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

    [[Page 237]]

                              17. FEDERAL RECEIPTS

      Receipts (budget and off-budget) are taxes and other collections from
    the public that result from the exercise of the Federal Government's
    sovereign or governmental powers. The difference between receipts and
    outlays determines the surplus or deficit.
      The Federal Government also collects income from the public from
    market-oriented activities. Collections from these activities, which are
    subtracted from gross outlays, rather than added to taxes and other
    governmental receipts, are discussed in the following Chapter.
      Total receipts in 2007 are estimated to be $2,415.9 billion, an
    increase of $130.4 billion or 5.7 percent relative to 2006. Receipts are
    projected to grow at an average annual rate of 5.9 percent between 2007
    and 2011, rising to $3,034.9 billion. This growth in receipts is largely
    due to assumed increases in incomes resulting from both real economic
    growth and inflation.
      As a share of GDP, receipts are projected to increase from 17.5
    percent in 2006 to 17.6 percent in 2007. The receipts share of GDP is
    projected to increase to 17.9 percent in 2011.

                                                            Table 17-1.  RECEIPTS BY SOURCE--SUMMARY
                                                                    (in billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                            Estimate
                                                      2005 Actual  -----------------------------------------------------------------------------------------
                                                                         2006           2007           2008           2009           2010           2011
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Individual income taxes........................       927.2          997.6        1,096.4        1,208.5        1,268.4        1,370.1        1,466.9
    Corporation income taxes.......................       278.3          277.1          260.6          268.5          277.1          282.0          292.0
    Social insurance and retirement receipts.......       794.1          841.1          884.1          932.1          980.7        1,037.4        1,096.7
      (On-budget)..................................      (216.6)        (231.1)        (241.8)        (253.0)        (264.5)        (278.9)        (295.1)
      (Off-budget).................................      (577.5)        (610.0)        (642.3)        (679.1)        (716.2)        (758.5)        (801.6)
    Excise taxes...................................        73.1           73.5           74.6           75.9           77.5           78.9           83.1
    Estate and gift taxes..........................        24.8           27.5           23.7           24.4           26.0           20.1            1.6
    Customs duties.................................        23.4           25.9           28.1           31.4           31.7           34.0           36.2
    Miscellaneous receipts.........................        33.0           42.8           48.4           49.4           52.7           55.7           58.4
                                                    --------------------------------------------------------------------------------------------------------
      Total receipts...............................     2,153.9        2,285.5        2,415.9        2,590.3        2,714.2        2,878.2        3,034.9
        (On-budget)................................    (1,576.4)      (1,675.5)      (1,773.5)      (1,911.1)      (1,998.0)      (2,119.7)      (2,233.3)
        (Off-budget)...............................      (577.5)        (610.0)        (642.3)        (679.1)        (716.2)        (758.5)        (801.6)

      Total receipts as a percentage of GDP........        17.5           17.5           17.6           17.8           17.7           17.9           17.9
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                 Table 17-2.  EFFECT ON RECEIPTS OF CHANGES IN THE SOCIAL SECURITY TAXABLE EARNINGS BASE
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                      Estimate
                                                              ------------------------------------------------------
                                                                  2007       2008       2009       2010       2011
    ----------------------------------------------------------------------------------------------------------------
    Social security (OASDI) taxable earnings base increases:
      $94,200 to $98,700 on Jan. 1, 2007.....................        2.3        6.1        6.8        7.6        8.6
      $98,700 to $103,500 on Jan. 1, 2008....................  .........        2.5        6.5        7.3        8.2
      $103,500 to $108,600 on Jan. 1, 2009...................  .........  .........        2.6        7.0        7.8
      $108,600 to $114,000 on Jan. 1, 2010...................  .........  .........  .........        2.8        7.4
      $114,000 to $119,400 on Jan. 1, 2011...................  .........  .........  .........  .........        2.8
    ----------------------------------------------------------------------------------------------------------------

    [[Page 238]]

                                                           Chart 17-1. Major Provisions of the Tax Code Under the 2001, 2003 and 2004 Tax Cuts
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
              Provision                   2003               2004              2005                2006               2007              2008             2009             2010             2011
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Individual Income Tax       Rates reduced to     ................  ................  ...................  ................  ...............  ...............  ...............  Rates increased
       Rates                       35, 33, 28, and 25                                                                                                                                 to 39.6, 36,
                                   percent                                                                                                                                            31, and 28
                                                                                                                                                                                      percent
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      10 Percent Bracket          Top of bracket       ................  ................  ...................  ................  ...............  ...............  ...............  Bracket
                                   increased to                                                                                                                                       eliminated,
                                   $7,000/$14,000 for                                                                                                                                 making lowest
                                   single/joint                                                                                                                                       bracket 15
                                   filers and                                                                                                                                         percent
                                   inflation-indexed
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      15 Percent Bracket for      Top of bracket for   ................  ................  ...................  ................  ...............  ...............  ...............  Top of bracket
       Joint Filers                joint filers                                                                                                                                       for joint
                                   increased to 200                                                                                                                                   filers reduced
                                   percent of top of                                                                                                                                  to 167 percent
                                   bracket for single                                                                                                                                 of top of
                                   filers                                                                                                                                             bracket for
                                                                                                                                                                                      single filers
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Standard Deduction for      Standard deduction   ................  ................  ...................  ................  ...............  ...............  ...............  Standard
       Joint Filers                for joint filers                                                                                                                                   deduction for
                                   increased to 200                                                                                                                                   joint filers
                                   percent of                                                                                                                                         reduced to 167
                                   standard deduction                                                                                                                                 percent of
                                   for single filers                                                                                                                                  standard
                                                                                                                                                                                      deduction for
                                                                                                                                                                                      single filers
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Child Credit                Tax credit for each  ................  ................  ...................  ................  ...............  ...............  ...............  Tax credit for
                                   qualifying child                                                                                                                                   each
                                   under age 17                                                                                                                                       qualifying
                                   increased to                                                                                                                                       child under
                                   $1,000                                                                                                                                             age 17 reduced
                                                                                                                                                                                      to $500
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
        Estate Taxes              Top rate reduced to  Top rate reduced  Top Rate reduced  Top rate reduced to  Top rate reduced  ...............  Exempt amount    Estate tax       Top rate
                                   49 percent           to 48 percent     to 47 percent     46 percent           to 45 percent                      increased to     repealed         increased to
                                                       Exempt amount                       Exempt amount                                            $3.5 million                      60 percent
                                                        increased to                        increased to $2                                                                          Exempt amount
                                                        $1.5 million                        million                                                                                   reduced to $1
                                                                                                                                                                                      million
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Small Business Expensing    Deduction increased  ................  ................  ...................  ................  Deduction        ...............  ...............  ...............
                                   to $100,000,                                                                                    declines to
                                   reduced by amount                                                                               $25,000,
                                   qualifying                                                                                      reduced by
                                   property exceeds                                                                                amount
                                   $400,000, and both                                                                              qualifying
                                   amounts inflation-                                                                              property
                                   indexed                                                                                         exceeds
                                  Includes software                                                                                $200,000 and
                                                                                                                                   amounts not
                                                                                                                                   inflation-
                                                                                                                                   indexed
                                                                                                                                  Does not apply
                                                                                                                                   to software
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Capital Gains               Tax rate on capital  ................  ................  ...................  ................  Tax on capital   Tax rate on      ...............  ...............
                                   gains reduced to 5/                                                                             gains            capital gains
                                   15 percent                                                                                      eliminated for   increased to
                                                                                                                                   taxpayers in     10/20 percent
                                                                                                                                   10/15 percent
                                                                                                                                   tax brackets
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    [[Page 239]]

      Dividends                   Tax rate on          ................  ................  ...................  ................  Tax on           Dividends taxed  ...............  ...............
                                   dividends reduced                                                                               dividends        at standard
                                   to 5/15 percent                                                                                 eliminated for   income tax
                                                                                                                                   taxpayers in     rates
                                                                                                                                   10/15 percent
                                                                                                                                   tax brackets
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Bonus Depreciation          Bonus depreciation   ................  Bonus             ...................  ................  ...............  ...............  ...............  ...............
                                   increased to 50                        depreciation
                                   percent of                             expires
                                   qualified property
                                   aquired after
                                    5/5/03
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Alternative Minimum Tax     AMT exemption        ................  ................  AMT exemption        ................  ...............  ...............  ...............  ...............
                                   amount increased                                         amount reduced to
                                   to $40,250/$58,000                                       $33,750/$45,000
                                   for single/joint                                         for single /joint
                                   filers                                                   filers
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

                               ENACTED LEGISLATION

      Several laws were enacted in 2005 that have an effect on governmental
    receipts. The major legislative changes affecting receipts are described
    below.

                            ENERGY POLICY ACT OF 2005

      This Act, which was signed by President Bush on August 8, 2005, laid
    the groundwork for a more energy-independent United States. The major
    provisions of this Act were designed to help secure our energy future
    and reduce our dependence on foreign sources of energy by encouraging
    conservation and efficiency, diversifying our energy supply with
    alternative and renewable sources, expanding domestic energy production
    in an environmentally sensitive way, and modernizing our electricity
    infrastructure. The major provisions of this Act affecting receipts are
    described below.

                              Energy Infrastructure

      Extend and modify tax credit for producing electricity from certain
    renewable resources.--Taxpayers are allowed a tax credit for electricity
    produced from wind, biomass, landfill gas and certain other sources.
    Biomass includes closed-loop biomass (organic material from a plant
    grown exclusively for use at a qualifying facility to produce
    electricity) and open-loop biomass (biomass from agricultural livestock
    waste nutrients or cellulosic waste material derived from forest-related
    resources, agricultural sources, and other specified sources). Closed-
    loop biomass may be co-fired with coal, with other biomass, or with both
    coal and other biomass. The credit rate is 1.5 cents per kilowatt hour
    for electricity produced from wind and closed-loop biomass and 0.75 cent
    per kilowatt hour for electricity produced from open-loop biomass and
    landfill gas (both rates are adjusted for inflation since 1992). To
    qualify for the credit under prior law, the electricity had to be
    produced at a facility placed in service before January 1, 2006 unless
    it was a refined coal facility, for which the placed-in-service date was
    extended three years, through December 31, 2008. This Act extended the
    placed-in-service date by two years, through December 31, 2007, for
    electricity produced from all qualifying facilities, except those
    producing electricity from solar energy and refined coal. For facilities
    producing electricity from solar energy and refined coal, the placed-in-
    service termination dates of prior law were not changed.
      This Act expanded the energy production credit to apply to electricity
    produced from hydropower at a facility: (1) that produced hydroelectric
    power before August 8, 2005 and to which efficiency improvements or
    additions to capacity are made after August 8, 2005 and before January
    1, 2008; or (2) that did not produce hydroelectric power before August
    8, 2005 and to which turbines or other electricity generating equipment
    is added after August 8, 2005 and before January 1, 2008. This Act also
    expanded the credit to apply to sales of coal produced from coal
    reserves that on June 14, 2005 were: (1) owned by a tribe of Indians
    recognized by the United States; or (2) were held in trust for a tribe
    of Indians or its members by the United States. The credit for Indian
    coal is $1.50 per ton for coal sold after December 31, 2005 and before
    January 1, 2010, and $2.00 per ton for coal sold after December 31, 2009
    and before January 1, 2013 (both rates are adjusted for inflation).
      Under prior law, cooperatives were not allowed to pass any portion of
    the energy production credit through to their patrons. Under this Act,
    eligible cooperatives may elect to pass any portion of the credit
    through to their patrons.

      Provide tax credits for investment in clean coal facilities.--Under
    this Act, a 20-percent tax credit was provided for qualified investments
    in electricity production facilities using integrated gasification
    combined cycle (IGCC) technologies and a 15-percent credit was

    [[Page 240]]

    provided to qualified investments in electricity production facilities
    using other advanced coal-based technologies. Qualified projects must be
    economically feasible and use the appropriate clean coal technologies.
    The Secretary of Treasury, in consultation with the Secretary of Energy,
    may allocate $800 million of credits to IGCC projects and $500 million
    of credits to projects using other advanced coal-based technologies. A
    20-percent tax credit was also provided for investment in certified
    gasification projects. The total amount of gasification credits
    allocable by the Secretary of the Treasury is $350 million. These three
    credits are effective for qualified investments made after August 8,
    2005.
      Modify treatment of nuclear decommissioning funds.--Under prior law,
    deductible contributions to nuclear decommissioning funds were limited
    to the amount included in the taxpayer's cost of service to ratepayers.
    In addition, deductible contributions were not permitted to exceed the
    amount the Internal Revenue Service (IRS) determined to be necessary to
    provide for level funding of an amount equal to the taxpayer's post-1983
    decommissioning costs. Effective for taxable years beginning after
    December 31, 2005, this Act repealed the cost-of-service requirement for
    deductible contributions to a nuclear decommissioning fund and expanded
    the deduction to apply to pre-1984 decommissioning costs. As provided
    under prior law, deductible contributions may not be made more rapidly
    than required to provide for level funding of the taxpayer's
    decommissioning costs.
      Reduce recovery period for certain assets used in the transmission of
    electricity.--Under the Modified Accelerated Cost Recovery System
    (MACRS) of current law, assets used in the transmission and distribution
    of electricity for sale may be depreciated over 20 years. This Act
    reduced the recovery period for certain assets used in the transmission
    of electricity for sale to 15 years. To qualify for the reduced recovery
    period: (1) the original use of the property must commence with the
    taxpayer after April 11, 2005; (2) the property must be used in the
    transmission at 69 or more kilovolts of electricity for sale; and (3)
    the property must not be subject to a binding contract on or before
    April 11, 2005 or, if self-constructed, the taxpayer or a related party
    must not have started construction on or before such date.
      Provide 84-month amortization for certain air pollution control
    facilities.--A taxpayer may elect to recover a portion of the cost of a
    certified pollution control facility over a period of 60 months under
    current law. To be eligible, the pollution control facility must be new,
    used in connection with a plant in operation before January 1, 1976,
    certified as being in conformity with State and Federal environmental
    laws, and meet certain other requirements. The amortizable portion is
    100 percent if the facility has a depreciation recovery period of 15
    years or less; otherwise, the portion equals 15 divided by the recovery
    period. This Act provided 84-month amortization to a similar portion of
    the cost of certified air pollution control facilities used in
    connection with an electric generation plant that is primarily coal
    fired and that was not in operation before January 1, 1976. For an air
    pollution control facility to be eligible for cost recovery over a
    period of 84 months: (1) its construction, reconstruction, or erection
    must be completed after April 11, 2005; or (2) it must be acquired after
    April 11, 2005 and its original use must commence with the taxpayer
    after that date.

                          Domestic Fossil Fuel Security

      Allow expensing of equipment used in the refining of liquid fuels.--
    This Act allowed a taxpayer to elect to treat 50 percent of the cost of
    qualified refinery investments as a current expense. An eligible
    investment must be placed in service after August 8, 2005 and before
    January 1, 2012, and cannot be subject to a written binding construction
    contract in effect on or before June 14, 2005. If self-constructed,
    construction must begin after June 14, 2005 and before January 1, 2008;
    otherwise, a written binding contract for construction must be entered
    into before January 1, 2008, or the property must be placed in service
    before that date. The original use of the property must commence with
    the taxpayer, and the property must meet all applicable environmental
    laws. If part of an existing refinery, the investment must increase
    refining capacity by at least five percent or increase the throughput of
    qualified fuels by at least 25 percent. Qualified fuels include oil
    produced from shale and tar sands. As a condition of eligibility,
    refineries of liquid fuels must report to the IRS on refinery
    operations.
      Reduce recovery period for certain natural gas distribution lines.--
    Under MACRS, natural gas distribution lines are assigned a 20-year
    recovery period. This Act established a 15-year recovery period for
    natural gas distribution lines, the original use of which begins with
    the taxpayer after April 11, 2005 and before January 1, 2011. The
    shortened recovery period does not apply to property subject to a
    binding contract on or before April 11, 2005, or, if self-constructed,
    the taxpayer or a related party must not have started construction on or
    before such date.
      Treat natural gas gathering lines as seven-year property.--This Act
    clarified existing law by establishing a statutory seven-year recovery
    period for natural gas gathering lines, the original use of which
    commences with the taxpayer after April 11, 2005. In addition, no
    depreciation adjustment must be made with respect to this property in
    computing a taxpayer's alternative minimum taxable income.
      Provide two-year amortization for certain geological and geophysical
    expenditures.--Geological and geophysical expenditures (G&G costs) are
    costs incurred by a taxpayer for the purpose of obtaining and
    accumulating data that will serve as the basis for the

    [[Page 241]]

    acquisition and retention of mineral properties by taxpayers exploring
    for minerals. A key issue with regard to such costs has been whether or
    not they are capital in nature. Various courts have held that G&G costs
    are capital and allocable to the cost of the property acquired or
    retained; IRS administrative rulings have provided further guidance
    regarding the definition and proper tax treatment of such costs. Under
    this Act, G&G costs paid or incurred in taxable years beginning after
    August 8, 2005, in connection with oil and gas exploration in the United
    States, may be amortized over two years.

