiesel fuel and biodiesel fuel mixtures is effective for
    fuels sold or used after December 31, 2004 and before January 1, 2007,
    and is 50 cents for each gallon of biodiesel fuel ($1.00 for each gallon
    of agri-biodiesel fuel) that the taxpayer uses as fuel, sells at retail
    and places in the fuel supply tank of the customer's vehicle, or uses in
    producing a qualified biodiesel fuel mixture.

      Provide tax incentives for agriculture.--The 2004 jobs creation act
    provided a number of tax incentives to taxpayers engaged in the
    agriculture business, which included: (1) special rules for the
    recognition of gain from the sale of livestock sold on account of
    drought, flood, or other weather-related conditions; (2) modifications
    allowing the small producer ethanol tax credit to be passed through to
    members of a cooperative; (3) extension of income averaging to taxpayers
    engaged in the trade or business of fishing; (4) AMT relief for farmers
    and fishermen using income averaging; and (5) expensing of up to $10,000
    of qualified reforestation expenditures.
      Provide tax incentives for small manufacturers.--The 2004 jobs
    creation act provided a number of tax incentives to small manufacturers,
    which included: (1) modification of the treatment of net income from
    publicly traded partnerships as qualifying income for regulated
    investment companies; (2) simplification of the excise tax imposed on
    bows and arrows (with further modifications provided in legislation
    modifying the taxation of arrows and bows signed by the President on
    December 23, 2004); (3) reduction of the excise tax imposed on fishing
    tackle boxes from ten percent to three percent; (4) repeal of the three-
    percent excise tax imposed on sonar devices suitable for finding fish;
    (5) extension of the placed in service date for bonus depreciation for
    certain aircraft; (6) expensing and credits allowed with respect to
    qualifying capital costs incurred by small business refiners in
    complying with the Highway Diesel Fuel Sulfur Control Requirements of
    the Environmental Protection Agency; and (7) modification of the
    qualified small issue bond capital expenditure limit.

                 Tax Reform and Simplification for U.S. Business

      Modify foreign tax credit.--Subject to various limitations, U.S.
    taxpayers may credit foreign taxes paid or accrued against U.S. tax on
    foreign-source income. The 2004 jobs creation act made several changes
    to the foreign tax credit rules. The major changes included the
    following:
            Modify foreign tax credit carryovers.--Under prior law, the
          amount of creditable taxes paid or accrued in any taxable year
          that exceeded the foreign tax credit limitation in that particular
          year was permitted to be carried back to the two immediately
          preceding taxable years and carried forward five taxable years and
          credited to the extent that the taxpayer otherwise had excess
          foreign tax credit limitation for those years. The 2004 jobs
          creation act extended the excess foreign tax credit carryforward
          period to ten years and limited the carryback period to one year.
          In general, the extended carryforward period is effective for
          excess foreign taxes that can be carried forward to any taxable
          year ending after October 22, 2004; the shortened carryback period
          is effective for excess foreign tax credits arising in taxable
          years beginning after October 22, 2004.
            Modify interest expense allocation rules.--To determine taxable
          income for foreign tax credit limitation purposes, a taxpayer must
          allocate and apportion deductions between U.S.-source and foreign-
          source income. Interest expense of a U.S. affiliated group is
          allocated and apportioned between U.S.-source and foreign-source
          income based on the group's total U.S. and foreign assets. All
          members of a U.S.-affiliated group of corporations generally are
          treated as a single corporation and allocation of interest expense
          is made on the basis of the assets of such members, ignoring the
          debt and interest expense of foreign subsidiaries. The 2004 jobs
          creation act modified the interest allocation rules by providing a
          one-time election. Under the election, foreign-source income would
          be determined by allocating and apportioning interest expense in
          an amount equal to the excess (if any) of (1) the worldwide
          affiliated group's total interest expense multiplied by the ratio
          of foreign assets of the worldwide affiliated group to total
          assets, over (2) the interest expense of foreign members of the
          worldwide affiliated group. These changes in the interest expense
          allocation rules are effective for taxable years beginning after
          December 31, 2008.
            Recharacterize overall domestic loss.--A taxpayer's losses from
          foreign sources in excess of income from foreign sources (an
          overall foreign loss, or OFL) may offsets U.S.-source taxable
          income, thereby reducing the effective tax rate on

    [[Page 274]]

          U.S.-source income. To address this consequence, to the extent
          that an OFL offsets U.S.-source taxable income, foreign-source
          income in succeeding years must be recharacterized as U.S.-source
          income for foreign tax credit limitation purposes. This OFL
          recapture rule has the effect of reducing the foreign tax credit
          limitation in one or more years following an OFL year, thereby
          reducing the amount of U.S. tax that can be offset by the foreign
          tax credit in those years. Under prior law, there was no
          symmetrical treatment for overall domestic losses that offset
          foreign source income in a taxable year. The 2004 jobs creation
          act provided that to the extent U.S.-source losses offset foreign-
          source taxable income, U.S.-source income in succeeding years is
          recharacterized as foreign-source income for foreign tax credit
          limitation purposes in a manner similar to the OFL recapture
          rules. These changes with respect to overall domestic losses are
          effective for taxable years beginning after December 31, 2006.
            Apply look-through approach to dividends paid by a 10/50
          company.--Special rules apply in the case of dividends received
          from a foreign corporation in which the taxpayer owns at least 10
          percent of the stock by vote and which is not a controlled foreign
          corporation (a ``10/50 company''). Under prior law, dividends paid
          by a 10/50 company out of earnings and profits accumulated in
          taxable years after December 31, 2002 received ``look-through''
          treatment based on the character of the underlying earnings. In
          contrast, dividends paid by a 10/50 company out of earnings and
          profits accumulated in taxable years before January 1, 2003 were
          subject to special basket rules. Effective for taxable years
          beginning after December 31, 2002, the 2004 jobs creation act
          generally applied the look-through approach to dividends paid by a
          10/50 company, regardless of the year in which the earnings and
          profits out of which the dividends were paid were accumulated.
            Consolidate foreign tax credit categories of income.--Under
          prior law, the foreign tax credit limitation rules were applied
          separately for nine statutory limitation categories or
          ``baskets.'' Effective for taxable years beginning after December
          31, 2006, the 2004 jobs creation act generally reduced the number
          of foreign tax credit limitation categories from nine to two, with
          the foreign tax credit limitation rules applied separately to
          passive income and general income.
            Provide AMT relief.--Taxpayers are permitted to reduce their AMT
          liability by an AMT foreign tax credit. Under prior law, the AMT
          foreign tax credit was limited to 90 percent of the pre-credit
          AMT. The 2004 jobs creation act repealed the 90-percent limitation
          on the use of the AMT foreign tax credit, effective for taxable
          years beginning after December 31, 2004.

      Modify subpart F rules.--Subpart F rules require U.S. shareholders
    with a 10-percent or greater interest in a controlled foreign
    corporation (CFC) to currently include in income for U.S. tax purposes
    their pro-rata share of the subpart F income of the CFC, whether or not
    such income is currently distributed to the shareholders. The 2004 jobs
    creation act made changes to the subpart F rules, generally effective
    for taxable years beginning after December 31, 2004. Principal changes
    included the following: (1) The exceptions to the definition of U.S.
    property were expanded to include: (a) securities acquired and held by a
    CFC in the ordinary course of its trade or business as a dealer in
    securities and (b) obligations acquired by the CFC from a U.S. person
    who is not a domestic corporation and is not a U.S. shareholder of the
    CFC or a partnership, estate, or trust in which the CFC or any related
    person is a partner, beneficiary or trustee. (2) In general, the sale of
    a partnership interest by a CFC would be treated as a sale of a
    proportionate share of partnership assets attributable to such interest.
    (3) The requirements for gains or losses on commodities hedging
    transactions to be excluded from the definition of foreign personal
    holding company income were modified. (4) The temporary exceptions from
    foreign personal holding company income and foreign base company
    services income provided for active financing income were modified. (5)
    The subpart F rules relating to foreign base company shipping income
    were repealed, and a safe harbor was provided to treat certain rents
    derived from leasing an aircraft or vessel in foreign commerce as active
    income. (6) For purposes of the exception to the definition of U.S.
    property, ``banking business'' was defined. In addition, the anti-
    deferral rules applicable to foreign personal holding companies and to
    foreign investment companies were repealed; various other anti-deferral
    rules were consolidated and modified.
      Provide incentive to reinvest foreign earnings in the United States.--
    Income from foreign operations conducted by foreign corporate
    subsidiaries generally is subject to U.S. tax when the income is
    distributed as a dividend to the domestic corporation. Until such
    repatriation, the U.S. tax on such income generally is deferred. Under
    the 2004 jobs creation act, certain dividends received by a U.S.
    corporation from controlled foreign corporations were provided an 85-
    percent dividends-received deduction. Various restrictions apply to
    determine whether dividends are eligible for the deduction, including a
    requirement that the funds be invested in the United States. At the
    taxpayer's election, the deduction is available for dividends received
    either during the taxpayer's first taxable year beginning on or after
    October 22, 2004, or during the taxpayer's last taxable year beginning
    before such date. Dividends received after the election period will be
    taxed in the normal manner under present law.

    [[Page 275]]

                       State and Local General Sales Taxes

      Provide optional temporary deduction for State and local general sales
    taxes.--An itemized deduction is permitted for certain State and local
    taxes, including individual income taxes, real property taxes, and
    personal property taxes. Under prior law, a deduction was not provided
    for State and local general sales taxes (a tax imposed at one rate with
    respect to the sale at retail of a broad range of classes of items).
    Under the 2004 jobs creation act, effective for taxable years beginning
    after December 31, 2003 and before January 1, 2006, a taxpayer would be
    allowed to elect to take an itemized deduction for State and local
    general sales taxes in lieu of the itemized deduction for State and
    local income taxes. The allowable deduction could be determined by
    tallying the amount of general State and local sales taxes paid on
    accumulated receipts, or from tables prescribed by the Secretary of the
    Treasury. A taxpayer tallying the amount of taxes paid would be able to
    include taxes imposed at one rate on the sale at retail of a broad range
    of classes of items, as well as taxes imposed at a lower rate on the
    sale at retail of food, clothing, medical supplies, and motor vehicles.
    Taxes imposed at a higher rate on the sale of motor vehicles would be
    deductible, but only up to the amount that would have been imposed at
    the general sales tax rate. The tables prescribed by the Secretary of
    the Treasury would be based on the average consumption of taxpayers on a
    State-by-State basis and would take into account filing status, number
    of dependents, adjusted gross income, and rates of State and local
    general sales taxes. Taxpayers who used the tables would be allowed to
    add to the table amounts general sales taxes paid with respect to
    purchases of motor vehicles, boats, and other items specified by the
    Secretary that would not be reflected in the tables.

                                 Tobacco Reform

      Reform the tobacco program.--Under prior law, the Federal tobacco
    program had two main components: a supply management component and a
    price support component. The supply management component limited and
    stabilized the quantity of tobacco marketed by farmers through marketing
    quotas. Because marketing quotas alone could not always guarantee
    tobacco prices, Federal support prices were established and guaranteed
    through the mechanism of nonrecourse loans available on each farmer's
    marketed crop. In 1982 legislation was enacted to ensure that the
    nonrecourse loan program was run at no-net-cost to the Federal
    government.
      The 2004 jobs creation act repealed all aspects of the Federal tobacco
    program, effective for crop years beginning in 2005. Under the reformed
    program, quota holders and producers of quota tobacco (owners,
    operators, landlords, tenants, or sharecroppers who shared in the risk
    of production) would be entitled to receive payments in exchange for the
    termination of the quotas and price supports of prior law. A base quota
    level would be established for each tobacco quota holder and each
    producer. Eligible tobacco quota holders would receive $7 per pound on
    their basic quota allotment, paid in equal installments over 10 years.
    Eligible producers would receive $1 to $3 per pound, depending on the
    extent of their quota-related activity in the 2002-2004 marketing years,
    multiplied by their base quota level, paid in equal installments over 10
    years.
      Assessments would be imposed quarterly on each manufacturer and
    importer of tobacco products sold in the United States, effective for
    fiscal years 2005 through 2014. The assessments, which would be
    sufficient to fund the payments to quota holders and producers and other
    expenditures associated with the program, would be based on the class of
    tobacco product (cigarettes, snuff, chewing tobacco, pipe tobacco, roll-
    your-own tobacco and cigars) and market share.

