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



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                          19. TAX EXPENDITURES

  The Congressional Budget Act of 1974 (Public Law 93-344) requires that 
a list of ``tax expenditures'' be included in the budget. Tax 
expenditures are defined in the law as ``revenue losses attributable to 
provisions of the Federal tax laws which allow a special exclusion, 
exemption, or deduction from gross income or which provide a special 
credit, a preferential rate of tax, or a deferral of liability.'' These 
exceptions may be viewed as alternatives to other policy instruments, 
such as spending or regulatory programs. Identification and measurement 
of tax expenditures depends importantly on the baseline tax system 
against which the actual tax system is compared.
  The largest reported tax expenditures tend to be associated with the 
individual income tax. For example, sizeable deferrals, deductions and 
exclusions are provided for employer contributions for medical 
insurance, pension contributions and earnings, capital gains, and 
payments of State and local individual income and property taxes. 
Reported tax expenditures under the corporate income tax tend to be 
related to timing differences in the rate of cost recovery for various 
investments. As is discussed below, the extent to which these provisions 
are classified as tax expenditures varies according to the conceptual 
baseline used.
  Each tax expenditure estimate in this chapter was calculated assuming 
other parts of the tax code remained unchanged. The estimates would be 
different if all tax expenditures or major groups of tax expenditures 
were changed simultaneously because of potential interactions among 
provisions. For that reason, this chapter does not present a grand total 
for the estimated tax expenditures. Moreover, past tax changes entailing 
broad elimination of tax expenditures were generally accompanied by 
changes in tax rates or other basic provisions, so that the net effects 
on Federal revenues were considerably (if not totally) offset.
  Tax expenditures relating to the individual and corporate income taxes 
are estimated for fiscal years 2004-2010 using three methods of 
accounting: revenue effects, outlay equivalents, and present values. The 
present value approach provides estimates of the revenue effects for tax 
expenditures that generally involve deferrals of tax payments into the 
future.
  The section of the chapter on performance measures and economic 
effects presents information related to assessment of the effect of tax 
expenditures on the achievement of program performance goals. This 
section is a complement to the Government-wide performance plan required 
by the Government Performance and Results Act of 1993.
  The 2004 and 2005 Budgets included a thorough review of important 
ambiguities in the tax expenditure concept. In particular, this review 
focused on defining tax expenditures relative to a comprehensive income 
tax baseline, defining tax expenditures relative to a broad-based 
consumption tax baseline, and defining negative tax expenditures, i.e., 
provisions of current law that over-tax certain items or activities. A 
similar review is presented in the Appendix again this year.

                   TAX EXPENDITURES IN THE INCOME TAX

                        Tax Expenditure Estimates

  All tax expenditure estimates presented here are based upon current 
tax law enacted as of December 31, 2004. Expired or repealed provisions 
are not listed if their revenue effects result only from taxpayer 
activity occurring before fiscal year 2004. Due to the time required to 
estimate the large number of tax expenditures, the estimates are based 
on Mid-Session economic assumptions; exceptions are the earned income 
tax credit and child credit provisions, which involve outlay components 
and hence are updated to reflect the economic assumptions used elsewhere 
in the budget.
  The total revenue effects for tax expenditures for fiscal years 2004-
2010 are displayed according to the budget's functional categories in 
Table 19-1. Descriptions of the specific tax expenditure provisions 
follow the tables of estimates and the discussion of general features of 
the tax expenditure concept.
  As in prior years, two baseline concepts, the normal tax baseline and 
the reference tax law baseline, are used to identify tax expenditures. 
These baseline concepts are thoroughly discussed in Special Analysis G 
of the 1985 Budget, where the former is referred to as the pre-1983 
method and the latter the post-1982 method. For the most part, the two 
concepts coincide. However, items treated as tax expenditures under the 
normal tax baseline, but not the reference tax law baseline, are 
indicated by the designation ``normal tax method'' in the tables. The 
revenue effects for these items are zero using the reference tax rules. 
The alternative baseline concepts are discussed in detail following the 
tables.
  Table 19-2 reports the respective portions of the total revenue 
effects that arise under the individual and corporate income taxes 
separately. The location of the estimates under the individual and 
corporate headings does not imply that these categories of filers 
benefit from the special tax provisions in proportion to the respective 
tax expenditure amounts shown. Rather, these breakdowns show the 
specific tax accounts through which

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the various provisions are cleared. The ultimate beneficiaries of 
corporate tax expenditures could be shareholders, employees, customers, 
or other providers of capital, depending on economic forces.
  Table 19-3 ranks the major tax expenditures by the size of their 2006-
2010 revenue effect.

                 Interpreting Tax Expenditure Estimates

  The estimates shown for individual tax expenditures in Tables 19-1, 
19-2, and 19-3 do not necessarily equal the increase in Federal revenues 
(or the change in the budget balance) that would result from repealing 
these special provisions, for the following reasons.
  Eliminating a tax expenditure may have incentive effects that alter 
economic behavior. These incentives can affect the resulting magnitudes 
of the activity or of other tax provisions or Government programs. For 
example, if capital gains were taxed at ordinary rates, capital gain 
realizations would be expected to decline, potentially resulting in a 
decline in tax receipts. Such behavioral effects are not reflected in 
the estimates.
  Tax expenditures are interdependent even without incentive effects. 
Repeal of a tax expenditure provision can increase or decrease the tax 
revenues associated with other provisions. For example, even if behavior 
does not change, repeal of an itemized deduction could increase the 
revenue costs from other deductions because some taxpayers would be 
moved into higher tax brackets. Alternatively, repeal of an itemized 
deduction could lower the revenue cost from other deductions if 
taxpayers are led to claim the standard deduction instead of itemizing. 
Similarly, if two provisions were repealed simultaneously, the increase 
in tax liability could be greater or less than the sum of the two 
separate tax expenditures, because each is estimated assuming that the 
other remains in force. In addition, the estimates reported in Table 19-
1 are the totals of individual and corporate income tax revenue effects 
reported in Table 19-2 and do not reflect any possible interactions 
between individual and corporate income tax receipts. For this reason, 
the estimates in Table 19-1 should be regarded as approximations.

                         Present-Value Estimates

  The annual value of tax expenditures for tax deferrals is reported on 
a cash basis in all tables except Table 19-4. Cash-based estimates 
reflect the difference between taxes deferred in the current year and 
incoming revenues that are received due to deferrals of taxes from prior 
years. Although such estimates are useful as a measure of cash flows 
into the Government, they do not accurately reflect the true economic 
cost of these provisions. For example, for a provision where activity 
levels have changed, so that incoming tax receipts from past deferrals 
are greater than deferred receipts from new activity, the cash-basis tax 
expenditure estimate can be negative, despite the fact that in present-
value terms current deferrals do have a real cost to the Government. 
Alternatively, in the case of a newly enacted deferral provision, a 
cash-based estimate can overstate the real effect on receipts to the 
Government because the newly deferred taxes will ultimately be received. 
Present-value estimates, which are a useful complement to the cash-basis 
estimates for provisions involving deferrals, are discussed below.
  Discounted present-value estimates of revenue effects are presented in 
Table 19-4 for certain provisions that involve tax deferrals or other 
long-term revenue effects. These estimates complement the cash-based tax 
expenditure estimates presented in the other tables.
  The present-value estimates represent the revenue effects, net of 
future tax payments, that follow from activities undertaken during 
calendar year 2004 which cause the deferrals or other long-term revenue 
effects. For instance, a pension contribution in 2004 would cause a 
deferral of tax payments on wages in 2004 and on pension earnings on 
this contribution (e.g., interest) in later years. In some future year, 
however, the 2004 pension contribution and accrued earnings will be paid 
out and taxes will be due; these receipts are included in the present-
value estimate. In general, this conceptual approach is similar to the 
one used for reporting the budgetary effects of credit programs, where 
direct loans and guarantees in a given year affect future cash flows.

                           Outlay Equivalents

  The concept of ``outlay equivalents'' is another theoretical measure 
of the budget effect of tax expenditures. It is the amount of budget 
outlays that would be required to provide the taxpayer the same after-
tax income as would be received through the tax provision. The outlay-
equivalent measure allows the cost of a tax expenditure to be compared 
with a direct Federal outlay on a more even footing. Outlay equivalents 
are reported in Table 19-5.

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                                                 Table 19-1.  ESTIMATES OF TOTAL INCOME TAX EXPENDITURES
                                                                (in millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             Total from corporations and individuals
                                                                        --------------------------------------------------------------------------------
                                                                           2004      2005      2006      2007      2008      2009      2010     2006-10
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
             National Defense
       1       Exclusion of benefits and allowances to armed forces         2,460     2,490     2,520     2,540     2,560     2,590     2,620     12,830
                personnel..............................................
 
             International affairs:
       2       Exclusion of income earned abroad by U.S. citizens......     2,680     2,750     2,810     2,940     3,100     3,270     3,450     15,570
       3       Exclusion of certain allowances for Federal employees          850       900       950     1,000     1,050     1,100     1,160      5,260
                abroad.................................................
       4       Extraterritorial income exclusion.......................     5,500     5,170     4,270     1,820       220        40        20      6,370
       5       Inventory property sales source rules exception.........     1,500     1,620     1,770     1,950     2,200     2,430     2,630     10,980
       6       Deferral of income from controlled foreign corporations      7,240     7,000     7,440     7,960     8,510     9,100     9,730     42,740
                (normal tax method)....................................
       7       Deferred taxes for financial firms on certain income         2,130     2,190     2,260       960  ........  ........  ........      3,220
                earned overseas........................................
 
             General science, space, and technology
       8       Expensing of research and experimentation expenditures      -2,330     4,110     7,920     6,990     6,260     5,360     4,800     31,330
                (normal tax method)....................................
       9       Credit for increasing research activities...............     4,680     5,130     2,140       910       390       180        50      3,670
 
             Energy
      10       Expensing of exploration and development costs, fuels...       260       400       370       280       240       190       140      1,220
      11       Excess of percentage over cost depletion, fuels.........     1,320     1,280     1,350     1,420     1,470     1,510     1,550      7,300
      12       Alternative fuel production credit......................     1,040     1,040     1,040     1,040       420  ........  ........      2,500
      13       Exception from passive loss limitation for working              20        20        20        20        20        20        20        100
                interests in oil and gas properties....................
      14       Capital gains treatment of royalties on coal............        70        70        80        80       100        70        60        390
      15       Exclusion of interest on energy facility bonds..........       100       100       110       110       120       120       130        590
      16       Enhanced oil recovery credit............................       330       340       340       350       360       370       390      1,810
      17       New technology credit...................................       330       470       620       700       800       820       690      3,630
      18       Alcohol fuel credits \1\................................        30        30        30        30        40        40        40        180
      19       Tax credit and deduction for clean-fuel burning vehicles        70        70        50       -20       -70       -80       -60       -180
      20       Exclusion of conservation subsidies provided by public         100       100       100       100        90        90        90        470
                utilities..............................................
 
             Natural resources and environment
      21       Expensing of exploration and development costs, nonfuel        230       230       250       250       250       270       270      1,290
                minerals...............................................
      22       Excess of percentage over cost depletion, nonfuel         ........  ........  ........  ........  ........  ........        10         10
                minerals...............................................
      23       Exclusion of interest on bonds for water, sewage, and          500       530       570       600       630       650       680      3,130
                hazardous waste facilities.............................
      24       Capital gains treatment of certain timber income........        70        70        80        80       100        70        60        390
      25       Expensing of multiperiod timber growing costs...........       340       350       370       380       400       410       430      1,990
      26       Tax incentives for preservation of historic structures..       300       320       330       340       360       380       400      1,810
      27       Expensing of capital costs with respect to complying      ........        10  ........        10        20        40        10         90
                with EPA sulfur regulations............................
      28       Exclusion of gain or loss on sale or exchange of certain  ........  ........  ........       -10       -30       -40       -40       -120
                brownfield sites.......................................
 
             Agriculture
      29       Expensing of certain capital outlays....................       100       110       130       130       130       140       140        670
      30       Expensing of certain multiperiod production costs.......        50        60        70        70        80        80        80        380
      31       Treatment of loans forgiven for solvent farmers.........        10        10        10        10        10        10        10         50
      32       Capital gains treatment of certain income...............       670       730       760       820       990       720       580      3,870
      33       Income averaging for farmers............................        40        40        40        40        40        40        40        200
      34       Deferral of gain on sale of farm refiners...............        10        10        10        20        20        20        20         90
      35       Bio-Diesel tax credit...................................  ........        30        30        10  ........  ........  ........         40
 
             Commerce and housing
               Financial institutions and insurance:
      36        Exemption of credit union income.......................     1,270     1,330     1,390     1,440     1,510     1,570     1,640      7,550
      37        Excess bad debt reserves of financial institutions.....       -20       -20       -10       -10       -10  ........  ........        -30
      38        Exclusion of interest on life insurance savings........    20,830    22,750    24,070    26,180    28,770    30,980    33,610    143,610
      39        Special alternative tax on small property and casualty         10        10        10        10        10        10        10         50
                 insurance companies...................................
      40        Tax exemption of certain insurance companies owned by         180       190       210       220       230       250       260      1,170
                 tax-exempt organizations..............................
      41        Small life insurance company deduction.................        80        80        80        80        80        80        80        400
               Housing:
      42        Exclusion of interest on owner-occupied mortgage            1,020     1,110     1,180     1,230     1,320     1,350     1,390      6,470
                 subsidy bonds.........................................
      43        Exclusion of interest on rental housing bonds..........       360       390       410       420       460       470       480      2,240
      44        Deductibility of mortgage interest on owner-occupied       61,450    68,870    76,030    81,990    88,990    95,770   102,760    445,540
                 homes.................................................
      45        Deductibility of State and local property tax on owner-    19,930    16,590    14,830    14,110    13,400    13,000    12,800     68,140
                 occupied homes........................................
      46        Deferral of income from post 1987 installment sales....     1,100     1,120     1,140     1,160     1,190     1,200     1,320      6,010
      47        Capital gains exclusion on home sales..................    29,730    32,840    36,270    40,050    44,240    54,660    71,960    247,180
      48        Exclusion of net imputed rental income on owner-           24,590    28,600    29,720    33,210    36,860    40,630    44,786    185,206
                 occupied homes........................................
      49        Exception from passive loss rules for $25,000 of rental     5,030     4,900     4,750     4,580     4,410     4,240     4,080     22,060
                 loss..................................................
      50        Credit for low-income housing investments..............     3,660     3,850     4,010     4,190     4,390     4,610     4,850     22,050
      51        Accelerated depreciation on rental housing (normal tax        750      -156      -993    -1,846    -2,697    -3,961    -5,901    -15,398
                 method)...............................................
               Commerce:
      52        Cancellation of indebtedness...........................        30        30        30        40        40        40        40        190
      53        Exceptions from imputed interest rules.................        50        50        50        50        50        50        50        250
      54        Capital gains (except agriculture, timber, iron ore,       25,150    27,200    28,370    30,450    36,840    26,900    21,630    144,190
                 and coal).............................................
      55        Capital gains exclusion of small corporation stock.....       160       210       250       300       350       390       430      1,720

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      56        Step-up basis of capital gains at death................    24,200    26,140    28,760    31,630    34,790    35,560    33,680    164,420
      57        Carryover basis of capital gains on gifts..............       210       240       290       290       310       430       850      2,170
      58        Ordinary income treatment of loss from small business          50        50        50        50        50        50        50        250
                 corporation stock sale................................
      59        Accelerated depreciation of buildings other than rental    -3,250    -4,180    -4,790    -6,940   -10,360   -14,740   -21,240    -58,060
                 housing (normal tax method)...........................
      60        Accelerated depreciation of machinery and equipment        44,690   -11,000   -37,830   -30,920   -27,950   -26,190   -25,760   -148,650
                 (normal tax method)...................................
      61        Expensing of certain small investments (normal tax          1,520     4,820     1,650      -490       -30       140       230      1,500
                 method)...............................................
      62        Amortization of start-up costs (normal tax method).....        80        50  ........       -40       -90      -140      -170       -440
      63        Graduated corporation income tax rate (normal tax           2,450     3,190     3,730     3,820     3,920     4,020     4,140     19,630
                 method)...............................................
      64        Exclusion of interest on small issue bonds.............       450       490       510       540       580       590       610      2,830
      65        Deduction for U.S. production activities...............  ........     3,270     5,420     8,750    11,230    11,670    15,860     52,930
      66        Special rules for certain film and TV production.......  ........        90       110        90        70       -40       -90        140
 
             Transportation
      67       Deferral of tax on shipping companies...................        20        20        20        20        20        20        20        100
      68       Exclusion of reimbursed employee parking expenses.......     2,470     2,590     2,730     2,880     3,030     3,180     3,330     15,150
      69       Exclusion for employer-provided transit passes..........       410       480       550       630       710       790       880      3,560
      70       Tax credit for certain expenditures for maintaining       ........        70       140       150       110        50        30        480
                railroad tracks........................................
 
             Community and regional development
      71       Investment credit for rehabilitation of structures              40        40        40        40        40        40        40        200
                (other than historic)..................................
      72       Exclusion of interest for airport, dock, and similar           850       930       980     1,030     1,100     1,130     1,170      5,410
                bonds..................................................
      73       Exemption of certain mutuals' and cooperatives' income..        60        60        60        70        70        70        70        340
      74       Empowerment zones, Enterprise communities, and Renewal       1,080     1,120     1,210     1,340     1,480     1,740     1,130      6,900
                communities............................................
      75       New markets tax credit..................................       290       430       610       830       870       790       670      3,770
      76       Expensing of environmental remediation costs............        80        70        20       -10       -10       -20       -10        -30
      77       Deferral of capital gains with respect of dispositions    ........      -490      -620      -530      -230       100       360       -920
                of transmission property...............................
 
             Education, training, employment, and social services
               Education:
      78        Exclusion of scholarship and fellowship income (normal      1,320     1,400     1,460     1,530     1,600     1,680     1,750      8,020
                 tax method)...........................................
      79        HOPE tax credit........................................     3,320     3,410     3,220     3,320     3,350     3,420     3,580     16,890
      80        Lifetime Learning tax credit...........................     2,190     2,130     2,080     2,310     2,340     2,380     2,450     11,560
      81        Education Individual Retirement Accounts...............       110       140       190       240       300       370       440      1,540
      82        Deductibility of student-loan interest.................       760       780       800       810       820       830       840      4,100
      83        Deduction for higher education expenses................     1,280     1,830     1,840  ........  ........  ........  ........      1,840
      84        State prepaid tuition plans............................       210       490       650       740       830       920     1,010      4,150
      85        Exclusion of interest on student-loan bonds............       290       310       340       350       370       380       390      1,830
      86        Exclusion of interest on bonds for private nonprofit          970     1,050     1,120     1,180     1,250     1,290     1,330      6,170
                 educational facilities................................
      87        Credit for holders of zone academy bonds...............        90       110       130       130       140       140       140        680
      88        Exclusion of interest on savings bonds redeemed to             10        10        20        20        20        20        20        100
                 finance educational expenses..........................
      89        Parental personal exemption for students age 19 or over     3,200     2,670     2,110     1,840     1,630     1,450     1,340      8,370
      90        Deductibility of charitable contributions (education)..     3,690     3,420     3,680     4,030     4,260     4,550     4,870     21,390
      91        Exclusion of employer-provided educational assistance..       530       560       590       620       650       690       720      3,270
      92        Special deduction for teacher expenses.................       150       160       150  ........  ........  ........  ........        150
      93        Discharge of student loan indebtedness.................  ........        20        20        20        20        20        20        100
               Training, employment, and social services:
      94        Work opportunity tax credit............................       280       250       280       190        60        30        10        570
      95        Welfare-to-work tax credit.............................        60        60        80        60        20        10  ........        170
      96        Employer provided child care exclusion.................       600       620       810       930       970     1,010     1,060      4,780
      97        Employer-provided child care credit....................  ........         8        10        10        10        10        10         50
      98        Assistance for adopted foster children.................       290       310       350       380       420       460       500      2,110
      99        Adoption credit and exclusion..........................       450       500       540       560       570       580       600      2,850
     100        Exclusion of employee meals and lodging (other than           810       850       890       930       970     1,010     1,060      4,860
                 military).............................................
     101        Child credit \2\.......................................    22,400    32,710    32,810    32,900    32,860    32,790    32,670    164,030
     102        Credit for child and dependent care expenses...........     2,990     3,140     2,810     1,900     1,800     1,710     1,630      9,850
     103        Credit for disabled access expenditures................        30        40        40        40        40        50        50        220
     104        Deductibility of charitable contributions, other than      27,370    29,670    32,550    34,500    36,790    39,410    42,210    185,460
                 education and health..................................
     105        Exclusion of certain foster care payments..............       440       440       440       450       450       460       470      2,270
     106        Exclusion of parsonage allowances......................       430       460       480       510       540       580       610      2,720
 
             Health
     107       Exclusion of employer contributions for medical            102,250   112,160   125,690   139,060   152,560   166,190   176,740    760,240
                insurance premiums and medical care....................
     108       Self-employed medical insurance premiums................     3,330     3,780     4,330     4,800     5,260     5,760     6,250     26,400
     109       Medical Savings Accounts/Health Savings Accounts........       620     1,050     1,830     2,650     3,510     3,960     3,910     15,860
     110       Deductibility of medical expenses.......................     7,380     8,590     9,140     9,970    11,100    11,890    12,670     54,770
     111       Exclusion of interest on hospital construction bonds....     1,870     2,020     2,160     2,260     2,400     2,470     2,550     11,840
     112       Deductibility of charitable contributions (health)......     3,090     3,350     3,670     3,890     4,150     4,450     4,770     20,930
     113       Tax credit for orphan drug research.....................       180       210       230       260       290       330       360      1,470
     114       Special Blue Cross/Blue Shield deduction................       400       390       360       390       340       370       430      1,890
     115       Tax credit for health insurance purchased by certain            50        60        40        40        40        50        50        220
                displaced and retired individuals \3\..................
 

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             Income security
     116       Exclusion of railroad retirement system benefits........       400       400       400       400       400       400       400      2,000
     117       Exclusion of workers' compensation benefits.............     5,490     5,730     5,940     6,100     6,300     6,520     6,730     31,590
     118       Exclusion of public assistance benefits (normal tax            410       430       450       470       490       510       480      2,400
                method)................................................
     119       Exclusion of special benefits for disabled coal miners..        60        50        50        50        40        40        40        220
     120       Exclusion of military disability pensions...............       100       100       110       110       110       120       120        570
               Net exclusion of pension contributions and earnings:
     121        Employer plans.........................................    46,970    50,330    51,050    52,570    47,530    45,310    44,570    241,030
     122        401(k) plans...........................................    47,730    45,870    48,140    51,800    56,140    60,930    66,400    283,410
     123        Individual Retirement Accounts.........................     7,450     7,340     7,310     6,990     6,680     6,220     5,650     32,850
     124        Low and moderate income savers credit..................       970     1,100     1,170       700  ........  ........  ........      1,870
     125        Keogh plans............................................     8,830     9,380     9,980    10,650    11,610    12,650    13,780     58,670
               Exclusion of other employee benefits:
     126        Premiums on group term life insurance..................     2,070     2,090     2,110     2,110     2,150     2,180     2,200     10,750
     127        Premiums on accident and disability insurance..........       260       280       290       300       310       320       330      1,550
     128       Small business retirement plan credit...................        80       100       120       140       150       150       140        700
     129       Income of trusts to finance supplementary unemployment          20        20        20        20        20        20        20        100
                benefits...............................................
     130       Special ESOP rules......................................     1,920     2,060     2,220     2,400     2,580     2,780     3,000     12,980
     131       Additional deduction for the blind......................        30        40        40        40        40        40        40        200
     132       Additional deduction for the elderly....................     1,700     1,810     1,960     1,940     1,900     1,930     1,950      9,680
     133       Tax credit for the elderly and disabled.................        20        20        20        20        10        10        10         70
     134       Deductibility of casualty losses........................       550       250       270       280       290       300       320      1,460
     135       Earned income tax credit \4\............................     4,890     4,980     5,420     5,170     5,290     5,480     5,600     26,960
 
             Social Security
               Exclusion of social security benefits
     136        Social Security benefits for retired workers...........    19,200    19,480    19,770    20,470    20,900    21,260    23,720    106,120
     137        Social Security benefits for disabled..................     3,580     3,740     3,870     4,110     4,290     4,500     4,910     21,680
     138        Social Security benefits for dependents and survivors..     4,140     4,120     3,990     4,030     3,880     3,920     4,060     19,880
 
             Veterans benefits and services
     139       Exclusion of veterans death benefits and disability          3,300     3,560     3,750     4,030     4,190     4,360     4,520     20,850
                compensation...........................................
     140       Exclusion of veterans pensions..........................       110       120       120       120       120       130       140        630
     141       Exclusion of GI bill benefits...........................       130       150       160       170       180       190       200        900
     142       Exclusion of interest on veterans housing bonds.........        50        50        50        60        60        60        60        290
 
             General purpose fiscal assistance
     143       Exclusion of interest on public purpose State and local     26,150    26,530    26,610    26,350    27,140    27,950    28,790    136,840
                bonds..................................................
     144       Deductibility of nonbusiness state and local taxes other    45,290    39,090    34,620    32,890    31,850    31,760    32,120    163,240
                than on owner-occupied homes...........................
     145       Tax credit for corporations receiving income from doing      1,000       900       500        50  ........  ........  ........        550
                business in U.S. possessions...........................
 
             Interest
     146       Deferral of interest on U.S. savings bonds..............        50        50        50        50        60        70        70        300
 
             Addendum: Aid to State and local governments
               Deductibility of:
                Property taxes on owner-occupied homes.................    19,930    16,590    14,830    14,110    13,400    13,000    12,800     68,140
                Nonbusiness State and local taxes other than on owner-     45,290    39,090    34,620    32,890    31,850    31,760    32,120    163,240
                 occupied homes........................................
               Exclusion of interest on State and local bonds for:
                Public purposes........................................    26,150    26,530    26,610    26,350    27,140    27,950    28,790    136,840
                Energy facilities......................................       100       100       110       110       120       120       130        590
                Water, sewage, and hazardous waste disposal facilities.       500       530       570       600       630       650       680      3,130
                Small-issues...........................................       450       490       510       540       580       590       610      2,830
                Owner-occupied mortgage subsidies......................     1,020     1,110     1,180     1,230     1,320     1,350     1,390      6,470
                Rental housing.........................................       360       390       410       420       460       470       480      2,240
                Airports, docks, and similar facilities................       850       930       980     1,030     1,100     1,130     1,170      5,410
                Student loans..........................................       290       310       340       350       370       380       390      1,830
                Private nonprofit educational facilities...............       970     1,050     1,120     1,180     1,250     1,290     1,330      6,170
                Hospital construction..................................     1,870     2,020     2,160     2,260     2,400     2,470     2,550     11,840
                Veterans' housing......................................        50        50        50        60        60        60        60        290
               Credit for holders of zone academy bonds................        90       110       130       130       140       140       140        680
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ In addition, the partial exemption from the excise tax and excise credits for alcohol fuels result in a reduction in excise tax receipts (in
  millions of dollars) as follows: 2004 $1,450; 2005 $1,490; 2006 $1,550; 2007 $1,590; 2008 $1,620; 2009 $1,650; and 2010 $1,680.
\2\ The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as
  follows: 2004 $8,857; 2005 $13,516; 2006 $13,180; 2007 $12,549; 2008 $12,040; 2009 $11,693 and 2010 $11,364
\3\ In addition to the receipts shown, there are outlays of $70 million in 2004, $90 million in 2005, $100 million in 2006, $120 million in 2007, $130
  million in 2008, and $140 million in 2009 and $150 million in 2010 projected.
\4\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of
  dollars) is as follows: 2004 $33,134;2005 $33,790; 2006 $34,132; 2007 $34,481; 2008 $34,723; 2009 $35,517; and 2010 $36,099.
Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method.
All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.


[[Page 320]]


                                                                        Table 19-2.  ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL INCOME TAXES
                                                                                                        (in millions of dollars)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Corporations                                                                           Individuals
                                                             ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                2004     2005      2006       2007       2008       2009       2010     2006-10      2004       2005       2006       2007       2008       2009       2010     2006-10
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 
             National Defense
       1       Exclusion of benefits and allowances to armed  .......  .......  .........  .........  .........  .........  .........  .........      2,460      2,490      2,520      2,540      2,560      2,590      2,620     12,830
                forces personnel............................
 