                       Conservation and Energy Efficiency

      Provide personal tax credit for certain solar energy equipment.--This
    Act provided a new nonrefundable tax credit for individuals who purchase
    qualified solar energy equipment to generate electricity (photovoltaic
    equipment) or heat water (solar water heating equipment) for use in a
    dwelling unit that the individual uses as a residence. Expenditures that
    are properly allocable to a swimming pool or hot tub do not qualify for
    the credit. The credit, which applies to property placed in service
    after December 31, 2005 and before January 1, 2008, is equal to 30-
    percent of the cost of the equipment and its installation, with a
    maximum credit of $2,000 for each system. A 30-percent credit for the
    cost of qualified fuel cell power plants, not to exceed $500 for each
    0.5 kilowatt of capacity, was also provided.
      Provide tax credit for energy-efficient improvements to principal
    residences.--This Act provided a nonrefundable 10-percent tax credit to
    homeowners for the cost of purchasing qualified energy efficient
    improvements installed in or on a dwelling unit in the United States
    that is used as their principal residence. Qualified energy efficient
    improvements include any energy efficiency building envelope component
    that meets or exceeds the prescriptive criteria for such a component
    established by the 2000 International Energy Conservation Code as
    supplemented and in effect on August 8, 2005. Building envelope
    components are: (1) insulation materials or systems that are
    specifically and primarily designed to reduce the heat loss or gain for
    a dwelling; (2) exterior windows (including skylights) and doors; and
    (3) metal roofs with appropriate pigmented coating specifically and
    primarily designed to reduce the heat gain for a dwelling. The credit,
    which applies to property placed in service after December 31, 2005 and
    before January 1, 2008, may not exceed $500 over all taxable years, and
    no more than $200 of such credit may be attributable to expenditures on
    windows.
      This Act also provided a tax credit to homeowners for the cost of
    residential energy property installed in or on a dwelling unit in the
    United States that is used as their principal residence. Residential
    energy property includes: (1) advanced main air circulating fans; (2)
    qualified natural gas, propane, or oil furnaces and hot water boilers;
    and (3) energy-efficient building property (certain electric and
    geothermal heat pumps, air conditioners, and natural gas, propane, or
    oil water heaters). The credit, which applies to property placed in
    service after December 31, 2005 and before January 1, 2008, may not
    exceed $50 per fan, $150 for each furnace or boiler, and $300 for each
    item of energy-efficient building property.

      Provide tax credit for the purchase of qualified hybrid, fuel cell and
    alternative fuel motor vehicles.--A qualified fuel cell vehicle is
    propelled by power derived from one or more cells that convert chemical
    energy directly into electricity. This Act provided a credit for the
    purchase of fuel cell vehicles, effective for vehicles placed in service
    after December 31, 2005 and before January 1, 2015. The amount of the
    credit is equal to a base credit amount, determined by the weight class
    of the vehicle and, in the case of automobiles and light trucks, an
    additional credit amount, determined by the rated fuel economy of the
    vehicle compared to the 2002 model year city fuel economy rating for
    vehicles of various weight classes. The base credit amount ranges from
    $8,000 ($4,000 after December 31, 2009) for vehicles with a gross weight
    less than or equal to 8,500 pounds, to $40,000 for vehicles weighting
    over 26,000 pounds. The additional credit amount ranges from $1,000 for
    a fuel economy rating that is at least 150 percent, but less than 175
    percent of the 2002 model year city fuel economy rating, to $4,000 for a
    fuel economy rating that is at least 300 percent of the 2002 model year
    city fuel economy rating.
      A qualified alternative fuel motor vehicle operates only on qualifying
    alternative fuels (compressed natural gas, liquefied natural gas,
    liquefied petroleum gas, hydrogen and any liquid fuel that is at least
    85 percent methanol) and is incapable of operating on gasoline or diesel
    fuel (except to the extent that gasoline or diesel fuel is part of a
    qualified mixed fuel). This Act provided a credit for the purchase of
    alternative fuel vehicles, effective for vehicles placed in service
    after December 31, 2005 and before January 1, 2011. The credit is equal
    to 50 percent of the incremental cost of the vehicle (the excess of the
    manufacturer's suggested retail price over the manufacturer's suggested
    retail price for a comparable gasoline or diesel vehicle), plus an
    additional 30 percent if the vehicle meets certain emissions standards.
    Depending on the weight of the vehicle, a maximum allowable incremental
    cost is specified, ranging from $5,000 for a vehicle weighing less than
    or equal to 8,500 pounds, to $40,000 for a vehicle weighing more than
    26,000 pounds. The total credit for the purchase of a new alternative
    fuel vehicle may not exceed $4,000 for a vehicle weighing less than or
    equal to 8,500 pounds and $32,000 for a vehicle weighing more than
    26,000 pounds. Certain mixed fuel vehicles (vehicles that use a
    combination of an alternative fuel and a petroleum-based fuel) are
    eligible for a reduced credit. Specifically, if the vehicle operates on
    a mixed fuel that is at least 75 percent alternative fuel, the vehicle
    is eligible for 70 percent of the other

    [[Page 242]]

    wise allowable alternative fuel vehicle credit and if the vehicle
    operates on a mixed fuel that is at least 90 percent alternative fuel,
    the vehicle is eligible for 90 percent of the otherwise allowable
    credit.
      A qualified hybrid vehicle is a motor vehicle that draws propulsion
    energy from on-board sources of stored energy that include both an
    internal combustion engine or heat engine using combustible fuel and a
    rechargeable energy storage system. This Act provided a credit for the
    purchase of qualified hybrid motor vehicles placed in service after
    December 31 2005 and before January 1, 2011 (January 1, 2010 in the case
    of a qualified hybrid vehicle weighing more than 8,500 pounds). For a
    qualified hybrid automobile or light truck weighing less than or equal
    to 8,500 pounds, or a lean-burn technology motor vehicle, the credit
    consists of two components: (1) a fuel economy credit of $400 to $2,400,
    depending upon the rated fuel economy of the vehicle compared to the
    2002 model year standard; and (2) a conservation credit of $250 to
    $1,000, depending upon the estimated lifetime fuel savings of the
    vehicle compared to a comparable 2002 model year vehicle. For a
    qualified hybrid vehicle weighing more than 8,500 pounds (a medium or
    heavy truck), the amount of credit is determined by the estimated
    increase in fuel economy and the incremental cost of the hybrid vehicle
    compared to a vehicle comparable in weight, size and use that is powered
    solely by a gasoline or diesel internal combustion engine. Depending on
    the weight of the vehicle, a maximum incremental cost is specified,
    ranging from $7,500 for a vehicle weighing more than 8,500 pounds but
    less than or equal to 14,000 pounds, to $30,000 for a vehicle weighing
    more than 26,000 pounds. For a vehicle that achieves a fuel economy
    increase of at least 30 percent but less than 40 percent, the credit is
    equal to 20 percent of the incremental cost of the vehicle. The credit
    increases to 30 percent of the incremental cost for a vehicle that
    achieves a fuel economy increase of at least 40 percent but less than 50
    percent, and to 40 percent of the incremental cost for a vehicle that
    achieves a fuel economy increase of 50 percent or more. In the case of
    passenger automobiles and light trucks, a limitation is imposed on the
    number of qualified hybrid motor vehicles and advanced lean-burn
    technology motor vehicles sold by each manufacturer. Taxpayers may claim
    the full amount of the allowable credit up to the end of the first
    calendar quarter following the quarter in which the manufacturer from
    whom they purchased their vehicle records its 60,000th sale of a hybrid
    or advanced lean-burn technology passenger automobile or light truck.
    The credit declines to one half the otherwise allowable amount in the
    subsequent two quarters, to one quarter of the otherwise allowable
    amount in the next two quarters, and then expires.

      Provide additional incentives to promote energy conservation and
    efficiency.--This Act provided a number of additional incentives to
    promote energy conservation and efficiency, which included: (1) a tax
    deduction for energy-efficient property installed during the
    construction of a commercial building; (2) tax credits for the purchase
    of qualified fuel cell and stationary micro-turbine power plants; (3) a
    tax credit for the construction of qualified new energy-efficient homes;
    and (4) a tax credit for the production of certain energy-efficient
    dishwashers, clothes washers and refrigerators.

                                     Offsets

      Reinstate excise taxes deposited in the Oil Spill Liability Trust
    Fund.--Between December 31, 1989 and January 1, 1995, a five-cent-per-
    barrel tax was imposed on: (1) crude oil received at a U.S. refinery;
    (2) imported petroleum products received for consumption, use or
    warehousing; and (3) any domestically produced crude oil that was
    exported from the United States if, before exportation, no taxes were
    imposed on the crude oil. Collections of the tax, which were deposited
    in the Oil Spill Liability Trust Fund, were used for several purposes,
    including the payment of costs associated with responding to and
    removing oil spills. The tax was imposed only if the unobligated balance
    in the Oil Spill Liability Trust Fund was less than $1 billion. This Act
    reinstated this tax, effective April 1, 2006 through December 31, 2014.
    The tax will be suspended during a calendar quarter if, at the close of
    the preceding quarter, the unobligated balance in the Fund exceeds $2.7
    billion.
      Extend excise taxes deposited in the Leaking Underground Storage Tank
    (LUST) Trust Fund.--An excise tax is imposed, generally at a rate of 0.1
    cents per gallon, on gasoline and other liquid motor fuels used on
    highways, in aviation, on inland waterways, and in diesel-powered
    trains. The tax, which is deposited in the LUST Trust Fund, was
    scheduled to expire on October 1, 2005 under prior law. This Act
    extended the tax through September 30, 2011. In addition, the tax was
    expanded to apply to dyed fuel, which was exempt from the tax under
    prior law and all other liquid fuel that is not exported.
      Modify recapture of section 197 amortization.--Gain on the sale of
    depreciable property must be recaptured as ordinary income to the extent
    of depreciation deductions previously claimed. The recapture amount is
    computed separately for each item of property that is sold. This Act
    modified the recapture rules of current law with respect to dispositions
    of section 197 intangibles. Section 197 intangibles include goodwill; a
    patent, copyright, formula, design or similar item; any license, permit,
    or other right granted by a governmental unit or agency; and any
    franchise, trademark, or trade name. Under this Act, multiple section
    197 intangibles sold in a single transaction or in a series of
    transactions after August 8, 2005 are treated as a single asset for the
    purpose of calculating the amount of gain to be recaptured as ordinary
    income. This rule does not apply to any amortizable section 197
    intangible for which adjusted basis exceeds fair market value.

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                     SAFE, ACCOUNTABLE, FLEXIBLE, EFFICIENT

                  TRANSPORTATION EQUITY ACT: A LEGACY FOR USERS

      This Act, which was signed by President Bush on August 10, 2005,
    reauthorized Federal spending for surface transportation programs
    through 2009, extended Federal highway taxes through 2011, and made
    numerous changes to transportation laws affecting safety, the
    environment, and other matters. The major provisions of this Act
    affecting receipts are described below.

                           Trust Fund Reauthorization

      Extend excise taxes deposited in the Highway Trust Fund.--Excise taxes
    imposed on nonaviation gasoline, diesel fuel, kerosene, special motor
    fuels, heavy highway vehicles, and tires for heavy highway vehicles
    generally are deposited in the Highway Trust Fund. Taxes deposited in
    the Highway Trust Fund are imposed on nonaviation gasoline at a rate of
    18.3 cents per gallon, on diesel fuel and kerosene at a rate of 24.3
    cents per gallon, and on special motor fuels at varying rates. Under
    prior law, these tax rates were scheduled to fall to 4.3 cents per
    gallon (or comparable rates in the case of special motor fuels) on
    October 1, 2005. A tax equal to 12 percent of the sales price is imposed
    on the first retail sale of heavy highway vehicles (generally, trucks
    with a gross weight greater than 33,000 pounds, trailers with a gross
    weight greater than 26,000 pounds, and highway tractors). In addition, a
    heavy highway vehicle use tax of up to $550 per year is imposed on
    highway vehicles with a gross weight of at least 55,000 pounds. A tax is
    also imposed on tires with a rated load capacity exceeding 3,500 pounds,
    generally at a rate of 0.945 cent per pound of excess. Under prior law,
    the taxes on heavy highway vehicles and tires for heavy highway vehicles
    were scheduled to expire on September 30, 2005; the heavy vehicle use
    tax was scheduled to expire on September 30, 2006. This Act extended the
    taxes on nonaviation gasoline, diesel fuel, kerosene, special motor
    fuels, heavy highway vehicles, tires for heavy highway vehicles, and the
    use of heavy highway vehicles at their prior law rates through September
    30, 2011.
      Eliminate Aquatic Resources Trust Fund and create Sport Fish
    Restoration and Boating Trust Fund.--Under prior law, 13.5 cents per
    gallon of the excise taxes imposed on motorboat gasoline and special
    motor fuels, and on gasoline used as a fuel in the nonbusiness use of
    small-engine outdoor power equipment, was transferred from the Highway
    Trust Fund to the Land and Water Conservation Fund and to the Boat
    Safety and Sport Fish Restoration Accounts of the Aquatic Resources
    Trust Fund. The remaining 4.8 cents per gallon of these taxes was
    retained in the General Fund of the Treasury. Amounts transferred from
    the Highway Trust Fund to the Land and Water Conservation Fund and the
    Aquatic Resources Trust Fund were allocated as follows: (1) Up to $70
    million in annual collections was transferred to the Boat Safety
    Account, subject to an overall limit equal to the amount that would not
    cause the Boat Safety Account to have an unobligated balance in excess
    of $70 million. (2) The next $1 million in annual collections was
    transferred to the Land and Water Conservation Fund. (3) All remaining
    annual collections were transferred to the Sport Fish Restoration
    Account. As explained in the preceding discussion of the Highway Trust
    Fund, these excise taxes were scheduled to decline to 4.3 cents per
    gallon on September 30, 2005; in addition, the retention of 4.8 cents
    per gallon of these taxes in the General Fund of the Treasury was
    scheduled to expire on that date.
      Effective October 1, 2005, this Act eliminated the Aquatic Resources
    Trust Fund and created the Sport Fish Restoration and Boating Trust
    Fund. This Act also extended the taxes on motorboat fuels and on
    gasoline used as a fuel in the nonbusiness use of small-engine outdoor
    power equipment at their prior law rates through September 30, 2011, but
    did not extend the retention of 4.8 cents per gallon of these taxes in
    the General Fund of the Treasury. Therefore, effective October 1, 2005,
    18.3 cents per gallon of the taxes on these fuels is deposited in the
    Highway Trust Fund and then transferred to the Land and Water
    Conservation Fund and to the Sport Fish Restoration and Boating Trust
    Fund as follows: (1) The first $1 million in annual collections is
    transferred to the Land and Water Conservation Fund. (2) All remaining
    annual collections are transferred to the Sport Fish Restoration and
    Boating Trust Fund.

                      Excise Tax Simplification and Reform

      Modify excise taxes on the retail sale of certain automobiles, heavy
    trucks and trailers.--An excise tax is imposed on the sale of
    automobiles weighing less than or equal to 6,000 pounds with a fuel
    economy less than or equal to 22.5 miles per gallon. The tax ranges from
    $1,000 to $7,700, depending on the fuel economy of the automobile. Under
    prior law, the tax applied to all limousines, regardless of their
    weight. Effective for sales after September 30, 2005, this Act repealed
    the tax with respect to limousines weighing more than 6,000 pounds.
      A tax equal to 12 percent of the sales price is imposed on the first
    retail sale of heavy highway vehicles. Under prior law, the tax was
    imposed on trucks with a gross weight greater than 33,000 pounds;
    trailers with a gross weight greater than 26,000 pounds; and highway
    tractors, regardless of weight. Effective for sales after September 30,
    2005, this Act repealed the tax with respect to tractors weighing less
    than or equal to 19,500 pounds, provided that when combined with a towed
    vehicle, the total weight does not exceed 33,000 pounds.