                            Miscellaneous Provisions

      Permit stock life insurance companies to make tax-free distributions
    from policyholder surplus accounts.--Policyholder surplus accounts of
    stock life insurance companies were established legislatively and
    represent earnings of such companies that were untaxed under prior law.
    Any direct or indirect distribution to shareholders from an existing
    policyholder surplus account of a stock life insurance company is
    subject to tax at the corporate rate in the taxable year of the
    distribution. Any distribution to shareholders is treated as made: (1)
    first out of the shareholder surplus account, to the extent thereof; (2)
    then out of the policyholder surplus account, to the extent thereof; and
    (3) finally, out of other accounts. A company may also elect to subtract
    from its policyholder surplus account any amount as of the close of a
    taxable year. For stock life insurance companies, the 2004 jobs creation
    act temporarily suspended the taxation of distributions to shareholders
    from an existing policyholder surplus account. The act also reversed the
    order in which distributions reduce the various accounts, so that
    distributions would be treated as: (1) first made out of the
    policyholder surplus account, to the extent thereof; (2) then out of the
    shareholder surplus account, to the extent thereof; and (3) lastly out
    of other income. These changes were effective for taxable years
    beginning after December 31, 2004 and before January 1, 2007.
      Modify method of accounting for naval shipbuilding contracts.--
    Taxpayers generally must use the percentage-of-completion method to
    determine taxable income from long-term contracts. However, an exception
    exists for certain ship construction contracts, which may be accounted
    for using the 40/60 percentage-of-completion/capital cost method (PCCM).
    Under the 40/60 PCCM, 40 percent of the taxpayer's long-term contract
    income is subject to the percentage-of-completion method, the remaining
    60 percent must be reported by consistently using the taxpayer's exempt
    contract method. Permissible exempt contract methods include the
    percentage of completion method, the exempt-con

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    tract percentage-of-completion method, and the completed contract
    method. The 2004 jobs creation act allowed qualified naval ship
    contracts to be accounted for using the 40/60 PCCM during the first five
    taxable years of the contract. The cumulative reduction in tax resulting
    from the provision over the five-year period must be recaptured and
    included in the taxpayer's tax liability in the sixth year. This change
    was effective for contracts for which construction commenced after
    October 22, 2004.
      Defer gain on the disposition of electric transmission property.--Gain
    on the sale or other disposition of property is ordinarily recognized in
    the year of sale. The 2004 jobs creation act permitted the gain from
    certain sales of electric transmission property to be recognized ratably
    over eight years beginning with the year of sale, except to the extent
    proceeds of the sale are not used to purchase replacement utility
    property. To qualify for this treatment, the transmission property must
    be sold to an independent transmission company after October 22, 2004
    and before January 1, 2007, and the proceeds from the sale must be used
    to purchase replacement utility property. To the extent the proceeds are
    not used to purchase replacement utility property, gain is recognized in
    the year of the sale.
      Expand resources eligible for 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 under prior
    law, the electricity had to be sold to an unrelated third party and had
    to be produced during the first 10 years of production at a qualified
    facility placed in service before January 1, 2006 and after December 31,
    1999 for a poultry waste facility, after December 31, 1992 for a closed-
    loop biomass facility and after December 31, 1993 for a wind energy
    facility. Under the 2004 jobs creation act, the credit was expanded to
    apply to electricity from closed-loop biomass produced at a facility
    originally placed in service before December 31, 1992 and modified to
    use closed-loop biomass to co-fire with coal, other biomass, or coal and
    other biomass before January 1, 2006. The credit for electricity
    produced by such facilities would be equal to the otherwise allowable
    credit multiplied by the ratio of the thermal content of the closed-loop
    biomass fuel burned in the facility to the thermal content of all fuels
    burned in the facility. The 2004 jobs creation act also expanded the
    credit to apply to the following new qualifying sources: (1) open-loop
    biomass (other than agricultural livestock waste nutrients) used at a
    facility placed in service before January 1, 2006; (2) municipal solid
    waste, agricultural livestock waste nutrients, geothermal energy, solar
    energy, small irrigation power, landfill gas, and trash combustion used
    at a qualifying facility placed in service after October 22, 2004 and
    before January 1, 2006; and (3) refined coal produced at a qualifying
    facility placed in service after October 22, 2004 and before January 1,
    2009. For facilities using open-loop biomass, including agricultural
    livestock waste nutrients, geothermal energy, solar energy, small
    irrigation power, landfill gas, or trash combustion, the credit period
    was reduced from ten years to five years and (except for geothermal
    energy and solar energy) the credit rate was reduced by half. Facilities
    using refined coal could claim the credit at a rate of $4.375 per ton
    (indexed for inflation).

                               Revenue Provisions

      Modify tax treatment of corporate inversions.--The 2004 jobs creation
    act addressed ``inversion transactions,'' which occur when a U.S.
    corporation reincorporates in a foreign jurisdiction and replaces the
    U.S. parent corporation of a multinational corporate group with a
    foreign parent corporation. The 2004 jobs creation act included
    provisions that addressed two types of inversion transactions. These
    changes generally applied to taxable years ending after March 4, 2003,
    effective for companies (and certain partnerships) inverting after that
    date:
            Inversions with at least 80 percent identity of stock
          ownership.--An inverting company generally would continue to be
          taxed as a U.S. company (that is, the inversion essentially would
          be disregarded) if: (1) it acquired substantially all the property
          of a U.S. corporation, (2) 80 percent or more of its stock was
          held by former shareholders of the U.S. corporation, and (3) its
          ``expanded affiliated group'' did not have substantial business
          activities in the country in which it was organized.
            Inversions with at least 60 percent (but less than 80 percent)
          identity of stock ownership.--Any inversion gain recognized by an
          inverting U.S. company generally would be taxed and the use of tax
          attributes such as net operating losses (NOLs) and foreign tax
          credits would be limited if: (1) it acquired substantially all the
          property of a U.S. corporation, (2) 60 percent or more of its
          stock was held by former shareholders of the U.S. corporation and
          (3) its ``expanded affiliated group'' did not have substantial
          business activities in the country in which it was organized.

      Revise taxation of individuals who relinquish U.S. citizenship or
    terminate long-term residency.--An individual who gives up U.S.
    citizenship or terminates long-term U.S. residency to avoid tax is
    subject to an alternative tax regime for 10 years following loss of
    citizenship or termination of residency. The 2004 jobs creation act: (1)
    eliminated the subjective ``principal purpose'' standard and established
    objective standards for determining whether former citizens or long-term
    residents are subject to the alternative tax regime; (2) provided tax-
    based rules for determining when an individual is no longer a U.S.
    citizen or long-term resident; (3) imposed full U.S. taxation on
    individuals subject to the alternative tax regime who return

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    to the U.S. for extended periods; (4) imposed the U.S. gift tax on gifts
    of stock of certain closely-held foreign corporations that hold U.S.-
    situated property; and (5) required individuals subject to the
    alternative tax regime to file an annual return. These changes applied
    to individuals who relinquished citizenship or terminated residency
    after June 3, 2004.
       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 2004 jobs creation act
    contained several provisions designed to curtail the use of abusive tax
    avoidance transactions. The major changes included: (1) the imposition
    of new or increased penalties on taxpayers who fail to disclose listed
    or reportable transactions, report an interest in a foreign financial
    account, or accurately report a listed or reportable transaction; (2)
    the imposition of new or increased penalties on tax shelter promoters
    who make false or fraudulent claims to promote abusive tax avoidance
    transactions, fail to maintain investor lists, or fail to disclose
    listed or reportable transactions; (3) modification of actions to enjoin
    conduct related to tax shelters and reportable transactions; (4)
    expansion of the tax shelter exception for Federal practitioner
    privilege to apply to all tax shelters; (5) extension of the statute of
    limitations for unreported listed transactions; and (6) denial of a
    deduction for interest paid or accrued on any portion of an underpayment
    of tax attributable to an undisclosed listed transaction or an
    undisclosed reportable avoidance transaction.
      Modify taxation of partnerships.--Although a partnership is a tax-
    reporting entity that must file an annual partnership return, a
    partnership does not pay Federal income tax. Instead, income or loss
    ``flows through'' to the partners who are each taxed on their
    distributive share of partnership taxable income. When filing their
    Federal income tax return, each partner must take into account their
    distributive share of certain items of partnership income, gain, loss,
    deduction, or credit. A partner generally is not taxed on distributions
    of cash or property received from the partnership, except to the extent
    that any money distributed exceeds the partner's adjusted basis in his
    partnership interest immediately before the distribution. Taxable gain
    can also result from distributions of property that were contributed to
    the partnership with a fair market value in excess of the adjusted basis
    (property with a built-in gain) and from property distributions
    characterized as sales and exchanges. The 2004 jobs creation act
    included several provisions that affect the calculation and allocation
    of partnership income and ownership interests. The major changes, which
    generally were applicable with respect to contributions of property,
    transfers of partnership interests and distributions of partnership
    property after October 22, 2004, included the following:
            Disallow certain partnership loss transfers and modify basis
          adjustments.--Built-in losses with respect to contributed property
          would be taken into account only by the contributing partner and
          not by other partners. In determining the amount of items
          allocated to partners other than the contributing partner, the
          basis of the contributed property would be the fair market value
          at the time of contribution. If the contributing partner's
          partnership interest were transferred or liquidated, the
          partnership's adjusted basis in the property would be based on the
          fair market value at the time of contribution, and the built-in
          loss would be eliminated.
            Modify basis adjustment in stock held by a partnership in a
          corporate partner.--In applying the basis allocation rules to a
          distribution in liquidation of a partner's interest, a partnership
          would be precluded from decreasing the basis of corporate stock of
          a partner or a related person. Any decrease in basis that would
          have otherwise been allocated to the stock would be allocated to
          other partnership assets. If the decrease in basis exceeded the
          basis of the other partnership assets, then the gain would be
          recognized by the partnership in the amount of the excess.
            Limit the transfer and importation of built-in losses.--The
          basis of property with a net built-in loss imported into the U.S.
          in a tax-free incorporation or reorganization from persons not
          subject to U.S. tax would be its fair market value, thereby
          eliminating the built-in loss.

      Reform the tax treatment for leasing arrangements with tax-indifferent
    parties.--Certain leasing arrangements (often referred to as sale-in/
    lease-out or SILO arrangements) 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 2004 jobs creation act limited a taxpayer's annual
    deductions or losses related to a lease with a tax-indifferent party by:
    (1) modifying the recovery period of certain property (qualified
    technological equipment, computer software and certain intangibles)
    leased to a tax-exempt entity to the longer of the property's assigned
    class life or 125 percent of the lease term; (2) altering the definition
    of lease term for all property leased to a tax-exempt entity to include
    the time period