             International affairs:
       2       Exclusion of income earned abroad by U.S.      .......  .......  .........  .........  .........  .........  .........  .........      2,680      2,750      2,810      2,940      3,100      3,270      3,450     15,570
                citizens....................................
       3       Exclusion of certain allowances for Federal    .......  .......  .........  .........  .........  .........  .........  .........        850        900        950       1000       1050       1100       1160      5,260
                employees abroad............................
       4       Extraterritorial income exclusion............    5,500    5,170      4,270      1,820        220         40         20      6,370  .........  .........  .........  .........  .........  .........  .........  .........
       5       Inventory property sales source rules            1,500    1,620      1,770      1,950      2,200      2,430      2,630     10,980  .........  .........  .........  .........  .........  .........  .........  .........
                exception...................................
       6       Deferral of income from controlled foreign       7,240    7,000      7,440      7,960      8,510      9,100      9,730     42,740  .........  .........  .........  .........  .........  .........  .........  .........
                corporations (normal tax method)............
       7       Deferred taxes for financial firms on certain    2,130    2,190      2,260        960  .........  .........  .........      3,220  .........  .........  .........  .........  .........  .........  .........  .........
                income earned overseas......................
 
             General science, space, and technology
       8       Expensing of research and experimentation       -2,280    4,010      7,770      6,850      6,140      5,250      4,700     30,710        -50        100        150        140        120        110        100        620
                expenditures (normal tax method)............
       9       Credit for increasing research activities....    4,630    5,080      2,100        910        390        180         50      3,630         50         50         40  .........  .........  .........  .........         40
 
             Energy
      10       Expensing of exploration and development           230      350        320        240        210        160        120      1,050         30         50         50         40         30         30         20        170
                costs, fuels................................
      11       Excess of percentage over cost depletion,        1,210    1,180      1,240      1,310      1,350      1,390      1,430      6,720        110        100        110        110        120        120        120        580
                fuels.......................................
      12       Alternative fuel production credit...........    1,000    1,000      1,000      1,000        400  .........  .........      2,400         40         40         40         40         20  .........  .........        100
      13       Exception from passive loss limitation for     .......  .......  .........  .........  .........  .........  .........  .........         20         20         20         20         20         20         20        100
                working interests in oil and gas properties.
      14       Capital gains treatment of royalties on coal.  .......  .......  .........  .........  .........  .........  .........  .........         70         70         80         80        100         70         60        390
      15       Exclusion of interest on energy facility            20       20         20         20         20         20         20        100         80         80         90         90        100        100        110        490
                bonds.......................................
      16       Enhanced oil recovery credit.................      300      310        310        320        330        340        350      1,650         30         30         30         30         30         30         40        160
      17       New technology credit........................      330      470        620        700        800        820        690      3,630  .........  .........  .........  .........  .........  .........  .........  .........
      18       Alcohol fuel credits \1\.....................       20       20         20         20         30         30         30        130         10         10         10         10         10         10         10         50
      19       Tax credit and deduction for clean-fuel             20       30         40         20        -10        -20        -10         20         50         40         10        -40        -60        -60        -50       -200
                burning vehicles............................
      20       Exclusion of conservation subsidies provided   .......  .......  .........  .........  .........  .........  .........  .........        100        100        100        100         90         90         90        470
                by public utilities.........................
 
             Natural resources and environment
      21       Expensing of exploration and development           210      210        230        230        230        250        250      1,190         20         20         20         20         20         20         20        100
                costs, nonfuel minerals.....................
      22       Excess of percentage over cost depletion,      .......  .......  .........  .........  .........  .........         10         10  .........  .........  .........  .........  .........  .........  .........  .........
                nonfuel minerals............................
      23       Exclusion of interest on bonds for water,          110      110        110        120        120        120        130        600        390        420        460        480        510        530        550      2,530
                sewage, and hazardous waste facilities......
      24       Capital gains treatment of certain timber      .......  .......  .........  .........  .........  .........  .........  .........         70         70         80         80        100         70         60        390
                income......................................
      25       Expensing of multiperiod timber growing costs      230      240        250        260        280        290        300      1,380        110        110        120        120        120        120        130        610
      26       Tax incentives for preservation of historic        230      240        250        260        270        290        300      1,370         70         80         80         80         90         90        100        440
                structures..................................
      27       Expensing of capital costs with respect to     .......       10  .........         10         20         40         10         90  .........  .........  .........  .........  .........  .........  .........  .........
                complying with EPA sulfur regulations.......
      28       Exclusion of gain or loss on sale or exchange  .......  .......  .........        -10        -20        -30        -30        -90  .........  .........  .........  .........        -10        -10        -10        -30
                of certain brownfield sites.................
 
             Agriculture
      29       Expensing of certain capital outlays.........       20       20         20         20         20         20         20        100         80         90        110        110        110        120        120        570
      30       Expensing of certain multiperiod production         10       10         10         10         10         10         10         50         40         50         60         60         70         70         70        330
                costs.......................................
      31       Treatment of loans forgiven for solvent        .......  .......  .........  .........  .........  .........  .........  .........         10         10         10         10         10         10         10         50
                farmers.....................................
      32       Capital gains treatment of certain income....  .......  .......  .........  .........  .........  .........  .........  .........        670        730        760        820        990        720        580      3,870
      33       Income averaging for farmers.................  .......  .......  .........  .........  .........  .........  .........  .........         40         40         40         40         40         40         40        200
      34       Deferral of gain on sale of farm refiners....       10       10         10         20         20         20         20         90  .........  .........  .........  .........  .........  .........  .........  .........
      35       Bio-Diesel tax credit........................  .......  .......  .........  .........  .........  .........  .........  .........  .........         30         30         10  .........  .........  .........         40
 
             Commerce and housing
               Financial institutions and insurance:
      36        Exemption of credit union income............    1,270    1,330      1,390      1,440      1,510      1,570      1,640      7,550  .........  .........  .........  .........  .........  .........  .........  .........
      37        Excess bad debt reserves of financial             -20      -20        -10        -10        -10  .........  .........        -30  .........  .........  .........  .........  .........  .........  .........  .........
                 institutions...............................
      38        Exclusion of interest on life insurance         2,010    2,180      2,270      2,570      2,880      3,070      3,330     14,120     18,820     20,570     21,800     23,610     25,890     27,910     30,280    129,490
                 savings....................................
      39        Special alternative tax on small property          10       10         10         10         10         10         10         50  .........  .........  .........  .........  .........  .........  .........  .........
                 and casualty insurance companies...........
      40        Tax exemption of certain insurance companies      180      190        210        220        230        250        260      1,170  .........  .........  .........  .........  .........  .........  .........  .........
                 owned by tax-exempt organizations..........
      41        Small life insurance company deduction......       80       80         80         80         80         80         80        400  .........  .........  .........  .........  .........  .........  .........  .........
               Housing:

[[Page 321]]

 
      42        Exclusion of interest on owner-occupied           220      230        230        240        250        250        260      1,230        800        880        950        990      1,070      1,100      1,130      5,240
                 mortgage subsidy bonds.....................
      43        Exclusion of interest on rental housing            80       80         80         80         90         90         90        430        280        310        330        340        370        380        390      1,810
                 bonds......................................
      44        Deductibility of mortgage interest on owner-  .......  .......  .........  .........  .........  .........  .........  .........     61,450     68,870     76,030     81,990     88,990     95,770    102,760    445,540
                 occupied homes.............................
      45        Deductibility of State and local property     .......  .......  .........  .........  .........  .........  .........  .........     19,930     16,590     14,830     14,110     13,400     13,000     12,800     68,140
                 tax on owner-occupied homes................
      46        Deferral of income from post 1987                 290      290        300        300        310        310        320      1,540        810        830        840        860        880        890      1,000      4,470
                 installment sales..........................
      47        Capital gains exclusion on home sales.......  .......  .......  .........  .........  .........  .........  .........  .........     29,730     32,840     36,270     40,050     44,240     54,660     71,960    247,180
      48        Exclusion of net imputed rental income on     .......  .......  .........  .........  .........  .........  .........  .........     24,590     28,600     29,720     33,210     36,860     40,630     44,786    185,206
                 owner-occupied homes.......................
      49        Exception from passive loss rules for         .......  .......  .........  .........  .........  .........  .........  .........      5,030      4,900      4,750      4,580      4,410      4,240      4,080     22,060
                 $25,000 of rental loss.....................
      50        Credit for low-income housing investments...    2,930    3,080      3,210      3,350      3,510      3,690      3,880     17,640        730        770        800        840        880        920        970      4,410
      51        Accelerated depreciation on rental housing        -10      -50       -100       -140       -200       -280       -390     -1,100        760       -110       -900     -1,700     -2,500     -3,690     -5,510    -14,300
                 (normal tax method)........................
               Commerce:
      52        Cancellation of indebtedness................  .......  .......  .........  .........  .........  .........  .........  .........         30         30         30         40         40         40         40        190
      53        Exceptions from imputed interest rules......  .......  .......  .........  .........  .........  .........  .........  .........         50         50         50         50         50         50         50        250
      54        Capital gains (except agriculture, timber,    .......  .......  .........  .........  .........  .........  .........  .........     25,150     27,200     28,370     30,450     36,840     26,900     21,630    144,190
                 iron ore, and coal)........................
      55        Capital gains exclusion of small corporation  .......  .......  .........  .........  .........  .........  .........  .........        160        210        250        300        350        390        430      1,720
                 stock......................................
      56        Step-up basis of capital gains at death.....  .......  .......  .........  .........  .........  .........  .........  .........     24,200     26,140     28,760     31,630     34,790     35,560     33,680    164,420
      57        Carryover basis of capital gains on gifts...  .......  .......  .........  .........  .........  .........  .........  .........        210        240        290        290        310        430        850      2,170
      58        Ordinary income treatment of loss from small  .......  .......  .........  .........  .........  .........  .........  .........         50         50         50         50         50         50         50        250
                 business corporation stock sale............
      59        Accelerated depreciation of buildings other    -2,980   -3,850     -4,340     -6,170     -9,220    -12,620    -17,320    -49,670       -280       -330       -450       -760     -1,140     -2,110     -3,930     -8,390
                 than rental housing (normal tax method)....
      60        Accelerated depreciation of machinery and      37,080   -8,780    -32,880    -26,480    -23,310    -21,260    -20,290   -124,220      7,610     -2,220     -4,950     -4,440     -4,640     -4,930     -5,470    -24,430
                 equipment (normal tax method)..............
      61        Expensing of certain small investments            680    1,780        680       -390       -140        -30        -10        110        840      3,040        970       -100        110        170        240      1,390
                 (normal tax method)........................
      62        Amortization of start-up costs (normal tax         70       40  .........        -40        -80       -120       -150       -390         10         10  .........  .........        -10        -20        -20        -50
                 method)....................................
      63        Graduated corporation income tax rate           2,450    3,190      3,730      3,820      3,920      4,020      4,140     19,630  .........  .........  .........  .........  .........  .........  .........  .........
                 (normal tax method)........................
      64        Exclusion of interest on small issue bonds..      100      100        100        100        110        110        110        530        350        390        410        440        470        480        500      2,300
      65        Deduction for U.S. production activities....  .......    2,560      4,330      7,110      9,130      9,470     12,860     42,900  .........        710      1,090      1,640      2,100      2,200      3,000     10,030
      66        Special rules for certain film and TV         .......       70         90         70         60        -30        -70        120  .........         20         20         20         10        -10        -20         20
                 production.................................
 
             Transportation
      67       Deferral of tax on shipping companies........       20       20         20         20         20         20         20        100  .........  .........  .........  .........  .........  .........  .........  .........
      68       Exclusion of reimbursed employee parking       .......  .......  .........  .........  .........  .........  .........  .........      2,470      2,590      2,730      2,880      3,030      3,180      3,330     15,150
                expenses....................................
      69       Exclusion for employer-provided transit        .......  .......  .........  .........  .........  .........  .........  .........        410        480        550        630        710        790        880      3,560
                passes......................................
      70       Tax credit for certain expenditures for        .......       70        140        150        110         50         30        480  .........  .........  .........  .........  .........  .........  .........  .........
                maintaining railroad tracks.................
 
             Community and regional development
      71       Investment credit for rehabilitation of             20       20         20         20         20         20         20        100         20         20         20         20         20         20         20        100
                structures (other than historic)............
      72       Exclusion of interest for airport, dock, and       180      190        190        200        210        210        220      1,030        670        740        790        830        890        920        950      4,380
                similar bonds...............................
      73       Exemption of certain mutuals' and                   60       60         60         70         70         70         70        340  .........  .........  .........  .........  .........  .........  .........  .........
                cooperatives' income........................
      74       Empowerment zones, Enterprise communities,         280      290        310        340        370        420        190      1,630        800        830        900      1,000      1,110      1,320        940      5,270
                and Renewal communities.....................
      75       New markets tax credit.......................       70      110        150        210        220        200        170        950        220        320        460        620        650        590        500      2,820
      76       Expensing of environmental remediation costs.       70       60         20        -10        -10        -20        -10        -30         10         10  .........  .........  .........  .........  .........  .........
      77       Deferral of capital gains with respect of      .......     -490       -620       -530       -230        100        360       -920  .........  .........  .........  .........  .........  .........  .........  .........
                dispositions of transmission property.......
 
             Education, training, employment, and social
              services
               Education:
      78        Exclusion of scholarship and fellowship       .......  .......  .........  .........  .........  .........  .........  .........      1,320      1,400      1,460      1,530      1,600      1,680      1,750      8,020
                 income (normal tax method).................
      79        HOPE tax credit.............................  .......  .......  .........  .........  .........  .........  .........  .........      3,320      3,410      3,220      3,320      3,350      3,420      3,580     16,890
      80        Lifetime Learning tax credit................  .......  .......  .........  .........  .........  .........  .........  .........      2,190      2,130      2,080      2,310      2,340      2,380      2,450     11,560
      81        Education Individual Retirement Accounts....  .......  .......  .........  .........  .........  .........  .........  .........        110        140        190        240        300        370        440      1,540
      82        Deductibility of student-loan interest......  .......  .......  .........  .........  .........  .........  .........  .........        760        780        800        810        820        830        840      4,100
      83        Deduction for higher education expenses.....  .......  .......  .........  .........  .........  .........  .........  .........      1,280      1,830      1,840  .........  .........  .........  .........      1,840
      84        State prepaid tuition plans.................  .......  .......  .........  .........  .........  .........  .........  .........        210        490        650        740        830        920      1,010      4,150
      85        Exclusion of interest on student-loan bonds.       60       60         70         70         70         70         70        350        230        250        270        280        300        310        320      1,480

[[Page 322]]

 
      86        Exclusion of interest on bonds for private        210      210        220        230        230        240        250      1,170        760        840        900        950       1020       1050       1080      5,000
                 nonprofit educational facilities...........
      87        Credit for holders of zone academy bonds....       90      110        130        130        140        140        140        680  .........  .........  .........  .........  .........  .........  .........  .........
      88        Exclusion of interest on savings bonds        .......  .......  .........  .........  .........  .........  .........  .........         10         10         20         20         20         20         20        100
                 redeemed to finance educational expenses...
      89        Parental personal exemption for students age  .......  .......  .........  .........  .........  .........  .........  .........      3,200      2,670      2,110      1,840      1,630      1,450      1,340      8,370
                 19 or over.................................
      90        Deductibility of charitable contributions         510      540        560        590        620        660        700      3,130      3,180      2,880      3,120      3,440      3,640      3,890      4,170     18,260
                 (education)................................
      91        Exclusion of employer-provided educational    .......  .......  .........  .........  .........  .........  .........  .........        530        560        590        620        650        690        720      3,270
                 assistance.................................
      92        Special deduction for teacher expenses......  .......  .......  .........  .........  .........  .........  .........  .........        150        160        150  .........  .........  .........  .........        150
      93        Discharge of student loan indebtedness......  .......  .......  .........  .........  .........  .........  .........  .........  .........         20         20         20         20         20         20        100
               Training, employment, and social services:
      94        Work opportunity tax credit.................      240      210        240        160         50         30         10        490         40         40         40         30         10  .........  .........         80
      95        Welfare-to-work tax credit..................       50       50         70         50         20         10  .........        150         10         10         10         10  .........  .........  .........         20
      96        Employer provided child care exclusion......  .......  .......  .........  .........  .........  .........  .........  .........        600        620        810        930        970       1010       1060      4,780
      97        Employer-provided child care credit.........  .......        8         10         10         10         10         10         50  .........  .........  .........  .........  .........  .........  .........  .........
      98        Assistance for adopted foster children......  .......  .......  .........  .........  .........  .........  .........  .........        290        310        350        380        420        460        500      2,110
      99        Adoption credit and exclusion...............  .......  .......  .........  .........  .........  .........  .........  .........        450        500        540        560        570        580        600      2,850
     100        Exclusion of employee meals and lodging       .......  .......  .........  .........  .........  .........  .........  .........        810        850        890        930        970      1,010      1,060      4,860
                 (other than military)......................
     101        Child credit \2\............................  .......  .......  .........  .........  .........  .........  .........  .........     22,400     32,710     32,810     32,900     32,860     32,790     32,670    164,030
     102        Credit for child and dependent care expenses  .......  .......  .........  .........  .........  .........  .........  .........      2,990      3,140      2,810      1,900      1,800      1,710      1,630      9,850
     103        Credit for disabled access expenditures.....       10       10         10         10         10         20         20         70         20         30         30         30         30         30         30        150
     104        Deductibility of charitable contributions,      1,170    1,230      1,290      1,360      1,430      1,500      1,570      7,150     26,200     28,440     31,260     33,140     35,360     37,910     40,640    178,310
                 other than education and health............
     105        Exclusion of certain foster care payments...  .......  .......  .........  .........  .........  .........  .........  .........        440        440        440        450        450        460        470      2,270
     106        Exclusion of parsonage allowances...........  .......  .......  .........  .........  .........  .........  .........  .........        430        460        480        510        540        580        610      2,720
 
             Health
     107       Exclusion of employer contributions for        .......  .......  .........  .........  .........  .........  .........  .........    102,250    112,160    125,690    139,060    152,560    166,190    176,740    760,240
                medical insurance premiums and medical care.
     108       Self-employed medical insurance premiums.....  .......  .......  .........  .........  .........  .........  .........  .........      3,330      3,780      4,330      4,800      5,260      5,760      6,250     26,400
     109       Medical Savings Accounts/Health Savings        .......  .......  .........  .........  .........  .........  .........  .........        620      1,050      1,830      2,650      3,510      3,960      3,910     15,860
                Accounts....................................
     110       Deductibility of medical expenses............  .......  .......  .........  .........  .........  .........  .........  .........      7,380      8,590      9,140      9,970     11,100     11,890     12,670     54,770
     111       Exclusion of interest on hospital                  400      410        430        440        450        460        480      2,260      1,470      1,610      1,730      1,820      1,950      2,010      2,070      9,580
                construction bonds..........................
     112       Deductibility of charitable contributions          150      160        160        170        180        190        200        900      2,940      3,190      3,510      3,720      3,970      4,260      4,570     20,030
                (health)....................................
     113       Tax credit for orphan drug research..........      180      210        230        260        290        330        360      1,470  .........  .........  .........  .........  .........  .........  .........  .........
     114       Special Blue Cross/Blue Shield deduction.....      400      390        360        390        340        370        430      1,890  .........  .........  .........  .........  .........  .........  .........  .........
     115       Tax credit for health insurance purchased by   .......  .......  .........  .........  .........  .........  .........  .........         50         60         40         40         40         50         50        220
                certain displaced and retired individuals
                \3\.........................................
 
             Income security
     116       Exclusion of railroad retirement system        .......  .......  .........  .........  .........  .........  .........  .........        400        400        400        400        400        400        400      2,000
                benefits....................................
     117       Exclusion of workers' compensation benefits..  .......  .......  .........  .........  .........  .........  .........  .........      5,490      5,730      5,940      6,100      6,300      6,520      6,730     31,590
     118       Exclusion of public assistance benefits        .......  .......  .........  .........  .........  .........  .........  .........        410        430        450        470        490        510        480      2,400
                (normal tax method).........................
     119       Exclusion of special benefits for disabled     .......  .......  .........  .........  .........  .........  .........  .........         60         50         50         50         40         40         40        220
                coal miners.................................
     120       Exclusion of military disability pensions....  .......  .......  .........  .........  .........  .........  .........  .........        100        100        110        110        110        120        120        570
               Net exclusion of pension contributions and
                earnings:
     121        Employer plans..............................  .......  .......  .........  .........  .........  .........  .........  .........     46,970     50,330     51,050     52,570     47,530     45,310     44,570    241,030
     122        401(k) plans................................  .......  .......  .........  .........  .........  .........  .........  .........     47,730     45,870     48,140     51,800     56,140     60,930     66,400    283,410
     123        Individual Retirement Accounts..............  .......  .......  .........  .........  .........  .........  .........  .........      7,450      7,340      7,310      6,990      6,680      6,220      5,650     32,850
     124        Low and moderate income savers credit.......  .......  .......  .........  .........  .........  .........  .........  .........        970      1,100      1,170        700  .........  .........  .........      1,870
     125        Keogh plans.................................  .......  .......  .........  .........  .........  .........  .........  .........      8,830      9,380      9,980     10,650     11,610     12,650     13,780     58,670
               Exclusion of other employee benefits:
     126        Premiums on group term life insurance.......  .......  .......  .........  .........  .........  .........  .........  .........      2,070      2,090      2,110      2,110      2,150      2,180      2,200     10,750
     127        Premiums on accident and disability           .......  .......  .........  .........  .........  .........  .........  .........        260        280        290        300        310        320        330      1,550
                 insurance..................................
     128       Small business retirement plan credit........       40       50         60         70         80         80         70        360         40         50         60         70         70         70         70        340
     129       Income of trusts to finance supplementary      .......  .......  .........  .........  .........  .........  .........  .........         20         20         20         20         20         20         20        100
                unemployment benefits.......................
     130       Special ESOP rules...........................     1600     1720       1870       2030       2190       2390       2610     11,090        320        340        350        370        390        390        390      1,890
     131       Additional deduction for the blind...........  .......  .......  .........  .........  .........  .........  .........  .........         30         40         40         40         40         40         40        200
     132       Additional deduction for the elderly.........  .......  .......  .........  .........  .........  .........  .........  .........      1,700      1,810      1,960      1,940      1,900      1,930      1,950      9,680
     133       Tax credit for the elderly and disabled......  .......  .......  .........  .........  .........  .........  .........  .........         20         20         20         20         10         10         10         70
     134       Deductibility of casualty losses.............  .......  .......  .........  .........  .........  .........  .........  .........        550        250        270        280        290        300        320      1,460
     135       Earned income tax credit \4\.................  .......  .......  .........  .........  .........  .........  .........  .........      4,893      4,983      5,423      5,168      5,287      5,480      5,597     26,955
 

[[Page 323]]

 
             Social Security
               Exclusion of social security benefits
     136        Social Security benefits for retired workers  .......  .......  .........  .........  .........  .........  .........  .........     19,200     19,480     19,770     20,470     20,900     21,260     23,720    106,120
     137        Social Security benefits for disabled.......  .......  .......  .........  .........  .........  .........  .........  .........      3,580      3,740      3,870      4,110      4,290      4,500      4,910     21,680
     138        Social Security benefits for dependents and   .......  .......  .........  .........  .........  .........  .........  .........      4,140      4,120      3,990      4,030      3,880      3,920      4,060     19,880
                 survivors..................................
 
             Veterans benefits and services
     139       Exclusion of veterans death benefits and       .......  .......  .........  .........  .........  .........  .........  .........      3,300      3,560      3,750      4,030      4,190      4,360      4,520     20,850
                disability compensation.....................
     140       Exclusion of veterans pensions...............  .......  .......  .........  .........  .........  .........  .........  .........        110        120        120        120        120        130        140        630
     141       Exclusion of GI bill benefits................  .......  .......  .........  .........  .........  .........  .........  .........        130        150        160        170        180        190        200        900
     142       Exclusion of interest on veterans housing           10       10         10         10         10         10         10         50         40         40         40         50         50         50         50        240
                bonds.......................................
 
             General purpose fiscal assistance
     143       Exclusion of interest on public purpose State    6,210    6,390      6,580      6,780      6,990      7,190      7,410     34,950     19,940     20,140     20,030     19,570     20,150     20,760     21,380    101,890
                and local bonds.............................
     144       Deductibility of nonbusiness state and local   .......  .......  .........  .........  .........  .........  .........  .........     45,290     39,090     34,620     32,890     31,850     31,760     32,120    163,240
                taxes other than on owner-occupied homes....
     145       Tax credit for corporations receiving income     1,000      900        500         50  .........  .........  .........        550  .........  .........  .........  .........  .........  .........  .........  .........
                from doing business in U.S. possessions.....
 
             Interest
     146       Deferral of interest on U.S. savings bonds...  .......  .......  .........  .........  .........  .........  .........  .........         50         50         50         50         60         70         70        300
 
             Addendum: Aid to State and local governments
               Deductibility of:
                Property taxes on owner-occupied homes......  .......  .......  .........  .........  .........  .........  .........  .........     19,930     16,590     14,830     14,110     13,400     13,000     12,800     68,140
                Nonbusiness State and local taxes other than  .......  .......  .........  .........  .........  .........  .........  .........     45,290     39,090     34,620     32,890     31,850     31,760     32,120    163,240
                 on owner-occupied homes....................
               Exclusion of interest on State and local
                bonds for:
                Public purposes.............................    6,210    6,390      6,580      6,780      6,990      7,190      7,410     34,950     19,940     20,140     20,030     19,570     20,150     20,760     21,380    101,890
                Energy facilities...........................       20       20         20         20         20         20         20        100         80         80         90         90        100        100        110        490
                Water, sewage, and hazardous waste disposal       110      110        110        120        120        120        130        600        390        420        460        480        510        530        550      2,530
                 facilities.................................
                Small-issues................................      100      100        100        100        110        110        110        530        350        390        410        440        470        480        500      2,300
                Owner-occupied mortgage subsidies...........      220      230        230        240        250        250        260      1,230        800        880        950        990      1,070      1,100      1,130      5,240
                Rental housing..............................       80       80         80         80         90         90         90        430        280        310        330        340        370        380        390      1,810
                Airports, docks, and similar facilities.....      180      190        190        200        210        210        220      1,030        670        740        790        830        890        920        950      4,380
                Student loans...............................       60       60         70         70         70         70         70        350        230        250        270        280        300        310        320      1,480
                Private nonprofit educational facilities....      210      210        220        230        230        240        250      1,170        760        840        900        950      1,020      1,050      1,080      5,000
                Hospital construction.......................      400      410        430        440        450        460        480      2,260      1,470      1,610      1,730      1,820      1,950      2,010      2,070      9,580
                Veterans' housing...........................       10       10         10         10         10         10         10         50         40         40         40         50         50         50         50        240
               Credit for holders of zone academy bonds.....       90      110        130        130        140        140        140        680  .........  .........  .........  .........  .........  .........  .........  .........
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ In addition, the partial exemption from the excise tax and excise credits for alcohol fuels result in a reduction in excise tax receipts (in millions of dollars) as follows: 2004 $1,450; 2005 $1,490; 2006 $1,550; 2007 $1,590;
  2008 $1,620; 2009 $1,650; and 2010 $1,680.
\2\ The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2004 $8,857; 2005 $13,516; 2006 $13,180; 2007 $12,549; 2008 $12,040;
  2009 $11,693 and 2010 $11,364
\3\ In addition to the receipts shown, there are outlays of $70 million in 2004, $90 million in 2005, $100 million in 2006, $120 million in 2007, $130 million in 2008, and $140 million in 2009 and $150 million in 2010 projected.
\4\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2004 $33,134;2005 $33,790; 2006 $34,132; 2007 $34,481; 2008
  $34,723; 2009 $35,517; and 2010 $36,099.
Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method.
All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.