      Modify taxation of alternative fuels.--In general, nonaviation
    gasoline is taxed at 18.3 cents per gallon, aviation gasoline is taxed
    at 19.3 cents per gallon, and diesel fuel and kerosene are taxed at 24.3
    cents per gallon. Although most special motor fuels are subject

    [[Page 244]]

    to tax at 18.3 cents per gallon, certain special motor fuels and
    compressed natural gas are taxed at reduced rates. Effective for sales
    after September 30, 2006, this Act increased the tax on certain special
    motor fuels as follows: (1) Liquefied petroleum gas and P Series fuels
    (as defined by the Secretary of Energy) will be taxed at 18.3 cents per
    gallon. (2) Compressed natural gas will be taxed at 18.3 cents per
    energy equivalent of a gallon of gasoline. (3) Liquefied natural gas,
    any liquid fuel derived from coal (other than ethanol or methanol) and
    liquid hydrocarbons derived from biomass will be taxed at 24.3 cents per
    gallon. This Act also created two new excise tax credits--the
    alternative fuel credit and the alternative fuel mixture credit--for the
    sale or use of alternative fuels. For purposes of the credits,
    alternative fuels are defined as liquefied petroleum gas, P Series fuels
    (as defined by the Secretary of Energy), compressed or liquefied natural
    gas, liquefied hydrogen, liquid fuel derived from coal through the
    Fisher-Tropsch process, and liquid hydrocarbons derived from biomass.
    The alternative fuel credit is 50 cents for each gallon of alternative
    fuel or gasoline-gallon equivalent of nonliquid alternative fuel sold by
    the taxpayer for use as a motor fuel in a motor vehicle or motorboat.
    The alternative fuel mixture credit is 50 cents for each gallon of
    alternative fuel used in producing an alternative fuel mixture for sale
    or use in a trade or business of the taxpayer. These credits, which are
    effective for qualified fuels sold or used after October 1, 2006 and
    before October 1, 2009 (October 1, 2014 for liquefied hydrogen), are to
    be paid from the General Fund of the Treasury.
      Cap excise tax on certain fishing equipment.--Effective for sales
    after September 30, 2005, the 10-percent excise tax imposed on the sale
    of fishing rods and poles is capped at $10.00 on each rod and pole sold.
      Modify aviation excise taxes.--Fuel used on a farm for farming
    purposes is exempt from Federal excise taxes on fuel. Under prior law,
    crop-dusters, instead of farm owners and operators, were allowed to
    claim a refund for taxes on aviation fuel consumed while operating over
    a farm if they had written consent from the farm owner or operator. Fuel
    consumed traveling to and from the farm was not exempt from Federal
    excise taxes on fuel. This Act repealed the requirement that crop-
    dusters receive written consent to apply for a refund and clarified that
    travel to and from a farm is exempt use, effective for fuel used after
    September 30, 2005.
      Domestic passenger tickets are subject to an air passenger ticket tax
    equal to 7.5 percent of the ticket price, plus $3.20 per domestic flight
    segment. Amounts paid to persons engaged in the business of transporting
    property by air for hire are subject to an air cargo tax of 6.25
    percent. The air passenger ticket tax does not apply to: (1)
    transportation by helicopter if the helicopter does not use Federally
    funded airport and airway services and is used for certain timber
    operations or the exploration, development or removal of oil, gas, or
    hard minerals; and (2) helicopters and fixed-wing aircraft that provide
    emergency medical services. In addition, the $3.20 tax on flight
    segments does not apply to a domestic segment beginning or ending at a
    rural airport. Neither the air passenger ticket tax nor the air cargo
    tax apply to transportation by an aircraft having a maximum certificated
    takeoff weight of 6,000 pounds or less unless the aircraft is operated
    on an established line. Under prior law, a rural airport was defined as
    an airport that: (1) had fewer than 100,000 passengers departing by air
    during the second preceding calendar year and was located more than 75
    miles from a larger airport; or (2) was receiving essential air service
    subsidy payments as of August 5, 1997. This Act expanded the definition
    of a rural airport, effective October 1, 2005, to include airports not
    connected by paved roads to another airport and having fewer than
    100,000 passengers departing on flight segments of at least 100 miles
    during the second preceding calendar year. This Act also expanded the
    types of transportation exempt from the passenger ticket and/or air
    cargo tax, effective with respect to transportation beginning after
    September 30, 2005. The expansions included the following: (1) The
    exemption of transportation by a seaplane from the air passenger ticket
    tax and the air cargo tax, provided the take off is from, and the
    landing is on, water, and the places from which such landings and
    takeoffs occur have not received or are not receiving financial
    assistance from the Airport and Airway Trust Fund. (2) The exemption of
    fixed-wing aircraft engaged in timber operations from aviation excise
    taxes if they are not using Federally-funded airport and airway
    services. (3) The exemption of sightseeing flights from the passenger
    ticket tax.

      Modify alcohol-related excise taxes.--The 2004 job creation act
    suspended the special occupational taxes imposed on producers and others
    engaged in the marketing of distilled spirits, wine, and beer, for the
    period July 1, 2005 through June 30, 2008. This Act repealed these taxes
    effective July 1, 2008. This Act also: (1) provided an income tax credit
    to eligible wholesalers, distillers, and importers of distilled spirits
    for the cost of carrying tax-paid products in inventory, effective for
    taxable years beginning after September 30, 2005; and (2) allowed
    certain domestic producers and importers of distilled spirits, wine, and
    beer with annual excise tax liability of $50,000 or less attributable to
    these articles in the preceding calendar year to file returns and pay
    taxes quarterly (rather than semi-monthly) in most cases effective for
    quarterly periods beginning after December 31, 2005.
      Provide custom gunsmiths an exemption from taxes on firearms and
    ammunition.--Sales of firearms and ammunition by the manufacturer,
    producer or importer generally are subject to an excise tax of 10 or 11
    percent of the retail price, depending upon the type of good sold. Sales
    of machine guns and short-barreled firearms are exempt from the tax.
    This Act

    [[Page 245]]

    expanded the exemption to apply to sales of firearms, pistols, and
    revolvers by a person who manufactures, produces, or imports less than
    50 of such articles during the calendar year. The exemption is effective
    for sales after September 30, 2005.

                                Other Provisions

      Provide tax-exempt financing for highway projects and rail-truck
    transfer facilities.--This Act authorized $15 billion of tax-exempt bond
    authority to finance qualified highway or surface freight transfer
    facilities.
      Modify treatment of kerosene for use in aviation.--In general,
    aviation-grade kerosene is taxed at a rate of 21.8 cents per gallon when
    it enters the United States, is removed from a refinery or terminal, or
    is sold to an unregistered person, unless there was a prior taxation
    upon entry or removal of the fuel. Aviation-grade kerosene may be taxed
    at a reduced rate, either 4.3 or zero cents per gallon, if it is removed
    directly into the fuel tank of an aircraft for use in commercial
    aviation or is for a use that is exempt from tax. Kerosene used for
    surface transportation is taxed at the diesel fuel rate of 24.3 cents
    per gallon. Under this Act, all kerosene is taxed at a rate of 24.3
    cents per gallon unless it is removed directly into the fuel tank of an
    aircraft or is for a use that is exempt from tax. This change is
    effective for kerosene that enters the United States, is removed from a
    refinery or terminal, or is sold after September 30, 2005. If the
    kerosene taxed at 24.3 cents per gallon is used for aviation or tax
    exempt purposes, a credit or refund may be claimed.
      Combat fuel fraud.--This Act included a number of provisions designed
    to combat fuel fraud. Under this Act: (1) Farmers who purchase clear
    diesel fuel must pay the excise tax on that fuel and then claim a refund
    for taxes paid on fuel used for farming purposes. (2) Credit card
    companies that allow tax-exempt fuel purchases on their cards must
    register with the IRS and be the party responsible for claiming refunds
    of the tax. (3) Blenders, importers, pipeline operators, position
    holders, refiners, terminal operators, and vessel operators who are
    registered with the IRS must reregister in the event of a change in
    ownership. (4) Information regarding taxable fuels destined for the
    United States must be transmitted electronically from the Bureau of
    Customs and Border Control to the IRS. (5) Operators of deep-draft
    ocean-going vessels used in the bulk transfer of fuel must register with
    the IRS.

                          KATRINA EMERGENCY TAX RELIEF

                                   ACT OF 2005

      This Act, which was signed by President Bush on September 23, 2005,
    provided emergency tax relief for individuals and employers affected by
    Hurricane Katrina and incentives for charitable giving. For purposes of
    this Act, the ``Hurricane Katrina disaster area'' is the area with
    respect to which a major disaster was declared by President Bush before
    September 14, 2005 by reason of Hurricane Katrina and the term ``core
    disaster area'' means that portion of the Hurricane Katrina disaster
    area determined by the President to warrant individual or individual and
    public assistance. The major provisions of this Act are described below.

                   Tax Relief for Victims of Hurricane Katrina

      Suspend certain limitations on personal casualty losses.--Under
    current law, a taxpayer generally is allowed to claim a deduction for
    any uncompensated loss of nonbusiness property arising from theft or
    casualty (e.g., fire, storm). Personal theft and casualty losses are
    deductible only if they exceed $100 per casualty or theft. In addition,
    aggregate net losses from casualty or theft are deductible only to the
    extent that they exceed 10 percent of the taxpayer's adjusted gross
    income (AGI). Effective for personal casualty and theft losses occurring
    in the Hurricane Katrina disaster area on or after August 25, 2005 and
    attributable to the hurricane, this Act suspended both the $100 and 10-
    percent-of-AGI limitations otherwise applicable under current law. In
    addition, losses under this provision are disregarded when applying the
    10-percent-of-AGI threshold to other personal casualty or theft losses.
      Extend replacement period for non-recognition of gain.--Gain realized
    by a taxpayer on the involuntary conversion of property generally is
    deferred to the extent the taxpayer purchases property similar or
    related in service or use to the converted property within the
    replacement period. The replacement period generally begins with the
    date of the disposition of the converted property and ends two years
    after the close of the first taxable year in which any part of the gain
    upon conversion is realized. Under current law, special rules extend the
    replacement period for certain real property and principal residences
    damaged by a Presidentially declared disaster or the terrorist attacks
    on September 11, 2001, and for livestock sold as the result of drought,
    flood, or other weather-related conditions. This Act extended from two
    to five years the replacement period for property in the Hurricane
    Katrina disaster area compulsorily or involuntarily converted on or
    after August 25, 2005, as a result of the hurricane.
      Provide exclusion for certain cancellations of indebtedness.--Under
    current law, gross income generally includes any income realized by a
    debtor from the discharge of indebtedness, subject to certain exceptions
    for debtors in Title 11 bankruptcy cases, insolvent debtors, certain
    farm indebtedness, and certain real property business indebtedness. This
    Act excluded from gross income the discharge of nonbusiness debt on or
    after August 28, 2005 and before January 1, 2007, if the debtor's
    principal place of abode on August 25, 2005 was located in: (1) the core
    disaster area, or (2) the Hurricane Katrina disaster area and such
    person suffered economic loss as a result of the hurricane.

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      Provide special rule for purposes of computing the child tax credit
    and earned income tax credit.--The earned income tax credit (EITC) is a
    refundable credit for low-income workers, the amount of which depends on
    the earned income of the taxpayer and whether the taxpayer has one, more
    than one, or no qualifying children. Taxpayers with income below certain
    thresholds also are eligible for a child credit for each qualifying
    child, which may be refundable. Under this Act, qualified individuals
    were permitted to elect to use their earned income from the prior
    taxable year to determine eligibility for these credits for the taxable
    year that includes August 25, 2005 if their earned income for the
    taxable year that includes August 25, 2005 was less than their earned
    income for the preceding taxable year. Qualified individuals are those
    whose principal place of abode on August 25, 2005 was located in: (1)
    the core disaster area, or (2) in the Hurricane Katrina disaster area
    and who were displaced by the hurricane.
      Provide special rules for mortgage revenue bonds.--Under current law
    State and local governments may issue mortgage revenue bonds (MRBs) to
    provide low-interest rate financing to qualified individuals for the
    purchase, improvement, or rehabilitation of owner-occupied residences.
    Several restrictions, including purchase price limitations, mortgagor
    income, and the first-time homebuyer requirement (except with regard to
    residences in certain targeted areas) apply to the financing of
    mortgages with MRBs. Effective for financing provided before January 1,
    2008, this Act waived the first-time homebuyer requirement of current
    law with respect to financing for: (1) residences located in the core
    disaster area, and (2) any other residence if the mortgagor owned a
    principal residence in the Hurricane Katrina disaster area on August 28,
    2005 that was rendered uninhabitable by the hurricane and the residence
    being financed is located in the same State as the prior principal
    residence. This Act also increased the current law limitation on home
    improvement loans financed with MRBs from $15,000 to $150,000 for
    residences located in the Hurricane Katrina disaster area, to the extent
    the loan is for the repair of damage caused by the hurricane.
      Extend tax filing and payment deadlines.--Deadlines for the filing of
    tax returns and the payment of taxes, including employment and excise
    taxes, otherwise required on or after August 25, 2005, were extended
    until February 28, 2006 for taxpayers affected by Hurricane Katrina.
      Authorize the Secretary of the Treasury to make adjustment regarding
    taxpayer and dependency status.--This Act authorized the Secretary of
    the Treasury to make adjustments in applying the Federal tax laws that
    may be necessary to ensure that taxpayers do not lose any deduction or
    credit or experience a change of filing status because of temporary
    relocations caused by Hurricane Katrina. This provision applies to
    taxable years beginning in 2005 and 2006.

                            Tax Relief for Employers

      Expand eligibility for the work opportunity tax credit.--Under current
    law, the work opportunity tax credit is available for first-year wages
    paid to a qualified individual from one or more of eight targeted groups
    who begins work before January 1, 2006. This Act expanded eligibility
    for the credit to include wages paid to: (1) an individual who on August
    28, 2005 had a principal place of abode in the core disaster area and is
    hired during the two-year period beginning on such date for a position,
    the principal place of employment of which is located in the core
    disaster area; and (2) an individual who on August 28, 2005 had a
    principal place of abode in the core disaster area, was displaced from
    such abode by reason of Hurricane Katrina, and is hired during the
    period beginning on such date and ending on December 31, 2005, without
    regard to whether the new principal place of employment is in the core
    disaster area.
      Provide an employee retention credit to employers affected by
    Hurricane Katrina.--Under this Act, a 40-percent tax credit was provided
    to eligible employers for the first $6,000 in qualified wages paid to an
    eligible employee. To be eligible, an employer must have employed an
    average of 200 or fewer employees in a business located in the core
    disaster area on August 28, 2005 that was inoperable on any day
    beginning on that date and ending on December 31, 2005, as a result of
    damage caused by the hurricane. An eligible employee, with respect to an
    eligible employer, is one whose principal place of employment with that
    employer was in the core disaster zone on August 28, 2005. Qualified
    wages are those paid by an eligible employer to an eligible employee on
    any day after August 28, 2005 and before January 1, 2006 during the
    period beginning on the date on which the trade or business first became
    inoperable at the principal place of employment of the employee and
    ending on the date on which such trade or business resumed significant
    operations at such principal place of employment. Qualified wages
    include those paid without regard to whether the employee performs a
    service, performs services at a different place of employment than such
    principal place of employment, or performs services at such principal
    place of employment before significant operations have resumed.

                        Incentives for Charitable Giving

      Suspend limitations on charitable contributions.--Deductions for
    charitable contributions are subject to certain limitations under
    current law, depending on the type of taxpayer, the property being
    contributed, and the donee organization. This Act suspended the current
    law percentage limitations for individuals who itemize deductions and
    corporations with respect to cash contributions to certain public
    charities made after

    [[Page 247]]

    August 27, 2005 and before January 1, 2006; however, for corporations,
    the suspension applied only to contributions for relief efforts related
    to Hurricane Katrina.
      Provide an exemption to taxpayers who housed individuals displaced by
    Hurricane Katrina.--Taxpayers who provided housing to individuals
    displaced by Hurricane Katrina were provided a one-time $500 exemption
    for each individual whom they housed. Taxpayers may claim the exemption
    for up to four displaced individuals, for a maximum exemption amount of
    $2,000. An individual displaced by Hurricane Katrina is a person (other
    than a spouse or dependent of the taxpayer): (1) whose principal place
    of abode on August 28, 2005 was in the Hurricane Katrina disaster area,
    (2) who is displaced from such abode, and (3) who is provided housing
    free of charge in the taxpayer's principal residence for a period of 60
    consecutive days, which ends in the taxable year in which the exemption
    is claimed. For individuals whose principal place of abode on August 28,
    2005 was in the Hurricane Katrina disaster area but outside the core
    disaster area, in order to qualify as a displaced individual, their
    abode must have been damaged by the hurricane or they must have been
    evacuated as a result of the hurricane. This provision applies to
    taxable years beginning in 2005 and 2006.
      Increase deduction for the costs associated with the charitable use of
    a motor vehicle.--Taxpayers may claim a deduction for the costs
    associated with the use of a motor vehicle in providing donated services
    to charity. The deduction may be calculated by using a standard mileage
    rate of 14 cents per mile. This Act increased the charitable standard
    mileage rate to 34 cents per mile for the costs associated with the use
    of a vehicle in providing services to charity solely for the provision
    of relief related to Hurricane Katrina. In addition, this Act excluded
    from the gross income of a volunteer up to 48.5 cents per mile in
    reimbursements paid by a charitable organization to the volunteer for
    the costs associated with using a passenger automobile in performing
    such charitable work. A volunteer may not claim a deduction or credit
    with respect to reimbursed amounts. Certain recordkeeping requirements
    apply. These changes apply to such relief provided during the period
    beginning on August 25, 2005 and ending on December 31, 2006.
      Expand enhanced deduction for contributions of food and books.--A
    taxpayer's deduction for charitable contributions of inventory generally
    is limited to the taxpayer's basis in the inventory, or, if less, the
    fair market value of the inventory. However, an enhanced deduction is
    provided to C corporations for certain contributions of inventory. This
    Act expanded the enhanced deduction to apply to qualified contributions
    of: (1) food inventory by all taxpayers (not just C corporations)
    engaged in a trade or business, and to (2) books to public schools by C
    corporations. The donated food must meet certain quality and labeling
    standards, and the taxpayer's total deduction for donated food inventory
    may not exceed 10 percent of the taxpayer's net income from the related
    trade or business. The donated books must be suitable for use and used
    by the public school in its educational programs. The enhanced deduction
    applies to such qualified contributions of food and books made after
    August 27, 2005 and before January 1, 2006.