    [[Page 278]]

    a lessee is under a service contract or similar obligation period; and
    (3) establishing rules to limit deductions associated with such leases
    to the net income generated from the lease unless the lease meets
    certain specified criteria. These rules generally were effective with
    respect to leases entered into after March 12, 2004, and did not apply
    to short-term leases of five or fewer years, with a modification for
    short-term leases of qualified technological equipment. Disallowed
    deductions could be carried forward and treated as deductions related to
    the lease in the next taxable year, subject to the same limitations, or
    taken when the taxpayer completely disposed of its interest in the
    leased property. Indian tribes and their instrumentalities were added to
    the definition of tax-exempt entities required to depreciate leased
    property on a straight line basis over a recovery period equal to the
    longer of the property's assigned class life or 125 percent of the lease
    term.
      Improve tax administration.--A number of provisions included in the
    2004 jobs creation act improved tax administration. The major
    provisions: (1) clarified the rules for payment of estimated tax with
    respect to tax attributable to a deemed asset sale; (2) clarified that
    the exclusion for gain on the sale or exchange of a principal residence
    does not apply in cases where the principal residence was acquired in a
    like-kind exchange in which any gain was not recognized within the prior
    five years; (3) allowed taxpayers to deposit cash with the Internal
    Revenue Service (IRS) that could subsequently be used to pay an
    underpayment of income, gift, estate, generation-skipping, or certain
    excise taxes; (4) authorized the IRS to enter into installment
    agreements that provide for the partial payment of taxes owed; (5)
    allowed the IRS to levy continuously up to 100 percent of Federal
    payments to vendors; (6) modified the rules regarding suspension of
    interest and penalties where the IRS fails to contact the taxpayer; (7)
    clarified the residence and income source rules relating to U.S.
    possessions; (8) expanded the prior law provision that disallowed a
    deduction for interest on certain corporate convertible or equity-linked
    debt; (9) prevented the mismatching of deductions for accrued interest
    and original issue discount with their inclusion in income in
    transactions with related foreign persons; and (10) permitted private
    collection agencies to engage in specific, limited activities to support
    IRS collection efforts.
      Reduce fuel tax evasion.--A number of provisions included in the 2004
    jobs creation act reduced fuel tax evasion. These provisions, which
    generally were effective after October 22, 2004, included: (1)
    codification of the exemption from certain excise taxes for mobile
    machinery vehicles; (2) modification of the definition of an off-highway
    vehicle; (3) modification of the point of taxation of aviation fuel from
    the sale by a producer or importer to removal from a refinery or
    terminal, or entry into the United States; (4) elimination of manual
    dying of fuel and the imposition of penalties for violation of fuel
    dying rules; (5) imposition of additional registration requirements on
    bulk transfers of tax-exempt fuel by pipeline, vessel or barge; (6)
    repeal of the installment method for payment of the heavy highway
    vehicle use tax and the elimination of reduced rates for certain heavy
    highway vehicles; and (7) expansion of taxable fuels to include transmix
    and diesel fuel blend stocks.
      Modify deductions for charitable contributions.--The 2004 jobs
    creation act made several changes to prior law rules regarding allowable
    deductions for donations of contributed property. The major changes
    included the following:
            Modify rules for donations of patents and other intellectual
          property.--In the initial year of a contribution of a patent or
          other intellectual property (other than certain copyrights or
          inventory), the allowable deduction would be limited to the lesser
          of the taxpayer's basis in the donated property or the fair market
          value of the property. In addition, in that year and in future
          years, additional amounts could be deducted based on a specified
          percentage of the amount of royalties or other revenue, if any,
          actually received by the donee charity from the donated property.
          These additional deductions would be allowed only to the extent
          that the aggregate of the amounts calculated exceeded the amount
          of the deduction claimed in the initial year of the contribution.
          No additional deductions would be permitted after the expiration
          of the legal life of the patent or intellectual property, or after
          the tenth anniversary of the date the contribution was made. This
          change was effective for contributions made after June 3, 2004.
            Limit deductions for charitable contributions of vehicles.--
          Under prior law, taxpayers generally were permitted to deduct the
          fair market value of donated vehicles, regardless of whether the
          vehicle was actually used for a charitable purpose or resold with
          the charity receiving some revenue from the sale. Under the 2004
          jobs creation act, the amount of deduction for charitable
          contributions of vehicles (generally including automobiles, boats,
          and airplanes for which the claimed value exceeded $500 and
          excluding inventory property) would depend upon the use of the
          vehicle by the donee organization. For vehicles sold by the donee
          organization without any significant intervening use or material
          improvement, the amount of the deduction could not exceed the
          gross proceeds from the sale. Deductions in excess of $500 would
          have to be substantiated by a contemporaneous written
          acknowledgement by the donee. Strict penalties would be levied on
          donee organizations knowingly furnishing false or fraudulent
          acknowledgements. These changes were effective for contributions
          made after December 31, 2004.

    [[Page 279]]

            Require increased reporting for noncash charitable
          contributions.--Under prior law, any individual, closely-held
          corporation, personal service corporation, or S 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) was
          required to obtain a qualified appraisal for the property. The
          2004 jobs creation act extended this requirement to all
          corporations. In addition, the act required that all taxpayers
          (whether an individual, a partnership, or a corporation) provide a
          copy of the appraisal to the IRS for deductions claimed in excess
          of $500,000. The change was effective for contributions made after
          June 3, 2004.

      Modify treatment of nonqualified deferred compensation plans.--Under
    prior law, the determination of when amounts deferred under a
    nonqualified deferred compensation arrangement were includible in the
    gross income of the individual earning the compensation depended on the
    facts and circumstances of the arrangement. If the arrangement was
    unfunded, the compensation generally was includible in income when it
    was actually or constructively received. If the arrangement was funded,
    then income was includible for the year in which the individual's rights
    were transferable or not subject to a substantial risk of forfeiture.
    Under the 2004 jobs creation act, all amounts deferred under a
    nonqualified deferred compensation plan are currently includible in the
    gross income of the individual earning the compensation to the extent
    not subject to a substantial risk of forfeiture and not previously
    included in gross income, unless certain requirements are satisfied.
    Such requirements include permissible timing for deferral elections and
    distributions of deferred amounts. If the requirements are not
    satisfied, interest at the underpayment rate plus one percentage point
    will be imposed on the underpayments that would have occurred had the
    compensation been includible in income when first deferred, or if later,
    when not subject to a substantial risk of forfeiture. In addition, the
    amount required to be included in income will be subject to a 20-pecent
    additional tax. These changes apply with respect to amounts deferred in
    taxable years beginning after December 31, 2004.
      Modify list of taxable vaccines.--A manufacturer's excise tax is
    imposed at the rate of 75 cents per dose on the following vaccines
    routinely recommended for administration to children: diphtheria,
    pertussis, tetanus, measles, mumps, rubella, polio, haemophilus
    influenza type B, hepatitis B, chicken pox, rotavirus gastroenteritis,
    and streptococcus pneumoniae. The tax applied to any vaccine that is a
    combination of vaccine components equals 75 cents times the number of
    components in the combined vaccine. Amounts equal to net revenue from
    the excise tax are deposited in the Vaccine Injury Compensation Trust
    Fund to finance compensation awards under the Federal Vaccine Injury
    Compensation Program for individuals who suffer certain injuries
    following administration of the taxable vaccines. The 2004 jobs creation
    act added any vaccine against hepatitis A and any trivalent vaccine
    against influenza to the list of taxable vaccines.
       Extend IRS user fees.--The IRS has 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. The 2004 jobs creation act extended
    authority for these fees, which had expired effective with requests made
    after December 31, 2004, through September 30, 2014.
      Establish specific class lives for utility grading costs.--A taxpayer
    is allowed a depreciation deduction for the exhaustion, wear and tear,
    and obsolescence of property that is used in a trade or business or held
    for the production of income. For most tangible property placed in
    service after 1986, the amount of the depreciation deduction is
    determined under MACRS using a statutorily prescribed depreciation
    method, recovery period, and placed in service convention. Under prior
    law, the cost of initially clearing and grading land improvements were
    depreciated over a seven-year recovery period under MACRS as assets for
    which no class life was provided. Under the 2004 jobs creation act,
    depreciable clearing and grading costs incurred to locate transmission
    and distribution lines and pipelines were assigned recovery periods of
    20 years for electric utilities and 15 years for gas utilities. These
    changes were effective for property placed in service after October 22,
    2004.
      Modify treatment of start-up and organizational expenditures.--Under
    prior law, at the election of the taxpayer, start-up and organizational
    expenditures could be amortized over a period of not less than 60
    months, beginning with the month in which the trade or business began.
    The 2004 jobs creation act allowed a taxpayer to elect to deduct up to
    $5,000 of start-up and $5,000 of organizational expenditures in the
    taxable year in which the trade or business began. However, each $5,000
    amount was reduced (but not below zero) by the amount by which the
    cumulative cost of start-up and organizational expenditures exceeded
    $50,000, respectively. Start-up and organization expenditures that were
    not deductible in the year in which the trade or business began would be
    amortized over a 15-year recovery period. The change was effective for
    start-up and organizational expenditures incurred after October 22,
    2004. Start-up and organizational expenditures incurred on or before
    October 22, 2004 would continue to be eligible to be amortized over a
    period not less than 60 months. However, all start-up and organizational
    expenditures related to a particular trade or business, whether incurred
    before or after October 22, 2004, would be considered in determining
    whether the cumulative cost of start-up or organizational expenditures
    exceeded $50,000.

    [[Page 280]]

      Limit deduction for certain entertainment expenses.--In general,
    deductions are not allowed with respect to an activity generally
    considered to be entertainment, amusement or recreation, unless the
    taxpayer establishes that the item was directly related to (or, in
    certain cases, associated with) the active conduct of the taxpayer's
    trade or business, or a facility (such as an airplane) used in
    connection with such activity. However, under prior law, this general
    entertainment expense disallowance rule did not apply to entertainment
    expenses for goods, services, and facilities to the extent that the
    expenses were (1) reported by the taxpayer as compensation and wages to
    an employee, or (2) includible in the gross income of a recipient who
    was not an employee as compensation for services rendered or as a prize
    or award. For specified individuals (officers, directors, and 10-
    percent-or-greater owners of private and publicly-held companies), the
    2004 jobs creation act disallowed the deduction, to the extent that such
    expenses exceeded the amount treated as compensation or includible in
    income for the individual, with respect to expenses for (1) nonbusiness
    activity generally considered to be entertainment, amusement or
    recreation, or (2) a facility used in connection with such activity.
    This change was effective for such expenses incurred after October 22,
    2004.
      Limit expensing of sport utility vehicles.--Under prior law, taxpayers
    purchasing a sport utility vehicle for business use could expense and
    deduct up to $100,000 of the cost in the year the vehicle was placed in
    service. The 2004 jobs creation act reduced the amount of expensing
    allowed with respect to the cost of a sports utility vehicle from
    $100,000 to $25,000. The change was effective for property placed in
    service after October 22, 2004.

                       PENSION FUNDING EQUITY ACT OF 2004

      This Act, which was signed by the President on April 10, 2004, made
    changes to the Employee Retirement Income Security Act of 1974 (ERISA)
    and the Internal Revenue Code that affect the operation of private
    pension plans. The major provisions of the Act: (1) established a two-
    year temporary replacement of the benchmark interest rate for
    determining funding liabilities of private sector pension plans; (2)
    established temporary alternative minimum funding standards that reduced
    funding requirements for commercial airlines, steel companies, and
    certain other employers; and (3) allowed certain multiemployer plans to
    temporarily delay the amortization of specified losses. This Act also
    contained a number of other provisions including: (1) modification of
    the definition of a property and casualty insurance company and the
    requirements for such companies to be eligible for tax-exempt status;
    (2) repeal of the prior law provision requiring reductions in deductions
    of mutual life insurance companies for policyholder dividends; and (3)
    extension, through December 31, 2013, of the prior law provision that
    allowed employers to transfer excess defined benefit plan assets to a
    special account for health benefits of retirees.

         UNITED STATES-AUSTRALIA FREE TRADE AGREEMENT IMPLEMENTATION ACT

      This Act implemented the U.S.-Australia Free Trade Agreement (FTA), as
    signed by the United States and Australia on May 18, 2004. The U.S.-
    Australia FTA advanced U.S. economic interests by providing increased
    access to Australia's markets for American services, manufactured goods,
    and agricultural products. The Agreement, which will create jobs and
    opportunities in both countries, solidified our relationship with an
    important partner in the global economy and set a strong example of the
    benefits of free trade and democracy.

          UNITED STATES-MOROCCO FREE TRADE AGREEMENT IMPLEMENTATION ACT

      This Act implemented the U.S.-Morocco FTA, as signed by the United
    States and Morocco on June 15, 2004. The U.S.-Morocco FTA advanced U.S.
    economic interests by providing increased access to Morocco's markets
    for American manufactured goods, agricultural products, services, and
    investment. The Agreement provided a significant opportunity to
    encourage economic reform and development in a moderate Muslim nation
    and was an important step in implementing the President's plan for a
    broader U.S.-Middle East Free Trade Area.

                        THE AGOA ACCELERATION ACT OF 2004

      The African Growth and Opportunity Act (AGOA), enacted in May 2000,
    reduced barriers to trade, thereby increasing exports, creating jobs,
    and increasing opportunities for Africans and Americans alike. It gave
    American businesses greater confidence to invest in Africa, and
    encouraged African nations to reform their economies and governments to
    take advantage of the opportunities that AGOA provided. The AGOA
    Acceleration Act, which was signed by the President on July 13, 2004,
    built on that success by extending trade preferences for certain imports
    from designated sub-Saharan African countries through September 30,
    2015. The deadline for expiration of these benefits had been September
    30, 2008 under prior law. The AGOA Acceleration Act also extended the
    prior law deadline for use of third country fabric benefits from
    September 30, 2004 to September 30, 2007. Under this provision, any AGOA
    country with a per capita GNP less than $1,500 enjoys duty-free access
    (subject to caps on the amount of imports as measured by square meter
    equivalents) to the U.S. market for apparel made from fabric originating
    anywhere in the world. This Act also expanded benefits by modifying
    rules of origin for certain apparel components, such as collars and
    cuffs, and expanded the scope of eligible goods to include ethnic
    fabrics made on machines, rather than just those made by hand.