[[Page 324]]


            Table 19-3.  INCOME TAX EXPENDITURES RANKED BY TOTAL 2006-2010 PROJECTED REVENUE EFFECTS
                                            (in millions of dollars)
----------------------------------------------------------------------------------------------------------------
                                   Provision                                          2006           2006-10
----------------------------------------------------------------------------------------------------------------
Exclusion of employer contributions for medical insurance premiums and medical     125,690          760,240
 care.........................................................................
Deductibility of mortgage interest on owner-occupied homes....................      76,030          445,540
Net exclusion of pension contributions and earnings: 401(k) plans.............      48,140          283,410
Capital gains exclusion on home sales.........................................      36,270          247,180
Net exclusion of pension contributions and earnings: Employer plans...........      51,050          241,030
Deductibility of charitable contributions, other than education and health....      32,550          185,460
Exclusion of net imputed rental income on owner-occupied homes................      29,720          185,206
Step-up basis of capital gains at death.......................................      28,760          164,420
Child credit..................................................................      32,810          164,030
Deductibility of nonbusiness State and local taxes other than on owner-             34,620          163,240
 occupied homes...............................................................
Capital gains (except agriculture, timber, iron ore, and coal)................      28,370          144,190
Exclusion of interest on life insurance savings...............................      24,070          143,610
Exclusion of interest on public purpose State and local bonds.................      26,610          136,840
Social Security benefits for retired workers..................................      19,770          106,120
Deductibility of State and local property tax on owner-occupied homes.........      14,830           68,140
Net exclusion of pension contributions and earnings: Keough plans.............       9,980           58,670
Deductibility of medical expenses.............................................       9,140           54,770
Deduction for U.S. production activities......................................       5,420           52,930
Deferral of income from controlled foreign corporations (normal tax method)...       7,440           42,740
Net exclusion of pension contributions and earnings: Individual Retirement           7,310           32,850
 Accounts.....................................................................
Exclusion of workers' compensation benefits...................................       5,940           31,590
Expensing of research and experimentation expenditures (normal tax method)....       7,920           31,330
Earned income tax credit......................................................       5,423           26,955
Self-employed medical insurance premiums......................................       4,330           26,400
Exception from passive loss rules for $25,000 of rental loss..................       4,750           22,060
Credit for low-income housing investments.....................................       4,010           22,050
Social Security benefits for disabled.........................................       3,870           21,680
Deductibility of charitable contributions (education).........................       3,680           21,390
Deductibility of charitable contributions (health)............................       3,670           20,930
Exclusion of veterans death benefits and disability compensation..............       3,750           20,850
Social Security benefits for dependents and survivors.........................       3,990           19,880
Graduated corporation income tax rate (normal tax method).....................       3,730           19,630
HOPE tax credit...............................................................       3,220           16,890
Medical Savings Accounts / Health Savings Accounts............................       1,830           15,860
Exclusion of income earned abroad by U.S. citizens............................       2,810           15,570
Exclusion of reimbursed employee parking expenses.............................       2,730           15,150
Special ESOP rules............................................................       2,220           12,980
Exclusion of benefits and allowances to armed forces personnel................       2,520           12,830
Exclusion of interest on hospital construction bonds..........................       2,160           11,840
Lifetime Learning tax credit..................................................       2,080           11,560
Inventory property sales source rules exception...............................       1,770           10,980
Premiums on group term life insurance.........................................       2,110           10,750
Credit for child and dependent care expenses..................................       2,810            9,850
Additional deduction for the elderly..........................................       1,960            9,680
Parental personal exemption for students age 19 or over.......................       2,110            8,370
Exclusion of scholarship and fellowship income (normal tax method)............       1,460            8,020
Exemption of credit union income..............................................       1,390            7,550
Excess of percentage over cost depletion, fuels...............................       1,350            7,300
Empowerment zones, Enterprise communities, and Renewal communities............       1,210            6,900
Exclusion of interest on owner-occupied mortgage subsidy bonds................       1,180            6,470
Extraterritorial income exclusion.............................................       4,270            6,370
Exclusion of interest on bonds for private nonprofit educational facilities...       1,120            6,170
Deferral of income from post 1987 installment sales...........................       1,140            6,010
Exclusion of interest for airport, dock, and similar bonds....................         980            5,410
Exclusion of certain allowances for Federal employees abroad..................         950            5,260
Exclusion of employee meals and lodging (other than military).................         890            4,860
Employer provided child care exclusion........................................         810            4,780
State prepaid tuition plans...................................................         650            4,150
Deductibility of student-loan interest........................................         800            4,100
Capital gains treatment of certain income.....................................         760            3,870
New markets tax credit........................................................         610            3,770
Credit for increasing research activities.....................................       2,140            3,670
New technology credit.........................................................         620            3,630
Exclusion for employer-provided transit passes................................         550            3,560
Exclusion of employer-provided educational assistance.........................         590            3,270
Deferred taxes for financial firms on certain income earned overseas..........       2,260            3,220
Exclusion of interest on bonds for water, sewage, and hazardous waste                  570            3,130
 facilities...................................................................
Adoption credit and exclusion.................................................         540            2,850
Exclusion of interest on small issue bonds....................................         510            2,830

[[Page 325]]

 
Exclusion of parsonage allowances.............................................         480            2,720
Alternative fuel production credit............................................       1,040            2,500
Exclusion of public assistance benefits (normal tax method)...................         450            2,400
Exclusion of certain foster care payments.....................................         440            2,270
Exclusion of interest on rental housing bonds.................................         410            2,240
Carryover basis of capital gains on gifts.....................................         290            2,170
Assistance for adopted foster children........................................         350            2,110
Exclusion of railroad retirement system benefits..............................         400            2,000
Expensing of multiperiod timber growing costs.................................         370            1,990
Special Blue Cross/Blue Shield deduction......................................         360            1,890
Low and moderate income savers credit.........................................       1,170            1,870
Deduction for higher education expenses.......................................       1,840            1,840
Exclusion of interest on student-loan bonds...................................         340            1,830
Tax incentives for preservation of historic structures........................         330            1,810
Enhanced oil recovery credit..................................................         340            1,810
Capital gains exclusion of small corporation stock............................         250            1,720
Premiums on accident and disability insurance.................................         290            1,550
Education Individual Retirement Accounts......................................         190            1,540
Expensing of certain small investments (normal tax method)....................       1,650            1,500
Tax credit for orphan drug research...........................................         230            1,470
Deductibility of casualty losses..............................................         270            1,460
Expensing of exploration and development costs, nonfuel minerals..............         250            1,290
Expensing of exploration and development costs, fuels.........................         370            1,220
Tax exemption of certain insurance companies owned by tax-exempt organizations         210            1,170
Exclusion of GI bill benefits.................................................         160              900
Small business retirement plan credit.........................................         120              700
Credit for holders of zone academy bonds......................................         130              680
Expensing of certain capital outlays..........................................         130              670
Exclusion of veterans pensions................................................         120              630
Exclusion of interest on energy facility bonds................................         110              590
Work opportunity tax credit...................................................         280              570
Exclusion of military disability pensions.....................................         110              570
Tax credit for corporations receiving income from doing business in U.S.               500              550
 possessions..................................................................
Tax credit for certain expenditures for maintaining railroad tracks...........         140              480
Exclusion of conservation subsidies provided by public utilities..............         100              470
Small life insurance company deduction........................................          80              400
Capital gains treatment of royalties on coal..................................          80              390
Capital gains treatment of certain timber income..............................          80              390
Expensing of certain multiperiod production costs.............................          70              380
Exemption of certain mutuals' and cooperatives' income........................          60              340
Deferral of interest on U.S. savings bonds....................................          50              300
Exclusion of interest on veterans housing bonds...............................          50              290
Ordinary income treatment of loss from small business corporation stock sale..          50              250
Exceptions from imputed interest rules........................................          50              250
Tax credit for health insurance purchased by certain displaced and retired              40              220
 individuals..................................................................
Exclusion of special benefits for disabled coal miners........................          50              220
Credit for disabled access expenditures.......................................          40              220
Investment credit for rehabilitation of structures (other than historic)......          40              200
Income averaging for farmers..................................................          40              200
Additional deduction for the blind............................................          40              200
Cancellation of indebtedness..................................................          30              190
Alcohol fuel credits..........................................................          30              180
Welfare-to-work tax credit....................................................          80              170
Special deduction for teacher expenses........................................         150              150
Special rules for certain film and TV production..............................         110              140
Income of trusts to finance supplementary unemployment benefits...............          20              100
Exclusion of interest on savings bonds redeemed to finance educational                  20              100
 expenses.....................................................................
Exception from passive loss limitation for working interests in oil and gas             20              100
 properties...................................................................
Discharge of student loan indebtedness........................................          20              100
Deferral of tax on shipping companies.........................................          20              100
Expensing of capital costs with respect to complying with EPA sulfur            ...............          90
 regulations..................................................................
Deferral of gain on sale of farm refiners.....................................          10               90
Tax credit for the elderly and disabled.......................................          20               70
Treatment of loans forgiven for solvent farmers...............................          10               50
Special alternative tax on small property and casualty insurance companies....          10               50
Employer-provided child care credit...........................................          10               50
Bio-Diesel tax credit.........................................................          30               40

[[Page 326]]

 
Excess of percentage over cost depletion, nonfuel minerals....................  ...............          10
Expensing of environmental remediation costs..................................          20              -30
Excess bad debt reserves of financial institutions............................         -10              -30
Exclusion of gain or loss on sale or exchange of certain brownfield sites.....  ...............        -120
Tax credit and deduction for clean-fuel burning vehicles......................          50             -180
Amortization of start-up costs (normal tax method)............................  ...............        -440
Deferral of capital gains with respect of dispositions of transmission                -620             -920
 property.....................................................................
Accelerated depreciation of buildings other than rental housing (normal tax         -4,786          -58,061
 method)......................................................................
Accelerated depreciation of machinery and equipment (normal tax method).......     -37,830         -148,650
----------------------------------------------------------------------------------------------------------------

  

           Table 19-4.  PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR ACTIVITY IN CALENDAR YEAR 2004
                                            (in millions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                                                   2004  Present
                                                 Provision                                           Value  of
                                                                                                    Revenue Loss
----------------------------------------------------------------------------------------------------------------
       1     Deferral of income from controlled foreign corporations (normal tax method).........      6,360
       2     Deferred taxes for financial firms on income earned overseas........................      2,160
       3     Expensing of research and experimentation expenditures (normal tax method)..........      2,220
       4     Expensing of exploration and development costs--fuels...............................        160
       5     Expensing of exploration and development costs--nonfuels............................  .............
       6     Expensing of multiperiod timber growing costs.......................................        200
       7     Expensing of certain multiperiod production costs--agriculture......................        140
       8     Expensing of certain capital outlays--agriculture...................................        180
       9     Deferral of income on life insurance and annuity contracts..........................     25,020
      10     Accelerated depreciation on rental housing..........................................      5,210
      11     Accelerated depreciation of buildings other than rental.............................        543
      12     Accelerated depreciation of machinery and equipment.................................     39,380
      13     Expensing of certain small investments (normal tax method)..........................        670
      14     Amortization of start-up costs (normal tax method)..................................         50
      15     Deferral of tax on shipping companies...............................................         20
      16     Credit for holders of zone academy bonds............................................        200
      17     Credit for low-income housing investments...........................................      3,870
      18     Deferral for State prepaid tuition plans............................................      1,310
      19     Exclusion of pension contributions--employer plans..................................     85,040
      20     Exclusion of 401(k) contributions...................................................     82,400
      21     Exclusion of IRA contributions and earnings.........................................      3,460
      22     Exclusion of contributions and earnings for Keogh plans.............................      3,000
      23     Exclusion of interest on public-purpose bonds.......................................     14,650
      24     Exclusion of interest on non-public purpose bonds...................................      5,680
      25     Deferral of interest on U.S. savings bonds..........................................        230
      26     Expensing of capital costs with respect to complying with EPA sulfur regulations....  .............
----------------------------------------------------------------------------------------------------------------


[[Page 327]]


                                                                                   Table 19-5.  OUTLAY EQUIVALENT ESTIMATES OF INCOME TAX EXPENDITURES
                                                                                                        (in millions of dollars)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Corporations                                                                           Individuals
                                                             ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                2004     2005      2006       2007       2008       2009       2010     2006-10      2004       2005       2006       2007       2008       2009       2010     2006-10
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
             National Defense
       1       Exclusion of benefits and allowances to armed  .......  .......  .........  .........  .........  .........  .........  .........      2,860      2,880      2,920      2,950      2,980      3,010      3,040     14,900
                forces personnel............................
 
             International affairs
       2       Exclusion of income earned abroad by U.S.      .......  .......  .........  .........  .........  .........  .........  .........      3,530      3,640      3,700      3,880      4,100      4,320      4,560     20,560
                citizens....................................
       3       Exclusion of certain allowances for Federal    .......  .......  .........  .........  .........  .........  .........  .........      1,100      1,150      1,210      1,280      1,350      1,410      1,490      6,740
                employees abroad............................
       4       Extraterritorial income exclusion............    8,470    7,950      6,570      2,800        330         50         30      9,780  .........  .........  .........  .........  .........  .........  .........  .........
       5       Inventory property sales solurce rules           2,310    2,490      2,720      3,000      3,390      3,740      4,050     16,900  .........  .........  .........  .........  .........  .........  .........  .........
                exception...................................
       6       Deferral of income from controlled foreign       7,240    7,000      7,440      7,960      8,510      9,100      9,730     42,740  .........  .........  .........  .........  .........  .........  .........  .........
                corporations (normal tax method)............
       7       Deferred taxes for financial firms on certain    2,130    2,190      2,260        960  .........  .........  .........      3,220  .........  .........  .........  .........  .........  .........  .........  .........
                income earned overseas......................
 
             General science, space, and technology
       8       Expensing of research and experimentation       -2,280    4,010      7,770      6,850      6,140      5,250      4,700     30,710        -50        100        150        140        120        110        100        620
                expenditures (normal tax method)............
       9       Credit for increasing research activities....    7,120    7,820      3,230      1,400        590        270         70      5,560         80         80         60  .........  .........  .........  .........         60
 
             Energy
      10       Expensing of exploration and development           230      350        330        250        210        180        140      1,110         40         70         60         50         40         30         30        210
                costs, fuels................................
      11       Excess of percentage over cost depletion,        1,570    1,570      1,690      1,760      1,820      1,880      1,910      9,060        140        140        150        150        170        170        180        820
                fuels.......................................
      12       Alternative fuel production credit...........    1,330    1,330      1,330      1,330        530  .........  .........      3,190         70         70         70         70         30  .........  .........        170
      13       Exception from passive loss limitation for     .......  .......  .........  .........  .........  .........  .........  .........         20         20         20         20         20         20         20        100
                working interests in oil and gas properties.
      14       Capital gains treatment of royalties on coal.  .......  .......  .........  .........  .........  .........  .........  .........        100        100        110        110        140        100         90        550
      15       Exclusion of interest on energy facility            30       30         30         30         30         30         30        150        120        120        130        130        140        140        160        700
                bonds.......................................
      16       Enhanced oil recovery credit.................      400      410        420        430        440        450        460      2,200         10         10         10         10         10         10         10         50
      17       New technology credit........................      470      680        880      1,000      1,130      1,160        970      5,140  .........  .........  .........  .........  .........  .........  .........  .........
      18       Alcohol fuel credits \1\.....................       20       20         20         20         30         30         30        130         10         10         10         10         10         10         10         50
      19       Tax credit and deduction for clean-fuel             30       40         50         30        -10        -30        -10         30         70         50         10        -50        -80        -80        -70       -270
                burning vehicles............................
      20       Exclusion of utility conservation subsidies..  .......  .......  .........  .........  .........  .........  .........  .........        130        130        130        130        130        120        120        630
 
             Natural resources and environment
      21       Expensing of exploration and development            10       10         10         10         10         10         10         50  .........  .........  .........  .........  .........  .........  .........  .........
                costs, nonfuel minerals.....................
      22       Excess of percentage over cost depletion,          280      280        300        300        320        320        340      1,580         20         20         30         30         30         30         30        150
                nonfuel minerals............................
      23       Exclusion of interest on bonds for water,          150      150        150        170        170        170        180        840        560        610        670        700        740        770        800      3,680
                sewage, and hazardous waste facilities......
      24       Capital gains treatment of certain timber      .......  .......  .........  .........  .........  .........  .........  .........        100        100        110        110        140        100         90        550
                income......................................
      25       Expensing of multiperiod timber growing costs      310      320        330        350        370        380        400      1,830        140        140        140        150        150        150        150        740
      26       Tax incentives for preservation of historic        230      240        250        260        270        290        300      1,370         70         80         80         80         90         90        100        440
                structures..................................
      27       Expensing of capital costs with respect to     .......       20  .........         10         30         70         10        120  .........  .........  .........  .........  .........  .........  .........  .........
                complying with EPA sulfur regulations.......
      28       Exclusion of gain or loss on sale or exchange  .......  .......  .........        -10        -20        -30        -50       -110  .........  .........  .........  .........        -10        -10        -20        -40
                of certain brownfield sites.................
 
             Agriculture
      29       Expensing of certain capital outlays.........       20       30         30         30         30         30         30        150        100        110        130        130        130        140        140        670
      30       Expensing of certain multiperiod production         10       10         20         20         20         20         20        100         50         60         70         70         80         80         80        380
                costs.......................................
      31       Treatment of loans forgiven for solvent        .......  .......  .........  .........  .........  .........  .........  .........         10         10         10         10         10         10         10         50
                farmers.....................................
      32       Capital gains treatment of certain income....  .......  .......  .........  .........  .........  .........  .........  .........        960      1,040      1,090      1,170      1,410      1,030        830      5,530
      33       Income averaging for farmers.................  .......  .......  .........  .........  .........  .........  .........  .........         40         40         40         40         50         50         50        230
      34       Deferral of gain on sale of farm refiners....       20       20         20         20         20         20         20        100  .........  .........  .........  .........  .........  .........  .........  .........
      35       Bio-Diesel tax credit........................  .......  .......  .........  .........  .........  .........  .........  .........  .........         40         40         10  .........  .........  .........         50
 
             Commerce and housing
               Financial institutions and insurance:
      36        Exemption of credit union income............    1,620    1,690      1,760      1,840      1,920      2,000      2,080      9,600  .........  .........  .........  .........  .........  .........  .........  .........
      37        Bad debt reserves of financial institutions.      -30      -30        -10        -10        -10  .........  .........        -30  .........  .........  .........  .........  .........  .........  .........  .........
      38        Exclusion of interest on life insurance         2,280    2,450      2,520      2,840      3,180      3,380      3,660     15,580     21,380     23,090     24,260     26,130     28,560     30,690     33,310    142,950
                 savings....................................
      39        Special alternative tax on small property          10       10         10         10         10         10         10         50  .........  .........  .........  .........  .........  .........  .........  .........
                 and casualty insurance companies...........
      40        Tax exemption of certain insurance companies      270      290        320        330        350        380        400      1,780  .........  .........  .........  .........  .........  .........  .........  .........
                 owned by tax-exempt organizations..........
      41        Small life insurance company deduction......      120      120        120        120        120        120        120        600  .........  .........  .........  .........  .........  .........  .........  .........
               Housing:
      42        Exclusion of interest on owner-occupied           310      320        320        330        350        350        360      1,710      1,160      1,270      1,380      1,430      1,550      1,590      1,640      7,590
                 mortgage subsidy bonds.....................

[[Page 328]]

 
      43        Exclusion of interest on rental housing           110      110        110        110        120        120        120        580        410        450        480        490        540        550        560      2,620
                 bonds......................................
      44        Deductibility of mortgage interest on owner-  .......  .......  .........  .........  .........  .........  .........  .........     61,450     68,870     76,030     81,990     88,990     95,770    102,760    445,540
                 occupied homes.............................
      45        Deductibility of State and local property     .......  .......  .........  .........  .........  .........  .........  .........     19,930     16,590     14,830     14,110     13,400     13,000     12,800     68,140
                 tax on owner-occupied homes................
      46        Deferral of income from post 1987                 290      290        300        300        310        310        320      1,540        810        830        840        860        880        890        890      4,360
                 installment sales..........................
      47        Capital gains exclusion on home sales.......  .......  .......  .........  .........  .........  .........  .........  .........     34,980     38,630     42,670     47,120     52,050     68,320     89,950    300,110
      48        Exclusion of net imputed rental income......  .......  .......  .........  .........  .........  .........  .........  .........     32,790     38,130     39,630     44,280     49,150     54,170     59,710    246,940
      49        Exception from passive loss rules for         .......  .......  .........  .........  .........  .........  .........  .........      5,030      4,900      4,750      4,580      4,410      4,240      4,240     22,220
                 $25,000 of rental loss.....................
      50        Credit for low-income housing investments...    3,910    4,110      4,290      4,470      4,680      4,920      5,170     23,530      1,050      1,100      1,150      1,200      1,250      1,320      1,380      6,300
      51        Accelerated depreciation on rental housing         -8      -46        -98       -143       -197       -275       -389     -1,102        758       -110       -895     -1,703     -2,500     -3,686     -5,512    -14,296
                 (normal tax method)........................
               Commerce:
      52        Cancellation of indebtedness................  .......  .......  .........  .........  .........  .........  .........  .........         30         30         30         40         40         40         40        190
      53        Exceptions from imputed interest rules......  .......  .......  .........  .........  .........  .........  .........  .........         50         50         50         50         50         50         50        250
      54        Capital gains (except agriculture, timber,    .......  .......  .........  .........  .........  .........  .........  .........     35,930     38,860     40,530     43,500     52,620     38,430     30,900    205,980
                 iron ore, and coal)........................
      55        Capital gains exclusion of small corporation  .......  .......  .........  .........  .........  .........  .........  .........        220        270        340        400        460        530        610      2,340
                 stock......................................
      56        Step-up basis of capital gains at death.....  .......  .......  .........  .........  .........  .........  .........  .........     32,260     34,860     38,340     42,180     46,390     47,410     44,910    219,230
      57        Carryover basis of capital gains on gifts...  .......  .......  .........  .........  .........  .........  .........  .........        250        280        340        350        370        530      1,060      2,650
      58        Ordinary income treatment of loss from small  .......  .......  .........  .........  .........  .........  .........  .........         60         60         60         60         60         60         60        300
                 business corporation stock sale............
      59        Accelerated depreciation of buildings other    -2,980   -3,850     -4,340     -6,170     -9,220    -12,620    -17,320    -49,670       -280       -330       -450       -760     -1,140     -2,110     -3,930     -8,390
                 than rental housing (normal tax method)....
      60        Accelerated depreciation of machinery and      37,080   -8,780    -32,880    -26,480    -23,310    -21,260    -20,290   -124,230      7,610     -2,220     -4,950     -4,440     -4,640     -4,930     -5,470    -24,430
                 equipment (normal tax method)..............
      61        Expensing of certain small investments            680    1,780        680       -390       -140        -30        -10        120        840      3,040        970       -100        110        170        240      1,400
                 (normal tax method)........................
      62        Amortization of start-up costs (normal tax         70       40  .........        -40        -80       -120       -150       -390         10         10  .........  .........        -10        -20        -20        -50
                 method)....................................
      63        Graduated corporation income tax rate           3,760    4,910      5,730      5,880      6,030      6,180      6,360     30,180  .........  .........  .........  .........  .........  .........  .........  .........
                 (normal tax method)........................
      64        Exclusion of interest on small issue bonds..      140      140        140        140        150        150        150        730        510        560        590        640        680        700        720      3,330
      65        Deduction for U.S. production activities....  .......    3,420      5,780      9,480     12,170     12,620     17,150     57,200  .........        950      1,460      2,180      2,800      2,940      4,000     13,380
      66        Special rules for certain film and TV         .......       70         90         70         60        -30        -70        120  .........         20         20         20         10        -10        -20         20
                 production.................................
 
             Transportation
      67       Deferral of tax on shipping companies........       20       20         20         20         20         20         20        100  .........  .........  .........  .........  .........  .........  .........  .........
      68       Exclusion of reimbursed employee parking       .......  .......  .........  .........  .........  .........  .........  .........      3,190      3,350      3,530      3,710      3,900      4,100      4,300     19,540
                expenses....................................
      69       Exclusion for employer-provided transit        .......  .......  .........  .........  .........  .........  .........  .........        510        600        690        790        890        980      1,100      4,450
                passes......................................
      70       Tax credit for certain expenditures for        .......      100        190        200        140         70         30        630  .........  .........  .........  .........  .........  .........  .........  .........
                maintaining railroad tracks.................
 
             Community and regional development
      71       Investment credit for rehabilitation of             20       20         20         20         20         20         20        100         20         20         20         20         20         20         20        100
                structures (other than historic)............
      72       Exclusion of interest for airport, dock, and       250      260        260        280        290        290        310      1,430        970      1,070      1,140      1,200      1,290      1,330      1,380      6,340
                similar bonds...............................
      73       Exemption of certain mutuals' and                   70       70         70         80         80         80         80        390  .........  .........  .........  .........  .........  .........  .........  .........
                cooperatives' income........................
      74       Empowerment zones, Enterprise communities and      280      290        310        340        370        420        190      1,630        800        830        900      1,000      1,110      1,320        940      5,270
                Renewal communities.........................
      75       New markets tax credit.......................       70      110        150        210        220        200        170        950        220        320        460        620        650        590        500      2,820
      76       Expensing of environmental remediation costs.       90       80         20        -20        -20        -20        -20        -60         20         20  .........  .........  .........  .........  .........  .........
      77       Deferral of capital gains with respect of      .......     -490       -620       -530       -230        100        360       -920  .........  .........  .........  .........  .........  .........  .........  .........
                dispositions of transmission property.......
 
             Education, training, employment, and social
              services
               Education:
      78        Exclusion of scholarship and fellowship       .......  .......  .........  .........  .........  .........  .........  .........      1,450      1,540      1,610      1,680      1,760      1,840      1,930      8,820
                 income (normal tax method).................
      79        HOPE tax credit.............................  .......  .......  .........  .........  .........  .........  .........  .........      4,260      4,380      4,130      4,260      4,300      4,380      4,590     21,660
      80        Lifetime Learning tax credit................  .......  .......  .........  .........  .........  .........  .........  .........      2,800      2,730      2,660      2,960      3,000      3,050      3,150     14,820
      81        Education Individual Retirement Accounts....  .......  .......  .........  .........  .........  .........  .........  .........        130        180        240        310        390        470        570      1,980
      82        Deductibility of student-loan interest......  .......  .......  .........  .........  .........  .........  .........  .........        900        930        960        970        980        990      1,000      4,900
      83        Deduction for higher education expenses.....  .......  .......  .........  .........  .........  .........  .........  .........      1,640      2,340      2,360  .........  .........  .........  .........      2,360
      84        State prepaid tuition plans.................  .......  .......  .........  .........  .........  .........  .........  .........        270        620        830        950      1,070      1,180      1,300      5,330
      85        Exclusion of interest on student-loan bonds.       80       80        100        100        100        100        100        500        330        360        390        410        430        450        460      2,140
      86        Exclusion of interest on bonds for private        290      290        310        320        320        330        350      1,630      1,100      1,220      1,300      1,380      1,480      1,520      1,560      7,240
                 nonprofit educational facilities...........
      87        Credit for holders of zone academy bonds....      130      160        180        190        200        200        190        960  .........  .........  .........  .........  .........  .........  .........  .........