                  Special Rules for the Use of Retirement Funds

      Allow tax-favored and penalty-free withdrawals from retirement plans
    for relief related to Hurricane Katrina.--Under current law, a
    distribution from a qualified retirement plan, a tax-sheltered annuity
    (a 403(b) annuity), an eligible deferred compensation plan maintained by
    a State or local government (a governmental 457 plan), or an individual
    retirement arrangement (IRA) generally is included in the taxpayer's
    gross income in the year of distribution. In addition, a distribution
    from a qualified retirement plan, a 403(b) plan, or an IRA received
    before age 59 1/2, death, or disability generally is subject to a 10-
    percent early withdrawal tax on the amount included in income, unless an
    exception applies. A distribution from a qualified retirement plan, a
    403(b) annuity, a governmental 457 plan, or an IRA rolled over within 60
    days to another plan, annuity or IRA generally is not included in a
    taxpayer's gross income and not subject to the 10-percent early
    withdrawal tax. This Act provided an exemption from the 10-percent early
    withdrawal tax for qualified Hurricane Katrina distributions. A
    qualified Hurricane Katrina distribution is a distribution from a
    qualified retirement plan, 403(b) annuity, or IRA made on or after
    August 25, 2005 and before January 1, 2007 to an individual whose
    principal place of abode on August 28, 2005 was located in the Hurricane
    Katrina disaster area and who had sustained an economic loss as a result
    of the hurricane. The total amount of qualified Hurricane Katrina
    distributions that an individual can receive from all qualified
    retirement plans, tax-sheltered annuities, or IRAs is $100,000. Any
    amount required to be included in income as a result of a qualified
    Hurricane Katrina distribution may be included in income ratably over
    the three-year period beginning with the year of distribution. In
    addition, any portion of a qualified Hurricane Katrina distribution
    repaid to a qualified retirement plan, tax-sheltered annuity or IRA
    within three years after the initial distribution is treated as a
    rollover and thereby excluded from the taxpayer's gross income and
    exempt from the 10-percent early withdrawal tax.
      Provide tax-favored and penalty-free treatment for the recontribution
    of withdrawals for home purchase cancelled as a result of Hurricane
    Katrina.--Under current law, certain amounts held in a 401(k) plan or a
    403(b) annuity may not be distributed before severance from employment,
    age 59\1/2\, death, disability, or financial hardship of the employee.
    For this purpose, subject to certain conditions, distribu

    [[Page 248]]

    tions for costs directly related to the purchase of a principal
    residence by an employee (excluding mortgage payments) are deemed to be
    distributions on account of financial hardship. Current law also allows
    distributions of up to $10,000 from IRAs for the purchase or
    construction of a principal residence of a first-time homebuyer. Under
    this Act, hardship distributions from a 401(k) plan or 403(b) annuity,
    and qualified first-time homebuyer distributions from an IRA received
    after February 28, 2005 and before August 29, 2005 for the purchase or
    construction of a principal residence in the Hurricane Katrina disaster
    area can be recontributed to such a plan, annuity or IRA if the
    residence was not purchased or constructed as a result of the hurricane.
    Any amount recontributed to such a plan is treated as a rollover and
    thereby excluded from the taxpayer's gross income and exempt from the
    10-percent early withdrawal tax.
      Modify treatment of loans from qualified retirement plans.--A loan
    from a qualified retirement plan to a plan participant generally is
    treated as a taxable distribution under current law. An exception to
    this general rule is provided to the extent that the loan does not
    exceed the lesser of (1) $50,000, reduced by the excess of the highest
    outstanding balance of loans from such plans during the one-year period
    ending on the day before the date the loan is made over the outstanding
    balance of loans from the plan on the date the loan is made, or (2) the
    greater of $10,000 or one half of the participant's accrued benefit
    under the plan. This Act increased from $50,000 to $100,000 the limit on
    loans from a qualified retirement plan to an individual whose principal
    place of abode on August 28, 2005 was located in the Hurricane Katrina
    disaster area and who sustained an economic loss as a result of
    Hurricane Katrina. To qualify for the higher limit, the loan must be
    made after September 23, 2005 and before January 1, 2007.

                        GULF OPPORTUNITY ZONE ACT OF 2005

      This Act, which was signed by President Bush on December 21, 2005,
    created a Gulf Opportunity Zone (GO Zone), in which additional tax
    relief was provided to individuals and businesses affected by Hurricane
    Katrina. This Act also extended many of the tax benefits provided in the
    Katrina Emergency Tax Relief Act of 2005 to victims of Hurricane Rita
    and Hurricane Wilma. For purposes of this Act, the ``Hurricane Rita
    disaster area'' is that area with respect to which a major disaster was
    declared by President Bush before October 6, 2005 by reason of Hurricane
    Rita and the ``Hurricane Wilma disaster area'' is that area with respect
    to which a major disaster was declared by President Bush before November
    14, 2005 by reason of Hurricane Wilma. The ``Gulf Opportunity Zone,''
    ``Rita GO Zone,'' and ``Wilma GO Zone,'' are defined, respectively, as
    that portion of the Hurricane Katrina, Rita and Wilma disaster areas
    determined by the President to warrant individual or individual and
    public assistance. The major provisions of this Act are described below.

                    Tax Relief for the Gulf Opportunity Zone

      Provide tax-exempt bond financing.--Interest on bonds issued by State
    and local governments to finance activities carried out and paid for by
    private persons (private activity bonds) is taxable unless the
    activities are specified in the Internal Revenue Code. The volume of
    certain tax-exempt private activity bonds that State and local
    governments may issue in each calendar year is limited by State-wide
    volume limits. Under this Act, Alabama, Louisiana, and Mississippi (or
    any political subdivision thereof) were provided authority to issue tax-
    exempt private activity bonds for: (1) the cost of any qualified rental
    project in the Gulf Opportunity Zone (GO Zone); (2) the cost of
    acquisition, construction, reconstruction, and renovation of
    nonresidential real property and public utility property in the GO Zone;
    and (3) the cost of certain owner-occupied residences in the GO Zone.
    Authority to issue these bonds, which are not subject to the aggregate
    annual State private activity bond volume limit, expires after December
    31, 2010. The maximum aggregate amount of bonds issued in each State is
    limited to $2,500 multiplied by the population of the State within the
    GO Zone. Depending on the purpose for which such bonds are issued, they
    are treated as either exempt facility bonds or qualified mortgage bonds
    and are subject to the general rules applicable to the issuance of such
    bonds, except as modified by this Act.
      Allow advance refunding of certain tax-exempt bonds.--Refunding bonds
    are used to pay principal, interest or redemption price on previously
    issued bonds. Different rules apply to ``current'' and ``advance''
    refunding bonds. A current refunding occurs when the refunded debt is
    retired within 90 days of issuance of the refunding bonds. Tax-exempt
    bonds may be currently refunded an indefinite number of times. An
    advance refunding occurs when the refunded debt is not retired within 90
    days after the refunding bonds are issued; instead, the proceeds of the
    refunding bonds are invested in an escrow account and held until a
    future date when the refunded debt may be retired. In general,
    governmental bonds and tax-exempt private activity bonds for charitable
    organizations (qualified 501(c)(3) bonds) may be advance refunded one
    time.
      This Act permitted an additional advance refunding of certain
    governmental and qualified 501(c)(3) bonds issued by Alabama, Louisiana,
    or Mississippi (or any political subdivision thereof). It also permitted
    one advance refunding of certain exempt facility bonds for airports,
    docks, or wharves issued by these States or any political subdivision
    thereof. Eligible bonds include only those bonds outstanding on August
    28, 2005 that could not be advance refunded because of restrictions in
    effect on that date. The maximum amount of advance refunding bonds that
    may be issued under this provision by Louisiana, Mississippi and Alabama
    is $4.5 billion, $2.250 billion, and $1.125 billion, respectively.
    Eligible advance refunding bonds must be designated as

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    such by the governor of the respective State and must be issued before
    January 1, 2011.

      Increase and modify the low-income housing tax credit.--A low-income
    housing tax credit is provided to owners of qualified low-income rental
    units under current law. The credit may be claimed over a 10-year period
    for a portion of the cost of rental housing occupied by tenants having
    incomes below specified levels. The credit percentage for newly
    constructed or substantially rehabilitated housing that is not federally
    subsidized is adjusted monthly by the IRS so that the 10 annual credit
    amounts have a present value of 70 percent of the qualified basis of the
    structure. The credit percentage for newly constructed or substantially
    rehabilitated housing that is federally subsidized is calculated to have
    a present value of 30 percent of the qualified basis of the structure.
    Buildings located in high cost areas (qualified census tracts and
    difficult development areas) are eligible for an enhanced credit,
    provided no more than 20 percent of the population of each metropolitan
    statistical area or nonmetropolitan statistical area is a difficult
    development area. Under the enhanced credit, the 70 percent and 30
    percent credits are increased to 91 percent and 39 percent,
    respectively. The aggregate credit authority allocated to each State for
    calendar year 2006 generally is the greater of $2.180 million or $1.90
    per capita. These amounts are indexed annually for inflation. In
    general, to qualify for the credit, a low-income housing project must
    satisfy one of two tests: (1) 20 percent or more of the residential
    units in the project are both rent-restricted and occupied by
    individuals whose income is 50 percent or less of area median gross
    income; or (2) 40 percent or more of the residential units in the
    project are both rent-restricted and occupied by individuals whose
    income is 60 percent or less of area median gross income.
      Under this Act, for calendar years 2006 through 2008, the otherwise
    applicable aggregate housing credit authority was increased for each
    State within the GO Zone. The additional credit amount for each State is
    equal to $18.00 multiplied by the number of such State's residents
    within the GO Zone. This amount is not indexed for inflation. For
    calendar year 2006, the otherwise applicable aggregate housing credit
    authority amount for both Florida and Texas was increased by $3.5
    million. This Act also replaced the area median gross income standards
    of current law with a national nonmetropolitan median gross income
    standard, with respect to property placed in service in a
    nonmetropolitan area within the GO Zone during calendar years 2006,
    2007, and 2008. The income targeting rules for property in metropolitan
    areas in the Go Zone are the same as under current law. In addition,
    property placed in service in calendar years 2006 through 2008 in the Go
    Zone, the Rita Go Zone, and the Wilma GO Zone are treated as high-cost
    areas and eligible for the enhanced credit; the 20 percent of population
    restriction of current law is waived. The enhanced credit and modified
    income targeting rules apply regardless of whether the property receives
    its credit allocation under the otherwise applicable low-income housing
    authority or the additional credit authority provided in this Act.

      Provide special depreciation allowance for certain property.--
    Taxpayers are allowed to recover the cost of certain property used in a
    trade or business or for the production of income through annual
    depreciation deductions. The amount of the allowable depreciation
    deduction for a taxable year generally is determined under MACRS, which
    assigns applicable recovery periods and depreciation methods to
    different types of property. Under this Act, qualifying GO Zone property
    is eligible for an additional first-year depreciation deduction equal to
    50 percent of the adjusted basis of the property. The additional first-
    year deprecation deduction is allowed for both regular and alternative
    minimum tax purposes in the year the property is placed in service. The
    basis of the property and the depreciation deductions allowable in other
    years are adjusted to reflect the additional first-year depreciation
    deduction. Qualifying property generally must be tangible property with
    a recovery period of 20 years or less, and also includes: (1) certain
    computer software; (2) water utility property; (3) leasehold improvement
    property; (4) nonresidential real property; and (5) residential rental
    property. In addition: (1) substantially all of the use of the property
    must be in the GO Zone and in the active conduct of a trade or business
    by the taxpayer in the GO Zone; (2) the original use of the property in
    the Go Zone must commence with the taxpayer on or after August 28, 2005;
    and (3) the property must be acquired by purchase by the taxpayer on or
    after August 28, 2005 and placed in service on or before December 31,
    2007 (December 31, 2008 in the case of nonresidential real property and
    residential rental property). Property acquired under a binding written
    contract entered into before August 28, 2005 is not eligible for the
    additional first-year depreciation deduction provided under this
    provision. Current law allowed certain property an extended placed-in-
    service deadline (December 31, 2005) with respect to existing additional
    first-year depreciation provisions. This Act granted the Department of
    Treasury authority to extend that deadline for up to one year if such
    property is placed in service in the GO Zone, the Rita GO Zone or the
    Wilma GO Zone.
       Increase expensing for small business.--Business taxpayers are
    allowed to expense up to $100,000 in annual investment expenditures for
    eligible property placed in service in taxable years 2003 through 2007.
    The amount that may be expensed is reduced by the amount by which the
    taxpayer's annual cost of qualifying property exceeds $400,000. Both the
    deduction and annual investment limits are indexed annually for
    inflation, effective for taxable years beginning after 2003 and before
    2008. Eligible property includes tangible personal property, certain
    real property, and, currently, off-the-shelf computer software. This Act
    increased the amount of annual investment expenditures

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    that business taxpayers are allowed to expense by the lesser of $100,000
    or the cost of eligible property that is also qualified GO Zone property
    placed in service during the taxable year. This Act also increased the
    phase-out threshold investment amount by the lesser of $600,000 or the
    cost of eligible property that is also qualified GO Zone property placed
    in service during the taxable year. Neither of these increased values is
    indexed for inflation. Qualified GO Zone property is property that meets
    the requirements needed to qualify for the special depreciation
    allowance (see discussion in the preceding paragraph).
      Allow five-year carryback of certain net operating losses.--A net
    operating loss (NOL) generally is the amount by which a taxpayer's
    allowable deductions exceed the taxpayer's gross income. A carryback of
    an NOL generally results in a refund of Federal income taxes paid for
    the carryback year. A carryforward of an NOL generally reduces Federal
    income tax payments for the carryforward year. Under current law, an NOL
    generally can be carried back two years and carried forward 20 years.
    This Act provided a special five-year carryback period for NOLs to the
    extent of certain specified amounts related to Hurricane Katrina or the
    GO Zone. The amount of the NOL eligible for the five-year carryback is
    limited to the aggregate amount of the following deductions: (1)
    qualified GO Zone casualty losses; (2) certain moving expenses; (3)
    certain temporary housing expenses; (4) depreciation deductions with
    respect to qualified GO Zone property for the taxable year the property
    is placed in service; and (5) deductions for certain repair expenses
    resulting form Hurricane Katrina. The five-year carryback applies to
    losses paid or incurred after August 27, 2005 and before January 1,
    2008.
      Increase amount of qualifying investment eligible for the new markets
    tax credit.--Under current law, the new markets tax credit is provided
    for qualified equity investments made to acquire stock in a corporation
    or a capital interest in a partnership that is a qualified community
    development entity (CDE). A credit of five percent is provided to the
    investor for the first three years of investment. The credit increases
    to six percent for the next four years. The maximum amount of annual
    qualifying equity investment is capped at $2.0 billion for calendar
    years 2004 and 2005, and $3.5 billion for calendar years 2006 and 2007.
    This Act increased the annual qualifying equity investment cap by $300
    million for 2005 and 2006, and $400 million for 2007. The additional
    amount is to be allocated among qualified CDEs to make qualified low-
    income community investments within the GO Zone. To qualify for the
    allocation, a qualified CDE must have as a significant mission the
    recovery and redevelopment of the GO Zone.
      Provide tax relief for in-kind lodging provided by an employer.--Under
    current law, employer-provided housing generally is includible in income
    as compensation and is wages for purposes of social security, Medicare,
    and unemployment insurance taxes. This Act provided an income tax
    exclusion for the value of in-kind lodging provided for a month to a
    qualified employee (and the employee's spouse or dependents) by or on
    behalf of a qualified employer. The amount of the exclusion for any
    month for which such lodging is furnished cannot exceed $600. For
    purposes of this exclusion, a qualified employee is any individual who:
    (1) on August 28, 2005, had a principal residence in the GO Zone; and
    (2) performed substantially all of his or her employment services in the
    Go Zone for the qualified employer furnishing the lodging. A qualified
    employer is any employer with a trade or business located in the GO
    Zone. The exclusion, which applies to lodging provided after December
    31, 2005 and before July 1, 2006, does not apply for purposes of social
    security, Medicare or unemployment insurance taxes. This Act also
    provided a tax credit to qualified employers equal to 30 percent of the
    value of such lodging excluded from the income of a qualified employee.
    The amount taken as a credit is not deductible by the employer.
      Provide other tax relief.--Other tax relief provided to property and
    individuals located in the GO Zone included: (1) a deduction for 50
    percent of certain clean-up costs; (2) a two-year extension of the
    current law provision allow expensing of certain environmental
    remediation costs; (3) an increase in the rehabilitation tax credit with
    respect to certain buildings; (4) an increase in the expensing limit for
    reforestation expenditures of certain small timber producers (also
    applicable to the Rita and Wilma GO Zones); (5) a five-year carryback
    for certain timber losses (also applicable to the Rita and Wilma GO
    Zones); (6) a ten-year carryback for certain public utility casualty
    losses; (7) a new category of tax-credit bonds to be issued by
    Louisiana, Mississippi and Alabama; (8) modification of the treatment of
    public utility disaster losses; and (9) expansion of the Hope and
    Lifetime Learning credits.
      Exclude certain property from specific tax benefits.--The provisions
    of this Act relating to additional first-year depreciation, increased
    expensing for small business, and the five-year carryback of NOLs do not
    apply with respect to the following property: (1) any private or
    commercial golf course, country club, massage parlor, hot tub facility,
    or suntan facility; (2) any store the principal business of which is the
    sale of alcoholic beverages for consumption off premises; and (3) any
    gambling or animal racing property.