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          THE MISCELLANEOUS TRADE AND TECHNICAL CORRECTIONS ACT OF 2004

      This Act, which was signed by the President on December 3, 2004,
    provided for the temporary suspension of tariffs on about 330 new items,
    including a wide variety of chemicals, and a number of pigments and dyes
    that are for the most part not made in the U.S. and needed by U.S.
    manufacturers. This Act also extended suspensions of tariffs on a number
    of items, refunded tariffs on specified imports, and made technical
    corrections to several trade laws.

                            ADMINISTRATION PROPOSALS

                          REFORM THE FEDERAL TAX SYSTEM

      On January 7, 2005, the President established an Advisory Panel on
    Federal Tax Reform to develop options to improve the tax system. The
    current tax system is complex, is perceived by many as unfair, and
    distorts household and business decisions. The excessive time taxpayers
    spend to understand and comply with the tax system is a burden and
    wastes resources. Taxpayers spend an estimated six billion hours to
    comply with the tax system at a cost of more than $100 billion annually.
    Individuals and businesses need a tax system that is simpler, and easier
    to understand and comply with. Faith in the fairness of our tax system
    is undermined when taxpayers believe others can exploit the complexities
    of the law to avoid paying tax. At the same time, Americans deserve a
    tax code that will allow them to make decisions based more on economic
    merit, free of the distortions generated by the tax system. The economic
    costs associated with these distortions can total hundreds of billions
    of dollars annually.
      The Advisory Panel will broadly focus on revenue-neutral reforms that
    make the tax system simpler, encourage economic growth, and promote
    fairness, while recognizing the importance of homeownership and
    charitable giving in American society. Information on the Advisory Panel
    and its deliberations can be found at www.taxreformpanel.gov. The
    Advisory Panel will provide options for reforming the tax system to the
    Secretary of the Treasury no later than July 31, 2005. These options
    will help the Treasury Secretary and others within the Administration
    develop specific recommendations for the President.
      Pending the outcome of fundamental tax reform, the President will
    continue to propose important policy initiatives including permanent
    extension of the increased expensing for small businesses and the
    reductions in taxes on capital gains and dividends provided in the 2003
    jobs and growth tax cut. The President's policy initiatives 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, improve tax compliance,
    curtail abusive tax avoidance activities, and strengthen the employer-
    based pension system.

            MAKE PERMANENT CERTAIN TAX CUTS ENACTED IN 2001 AND 2003

      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
    business 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
    through 2007. 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
    2008. Also, with respect to a taxable year beginning after 2002 and
    before 2008, 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 2007.
      Extend permanently provisions expiring in 2010.--Most of the
    provisions of the 2001 tax cut 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 Individual Retirement Accounts (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

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    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 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, 2005 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 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).
      Saving will be further simplified and encouraged by administrative
    changes already planned for the 2007 filing season that will allow
    taxpayers to have their tax refunds directly deposited into more than
    one account. Consequently, taxpayers will be able, for example, to
    direct that a portion of their tax refunds be deposited into an LSA or
    RSA.

      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 generally 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, 2005.

      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
    2008. 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-

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    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, 2006 and before January 1, 2014, to the first
    900,000 IDA accounts opened before January 1, 2012.

                              Invest in Health Care

      Provide a 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 adjusted gross income (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. In
    addition, individuals are allowed to accumulate funds in a health
    savings account (HSA) or medical savings account (MSA) on a tax-
    preferred basis to pay for medical expenses, provided they are covered
    by an HSA high-deductible health plan (and no other health plan). 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, 2005, 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.
      If the health insurance qualifies as an HSA high-deductible health
    plan, an individual may opt to contribute 30 percent of the credit to a
    special HSA that could only be used to pay for medical expenses.
    Individuals could claim the tax credit for health insurance premiums
    paid as part of the normal tax-filing process. Alternatively, beginning
    July 1, 2007, the tax credit would be available in advance at the time
    the individual purchases health insurance. The advance credit would
    reduce the premium paid by the individual to the health insurer, and the
    health insurer would be reimbursed directly by the Department of
    Treasury for the amount of the advance credit. Eligibility for an
    advance credit would be based on an individual's prior year tax return.
    To qualify for the credit, a health insurance policy would have to
    include coverage for catastrophic medical expenses. Qualifying insurance
    could be purchased in the individual market. Qualifying health insurance
    could also be purchased through private purchasing groups, State-
    sponsored insurance purchasing pools, and high-risk pools. Such groups
    may make purchasing health insurance easier and help reduce health
    insurance costs and increase coverage options for individuals, including
    older and higher-risk individuals.

      Provide an above-the-line deduction for high-deductible insurance
    premiums.--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. Current law also allows
    individuals to accumulate funds in an HSA or MSA on a tax-preferred
    basis to pay for medical expenses, provided they are covered by a high-
    deductible health plan (and no other health plan). The Administration
    proposes to allow individuals who contribute to an HSA because they are
    covered under an HSA high-deductible health plan in the individual
    insurance market to deduct the amount of the premium in determining AGI
    (whether or not the person itemizes deductions). Individuals claiming
    other credits or deductions or covered by employer plans, public plans
    or otherwise not eligible to contribute to an HSA would not qualify. The
    provision would be effective to taxable years beginning after December
    31, 2005.
      Provide a refundable tax credit for contributions of small employers
    to employee HSAs.--Under current law, employers are provided a deduction
    for the cost of health coverage provided to employees and the value of
    that coverage is not subject to tax for the employees. Nevertheless,
    many American workers in small firms are currently without health
    coverage. In order to provide an incentive to small employers to sponsor
    group health coverage, especially high-deductible health coverage that
    encourages cost consciousness, the Administration proposes to provide a
    refundable tax credit for employer contributions to employee HSA
    accounts of up to $200 for single coverage and up to $500 for family
    coverage. The subsidy would be provided to for-profit employers that
    normally employ fewer than 100 employees. The employer would be required
    to maintain a high-deductible health plan (as defined for purposes of
    the HSA) accessible to all employees, but the employer would not be
    required to make contributions toward employees' premiums under the
    plan. The employer would not be entitled to a deduction for the amount
    reimbursed by the credit and the credit could not be carried back or
    carried forward. The amount of the employer contribution to the HSA for
    which a credit is claimed would be maintained in a special HSA that
    would be subject to the rules currently applicable to HSAs, except that
    withdrawals in excess of qualified medical expenses would subject the
    HSA owner to a tax equal to 100 percent of the amount of the withdrawal.
    Sole proprietors, partners and S-corporation shareholders would be
    eligible for the credit to the extent their business is a small employer
    or

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    has no employees. However, self-employed individuals would not be
    entitled to any deductions for the amount reimbursed by the credit. The
    HSA tax credit would be effective for taxable years beginning after
    December 31, 2005.
      Improve the Health Coverage Tax Credit.--The Health Coverage Tax
    Credit (HCTC) was created under the Trade 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 make the requirements for qualified State-based coverage
    under the HCTC more consistent with the rules applicable under the
    Health Insurance Portability and Accountability Act (HIPAA) and thus
    encourage more plans to participate in the HCTC program, the
    Administration proposes to allow State-based coverage to impose a pre-
    existing condition restriction for a period of up to 12 months, provided
    the plan reduces the restriction period by the length of the eligible
    individual's creditable coverage (as of the date the individual applied
    for the State-based coverage). This provision would be effective for
    eligible individuals applying for coverage after December 31, 2005.
    Also, in order to prevent an individual from losing the benefit of the
    HCTC just because his or her spouse becomes eligible for Medicare, the
    Administration proposes to permit spouses of HCTC-eligible individuals
    to claim the HCTC when the HCTC-eligible individual becomes entitled to
    Medicare coverage. The spouse, however, would have to be at least 55
    years old and meet the other HCTC eligibility requirements. This
    provision would be effective for taxable years beginning after December
    31, 2005. Finally, to improve the administration of the HCTC, the
    Administration proposes to: (1) modify the definition of ``other
    specified coverage'' for ``eligible ATAA recipients,'' to be the same as
    the definition applied to ``eligible TAA recipients;'' (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 the 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.
      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, 2004.

                    Provide Incentives for Charitable Giving

      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

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    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, 2004.

       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, 2004.
       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 undistributed ordinary
    income for that year and all prior years; (2) capital gains to the
    extent of the trust's undistributed capital gain for that year and all
    prior years; (3) other income to the extent of the trust's undistributed
    other income for that year and all prior years; 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, 2004, 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 prop

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    erty 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, 2004.
      Repeal the $150 million limitation on qualified 501(c)(3) bonds.--
    Current law contains a $150 million limitation on the volume of
    outstanding, non-hospital, tax-exempt bonds for the benefit of any one
    501(c)(3) organization. The limitation was repealed in 1997 for bonds
    issued after August 5, 1997, at least 95 percent of the net proceeds of
    which are used to finance capital expenditures incurred after that date.
    However, the limitation continues to apply to bonds more than five
    percent of the net proceeds of which finance or refinance working
    capital expenditures, or capital expenditures incurred on or before
    August 5, 1997. In order to simplify the tax laws and provide consistent
    treatment of bonds for 501(c)(3) organizations, the Administration
    proposes to repeal the $150 million limitation in its entirety.
      Repeal 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 current law, teachers
    who itemize deductions (do not use the standard deduction) and incur
    unreimbursed, job-related expenses are allowed to deduct those expenses
    to the extent that when combined with other miscellaneous itemized
    deductions they exceeded two percent of AGI. Current law also allows
    certain teachers and other elementary and secondary school professionals
    to treat up to $250 in annual qualified out-of-pocket classroom expenses
    as a non-itemized deduction (above-the-line deduction). This additional
    deduction is effective for expenses incurred in taxable years beginning
    after December 31, 2001 and before January 1, 2006. Unreimbursed
    expenditures for certain books, supplies, and equipment related to
    classroom instruction qualify for the above-the-line deduction. Expenses
    claimed as an above-the-line deduction may 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 in
    taxable years beginning after December 31, 2005, 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, 2005.

                     Provide Assistance to Distressed Areas

      Establish Opportunity Zones.--The Administration proposes to establish
    authority to designate 40 opportunity zones (28 in urban areas and 12 in
    rural areas). The zone designation and corresponding incentives would be
    in effect from January 1, 2006 through December 31, 2015. To qualify to
    apply for zone status, a community must either have suffered from a
    significant decline in its economic base over the past decade as
    measured by the loss of manufacturing and retail establishments and
    manufacturing jobs, or be an existing empowerment zone, renewal
    community or enterprise community. The Secretary of Commerce would
    select opportunity zones through a competitive process based on the
    applicant's ``community transition plan'' and ``statement of economic
    transition.'' The community transition plan would have to set concrete,
    measurable goals for reducing local regulatory and tax barriers to
    construction, residential development and business creation. The
    statement of economic transition would have to demonstrate that the
    local community's economic base is in transition, as indicated by a
    declining job base and labor force, and other measures, during the past
    decade. In evaluating applications, the Secretary of Commerce could
    consider other factors, including: (1) changes in unemployment rates,
    poverty rates, household income, homeownership and labor force
    participation; (2) the educational attainment and average

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    age of the population; and (3) for urban areas, the number of mass
    layoffs occurring in the area's vicinity over the previous decade.
    Empowerment zones and renewal communities designated as opportunity
    zones would not count against the limitation of 40 new opportunity
    zones. Such communities would be required to relinquish their current
    status and benefits once selected. Opportunity zone benefits for
    converted empowerment zones and renewal communities would expire on
    December 31, 2009. Tax benefits for enterprise communities expired at
    the end of 2004. Enterprise communities designated as opportunity zones
    would count against the limitation of 40 new zones and opportunity zone
    benefits would be in effect through 2015.
      A number of tax incentives would be applicable to opportunity zones.
    First, a business would be allowed to exclude 25 percent of its taxable
    income if it qualified as an ``opportunity zone business'' and it
    satisfied a $5 million gross receipts test. The definition of an
    opportunity zone business would be based on the definition of a
    ``qualified active low-income community business'' for purposes of the
    new markets tax credit, treating opportunity zones as low-income
    communities. Second, an opportunity zone business would be allowed to
    expense the cost of section 179 property that is qualified zone
    property, up to an additional $100,000 above the amounts generally
    available under current law. Third, a commercial revitalization
    deduction would be available for opportunity zones in a manner similar
    to the deduction for renewal communities. A $12 million annual cap on
    these deductions would apply to each opportunity zone. Finally,
    individuals who live and work in an opportunity zone would constitute a
    new target group with respect to wages earned within the zone under the
    proposed combined work opportunity tax credit and welfare-to-work tax
    credit (see discussion later in this Chapter).

