[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,

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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.

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  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

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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

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      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.

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                   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.

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        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.

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  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

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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

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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.