                    Tax Relief for Victims of Hurricanes Rita

                                    and Wilma

      Provide special rules for the use of retirement funds.--Under the
    Katrina Emergency Tax Relief Act of 2005, special rules were provided
    for the use of retirement funds by an individual whose principal place
    of abode on August 28, 2005 was located in the Hurri

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    cane Katrina disaster area and who had sustained an economic loss as a
    result of the hurricane. These special rules, which are described in
    greater detail under the discussion of the Katrina Emergency Tax Relief
    Act of 2005, included the following: (1) tax-favored and penalty-free
    withdrawals from retirement plans; (2) tax-favored and penalty-free
    treatment for the recontribution of withdrawals for home purchase
    cancelled as a result of the hurricane; and (3) modification of the
    treatment of loans from qualified plans. This Act expanded that relief
    to apply to: (1) an individual whose principal place of abode on
    September 23, 2005 was located in the Hurricane Rita disaster area and
    who sustained an economic loss as a result of the hurricane; and (2) an
    individual whose principal place of abode on October 23, 2005 was
    located in the Hurricane Wilma disaster area and who sustained an
    economic loss as a result of the hurricane.
      Provide an employee retention credit to employers affected by
    Hurricanes Rita and Wilma.--Under the Katrina Emergency Tax Relief Act
    of 2005, an employee retention credit was provided to employers who
    employed an average of 200 or fewer employees in a business located in
    the core Katrina disaster area on August 28, 2005, whose business was
    inoperable on any day during the period August 28, 2005 through December
    31, 2005, as a result of Hurricane Katrina. This Act repealed the
    employer size limitation, effective for wages paid with respect to
    Hurricane Katrina on any day after August 28, 2005 and before January 1,
    2006. This Act also expanded eligibility for the employee retention
    credit, as modified to repeal the employer size limitation, to apply to
    employers affected by Hurricanes Rita and Wilma and located in the Rita
    GO Zone on September 23, 2005 and in the Wilma GO Zone on October 23,
    2005, respectively.
      Suspend limitation on charitable contributions.--Deductions for
    charitable contributions are subject to certain limitations under
    current law. The Katrina Emergency Tax Relief Act of 2005 temporarily
    suspended these limitations for corporations and individuals who itemize
    deductions with respect to cash contributions to certain public
    charities made after August 27, 2005 and before January 1, 2006. For
    corporations, the suspension applied only to contributions for relief
    efforts related to Hurricane Katrina. This Act expanded this temporary
    suspension to apply to corporate cash contributions for relief efforts
    related to Hurricanes Rita and Wilma.
      Suspend limitation on personal casualty losses.--The Katrina Emergency
    Tax Relief Act of 2005 suspended both the $100 and 10-percent-of-AGI
    limitations otherwise applicable to personal casualty losses, with
    respect to such loses occurring in the Hurricane Katrina disaster area
    on or after August 25, 2005 and attributable to the hurricane. This Act
    expanded this suspension to apply to such losses occurring in the
    Hurricane Rita disaster area on or after September 23, 2005 and the
    Hurricane Wilma disaster area on or after October 23, 2005.
      Provide other tax relief for victims of Hurricane Rita and Hurricane
    Wilma.--Other tax relief provided to victims of Hurricanes Rita and
    Wilma included: (1) a special rule for purposes of computing the
    refundable portion of the child tax credit and the EITC; (2) authority
    to make adjustments regarding taxpayer and dependency status; and (3)
    special rules for mortgage revenue bonds.

                                Other Provisions

      Extend election to treat combat pay as earned income for purposes of
    computing the EITC.--This Act extended for one year, through December
    31, 2006, the prior law election that allowed combat pay, which is
    otherwise excluded from gross income, to be treated as earned income for
    purposes of calculating the EITC.
      Modify the rules regarding the suspension of interest and penalties
    where the IRS fails to contact the taxpayer.--In general, interest and
    penalties accrue during periods for which taxes are unpaid, without
    regard to whether the taxpayer was aware that taxes were due. Beginning
    18 months after the filing of a timely return, the accrual of certain
    penalties and interest is suspended if the IRS failed to send the
    taxpayer a notice specifically stating the taxpayer's liability and the
    basis for the liability. Interest and penalties resume 21 days after the
    required notice is sent to the taxpayer by the IRS. The temporary
    suspension of certain penalties and interest does not apply to interest
    accruing after October 3, 2004 with respect to underpayments resulting
    from listed transactions or undisclosed reportable transactions. This
    Act expanded the exception for listed transactions and undisclosed
    reportable transactions to apply to interest accruing on or before
    October 3, 2004. However, taxpayers remain eligible for the present-law
    suspension of interest if: (1) the year in which the underpayment
    occurred is barred by the statute of limitations (or a closing
    agreement) as of December 14, 2005; (2) it is determined that the
    taxpayer acted reasonably and in good faith with respect to the
    transaction; or (3) as of January 23, 2006, the taxpayer participates in
    the IRS settlement initiative with respect to the transaction. In
    addition, if a taxpayer files an amended return or other signed written
    document after December 21, 2005 that shows that the taxpayer owes an
    additional amount of tax for a given taxable year, the 18-month period
    is measured from the latest date on which such documents were provided.
      Make technical corrections to recently enacted legislation.--This Act
    also included technical corrections and other corrections to recently
    enacted tax legislation.

    [[Page 252]]

                       DOMINICAN REPUBLIC-CENTRAL AMERICA-

                       UNITED STATES FREE TRADE AGREEMENT

                               IMPLEMENTATION ACT

      This Act, which was signed by President Bush on August 2, 2005,
    approved and provided for U.S implementation of the Dominican Republic-
    Central America-United States Free Trade Agreement, as signed by the
    United States, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua
    and the Dominican Republic. When this Agreement enters into force, it
    will level the playing field for U.S. farmers, manufacturers and
    entrepreneurs. This Agreement will expand access for U.S. manufactured
    goods and agricultural products to a market of 44 million customers. In
    addition to advancing U.S. economic interests, this Agreement provides a
    unique opportunity to strengthen our political ties with Central America
    and the Caribbean, thereby enhancing our Nation's security as democracy,
    stability and prosperity advance throughout the region.

          UNITED STATES-BAHRAIN FREE TRADE AGREEMENT IMPLEMENTATION ACT

      This Act, which was signed by President Bush on January 11, 2006,
    approved and provided for U.S. implementation of the United States-
    Bahrain Free Trade Agreement, as signed by the United States and Bahrain
    on September 14, 2004. When this Agreement enters into force, it will
    provide increased access to Bahrain's markets for U.S. industrial,
    consumer, and agricultural goods, and create new opportunities for U.S.
    services firms. In addition to enhancing our bilateral relationship with
    a strategic friend and ally in the Middle East region and promoting
    economic growth and prosperity in both nations, this Agreement provides
    an important opportunity to encourage economic development in a moderate
    Muslim nation that is a leader of reform in the Gulf region. This
    Agreement marks a significant step in implementing the President's plan
    for a broader Middle East Free Trade Area.

                            ADMINISTRATION PROPOSALS

                          REFORM THE FEDERAL TAX SYSTEM

      Americans deserve a tax system that is simple, fair, and pro-growth--
    in tune with our dynamic, 21st century economy. The tax system should
    allow taxpayers to make decisions based on economic merit, free of tax-
    induced distortions. The bipartisan and unanimous Report of the
    President's Advisory Panel on Federal Tax Reform has provided a strong
    foundation for a national discussion on ways to ensure that our tax
    system better meets the needs of today's economy.
      The President has proposed several changes that move the tax code in
    this direction. The Budget includes proposals to make health care more
    affordable to a mobile labor force, to promote savings for all
    Americans, to encourage investment by entrepreneurs, and to enhance our
    competitiveness by lowering the cost of capital. The Budget also
    recognizes that tax policy analysis needs to account fully for the
    economic benefits of reform on our economy. In the coming months, the
    Treasury Department will continue to study reform and engage in a public
    dialogue on this important issue.

            MAKE PERMANENT CERTAIN TAX CUTS ENACTED IN 2001 AND 2003

      Extend permanently reductions in individual income taxes on capital
    gains and dividends.--The maximum individual income tax rate on net
    capital gains and dividends is 15 percent for taxpayers in individual
    income tax rate brackets above 15 percent and 5 percent (zero in 2008)
    for lower income taxpayers. The Administration proposes to extend
    permanently these reduced rates (15 percent and zero), which are
    scheduled to expire on December 31, 2008.
      Extend permanently increased expensing for small business.--Business
    taxpayers are allowed to expense up to $100,000 in annual investment
    expenditures for qualifying property (expanded to include off-the-shelf
    computer software) placed in service in taxable years 2003 through 2007.
    The amount that may be expensed is reduced by the amount by which the
    taxpayer's cost of qualifying property exceeds $400,000. Both the
    deduction and annual investment limits are indexed annually for
    inflation, effective for taxable years beginning after 2003 and before
    2008. Also, with respect to a taxable year beginning after 2002 and
    before 2008, taxpayers are permitted to make or revoke expensing
    elections on amended returns without the consent of the IRS
    Commissioner. The Administration proposes to extend permanently each of
    these temporary provisions, applicable for qualifying property
    (including off-the-shelf computer software) placed in service in taxable
    years beginning after 2007.
      Extend permanently provisions expiring in 2010.--Most of the
    provisions of the 2001 tax cut sunset on December 31, 2010. The
    Administration proposes to extend those provisions permanently.

                                 TAX INCENTIVES

                          Simplify and Encourage Saving

      Expand tax-free savings opportunities.--Under current law, individuals
    can contribute to traditional Individual Retirement Accounts (IRAs),
    nondeductible IRAs, and Roth IRAs, each subject to different sets of
    rules. For example, contributions to traditional IRAs are deductible,
    while distributions are taxed; contributions to Roth IRAs are taxed, but
    distributions are excluded from income. In addition, eligibility to
    contribute is subject to various age and income limits. While primarily
    intended for retirement saving, withdrawals for certain education,
    medical, and other non-retirement expenses are penalty free. The
    eligibility and with

    [[Page 253]]

    drawal restrictions for these accounts complicate compliance and limit
    incentives to save.
      The Administration proposes to replace current law IRAs with two new
    savings accounts: a Lifetime Savings Account (LSA) and a Retirement
    Savings Account (RSA). Regardless of age or income, individuals could
    make annual nondeductible contributions of $5,000 to an LSA and $5,000
    (or earnings if less) to an RSA. Distributions from an LSA would be
    excluded from income and could be made at anytime for any purpose
    without restriction. Distributions from an RSA would be excluded from
    income after attaining age 58 or in the event of death or disability.
    All other distributions would be included in income (to the extent they
    exceed basis) and subject to an additional tax. Distributions would be
    deemed to come from basis first. The proposal would be effective for
    contributions made after December 31, 2006 and future year contribution
    limits would be indexed for inflation.
      Existing Roth IRAs would be renamed RSAs and would be subject to the
    new rules for RSAs. Existing traditional and nondeductible IRAs could be
    converted into an RSA by including the conversion amount (excluding
    basis) in gross income, similar to a current-law Roth conversion.
    However, no income limit would apply to the ability to convert.
    Taxpayers who convert IRAs to RSAs could spread the included conversion
    amount over several years. Existing traditional or nondeductible IRAs
    that are not converted to RSAs could not accept new contributions. New
    traditional IRAs could be created to accommodate rollovers from employer
    plans, but they could not accept new individual contributions.
    Individuals wishing to roll an amount directly from an employer plan to
    an RSA could do so by including the rollover amount (excluding basis) in
    gross income (i.e., ``converting'' the rollover, similar to a current
    law Roth conversion).
      Saving will be further simplified and encouraged by administrative
    changes already planned for the 2007 filing season that will allow
    taxpayers to have their tax refunds directly deposited into more than
    one account. Consequently, taxpayers will be able, for example, to
    direct that a portion of their tax refunds be deposited into an LSA or
    RSA.

      Consolidate employer-based savings accounts.--Current law provides
    multiple types of tax-preferred employer-based savings accounts to
    encourage saving for retirement. The accounts have similar goals but are
    subject to different sets of rules regulating eligibility, contribution
    limits, tax treatment, and withdrawal restrictions. For example, 401(k)
    plans for private employers, SIMPLE 401(k) plans for small employers,
    403(b) plans for 501(c)(3) organizations and public schools, and 457
    plans for State and local governments are all subject to different
    rules. To qualify for tax benefits, plans must satisfy multiple
    requirements. Among the requirements, the plan generally may not
    discriminate in favor of highly compensated employees with regard either
    to coverage or to amount or availability of contributions or benefits.
    Rules covering employer-based savings accounts are among the lengthiest
    and most complicated sections of the tax code and associated
    regulations. This complexity imposes substantial costs on employers,
    participants, and the Government, and likely has inhibited the adoption
    of retirement plans by employers, especially small employers.
      The Administration proposes to consolidate 401(k), SIMPLE 401(k),
    403(b), and 457 plans, as well as SIMPLE IRAs and SARSEPs, into a single
    type of plan--Employee Retirement Savings Accounts (ERSAs) that would be
    available to all employers. ERSA non-discrimination rules would be
    simpler and include a new ERSA non-discrimination safe-harbor. Under one
    of the safe-harbor options, a plan would satisfy the nondiscrimination
    rules with respect to employee deferrals and employee contributions if
    it provided a 50-percent match on elective contributions up to six
    percent of compensation. By creating a simplified and uniform set of
    rules, the proposal would substantially reduce complexity. The proposal
    would be effective for taxable years beginning after December 31, 2006.

      Establish Individual Development Accounts (IDAs).--The Administration
    proposes to allow eligible individuals to make contributions to a new
    savings vehicle, the Individual Development Account, which would be set
    up and administered by qualified financial institutions, nonprofit
    organizations, or Indian tribes (qualified entities). Citizens or legal
    residents of the United States between the ages of 18 and 60 who cannot
    be claimed as a dependent on another taxpayer's return, are not
    students, and who meet certain income limitations would be eligible to
    establish and contribute to an IDA. A single taxpayer would be eligible
    to establish and contribute to an IDA if his or her modified AGI in the
    preceding taxable year did not exceed $20,000 ($30,000 for heads of
    household, and $40,000 for married taxpayers filing a joint return).
    These thresholds would be indexed annually for inflation beginning in
    2008. Qualified entities that set up and administer IDAs would be
    required to match, dollar-for-dollar, the first $500 contributed by an
    eligible individual to an IDA in a taxable year. Qualified entities
    would be allowed a 100 percent tax credit for up to $500 in annual
    matching contributions to each IDA, and a $50 tax credit for each IDA
    maintained at the end of a taxable year with a balance of not less that
    $100 (excluding the taxable year in which the account was established).
    Matching contributions and the earnings on those contributions would be
    deposited in a separate ``parallel account.'' Contributions to an IDA by
    an eligible individual would not be deductible, and earnings on those
    contributions would be included in income. Matching contributions by
    qualified entities and the earnings on those contributions would be tax-
    free.
      Withdrawals from the parallel account may be made only for qualified
    purposes (higher education, the first-time purchase of a home, business
    start-up, and qualified rollovers). Withdrawals from the IDA for other
    than qualified purposes may result in the forfeiture of some or all
    matching contributions and the earnings

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    on those contributions. The credit could be claimed for taxable years
    ending after December 31, 2007 and beginning before January 1, 2015. The
    credit would apply with respect to the first 900,000 IDA accounts opened
    after December 31, 2007 and before January 1, 2013, and with respect to
    matching funds for participant contributions that are made after
    December 31, 2007 and before January 1, 2015.

                    Encourage Entrepreneurship and Investment

      Increase expensing for small business.--Business taxpayers are allowed
    to expense up to $100,000 in annual investment expenditures for
    qualifying property (expanded to include off-the-shelf computer
    software) placed in service in taxable years 2003 through 2007. The
    amount that may be expensed is reduced by the amount by which the
    taxpayer's cost of qualifying property exceeds $400,000. Both the
    deduction and annual investment limits are indexed annually for
    inflation, effective for taxable years beginning after 2003 and before
    2008. Also, with respect to a taxable year beginning after 2002 and
    before 2008, taxpayers are permitted to make or revoke expensing
    elections on amended returns without the consent of the IRS
    Commissioner. The Administration proposes to increase the amount of
    annual investment expenditures that taxpayers are allowed to expense to
    $200,000, and to raise the amount of qualifying investment at which the
    phase-out begins to $800,000, effective for qualifying property placed
    in service in taxable years beginning after 2006. These higher amounts
    would be indexed for inflation, effective for taxable years beginning
    after 2007.