                             Provide Disaster Relief

      Provide tax relief for Federal Emergency Management Agency (FEMA)
    hazard mitigation assistance programs.--The Federal Emergency Management
    Agency's mitigation assistance programs provide grants through State and
    local governments to businesses and individuals for cost-effective
    responses to natural hazards. FEMA may make grants in the aftermath of a
    major disaster, in anticipation of a natural hazard, or in areas of
    severe repetitive loss. Grants may fund demolition, retro-fitting,
    elevation, or other measures to reduce the cost of future property
    damage. Under current tax law, gross income includes governmental
    disaster payments unless they fall into certain exceptions that
    generally provide for relief with respect to damages or expenses
    incurred, but would not encompass payments to mitigate future damage.
    Tax relief is warranted to the extent that property owners may decline
    to participate in mitigation assistance programs because of the
    potential tax obligation. The Administration proposes to exclude FEMA
    mitigation grants from gross income. To prevent a double benefit, a
    business that receives a tax-free mitigation grant and uses the grant to
    purchase or repair property could not claim a deduction for those
    expenses. The exclusion would apply only to FEMA mitigation grants, and
    not to any compensation from a mitigation assistance program for the
    acquisition of property situated in a disaster or hazard area. However,
    if FEMA acquires property, and the owner replaces the property within a
    specified period, then instead of reflecting the compensation in gross
    income, the owner would have a carry-over cost basis in the replacement
    property. If a mitigation assistance program pays the cost of improving
    property, the cost would be excluded from gross income, but there would
    be no increase in the owner's cost basis in the property. Thus, if the
    property is later sold, any resulting gain potentially would be taxable.
    The proposal generally would be effective for mitigation assistance
    received after December 31, 2004, but the Department of Treasury would
    have administrative authority to provide retroactive relief.

                         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 2006, 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 was equal to
    the greater of $2.075 million or $1.80 per capita for 2004, and is
    indexed annually for inflation. 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, 2006, to treat certain environmental remediation
    expenditures that would otherwise be chargeable to a cap

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    ital account as deductible in the year paid or incurred. The
    Administration proposes to extend this provision permanently making it
    available for expenditures paid or incurred after December 31, 2005, and
    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.
    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, 2005 and before January 1, 2009.

           Increase Energy Production and Promote Energy Conservation

      Extend the tax credit for producing electricity from wind, biomass,
    and landfill gas and modify the tax credit for electricity produced from
    biomass.--Taxpayers are allowed a tax credit for electricity produced
    from wind, biomass, landfill gas, and certain other sources. Biomass
    includes closed-loop biomass (organic material from a plant grown
    exclusively for use at a qualifying facility to produce electricity) and
    open-loop biomass (biomass from agricultural livestock waste nutrients
    or cellulosic waste material derived from forest-related resources,
    agricultural sources, and other specified sources). Open-loop biomass
    does not include biomass that is co-fired with coal. Thus, electricity
    produced from biomass, other than closed-loop biomass, co-fired with
    coal does not qualify for the credit. The credit rate is 1.5 cents per
    kilowatt hour for electricity produced from wind and closed-loop biomass
    and 0.75 cent per kilowatt hour for electricity produced from open-loop
    biomass and landfill gas (both rates are adjusted for inflation since
    1992). To qualify for the credit, the electricity must be produced at a
    facility placed in service before January 1, 2006. The Administration
    proposes to extend the credit for electricity produced from wind,
    biomass other than agricultural livestock waste nutrients, and landfill
    gas to electricity produced at facilities placed in service before
    January 1, 2008. In addition, a credit at 60 percent of the generally
    applicable rate for electricity produced from open-loop biomass would be
    allowed for electricity produced from open-loop biomass (other than
    agricultural livestock waste nutrients) co-fired in coal plants during
    the period from January 1, 2006 through December 31, 2008.
      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, 2004 and before January 1, 2010 and to solar water heating
    equipment placed in service after December 31, 2004 and before January
    1, 2008.
      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, 2004.

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      Provide tax credit for purchase of certain hybrid and fuel cell
    vehicles.--Under current law, a 10-percent tax credit up to a maximum of
    $4,000 is provided for the cost of a qualified electric vehicle. The
    full amount of the credit is available for purchases prior to January 1,
    2006. The credit is reduced by 75 percent for purchases in 2006 and is
    not available for purchases after December 31, 2006. A qualified
    electric vehicle is a motor vehicle that is powered primarily by an
    electric motor drawing current from rechargeable batteries, fuel cells,
    or other portable sources of electric current, the original use of which
    commences with the taxpayer, and that is acquired for use by the
    taxpayer and not for resale. Electric vehicles and hybrid vehicles
    (those that have more than one source of power on board the vehicle)
    have the potential to reduce petroleum consumption, air pollution and
    greenhouse gas emissions. To encourage the purchase of such vehicles,
    the Administration is proposing the following tax credits: (1) A credit
    of up to $4,000 would be provided for the purchase of qualified hybrid
    vehicles after December 31, 2004 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, 2004 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 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, 2004 and before January 1,
    2010.

                     Restructure Assistance to New York City

      Provide tax incentives for transportation infrastructure.--The
    Administration proposes to restructure the tax benefits for New York
    recovery that were enacted in 2002. Some of the tax benefits that were
    provided to New York following the attacks of September 11, 2001, likely
    will not be usable in the form in which they were originally provided.
    As such, the Administration proposed in the Mid-Session Review of the
    2005 Budget to sunset certain existing New York Liberty Zone tax
    benefits and in their place provide tax credits to New York State and
    New York City for expenditures incurred in building or improving
    transportation infrastructure in or connecting with the New York Liberty
    Zone. The tax credit would be available as of the date of enactment,
    subject to an annual limit of $200 million ($2 billion in total over 10
    years), evenly divided between the State and the City. Any unused credit
    limit in a given year would be added to the $200 million allowable in
    the following year, including years beyond the 10-year period of the
    credit. Similarly, expenditures that could not be credited in a given
    year because of the credit limit would be carried forward and used
    against the next year's limitation. The credit would be allowed against
    any payments (e.g., income tax withholding) made by the City and State
    under any provision of the Internal Revenue Code, other than Social
    Security and Medicare payroll taxes and excise taxes. The Secretary of
    the Treasury may prescribe such rules as are necessary to ensure that
    the expenditures are made for the intended purpose.
      Repeal certain New York City Liberty Zone incentives.--The
    Administration proposes to terminate the following tax incentives
    provided to qualified property within the New York Liberty Zone under
    the 2002 economic stimulus act: (1) the additional first-year
    depreciation deduction; (2) the five-year recovery period for leasehold
    improvement property; (3) increased expensing for small businesses; and
    (4) the extended re

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    placement period for the nonrecognition of gain on involuntarily
    converted property. These terminations are proposed to be effective on
    the date of enactment. Property placed in service after the date of
    enactment would not be eligible for the first three incentives listed
    above unless a binding written contract was in effect on the date of
    enactment, in which case the property would need to be placed in service
    by the original termination dates provided in the 2002 economic stimulus
    act. Other related changes to the Internal Revenue Code would be made as
    appropriate.

                       SIMPLIFY THE TAX LAWS FOR FAMILIES

      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 2005, the limitation on qualified adoption expenses for
    both the credit and the exclusion is $10,630. Taxpayers who adopt
    children with special needs may claim the full $10,630 credit or
    exclusion even if adoption expenses are less than this amount. Taxpayers
    may carry forward unused credit amounts for up to five years. When
    modified adjusted gross income exceeds $159,450 (in 2005), 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, 2005.
    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.

      Clarify eligibility of siblings and other family members for child-
    related tax benefits.--The 2004 tax relief bill created a uniform
    definition of a child, allowing, in many circumstances, a taxpayer to
    claim the same child for five different child-related tax benefits.
    Under the new rules, a qualifying child must meet relationship,
    residency, and age tests. While the new rules simplify the determination
    of eligibility for many child-related tax benefits, the elimination of
    certain complicated factual tests to determine if siblings and certain
    other family members were eligible to claim a qualifying child may have
    some unintended consequences. The new rules effectively deny the EITC to
    some young taxpayers who are the sole guardians of their younger
    siblings. Yet some taxpayers will be able to avoid income limitations on
    child-related tax benefits by allowing other family members, who have
    lower incomes, to claim the taxpayers' sons or daughters as qualifying
    children. To ensure that deserving taxpayers receive child-related tax
    benefits, the Administration proposes to clarify the eligibility of
    siblings and other family members for these benefits. First, a taxpayer
    would not be a qualifying child of another individual if the taxpayer is
    older than that individual. However, an individual could be a qualifying
    child of a younger sibling if the individual is permanently and totally
    disabled. Second, if a parent resides with his or her child for over
    half the year, the parent would be the only individual eligible to claim
    the child as a qualifying child. The parent could waive the child-
    related tax benefits to another member of the household who has higher
    adjusted gross income and is otherwise eligible for the tax benefits.
    The proposal is effective for taxable years beginning after December 31,
    2004.

                  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 effec

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    tive ceiling on interest credits in cash balance plans. All changes
    would be effective prospectively.
      Strengthen funding for single-employer pension plans.--Under current
    law, defined benefit pension plans are subject to minimum funding
    requirements imposed under both the Internal Revenue Code and the
    Employee Retirement Income Security Act of 1974 (ERISA). In the case of
    a qualified plan, the Internal Revenue Code excludes such contributions
    from gross income and allows a deduction for the contributions, subject
    to certain limits on the maximum deductible amount. The calculation of
    the minimum funding requirements and the limits on deductible
    contributions are determined under a series of complex rules and
    measures of assets and liability, many of which are manipulable and none
    of which entail the use of an accurate measure of the plan's assets and
    its true liabilities.
      The Administration proposes rationalizing the multiple sets of funding
    rules applicable to single-employer defined benefit plans and replacing
    them with a single set of rules that provide for: (1) funding targets
    that are based on meaningful, accurate measures of liabilities that
    reflect the financial health of the employer; (2) the use of market
    value of assets; (3) a seven-year amortization period for funding
    shortfalls; (4) the opportunity for an employer to make additional
    deductible contributions in good years, even when the plan's assets are
    above the funding target; and (5) meaningful consequences for employers
    and plans whose funded status does not improve.
      These funding rules changes and the addition of meaningful
    consequences for employers and plans whose funded status does not
    improve and improved disclosure to plan participants, investors and
    regulators are part of an overall package of reforms that will improve
    the health of defined benefit pensions and the PBGC guarantee system. As
    described in Chapter 7 of Analytical Perspectives and the Department of
    Labor Chapter of the Budget volume, this overall package includes reform
    of the premium structure for the PBGC, revision in the application of
    the PBGC guarantee rates and changes to the bankruptcy law.

      Reflect market interest rates in lump sum payments.--Current law
    generally requires that a lump sum paid from a pension plan be
    calculated using the rate of interest on 30-year Treasury securities for
    the month preceding the distribution. Because there are no 30-year
    Treasury securities outstanding, the interest rate on the Treasury bond
    due February 15, 2031 is used for this purpose. The Administration
    proposes to require that these calculations reflect market interest
    rates and lump sum calculations would be calculated using interest rates
    that are drawn from a zero-coupon corporate bond yield curve. The yield
    curve would be issued monthly by the Secretary of Treasury and would be
    based on the interest rates (averaged over 90 business days) for high
    quality corporate bonds with varying maturities. In order to avoid
    disruptions, the proposal would be phased in for plan years beginning in
    2007 and 2008 and would not be fully effective until the plan year
    beginning in 2009.