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      88        Exclusion of interest on savings bonds        .......  .......  .........  .........  .........  .........  .........  .........         20         20         20         20         20         20         20        100
                 redeemed to finance educational expenses...
      89        Parental personal exemption for students age  .......  .......  .........  .........  .........  .........  .........  .........      3,550      2,960      2,340      2,040      1,800      1,600      1,480      9,260
                 19 or over.................................
      90        Deductibility of charitable contributions         510      540        560        590        620        660        700      3,130      3,180      2,880      3,120      3,440      3,640      3,890      3,890     17,980
                 (education)................................
      91        Exclusion of employer-provided educational    .......  .......  .........  .........  .........  .........  .........  .........        650        690        730        770        810        850        890      4,050
                 assistance.................................
      92        Special deduction for teacher expenses......  .......  .......  .........  .........  .........  .........  .........  .........        190        200        180  .........  .........  .........  .........        180
      93        Discharge of student loan indebtedness......  .......  .......  .........  .........  .........  .........  .........  .........  .........         20         20         20         20         20         20        100
               Training, employment, and social services:
      94        Work opportunity tax credit.................      240      210        240        160         50         30         10        490         40         40         40         30         10  .........  .........         80
      95        Welfare-to-work tax credit..................       50       50         70         50         20         10  .........        150         10         10         10         10  .........  .........  .........         20
      96        Exclusion of employer provided child care...  .......  .......  .........  .........  .........  .........  .........  .........        800        830      1,080      1,240      1,290      1,350      1,410      6,370
      97        Employer-provided child care................        6       11         13         15         17         18         20         83  .........  .........  .........  .........  .........  .........  .........  .........
      98        Assistance for adopted foster children......  .......  .......  .........  .........  .........  .........  .........  .........        330        350        390        430        470        520        570      2,380
      99        Adoption credit and exclusion...............  .......  .......  .........  .........  .........  .........  .........  .........        570        640        690        710        730        750        760      3,640
     100        Exclusion of employee meals and lodging       .......  .......  .........  .........  .........  .........  .........  .........        990      1,030      1,080      1,130      1,180      1,230      1,290      5,910
                 (other than military)......................
     101        Child credit \2\............................  .......  .......  .........  .........  .........  .........  .........  .........     25,950     39,010     32,280     31,960     31,450     31,450     31,450    158,590
     102        Credit for child and dependent care expenses  .......  .......  .........  .........  .........  .........  .........  .........      3,990      4,190      3,750      2,530      2,400      2,280      2,170     13,130
     103        Credit for disabled access expenditures.....       20       20         20         20         20         20         20        100         30         30         40         40         40         40         40        200
     104        Deductibility of charitable contributions,      1,170    1,230      1,290      1,360      1,430      1,500      1,570      7,150     26,200     28,440     31,260     33,140     35,360     37,910     37,910    175,580
                 other than education and health............
     105        Exclusion of certain foster care payments...  .......  .......  .........  .........  .........  .........  .........  .........        510        510        510        510        520        530        540      2,610
     106        Exclusion of parsonage allowances...........  .......  .......  .........  .........  .........  .........  .........  .........        520        550        590        630        660        710        750      3,340
 
             Health
     107       Exclusion of employer contributions for        .......  .......  .........  .........  .........  .........  .........  .........    126,660    139,650    158,980    177,050    195,850    214,730    228,090    974,700
                medical insurance premiums and medical care.
     108       Self-employed medical insurance premiums.....  .......  .......  .........  .........  .........  .........  .........  .........      4,140      4,730      5,480      6,110      6,700      7,360      7,990     33,640
     109       Medical Savings Accounts Health Savings        .......  .......  .........  .........  .........  .........  .........  .........        520      1,040      1,670      2,450      3,150      3,540      3,520     14,330
                Accounts....................................
     110       Deductibility of medical expenses............  .......  .......  .........  .........  .........  .........  .........  .........      7,930      9,280      9,880     10,780     12,050     12,910     13,750     59,370
     111       Exclusion of interest on hospital                  560      570        600        610        620        640        670      3,140      2,130      2,330      2,510      2,640      2,820      2,910      3,000     13,880
                construction bonds..........................
     112       Deductibility of charitable contributions          150      160        160        170        180        190        200        900      2,940      3,190      3,510      3,720      3,970      4,260      4,260     19,720
                (health)....................................
     113       Tax credit for orphan drug research..........      280      310        350        390        430        480        540      2,190  .........  .........  .........  .........  .........  .........  .........  .........
     114       Special Blue Cross/Blue Shield deduction.....      570      560        510        560        490        530        610      2,700  .........  .........  .........  .........  .........  .........  .........  .........
     115       Tax credit for health insurance purchased by   .......  .......  .........  .........  .........  .........  .........  .........         50         60         40         40         50         50         50        230
                certain displaced and retired individuals
                \3\.........................................
 
             Income security
     116       Exclusion of railroad retirement system        .......  .......  .........  .........  .........  .........  .........  .........        400        400        400        400        400        400        400      2,000
                benefits....................................
     117       Exclusion of workers' compensation benefits..  .......  .......  .........  .........  .........  .........  .........  .........      5,490      5,730      5,940      6,100      6,300      6,520      6,730     31,590
     118       Exclusion of public assistance benefits        .......  .......  .........  .........  .........  .........  .........  .........        410        430        450        470        490        510        480      2,400
                (normal tax method).........................
     119       Exclusion of special benefits for disabled     .......  .......  .........  .........  .........  .........  .........  .........         60         50         50         50         40         40         40        220
                coal miners.................................
     120       Exclusion of military disability pensions....  .......  .......  .........  .........  .........  .........  .........  .........        100        100        110        110        110        120        120        570
               Net exclusion of pension contributions and
                earnings:
     121        Employer plans..............................  .......  .......  .........  .........  .........  .........  .........  .........     57,280     61,380     62,260     64,110     57,960     55,260     54,350    293,940
     122        401(k) plans................................  .......  .......  .........  .........  .........  .........  .........  .........     58,210     55,940     58,710     63,170     68,460     74,300     80,980    345,620
     123        Individual Retirement Accounts..............  .......  .......  .........  .........  .........  .........  .........  .........      8,470      9,300      9,140      9,120      8,730      8,340      7,790     43,120
     124        Low and moderate income savers credit.......  .......  .......  .........  .........  .........  .........  .........  .........      1,150      1,310      1,380        830  .........  .........  .........      2,210
     125        Keogh plans.................................  .......  .......  .........  .........  .........  .........  .........  .........     11,170     11,800     12,500     13,290     14,490     15,780     17,200     73,260
               Exclusion of other employee benefits:
     126        Premiums on group term life insurance.......  .......  .......  .........  .........  .........  .........  .........  .........      2,660      2,690      2,700      2,700      2,750      2,790      2,830     13,770
     127        Premiums on accident and disability           .......  .......  .........  .........  .........  .........  .........  .........        350        370        390        400        410        430        440      2,070
                 insurance..................................
     128       Small business retirement plan credit........       60       70         90        100        110        110        100        510         50         70         80        100        100        100        100        480
     129       Income of trusts to finance supplementary      .......  .......  .........  .........  .........  .........  .........  .........         20         20         20         20         20         20         20        100
                unemployment benefits.......................
     130       Special ESOP rules...........................    2,550    2,740      2,970      3,210      3,460      3,750      4,070     17,460        510        540        550        590        620        610        610      2,980
     131       Additional deduction for the blind...........  .......  .......  .........  .........  .........  .........  .........  .........         40         40         50         40         50         50         50        240
     132       Additional deduction for the elderly.........  .......  .......  .........  .........  .........  .........  .........  .........      2,060      2,190      2,370      2,350      2,290      2,330      2,360     11,700
     133       Tax credit for the elderly and disabled......  .......  .......  .........  .........  .........  .........  .........  .........         20         20         20         20         20         10         10         80
     134       Deductibility of casualty losses.............  .......  .......  .........  .........  .........  .........  .........  .........        610        270        290        280        290        300        320      1,480
     135       Earned income tax credit \4\.................  .......  .......  .........  .........  .........  .........  .........  .........      5,437      5,536      6,026      5,742      5,874      6,089      5,868     29,599
 
             Social Security
               Exclusion of social security benefits:

[[Page 330]]

 
     136        Social Security benefits for retired workers  .......  .......  .........  .........  .........  .........  .........  .........     19,200     19,480     19,770     20,470     20,900     21,260     23,720    106,120
     137        Social Security benefits for disabled.......  .......  .......  .........  .........  .........  .........  .........  .........      3,580      3,740      3,870      4,110      4,290      4,500      4,910     21,680
     138        Social Security benefits for dependents and   .......  .......  .........  .........  .........  .........  .........  .........      4,140      4,120      3,990      4,030      3,880      3,920      4,060     19,880
                 survivors..................................
 
             Veterans benefits and services
     139       Exclusion of veterans death benefits and       .......  .......  .........  .........  .........  .........  .........  .........      3,300      3,560      3,750      4,030      4,190      4,360      4,520     20,850
                disability compensation.....................
     140       Exclusion of veterans pensions...............  .......  .......  .........  .........  .........  .........  .........  .........        110        120        120        120        120        130        140        630
     141       Exclusion of GI bill benefits................  .......  .......  .........  .........  .........  .........  .........  .........        130        150        160        170        180        190        200        900
     142       Exclusion of interest on veterans housing           10       10         10         10         10         10         10         50         60         60         60         70         70         70         70        340
                bonds.......................................
 
             General purpose fiscal assistance
     143       Exclusion of interest on public purpose State    8,620    8,870      9,130      9,410      9,700      9,980     10,280     48,500     28,880     29,170     29,010     28,340     29,180     30,070     30,970    147,570
                and local bonds.............................
     144       Deductibility of nonbusiness state and local   .......  .......  .........  .........  .........  .........  .........  .........     45,290     39,090     34,620     32,890     31,850     31,760     32,120    163,240
                taxes other than on owner-occupied homes....
     145       Tax credit for corporations receiving income     1,430    1,290        720         70  .........  .........  .........        790  .........  .........  .........  .........  .........  .........  .........  .........
                from doing business in U.S. possessions.....
 
             Interest
     146       Deferral of interest on U.S. savings bonds...  .......  .......  .........  .........  .........  .........  .........  .........         50         50         50         50         60         70         70        300
 
             Addendum: Aid to State and local governments:
               Deductibility of:
                Property taxes on owner-occupied homes......  .......  .......  .........  .........  .........  .........  .........  .........     19,930     16,590     14,830     14,110     13,400     13,000     12,800     68,140
                Nonbusiness State and local taxes other than  .......  .......  .........  .........  .........  .........  .........  .........     45,290     39,090     34,620     32,890     31,850     31,760     32,120    163,240
                 on owner-occupied homes....................
               Exclusion of interest on State and local
                bonds for:
                Public purposes.............................    8,620    8,870      9,130      9,410      9,700      9,980     10,280     48,500     28,880     29,170     29,010     28,340     29,180     30,070     30,970    147,570
                Energy facilities...........................       30       30         30         30         30         30         30        150        120        120        130        130        140        140        160        700
                Water, sewage, and hazardous waste disposal       150      150        150        170        170        170        180        840        560        610        670        700        740        770        800      3,680
                 facilities.................................
                Small-issues................................      140      140        140        140        150        150        150        730        510        560        590        640        680        700        720      3,330
                Owner-occupied mortgage subsidies...........      310      320        320        330        350        350        360      1,710      1,160      1,270      1,380      1,430      1,550      1,590      1,640      7,590
                Rental housing..............................      110      110        110        110        120        120        120        580        410        450        480        490        540        550        560      2,620
                Airports, docks, and similar facilities.....      250      260        260        280        290        290        310      1,430        970      1,070      1,140      1,200      1,290      1,330      1,380      6,340
                Student loans...............................       80       80        100        100        100        100        100        500        330        360        390        410        430        450        460      2,140
                Private nonprofit educational facilities....      290      290        310        320        320        330        350      1,630      1,100      1,220      1,300      1,380      1,480      1,520      1,560      7,240
                Hospital construction.......................      560      570        600        610        620        640        670      3,140      2,130      2,330      2,510      2,640      2,820      2,910      3,000     13,880
                Veterans' housing...........................       10       10         10         10         10         10         10         50         60         60         60         70         70         70         70        340
               Credit for holders of zone academy bonds.....      130      160        180        190        200        200        190        960  .........  .........  .........  .........  .........  .........  .........  .........
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ In addition, the partial exemption from the excise tax and excise credits for alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as follows: 2004 $1,450; 2005 $1,490; 2006 $1,550; 2007 $1,590;
  2008 $1,620; 2009 $1,650; and 2010 $1,680.
\2\ The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2004 $8,857; 2005 $13,516; 2006 $13,180; 2007 $12,549; 2008 $12,040;
  2009 $11,693 and 2010 $11,364
\3\ In addition to the receipts shown, there are outlays of $70 million in 2004, $90 million in 2005, $100 million in 2006, $120 million in 2007, $130 million in 2008, and $140 million in 2009 and $150 million projected.
\4\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2004 $33,134;2005 $33,790; 2006 $34,132; 2007 $34,481; 2008
  $34,723; 2009 $35,517; and 2010 $36,099.


                        Tax Expenditure Baselines

  A tax expenditure is an exception to baseline provisions of the tax 
structure. The 1974 Congressional Budget Act, which mandated the tax 
expenditure budget, did not specify the baseline provisions of the tax 
law. As noted previously, deciding whether provisions are exceptions, 
therefore, is a matter of judgment. As in prior years, most of this 
year's tax expenditure estimates are presented using two baselines: the 
normal tax baseline and the reference tax law baseline. An exception is 
provided for the lower tax rate on dividends and capital gains on 
corporate shares as discussed below.
  The normal tax baseline is patterned on a comprehensive income tax, 
which defines income as the sum of consumption and the change in net 
wealth in a given period of time. The normal tax baseline allows 
personal exemptions, a standard deduction, and deductions of the 
expenses incurred in earning income. It is not limited to a particular 
structure of tax rates, or by a specific definition of the taxpaying 
unit.
  In the case of income taxes, the reference tax law baseline is also 
patterned on a comprehensive income tax, but it is closer to existing 
law. Tax expenditures under the reference law baseline are generally tax 
expenditures under the normal tax baseline, but the reverse is not 
always true.
  Both the normal and reference tax baselines allow several major 
departures from a pure comprehensive income tax. For example, under the 
normal and reference tax baselines:

[[Page 331]]

    Income is taxable only when it is realized in exchange. 
          Thus, neither the deferral of tax on unrealized capital gains 
          nor the tax exclusion of imputed income (such as the rental 
          value of owner-occupied housing or farmers' consumption of 
          their own produce) is regarded as a tax expenditure. Both 
          accrued and imputed income would be taxed under a 
          comprehensive income tax.
    A comprehensive income tax would generally not exclude from 
          the tax base amounts for personal exemptions or a standard 
          deduction, except perhaps to ease tax administration.
    There generally is a separate corporate income tax.
    Tax rates are allowed to vary with marital status.
    Values of assets and debt are not generally adjusted for 
          inflation. A comprehensive income tax would adjust the cost 
          basis of capital assets and debt for changes in the price 
          level during the time the assets or debt are held. Thus, under 
          a comprehensive income tax baseline, the failure to take 
          account of inflation in measuring depreciation, capital gains, 
          and interest income would be regarded as a negative tax 
          expenditure (i.e., a tax penalty), and failure to take account 
          of inflation in measuring interest costs would be regarded as 
          a positive tax expenditure (i.e., a tax subsidy).

  Although the reference law and normal tax baselines are generally 
similar, areas of difference include:

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

            Income subject to the tax. Income subject to tax is defined 
          as gross income less the costs of earning that income. The 
          Federal income tax defines gross income to include: (1) 
          consideration received in the exchange of goods and services, 
          including labor services or property; and (2) the taxpayer's 
          share of gross or net income earned and/or reported by another 
          entity (such as a partnership). Under the reference tax rules, 
          therefore, gross income does not include gifts defined as 
          receipts of money or property that are not consideration in an 
          exchange or most transfer payments, which can be thought of as 
          gifts from the Government. \1\ The normal tax baseline also 
          excludes gifts between individuals from gross income. Under 
          the normal tax baseline, however, all cash transfer payments 
          from the Government to private individuals are counted in 
          gross income, and exemptions of such transfers from tax are 
          identified as tax expenditures. The costs of earning income 
          are generally deductible in determining taxable income under 
          both the reference and normal tax baselines. \2\
---------------------------------------------------------------------------
  \1\ Gross income does, however, include transfer payments associated 
with past employment, such as Social Security benefits.
  \2\ In the case of individuals who hold ``passive'' equity interests 
in businesses, however, the pro-rata shares of sales and expense 
deductions reportable in a year are limited. A passive business activity 
is defined to be one in which the holder of the interest, usually a 
partnership interest, does not actively perform managerial or other 
participatory functions. The taxpayer may generally report no larger 
deductions for a year than will reduce taxable income from such 
activities to zero. Deductions in excess of the limitation may be taken 
in subsequent years, or when the interest is liquidated. In addition, 
costs of earning income may be limited under the alternative minimum 
tax.
---------------------------------------------------------------------------
            Capital recovery. Under the reference tax law baseline no 
          tax expenditures arise from accelerated depreciation. Under 
          the normal tax baseline, the depreciation allowance for 
          property is computed using estimates of economic depreciation. 
          The latter represents a change in the calculation of the tax 
          expenditure under normal law first made in the 2004 Budget. 
          The Appendix provides further details on the new methodology 
          and how it differs from the prior methodology.

            Treatment of foreign income. Both the normal and reference 
          tax baselines allow a tax credit for foreign income taxes paid 
          (up to the amount of U.S. income taxes that would otherwise be 
          due), which prevents double taxation of income earned abroad. 
          Under the normal tax method, however, controlled foreign 
          corporations (CFCs) are not regarded as entities separate from 
          their controlling U.S. shareholders. Thus, the deferral of tax 
          on income received by CFCs is regarded as a tax expenditure 
          under this method. In contrast, except for tax haven 
          activities, the reference law baseline follows current law in 
          treating CFCs as separate taxable entities whose income is not 
          subject to U.S. tax until distributed to U.S. taxpayers. Under 
          this baseline, deferral of tax on CFC income is not a tax 
          expenditure because U.S. taxpayers generally are not taxed on 
          accrued, but unrealized, income.

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

                  Double Taxation of Corporate Profits

  In a gradual transition to a more economically neutral tax system 
where corporate income is subject to a single layer of tax, the lower 
tax rates on dividends and capital gains on corporate equity have not 
been considered tax preferences since the 2005 Budget. Thus, the 
difference between ordinary tax rates and the lower tax rates on 
dividends, introduced by the Jobs and Growth Tax Relief Reconciliation 
Act of 2003 (JGTRRA), does not give rise to a tax expenditure. 
Similarly, the lower capital gains tax rates applied to gains realized 
from the disposition of corporate equity do not give rise to a tax 
expenditure as well. As a

[[Page 332]]

consequence, tax expenditure estimates for the lower tax rates on 
capital, step-up in basis, and the inside build-up on pension assets, 
401k plans, IRAs, among others, are limited to capital gains from 
sources other than corporate equity. The Appendix provides a greater 
discussion of alternative baselines.

    Performance Measures and the Economic Effects of Tax Expenditures

  The Government Performance and Results Act of 1993 (GPRA) directs 
Federal agencies to develop annual and strategic plans for their 
programs and activities. These plans set out performance objectives to 
be achieved over a specific time period. Most of these objectives will 
be achieved through direct expenditure programs. Tax expenditures, 
however, may also contribute to achieving these goals. The report of the 
Senate Governmental Affairs Committee on GPRA \3\ calls on the Executive 
branch to undertake a series of analyses to assess the effect of 
specific tax expenditures on the achievement of agencies' performance 
objectives.
---------------------------------------------------------------------------
  \3\ Committee on Government Affairs, United States Senate, 
``Government Performance and Results Act of 1993'' (Report 103-58, 
1993).
---------------------------------------------------------------------------
  The Executive Branch is continuing to focus on the availability of 
data needed to assess the effects of the tax expenditures designed to 
increase savings. Treasury's Office of Tax Analysis and Statistics of 
Income Division (IRS) have developed a new sample of individual income 
tax filers as one part of this effort. This new ``panel'' sample will 
follow the same taxpayers over a period of at least ten years. The first 
year of this panel sample was drawn from tax returns filed in 2000 for 
tax year 1999. The sample will capture the changing demographic and 
economic circumstances of individuals and the effects of changes in tax 
law over an extended period of time. Data from the sample will therefore 
permit more extensive, and better, analyses of many tax provisions than 
can be performed using only annual (``cross-section'') data. In 
particular, data from this panel sample will enhance our ability to 
analyze the effect of tax expenditures designed to increase savings. 
Other efforts by OMB, Treasury, and other agencies to improve data 
available for the analysis of savings tax expenditures will continue 
over the next several years.
  Comparison of tax expenditure, spending, and regulatory policies. Tax 
expenditures by definition work through the tax system and, 
particularly, the income tax. Thus, they may be relatively advantageous 
policy approaches when the benefit or incentive is related to income and 
is intended to be widely available. \4\ Because there is an existing 
public administrative and private compliance structure for the tax 
system, the incremental administrative and compliance costs for a tax 
expenditure may be low in many cases. In addition, some tax expenditures 
actually simplify the operation of the tax system, (for example, the 
exclusion for up to $500,000 of capital gains on home sales). Tax 
expenditures also implicitly subsidize certain activities. Spending, 
regulatory or tax-disincentive policies can also modify behavior, but 
may have different economic effects. Finally, a variety of tax 
expenditure tools can be used e.g., deductions; credits; exemptions; 
deferrals; floors; ceilings; phase-ins; phase-outs; dependent on income, 
expenses, or demographic characteristics (age, number of family members, 
etc.). This wide range means that tax expenditures can be flexible and 
can have very different economic effects.
---------------------------------------------------------------------------
  \4\ Although this section focuses upon tax expenditures under the 
income tax, tax expenditures also arise under the unified transfer, 
payroll, and excise tax systems. Such provisions can be useful when they 
relate to the base of those taxes, such as an excise tax exemption for 
certain types of consumption deemed meritorious.
---------------------------------------------------------------------------
  Tax expenditures also have limitations. In many cases they add to the 
complexity of the tax system, which raises both administrative and 
compliance costs. For example, targeting personal exemptions and credits 
can complicate filing and decision-making. The income tax system may 
have little or no contact with persons who have no or very low incomes, 
and does not require information on certain characteristics of 
individuals used in some spending programs, such as wealth. These 
features may reduce the effectiveness of tax expenditures for addressing 
certain income-transfer objectives. Tax expenditures also generally do 
not enable the same degree of agency discretion as an outlay program. 
For example, grant or direct Federal service delivery programs can 
prioritize activities to be addressed with specific resources in a way 
that is difficult to emulate with tax expenditures. Finally, tax 
expenditures may not receive the same level of scrutiny afforded to 
other programs.
  Outlay programs have advantages where direct Government service 
provision is particularly warranted such as equipping and providing the 
armed forces or administering the system of justice. Outlay programs may 
also be specifically designed to meet the needs of low-income families 
who would not otherwise be subject to income taxes or need to file a tax 
return. Outlay programs may also receive more year-to-year oversight and 
fine tuning, through the legislative and executive budget process. In 
addition, many different types of spending programs including direct 
Government provision; credit programs; and payments to State and local 
governments, the private sector, or individuals in the form of grants or 
contracts provide flexibility for policy design. On the other hand, 
certain outlay programs such as direct Government service provision may 
rely less directly on economic incentives and private-market provision 
than tax incentives, which may reduce the relative efficiency of 
spending programs for some goals. Spending programs also require 
resources to be raised via taxes, user charges, or Government borrowing, 
which can impose further costs by diverting resources from their most 
efficient uses. Finally, spending programs, particularly on the 
discretionary side, may respond less readily to changing activity levels 
and economic conditions than tax expenditures.
  Regulations have more direct and immediate effects than outlay and 
tax-expenditure programs because regulations apply directly and 
immediately to the regulated party (i.e., the intended actor) generally 
in the private sector. Regulations can also be fine-tuned more

[[Page 333]]

quickly than tax expenditures, because they can often be changed as 
needed by the executive branch without legislation. Like tax 
expenditures, regulations often rely largely upon voluntary compliance, 
rather than detailed inspections and policing. As such, the public 
administrative costs tend to be modest relative to the private resource 
costs associated with modifying activities. Historically, regulations 
have tended to rely on proscriptive measures, as opposed to economic 
incentives. This reliance can diminish their economic efficiency, 
although this feature can also promote full compliance where (as in 
certain safety-related cases) policymakers believe that trade-offs with 
economic considerations are not of paramount importance. Also, 
regulations generally do not directly affect Federal outlays or 
receipts. Thus, like tax expenditures, they may escape the degree of 
scrutiny that outlay programs receive. However, major regulations are 
subjected to a formal regulatory analysis that goes well beyond the 
analysis required for outlays and tax-expenditures. To some extent, the 
GPRA requirement for performance evaluation will address this lack of 
formal analysis.
  Some policy objectives are achieved using multiple approaches. For 
example, minimum wage legislation, the earned income tax credit, and the 
food stamp program are regulatory, tax expenditure, and direct outlay 
programs, respectively, all having the objective of improving the 
economic welfare of low-wage workers.
  Tax expenditures, like spending and regulatory programs, have a 
variety of objectives and effects. When measured against a comprehensive 
income tax, for example, these include: encouraging certain types of 
activities (e.g., saving for retirement or investing in certain 
sectors); increasing certain types of after-tax income (e.g., favorable 
tax treatment of Social Security income); reducing private compliance 
costs and Government administrative costs (e.g., the exclusion for up to 
$500,000 of capital gains on home sales); and promoting tax neutrality 
(e.g., accelerated depreciation in the presence of inflation). Some of 
these objectives are well suited to quantitative measurement, while 
others are less well suited. Also, many tax expenditures, including 
those cited above, may have more than one objective. For example, 
accelerated depreciation may encourage investment. In addition, the 
economic effects of particular provisions can extend beyond their 
intended objectives (e.g., a provision intended to promote an activity 
or raise certain incomes may have positive or negative effects on tax 
neutrality).
  Performance measurement is generally concerned with inputs, outputs, 
and outcomes. In the case of tax expenditures, the principal input is 
usually the revenue effect. Outputs are quantitative or qualitative 
measures of goods and services, or changes in income and investment, 
directly produced by these inputs. Outcomes, in turn, represent the 
changes in the economy, society, or environment that are the ultimate 
goals of programs.
  Thus, for a provision that reduces taxes on certain investment 
activity, an increase in the amount of investment would likely be a key 
output. The resulting production from that investment, and, in turn, the 
associated improvements in national income, welfare, or security, could 
be the outcomes of interest. For other provisions, such as those 
designed to address a potential inequity or unintended consequence in 
the tax code, an important performance measure might be how they change 
effective tax rates (the discounted present-value of taxes owed on new 
investments or incremental earnings) or excess burden (an economic 
measure of the distortions caused by taxes). Effects on the incomes of 
members of particular groups may be an important measure for certain 
provisions.
  An overview of evaluation issues by budget function. The discussion 
below considers the types of measures that might be useful for some 
major programmatic groups of tax expenditures. The discussion is 
intended to be illustrative and not all encompassing. However, it is 
premised on the assumption that the data needed to perform the analysis 
are available or can be developed. In practice, data availability is 
likely to be a major challenge, and data constraints may limit the 
assessment of the effectiveness of many provisions. In addition, such 
assessments can raise significant challenges in economic modeling.
  National defense. Some tax expenditures are intended to assist 
governmental activities. For example, tax preferences for military 
benefits reflect, among other things, the view that benefits such as 
housing, subsistence, and moving expenses are intrinsic aspects of 
military service, and are provided, in part, for the benefit of the 
employer, the U.S. Government. Tax benefits for combat service are 
intended to reduce tax burdens on military personnel undertaking 
hazardous service for the Nation. A portion of the tax expenditure 
associated with foreign earnings is targeted to benefit U.S. Government 
civilian personnel working abroad by offsetting the living costs that 
can be higher than those in the United States. These tax expenditures 
should be considered together with direct agency budget costs in making 
programmatic decisions.
  International affairs. Tax expenditures are also aimed at goals such 
as tax neutrality. These include the exclusion for income earned abroad 
by nongovernmental employees and exclusions for income of U.S.-
controlled foreign corporations. Measuring the effectiveness of these 
provisions raises challenging issues.
  General science, space and technology; energy; natural resources and 
the environment; agriculture; and commerce and housing. A series of tax 
expenditures reduces the cost of investment, both in specific activities 
such as research and experimentation, extractive industries, and certain 
financial activities and more generally, through accelerated 
depreciation for plant and equipment. These provisions can be evaluated 
along a number of dimensions. For example, it could be useful to 
consider the strength of the incentives by measuring their effects on 
the cost of capital (the interest rate which investments must yield to 
cover their costs) and effective tax rates. The impact of these 
provisions on the amounts of corresponding forms of investment (e.g.,