                              Invest in Health Care

      Expand health savings accounts (HSAs).--Current law provides a tax
    preference for employer-provided group health insurance plans, but not
    for individually purchased health insurance coverage except to the
    extent that deductible medical expenses exceed 7.5 percent of AGI, the
    individual has self-employment income, or the individual is eligible
    under the Trade Act of 2002 to purchase certain types of qualified
    health insurance. In addition, individuals are allowed to accumulate
    funds in a health savings account (HSA) or medical savings account (MSA)
    on a tax-preferred basis to pay for medical expenses, provided they are
    covered by an HSA-qualified high-deductible health plan (HDHP), and no
    other health plan. Under current law, only employer contributions to
    HSAs are excluded from income for payroll tax purposes.
      The Administration proposes that individuals who make after-tax
    contributions to an HSA would be allowed a credit equal to a percentage
    of their after-tax contributions to the HSA to offset the employment
    taxes on their contributions. The credit generally would be 15.3 percent
    of their HSA contributions, but would be limited by the amount of wages
    in the payroll tax base. In order to recapture the credit relating to
    employment taxes for contributions that are not used for medical
    expenses, the additional tax on non-medical withdrawals would increase
    to 30 percent, with a 15 percent rate on non-medical distributions after
    death, disability, or attaining the age of 65.
      The Administration proposes to increase the maximum HSA contribution
    for all eligible individuals. For any year, the maximum HSA contribution
    would be increased to the bona fide out-of-pocket limit of the high-
    deductible health plan.
      Additional changes would be made to HSAs to encourage the use of HSAs
    and coverage under the HSA-eligible high-deductible health plans,
    including: (1) allowing HSA funds to be used tax-free for premiums for
    the purchase of non-group high-deductible health plans; (2) allowing
    qualified medical expenses to include any medical expense incurred on or
    after the first day of HDHP coverage if individuals have established an
    HSA by their return filing date for that year; (3) allowing employers to
    contribute existing health reimbursement arrangement (HRA) balances to
    the HSAs of employees who would be eligible individuals but for the HRA
    coverage; and (4) excluding from the comparability rules extra employer
    contributions to HSAs on behalf of employees who are chronically ill or
    employees who have spouses or dependents who are chronically ill. All of
    the HSA-related proposals would be effective for years beginning after
    December 31, 2006.

      Provide an above-the-line deduction for high-deductible insurance
    premiums.--Current law provides a tax preference for employer-provided
    group health insurance plans, but not for individually purchased health
    insurance coverage except to the extent that deductible medical expenses
    exceed 7.5 percent of AGI, the individual has self-employment income, or
    the individual is eligible under the Trade Act of 2002 to purchase
    certain types of qualified health insurance. Current law also allows
    individuals to accumulate funds in an HSA or MSA on a tax-preferred
    basis to pay for medical expenses, provided they are covered by an HDHP,
    and no other health plan.
      The Administration proposes to allow individuals who are eligible for
    an HSA because they are covered under an HDHP in the individual
    insurance market to deduct the amount of the premium in determining AGI
    (whether or not the person itemizes deductions). These individuals would
    also be entitled to an income tax credit to account for employment
    taxes. Individuals claiming other credits or deductions or covered by
    public plans or otherwise not eligible to contribute to an HSA would not
    qualify for the above-the-line deduction or the credit. The credit
    generally would be 15.3 percent of their HDHP premium payment, but would
    be limited by the amount of wages in the payroll tax base. The above-
    the-line deduction and tax credit would be effective for taxable years
    beginning after December 31, 2006.

      Provide refundable tax credit for the purchase of health insurance.--
    Current law provides a tax preference for employer-provided group health
    insurance plans, but not for individually purchase health

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    insurance coverage except to the extent that deductible medical expenses
    exceed 7.5 percent of AGI, the individual has self-employment income, or
    the individual is eligible under the Trade Act of 2002 to purchase
    certain types of qualified health insurance. In addition, individuals
    are allowed to accumulate funds in an HSA or MSA on a tax-preferred
    basis to pay for medical expenses, provided they are covered by an HDHP,
    and no other health plan.
      The Administration proposes to make health insurance more affordable
    for individuals not covered by an employer plan or a public program.
    Effective for taxable years beginning after December 31, 2006, a new
    refundable tax credit would be provided for the cost of an HDHP
    purchased by an individual under age 65. The credit would provide a
    subsidy for a percentage of the health insurance premium, up to a
    maximum includable premium. The maximum subsidy percentage would be 90
    percent for low-income taxpayers and would phase down with income. The
    maximum credit would be $1,000 for a plan covering one adult, $2,000 for
    a plan covering two adults, $3,000 for a plan covering two adults and
    one or more children, and $1,000 for a plan covering only children. The
    credit would be phased out at an income of $30,000 for single taxpayers
    and $60,000 for families purchasing a family policy. Individuals could
    claim the tax credit for health insurance premiums paid as part of the
    normal tax-filing process. Alternatively, beginning July 1, 2007, the
    tax credit would be available in advance at the time the individual
    purchases health insurance. The advance credit would reduce the premium
    paid by the individual to the health insurer, and the health insurer
    would be reimbursed directly by the Department of Treasury for the
    amount of the advance credit. Eligibility for an advance credit would be
    based on an individual's prior year tax return. Qualifying insurance
    could be purchased in the individual market. Qualifying health insurance
    could also be purchased through private purchasing groups, State-
    sponsored insurance purchasing pools, and high-risk pools.

      Improve the Health Coverage Tax Credit.--The Health Coverage Tax
    Credit (HCTC) was created under the Trade Act of 2002 for the purchase
    of qualified health insurance. Eligible persons include certain
    individuals who are receiving benefits under the TAA or the Alternative
    TAA (ATAA) program and certain individuals between the ages of 55 and 64
    who are receiving pension benefits from the Pension Benefit Guaranty
    Corporation (PBGC). The tax credit is refundable and can be claimed
    through an advance payment mechanism at the time the insurance is
    purchased.
      To make the requirements for qualified State-based coverage under the
    HCTC more consistent with the rules applicable under the Health
    Insurance Portability and Accountability Act (HIPAA) and thus encourage
    more plans to participate in the HCTC program, the Administration
    proposes to allow State-based coverage to impose a pre-existing
    condition restriction for a period of up to 12 months, provided the plan
    reduces the restriction period by the length of the eligible
    individual's creditable coverage (as of the date the individual applied
    for the State-based coverage). This provision would be effective for
    eligible individuals applying for coverage after December 31, 2006.
    Also, in order to prevent an individual from losing the benefit of the
    HCTC just because his or her spouse becomes eligible for Medicare, the
    Administration proposes to permit spouses of HCTC-eligible individuals
    to claim the HCTC when the HCTC-eligible individual becomes entitled to
    Medicare coverage. The spouse, however, would have to be at least 55
    years old and meet the other HCTC eligibility requirements. This
    provision would be effective for taxable years beginning after December
    31, 2006.
      To improve the administration of the HCTC, the Administration proposes
    to: (1) modify the definition of ``other specified coverage'' for
    ``eligible ATAA recipients,'' to be the same as the definition applied
    to ``eligible TAA recipients;'' (2) clarify that certain PBGC pension
    recipients are eligible for the tax credit; (3) allow State-based
    continuation coverage to qualify without meeting the requirements for
    State-based qualified coverage; and (4) for purposes of the State-based
    coverage rules, permit the Commonwealths of Puerto Rico and Northern
    Mariana Islands, as well as American Samoa, Guam, and the U.S. Virgin
    Islands to be deemed as States.

      Allow the orphan drug tax credit for certain pre-designation
    expenses.--Current law provides a 50-percent credit for expenses related
    to human clinical testing of drugs for the treatment of certain rare
    diseases and conditions (``orphan drugs''). A taxpayer may claim the
    credit only for expenses incurred after the Food and Drug Administration
    (FDA) designates a drug as a potential treatment for a rare disease or
    condition. This creates an incentive to defer clinical testing for
    orphan drugs until the taxpayer receives the FDA's approval and
    increases complexity for taxpayers by treating pre-designation and post-
    designation clinical expenses differently. The Administration proposes
    to allow taxpayers to claim the orphan drug credit for expenses incurred
    prior to FDA designation if designation occurs before the due date
    (including extensions) for filing the tax return for the year in which
    the FDA application was filed. The proposal would be effective for
    qualified expenses incurred after December 31, 2005.

                    Provide Incentives for Charitable Giving

      Permit tax-free withdrawals from IRAs for charitable contributions.--
    Under current law, eligible individuals may make deductible or non-
    deductible contributions to a traditional IRA. Pre-tax contributions and
    earnings in a traditional IRA are included in income when withdrawn.
    Effective for distributions after date of enactment, the Administration
    proposes to allow individuals who have attained age 65 to exclude from
    gross income IRA distributions made directly to a chari

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    table organization. The exclusion would apply without regard to the
    percentage-of-AGI limitations that apply to deductible charitable
    contributions. The exclusion would apply only to the extent the
    individual receives no return benefit in exchange for the transfer, and
    no charitable deduction would be allowed with respect to any amount that
    is excludable from income under this provision.
      Expand and increase the enhanced charitable deduction for
    contributions of food inventory.--A taxpayer's deduction for charitable
    contributions of inventory generally is limited to the taxpayer's basis
    (typically cost) in the inventory. However, for certain contributions of
    inventory, C corporations may claim an enhanced deduction equal to the
    lesser of: (1) basis plus one half of the fair market value in excess of
    basis, or (2) two times basis. To be eligible for the enhanced
    deduction, the contributed property generally must be inventory of the
    taxpayer contributed to a charitable organization and the donee must:
    (1) use the property consistent with the donee's exempt purpose solely
    for the care of the ill, the needy, or infants; (2) not transfer the
    property in exchange for money, other property, or services; and (3)
    provide the taxpayer a written statement that the donee's use of the
    property will be consistent with such requirements. To use the enhanced
    deduction, the taxpayer must establish that the fair market value of the
    donated item exceeds basis.
      Under the Administration's proposal, which is designed to encourage
    contributions of food inventory to charitable organizations, any
    taxpayer engaged in a trade or business would be eligible to claim an
    enhanced deduction for donations of food inventory. The enhanced
    deduction for donations of food inventory would be increased to the
    lesser of: (1) fair market value or (2) two times basis. However, to
    ensure consistent treatment of all businesses claiming an enhanced
    deduction for donations of food inventory, the enhanced deduction for
    qualified food donations by S corporations and non-corporate taxpayers
    would be limited to 10 percent of net income from the trade or business.
    A special provision would allow taxpayers with a zero or low basis in
    the qualified food donation (e.g., taxpayers that use the cash method of
    accounting for purchases and sales, and taxpayers that are not required
    to capitalize indirect costs) to assume a basis equal to 25 percent of
    fair market value. The enhanced deduction would be available only for
    donations of ``apparently wholesome food'' (food intended for human
    consumption that meets all quality and labeling standards imposed by
    Federal, State, and local laws and regulations, even though the food may
    not be readily marketable due to appearance, age, freshness, grade,
    size, surplus, or other conditions). The fair market value of
    ``apparently wholesome food'' that cannot or will not be sold solely due
    to internal standards of the taxpayer or lack of market, would be
    determined by taking into account the price at which the same or
    substantially the same food items (as to both type and quality) are sold
    by the taxpayer at the time of the contribution or, if not sold at such
    time, in the recent past. These proposed changes in the enhanced
    deduction for donations of food inventory would be effective for taxable
    years beginning after December 31, 2005.

      Reform excise tax based on investment income of private foundations.--
    Under current law, private foundations that are exempt from Federal
    income tax are subject to a two-percent excise tax on their net
    investment income (one-percent if certain requirements are met). The
    excise tax on private foundations that are not exempt from Federal
    income tax, such as certain charitable trusts, is equal to the excess of
    the sum of the excise tax that would have been imposed if the foundation
    were tax exempt and the amount of the unrelated business income tax that
    would have been imposed if the foundation were tax exempt, over the
    income tax imposed on the foundation. To encourage increased charitable
    activity and simplify the tax laws, the Administration proposes to
    replace the two rates of tax on the net investment income of private
    foundations that are exempt from Federal income tax with a single tax
    rate of one percent. The excise tax on private foundations not exempt
    from Federal income tax would be equal to the excess of the sum of the
    one-percent excise tax that would have been imposed if the foundation
    were tax exempt and the amount of the unrelated business income tax what
    would have been imposed if the foundation were tax exempt, over the
    income tax imposed on the foundation. The proposed change would be
    effective for taxable years beginning after December 31, 2005.
      Modify tax on unrelated business taxable income of charitable
    remainder trusts.--A charitable remainder annuity trust is a trust that
    is required to pay, at least annually, a fixed dollar amount of at least
    five percent of the initial value of the trust to a noncharity for the
    life of an individual or for a period of 20 years or less, with the
    remainder passing to charity. A charitable remainder unitrust is a trust
    that generally is required to pay, at least annually, a fixed percentage
    of at least five percent of the fair market value of the trust's assets
    determined at least annually to a non-charity for the life of an
    individual or for a period of 20 years or less, with the remainder
    passing to charity. A trust does not qualify as a charitable remainder
    annuity trust if the annuity for a year is greater than 50 percent of
    the initial fair market value of the trust's assets. A trust does not
    qualify as a charitable remainder unitrust if the percentage of assets
    that are required to be distributed at least annually is greater than 50
    percent. A trust does not qualify as a charitable remainder annuity
    trust or a charitable remainder unitrust unless the value of the
    remainder interest in the trust is at least 10 percent of the value of
    the assets contributed to the trust. Distributions from a charitable
    remainder annuity trust or charitable remainder unitrust, which are
    included in the income of the beneficiary for the year that the amount
    is required to be distributed, are treated in the following

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    order as: (1) ordinary income to the extent of the trust's undistributed
    ordinary income for that year and all prior years; (2) capital gains to
    the extent of the trust's undistributed capital gain for that year and
    all prior years; (3) other income to the extent of the trust's
    undistributed other income for that year and all prior years; and (4)
    corpus (trust principal).
      Charitable remainder annuity trusts and charitable remainder unitrusts
    are exempt from Federal income tax; however, such trusts lose their
    income tax exemption for any year in which they have unrelated business
    taxable income. Any taxes imposed on the trust are required to be
    allocated to trust corpus. The Administration proposes to levy a 100-
    percent excise tax on the unrelated business taxable income of
    charitable remainder trusts, in lieu of removing the Federal income tax
    exemption for any year in which unrelated business taxable income is
    incurred. This change, which is a more appropriate remedy than loss of
    tax exemption, is proposed to become effective for taxable years
    beginning after December 31, 2005, regardless of when the trust was
    created.

      Modify basis adjustment to stock of S corporations contributing
    appreciated property.--Under current law, each shareholder in an S
    corporation separately accounts for his or her pro rata share of the S
    corporation's charitable contributions in determining his or her income
    tax liability. A shareholder's basis in the stock of the S corporation
    must be reduced by the amount of his or her pro rata share of the S
    corporation's charitable contribution. In order to preserve the benefit
    of providing a charitable contribution deduction for contributions of
    appreciated property and to prevent the recognition of gain in the
    contributed property on the disposition of the S corporation stock, the
    Administration proposes to allow a shareholder in an S corporation to
    increase his or her basis in the stock of an S corporation by an amount
    equal to the excess of the shareholder's pro rata share of the S
    corporation's charitable contribution over the stockholder's pro rata
    share of the adjusted basis of the contributed property. The proposal
    would be effective for taxable years beginning after December 31, 2005.
      Repeal the $150 million limitation on qualified 501(c)(3) bonds.--
    Current law contains a $150 million limitation on the volume of
    outstanding, non-hospital, tax-exempt bonds for the benefit of any one
    501(c)(3) organization. The limitation was repealed in 1997 for bonds
    issued after August 5, 1997, at least 95 percent of the net proceeds of
    which are used to finance capital expenditures incurred after that date.
    However, the limitation continues to apply to bonds more than five
    percent of the net proceeds of which finance or refinance working
    capital expenditures, or capital expenditures incurred on or before
    August 5, 1997. In order to simplify the tax laws and provide consistent
    treatment of bonds for 501(c)(3) organizations, the Administration
    proposes to repeal the $150 million limitation in its entirety.
      Repeal certain restrictions on the use of qualified 501(c)(3) bonds
    for residential rental property.--Tax-exempt, 501(c)(3) organizations
    generally may utilize tax-exempt financing for charitable purposes.
    However, existing law contains a special limitation under which
    501(c)(3) organizations may not use tax-exempt financing to acquire
    existing residential rental property for charitable purposes unless the
    property is rented to low-income tenants or is substantially
    rehabilitated. In order to simplify the tax laws and provide consistent
    treatment of bonds for 501(c)(3) organizations, the Administration
    proposes to repeal the residential rental property limitation.

                              Strengthen Education

      Extend the above-the-line deduction for qualified out-of-pocket
    classroom expenses.--Under current law, teachers who itemize deductions
    (do not use the standard deduction) and incur unreimbursed, job-related
    expenses are allowed to deduct those expenses to the extent that when
    combined with other miscellaneous itemized deductions they exceeded two
    percent of AGI. Current law also allows certain teachers and other
    elementary and secondary school professionals to treat up to $250 in
    annual qualified out-of-pocket classroom expenses as a non-itemized
    deduction (above-the-line deduction). This additional deduction is
    effective for expenses incurred in taxable years beginning after
    December 31, 2001 and before January 1, 2006. Unreimbursed expenditures
    for certain books, supplies, and equipment related to classroom
    instruction qualify for the above-the-line deduction. Expenses claimed
    as an above-the-line deduction may not be claimed as an itemized
    deduction. The Administration proposes to extend the above-the-line
    deduction to apply to qualified out-of-pocket expenditures incurred in
    taxable years beginning after December 31, 2005.