                   CLOSE LOOPHOLES AND IMPROVE TAX COMPLIANCE

      Combat abusive foreign tax credit transactions.--Current law allows
    taxpayers a credit against U.S. taxes for foreign taxes incurred with
    respect to foreign income, subject to specified limits. The
    Administration proposes to provide the Department of Treasury with
    additional regulatory authority to ensure that the foreign tax credit
    rules cannot be used to achieve inappropriate results that are not
    consistent with the underlying economics of the transactions in which
    the foreign tax credits arise. The regulatory authority would allow the
    Department of Treasury 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. Regulations
    could provide for the disallowance of a credit for all or a portion of
    the foreign taxes or the reallocation of the foreign taxes among the
    participants to the transaction.
      Modify the active trade or business test.--Current law allows
    corporations to avoid recognizing gain in certain spin-off and split-off
    transactions provided that, among other things, the active trade or
    business test is satisfied. The active trade or business test requires
    that immediately after the distribution, the distributing corporation
    and the corporation the stock of which is distributed (the controlled
    corporation) be engaged in a trade or business that has been actively
    conducted throughout the five-year period ending on the date of the
    distribution. There is no statutory requirement that a certain
    percentage of the distributing corporation's or controlled corporation's
    assets be used in that active trade or business in order for the active
    trade or business test to be satisfied. Because certain non-pro rata
    distributions resemble redemptions for cash, the Administration proposes
    to require that in the case of a non-pro rata distribution, in order for
    a corporation to satisfy the active trade or business test, as of the
    date of the distribution, at least 50 percent of its assets, by value,
    must be used or held for use in a trade or business that satisfies the
    active trade or business test.
      Impose penalties on charities that fail to enforce conservation
    easements.--Although gifts of partial interests in property generally
    are not deductible as charitable contributions, current law allows a
    deduction for certain restrictions granted in perpetuity on the use that
    may be made of real property (such as an easement). A deduction is
    allowed only if the contribution is made to a qualified organization
    exclusively for conservation purposes. To qualify to receive such
    qualified conservation contributions, a charity must have a commitment
    to protect the conservation purposes of the

    [[Page 292]]

    donation and have the resources to enforce the restrictions. The
    Department of Treasury is concerned that in some cases charities are
    failing to monitor and enforce the conservation restrictions for which
    charitable contribution deductions were claimed. The proposal would
    impose significant penalties on any charity that removes or fails to
    enforce such a conservation restriction, or transfers the easement
    without ensuring that the conservation purposes will be protected in
    perpetuity. The amount of the penalty would be determined based on the
    value of the easement shown on the appraisal summary provided to the
    charity by the donor. The Secretary of the Treasury would be authorized
    to waive the penalty in certain circumstances. The Secretary of the
    Treasury also would be authorized to require such additional reporting
    as may be necessary or appropriate to ensure that the conservation
    purposes are protected in perpetuity.
      Eliminate the special exclusion from unrelated business taxable income
    for gain or loss on the sale or exchange of certain brownfields.--In
    general, an organization that is otherwise exempt from Federal income
    tax is taxed on income from any trade or business regularly carried on
    by the organization that is not substantially related to the
    organization's exempt purposes. In addition, income derived from
    property that is debt-financed generally is subject to unrelated
    business income tax. The 2004 jobs creation act created a special
    exclusion from unrelated business taxable income of gain or loss from
    the sale or exchange of certain qualifying brownfield properties. The
    exclusion applies regardless of whether the property is debt-financed.
    The new provision adds considerable complexity to the Internal Revenue
    Code and, because there is no limit on the amount of tax-free gain,
    could exempt from tax real estate development considerably beyond mere
    environmental remediation. The proposal would eliminate this special
    exclusion retroactive to January 1, 2005.
      Apply an excise tax to amounts received under certain life insurance
    contracts.--Under current law, both death benefits and accrual of cash
    value under a life insurance contract are treated favorably for Federal
    income tax purposes. In many states, a charity has an insurable interest
    in the life of a consenting donor. The Department of Treasury has
    learned of arrangements in which private investors join with a charity
    to purchase life insurance on the lives of the charity's donors. The
    private investors have no relationship to the insured individuals,
    however, except by reason of the arrangement. These arrangements do more
    to facilitate investment by private investors in life insurance
    contracts than to further a charity's exempt purposes and may
    inappropriately afford benefits to private investors that would not
    otherwise be available without the charity's involvement. The
    Administration proposes to apply a nondeductible 25 percent excise tax
    to death benefits, dividends, withdrawals, loans or surrenders under a
    life insurance contract if: (1) a charity has ever had a direct or
    indirect ownership interest in the contract; and (2) a person other than
    a charity has ever had a direct or indirect interest in the same
    contract (including an interest in an entity holding an interest in that
    contract). The excise tax would not apply in enumerated situations that
    present a low risk of abuse. The proposal would be effective with
    respect to amounts received under life insurance contracts entered into
    after February 7, 2005.
      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, 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 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. The Department of
    Treasury also is conducting a study of these rules and the potential for
    further modifications to ensure the prevention of inappropriate income-
    reduction opportunities.
      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 account. In
    addition, current law creates opportunities for inappropriate use of
    these accounts. The proposal would simplify the tax consequences under
    these programs and

    [[Page 293]]

    promote use of these accounts to save for higher education. The most
    significant change made by this proposal is the elimination of
    substantially all post-contribution transfer taxes, thus permitting tax-
    free changes of the designated beneficiary of an account, without
    limitation as to the relationship or number of generations between the
    current and former beneficiaries. Any distribution used to pay the
    beneficiary's qualified higher education expenses would continue to be
    tax-free. However, to eliminate the potential transfer tax benefit of
    using an account for purposes not intended by the statute, the principal
    portion of any distribution that is not used for higher education
    expenses generally 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. Distributions from an account would be
    permitted to be made only to or for the benefit of the designated
    beneficiary. However, a contributor who sets up an account would be
    permitted to withdraw funds from the account during the contributor's
    life, subject to income tax on the income portion of the withdrawal. The
    income portion of a withdrawal by the account's contributor generally
    also would be subject to an additional tax to discourage individuals
    from using these accounts to save for retirement. The proposal would be
    effective for Section 529 accounts established after the date of
    enactment, and no additional contributions would be permitted to
    preexisting Section 529 savings accounts unless those accounts elect to
    be governed by the new rules.

              TAX ADMINISTRATION, UNEMPLOYMENT INSURANCE, AND OTHER

                           Improve Tax Administration

      Implement IRS administrative reforms.--The proposed modification to
    the IRS Restructuring and Reform Act of 1998 is comprised of five 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 eliminates
    the requirement that the IRS Chief Counsel provide an opinion for any
    accepted offer-in-compromise of unpaid tax (including interest and
    penalties) equal to or exceeding $50,000. This proposal requires that
    the Secretary of the Treasury 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 would encourage
    increased electronic filing of income tax returns by extending the April
    filing date for electronically filed income tax returns to April 30th,
    provided that any tax due is also paid electronically. The proposal also
    would provide the IRS additional authority to require electronic filing.
    This proposal would allow the IRS to process more returns and payments
    efficiently.
      Allow IRS to access information in the National Directory of New Hires
    for tax administration purposes.--The National Directory of New Hires
    (NDNH), an electronic database maintained by the Department of Health
    and Human Services, contains timely, uniformly compiled employment data
    from State agencies across the country. Currently, the IRS may obtain
    data from the NDNH, but only for limited purposes. Access to NDNH data
    for tax administration purposes generally would make the IRS more
    productive by reducing the amount of resources it must dedicate to
    obtaining and processing data. The Administration proposes to amend the
    Social Security Act to allow the IRS access to NDNH data for general tax
    administration purposes, including data matching, verification of
    taxpayer claims during return processing, preparation of substitute
    returns for non-compliant taxpayers, and identification of levy sources.
    Data obtained by the IRS from the NDNH would be protected by existing
    taxpayer privacy law, including civil and criminal sanctions. The
    proposal would be effective on the date of enactment.
      Extend IRS authority to fund undercover operations.--Current law
    places the IRS on equal footing with other Federal Law enforcement
    agencies by permitting the IRS to fund certain necessary and reasonable
    expenses of undercover operations. These undercover operations include
    international and domestic money laundering and narcotics operations.
    The Administration proposes to extend this funding authority, which will
    expire on December 31, 2005, through December 31, 2010.

            Strengthen Financial Integrity of Unemployment Insurance

      Strengthen the financial integrity of the unemployment insurance
    system by reducing improper benefit payments and tax avoidance.--The
    Administration has a five-part proposal to strengthen the financial
    integrity of the unemployment insurance (UI) sys

    [[Page 294]]

    tem. The Administration's proposal will boost States' incentives to
    recover benefit overpayments by permitting them to use a portion of
    recovered funds on fraud and error reduction. The proposal would also
    require States to impose a monetary penalty on UI fraud, which would be
    used to reduce overpayments; permit more active participation by private
    collection agencies in the recovery of overpayments and delinquent
    employer taxes; require States to charge employers when their actions
    lead to overpayments; and collect delinquent UI overpayments through
    garnishment of Federal tax refunds. These efforts to strengthen the
    financial integrity of the UI system will keep State UI taxes down and
    improve the solvency of the State trust funds.

                                 Other Proposals

      Modify pesticide registration fee.--The Environmental Protection
    Agency has the authority and has promulgated a rule to collect fees for
    the registration of new pesticides. The collection of this fee has been
    blocked through appropriations acts since 1989. Most recently,
    provisions in the 2004 Consolidated Appropriations Act suspended this
    authority through 2010. The Administration proposes to eliminate the
    prohibition on the collection of the fee beginning in 2006 and to
    reclassify the fee as offsetting receipts.
      Increase Indian gaming activity fees.--The National Indian Gaming
    Commission regulates and monitors gaming operations conducted on Indian
    lands. Since 1998, the Commission has been prohibited from collecting
    more than $8 million in annual fees from gaming operations to cover the
    costs of its oversight responsibilities. The Administration proposes to
    amend the current fee structure so that the Commission can adjust its
    activities to the growth in the Indian gaming industry.

                 REAUTHORIZE FUNDING FOR THE HIGHWAY TRUST FUND

      Extend excise taxes deposited in the Highway Trust Fund.--Excise taxes
    imposed on nonaviation gasoline, diesel fuel, kerosene, special motor
    fuels, heavy highway vehicles, and tires for heavy highway vehicles are
    generally deposited in the Highway Trust Fund. Tax is imposed on
    nonaviation gasoline at a rate of 18.4 cents per gallon, on diesel fuel
    and kerosene at a rate of 24.4 cents per gallon, and on special motor
    fuels at varying rates. The tax rates are scheduled to fall, generally
    by 0.1 cent per gallon, on April 1, 2005 (reflecting the scheduled
    expiration of the LUST Trust Fund tax) and to 4.3 cents per gallon (or
    comparable rates in the case of special motor fuels) on October 1, 2005.
    A tax equal to 12 percent of the sales price is imposed on the first
    retail sale of heavy highway vehicles (generally, trucks with a gross
    weight greater than 33,000 pounds, trailers with a gross weight greater
    than 26,000 pounds, and highway tractors). In addition, a highway use
    tax of up to $550 per year is imposed on highway vehicles with a gross
    weight of at least 55,000 pounds. A tax is also imposed on tires with a
    rated load capacity exceeding 3,500 pounds, generally at a rate of 0.945
    cent per pound of excess. The taxes on heavy highway vehicles and tires
    for heavy highway vehicles are scheduled to expire on September 30,
    2005. The Administration proposes to extend the taxes on nonaviation
    gasoline, diesel fuel and kerosene, and special motor fuels at their
    current rates, except to the extent attributable to the LUST Trust Fund
    tax, through September 30, 2011. The Administration also proposes to
    extend the taxes on heavy highway vehicles and tires for heavy highway
    vehicles at their current rates through September 30, 2011.
      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 2005 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.

                                  PROMOTE TRADE

      Implement free trade agreements with Bahrain, Panama, and the
    Dominican Republic.--Free trade agreements are expected to be completed
    with Bahrain, Panama, and the Dominican Republic in 2005, with ten-year
    implementation to begin in fiscal year 2006. These agreements will
    continue the Administration's effort to use free trade agreements to
    benefit U.S. consumers and producers as well as strengthen the economies
    of our partner countries.