[[Page 334]]

research spending, exploration activity, equipment) might also be 
estimated. In some cases, such as research, there is evidence that the 
investment can provide significant positive externalities that is, 
economic benefits that are not reflected in the market transactions 
between private parties. It could be useful to quantify these 
externalities and compare them with the size of tax expenditures. 
Measures could also indicate the effects on production from these 
investments such as numbers or values of patents, energy production and 
reserves, and industrial production. Issues to be considered include the 
extent to which the preferences increase production (as opposed to 
benefitting existing output) and their cost-effectiveness relative to 
other policies. Analysis could also consider objectives that are more 
difficult to measure but still are ultimate goals, such as promoting the 
Nation's technological base, energy security, environmental quality, or 
economic growth. Such an assessment is likely to involve tax analysis as 
well as consideration of non-tax matters such as market structure, 
scientific, and other information (such as the effects of increased 
domestic fuel production on imports from various regions, or the effects 
of various energy sources on the environment).
  Housing investment also benefits from tax expenditures. The imputed 
net rental income from owner-occupied housing is excluded from the tax 
base. The mortgage interest deduction and property tax deduction on 
personal residences also are reported as tax expenditures because the 
value of owner-occupied housing services is not included in a taxpayer's 
taxable income. Taxpayers also may exclude up to $500,000 of the capital 
gains from the sale of personal residences. Measures of the 
effectiveness of these provisions could include their effects on 
increasing the extent of home ownership and the quality of housing. 
Similarly, analysis of the extent of accumulated inflationary gains is 
likely to be relevant to evaluation of the capital gains for home sales. 
Deductibility of State and local property taxes assists with making 
housing more affordable as well as easing the cost of providing 
community services through these taxes. Provisions intended to promote 
investment in rental housing could be evaluated for their effects on 
making such housing more available and affordable. These provisions 
should then be compared with alternative programs that address housing 
supply and demand.
  Transportation. Employer-provided parking is a fringe benefit that, 
for the most part, is excluded from taxation. The tax expenditure 
estimates reflect the cost of parking that is leased by employers for 
employees; an estimate is not currently available for the value of 
parking owned by employers and provided to their employees. The 
exclusion for employer-provided transit passes is intended to promote 
use of this mode of transportation, which has environmental and 
congestion benefits. The tax treatments of these different benefits 
could be compared with alternative transportation policies.
  Community and regional development. A series of tax expenditures is 
intended to promote community and regional development by reducing the 
costs of financing specialized infrastructure, such as airports, docks, 
and stadiums. Empowerment zone and enterprise community provisions are 
designed to promote activity in disadvantaged areas. These provisions 
can be compared with grants and other policies designed to spur economic 
development.
  Education, training, employment, and social services. Major provisions 
in this function are intended to promote post-secondary education, to 
offset costs of raising children, and to promote a variety of charitable 
activities. The education incentives can be compared with loans, grants, 
and other programs designed to promote higher education and training. 
The child credits are intended to adjust the tax system for the costs of 
raising children; as such, they could be compared to other Federal tax 
and spending policies, including related features of the tax system, 
such as personal exemptions (which are not defined as a tax 
expenditure). Evaluation of charitable activities requires consideration 
of the beneficiaries of these activities, who are generally not the 
parties receiving the tax reduction.
  Health. Individuals also benefit from favorable treatment of employer-
provided health insurance. Measures of these benefits could include 
increased coverage and pooling of risks. The effects of insurance 
coverage on final outcome measures of actual health (e.g., infant 
mortality, days of work lost due to illness, or life expectancy) or 
intermediate outcomes (e.g., use of preventive health care or health 
care costs) could also be investigated.
  Income security, Social Security, and veterans benefits and services. 
Major tax expenditures in the income security function benefit 
retirement savings, through employer-provided pensions, individual 
retirement accounts, and Keogh plans. These provisions might be 
evaluated in terms of their effects on boosting retirement incomes, 
private savings, and national savings (which would include the effect on 
private savings as well as public savings or deficits). Interactions 
with other programs, including Social Security, also may merit analysis. 
As in the case of employer-provided health insurance, analysis of 
employer-provided pension programs requires imputing the value of 
benefits funded at the firm level to individuals.
  Other provisions principally affect the incomes of members of certain 
groups, rather than affecting incentives. For example, tax-favored 
treatment of Social Security benefits, certain veterans' benefits, and 
deductions for the blind and elderly provide increased incomes to 
eligible parties. The earned-income tax credit, in contrast, should be 
evaluated for its effects on labor force participation as well as the 
income it provides lower-income workers.
  General purpose fiscal assistance and interest. The tax-exemption for 
public purpose State and local bonds reduces the costs of borrowing for 
a variety of purposes (borrowing for non-public purposes is reflected 
under

[[Page 335]]

other budget functions). The deductibility of certain State and local 
taxes reflected under this function primarily relates to personal income 
taxes (property tax deductibility is reflected under the commerce and 
housing function). Tax preferences for Puerto Rico and other U.S. 
possessions are also included here. These provisions can be compared 
with other tax and spending policies as means of benefitting fiscal and 
economic conditions in the States, localities, and possessions. Finally, 
the tax deferral for interest on U.S. savings bonds benefits savers who 
invest in these instruments. The extent of these benefits and any 
effects on Federal borrowing costs could be evaluated.
  The above illustrative discussion, although broad, is nevertheless 
incomplete, omitting important details both for the provisions mentioned 
and the many that are not explicitly cited. Developing a framework that 
is sufficiently comprehensive, accurate, and flexible to reflect the 
objectives and effects of the wide range of tax expenditures will be a 
significant challenge. OMB, Treasury, and other agencies will work 
together, as appropriate, to address this challenge. As indicated above, 
over the next few years the Executive Branch's focus will be on the 
availability of the data needed to assess the effects of the tax 
expenditures designed to increase savings.

                  Descriptions of Income Tax Provisions

  Descriptions of the individual and corporate income tax expenditures 
reported upon in this chapter follow. These descriptions relate to 
current law as of December 31, 2004, and do not reflect proposals made 
elsewhere in the Budget. Nine additional provisions are considered when 
compared to the 2005 Budget. These are: (1) Expensing of capital costs 
with respect to complying with EPA sulfur regulations, (2) Exclusion of 
gain or loss on sale or exchange of certain brownfield sites, (3) Bio-
Diesel tax credit, (4) Imputed net rental income on owner occupied 
housing, (5) Deduction for US production activities, (6) Special rules 
for certain film and TV production, (7) Tax credit for certain 
expenditures for maintaining railroad tracks, (8) Deferral of capital 
gains with respect of dispositions of transmission property, and (9) 
Discharge of student loan indebtedness.

                            National Defense

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

                          International Affairs

  2. Income earned abroad.--U.S. citizens who lived abroad, worked in 
the private sector, and satisfied a foreign residency requirement may 
exclude up to $80,000 in foreign earned income from U.S. taxes. In 
addition, if these taxpayers receive a specific allowance for foreign 
housing from their employers, they may also exclude the value of that 
allowance. If they do not receive a specific allowance for housing 
expenses, they may deduct against their U.S. taxes that portion of such 
expenses that exceeds one-sixth the salary of a civil servant at grade 
GS-14, step 1 ($74,335 in 2004).
  3. Exclusion of certain allowances for Federal employees abroad.--U.S. 
Federal civilian employees and Peace Corps members who work outside the 
continental United States are allowed to exclude from U.S. taxable 
income certain special allowances they receive to compensate them for 
the relatively high costs associated with living overseas. The 
allowances supplement wage income and cover expenses like rent, 
education, and the cost of travel to and from the United States.
  4. Extraterritorial income exclusion. \5\--For purposes of calculating 
U.S. tax liability, a taxpayer may exclude from gross income the 
qualifying foreign trade income attributable to foreign trading gross 
receipts. The exclusion generally applies to income from the sale or 
lease of qualifying foreign trade property and certain types of services 
income. The FSC Repeal and Extraterritorial Income Exclusion Act of 2000 
created the extraterritorial income exclusion to replace the foreign 
sales corporation provisions, which the Act repealed. The exclusion is 
generally available for transactions entered into after September 30, 
2000.
---------------------------------------------------------------------------
  \5\ The determination of whether a provision is a tax expenditure is 
made on the basis of a broad concept of ``income'' that is larger in 
scope than is ``income'' as defined under general U.S. income tax 
principles. For that reason, the tax expenditure estimates include, for 
example, estimates related to the exclusion of extraterritorial income, 
as well as other exclusions, notwithstanding that such exclusions define 
income under the general rule of U.S. income taxation.
---------------------------------------------------------------------------
  5. Sales source rule exceptions.--The worldwide income of U.S. persons 
is taxable by the United States and a credit for foreign taxes paid is 
allowed. The amount of foreign taxes that can be credited is limited to 
the pre-credit U.S. tax on the foreign source income. The sales source 
rules for inventory property allow U.S. exporters to use more foreign 
tax credits by allowing the exporters to attribute a larger portion of 
their earnings abroad than would be the case if the allocation of 
earnings was based on actual economic activity.
  6. Income of U.S.-controlled foreign corporations.--The income of 
foreign corporations controlled by U.S. shareholders is not subject to 
U.S. taxation. The income becomes taxable only when the controlling U.S. 
shareholders receive dividends or other distributions from their foreign 
stockholding. Under the normal tax method, the currently attributable 
foreign source pre-tax income from such a controlling interest is 
considered to be subject to U.S. taxation, whether or not distributed. 
Thus, the normal tax method considers the amount of controlled foreign 
corporation income not yet distributed to a U.S. shareholder as tax-
deferred income.
  7. Exceptions under subpart F for active financing income.--Financial 
firms can defer taxes on income earned overseas in an active business. 
Taxes on income earned through December 31, 2006 can be deferred.

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                 General Science, Space, and Technology

  8. Expensing R&E expenditures.--Research and experimentation (R&E) 
projects can be viewed as investments because, if successful, their 
benefits accrue for several years. It is often difficult, however, to 
identify whether a specific R&E project is successful and, if 
successful, what its expected life will be. Under the normal tax method, 
the expensing of R&E expenditures is viewed as a tax expenditure. The 
baseline assumed for the normal tax method is that all R&E expenditures 
are successful and have an expected life of five years.
  9. R&E credit.--The research and experimentation (R&E) credit is 20 
percent of qualified research expenditures in excess of a base amount. 
The base amount is generally determined by multiplying a ``fixed-base 
percentage'' by the average amount of the company's gross receipts for 
the prior four years. The taxpayer's fixed base percentage generally is 
the ratio of its research expenses to gross receipts for 1984 through 
1988. Taxpayers may also elect an alternative credit regime. Under the 
alternative credit regime the taxpayer is assigned a three-tiered fixed-
base percentage that is lower than the fixed-base percentage that would 
otherwise apply, and the credit rate is reduced (the rates range from 
2.65 percent to 3.75 percent). A 20-percent credit with a separate 
threshold is provided for a taxpayer's payments to universities for 
basic research. The credit applies to research conducted before January 
1, 2006 and extends to research conducted in Puerto Rico and the U.S. 
possessions.

                                 Energy

  10. Exploration and development costs.--For successful investments in 
domestic oil and gas wells, intangible drilling costs (e.g., wages, the 
costs of using machinery for grading and drilling, the cost of 
unsalvageable materials used in constructing wells) may be expensed 
rather than amortized over the productive life of the property. 
Integrated oil companies may deduct only 70 percent of such costs and 
must amortize the remaining 30 percent over five years. The same rule 
applies to the exploration and development costs of surface stripping 
and the construction of shafts and tunnels for other fuel minerals.
  11. Percentage depletion.--Independent fuel mineral producers and 
royalty owners are generally allowed to take percentage depletion 
deductions rather than cost depletion on limited quantities of output. 
Under cost depletion, outlays are deducted over the productive life of 
the property based on the fraction of the resource extracted. Under 
percentage depletion, taxpayers deduct a percentage of gross income from 
mineral production at rates of 22 percent for uranium; 15 percent for 
oil, gas and oil shale; and 10 percent for coal. The deduction is 
limited to 50 percent of net income from the property, except for oil 
and gas where the deduction can be 100 percent of net property income. 
Production from geothermal deposits is eligible for percentage depletion 
at 65 percent of net income, but with no limit on output and no 
limitation with respect to qualified producers. Unlike depreciation or 
cost depletion, percentage depletion deductions can exceed the cost of 
the investment.
  12. Alternative fuel production credit.--A nontaxable credit of $3 per 
oil-equivalent barrel of production (in 1979 dollars) is provided for 
several forms of alternative fuels. The credit is generally available if 
the price of oil stays below $29.50 (in 1979 dollars). The credit 
generally expires on December 31, 2002.
  13. Oil and gas exception to passive loss limitation.--Owners of 
working interests in oil and gas properties are exempt from the 
``passive income'' limitations. As a result, the working interest-
holder, who manages on behalf of himself and all other owners the 
development of wells and incurs all the costs of their operation, may 
aggregate negative taxable income from such interests with his income 
from all other sources.
  14. Capital gains treatment of royalties on coal.--Sales of certain 
coal under royalty contracts can be treated as capital gains rather than 
ordinary income.
  15. Energy facility bonds.--Interest earned on State and local bonds 
used to finance construction of certain energy facilities is tax-exempt. 
These bonds are generally subject to the State private-activity bond 
annual volume cap.
  16. Enhanced oil recovery credit.--A credit is provided equal to 15 
percent of the taxpayer's costs for tertiary oil recovery on U.S. 
projects. Qualifying costs include tertiary injectant expenses, 
intangible drilling and development costs on a qualified enhanced oil 
recovery project, and amounts incurred for tangible depreciable 
property.
  17. New technology credits.--A credit of 10 percent is available for 
investment in solar and geothermal energy facilities. In addition, a 
credit of 1.5 cents (indexed for inflation) is provided per kilowatt 
hour of electricity produced from certain renewable resources. 
Generally, qualifying sources include wind, closed-loop biomass, open-
loop biomass including agricultural livestock waste nutrients, 
geothermal energy, solar energy, small irrigation, landfill gas, and 
trash combustion used to produce electricity at a facility placed in 
service before January 1, 2006. For facilities using open-loop biomass, 
small irrigation, landfill gas, or trash combustion, the credit rate is 
reduced by half. In addition, refined coal produced at a facility placed 
in service before January 1, 2009 cn claim a credit at a rate of $4.375 
per ton (indexed for inflation).
  18. Alcohol fuel credits.--An income tax credit is provided for 
ethanol that is derived from renewable sources and used as fuel. The 
credit equals 53 cents per gallon in 2001 and 2002; 52 cents per gallon 
in 2003 and 2004; and 51 cents per gallon through 2010. To the extent 
that ethanol is mixed with taxable motor fuel to create gasohol, 
taxpayers may claim an exemption of the Federal excise tax rather than 
the income tax credit. In addition, small ethanol producers are eligible 
for a separate 10 cents per gallon credit.
  19. Credit and deduction for clean-fuel vehicles and property.--A tax 
credit of 10 percent (not to ex

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ceed $4,000) is provided for purchasers of electric vehicles. Purchasers 
of other clean-fuel burning vehicles and owners of clean-fuel refueling 
property may deduct part of their expenditures. The deduction and credit 
are reduced by 75 percent for vehicles placed in service in 2006 and are 
not available for vehicles placed in service after December 31, 2006.
  20. Exclusion of utility conservation subsidies.--Non-business 
customers can exclude from gross income subsidies received from public 
utilities for expenditures on energy conservation measures.

                    Natural Resources and Environment

  21. Exploration and development costs.--Certain capital outlays 
associated with exploration and development of nonfuel minerals may be 
expensed rather than depreciated over the life of the asset.
  22. Percentage depletion.--Most nonfuel mineral extractors may use 
percentage depletion rather than cost depletion, with percentage 
depletion rates ranging from 22 percent for sulfur to 5 percent for sand 
and gravel.
  23. Sewage, water, solid and hazardous waste facility bonds.--Interest 
earned on State and local bonds used to finance the construction of 
sewage, water, or hazardous waste facilities is tax-exempt. These bonds 
are generally subject to the State private-activity bond annual volume 
cap.
  24. Capital gains treatment of certain timber.--Certain timber sales 
can be treated as a capital gain rather than ordinary income.
  25. Expensing multiperiod timber growing costs.--Most of the 
production costs of growing timber may be expensed rather than 
capitalized and deducted when the timber is sold. In most other 
industries, these costs are capitalized under the uniform capitalization 
rules.
  26. Historic preservation.--Expenditures to preserve and restore 
historic structures qualify for a 20-percent investment credit, but the 
depreciable basis must be reduced by the full amount of the credit 
taken.
  27. Expensing of capital costs with respect to complying with EPA 
sulfur regulations.--Small refiners are allowed to deduct 75 percent of 
qualified capital costs incurred by the taxpayer during the taxable 
year. This provision was introduced by the American Jobs Creation Act 
(AJCA) enacted in 2004.
  28. Exclusion of gain or loss on sale or exchange of certain 
brownfield sites.--This provision was introduced by the AJCA enacted in 
2004. This exclusion applies to taxpayers who have incurred remediation 
expenditures in an amount which exceeds the greater of $550,000 or 12 
percent of the fair market value of the property at the time such 
property was acquired by the eligible taxpayer, determined as if there 
were not a presence of a hazardous substance, pollutant, or contaminant 
on the property which is complicating the expansion, redevelopment, or 
reuse of the property.

                               Agriculture

  29. Expensing certain capital outlays.--Farmers, except for certain 
agricultural corporations and partnerships, are allowed to expense 
certain expenditures for feed and fertilizer, as well as for soil and 
water conservation measures. Expensing is allowed, even though these 
expenditures are for inventories held beyond the end of the year, or for 
capital improvements that would otherwise be capitalized.
  30. Expensing multiperiod livestock and crop production costs.--The 
production of livestock and crops with a production period of less than 
two years is exempt from the uniform cost capitalization rules. Farmers 
establishing orchards, constructing farm facilities for their own use, 
or producing any goods for sale with a production period of two years or 
more may elect not to capitalize costs. If they do, they must apply 
straight-line depreciation to all depreciable property they use in 
farming.
  31. Loans forgiven solvent farmers.--Farmers are forgiven the tax 
liability on certain forgiven debt. Normally, debtors must include the 
amount of loan forgiveness as income or reduce their recoverable basis 
in the property to which the loan relates. If the debtor elects to 
reduce basis and the amount of forgiveness exceeds the basis in the 
property, the excess forgiveness is taxable. For insolvent (bankrupt) 
debtors, however, the amount of loan forgiveness reduces carryover 
losses, then unused credits, and then basis; any remainder of the 
forgiven debt is excluded from tax. Farmers with forgiven debt are 
considered insolvent for tax purposes, and thus qualify for income tax 
forgiveness.
  32. Capital gains treatment of certain income.--Certain agricultural 
income, such as unharvested crops, can be treated as capital gains 
rather than ordinary income.
  33. Income averaging for farmers.--Taxpayers can lower their tax 
liability by averaging, over the prior three-year period, their taxable 
income from farming and fishing.
  34. Deferral of gain on sales of farm refiners.--A taxpayer who sells 
stock in a farm refiner to a farmers' cooperative can defer recognition 
of gain if the taxpayer reinvests the proceeds in qualified replacement 
property.
  35. Bio-Diesel tax credit.--An income tax credit of $0.50, similar to 
Ethanol benefits, is available for each gallon of biodiesel used or 
sold. Biodiesel derived from virgin sources (agri-biodiesel) receives an 
increased credit of $1.00 per gallon. The provision was introduced by 
the AJCA in 2004, and is set to expire on after December 31, 2006.

                          Commerce and Housing

  This category includes a number of tax expenditure provisions that 
also affect economic activity in other functional categories. For 
example, provisions related to investment, such as accelerated 
depreciation, could be classified under the energy, natural resources 
and environment, agriculture, or transportation categories.

[[Page 338]]

  36. Credit union income.--The earnings of credit unions not 
distributed to members as interest or dividends are exempt from income 
tax.
  37. Bad debt reserves.--Small (less than $500 million in assets) 
commercial banks, mutual savings banks, and savings and loan 
associations may deduct additions to bad debt reserves in excess of 
actually experienced losses.
  38. Deferral of income on life insurance and annuity contracts.--
Favorable tax treatment is provided for investment income within 
qualified life insurance and annuity contracts. Investment income earned 
on qualified life insurance contracts held until death is permanently 
exempt from income tax. Investment income distributed prior to the death 
of the insured is tax-deferred, if not tax-exempt. Investment income 
earned on annuities is treated less favorably than income earned on life 
insurance contracts, but it benefits from tax deferral without annual 
contribution or income limits generally applicable to other tax-favored 
retirement income plans.
  39. Small property and casualty insurance companies.--For taxable 
years beginning before January 1, 2004, insurance companies that were 
not life insurance companies and which had annual net premiums of less 
than $350,000 were exempt from tax; those with $350,000 to $1.2 million 
of annual net premiums could elect to pay tax only on the income earned 
by their taxable investment portfolio. For taxable years beginning after 
December 31, 2003, stock non-life insurance companies are generally 
exempt from tax if their gross receipts for the taxable year do not 
exceed $600,00 and more than 50 percent of such gross receipts consists 
of premiums. Mutual non-life insurance companies are generally tax-
exempt if their annual gross receipts do not exceed $150,000 and more 
than 35 percent of gross receipts consist of premiums. Also, for taxable 
years beginning after December 31, 2003, non-life insurance companies 
with no more than $1.2 million of annual net premiums may elect to pay 
tax only on their taxable investment income.
  40. Insurance companies owned by exempt organizations.--Generally, the 
income generated by life and property and casualty insurance companies 
is subject to tax, albeit by special rules. Insurance operations 
conducted by such exempt organizations as fraternal societies and 
voluntary employee benefit associations, however, are exempt from tax.
  41. Small life insurance company deduction.--Small life insurance 
companies (gross assets of less than $500 million) can deduct 60 percent 
of the first $3 million of otherwise taxable income. The deduction 
phases out for otherwise taxable income between $3 million and $15 
million.
  42. Mortgage housing bonds.--Interest earned on State and local bonds 
used to finance homes purchased by first-time, low-to-moderate-income 
buyers is tax-exempt. The amount of State and local tax-exempt bonds 
that can be issued to finance these and other private activity is 
limited. The combined volume cap for private activity bonds, including 
mortgage housing bonds, rental housing bonds, student loan bonds, and 
industrial development bonds was $62.50 per capita ($187.5 million 
minimum) per State in 2001, and $75 per capita ($225 million minimum) in 
2002. The Community Renewal Tax Relief Act of 2000 accelerated the 
scheduled increase in the state volume cap and indexed the cap for 
inflation, beginning in 2003. States may issue mortgage credit 
certificates (MCCs) in lieu of mortgage revenue bonds. MCCs entitle home 
buyers to income tax credits for a specified percentage of interest on 
qualified mortgages. The total amount of MCCs issued by a State cannot 
exceed 25 percent of its annual ceiling for mortgage-revenue bonds.
  43. Rental housing bonds.--Interest earned on State and local 
government bonds used to finance multifamily rental housing projects is 
tax-exempt. At least 20 percent (15 percent in targeted areas) of the 
units must be reserved for families whose income does not exceed 50 
percent of the area's median income; or 40 percent for families with 
incomes of no more than 60 percent of the area median income. Other tax-
exempt bonds for multifamily rental projects are generally issued with 
the requirement that all tenants must be low or moderate income 
families. Rental housing bonds are subject to the volume cap discussed 
in the mortgage housing bond section above.
  44. Interest on owner-occupied homes.--Owner-occupants of homes may 
deduct mortgage interest on their primary and secondary residences as 
itemized nonbusiness deductions. The mortgage interest deduction is 
limited to interest on debt no greater than the owner's basis in the 
residence and, for debt incurred after October 13, 1987; it is limited 
to no more than $1 million. Interest on up to $100,000 of other debt 
secured by a lien on a principal or second residence is also deductible, 
irrespective of the purpose of borrowing, provided the debt does not 
exceed the fair market value of the residence. Mortgage interest 
deductions on personal residences are tax expenditures because the value 
of owner-occupied housing services is not included in a taxpayer's 
taxable income.
  45. Taxes on owner-occupied homes.--Owner-occupants of homes may 
deduct property taxes on their primary and secondary residences even 
though they are not required to report the value of owner-occupied 
housing services as gross income.
  46. Installment sales.--Dealers in real and personal property (i.e., 
sellers who regularly hold property for sale or resale) cannot defer 
taxable income from installment sales until the receipt of the loan 
repayment. Nondealers (i.e., sellers of real property used in their 
business) are required to pay interest on deferred taxes attributable to 
their total installment obligations in excess of $5 million. Only 
properties with sales prices exceeding $150,000 are includable in the 
total. The payment of a market rate of interest eliminates the benefit 
of the tax deferral. The tax exemption for nondealers with total 
installment obligations of less than $5 million is, therefore, a tax 
expenditure.

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  47. Capital gains exclusion on home sales.--A homeowner can exclude 
from tax up to $500,000 ($250,000 for singles) of the capital gains from 
the sale of a principal residence. The exclusion may not be used more 
than once every two years.
  48. Imputed net rental income on owner occupied housing.--The implicit 
rental value of home ownership, net of expenses such as mortgage 
interest and depreciation, is excluded from income. The appendix 
provides a greater explanation of this new addition to the tax 
expenditure budget.
  49. Passive loss real estate exemption.--In general, passive losses 
may not offset income from other sources. Losses up to $25,000 
attributable to certain rental real estate activity, however, are exempt 
from this rule.
  50. Low-income housing credit.--Taxpayers who invest in certain low-
income housing are eligible for a tax credit. The credit rate is set so 
that the present value of the credit is equal to 70 percent for new 
construction and 30 percent for (1) housing receiving other Federal 
benefits (such as tax-exempt bond financing), or (2) substantially 
rehabilitated existing housing. The credit is allowed in equal amounts 
over 10 years. State agencies determine who receives the credit; States 
are limited in the amount of credit they may authorize annually. The 
Community Renewal Tax Relief Act of 2000 increased the per-resident 
limit to $1.50 in 2001 and to $1.75 in 2002 and indexed the limit for 
inflation, beginning in 2003. The Act also created a $2 million minimum 
annual cap for small States beginning in 2002; the cap is indexed for 
inflation, beginning in 2003.
  51. Accelerated depreciation of rental property.--The tax depreciation 
allowance provisions are part of the reference law rules, and thus do 
not give rise to tax expenditures under the reference method. Under the 
normal tax method, however, economic depreciation is assumed. This 
calculation is described in more detail in the Appendix.
  52. Cancellation of indebtedness.--Individuals are not required to 
report the cancellation of certain indebtedness as current income. If 
the canceled debt is not reported as current income, however, the basis 
of the underlying property must be reduced by the amount canceled.
  53. Imputed interest rules.--Holders (issuers) of debt instruments are 
generally required to report interest earned (paid) in the period it 
accrues, not when paid. In addition, the amount of interest accrued is 
determined by the actual price paid, not by the stated principal and 
interest stipulated in the instrument. In general, any debt associated 
with the sale of property worth less than $250,000 is excepted from the 
general interest accounting rules. This general $250,000 exception is 
not a tax expenditure under reference law but is under normal law. 
Exceptions above $250,000 are a tax expenditure under reference law; 
these exceptions include the following: (1) sales of personal residences 
worth more than $250,000, and (2) sales of farms and small businesses 
worth between $250,000 and $1 million.
  54. Capital gains (other than agriculture, timber, iron ore, and 
coal).--Capital gains on assets held for more than 1 year are taxed at a 
lower rate than ordinary income. Under the revised reference law 
baseline used for the 2005 Budget, the lower rate on capital gains is 
considered a tax expenditure under the reference law method, but only 
for capital gains that have not been previously taxed under the 
corporate income tax. As discussed above, this treatment partially 
adjusts for the double tax on corporate income and is more consistent 
with a comprehensive income tax base.
  Prior to passage of the Jobs Growth Tax Relief Reconciliation Act 
(JGTRRA), the top capital gains tax rate for most assets held for more 
than 1 year was 20 percent. For assets acquired after December 31, 2000, 
the top capital gains tax rate for assets held for more than 5 years was 
18 percent. Since January 1, 2001, taxpayers may mark-to-market existing 
assets to start the 5-year holding period. Losses from the mark-to-
market are not recognized.
  For assets held for more than 1 year by taxpayers in the 15-percent 
ordinary tax bracket, the top capital gains tax rate was 10 percent. 
After December 31, 2000, the top capital gains tax rate for assets held 
by these taxpayers for more than 5 years was 8 percent.
  JGTRRA reduced the previous 20 percent and 18 percent rates on net 
capital gains to 15 percent and the previous 10 percent and 8 percent 
rates to 5 percent (0 percent, in 2008). The lower rates apply to assets 
held for more than one year. The lower rates apply to assets sold after 
May 6, 2003 through 2008.
  55. Capital gains exclusion for small business stock.--An exclusion of 
50 percent is provided for capital gains from qualified small business 
stock held by individuals for more than 5 years. A qualified small 
business is a corporation whose gross assets do not exceed $50 million 
as of the date of issuance of the stock.
  56. Step-up in basis of capital gains at death.--Capital gains on 
assets held at the owner's death are not subject to capital gains taxes. 
The cost basis of the appreciated assets is adjusted upward to the 
market value at the owner's date of death. After repeal of the estate 
tax for 2010 under the Economic Growth and Tax Relief Reconciliation Act 
(EGTRRA) of 2001, the basis for property acquired from a decedent will 
be the lesser of fair market value or the decedent's basis. Certain 
types of additions to basis will be allowed so that assets in most 
estates that are not currently subject to estate tax will not be subject 
to capital gains tax in the hands of the heirs.
  57. Carryover basis of capital gains on gifts.--When a gift is made, 
the donor's basis in the transferred property (the cost that was 
incurred when the transferred property was first acquired) carries-over 
to the donee. The carryover of the donor's basis allows a continued 
deferral of unrealized capital gains. Even though the estate tax is 
repealed for 2010 under