                     Provide Assistance to Distressed Areas

      Establish Opportunity Zones.--The Administration proposes to establish
    authority to designate 20 opportunity zones (14 in urban areas and 6 in
    rural areas). The zone designation and corresponding incentives would be
    in effect from January 1, 2007 through December 31, 2016. To qualify to
    apply for zone status, a community must either have suffered from a
    significant decline in its economic base over the past decade as
    measured by the loss of manufacturing and retail establishments and
    manufacturing jobs, or be a previously designated empowerment zone,
    renewal community or enterprise community. The Secretary of Commerce
    would select opportunity zones through a competitive process based on
    the applicant's ``community transition plan'' and ``statement of
    economic transition.'' The community transition plan would have to set
    concrete, measurable goals for reducing local regulatory and tax
    barriers to construction, residential development and business creation.
    The statement of economic transition would have to demonstrate that the
    local community's economic base is in transition, as indicated

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    by a declining job base and labor force, and other measures, during the
    past decade. In evaluating applications, the Secretary of Commerce could
    consider other factors, including: (1) changes in unemployment rates,
    poverty rates, household income, homeownership and labor force
    participation; (2) the educational attainment and average age of the
    population; and (3) for urban areas, the number of mass layoffs
    occurring in the area's vicinity over the previous decade. Empowerment
    zones and renewal communities designated as opportunity zones would not
    count against the limitation of 20 new opportunity zones. Such
    communities would be required to relinquish their current status and
    benefits once selected. Opportunity zone benefits for converted
    empowerment zones and renewal communities would expire on December 31,
    2010. Tax benefits for enterprise communities expired at the end of
    2004. Enterprise communities designated as opportunity zones would count
    against the limitation of 20 new zones and opportunity zone benefits
    would be in effect through 2016.
      A number of tax incentives would be applicable to opportunity zones.
    First, a business would be allowed to exclude 25 percent of its taxable
    income if it qualified as an ``opportunity zone business'' and it
    satisfied a $5 million gross receipts test. The definition of an
    opportunity zone business would be based on the definition of a
    ``qualified active low-income community business'' for purposes of the
    new markets tax credit, treating opportunity zones as low-income
    communities. Second, an opportunity zone business would be allowed to
    expense the cost of section 179 property that is qualified zone
    property, up to an additional $100,000 above the amounts generally
    available under current law. Third, a commercial revitalization
    deduction would be available for opportunity zones in a manner similar
    to the deduction for renewal communities. A $12 million annual cap on
    these deductions would apply to each opportunity zone. Finally,
    individuals who live and work in an opportunity zone would constitute a
    new target group with respect to wages earned within the zone under the
    proposed combined work opportunity tax credit and welfare-to-work tax
    credit (see discussion later in this Chapter).

                             Protect the Environment

      Extend permanently expensing of brownfields remediation costs.--
    Taxpayers may elect, with respect to expenditures paid or incurred
    before January 1, 2006, to treat certain environmental remediation
    expenditures that would otherwise be chargeable to a capital account as
    deductible in the year paid or incurred. The Administration proposes to
    extend this provision permanently making it available for expenditures
    paid or incurred after December 31, 2005, and facilitating its use by
    businesses to undertake projects that may be uncertain in overall
    duration.

                     Restructure Assistance to New York City

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

                       SIMPLIFY THE TAX LAWS FOR FAMILIES

      Clarify uniform definition of a child.--The 2004 tax relief act
    created a uniform definition of a child, allowing, in many
    circumstances, a taxpayer to claim the same child for five different
    child-related tax benefits. Under the new rules, a qualifying child must
    meet relationship, residency, and age tests. While the new

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    rules simplify the determination of eligibility for many child-related
    tax benefits, the elimination of certain complicated factual tests to
    determine if siblings and certain other family members are eligible to
    claim a qualifying child may have some unintended consequences. The new
    rules effectively deny the EITC to some young taxpayers who are the sole
    guardians of their younger siblings. Yet some taxpayers are able to
    avoid income limitations on child-related tax benefits by allowing other
    family members, who have lower incomes, to claim the taxpayers' sons or
    daughters as qualifying children. The 2004 tax relief act had other
    unintended consequences, which made some of the eligibility rules less
    uniform. For example, it allowed dependent filers to claim the child tax
    credit, even though they are generally ineligible for most other child-
    related tax benefits. It also allowed taxpayers to claim the child tax
    credit on behalf of a married child who files a joint return with his or
    her spouse, even though the taxpayer generally cannot claim other
    benefits for the married child. These exceptions create confusion and
    add complexity.
      To ensure that deserving taxpayers receive child-related tax benefits,
    the Administration proposes to clarify the uniform definition of a
    child. First, the definition of a qualifying child would be further
    simplified. A taxpayer would not be a qualifying child of another
    individual if the taxpayer is older than that individual. However, an
    individual could be a qualifying child of a younger sibling if the
    individual is permanently and totally disabled. Also, under the
    proposal, an individual who is married and filing jointly (for any
    reason other than to obtain a refund of overwithheld taxes) would not be
    considered a qualifying child for the child-related tax benefits,
    including the child tax credit. Second, the proposal clarifies when a
    taxpayer is eligible to claim child-related tax benefits. If a parent
    resides with his or her child for over half the year, the parent would
    be the only individual eligible to claim the child as a qualifying
    child. The parent could waive the child-related tax benefits to another
    member of the household who has higher adjusted gross income and is
    otherwise eligible for the tax benefits. In addition, dependent filers
    would not be allowed to claim qualifying children. The proposal is
    effective for taxable years beginning after December 31, 2006.

      Simplify EITC eligibility requirement regarding filing status,
    presence of children, and work and immigrant status.--To qualify for the
    EITC, taxpayers must satisfy requirements regarding filing status, the
    presence of children in their households, and their work and immigration
    status in the United States. These rules are confusing, require
    significant record-keeping, and are costly to administer. Under the
    proposal, married taxpayers who reside with children could claim the
    EITC without satisfying a complicated household maintenance test if they
    live apart from their spouse for the last six months of the year. In
    addition, certain taxpayers who live with children but do not qualify
    for the larger child-related EITC could claim the smaller EITC for very
    low-income childless workers. The proposal would also improve the
    administration of the EITC with respect to eligibility requirements for
    undocumented workers. The proposal is effective for taxable years
    beginning after December 31, 2006.
      Reduce computational complexity of refundable child tax credit.--
    Taxpayers with earned income in excess of $11,300 may qualify for a
    refundable (or ``additional'') child tax credit even if they do not have
    any income tax liability. About 70 percent of additional child tax
    credit claimants also claim the EITC. However, the two credits have a
    different definition of earned income and different U.S. residency
    requirements. In addition, some taxpayers have to perform multiple
    computations to determine the amount of the additional child tax credit
    they can claim. First, they must compute the additional child tax credit
    using a formula based on earned income. Then, if they have three or more
    children, they may recalculate the credit using a formula based on
    social security taxes and claim the higher of the two amounts.
      Under the proposal, the additional child tax credit would use the same
    definition of earned income as is used for the EITC. Taxpayers (other
    than members of the Armed Forces stationed overseas) would be required
    to reside with a child in the United States to claim the additional
    child tax credit (as they are currently required to do for the EITC).
    Taxpayers with three or more children would do only one computation
    based on earned income to determine the credit amount. The proposal
    would be effective for taxable years beginning after December 31, 2006.

                  STRENGTHEN THE EMPLOYER-BASED PENSION SYSTEM

      Ensure fair treatment of older workers in cash balance conversions and
    protect defined benefit plans.--Qualified retirement plans consist of
    defined benefit plans and defined contribution plans. In recent years,
    many plan sponsors have adopted cash balance and other ``hybrid'' plans
    that combine features of defined benefit and defined contribution plans.
    A cash balance plan is a defined benefit plan that provides for annual
    ``pay credits'' to a participant's ``hypothetical account'' and
    ``interest credits'' on the balance in the hypothetical account.
    Questions have been raised about whether such plans satisfy the rules
    relating to age discrimination and the calculation of lump sum
    distributions. The Administration proposes to: (1) ensure fairness for
    older workers in cash balance conversions; (2) protect the defined
    benefit system by clarifying the status of cash balance plans; and (3)
    remove the effective ceiling on interest credits in cash balance plans.
    All changes would be effective prospectively.
      Strengthen funding for single-employer pension plans.--Under current
    law, defined benefit pension plans are subject to minimum funding
    requirements imposed under both the Internal Revenue Code and

    [[Page 260]]

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

      Reflect market interest rates in lump sum payments.--Current law
    generally requires that a lump sum paid from a pension plan be
    calculated using the rate of interest on 30-year Treasury securities (or
    a close proxy) for the month preceding the distribution. The
    Administration proposes that the value of the lump sum reflect market
    interest rates and the timing of the expected benefit payments for which
    the lump sum is calculated. This would ensure that the value of the lump
    sum is equivalent to the value of the annuity. Lump sums would be
    calculated using interest rates that are drawn from a zero-coupon
    corporate bond yield curve. The yield curve would be issued monthly by
    the Secretary of the Treasury and would be based on the interest rates
    (averaged over 90 business days) for high quality corporate bonds with
    varying maturities. In order to avoid disruptions, the proposal would be
    phased in for plan years beginning in 2008 and 2009 and would not be
    fully effective until the plan year beginning in 2010.

                   CLOSE LOOPHOLES AND IMPROVE TAX COMPLIANCE

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

    [[Page 261]]

    contribution deductions were claimed. The proposal would impose
    significant penalties on any charity that removes or fails to enforce
    such a conservation restriction, or transfers the easement without
    ensuring that the conservation purposes will be protected in perpetuity.
    The amount of the penalty would be determined based on the value of the
    easement shown on the appraisal summary provided to the charity by the
    donor. The Secretary of the Treasury would be authorized to waive the
    penalty in certain circumstances. The Secretary of the Treasury also
    would be authorized to require such additional reporting as may be
    necessary or appropriate to ensure that the conservation purposes are
    protected in perpetuity.
      Eliminate the special exclusion from unrelated business taxable income
    for gain or loss on the sale or exchange of certain brownfields.--In
    general, an organization that is otherwise exempt from Federal income
    tax is taxed on income from any trade or business regularly carried on
    by the organization that is not substantially related to the
    organization's exempt purposes. In addition, income derived from
    property that is debt-financed generally is subject to unrelated
    business income tax. The 2004 job creation act created a special
    exclusion from unrelated business taxable income of gain or loss from
    the sale or exchange of certain qualifying brownfield properties. The
    exclusion applies regardless of whether the property is debt-financed.
    The new provision adds considerable complexity to the Internal Revenue
    Code and, because there is no limit on the amount of tax-free gain,
    could exempt from tax real estate development considerably beyond mere
    environmental remediation. The proposal would eliminate this special
    exclusion effective for taxable years beginning after December 31, 2006.
      Limit related party interest deductions.--Current law (section 163(j)
    of the Internal Revenue Code) denies U.S. tax deductions for certain
    interest expenses paid to a related party where: (1) the corporation's
    debt-to-equity ratio exceeds 1.5 to 1, and (2) net interest expenses
    exceed 50 percent of the corporation's adjusted taxable income (computed
    by adding back net interest expense, depreciation, amortization,
    depletion, and any net operating loss deduction). If these thresholds
    are exceeded, no deduction is allowed for interest in excess of the 50-
    percent limit that is paid to a related party or paid to an unrelated
    party but guaranteed by a related party, and that is not subject to U.S.
    tax. Any interest that is disallowed in a given year is carried forward
    indefinitely and may be deductible in a subsequent taxable year. A
    three-year carryforward for any excess limitation (the amount by which
    interest expense for a given year falls short of the 50-percent limit)
    is also allowed. Because of the opportunities available under current
    law to reduce inappropriately U.S. tax on income earned on U.S.
    operations through the use of foreign related-party debt, the
    Administration proposes to tighten the interest disallowance rules of
    section 163(j) as follows: (1) the current law 1.5 to 1 debt-to-equity
    safe harbor would be eliminated; (2) the adjusted taxable income
    threshold for the limitation would be reduced from 50 percent to 25
    percent of adjusted taxable income with respect to disqualified interest
    other than interest paid to unrelated parties on debt that is subject to
    a related-party guarantee, which generally would remain subject to the
    current law 50 percent threshold; and (3) the indefinite carryforward
    for disallowed interest would be limited to ten years and the three-year
    carryforward of excess limitation would be eliminated. The Department of
    Treasury also is conducting a study of these rules and the potential for
    further modifications to ensure the prevention of inappropriate income-
    reduction opportunities.
      Clarify and simplify qualified tuition programs.--Current law provides
    special tax treatment for contributions to and distributions from
    qualified tuition programs under Section 529. The purpose of these
    programs is to encourage saving for the higher education expenses of
    designated beneficiaries. However, current law is unclear in certain
    situations with regard to the transfer tax consequences of changing the
    designated beneficiary of a qualified tuition program account. In
    addition, current law creates opportunities for inappropriate use of
    these accounts. The proposal would simplify the tax consequences under
    these programs and promote use of these accounts to save for higher
    education. The most significant change made by this proposal is the
    elimination of substantially all post-contribution transfer taxes, thus
    permitting tax-free changes of the designated beneficiary of an account,
    without limitation as to the relationship or number of generations
    between the current and former beneficiaries. Any distribution used to
    pay the beneficiary's qualified higher education expenses would continue
    to be tax-free. However, to eliminate the potential transfer tax benefit
    of using an account for purposes not intended by the statute, any
    distribution that is not used for higher education expenses generally
    would be subject to a new excise tax (payable from the account) once the
    cumulative amount of these distributions exceeds a stated amount per
    beneficiary. Distributions from an account would be permitted to be made
    only to or for the benefit of the designated beneficiary. However, a
    contributor who sets up an account would be permitted to withdraw funds
    from the account during the contributor's life, subject to income tax on
    the income portion of the withdrawal. The income portion of a withdrawal
    by the account's contributor generally also would be subject to an
    additional tax to discourage individuals from using these accounts to
    save for retirement. The proposal would be effective for Section 529
    accounts established after the date of enactment, and no additional
    contributions would be permitted to preexisting Section 529 savings
    accounts unless those accounts elect to be governed by the new rules.

    [[Page 262]]

              TAX ADMINISTRATION, UNEMPLOYMENT INSURANCE, AND OTHER

                           Improve Tax Administration

      Implement IRS administrative reforms.--The proposed modification to
    the IRS Restructuring and Reform Act of 1998 is comprised of five parts.
    The first part modifies employee infractions subject to mandatory
    termination and permits a broader range of available penalties. It
    strengthens taxpayer privacy while reducing employee anxiety resulting
    from unduly harsh discipline or unfounded allegations. The second part
    adopts measures to curb frivolous submissions and filings that are
    intended to impede or delay tax administration. The third part allows
    the IRS to terminate installment agreements when taxpayers fail to make
    timely tax deposits and file tax returns on current liabilities. The
    fourth part streamlines jurisdiction over collection due process cases
    in the Tax Court, thereby simplifying procedures and reducing the cycle
    time for certain collection due process cases. The fifth part eliminates
    the requirement that the IRS Chief Counsel provide an opinion for any
    accepted offer-in-compromise of unpaid tax (including interest and
    penalties) equal to or exceeding $50,000. This proposal requires that
    the Secretary of the Treasury establish standards to determine when an
    opinion is appropriate.
      Initiate IRS cost saving measures.--The Administration has two
    proposals to improve IRS efficiency and performance from current
    resources. The first proposal modifies the way that Financial Management
    Services (FMS) recovers its transaction fees for processing IRS levies
    by permitting FMS to retain a portion of the amount collected before
    transmitting the balance to the IRS, thereby reducing Government
    transaction costs. The offset amount would be included as part of the
    15-percent limit on continuous levies against income and would also be
    credited against the taxpayer's liability. The second proposal would
    provide the IRS additional authority to require electronic filing. This
    proposal would allow the IRS to process more returns and payments
    efficiently.
      Allow IRS to access information in the National Directory of New Hires
    for tax administration purposes.--The National Directory of New Hires
    (NDNH), an electronic database maintained by the Department of Health
    and Human Services, contains timely, uniformly compiled employment data
    from State agencies across the country. Currently, the IRS may obtain
    data from the NDNH, but only for limited purposes. Access to NDNH data
    for tax administration purposes generally would make the IRS more
    productive by reducing the amount of resources it must dedicate to
    obtaining and processing data. The Administration proposes to amend the
    Social Security Act to allow the IRS access to NDNH data for general tax
    administration purposes, including data matching, verification of
    taxpayer claims during return processing, preparation of substitute
    returns for non-compliant taxpayers, and identification of levy sources.
    Data obtained by the IRS from the NDNH would be protected by existing
    taxpayer privacy law, including civil and criminal sanctions. The
    proposal would be effective on the date of enactment.
      Extend IRS authority to fund undercover operations.--Current law
    places the IRS on equal footing with other Federal law enforcement
    agencies by permitting the IRS to fund certain necessary and reasonable
    expenses of undercover operations. These undercover operations include
    international and domestic money laundering and narcotics operations.
    The Administration proposes to extend this funding authority, which
    expires on December 31, 2006, through December 31, 2010.

      Reduce the tax gap.--While the vast majority of American taxpayers pay
    their taxes timely and accurately, the nation still has a significant
    tax gap, which is the difference between what taxpayers should pay and
    what they actually pay on a timely basis. The IRS has taken a number of
    steps to bolster enforcement; however, it is unlikely that IRS will be
    able to narrow the tax gap to an acceptable level through enforcement
    alone. In an effort to reduce the tax gap with minimum taxpayer burden,
    the Administration proposes to: (1) Clarify the circumstances in which
    employee leasing companies and their clients can be held jointly liable
    for Federal employment taxes. (2) Require debit and credit card issuers
    to report to the IRS gross reimbursements paid to certain businesses.
    (3) Require increased information reporting for certain non-wage
    payments made by Federal, State and local governments to procure
    property and services. (4) Amend collections due process procedures
    applicable to Federal employment taxes. (5) Expand return preparer
    identification and penalty provisions. In addition, the Department of
    Treasury will study the standards used to distinguish between employees
    and independent contractors for purposes of withholding and paying
    Federal employment taxes.