                           EXTEND EXPIRING PROVISIONS

      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 December 31, 2005.

    [[Page 295]]

      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, 2006.
      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,
    2006.
      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 to individuals who begin work after
    December 31, 2005 and before January 1, 2007.

      Extend the first-time homebuyer credit for the District of Columbia.--
    A one-time nonrefundable $5,000 credit is available to purchasers of a
    principal residence in the District of Columbia who have not owned a
    residence in the District during the year preceding the purchase. The
    credit phases out for taxpayers with modified adjusted gross income
    between $70,000 and $90,000 ($110,000 and $130,000 for joint returns).
    The credit does not apply to purchases after December 31, 2005. The
    Administration proposes to extend the credit for one year, making the
    credit available with respect to purchases after December 31, 2005 and
    before January 1, 2007.
      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 2005. 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 2005 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 calendar years 2006;
    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, 2005, to apply to donations made before January 1, 2007.
      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 will expire on
    December 31, 2005, through December 31, 2006.
      Extend excise taxes deposited in the Leaking Underground Storage Tank
    (LUST) Trust Fund.--An excise tax is imposed, generally at a rate of 0.1
    cents per gallon, on gasoline and other liquid motor fuels used on
    highways, in aviation, on inland waterways, and in diesel-powered
    trains. The tax is deposited in the LUST Trust Fund. The tax is
    scheduled to expire on March 31, 2005. The Administration proposes to
    extend the tax at the current rate through March 31, 2007.

    [[Page 296]]

      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 June 30, 2005. Abandoned mine
    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. The Administration also
    proposes to modify the authorization language to allocate more of the
    receipts collected toward restoration of abandoned coal mine land.
      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 $0.55 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 coal from underground mines and
    surface mines will decline to $0.50 per ton and $0.25 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.

                                                          Table 17-3.  EFFECT OF PROPOSALS ON RECEIPTS
                                                                    (in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       2005       2006       2007       2008       2009       2010     2006-10     2006-15
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Make Permanent Certain Tax Cuts Enacted in 2001 and 2003
     (assumed in the baseline):
        Dividends tax rate structure..............................        309        509        547        537    -16,725       -568    -15,700     -102,905
        Capital gains tax rate structure..........................  .........  .........  .........     -5,268     -7,473     -5,076    -17,817      -59,016
        Expensing for small business..............................  .........  .........  .........     -3,402     -5,417     -4,073    -12,892      -21,897
        Marginal individual income tax rate reductions............  .........  .........  .........  .........  .........  .........  .........     -502,228
        Child tax credit \1\......................................  .........  .........  .........  .........  .........  .........  .........      -96,777
        Marriage penalty relief \2\...............................  .........  .........  .........  .........  .........  .........  .........      -36,029
        Education incentives......................................  .........  .........  .........  .........  .........          3          3       -8,687
        Repeal of estate and generation-skipping transfer taxes,
         and
          modification of gift taxes..............................          4       -557       -910     -1,514     -1,847     -2,192     -7,020     -256,057
        Modifications of pension plans............................  .........  .........  .........  .........  .........  .........  .........       -2,323
        Other incentives for families and children................  .........  .........  .........  .........  .........          5          5       -3,594
                                                                   -----------------------------------------------------------------------------------------
            Total make permanent certain tax cuts enacted in
              2001 and 2003.......................................        313        -48       -363     -9,647    -31,462    -11,901    -53,421   -1,089,513

    Tax Incentives:
      Simplify and encourage saving:
        Expand tax-free savings opportunities.....................  .........      3,709      7,151      4,069      1,693        199     16,821        1,461
        Consolidate employer-based savings accounts...............  .........       -224       -335       -357       -382       -411     -1,709      -14,816
        Establish Individual Development Accounts (IDAs)..........  .........  .........       -134       -286       -326       -300     -1,046       -1,763
                                                                   -----------------------------------------------------------------------------------------
            Total simplify and encourage saving...................  .........      3,485      6,682      3,426        985       -512     14,066      -15,118
      Invest in health care:
        Provide a refundable tax credit for the purchase of health
          insurance \3\...........................................  .........        -19     -1,435     -1,543     -1,370     -1,241     -5,608       -9,897
        Provide an above-the-line deduction for high-deductible
          insurance premiums......................................  .........       -200     -2,029     -2,316     -2,636     -2,876    -10,057      -28,495
        Provide a refundable tax credit for contributions of small
          employers to employee HSAs \4\..........................  .........        -61       -304       -834     -1,545     -2,025     -4,769      -17,760
        Improve the Health Coverage Tax Credit \5\................  .........  .........         -3         -4         -5         -5        -17          -49
        Allow the orphan drug tax credit for certain pre-
         designation
          expenses................................................  .........  .........  .........  .........  .........  .........         -1           -3
                                                                   -----------------------------------------------------------------------------------------
            Total invest in health care...........................  .........       -280     -3,771     -4,697     -5,556     -6,147    -20,452      -56,204
      Provide incentives for charitable giving:
        Permit tax-free withdrawals from IRAs for charitable
          contributions...........................................        -70       -335       -318       -318       -313       -304     -1,588       -3,095
        Expand and increase the enhanced charitable deduction
          for contributions of food inventory.....................        -42        -87        -96       -106       -116       -127       -532       -1,388
        Reform excise tax based on investment income of private
          foundations.............................................  .........       -148        -98       -105       -111       -119       -581       -1,321
        Modify tax on unrelated business taxable income of
          charitable remainder trusts.............................         -6         -5         -6         -6         -6         -7        -30          -69

    [[Page 297]]

        Modify basis adjustment to stock of S corporations
          contributing appreciated property.......................         -4        -20        -21        -25        -28        -32       -126         -354
        Repeal the $150 million limitation on qualified
          501(c)(3) bonds.........................................         -3         -6        -10        -11        -10        -10        -47          -92
        Repeal certain restrictions on the use of qualified
          501(c)(3) bonds for residential rental property.........  .........         -2         -5         -9        -16        -24        -56         -278
                                                                   -----------------------------------------------------------------------------------------
            Total provide incentives for charitable giving........       -125       -603       -554       -580       -600       -623     -2,960       -6,597
      Strengthen education:
        Extend, increase, and expand the above-the-line deduction
          for qualified out-of-pocket classroom expenses..........  .........        -27       -267       -279       -282       -285     -1,140       -2,630
      Encourage telecommuting:
        Exclude from income the value of employer-provided
          computers, software, and peripherals....................  .........        -29        -50        -50        -55        -65       -249         -767
      Provide assistance to distressed areas:
        Establish Opportunity Zones...............................  .........       -433       -806       -853       -899       -912     -3,903       -9,594
      Provide disaster relief:
        Provide tax relief for FEMA hazard mitigation assistance
          programs................................................        -20        -40        -40        -40        -40        -40       -200         -400
      Increase housing opportunities:
        Provide tax credit for developers of affordable single-
         family
          housing.................................................  .........         -7        -84       -342       -815     -1,425     -2,673      -17,370
      Protect the environment:
        Extend permanently expensing of brownfields remediation
          costs...................................................  .........       -138       -215       -203       -195       -184       -935       -1,743
        Exclude 50 percent of gains from the sale of property for
          conservation purposes...................................  .........        -47        -92       -105        -60  .........       -304         -304
                                                                   -----------------------------------------------------------------------------------------
            Total protect the environment.........................  .........       -185       -307       -308       -255       -184     -1,239       -2,047
      Increase energy production and promote energy
        conservation:
        Extend the tax credit for producing electricity from wind,
          biomass, and landfill gas and modify the tax credit for
          electricity from biomass................................        -48       -144       -321       -260       -160       -163     -1,048       -1,779
        Provide tax credit for residential solar energy systems...         -5        -11        -19        -24        -34        -16       -104         -104
        Modify treatment of nuclear decommissioning funds.........        -47       -166       -162       -170       -177       -183       -858       -1,881
        Provide tax credit for purchase of certain hybrid and fuel
          cell vehicles \6\.......................................        -13       -260       -447       -614       -680        -23     -2,024       -2,532
        Provide tax credit for combined heat and power property...        -17       -109        -84       -105       -114        -36       -448         -394
                                                                   -----------------------------------------------------------------------------------------
            Total increase energy production and promote
              energy conservation.................................       -130       -690     -1,033     -1,173     -1,165       -421     -4,482       -6,690
      Restructure assistance to New York City:
        Provide tax incentives for transportation infrastructure..  .........       -200       -200       -200       -200       -200     -1,000       -2,000
        Repeal certain New York City Liberty Zone incentives......  .........        200        200        200        200        200      1,000        2,000
                                                                   -----------------------------------------------------------------------------------------
            Total restructure assistance to New York City.........  .........  .........  .........  .........  .........  .........  .........  ...........
                                                                   -----------------------------------------------------------------------------------------
                Total tax incentives..............................       -275      1,191       -230     -4,896     -8,682    -10,614    -23,232     -117,417

    Simplify the Tax Laws for Families:
      Simplify adoption tax benefits..............................  .........         -4        -40        -42        -43        -45       -174         -426
      Clarify eligibility of siblings and other family members for
       child
        related tax benefits \7\..................................         11         51         78         77         60         40        306          536
                                                                   -----------------------------------------------------------------------------------------
          Total simplify the tax laws for families................         11         47         38         35         17         -5        132          110

    Strengthen the Employer-Based Pension System:
      Ensure fair treatment of older workers in cash balance
        conversions and protect defined benefit plans.............  .........         57         62         78         92        104        393        1,096
      Strengthen funding for single-employer pension plans........  .........        151      1,432       -869     -2,699     -1,762     -3,747      -12,735
      Reflect market interest rates in lump sum payments..........  .........  .........         -3         -8        -15        -20        -46         -241
                                                                   -----------------------------------------------------------------------------------------
          Total strengthen the employer-based pension system......  .........        208      1,491       -799     -2,622     -1,678     -3,400      -11,880

    Close Loopholes and Improve Tax Compliance:
      Combat abusive foreign tax credit transactions..............          1          2          2          2          2          3         11           26
      Modify the active trade or business test....................          2          6          8          8          8          8         38           87
      Impose penalties on charities that fail to enforce
       conservation
        easements.................................................          3          8          8          8          9          9         42           96

    [[Page 298]]

      Eliminate the special exclusion from unrelated business
       taxable
        income for gain or loss on the sale or exchange of certain
        brownfields...............................................          1          4         12         23         37         49        125          242
      Apply an excise tax to amounts received under certain life
        insurance contracts.......................................          2          7         12         17         23         28         87          323
      Limit related party interest deductions.....................         74        128        134        141        148        155        706        1,607
      Clarify and simplify qualified tuition programs.............  .........          4         12         13         14         20         63          222
                                                                   -----------------------------------------------------------------------------------------
          Total close loopholes and improve tax compliance........         83        159        188        212        241        272      1,072        2,603

    Tax Administration, Unemployment Insurance, and Other:
      Improve tax administration:
        Implement IRS administrative reforms and initiate cost
          saving measures \8\.....................................  .........  .........  .........  .........  .........  .........  .........  ...........
      Strengthen financial integrity of unemployment
        insurance:
        Strengthen the financial integrity of the unemployment
          insurance system by reducing improper benefit payments
          and tax avoidance \6\...................................  .........  .........          6         -6       -129       -530       -659       -2,856
      Other proposals:
        Modify pesticide registration fee.........................  .........  .........  .........  .........  .........  .........  .........         -152
        Increase Indian gaming activity fees......................  .........  .........          4          4          5          5         18           43
                                                                   -----------------------------------------------------------------------------------------
          Total tax administration, unemployment insurance,
            and other.............................................  .........  .........         10         -2       -124       -525       -641       -2,965

    Reauthorize Funding for the Highway Trust Fund:
      Extend excise taxes deposited in the Highway Trust Fund \6\.  .........         10         11         11         11         11         54           65
      Allow tax-exempt financing for private highway projects and
        rail-truck transfer facilities............................         -5        -22        -47        -75        -92        -97       -333         -601
                                                                   -----------------------------------------------------------------------------------------
          Total reauthorize funding for the Highway Trust Fund....         -5        -12        -36        -64        -81        -86       -279         -536