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EGTRRA, the gift tax is retained with a lifetime exemption of $1 
million.
  58. Ordinary income treatment of losses from sale of small business 
corporate stock shares.--Up to $100,000 in losses from the sale of small 
business corporate stock (capitalization less than $1 million) may be 
treated as ordinary losses. Such losses would, thus, not be subject to 
the $3,000 annual capital loss write-off limit.
  59. Accelerated depreciation of non-rental-housing buildings.--The tax 
depreciation allowance provisions are part of the reference law rules, 
and thus do not give rise to tax expenditures under reference law. Under 
normal law, however, economic depreciation is assumed. This calculation 
is described in more detail in the Appendix.
  60. Accelerated depreciation of machinery and equipment.--The tax 
depreciation allowance provisions are part of the reference law rules, 
and thus do not give rise to tax expenditures under reference law. Under 
the normal tax baseline, this tax depreciation allowance is measured 
relative to economic depreciation. This calculation is described in more 
detail in the Appendix.
  61. Expensing of certain small investments.--As of 2003, under prior 
law, qualifying investments in tangible property up to $25,000 could 
have been expensed rather than depreciated over time. The amount 
eligible for expensing was decreased to the extend the taxpayer's 
qualifying investment during the year exceeded $200,000. For 2003, 
however, the expensing limit was temporarily increased to $100,000, the 
phase-out limit was temporarily increased to $400,000, and computer 
software became temporarily eligible for expensing treatment. For 2004, 
through 2007, these higher limits are indexed for inflation, and 
computer software continues to be an eligible investment. In all years, 
the amount expensed cannot exceed the taxpayer's taxable income for the 
year. The prior rules will apply for taxable years beginning after 2007.
  62. Business start-up costs.--Business start-up costs are costs 
incurred prior to the creation of an active trade or business that would 
be deductible if incurred in connection with the operation of an 
existing trade or business. If the start-up costs were incurred on or 
before October 22, 2004, a taxpayer could elect to amortize them over 60 
months. For costs incurred after that date, a taxpayer may elect to 
deduct up to $5,000 of start-up costs, but this deductible amount is 
reduced (but now below zero) by the amount by which the taxpayer's total 
start-up costs for the year exceed $50,000. Non-deducted start-up costs 
incurred after October 22, 2004 are amortized over a 15-year period. The 
normal-tax method treats the 60-month amortized amounts and the deducted 
amounts as tax expenditures; the reference tax method does not.
  63. Graduated corporation income tax rate schedule.--The corporate 
income tax schedule is graduated, with rates of 15 percent on the first 
$50,000 of taxable income, 25 percent on the next $25,000, and 34 
percent on the next $9.925 million. Compared with a flat 34-percent 
rate, the lower rates provide an $11,750 reduction in tax liability for 
corporations with taxable income of $75,000. This benefit is recaptured 
for corporations with taxable incomes exceeding $100,000 by a 5-percent 
additional tax on corporate incomes in excess of $100,000 but less than 
$335,000.
  The corporate tax rate is 35 percent on income over $10 million. 
Compared with a flat 35-percent tax rate, the 34-percent rate provides a 
$100,000 reduction in tax liability for corporations with taxable 
incomes of $10 million. This benefit is recaptured for corporations with 
taxable incomes exceeding $15 million by a 3-percent additional tax on 
income over $15 million but less than $18.33 million. Because the 
corporate rate schedule is part of reference tax law, it is not 
considered a tax expenditure under the reference method. A flat 
corporation income tax rate is taken as the baseline under the normal 
tax method; therefore the lower rates is considered a tax expenditure 
under this concept.
  64. Small issue industrial development bonds.--Interest earned on 
small issue industrial development bonds (IDBs) issued by State and 
local governments to finance manufacturing facilities is tax-exempt. 
Depreciable property financed with small issue IDBs must be depreciated, 
however, using the straight-line method. The annual volume of small 
issue IDBs is subject to the unified volume cap discussed in the 
mortgage housing bond section above.
  65. Deduction for U.S. production activities.--This provision was 
introduced by the AJCA in 2004 and allows for a deduction equal to a 
portion of taxable income attributable to domestic production. For 
taxable years beginning in 2004, 2005, 2006, 2007, and 2008, the amount 
of the deduction is 5, 5, 5, 6, and 7 percent, respectively. For taxable 
years beginning after 2008, the amount of the deduction is 9 percent.
  66. Special rules for certain film and TV production.--Taxpayers may 
deduct up to $15 million ($15 million in certain distressed areas) per 
production expenditures in the year incurred. Excess expenditures may be 
deducted over three years using the straight line method. This provision 
was introduced by the AJCA enacted in 2004. Under prior law, production 
expenses were depreciated.

                             Transportation

  67. Deferral of tax on U.S. shipping companies.--Certain companies 
that operate U.S. flag vessels can defer income taxes on that portion of 
their income used for shipping purposes, primarily construction, 
modernization and major repairs to ships, and repayment of loans to 
finance these investments. Once indefinite, the deferral has been 
limited to 25 years since January 1, 1987.
  68. Exclusion of employee parking expenses.--Employee parking expenses 
that are paid for by the employer or that are received in lieu of wages 
are excludable from the income of the employee. In 2004,

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the maximum amount of the parking exclusion is $195 (indexed) per month. 
The tax expenditure estimate does not include parking at facilities 
owned by the employer.
  69. Exclusion of employee transit pass expenses.--Transit passes, 
tokens, fare cards, and vanpool expenses paid for by an employer or 
provided in lieu of wages to defray an employee's commuting costs are 
excludable from the employee's income. In 2005, the maximum amount of 
the exclusion is $105 (indexed) per month.
  70. Tax credit for certain expenditures for maintaining railroad 
tracks.--Eligible taxpayers may claim a credit equal to the lesser of 50 
percent of maintenance expenditures and the product of $3,500 and the 
number of miles of track owned or leased. This provision was introduced 
by the AJCA in 2004.

                   Community and Regional Development

  71. Rehabilitation of structures.--A 10-percent investment tax credit 
is available for the rehabilitation of buildings that are used for 
business or productive activities and that were erected before 1936 for 
other than residential purposes. The taxpayer's recoverable basis must 
be reduced by the amount of the credit.
  72. Airport, dock, and similar facility bonds.--Interest earned on 
State and local bonds issued to finance high-speed rail facilities and 
government-owned airports, docks, wharves, and sport and convention 
facilities is tax-exempt. These bonds are not subject to a volume cap.
  73. Exemption of income of mutuals and cooperatives.--The incomes of 
mutual and cooperative telephone and electric companies are exempt from 
tax if at least 85 percent of their revenues are derived from patron 
service charges.
  74. Empowerment zones, enterprise communities, and renewal 
communities.--Qualifying businesses in designated economically depressed 
areas can receive tax benefits such as an employer wage credit, 
increased expensing of investment in equipment, special tax-exempt 
financing, accelerated depreciation, and certain capital gains 
incentives. The Job Creation and Worker Assistance Act of 2002 expanded 
the existing provisions by adding the ``New York City Liberty Zone.'' In 
addition, the Working Families Tax Relief Act of 2004 extended the 
District of Columbia Enterprise Zone and the District of Columbia first 
time homebuyer credit by two years through 2005.
  75. New markets tax credit.--Taxpayers who invest in a community 
development entity (CDE) after December 31, 2000 are eligible for a tax 
credit. The total equity investment available for the credit across all 
CDEs is $1.0 billion in 2001, $1.5 billion in 2002 and 2003, $2.0 
billion in 2004 and 2005, and $3.5 billion in 2006 and 2007. The amount 
of the credit equals (1) 5 percent in the year of purchase and the 
following 2 years, and (2) 6 percent in the following 4 years. A CDE is 
any domestic firm whose primary mission is to serve or provide 
investment capital for low-income communities/individuals; a CDE must be 
accountable to residents of low-income communities. The Community 
Renewal Tax Relief Act of 2000 created the new markets tax credit.
  76. Expensing of environmental remediation costs.--Taxpayers who clean 
up certain hazardous substances at a qualified site may expense the 
clean-up costs, rather than capitalize the costs, even though the 
expenses will generally increase the value of the property significantly 
or appreciably prolong the life of the property. The Working Families 
Tax Relief Act of 2004 extended this provision for two years, allowing 
remediation expenditures incurred before December 31, 2005 to be 
eligible for expensing.
  77. Deferral of capital gains with respect of dispositions of 
transmission property.--This provision, introduced by the AJCA, provides 
for the deferral of gains from sales or dispositions to implement 
Federal Energy Regulatory Commission or State electric restructuring 
policy.

          Education, Training, Employment, and Social Services

  78. Scholarship and fellowship income.--Scholarships and fellowships 
are excluded from taxable income to the extent they pay for tuition and 
course-related expenses of the grantee. Similarly, tuition reductions 
for employees of educational institutions and their families are not 
included in taxable income. From an economic point of view, scholarships 
and fellowships are either gifts not conditioned on the performance of 
services, or they are rebates of educational costs. Thus, under the 
reference law method, this exclusion is not a tax expenditure because 
this method does not include either gifts or price reductions in a 
taxpayer's gross income. The exclusion, however, is considered a tax 
expenditure under the normal tax method, which includes gift-like 
transfers of Government funds in gross income (many scholarships are 
derived directly or indirectly from Government funding).
  79. HOPE tax credit.--The non-refundable HOPE tax credit allows a 
credit for 100 percent of an eligible student's first $1,000 of tuition 
and fees and 50 percent of the next $1,000 of tuition and fees. The 
credit only covers tuition and fees paid during the first two years of a 
student's post-secondary education. In 2004, the credit is phased out 
ratably for taxpayers with modified AGI between $85,000 and $105,000 
($42,000 and $52,000 for singles), indexed.
  80. Lifetime Learning tax credit.--The non-refundable Lifetime 
Learning tax credit allows a credit for 20 percent of an eligible 
student's tuition and fees. For tuition and fees paid after December 31, 
2002, the maximum credit per return is $2,000. The credit is phased out 
ratably for taxpayers with modified AGI between $85,000 and $105,000 
($42,000 and $52,000 for singles) (indexed beginning in 2002). The 
credit applies to both undergraduate and graduate students.
  81. Deduction for Higher Education Expenses.--The maximum annual 
deduction for qualified higher education expenses is $4,000 in 2004 for 
taxpayers with

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adjusted gross income up to $130,000 on a joint return ($65,000 for 
singles). Taxpayers with adjusted gross income up to $160,000 on a joint 
return ($80,000 for singles) may deduct up to $2,000 beginning in 2004. 
No deduction is allowed for expenses paid after December 31, 2005.
  82. Education Individual Retirement Accounts.--Contributions to an 
education IRA are not tax-deductible. Investment income earned by 
education IRAs is not taxed when earned, and investment income from an 
education IRA is tax-exempt when withdrawn to pay for a student's 
tuition and fees. The maximum contribution to an education IRA in 2004 
is $2000 per beneficiary. The maximum contribution is phased down 
ratably for taxpayers with modified AGI between $190,000 and $220,000 
($95,000 and $110,000 for singles).
  83. Student-loan interest.--Taxpayers may claim an above-the-line 
deduction of up to $2,500 on interest paid on an education loan. 
Interest may only be deducted for the first five years in which interest 
payments are required. In 2004, the maximum deduction is phased down 
ratably for taxpayers with modified AGI between $100,000 and $130,000 
($50,000 and $65,000 for singles), indexed.
  84. State prepaid tuition plans.--Some States have adopted prepaid 
tuition plans and prepaid room and board plans, which allow persons to 
pay in advance for college expenses for designated beneficiaries. In 
2001 taxes on the earnings from these plans are paid by the 
beneficiaries and are deferred until tuition is actually paid. Beginning 
in 2002, investment income is not taxed when earned, and is tax-exempt 
when withdrawn to pay for qualified expenses.
  85. Student-loan bonds.--Interest earned on State and local bonds 
issued to finance student loans is tax-exempt. The volume of all such 
private activity bonds that each State may issue annually is limited.
  86. Bonds for private nonprofit educational institutions.--Interest 
earned on State and local Government bonds issued to finance the 
construction of facilities used by private nonprofit educational 
institutions is not taxed.
  87. Credit for holders of zone academy bonds.--Financial institutions 
that own zone academy bonds receive a non-refundable tax credit (at a 
rate set by the Treasury Department) rather than interest. The credit is 
included in gross income. Proceeds from zone academy bonds may only be 
used to renovate, but not construct, qualifying schools and for certain 
other school purposes. The total amount of zone academy bonds that may 
be issued is limited to $1.6 billion--$400 million in each year from 
1998 to 2005.
  88. U.S. savings bonds for education.--Interest earned on U.S. savings 
bonds issued after December 31, 1989 is tax-exempt if the bonds are 
transferred to an educational institution to pay for educational 
expenses. The tax exemption is phased out for taxpayers with AGI between 
$89,750 and $119.750 ($59,850 and $74,850 for singles) in 2004.
  89. Dependent students age 19 or older.--Taxpayers may claim personal 
exemptions for dependent children age 19 or over who (1) receive 
parental support payments of $1,000 or more per year, (2) are full-time 
students, and (3) do not claim a personal exemption on their own tax 
returns.
  90. Charitable contributions to educational institutions.--Taxpayers 
may deduct contributions to nonprofit educational institutions. 
Taxpayers who donate capital assets to educational institutions can 
deduct the asset's current value without being taxed on any appreciation 
in value. An individual's total charitable contribution generally may 
not exceed 50 percent of adjusted gross income; a corporation's total 
charitable contributions generally may not exceed 10 percent of pre-tax 
income.
  91. Employer-provided educational assistance.--Employer-provided 
educational assistance is excluded from an employee's gross income even 
though the employer's costs for this assistance are a deductible 
business expense. EGTRRA permanently extended this exclusion and 
extended the exclusion to also include graduate education (beginning in 
2002).
  92. Special deduction for teacher expenses.--Educators in both public 
and private elementary and secondary schools, who work at least 900 
hours during a school year as a teacher, instructor, counselor, 
principal or aide, may subtract up to $250 of qualified expenses when 
figuring their adjusted gross income (AGI).
  93. Discharge of student loan indebtedness.--Certain professionals who 
perform in underserved areas, and as a consequence get their student 
loans discharged, may not recognize such discharge as income. This 
provision was expanded by the AJCA to include health professionals.
  94. Work opportunity tax credit.--Employers can claim a tax credit for 
qualified wages paid to individuals who begin work on or before December 
31, 2005 and who are certified as members of various targeted groups. 
The amount of the credit that can be claimed is 25 percent for 
employment of less than 400 hours and 40 percent for employment of 400 
hours or more. The maximum credit per employee is $2,400 and can only be 
claimed on the first year of wages an individual earns from an employer. 
Employers must reduce their deduction for wages paid by the amount of 
the credit claimed.
  95. Welfare-to-work tax credit.--An employer is eligible for a tax 
credit on the first $20,000 of eligible wages paid to qualified long-
term family assistance recipients during the first two years of 
employment. The credit is 35 percent of the first $10,000 of wages in 
the first year of employment and 50 percent of the first $10,000 of 
wages in the second year of employment. The maximum credit is $8,500 per 
employee. The credit applies to wages paid to employees who are hired on 
or before December 31, 2005.
  96. Employer-provided child care exclusion.--Up to $5,000 of employer-
provided child care is excluded from an employee's gross income even 
though the em

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ployer's costs for the child care are a deductible business expense.
  97. Employer-provided child care credit.--Employers can deduct 
expenses for supporting child care or child care resource and referral 
services. EGTRRA provides a tax credit to employers for qualified 
expenses beginning in 2002. The credit is equal to 25 percent of 
qualified expenses for employee child care and 10 percent of qualified 
expenses for child care resource and referral services. Employer 
deductions for such expenses are reduced by the amount of the credit. 
The maximum total credit is limited to $150,000 per taxable year.
  98. Assistance for adopted foster children.--Taxpayers who adopt 
eligible children from the public foster care system can receive monthly 
payments for the children's significant and varied needs and a 
reimbursement of up to $2,000 for nonrecurring adoption expenses. These 
payments are excluded from gross income.
  99. Adoption credit and exclusion.--Taxpayers can receive a 
nonrefundable tax credit for qualified adoption expenses. The maximum 
credit is $10,390 per child for 2004, and is phased-out ratably for 
taxpayers with modified AGI between $155,860 and $195,860. The credit 
amounts and the phase-out thresholds are indexed for inflation beginning 
in 2003. Unused credits may be carried forward and used during the five 
subsequent years. Taxpayers may also exclude qualified adoption expenses 
from income, subject to the same maximum amounts and phase-out as the 
credit. The same expenses cannot qualify for tax benefits under both 
programs; however, a taxpayer may use the benefits of the exclusion and 
the tax credit for different expenses. Stepchild adoptions are not 
eligible for either benefit.
  100. Employer-provided meals and lodging.--Employer-provided meals and 
lodging are excluded from an employee's gross income even though the 
employer's costs for these items are a deductible business expense.
  101. Child credit.--Taxpayers with children under age 17 can qualify 
for a $1,000 refundable per child credit. The maximum credit declines to 
$500 in 2011 and later years. The credit is phased out for taxpayers at 
the rate of $50 per $1,000 of modified AGI above $110,000 ($75,000 for 
singles).
  102. Child and dependent care expenses.--Married couples with child 
and dependent care expenses may claim a tax credit when one spouse works 
full time and the other works at least part time or goes to school. The 
credit may also be claimed by single parents and by divorced or 
separated parents who have custody of children. Expenditures up to a 
maximum $3,000 for one dependent and $6,000 for two or more dependents 
are eligible for the credit. The credit is equal to 35 percent of 
qualified expenditures for taxpayers with incomes of $15,000. The credit 
is reduced to a minimum of 20 percent by one percentage point for each 
$2,000 of income in excess of $15,000.
  103. Disabled access expenditure credit.--Small businesses (less than 
$1 million in gross receipts or fewer than 31 full-time employees) can 
claim a 50-percent credit for expenditures in excess of $250 to remove 
access barriers for disabled persons. The credit is limited to $5,000.
  104. Charitable contributions, other than education and health.--
Taxpayers may deduct contributions to charitable, religious, and certain 
other nonprofit organizations. Taxpayers who donate capital assets to 
charitable organizations can deduct the assets' current value without 
being taxed on any appreciation in value. An individual's total 
charitable contribution generally may not exceed 50 percent of adjusted 
gross income; a corporation's total charitable contributions generally 
may not exceed 10 percent of pre-tax income.
  105. Foster care payments.--Foster parents provide a home and care for 
children who are wards of the State, under contract with the State. 
Compensation received for this service is excluded from the gross 
incomes of foster parents; the expenses they incur are nondeductible.
  106. Parsonage allowances.--The value of a minister's housing 
allowance and the rental value of parsonages are not included in a 
minister's taxable income.

                                 Health

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

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and Modernization Act of 2003 introduced health savings accounts (HSA) 
which provides a tax-favored savings for health care expenses. The 
definition of a high-deductible health plan is less restrictive for HSAs 
than for MSAs.
  110. Medical care expenses.--Personal expenditures for medical care 
(including the costs of prescription drugs) exceeding 7.5 percent of the 
taxpayer's adjusted gross income are deductible.
  111. Hospital construction bonds.--Interest earned on State and local 
government debt issued to finance hospital construction is excluded from 
income subject to tax.
  112. Charitable contributions to health institutions.--Individuals and 
corporations may deduct contributions to nonprofit health institutions. 
Tax expenditures resulting from the deductibility of contributions to 
other charitable institutions are listed under the education, training, 
employment, and social services function.
  113. Orphan drugs.--Drug firms can claim a tax credit of 50 percent of 
the costs for clinical testing required by the Food and Drug 
Administration for drugs that treat rare physical conditions or rare 
diseases.
  114. Blue Cross and Blue Shield.--Blue Cross and Blue Shield health 
insurance providers in existence on August 16, 1986 and certain other 
nonprofit health insurers are provided exceptions from otherwise 
applicable insurance company income tax accounting rules that 
substantially reduce (or even eliminate) their tax liabilities.
  115. Tax credit for health insurance purchased by certain displaced 
and retired individuals.--The Trade Act of 2002 provided a refundable 
tax credit of 65 percent for the purchase of health insurance coverage 
by individuals eligible for Trade Adjustment Assistance and certain PBGC 
pension recipients.

                             Income Security

  116. Railroad retirement benefits.--Railroad retirement benefits are 
not generally subject to the income tax unless the recipient's gross 
income reaches a certain threshold. The threshold is discussed more 
fully under the Social Security function.
  117. Workers' compensation benefits.--Workers compensation provides 
payments to disabled workers. These benefits, although income to the 
recipients, are not subject to the income tax.
  118. Public assistance benefits.--Public assistance benefits are 
excluded from tax. The normal tax method considers cash transfers from 
the Government as taxable and, thus, treats the exclusion for public 
assistance benefits as a tax expenditure.
  119. Special benefits for disabled coal miners.--Disability payments 
to former coal miners out of the Black Lung Trust Fund, although income 
to the recipient, are not subject to the income tax.
  120. Military disability pensions.--Most of the military pension 
income received by current disabled retired veterans is excluded from 
their income subject to tax.
  121. Employer-provided pension contributions and earnings.--Certain 
employer contributions to pension plans are excluded from an employee's 
gross income even though the employer can deduct the contributions. In 
addition, the tax on the investment income earned by the pension plans 
is deferred until the money is withdrawn.
  122. 401(k) plans.--Individual taxpayers can make tax-preferred 
contributions to certain types of employer-provided 401(k) plans (and 
401(k)-type plans like 403(b) plans and the Federal government's Thrift 
Savings Plan). In 2004, an employee could exclude up to $14,000 of wages 
from AGI under a qualified arrangement with an employer's 401(k) plan. 
This increases to $14,000 in 2005 and $15,000 in 2006 (indexed 
thereafter). The tax on the investment income earned by 401(k)-type 
plans is deferred until withdrawn.
  Employees are allowed to make after-tax contributions to 401(k) and 
401(k)-type plans. These contributions are not excluded from AGI, but 
the investment income of such after-tax contributions is not taxed when 
earned or withdrawn.
  123. Individual Retirement Accounts.--Individual taxpayers can take 
advantage of several different Individual Retirement Accounts (IRAs): 
deductible IRAs, non-deductible IRAs, and Roth IRAs. The annual 
contributions limit applies to the total of a taxpayer's deductible, 
non-deductible, and Roth IRAs contributions. The IRA contribution limit 
is $3,000 in 2004, $4,000 in 2005, and $5,000 in 2008 (indexed 
thereafter) and allows taxpayers over age 50 to make additional ``catch-
up'' contributions of $1,000 (by 2006).
  Taxpayers whose AGI is below $75,000 ($55,000 for non-joint filers) in 
2004 can claim a deduction for IRA contributions. The IRA deduction is 
phased out for taxpayers with AGI between $65,000 and $75,000 ($45,000 
and $55,000 for non-joint). The phase-out range increases annually until 
it reaches $80,000 to $100,000 in 2007 ($50,000 to $60,000 in 2005 for 
non-joint filers). Taxpayers whose AGI is above the phase-out range can 
also claim a deduction for their IRA contributions depending on whether 
they (or their spouse) are an active participant in an employer-provided 
retirement plan. The tax on the investment income earned by 401(k) 
plans, non-deductible IRAs, and deductible IRAs is deferred until the 
money is withdrawn.
  Taxpayers with incomes below $160,000 ($110,000 for nonjoint filers) 
can make contributions to Roth IRAs. The maximum contribution to a Roth 
IRA is phased out for taxpayers with AGI between $150,000 and $160,000 
($95,000 and $110,000 for singles). Investment income of a Roth IRA is 
not taxed when earned nor when withdrawn. Withdrawals from a Roth IRA 
are penalty free if: (1) the Roth IRA was opened at least 5 years before 
the withdrawal, and (2) the taxpayer either (a) is at least 591/2, (b) 
dies, (c) is disabled, or (d) purchases a first-time house.

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  Taxpayers can contribute to a non-deductible IRA regardless of their 
income and whether they are an active participant in an employer-
provided retirement plan. The tax on investment income earned by non-
deductible IRAs is deferred until the money is withdrawn.
  124. Low and moderate income savers' credit.--The Tax Code provides an 
additional incentive for lower-income taxpayers to save through a 
nonrefundable credit of up to 50 percent on IRA and other retirement 
contributions of up to $2,000. This credit is in addition to any 
deduction or exclusion. The credit is completely phased out by $50,000 
for joint filers and $25,000 for single filers. This temporary credit is 
in effect from 2002 through 2006.
  125. Keogh plans.--Self-employed individuals can make deductible 
contributions to their own retirement (Keogh) plans equal to 25 percent 
of their income, up to a maximum of $40,000 in 2001. Total plan 
contributions are limited to 25 percent of a firm's total wages. The tax 
on the investment income earned by Keogh plans is deferred until 
withdrawn.
  126. Employer-provided life insurance benefits.--Employer-provided 
life insurance benefits are excluded from an employee's gross income 
even though the employer's costs for the insurance are a deductible 
business expense, but only to the extent that the employer's share of 
the total costs does not exceed the cost of $50,000 of such insurance.
  127. Small business retirement plan credit.--EGTRRA provides 
businesses with 100 or fewer employees a credit for 50 percent of the 
qualified startup costs associated with a new qualified retirement plan. 
The credit is limited to $500 annually and may only be claimed for 
expenses incurred during the first three years from the start of the 
qualified plan. Qualified startup expenses include expenses related to 
the establishment and administration of the plan, and the retirement-
related education of employees. The credit applies to costs incurred 
beginning in 2002.
  128. Employer-provided accident and disability benefits.--Employer-
provided accident and disability benefits are excluded from an 
employee's gross income even though the employer's costs for the 
benefits are a deductible business expense.
  129. Employer-provided supplementary unemployment benefits.--Employers 
may establish trusts to pay supplemental unemployment benefits to 
employees separated from employment. Interest payments to such trusts 
are exempt from taxation.
  130. Employer Stock Ownership Plan (ESOP) provisions.--ESOPs are a 
special type of tax-exempt employee benefit plan. Employer-paid 
contributions (the value of stock issued to the ESOP) are deductible by 
the employer as part of employee compensation costs. They are not 
included in the employees' gross income for tax purposes, however, until 
they are paid out as benefits. The following special income tax 
provisions for ESOPs are intended to increase ownership of corporations 
by their employees: (1) annual employer contributions are subject to 
less restrictive limitations; (2) ESOPs may borrow to purchase employer 
stock, guaranteed by their agreement with the employer that the debt 
will be serviced by his payment (deductible by him) of a portion of 
wages (excludable by the employees) to service the loan; (3) employees 
who sell appreciated company stock to the ESOP may defer any taxes due 
until they withdraw benefits; and (4) dividends paid to ESOP-held stock 
are deductible by the employer.
  131. Additional deduction for the blind.--Taxpayers who are blind may 
take an additional $1,200 standard deduction if single, or $950 if 
married in 2004.
  132. Additional deduction for the elderly.--Taxpayers who are 65 years 
or older may take an additional $1,200 standard deduction if single, or 
$950 if married in 2004.
  133. Tax credit for the elderly and disabled.--Individuals who are 65 
years of age or older, or who are permanently disabled, can take a tax 
credit equal to 15 percent of the sum of their earned and retirement 
income. Income is limited to no more than $5,000 for single individuals 
or married couples filing a joint return where only one spouse is 65 
years of age or older, and up to $7,500 for joint returns where both 
spouses are 65 years of age or older. These limits are reduced by one-
half of the taxpayer's adjusted gross income over $7,500 for single 
individuals and $10,000 for married couples filing a joint return.
  134. Casualty losses.--Neither the purchase of property nor insurance 
premiums to protect its value are deductible as costs of earning income; 
therefore, reimbursement for insured loss of such property is not 
reportable as a part of gross income. Taxpayers, however, may deduct 
uninsured casualty and theft losses of more than $100 each, but only to 
the extent that total losses during the year exceed 10 percent of AGI.
  135. Earned income tax credit (EITC).--The EITC may be claimed by low 
income workers. For a family with one qualifying child, the credit is 34 
percent of the first $7,660 of earned income in 2004. The credit is 40 
percent of the first $10,750 of income for a family with two or more 
qualifying children. The credit is phased out beginning when the 
taxpayer's income exceeds $14,040 at the rate of 15.98 percent (21.06 
percent if two or more qualifying children are present). It is 
completely phased out when the taxpayer's modified adjusted gross income 
reaches $30,338 ($34,458 if two or more qualifying children are 
present), $31,338 (or $35,458) for those married.
  The credit may also be claimed by workers who do not have children 
living with them. Qualifying workers must be at least age 25 and may not 
be claimed as a dependent on another taxpayer's return. The credit is 
not available to workers age 65 or older. In 2004, the credit is 7.65 
percent of the first $5,100 of earned income. When the taxpayer's income 
exceeds $6,390 (7,390 if married), the credit is phased out at the rate 
of 7.65 percent. It is completely phased out at $11,490 ($12,490 for 
married) of modified adjusted gross income.