    Promote Trade:
        Implement free trade agreements with Bahrain, Panama and
          the Dominican Republic \6\..............................  .........        -56        -84        -91        -97       -102       -430         -976

    Extend Expiring Provisions:
        Research & Experimentation (R&E) tax credit...............  .........     -2,097     -4,601     -5,944     -6,889     -7,669    -27,200      -76,225
        Combined work opportunity/welfare-to-work tax credit......  .........       -131       -166        -65        -16         -5       -383         -383
        First-time homebuyer credit for DC........................  .........         -1        -18  .........  .........  .........        -19          -19
        Authority to issue Qualified Zone Academy Bonds...........  .........         -3         -8        -13        -18        -20        -62         -162
        Deduction for corporate donations of computer technology..  .........        -73        -49  .........  .........  .........       -122         -122
        Disclosure of tax return information related to terrorist
          activity \8\............................................  .........  .........  .........  .........  .........  .........  .........  ...........
        LUST Trust Fund taxes \6\.................................         74        152         77  .........  .........  .........        229          229
        Abandoned mine reclamation fees...........................  .........        304        312        318        322        323      1,579        3,230
        Excise tax on coal \6\....................................  .........  .........  .........  .........  .........  .........  .........          479
                                                                   -----------------------------------------------------------------------------------------
            Total extend expiring provisions......................         74     -1,849     -4,453     -5,704     -6,601     -7,371    -25,978      -72,973

      Total budget proposals, including proposals assumed in the          201       -360     -3,439    -20,956    -49,411    -32,010   -106,177   -1,293,547
       baseline...................................................
      Total budget proposals, excluding proposals assumed in the         -112       -312     -3,076    -11,309    -17,949    -20,109    -52,756     -204,034
       baseline...................................................
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $37,319 million for 2006-2015.
    \2\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $7,491 million for 2006-2015.
    \3\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $78 million for 2006, $3,660 million for 2007, $5,514
      million for 2008, $6,529 million for 2009, $7,035 million for 2010, $22,816 million for 2006-2010 and $64,078 million for 2006-2015.
    \4\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $18 million for 2006, $87 million for 2007, $237
      million for 2008, $392 million for 2009, $589 million for 2010, $1,323 million for 2006-2010 and $4,930 million for 2006-2015.
    \5\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $3 million for 2006, $10 million for 2007, $11
      million for 2008, $13 million for 2009, $14 million for 2010, $51 million for 2006-2010 and $130 million for 2006-2015.
    \6\ Net of income offsets.
    \7\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is -$115 million for 2006, -$150 million for 2007, -$168
      million for 2008, -$196 million for 2009, -$258 million for 2010, -$887 million for 2006-2010 and -$2,239 million for 2006-2015.
    \8\ No net budgetary impact.

    [[Page 299]]

                                             Table 17-4. RECEIPTS BY SOURCE
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                             Estimate
               Source                2004    -----------------------------------------------------------------------
                                    Actual       2005        2006        2007        2008        2009        2010
    ----------------------------------------------------------------------------------------------------------------
    Individual income taxes
     (federal funds):
      Existing law..............     808,959     893,698     964,283   1,069,364   1,177,249   1,280,242   1,370,919
        Proposed Legislation....  ..........           6       2,594       1,805     -10,076     -35,103     -17,644
                                 -----------------------------------------------------------------------------------
    Total individual income          808,959     893,704     966,877   1,071,169   1,167,173   1,245,139   1,353,275
     taxes......................
                                 ===================================================================================
    Corporation income taxes:
      Federal funds:
        Existing law............     189,370     226,431     222,811     234,112     252,724     264,958     270,000
          Proposed Legislation..  ..........          95      -2,553      -4,295      -9,307     -12,595     -12,367
                                 -----------------------------------------------------------------------------------
      Total Federal funds            189,370     226,526     220,258     229,817     243,417     252,363     257,633
       corporation income taxes.
                                 -----------------------------------------------------------------------------------
      Trust funds:
        Hazardous substance                1  ..........  ..........  ..........  ..........  ..........  ..........
         superfund..............
                                 -----------------------------------------------------------------------------------
    Total corporation income         189,371     226,526     220,258     229,817     243,417     252,363     257,633
     taxes......................
                                 ===================================================================================
    Social insurance and
     retirement receipts (trust
     funds):
      Employment and general
       retirement:
        Old-age and survivors        457,120     479,891     507,087     537,849     568,092     598,946     635,310
         insurance (Off-budget).
        Disability insurance          77,625      81,472      86,104      91,333      96,469     101,708     107,883
         (Off-budget)...........
        Hospital insurance......     150,589     161,360     172,135     182,412     193,079     204,007     216,710
        Railroad retirement:
          Social Security              1,729       1,726       1,760       1,778       1,819       1,853       1,891
           equivalent account...
          Rail pension and             2,297       2,187       2,209       2,252       2,192       2,203       2,364
           supplemental annuity.
                                 -----------------------------------------------------------------------------------
      Total employment and           689,360     726,636     769,295     815,624     861,651     908,717     964,158
       general retirement.......
                                 -----------------------------------------------------------------------------------
        On-budget...............     154,615     165,273     176,104     186,442     197,090     208,063     220,965
        Off-budget..............     534,745     561,363     593,191     629,182     664,561     700,654     743,193
                                 -----------------------------------------------------------------------------------
      Unemployment insurance:
        Deposits by States \1\ .      32,605      35,371      37,513      38,870      39,620      40,399      42,420
          Proposed Legislation..  ..........  ..........  ..........           7          -7        -162        -662
        Federal unemployment           6,718       7,009       7,357       7,181       6,011       5,798       6,124
         receipts \1\ ..........
        Railroad unemployment            130          96          86         101         124         132         121
         receipts \1\ ..........
                                 -----------------------------------------------------------------------------------
      Total unemployment              39,453      42,476      44,956      46,159      45,748      46,167      48,003
       insurance................
                                 -----------------------------------------------------------------------------------
      Other retirement:
        Federal employees'             4,543       4,574       4,540       4,400       4,301       4,153       4,038
         retirement--employee
         share..................
        Non-Federal employees             51          45          43          39          36          33          30
         retirement \2\ ........
                                 -----------------------------------------------------------------------------------
      Total other retirement....       4,594       4,619       4,583       4,439       4,337       4,186       4,068
                                 -----------------------------------------------------------------------------------
    Total social insurance and       733,407     773,731     818,834     866,222     911,736     959,070   1,016,229
     retirement receipts........
                                 ===================================================================================
      On-budget.................     198,662     212,368     225,643     237,040     247,175     258,416     273,036
      Off-budget................     534,745     561,363     593,191     629,182     664,561     700,654     743,193
                                 ===================================================================================
    Excise taxes:
      Federal funds:
        Alcohol taxes...........       8,105       7,909       8,056       8,190       8,330       8,579       8,716
          Proposed Legislation..  ..........  ..........         -56         -19  ..........  ..........  ..........
        Tobacco taxes...........       7,926       7,899       7,732       7,590       7,459       7,325       7,202
        Transportation fuels tax       1,381        -526      -1,325      -1,417      -1,460      -1,481      -1,500
          Proposed Legislation..  ..........  ..........          12          13          13          13          14
        Telephone and teletype         5,997       6,485       6,881       7,292       7,717       8,158       8,619
         services...............
        Other Federal fund             1,157       1,373       1,329       1,370       1,423       1,478       1,533
         excise taxes...........
          Proposed Legislation..  ..........      -1,089      -1,206      -1,214      -1,268      -1,301      -1,333
                                 -----------------------------------------------------------------------------------
      Total Federal fund excise       24,566      22,051      21,423      21,805      22,214      22,771      23,251
       taxes....................
                                 -----------------------------------------------------------------------------------
      Trust funds:
        Highway.................      34,711      37,792      39,119      39,908      40,630      41,315      41,989
          Proposed Legislation..  ..........       1,089       1,107       1,119       1,137       1,151       1,160

    [[Page 300]]

        Airport and airway......       9,174      10,517      11,319      11,996      12,651      13,346      14,077
        Aquatic resources.......         416         424         426         439         451         466         479
        Tobacco.................  ..........       1,098       1,089         964         964         964         964
        Black lung disability            566         584         601         618         636         650         660
         insurance..............
        Inland waterway.........          91          91          92          93          93          94          95
        Vaccine injury                   142         170         188         192         194         196         199
         compensation...........
        Leaking underground              189          97  ..........  ..........  ..........  ..........  ..........
         storage tank...........
          Proposed Legislation..  ..........         100         202         103  ..........  ..........  ..........
                                 -----------------------------------------------------------------------------------
      Total trust funds excise        45,289      51,962      54,143      55,432      56,756      58,182      59,623
       taxes....................
                                 -----------------------------------------------------------------------------------
    Total excise taxes..........      69,855      74,013      75,566      77,237      78,970      80,953      82,874
                                 ===================================================================================
    Estate and gift taxes:
      Federal funds.............      24,831      23,754      26,810      24,628      25,973      27,625      21,509
        Proposed Legislation....  ..........  ..........        -689      -1,162      -1,649      -1,612      -1,371
                                 -----------------------------------------------------------------------------------
    Total estate and gift taxes.      24,831      23,754      26,121      23,466      24,324      26,013      20,138
                                 ===================================================================================
    Customs duties:
      Federal funds.............      20,143      22,100      25,643      27,954      29,918      31,861      33,195
        Proposed Legislation....  ..........       1,608       1,540       1,512         734         736         739
      Trust funds...............         940         966       1,073       1,170       1,246       1,295       1,345
                                 -----------------------------------------------------------------------------------
    Total customs duties........      21,083      24,674      28,256      30,636      31,898      33,892      35,279
                                 ===================================================================================
    MISCELLANEOUS RECEIPTS: \3\
      Miscellaneous taxes.......          96         100         110         106         106         106         106
        Proposed Legislation....  ..........  ..........  ..........           4           4           5           5
      United Mine Workers of             127          96         119         128         125         122         119
       America combined benefit
       fund.....................
      Deposit of earnings,            19,652      24,102      28,528      32,197      36,076      39,441      42,239
       Federal Reserve System...
      Defense cooperation.......          13           7           7           8           8           8           8
      Confiscated Assets........          18  ..........  ..........  ..........  ..........  ..........  ..........
      Fees for permits and             8,675       9,625      10,049      10,360      10,316      10,004      10,058
       regulatory and judicial
       services.................
        Proposed Legislation....  ..........  ..........         304         312         318         322         323
      Fines, penalties, and            3,902       4,252       4,276       4,265       3,551       3,592       3,633
       forfeitures..............
        Proposed Legislation....  ..........      -1,608      -1,615      -1,624        -855        -865        -874
      Gifts and contributions...         153         195         188         187         188         190         192
      Refunds and recoveries....         -71        -326        -328        -336        -344        -352        -359
                                 -----------------------------------------------------------------------------------
    Total miscellaneous receipts      32,565      36,443      41,638      45,607      49,493      52,573      55,450
                                 ===================================================================================
    Total budget receipts.......   1,880,071   2,052,845   2,177,550   2,344,154   2,507,011   2,650,003   2,820,878
      On-budget.................   1,345,326   1,491,482   1,584,359   1,714,972   1,842,450   1,949,349   2,077,685
      Off-budget................     534,745     561,363     593,191     629,182     664,561     700,654     743,193
                                 -----------------------------------------------------------------------------------
             MEMORANDUM
      Federal funds.............   1,100,875   1,228,758   1,307,760   1,423,134   1,539,578   1,633,820   1,746,109
      Trust funds...............     495,410     545,688     637,748     665,392     694,810     727,810     765,078
      Interfund transactions....    -250,959    -282,964    -361,149    -373,554    -391,938    -412,281    -433,502
                                 -----------------------------------------------------------------------------------
    Total on-budget.............   1,345,326   1,491,482   1,584,359   1,714,972   1,842,450   1,949,349   2,077,685
                                 -----------------------------------------------------------------------------------
    Off-budget (trust funds)....     534,745     561,363     593,191     629,182     664,561     700,654     743,193
                                 ===================================================================================
    Total.......................   1,880,071   2,052,845   2,177,550   2,344,154   2,507,011   2,650,003   2,820,878
    ----------------------------------------------------------------------------------------------------------------
    \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.