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  For workers with or without children, the income levels at which the 
credit begins to phase-out and the maximum amounts of income on which 
the credit can be taken are adjusted for inflation. For married 
taxpayers filing a joint return, the base amount for the phase-out 
increases by $2,000 in 2005 through 2007, and $3,000 in 2008 (indexed 
thereafter).
  Earned income tax credits in excess of tax liabilities owed through 
the individual income tax system are refundable to individuals. This 
portion of the credit is shown as an outlay, while the amount that 
offsets tax liabilities is shown as a tax expenditure.

                             Social Security

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

                     Veterans Benefits and Services

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

                           General Government

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

                                Interest

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

                                Appendix:

           TREASURY REVIEW OF THE TAX EXPENDITURE PRESENTATION

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

[[Page 347]]

    DIFFERENCES BETWEEN OFFICIAL TAX EXPENDITURES AND THOSE BASED ON 
                          COMPREHENSIVE INCOME

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

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

  Comprehensive income, also called Haig-Simons income, is the real, 
inflation adjusted, accretion to one's economic power arising between 
two points in time, e.g., the beginning and ending of the year. It 
includes all accretions to wealth, whether or not realized, whether or 
not related to a market transaction, and whether a return to capital or 
labor. Inflation adjusted capital gains (and losses) would be included 
in comprehensive income as they accrue. Business, investment, and 
casualty losses, including losses caused by depreciation, would be 
deducted. Implicit returns, such as those accruing to homeowners, also 
would be included in comprehensive income. A comprehensive income tax 
baseline would tax all sources of income once. Thus, it would not 
include a separate tax on corporate income that leads to the double 
taxation of corporate profits.
  While comprehensive income can be defined on the sources side of the 
consumer's balance sheet, it sometimes is instructive to use the 
identity between the sources of wealth and the uses of wealth to 
redefine it as the sum of consumption during the period plus the change 
in net worth between the beginning and the end of the period.
  Comprehensive income is widely held to be the idealized base for an 
income tax even though it is not a perfectly defined concept. \6\ It 
suffers from conceptual ambiguities, some of which are discussed below, 
as well as practical problems in measurement and tax administration, 
e.g., how to implement a practicable deduction for economic depreciation 
or include in income the return earned on consumer durable goods, 
including housing, automobiles, and major appliances.
---------------------------------------------------------------------------
  \6\ See, e.g., David F. Bradford, Untangling the Income Tax 
(Cambridge, MA: Harvard University Press, 1986), pp. 15-31, and Richard 
Goode, ``The Economic Definition of Income'' in Joseph Pechman, ed., 
Comprehensive Income Taxation (Washington, D.C.: The Brookings 
Institution, 1977), pp. 1-29.
---------------------------------------------------------------------------
  Furthermore, comprehensive income does not necessarily represent an 
ideal tax base; efficiency or equity might be improved by deviating from 
comprehensive income as a tax base, e.g., by reducing the tax on capital 
income in order to further spur economic growth or by subsidizing 
certain types of activities in order to correct for market failures or 
to improve the after-tax distribution of income. In addition, some 
elements of comprehensive income would be difficult or impossible to 
include in a tax system that is administrable.
  Classifying individual tax provisions relative to a comprehensive 
income baseline is difficult, in part because of the ambiguity of the 
baseline. It also is difficult because of interactions between tax 
provisions (or their absence). These interactions mean that it may not 
always be appropriate to consider each provision in isolation. 
Nonetheless, Appendix Table 1 attempts such a classification for each of 
the thirty largest tax expenditures from the Budget.
  We classify fifteen of the thirty items as tax expenditures under a 
comprehensive tax base (those in panel A). Most of these give 
preferential tax treatment to the return on certain types of savings or 
investment. They are a result of the explicitly hybrid nature of the 
existing tax system, and arise out of policy decisions that reflect 
discomfort with the high tax rate on capital income that would otherwise 
arise under the current structure of the income tax. Even these 
relatively clear cut items, however, can raise ambiguities particularly 
in light of the absence of integration of the corporate and individual 
tax systems. Given current law's corporate income tax, the reduction or 
elimination of individual level tax on income from investment in 
corporate equities might not be a tax expenditure relative to a 
comprehensive income baseline. Rather, an individual income tax 
preference might undo the corporate tax penalty (i.e., the double tax). 
This perspective is reflected in adjustments that have been made to the 
calculation of the tax expenditures for pensions and several other items 
in the 2006 budget (as discussed above). However, these adjustments have 
not been made in all tax expenditure calculations, e.g., no adjustment 
was made in the exclusion of interest on life insurance saving. A 
similar line of reasoning could be used to argue that in the case of 
corporations, expens

[[Page 348]]

ing \7\ of R&E is not a tax expenditure because it serves to offset the 
corporate tax penalty.
---------------------------------------------------------------------------
  \7\ Expensing means immediate deduction. Proper income tax treatment 
requires capitalization followed by annual depreciation allowances 
reflecting the decay in value of the associated R&E spending.
---------------------------------------------------------------------------
  In contrast to treatment in previous budgets, the 2006 budget includes 
as a tax expenditure the failure to tax net rental income from owner-
occupied housing. Because net rental income (gross rents minus 
depreciation, interest, taxes, and other expenses) would be in the 
homeowner's tax base under a comprehensive income tax baseline, this 
item would be a tax expenditure relative to a comprehensive income 
baseline.
  The exclusion of worker's compensation benefits also would be a tax 
expenditure under comprehensive income principles. Under comprehensive 
income tax principles, if the worker were to buy the insurance himself, 
he would be able to deduct the premium (since it represents a reduction 
in net worth) but should include in income the benefit when paid (since 
it represents an increase in net worth). \8\ If the employer pays the 
premium, the proper treatment would allow the employer a deduction and 
allow the employee to disregard the premium, but he would take the 
proceeds, if any, into income. Current law allows the employer to deduct 
the premium and excludes both the premium and the benefits from the 
employee's tax base.
---------------------------------------------------------------------------
  \8\ Suppose a taxpayer buys a one year term unemployment insurance 
policy at the beginning of the year. At that time he exchanges one 
asset, cash, for another, the insurance policy, so there is no change in 
net worth. But, at the end of the year, the policy expires and so is 
worthless, hence the taxpayer has a reduction in net worth equal to the 
premium. If the policy pays off during the year (i.e., the taxpayer has 
a work related injury), then the taxpayer would include the proceeds in 
income because they represent an increase in his net worth.
---------------------------------------------------------------------------
  Veteran's death and disability benefits seem likely to represent a tax 
expenditure. This is clearly the case to the extent they are seen as 
deferred wages or as transfers. It also is the case to the extent that 
they are seen as insurance benefits, since the premiums, which come in 
the form of foregone wages, were not included in taxable income. \9\
---------------------------------------------------------------------------
  \9\ The treatment of insurance premiums and benefits is discussed more 
completely below.
---------------------------------------------------------------------------
  Panel B deals with items that probably are tax expenditures, but that 
raise issues. Current law allows deductions for home mortgage interest 
and for property taxes on owner-occupied housing. The tax expenditure 
budget includes both of these deductions. From one perspective, these 
two deductions would not be considered tax expenditures relative to a 
comprehensive tax base; a comprehensive base would allow both 
deductions. However, this perspective ignores current law's failure to 
impute gross rental income. Conditional on this failure, the deductions 
for interest and property taxes might be viewed as inappropriate, 
because they move the tax system away from rather than towards a 
comprehensive income tax base. \10\ Indeed, the sum of the tax 
expenditure for these two deductions, plus the tax expenditure for the 
failure to include net rental income, sums to the tax expenditure for 
owner-occupied housing relative to a comprehensive income tax base. 
Consequently, there is a strong argument for classifying them as tax 
expenditures relative to a comprehensive income baseline.
---------------------------------------------------------------------------
  \10\ If there were no deduction for interest and property taxes, the 
tax expenditure base (i.e., the proper tax base minus the actual tax 
base) for owner-occupied housing would equal the homeowner's net rental 
income: gross rents--(depreciation+interest+property taxes+other 
expenses). With the deduction for interest and property taxes, the tax 
expenditure base rises to gross rents minus (depreciation+other 
expenses).
---------------------------------------------------------------------------
  The deduction of nonbusiness State and local taxes other than on 
owner-occupied homes also is included in this section. These taxes 
include income, sales, and property taxes. The stated justification for 
this tax expenditure is that ``Taxpayers may deduct State and local 
income taxes and property taxes even though these taxes primarily pay 
for services that, if purchased directly by taxpayers, would not be 
deductible. \11\ The idea is that these taxes represent (or serve as 
proxies for) consumption expenditures for which current law makes no 
imputations to income. \12\
---------------------------------------------------------------------------
  \11\ Fiscal Year 2003 Budget of the United States Government, 
Analytical Perspectives (Washington, D.C.: U.S. Government Printing 
Office, 2002) p. 127.
  \12\ Property taxes on owner-occupied housing also might serve as a 
proxy for the value of untaxed local services provided to homeowners. As 
such, they would be listed in the tax expenditure budget (as configured, 
i.e., building on the estimate for the failure to tax net rents) twice, 
once because current law does not tax rental income and again as a proxy 
for government services received. Property taxes on other consumer 
durables such as automobiles also might be included twice, owing to 
current law's exclusion from income of the associated service flow.
---------------------------------------------------------------------------
  In contrast to the view in the official Budget, however, the deduction 
for State and local taxes might not be a tax expenditure if the baseline 
were comprehensive income. Properly measured comprehensive income would 
include the value of State and local government benefits received, but 
would allow a deduction for State and local taxes paid. \13\ Thus, in 
this sense the deductibility of State and local taxes is consistent with 
comprehensive income tax principles; it should not be a tax expenditure. 
Nonetheless, imputing the value of State and local services is difficult 
and is not done under current law. Consequently, a deduction for taxes 
might sensibly be viewed as a tax expenditure relative to a 
comprehensive income baseline. \14\
---------------------------------------------------------------------------
  \13\ U.S. Treasury, Blueprints for Basic Tax Reform (Washington, D.C.: 
U.S. Government Printing Office, 1977) p. 92.
  \14\ Under the normal tax method employed by the Joint Committee on 
Taxation, the value of some public assistance benefits provided by State 
Governments is included as a tax expenditure, thereby raising a 
potential double counting issue.
---------------------------------------------------------------------------
  To the extent that the personal and dependent care exemptions and the 
standard deduction properly remove from taxable income all expenditures 
that do not yield suitably discretionary consumption value, or otherwise 
appropriately adjust for differing taxpaying capacity, then the child 
care credit and the earned income tax credit would be tax expenditures. 
In contrast, a competing perspective views these credits as appropriate 
modifications that account for differing taxpaying capacity. Even 
accepting this competing perspective, however, one might question why 
these programs come in the form of credits rather than deductions.
  The step-up of basis at death lowers the income tax on capital gains 
for those who inherit assets below what it would be otherwise. From that 
perspective it would be a tax expenditure under a comprehensive income 
baseline. Nonetheless, there are ambiguities. Under a comprehensive 
income baseline, all real inflation adjusted gains would be taxed as 
accrued, so there would be no deferred unrealized gains on assets held 
at death.
  The lack of full taxation of Social Security benefits also is listed 
in panel B. Consider first Social Security retirement benefits. To the 
extent that Social Security

[[Page 349]]

is viewed as a pension, a comprehensive income tax would include in 
income all contributions to Social Security retirement funds (payroll 
taxes) and tax accretions to value as they arise (inside build-up). \15\ 
Benefits paid out of prior contributions and the inside build-up, 
however, would not be included in the tax base because the fall in the 
value of the individual's Social Security account would be offset by an 
increase in cash. In contrast, to the extent that Social Security is 
viewed as a transfer program, all contributions should be deductible 
from the income tax base and all benefits received should be included in 
the income tax base.
---------------------------------------------------------------------------
  \15\ As a practical matter, this may be impossible to do. Valuing 
claims subject to future contingencies is very difficult, as discussed 
in Bradford, Untangling the Income Tax, pp. 23-24.
---------------------------------------------------------------------------
  A similar analysis applies to Social Security benefits paid to 
dependents and survivors. If these benefits represent transfers from the 
Government, then they should be included in the tax base. If the 
taxpaying unit consists of the worker plus dependents and survivors, 
then to the extent that Social Security benefits represent payments from 
a pension, the annual pension earnings should be taxed in the same way 
that earnings accruing to retirees are taxed. However, benefits paid to 
dependents and survivors might be viewed as a gift or transfer from the 
decedent, in which case the dependents and survivors should pay tax on 
the full amount of the benefit received. (In this case the decedent or 
his estate should pay tax on the pension income as well, to the extent 
that the gift represents consumption rather than a reduction in net 
worth).
  In addition, dependent and survivors benefits might be viewed in part 
as providing life insurance. In that case, the annual premiums paid each 
year, or the portion of Social Security taxes attributable to the 
premiums, should be deducted from income, since they represent a decline 
in net worth, while benefits should be included in income. 
Alternatively, taxing premiums and excluding benefits also would 
represent appropriate income tax policy.
  In contrast to any of these treatments, current law excludes one-half 
of Social Security contributions (employer-paid payroll taxes) from the 
base of the income tax, makes no attempt to tax accretions, and subjects 
some, but not all, benefits to taxation. The difference between current 
law's treatment of Social Security benefits and their treatment under a 
comprehensive income tax would qualify as a tax expenditure, but such a 
tax expenditure differs in concept from that included in the official 
budget.
  The tax expenditures in the official budget \16\ reflect exemptions 
for lower income beneficiaries from the tax on 85 percent of Social 
Security benefits. \17\ Historically, payroll taxes paid by the employee 
represented no more than 15 percent of the expected value of the 
retirement benefits received by a lower-earnings Social Security 
beneficiary. The 85 percent inclusion rate is intended to tax upon 
distribution the remaining amount of the retirement benefit payment--the 
portion arising from the payroll tax contributions made by employers and 
the implicit return on the employee and employer contributions. Thus, 
the tax expenditure conceived and measured in the current budget is not 
intended to capture the deviation from a comprehensive income baseline, 
which would additionally account for the deferral of tax on the 
employer's contributions and on the rate of return (less an inflation 
adjustment attributable to the employee's payroll tax contributions). 
Rather, it is intended to approximate the taxation of private pensions 
with employee contributions made from after-tax income, \18\ on the 
assumption that Social Security is comparable to such pensions. Hence, 
the official tax expenditure understates the tax advantage accorded 
Social Security retirement benefits relative to a comprehensive income 
baseline.
---------------------------------------------------------------------------
  \16\ This includes the tax expenditure for benefits paid to workers, 
that for benefits paid to survivors and dependents, and that for 
benefits paid to dependents.
  \17\ The current budget does not include as a tax expenditure the 
absence of income taxation on the employer's contributions (payroll 
taxes) to Social Security retirement at the time these contributions are 
made.
  \18\ Private pensions allow the employee to defer tax on all inside 
build-up. They also allow the employee to defer tax on contributions 
made by the employer, but not on contributions made directly by the 
employee. Applying these tax rules to Social Security would require the 
employee to include in his taxable income benefits paid out of inside 
build-up and out of the employer's contributions, but would allow the 
employee to exclude from his taxable income benefits paid out of his own 
contributions.
---------------------------------------------------------------------------
  To the extent that the benefits paid to dependents and survivors 
should be taxed as private pensions, the same conclusion applies: the 
official tax expenditure understates the tax advantage.
  The deduction for U.S. production activities also raises some 
problems. To the extent it is viewed as a tax break for certain 
qualifying businesses (``manufacturers''), it would be a tax 
expenditure. In contrast, the deduction may prove to be so broad that it 
is available to most U.S. businesses, in which case it might not be seen 
as a tax expenditure. Rather, it would represent a feature of the 
baseline tax rate system, because the deduction is equivalent to a lower 
tax rate. In addition, to the extent that it is viewed as providing 
relief from the double tax on corporate profits, it might not be a tax 
expenditure.
  The next category (panel C) includes items whose treatment is less 
certain. The proper treatment of some of these items under a 
comprehensive income tax is ambiguous, while others perhaps serve as 
proxies for what would be a tax expenditure under a comprehensive income 
base. \19\ Consider, for example, the items relating to charitable 
contributions. Under existing law, charitable contributions are 
deductible, and this deduction is considered on its face a tax 
expenditure in the current budget. \20\
---------------------------------------------------------------------------
  \19\ See, for example, Goode, The Economic Definition of Income, pp. 
16-17, and Bradford, Untangling the Income Tax, pp. 19-21, and pp.30-31.
  \20\ The item also includes gifts of appreciated property, at least 
part of which represents a tax expenditure relative to an ideal income 
tax, even if one assumes that charitable donations are not consumption.
---------------------------------------------------------------------------
  The treatment of charitable donations, however, is ambiguous under a 
comprehensive income tax. If charitable contributions are a consumption 
item for the giver, then they are properly included in his taxable 
income; a deduction for contributions would then be a tax expenditure 
relative to a comprehensive income tax baseline. In contrast, charitable 
contributions could represent a transfer of purchasing power from the 
giver

[[Page 350]]

to the receiver. As such, they would represent a reduction in the 
giver's net worth, not an item of consumption, and so properly would be 
deductible, implying that current law's treatment is not a tax 
expenditure. At the same time, however, the value of the charitable 
benefits received is income to the recipient. Under current law, such 
income generally is not taxed, and so represents a tax expenditure whose 
size might be approximated by the size of the donor's contribution. \21\
---------------------------------------------------------------------------
  \21\ If recipients tend to be in lower tax brackets, then the tax 
expenditure is smaller than when measured at the donor's tax rates.
---------------------------------------------------------------------------
  Medical expenditures may or may not be an element of income (or 
consumption). Some argue that medical expenditures don't represent 
discretionary spending, and so aren't really consumption. Instead, they 
are a reduction of net worth and should be excluded from the tax base. 
In contrast, others argue that there is no way to logically distinguish 
medical care from other consumption items. Those who view medical 
spending as consumption point out that there is choice in many health 
care decisions, e.g., whether to go to the best doctor, whether to have 
voluntary surgical procedures, and whether to exercise and eat 
nutritiously so as to improve and maintain one's health and minimize 
medical expenditures. This element of choice makes it more difficult to 
argue, at least in many cases, that medical spending is more 
``necessary'' than, or otherwise different from, other consumption 
spending.
  The exemption of full taxation of Social Security benefits paid to the 
disabled also raises some issues. Social Security benefits for the 
disabled most closely resemble either Government transfers or insurance. 
A comprehensive income tax would require the worker to include the 
benefit fully in his income and would allow him to deduct associated 
Social Security taxes. If viewed as insurance, he also could include the 
premium (i.e., tax) and exclude the benefit. The deviation between such 
treatment and current law's treatment (described above) would be a tax 
expenditure under a comprehensive income baseline.
  In contrast, as described above, the official tax expenditure measures 
the benefit of exemption for low income beneficiaries from the tax on 85 
percent of Social Security benefits. This measurement does not 
correspond closely to that required under a comprehensive income base. 
If the payment of the benefit is viewed as a transfer and divorced from 
the treatment of Social Security taxes, then the current tax expenditure 
understates the tax expenditure measured relative to a comprehensive 
income baseline. If the payment of the benefit is viewed as a transfer 
but the inability to deduct the employee's share of the Social Security 
tax is simultaneously considered, then it is less likely that the 
current tax expenditure overstates the tax expenditure relative to a 
comprehensive income baseline, and in some cases it may generate a 
negative tax expenditure. If the benefit is viewed as insurance and the 
tax as a premium, then the current tax expenditure overstates the tax 
expenditure relative to a comprehensive income baseline. Indeed, in the 
insurance model, the ability to exclude from tax only \1/2\ of the 
premium might suggest that \1/2\ of the payout should be taxed, so that 
the current tax rules impose a greater tax burden than that implied by a 
comprehensive income tax, i.e., a negative tax expenditure. \22\
---------------------------------------------------------------------------
  \22\ In contrast, the passive loss rules themselves, which restrict 
the deduction of losses, would be a negative tax expenditure when 
compared to a comprehensive tax base.
---------------------------------------------------------------------------
  The final category (panel D) includes items that would not be tax 
expenditures under a comprehensive income tax base. A tax based on 
comprehensive income would allow all losses to be deducted. Hence, the 
exception from the passive loss rules would not be a tax expenditure.

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

  While most of the major tax expenditures in the current budget also 
would be tax expenditures under a comprehensive income base, there also 
are tax expenditures relative to a comprehensive income base that are 
not found on the existing tax expenditure list. These additional tax 
expenditures include the imputed return from certain consumer durables 
(e.g., automobiles), the imputed return to consumption of financial 
services (e.g., checking account services received in kind and paid for 
by accepting a below market interest rate on deposits), the difference 
between capital gains (and losses) as they accrue and capital gains as 
they are realized, private gifts and inheritances received, in-kind 
benefits from such Government programs as food-stamps, Medicaid, and 
public housing, the value of payouts from insurance policies, \23\ and 
benefits received from private charities. Under some ideas of 
comprehensive income, the value of leisure and of household production 
of goods and services also would be included as tax expenditures. The 
personal exemption and standard deduction also might be considered tax 
expenditures, although they can be viewed differently, e.g., as elements 
of the basic tax rate schedule. The foreign tax credit also might be a 
tax expenditure, since a deduction for foreign taxes, rather than a 
credit, would seem to measure the income of U.S. residents properly.
---------------------------------------------------------------------------
  \23\ To the extent that premiums are deductible.

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

  Under current budgetary practice, negative tax expenditures, tax 
provisions that raise rather than lower taxes, are excluded from the 
official tax expenditure list. This exclusion conforms with the view 
that tax expenditures are intended to be similar to Government spending 
programs.
  If attention is expanded from a focus on spending-like programs to 
include any deviation from the baseline tax system, negative tax 
expenditures would be of interest. Relative to a comprehensive income 
baseline, there are a number of important negative tax expenditures, 
some of which also might be viewed as negative tax expenditures under an 
expanded interpretation of the normal or reference law baseline. Among 
the more important negative tax expenditures is the corporation income 
tax, or more generally the double

[[Page 351]]

tax on corporate profits, which would be eliminated under a 
comprehensive income tax. The Jobs and Growth Tax Relief and 
Reconciliation Act of 2003 (JGTRRA) reduced the tax rate on dividends 
and capital gains to 15 percent, thus reducing the double tax compared 
to prior law. Nonetheless, as discussed later in the Appendix, current 
law still imposes a substantial double tax on corporate profits. The 
passive loss rules, restrictions on the deductibility of capital losses, 
and NOL carry-forward requirements each would generate a negative tax 
expenditure, since a comprehensive income tax would allow full 
deductibility of losses. If human capital were considered an asset, then 
its cost (e.g., certain education and training expenses, including 
perhaps the cost of college and professional school) should be 
amortizable, but it is not under current law. \24\ Some restricted 
deductions under the individual AMT might be negative tax expenditures 
as might the phase-out of personal exemptions and of itemized 
deductions. The inability to deduct consumer interest also might be a 
negative tax expenditure, as an interest deduction may be required to 
properly measure income, as seen by the equivalence between borrowing 
and reduced lending. \25\ As discussed above, the current treatment of 
Social Security payments to the disabled also might represent a negative 
tax expenditure, if viewed as payments on an insurance policy.
---------------------------------------------------------------------------
  \24\ Current law offers favorable treatment to some education costs, 
thereby creating (positive) tax expenditures. Current law allows 
expensing of that part of the cost of education and career training that 
is related to foregone earnings and this would be a tax expenditure 
under a comprehensive income baseline.
  \25\ See Bradford, Untangling the Income Tax, p. 41.
---------------------------------------------------------------------------
  Current tax law also fails to index for inflation interest receipts, 
capital gains, depreciation, and inventories. This failure leads to 
negative tax expenditures because comprehensive income would be indexed 
for inflation. Current law, however, also fails to index for inflation 
the deduction for interest payments; this represents a (positive) tax 
expenditure.
  The issue of indexing also highlights that even if one wished to focus 
only on tax policies that are similar to spending programs, accounting 
for some negative tax expenditures may be required. For example, the net 
subsidy created by accelerated depreciation is properly measured by the 
difference between depreciation allowances specified under existing tax 
law and economic depreciation, which is indexed for inflation. \26\
---------------------------------------------------------------------------
  \26\ Accelerated depreciation can be described as the equivalent of an 
interest free loan from the Government to the taxpayer. Under federal 
budget accounting principles, such a loan would be treated as an outlay 
equal to the present value of the foregone interest.
---------------------------------------------------------------------------

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

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

Ambiguities in Determining Tax Expenditures Relative to a Consumption 
Baseline

  A broad-based consumption tax is a combination of an income tax plus a 
deduction for net saving. This follows from the definition of 
comprehensive income as consumption plus the change in net worth. It 
therefore seems straightforward to say that current law's deviations 
from a consumption base are the sum of (a) tax expenditures on an income 
base associated with exemptions and deductions for certain types of 
income, plus (b) overpayments of tax, or negative tax expenditures, to 
the extent net saving is not deductible from the tax base. In reality, 
however, the situation is more complicated. A number of issues arise, 
some of which also are problems in defining a comprehensive income tax, 
but seem more severe, or at least only more obvious, for the consumption 
tax baseline.
  It is not always clear how to treat certain items under a consumption 
tax. One problem is determining whether a particular expenditure is an 
item of consumption. Spending on medical care and charitable donations 
are two examples. The classification below suggests that medical 
spending and charitable contributions might be included in the 
definition of consumption, but also considers an alternative view.
  There may be more than one way to treat various items under a 
consumption tax. For example, a consumption tax might ignore borrowing 
and lending by excluding from the borrower's tax base the proceeds from 
loans, denying the borrower a deduction for payments of interest and 
principal, and excluding interest and principal payments received from 
the lender's tax base. On the other hand, a consumption tax might 
include borrowing and lending in the tax base by requiring the borrower 
to add the proceeds from loans in his tax base, allowing the lender to 
deduct loans from his tax base, allowing the borrower to deduct payments 
of principal and interest, and requiring the lender to include receipt 
of principal and interest payments. In

[[Page 352]]

present value terms, the two approaches are equivalent for both the 
borrower and the lender; in particular both allow the tax base to 
measure consumption and both impose a zero effective tax rate on 
interest income. But which approach is taken obviously has different 
implications (at least on an annual flow basis) for the treatment of 
many important items of income and expense, such as the home mortgage 
interest deduction. The classification below suggests that the deduction 
for home mortgage interest could well be a tax expenditure, but takes 
note of alternative views.
  Some exclusions of income are equivalent in many respects to 
consumption tax treatment that immediately deducts the cost of an 
investment while taxing the future cash-flow. For example, exempting 
investment income is equivalent to consumption tax treatment as far as 
the normal rate of return on new investment is concerned. This is 
because expensing generates a tax reduction that offsets in present 
value terms the tax paid on the investment's future normal returns. 
Expensing gives the income from a marginal investment a zero effective 
tax rate. However, a yield exemption approach differs from a consumption 
tax as far as the distribution of income and Government revenue is 
concerned. Pure profits in excess of the normal rate of return would be 
taxed under a consumption tax, because they are an element of cash-flow, 
but would not be taxed under a yield exemption tax system. Should 
exemption of certain kinds of investment income, and certain investment 
tax credits, be regarded as the equivalent of consumption tax treatment? 
The classification that follows takes a fairly broad view of this 
equivalence and considers many tax provisions that reduce or eliminate 
the tax on capital income to be roughly consistent with a broad-based 
consumption tax.
  Looking at provisions one at a time can be misleading. The hybrid 
character of the existing tax system leads to many provisions that might 
make good sense in the context of a consumption tax, but that generate 
inefficiencies because of the problem of the ``uneven playing field'' 
when evaluated within the context of the existing tax rules. It is not 
clear how these should be classified. For example, many saving 
incentives are targeted to specific tax favored sources of capital 
income. The inability to save on a similar tax-favored basis 
irrespective of the ultimate purpose to which the saving is applied 
potentially distorts economic choices in ways that would not occur under 
a broad-based consumption tax. As another example, under a consumption 
VAT based on the destination principle, there would be a rebate of the 
VAT on exports and a tax on imports. Does this mean that the 
extraterritorial income exclusion (the successor of the Foreign Sales 
Corporation provision) is not a tax expenditure? Resolution comes down 
to judgments about how broad is broad enough to be considered general, 
or whether it even matters at all that a provision is targeted in some 
way. The classification that follows views many savings incentives, even 
if targeted, as roughly consistent with a broad based consumption tax.
  In addition, provisions can interact even once an appropriate 
treatment is determined. For example, suppose that it is determined that 
financial flows are out of the tax base. Then the deduction for home 
mortgage interest would seem to be a tax expenditure. However, this 
conclusion is cast into doubt because current law generally taxes 
interest income. When combined with the homeowners' deduction, this 
results in a zero tax rate on the interest flow, consistent with 
consumption tax treatment.
  Capital gains would not be a part of a comprehensive consumption tax 
base. Proceeds from asset sales and sometimes borrowing would be part of 
the cash-flow tax base, but, for transactions between domestic investors 
at a flat tax rate, would cancel out in the economy as a whole. How 
should existing tax expenditures related to capital gains be classified? 
The classification below generally views available capital gains tax 
breaks as consistent with a broad-based consumption tax because they 
lower the tax rate on capital income toward the zero rate that is 
consistent with a consumption-based tax.
  Such considerations suggest that trying to compute the current tax's 
deviations from ``the'' base of a consumption tax is impossible because 
deviations cannot be uniquely determined, making it very difficult to do 
a consistent accounting of the differences between the current tax base 
and a consumption tax base. Nonetheless, Appendix Table 2 attempts a 
classification based on the judgments outlined above.

Treatment of Major Tax Expenditures under a Comprehensive Consumption 
Baseline

  As noted above, the major difference between a comprehensive 
consumption tax and a comprehensive income tax is in the treatment of 
saving, or in the taxation of capital income. Consequently, many current 
tax expenditures related to preferential taxation of capital income 
would not be tax expenditures under a consumption tax. However, 
preferential treatment of items of income that is unrelated to 
moderately broad-based saving or investment incentives would remain tax 
expenditures under a consumption baseline. In addition, several official 
tax expenditures relating to items of income and expense are difficult 
to classify properly, while others may serve as proxies for properly 
measured tax expenditures.
  Appendix Table 2 shows thirty large official tax expenditures from the 
Budget classified according to whether they would be considered a tax 
expenditure under a consumption tax. Two of the thirty items clearly 
would be a tax expenditure (shown in panel A) under a consumption tax, 
while an additional seven (those in panel B) probably would be tax 
expenditures.
  A consumption tax would include in the homeowners' tax base the value 
of the implicit (gross) rental income from owner-occupied housing. Net 
rental income is a

[[Page 353]]

component of this, and so would be included as a tax expenditure, 
relative to a consumption tax baseline. \27\
---------------------------------------------------------------------------
  \27\ Suppose that the rental value of a house is $100 per year, and 
that depreciation is $20, interest is $15, property taxes are $10, and 
other expenses are $5. Net rental income is $50 (gross rents less all 
items of expense). Hence, net rental income is a component of the gross 
rent, which is the consumption value of the housing services. Under a 
real based cash flow tax, in which financial flows are outside the tax 
base, the homeowner's net tax base would be $85: gross rents--(property 
taxes + other expenses), assuming that property taxes are viewed as a 
reduction in net worth and that he makes no new investment (which would 
be deductible).
---------------------------------------------------------------------------
  Exclusion of workers' compensation benefits allows an exclusion from 
income that is unrelated to investment, and so should be included in the 
base of a comprehensive consumption tax.
  Consider next the deductibility of home mortgage interest and of 
property taxes on owner-occupied housing. Both items would seem to be 
strong candidates for inclusion as a tax expenditure, given current 
law's failure to impute the consumption value of housing. That is, 
focusing on the homeowner's tax base, these deductions move the tax 
system away from rather than towards the proper treatment of housing 
services. \28\
---------------------------------------------------------------------------
  \28\ Using the figures from the example in the previous footnote, the 
homeowner would pay tax on gross rents minus property taxes minus other 
expenses, or on $85. If property taxes and mortgage interest were not 
deducted, then this would be the size of the tax expenditure. However, 
current law allows these deductions, which raises the tax expenditure 
base to $110.
---------------------------------------------------------------------------
  However, with respect to the home mortgage interest deduction, some 
ambiguity is introduced by the taxation of interest income to lenders. 
In a sense, the homeowner's deduction offsets the lenders inclusion, 
leaving (for equal tax rates) no net tax due on the interest flow, as 
would be appropriate under a consumption tax. Hence, from the 
perspective of the entire tax system, it is less clear that the home 
mortgage interest deduction represents a tax expenditure. \29\
---------------------------------------------------------------------------
  \29\ One must guard against double counting here, however, to the 
extent that current law's general taxation of capital income is 
calculated elsewhere in the tax expenditure budget as a negative tax 
expenditure.
---------------------------------------------------------------------------
  Some ambiguity also is introduced by the variable treatment of 
financial flows possible under a consumption tax. That is, the proper 
treatment of interest under a consumption tax depends on whether 
financial flows are in or out of the consumption tax base. If the loans 
are taken into income (as they would be under some types of consumption 
taxes), then the associated interest and principal payments should be 
deductible, otherwise not.
  With respect to property taxes on housing as well as other State and 
local taxes, some ambiguity arises because the tax might not represent 
consumption--it might be considered a reduction in net worth. Considered 
alone, this argument perhaps has some merit. However, there are two 
problems with this argument when viewed from the context of the entire 
tax system. First, the deduction for property taxes would seem to be 
inappropriate when there is no imputation for the associated consumption 
value, as discussed above. Second, the current tax system does not 
impute the consumption value of State and local services, and tax 
payments might serve as a proxy for that value, making their deduction 
unnecessary for the proper measurement of consumption.
  The official tax expenditures for Social Security benefits reflects 
exceptions for low income taxpayers from the general rule that 85 
percent of Social Security benefits are included in the recipient's tax 
base. The 85 percent inclusion is intended as a simplified mechanism for 
taxing Social Security benefits as if the Social Security program were a 
private pension with employee contributions made from after-tax income. 
Under these tax rules, income earned on contributions made by both 
employers and employees benefits from tax deferral, but employer 
contributions also benefit because the employee may exclude them from 
his taxable income, while the employee's own contributions are included 
in his taxable income. These tax rules give the equivalent of 
consumption tax treatment, a zero effective tax rate on the return, to 
the extent that the original pension contributions are made by the 
employer, but give less generous treatment to the extent that the 
original contributions are made by the employee. Income earned on 
employee contributions is taxed at a low, but positive, effective tax 
rate. Based on historical calculations, the 85 percent inclusion 
reflects roughly the outcome of applying these tax rules to a lower-
income earner when one-half of the contributions are from the employer 
and one-half from the employee.
  The current tax expenditure measures a tax benefit relative to a 
baseline that is somewhere between a comprehensive income tax and a 
consumption tax. The properly measured tax expenditure relative to a 
consumption tax baseline would include only those Social Security 
benefits that are accorded treatment more favorable than that implied by 
a consumption tax, which would correspond to including 50 percent of 
Social Security benefits in the recipient's tax base.
  A similar analysis would apply to exclusion of Social Security 
benefits of dependents and retirees.
  There is a strong case for viewing the child credit and the earned 
income tax credit as social welfare programs (transfers). As such, they 
would be tax expenditures relative to a consumption baseline. 
Nonetheless, these credits could alternatively be viewed as relieving 
tax on ``nondiscretionary'' consumption, and so not properly considered 
a tax expenditure.
  The treatment of the items in panels C is less uncertain. Several of 
these items relate to the costs of medical care or to charitable 
contributions. As discussed in the previous section of the appendix, 
there is disagreement within the tax policy community over the extent to 
which medical care and charitable giving represent consumption items. 
Medical care is widely held to be consumption, except perhaps the 
medical care that actually raises, rather than simply sustains the 
individual's ability to work. Charitable giving, on the other hand, may 
be considered to be a reduction in net worth that should be excluded 
from the tax base because it does not yield direct satisfaction to 
taxpayer who makes the expenditure. In this case, the tax expenditure 
lies not with the individual making the charitable deduction, but with 
the exclusion from taxation of the amounts received by the recipient.
  There also is the issue of how to tax medical insurance premiums. 
Under current law, employees do not

[[Page 354]]

have to include insurance premiums paid for by employers in their 
income. The self-employed also may exclude (via a deduction) medical 
insurance premiums from their taxable income. From some perspectives, 
these premiums should be in the tax base because they appear to 
represent consumption. Yet an alternative perspective would support 
excluding the premium from tax as long as the consumption tax base 
included the value of any medical services paid for by the insurance 
policy, because the premium equals the expected value of insurance 
benefits received. But even from this alternative perspective, the 
official tax expenditure might continue to be a tax expenditure under a 
consumption tax baseline because current law excludes the value of 
medical services paid with insurance benefits from the employee's 
taxable income.
  If medical spending is not consumption, one approach to measuring the 
consumption base would ignore insurance, but allow the consumer to 
deduct the value of all medical services obtained. An alternative 
approach would allow a deduction for the premium but include the value 
of any insurance benefits received, while continuing to allow a 
deduction for a value of all medical services obtained. In either case, 
the official tax expenditure for the exclusion of employer provided 
medical insurance and expenses would not be a tax expenditure relative 
to a consumption tax baseline.
  The extraterritorial income exclusion replaces the previous Foreign 
Sales Corporation program. It provides an exclusion from income for 
certain exports. To the extent that the program is viewed as a component 
of a destination based VAT it might not be a tax expenditure. In 
addition, to the extent that the exclusion reduces the income tax bias 
against investment it might be consistent with consumption tax 
principles (i.e., a low tax rate on capital income).
  The taxation of Social Security benefits for the disabled also is 
difficult to classify. As discussed in this appendix above, these 
benefits generally ought to be taxed because they represent purchasing 
power. However, the associated Social Security taxes ought to be fully 
deductible, but they are not. Hence the proper treatment is unclear. 
Moreover, if the insurance model is applied, the taxation of Social 
Security benefits might be a negative tax expenditure.
  The credit for low income housing acts to lower the tax burden on 
qualified investment, and so from one perspective would not be a tax 
expenditure under a consumption tax baseline. However, in some cases the 
credit is too generous; it can give a negative tax on income from 
qualified investment rather than the zero tax called for under 
consumption tax principles. In addition, the credit is very narrowly 
targeted. Consequently, it could be considered a tax expenditure 
relative to a consumption tax baseline.
  The final panel (D) shows items that are not likely to be tax 
expenditures under a consumption base. Most of these relate to tax 
provisions that eliminate or reduce the tax on various types of capital 
income because a zero tax on capital income is consistent with 
consumption tax principles.
  The deduction for U.S. production activities is not classified as a 
tax expenditure. This reflects the view that it represents a widespread 
reduction in taxes on capital income or an offset to the corporate 
income tax. In contrast to this classification, however, it would be a 
tax expenditure to the extent that it is viewed as a targeted tax 
incentive.
  The exception from the passive loss rules probably would not be a tax 
expenditure because proper measurement of income, and hence of 
consumption, requires full deduction of losses.

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

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

Negative Tax Expenditures

  Importantly, current law also deviates from a consumption tax norm in 
ways that increase, rather than decrease, tax liability. These could be 
called negative tax expenditures. The official budget excludes negative 
tax expenditures on the theory that tax expenditures are intended to 
substitute for Government spending programs. Yet excluding negative tax 
expenditures gives a very one-sided look at the differences between the 
existing tax system and a consumption tax.
  A large item on this list would be the inclusion of capital income in 
the current individual income tax base, including the income earned on 
inside-build up in Social Security accounts. The revenue from the 
corporation income tax, or more generally a measure of the double tax on 
corporate profits, also would be a negative tax expenditure. 
Depreciation allowances, even

[[Page 355]]

if accelerated, would be a negative tax expenditure since consumption 
tax treatment generally would require expensing. Depending on the 
treatment of loans, the borrower's inability to deduct payments of 
principal and the lender's inability to deduct loans might be a negative 
tax expenditure. The passive loss rules and NOL carry-forward provisions 
also might generate negative tax expenditures, because the change in net 
worth requires a deduction for losses (consumption = income--the change 
in net worth). If human capital were considered an asset, then its cost 
(e.g., certain education and training expenses, including perhaps costs 
of college and professional school) should be expensed, but it is not 
under current law. Certain restrictions under the individual AMT as well 
as the phase-out of personal exemptions and of itemized deductions also 
might be considered negative tax expenditures. Under some views, the 
current tax treatment of Social Security benefits paid to the disabled 
would be a negative tax expenditure.

             REVISED ESTIMATES OF SELECTED TAX EXPENDITURES

Accelerated Depreciation

  Under the reference tax law baseline no tax expenditures arise from 
accelerated depreciation. In the past, official tax expenditure 
estimates of accelerated depreciation under the normal tax law baseline 
compared tax allowances based on the historic cost of an asset with 
allowances calculated using the straight-line method over relatively 
long recovery periods. Normal law allowances also were determined by the 
historical cost of the asset and so did not adjust for inflation, 
although such an adjustment is required when measuring economic 
depreciation, the age related fall in the real value of the asset.
  Beginning with the 2004 Budget, the tax expenditures for accelerated 
depreciation under the normal law concept have been recalculated using 
as a baseline depreciation rates and replacement cost indexes from the 
National Income and Product Accounts. \30\ The revised estimates are 
intended to approximate the degree of acceleration provided by current 
law over a baseline determined by real, inflation adjusted, and economic 
depreciation. Current law depreciation allowances for machinery and 
equipment include the benefits of a temporary expensing provision. \31\ 
The estimates are shown in tables in the body of the main text, e.g., 
Table 19-1.
---------------------------------------------------------------------------
  \30\ See Barbara Fraumeni, ``The Measurement of Depreciation in the 
U.S. National Income and Product Accounts,'' in Survey of Current 
Business 77 No. 7 (Washington, D.C.: Department of Commerce, Bureau of 
Economic Analysis, July, 1997), pp. 7-42, and the National Income and 
Product Accounts of the United States, Table 7.6, ``Chain-type Quantity 
and Price Indexes for Private Fixed Investment by Type,'' U.S. 
Department of Commerce, Bureau of Economic Analysis.
  \31\ The temporary provision allows 30 percent of the cost of a 
qualifying investment to be deducted immediately rather than capitalized 
and depreciated over time. It is generally effective for qualifying 
investments made after September 10, 2001 and before September 11, 2004. 
The Jobs and Growth Tax Relief Reconciliation Act of 2003 raised the 
deduction to 50 percent depreciation (up from 30 percent) of the cost 
new equipment purchased after May 5, 2003 and placed into service before 
January 1, 2005. Qualifying investments generally are limited to 
tangible property with depreciation recovery periods of 20 years or 
less, certain software, and leasehold improvements, but this set of 
assets corresponds closely to machinery and equipment.
---------------------------------------------------------------------------
  The revised tax expenditure estimates differ substantially from 
estimates calculated under the old methodology. In general, the new tax 
expenditure estimates are smaller than the old estimates. \32\ In part, 
this is because the new baseline uses depreciation allowances that are 
faster than those in the old baseline. In addition, the new baseline 
calculates depreciation on a replacement cost basis rather on the 
historic cost basis previously used; this translates into larger 
depreciation allowances to the extent that asset prices rise over time. 
In many years the new tax expenditures are negative, indicating that 
current law's tax depreciation allowances are smaller than those implied 
by economic depreciation. Because these estimates are on a cash flow, 
rather than a present value, basis, the negative value does not 
necessarily indicate that tax depreciation is decelerated relative to 
economic depreciation over the life of an investment. Even when tax 
depreciation is accelerated over the life of an investment, negative 
annual cash flow estimates could obtain in the later years of an 
investment's economic life. This type of vintage effect contributes 
importantly to the negative tax expenditures calculated for equipment in 
2006-2010 because the temporary expensing provision expires at the end 
of 2004. Calculations that compare the present value of tax depreciation 
(without the temporary expensing) with the present value of inflation 
indexed economic depreciation over each investment's economic life show 
that for many types of assets tax depreciation is accelerated, but only 
slightly, assuming a moderate rate of inflation. \33\
---------------------------------------------------------------------------
  \32\ Estimates under the old methodology are no longer shown in the 
tables.
  \33\ U.S. Department of the Treasury, Report to the Congress on 
Depreciation Recovery Periods and Methods (Washington, D.C.: U.S. 
Government Printing Office, July, 2000), p. 32.

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

  A homeowner receives a flow of housing services equal in gross value 
to the rent that could have been earned had the owner chosen to rent the 
house to others. Comprehensive income would include in the homeowner's 
tax base this gross rental flow, and would allow the homeowner a 
deduction for expenses such as interest, depreciation, property taxes, 
and other costs associated with earning the rental income. Thus, a 
comprehensive tax base would include in its base the homeowner's 
implicit net rental income (gross income minus deductions) earned on 
investment in owner-occupied housing.
  In contrast to a comprehensive income tax, current law makes no 
imputation for gross rental income and allows no deduction for 
depreciation or for other expenses, such as utilities and maintenance. 
Current law does, however, allow a deduction for home mortgage interest 
and for property taxes. Consequently, relative to a comprehensive income 
baseline, the total tax expenditure for owner-occupied housing is the 
sum of tax on net rental income plus the tax saving from the de

[[Page 356]]

duction for property taxes and for home mortgage interest. \34\
---------------------------------------------------------------------------
  \34\ The homeowner's tax base under a comprehensive income tax is net 
rents. Under current law, the homeowner's tax base is-(interest + 
property taxes). The tax expenditure base is the difference between the 
comprehensive income base and current law's tax base, which for 
homeowners is the sum of net rents plus interest plus property taxes.
---------------------------------------------------------------------------
  Prior to 2006, the official list of tax expenditures did not include 
the exclusion of net implicit rental income on owner-occupied housing. 
Instead, it included as a tax expenditure deductions for home mortgage 
interest and for property taxes. While these deductions are legitimately 
considered tax expenditures, given current law's failure to impute 
rental income, they are highly flawed as estimates of the total tax 
advantage to housing; they overlook the additional exclusion of implicit 
net rental income. To the extent that a homeowner owns his house 
outright, unencumbered by a mortgage, he would have no home mortgage 
interest deduction, yet he still would enjoy the benefits of receiving 
tax free the implicit rental income earned on his house. The treatment 
of owner-occupied housing has been revised in the 2006 budget, which now 
includes an item for the exclusion of net rental income of homeowners. 
\35\
---------------------------------------------------------------------------
  \35\ This estimate combines the positive tax expenditure for the 
failure to impute rental income with the negative tax expenditure for 
the failure to allow a deduction for depreciation and other costs.
---------------------------------------------------------------------------
  Appendix Table 3 as well as the Tables in the body of the main text, 
e.g., Table 19-1 show estimates of the tax expenditure caused by the 
exclusion of implicit net rental income from investment in owner-
occupied housing. This estimate starts with the NIPA calculated value of 
gross rent on owner-occupied housing, and subtracts interest, taxes, 
economic depreciation, and other costs in arriving at an estimate of 
net-rental income from owner-occupied housing. \36\
---------------------------------------------------------------------------
  \36\ National Income and Production Accounts, Table 2.4.

---------------------------------------------------------------------------
Accrued Capital Gains

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

Double Tax on Corporate Profits

  A comprehensive income tax would tax all sources of income once. Taxes 
would not vary by type or source of income.
  In contrast to this benchmark, current law taxes income that 
shareholders earn on investment in corporate stocks at least twice, and 
at combined rates that generally are higher than those imposed on other 
sources of income. Corporate profits are taxed once at the company level 
under the corporation income tax. They are taxed again at the 
shareholder level when received as a dividend or recognized as a capital 
gain. Corporate profits can be taxed more then twice when they pass 
through multiple corporations before being distributed to noncorporate 
shareholders. Corporate level taxes cascade because corporations are 
taxed on capital gains they realize on the sale of stock shares and on 
some dividend income received. Compared to a comprehensive income tax 
current law's double (or more) tax on corporate profits is an example of 
a negative tax expenditure because it subjects income to a larger tax 
burden than implied by a comprehensive income baseline.
  Appendix Table 3 provides an estimate of the negative tax expenditure 
caused by the multiple levels of tax on corporate profits. This negative 
tax expenditure is measured as the shareholder level tax on dividends 
paid and capital gains realized out of earnings that have been fully 
taxed at the corporate level. It also includes the corporate tax paid on 
inter-corporate dividends and on corporate capital gains attributable to 
the sale of stock shares. The estimate includes the reduction in the 
dividends and capital gains tax rates enacted in JGTRRA.
  The negative tax expenditure is large in magnitude; it exceeds $33 
billion in the years 2006 through in 2010. It is comparable in size (but 
opposite in sign) to all but the largest official tax expenditures. 
JGTRRA reduced but did not eliminate the double tax on corporate 
profits.

[[Page 357]]



                     Appendix Table 1.  COMPARISON OF CURRENT TAX EXPENDITURES WITH THOSE IMPLIED BY A COMPREHENSIVE INCOME TAX \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Revenue Effect
                                                             Description                                                                       2006
--------------------------------------------------------------------------------------------------------------------------------------------------------
A.  Tax Expenditure Under a Comprehensive Income Tax
Net exclusion of pension contributions and earnings: Employer plans....................................................................      51,050
Net exclusion of pension contributions and earnings: 401(k) plans......................................................................      48,140
Capital gains exclusion on home sales..................................................................................................      36,270
Exclusion of net imputed rental income on owner-occupied housing.......................................................................      29,720
Capital gains (except agriculture, timber, iron ore, and coal).........................................................................      28,370
Exclusion of interest on public purpose State and local bonds..........................................................................      26,610
Exclusion of interest on life insurance savings........................................................................................      24,070
Net exclusion of pension contributions and earnings: Keogh plans.......................................................................       9,980
Expensing of research and experimentation expenditures (normal tax method).............................................................       7,920
Deferral of income from controlled foreign corporations (normal tax method)............................................................       7,440
Net exclusion of pension contributions and earnings: Individual Retirement Accounts....................................................       7,310
Exclusion of workers' compensation benefits............................................................................................       5,940
Extraterritorial income exclusion......................................................................................................       4,260
Credit for low-income housing investments..............................................................................................       4,010
Exclusion of veterans death beenfits and disability compensation.......................................................................       3,750
 
B.  Possibly a Tax Expenditure Under a Comprehensive Income Tax, But With Some Qualifications
Deductibility of mortgage interest on owner-occupied homes.............................................................................      76,030
Deductibility of nonbusiness state and local taxes other than on owner-occupied homes..................................................      34,620
Child credit...........................................................................................................................      32,810
Step-up basis of capital gains at death................................................................................................      28,760
Exclusion of Social Security benefits for retired workers..............................................................................      19,770
Deductibility of State and local property tax on owner-occupied homes..................................................................      14,830
Earned income tax credit...............................................................................................................       5,423
Deduction for U.S. production activities...............................................................................................       5,420
Exclusion of Social security benefits of dependents and survivors......................................................................       3,990
 
C.  Uncertain
Exclusion of employer contributions for medical insurance premiums and medical care....................................................     125,690
Deductibility of charitable contributions, other than education and health.............................................................      32,550
Deductibility of medical expenses......................................................................................................       9,140
Deductibility of self-employed medical insurance premiums..............................................................................       4,330
Social Security benefits for disabled..................................................................................................       3,870
 
D.  Probably Not a Tax Expenditure Under a Comprehensive Income Tax
Exception from passive loss rules for $25,000 of rental loss...........................................................................       4,750
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The measurement of certain tax expenditures under a comprehensive income tax baseline may differ from the official budget estimate even when the
  provision would be a tax expenditure under both baselines.
 
Source: Table 19-2, Tax Expenditure Budget.


[[Page 358]]


                   Appendix Table 2.  COMPARISON OF CURRENT TAX EXPENDITURES WITH THOSE IMPLIED BY A COMPREHENSIVE CONSUMPTION TAX \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Revenue Effect
                                                             Description                                                                       2006
--------------------------------------------------------------------------------------------------------------------------------------------------------
A.  Tax Expenditure Under a Consumption Base
Exclusion of net imputed rental income on owner-occupied housing.......................................................................      29,720
Exclusion of workers' compensation benefits............................................................................................       5,940
 
B.  Probably a Tax Expenditure Under a Consumption Base
Deductibility of mortgage interest on owner-occupied homes.............................................................................      76,030
Deductibility of nonbusiness state and local taxes other than on owner-occupied homes..................................................      34,620
Child credit...........................................................................................................................      32,810
Exclusion of Social Security benefits for retired workers..............................................................................      19,770
Earned income tax credit...............................................................................................................       5,423
Exclusion of Social Security benefits of dependents and survivors......................................................................       3,990
Exclusion of veterans death beenfits and disability compensation.......................................................................       3,750
 
C.  Uncertain
Exclusion of employer contributions for medical insurance premiums and medical care....................................................     125,690
Deductibility of charitable contributions, other than education and health.............................................................      32,550
Deductibility of State and local property tax on owner-occupied homes..................................................................      14,830
Deductibility of medical expenses......................................................................................................       9,140
Deductibility of self-employed medical insurance premiums..............................................................................       4,330
Extraterritorial income exclusion......................................................................................................       4,260
Credit for low-income housing investments..............................................................................................       4,010
Social Security benefits for disabled..................................................................................................       3,870
 
D.  Not a Tax Expenditure Under a Consumption Base
Net exclusion of pension contributions and earnings: Employer plans....................................................................      51,050
Net exclusion of pension contributions and earnings: 401(k) plans......................................................................      48,140
Capital gains exclusion on home sales..................................................................................................      36,270
Step-up basis of capital gains at death................................................................................................      28,760
Capital gains (except agriculture, timber, iron ore, and coal).........................................................................      28,370
Exclusion of interest on public purpose State and local bonds..........................................................................      26,610
Exclusion of interest on life insurance savings........................................................................................      24,070
Net exclusion of pension contributions and earnings: Keogh plans.......................................................................       9,980
Expensing of research and experimentation expenditures (normal tax method).............................................................       7,920
Deferral of income from controlled foreign corporations (normal tax method)............................................................       7,440
Net exclusion of pension contributions and earnings: Individual Retirement Accounts....................................................       7,310
Deduction for U.S. production activities...............................................................................................       5,420
Exception from passive loss rules for $25,000 of rental loss...........................................................................       4,750
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\1\ The measurement of certain tax expenditures under a consumption tax baseline may differ from the official budget estimate even when the provision
  would be a tax expenditure under both baselines.
 
Source: Table 19-2, Tax Expenditure Budget.


                            Appendix Table 3.  REVISED TAX EXPENDITURE ESTIMATES \1\
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                                                                        Revenue Loss
               Provision                   ---------------------------------------------------------------------
                                              2004      2005      2006      2007      2008      2009      2010
----------------------------------------------------------------------------------------------------------------
Imputed Rent On Owner-Occupied Housing....    24,590    28,600    29,720    33,210    36,860    40,630    44,786
Double Tax on corporate profit \2\........   -23,730   -30,170   -29,600   -30,330   -31,540   -33,260   -35,074
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\1\ Calculations described in the appendix text.
\2\ This is a negative tax expenditure, a tax provision that overtaxes income relative to the treatment
  specified by the baseline tax system.