            Strengthen Financial Integrity of Unemployment Insurance

      Strengthen the financial integrity of the unemployment insurance
    system by reducing improper benefit payments and tax avoidance.--The
    Administration has a multi-part proposal to strengthen the financial
    integrity of the unemployment insurance (UI) system and to encourage the
    early reemployment of UI beneficiaries. The Administration's proposal
    will boost States' ability to recover benefit overpayments and deter tax
    evasion schemes by permitting them to use a portion of recovered funds
    to expand enforcement efforts in these areas. In addition, the proposal
    would require States to impose a monetary penalty on UI benefit fraud,
    which would be used to reduce overpayments; make it easier for States to
    use private collection agencies in the recovery of hard-to-collect
    overpayments and delinquent employer taxes; require States

    [[Page 263]]

    to charge employers found to be at fault when their actions lead to
    overpayments; permit collection of delinquent UI overpayments and
    employer taxes through garnishment of Federal tax refunds; and improve
    the accuracy of hiring data in the National Directory of New Hires,
    which would reduce benefit overpayments. The Administration's proposal
    would also permit States to request waivers of certain Federal
    requirements in order to carry out demonstration projects that speed
    reemployment of individuals eligible for UI. These efforts to strengthen
    the financial integrity of the UI system and encourage early
    reemployment of UI beneficiaries will keep State UI taxes down and
    improve the solvency of the State trust funds.
      Extend unemployment insurance surtax.--The unemployment insurance
    surtax of 0.2 percent imposed on employers is scheduled to expire with
    respect to wages paid after December 31, 2007. This tax is proposed to
    be extended for five years, through December 31, 2012.

                                 Other Proposals

      Increase Indian gaming activity fees.--The National Indian Gaming
    Commission regulates and monitors gaming operations conducted on Indian
    lands. Since 1998, the Commission has had a fixed ceiling on what it may
    collect in annual fees from gaming operations to cover the costs of its
    oversight responsibilities. The Administration proposes to amend the
    current fee structure so that the Commission can adjust its activities
    to the growth in the Indian gaming industry.

                        MODIFY ENERGY POLICY ACT OF 2005

      Repeal reduced recovery period for natural gas distribution lines.--
    The Energy Policy Act of 2005 reduced the recovery period for certain
    natural gas distribution lines from 20 years to 15 years (see the
    discussion of the Energy Policy Act of 2005 in this Chapter). The
    Administration proposes to repeal this provision for natural gas
    distribution lines placed in service after December 31, 2006.
      Modify amortization for certain geological and geophysical
    expenditures.--Under the Energy Policy Act of 2005, geological and
    geophysical expenditures paid or incurred in taxable years beginning
    after August 8, 2005, in connection with oil and gas exploration in the
    United States, may be amortized over two years. The Administration
    proposes to increase the amortization period to five years for amounts
    paid or incurred in taxable years beginning after December 31, 2006.

                                  PROMOTE TRADE

      Implement free trade agreements.--Free trade agreements continue to be
    negotiated with Thailand, Colombia, Ecuador, Panama, and the United Arab
    Emirates (UAE), with an expectation--once completed--that the 10-year
    implementation will begin as early as FY 2007. The recently completed
    agreements with Oman and Peru could also begin implementation in 2007. A
    free trade agreement is expected to be completed with the Southern
    African Customs Union (SACU), with 10-year implementation to begin in FY
    2008. These agreements will continue the Administration's effort to use
    free trade agreements to benefit U.S. consumers and producers as well as
    strengthen the economies of our partner countries.
      Extend Generalized System of Preferences (GSP).--Under GSP, duty-free
    access is provided to approximately 3,400 products from eligible
    beneficiary developing countries that meet certain worker rights,
    intellectual property protection, and other statutory criteria. The
    Administration proposes to extend this program, which is scheduled to
    expire after December 31, 2006, through December 31, 2011.

                           EXTEND EXPIRING PROVISIONS

      Extend minimum tax relief for individuals.--A temporary provision of
    current law increased the alternative minimum tax (AMT) exemption
    amounts to $40,250 for single taxpayers, $58,000 for married taxpayers
    filing a joint return and surviving spouses, and $29,000 for married
    taxpayers filing a separate return and estates and trusts. Effective for
    taxable years beginning after December 31, 2005, the AMT exemption
    amounts decline to $33,750 for single taxpayers, $45,000 for married
    taxpayers filing a joint return and surviving spouses, and $22,500 for
    married taxpayers filing a separate return and estates and trusts. The
    Administration proposes to extend the temporary, higher exemption
    amounts through taxable year 2006.
      A temporary provision of current law permits nonrefundable personal
    tax credits to offset both the regular tax and the alternative minimum
    tax for taxable years beginning before January 1, 2006. The
    Administration proposes to extend minimum tax relief for nonrefundable
    personal credits for one year, to apply to taxable year 2006. The
    proposed extension does not apply to the child credit, the new saver
    credit, the earned income credit or the adoption credit, which were
    provided AMT relief through December 31, 2010 under the 2001 tax cut.
    The refundable portion of the child credit and the earned income tax
    credit are also allowed against the AMT through December 31, 2010.

      Extend permanently the research and experimentation (R&E) tax
    credit.--The Administration proposes to extend permanently the 20-
    percent tax credit for qualified research and experimentation
    expenditures above a base amount and the alternative incremental credit,
    which expired on December 31, 2005.
      In addition, the Administration is concerned that features of the R&E
    tax credit may limit its effectiveness in encouraging taxpayers to
    invest in R&E. The Administration will work closely with the Congress to
    develop

    [[Page 264]]

    and enact reforms to modernize the R&E tax credit and improve its
    incentive effect.

      Extend and modify the work opportunity tax credit and the welfare-to-
    work tax credit.--Under present law, the work opportunity tax credit
    provides incentives for hiring individuals from certain targeted groups.
    The credit generally applies to the first $6,000 of wages paid to
    several categories of economically disadvantaged or handicapped workers.
    The credit rate is 25 percent of qualified wages for employment of at
    least 120 hours but less than 400 hours and 40 percent for employment of
    400 or more hours. The credit is available for a qualified individual
    who begins work before January 1, 2006.
      Under present law, the welfare-to-work tax credit provides an
    incentive for hiring certain recipients of long-term family assistance.
    The credit is 35 percent of up to $10,000 of eligible wages in the first
    year of employment and 50 percent of wages up to $10,000 in the second
    year of employment. Eligible wages include cash wages plus the cash
    value of certain employer-paid health, dependent care, and educational
    fringe benefits. The minimum employment period that employees must work
    before employers can claim the credit is 400 hours. This credit is
    available for qualified individuals who begin work before January 1,
    2006.
      The Administration proposes to simplify employment incentives by
    combining the credits into one credit and making the rules for computing
    the combined credit simpler. The credits would be combined by creating a
    new welfare-to-work targeted group under the work opportunity tax
    credit. The minimum employment periods and credit rates for the first
    year of employment under the present work opportunity tax credit would
    apply to welfare-to-work employees. The maximum amount of eligible wages
    would continue to be $10,000 for welfare-to-work employees and $6,000
    for other targeted groups. In addition, the second year 50-percent
    credit currently available under the welfare-to-work credit would
    continue to be available for welfare-to-work employees under the
    modified work opportunity tax credit. Qualified wages would be limited
    to cash wages. The work opportunity tax credit would also be simplified
    by eliminating the need to determine family income for qualifying ex-
    felons (one of the present targeted groups). The modified work
    opportunity tax credit would apply to individuals who begin work after
    December 31, 2005 and before January 1, 2007.

      Extend the first-time homebuyer credit for the District of Columbia.--
    A one-time nonrefundable $5,000 credit is available to purchasers of a
    principal residence in the District of Columbia who have not owned a
    residence in the District during the year preceding the purchase. The
    credit phases out for taxpayers with modified adjusted gross income
    between $70,000 and $90,000 ($110,000 and $130,000 for joint returns).
    The credit does not apply to purchases after December 31, 2005. The
    Administration proposes to extend the credit for one year, making the
    credit available with respect to purchases after December 31, 2005 and
    before January 1, 2007.
      Extend authority to issue Qualified Zone Academy Bonds.--Current law
    allows State and local governments to issue ``qualified zone academy
    bonds,'' the interest on which is effectively paid by the Federal
    government in the form of an annual income tax credit. The proceeds of
    the bonds have to be used for teacher training, purchases of equipment,
    curriculum development, or rehabilitation and repairs at certain public
    school facilities. A nationwide total of $400 million of qualified zone
    academy bonds were authorized to be issued in each of calendar years
    1998 through 2005. In addition, unused authority arising in 1998 and
    1999 can be carried forward for up to three years and unused authority
    arising in 2000 through 2005 can be carried forward for up to two years.
    The Administration proposes to authorize the issuance of an additional
    $400 million of qualified zone academy bonds in calendar year 2006;
    unused authority could be carried forward for up to two years. Reporting
    of issuance would be required.
      Extend provisions permitting disclosure of tax return information
    relating to terrorist activity.--Current law permits disclosure of tax
    return information relating to terrorism in two situations. The first is
    when an executive of a Federal law enforcement or intelligence agency
    has reason to believe that the return information is relevant to a
    terrorist incident, threat or activity and submits a written request.
    The second is when the IRS wishes to apprise a Federal law enforcement
    agency of a terrorist incident, threat or activity. The Administration
    proposes to extend this disclosure authority, which expires on December
    31, 2006, through December 31, 2007.
      Extend excise tax on coal at current rates.--Excise taxes levied on
    coal mined and sold for use in the United States are deposited in the
    Black Lung Disability Trust Fund. Amounts deposited in the Fund are used
    to cover the cost of program administration and compensation, medical,
    and survivor benefits to eligible miners and their survivors, when mine
    employment terminated prior to 1970 or when no mine operator can be
    assigned liability. Current tax rates on coal sold by a producer are
    $1.10 per ton of coal from underground mines and $0.55 per ton of coal
    from surface mines; however, these rates may not exceed 4.4 percent of
    the price at which the coal is sold. Effective for coal sold after
    December 31, 2013, the tax rates on coal from underground mines and
    surface mines will decline to $0.50 per ton and $0.25 per ton,
    respectively, and will be capped at 2 percent of the price at which the
    coal is sold. The Administration proposes to repeal the reduction in
    these tax rates effective for sales after December 31, 2013, and keep
    current rates in effect until the Black Lung Disability Trust Fund debt
    is repaid.

    [[Page 265]]

                                                          Table 17-3.  EFFECT OF PROPOSALS ON RECEIPTS
                                                                    (in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        2006       2007       2008       2009       2010       2011     2007-11     2007-16
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Make Permanent Certain Tax Cuts Enacted in 2001 and 2003
     (assumed in the baseline):
        Dividends tax rate structure...............................        288        571     -1,329    -14,161       -537     -6,545    -22,001    -128,050
        Capital gains tax rate structure...........................  .........  .........  .........    -14,183     -5,519     -6,606    -26,308     -74,931
        Expensing for small business...............................  .........  .........     -4,679     -6,498     -4,872     -3,853    -19,902     -32,620
        Marginal individual income tax rate reductions.............  .........  .........  .........  .........  .........    -66,918    -66,918    -605,961
        Child tax credit \1\.......................................  .........  .........  .........  .........  .........     -5,452     -5,452    -116,691
        Marriage penalty relief \2\................................  .........  .........  .........  .........  .........     -4,968     -4,968     -37,578
        Education incentives.......................................  .........  .........  .........  .........          3     -1,098     -1,095     -10,960
        Repeal of estate and generation-skipping transfer taxes,
         and
          modification of gift taxes...............................       -205     -1,102     -1,728     -2,181     -2,676    -23,758    -31,445    -339,022
        Modifications of pension plans.............................  .........  .........  .........  .........  .........       -346       -346      -2,858
        Other incentives for families and children.................  .........  .........  .........  .........          5       -170       -165      -4,362
                                                                    ----------------------------------------------------------------------------------------
            Total make permanent certain tax cuts enacted in
              2001 and 2003........................................         83       -531     -7,736    -37,023    -13,596   -119,714   -178,600  -1,353,033

    Tax Incentives:
      Simplify and encourage saving:
        Expand tax-free savings opportunities......................  .........      4,796     10,407      7,507      3,970       -383     26,297        -122
        Consolidate employer-based savings accounts................  .........  .........       -542       -579       -618     -1,826     -3,565     -20,063
        Establish Individual Development Accounts (IDAs)...........  .........  .........       -134       -286       -326       -300     -1,046      -1,763
                                                                    ----------------------------------------------------------------------------------------
            Total simplify and encourage saving....................  .........      4,796      9,731      6,642      3,026     -2,509     21,686     -21,948
      Encourage entrepreneurship and investment:
        Increase expensing for small business......................  .........     -2,522     -3,527     -2,625     -2,037     -1,645    -12,356     -18,713
      Invest in health care:
        Expand health savings accounts (HSAs) \3\..................  .........     -1,978     -4,321     -6,201     -7,720     -8,826    -29,046     -87,212
        Provide an above-the-line deduction for high-deductible
          insurance premiums \4\...................................  .........     -2,519     -3,815     -3,840     -3,691     -3,668    -17,533     -38,127
        Provide refundable tax credit for the purchase of health
          insurance \5\............................................  .........       -254       -861     -1,194     -1,404     -1,362     -5,075     -11,154
        Improve the Health Coverage Tax Credit \6\.................  .........         -1         -3         -4         -5         -5        -18         -51
        Allow the orphan drug tax credit for certain pre-
         designation
          expenses \7\.............................................  .........  .........  .........  .........  .........  .........  .........  ..........
                                                                    ----------------------------------------------------------------------------------------
            Total invest in health care............................  .........     -4,752     -9,000    -11,239    -12,820    -13,861    -51,672    -136,544
      Provide incentives for charitable giving:
        Permit tax-free withdrawals from IRAs for charitable
          contributions............................................  .........       -102       -510       -512       -501       -497     -2,122      -4,706
        Expand and increase the enhanced charitable deduction
          for contributions of food inventory......................  .........        -44        -96       -106       -116       -127       -489      -1,345
        Reform excise tax based on investment income of private
          foundations..............................................  .........        -56        -85        -90        -96       -102       -429      -1,074
        Modify tax on unrelated business taxable income of
          charitable remainder trusts..............................  .........         -1         -6         -6         -6         -6        -25         -62
        Modify basis adjustment to stock of S corporations
          contributing appreciated property........................  .........         -3        -15        -21        -25        -28        -92        -301
        Repeal the $150 million limitation on qualified
          501(c)(3) bonds..........................................  .........         -2         -3         -6        -10        -11        -32         -81
        Repeal certain restrictions on the use of qualified
          501(c)(3) bonds for residential rental property..........  .........         -2         -5         -9        -16        -24        -56        -278
                                                                    ----------------------------------------------------------------------------------------
            Total provide incentives for charitable giving.........  .........       -210       -720       -750       -770       -795     -3,245      -7,847
      Strengthen education:
        Extend the above-the-line deduction for qualified out-of-          -17       -171       -178       -180       -183       -185       -897      -1,867
         pocket classroom expenses.................................
      Provide assistance to distressed areas:
        Establish Opportunity Zones................................  .........       -221       -411       -439       -451       -482     -2,004      -4,960
      Protect the environment:
        Extend permanently expensing of brownfields remediation
          costs....................................................        -98       -146       -163       -177       -168       -157       -811      -1,503
      Restructure assistance to New York City:
        Provide tax incentives for transportation infrastructure...  .........       -200       -200       -200       -200       -200     -1,000      -2,000
        Repeal certain New York City Liberty Zone incentives.......  .........        200        200        200        200        200      1,000       2,000
                                                                    ----------------------------------------------------------------------------------------
            Total restructure assistance to New York City..........  .........  .........  .........  .........  .........  .........  .........  ..........
                                                                    ----------------------------------------------------------------------------------------
                Total tax incentives...............................       -115     -3,226     -4,268     -8,768    -13,403    -19,634    -49,299    -193,382

    [[Page 266]]

    Simplify the Tax Laws for Families:
      Clarify uniform definition of a child \8\....................  .........         17         66         50         32         48        213         395
      Simplify EITC eligibility requirement regarding filing         .........         27        -24        -21        -26        -28        -72        -207
       status, presence of children, and work and immigration
       status \9\..................................................
      Reduce computational complexity of refundable child tax        .........  .........  .........  .........  .........  .........  .........  ..........
       credit \10\.................................................
                                                                    ----------------------------------------------------------------------------------------
        Total simplify the tax laws for families...................  .........         44         42         29          6         20        141         188

    Strengthen the Employer-Based Pension System:
      Ensure fair treatment of older workers in cash balance
        conversions and protect defined benefit plans..............          3         53         62         77         89        100        381       1,039
      Strengthen funding for single-employer pension plans.........  .........        536      2,290       -153     -2,336     -1,611     -1,274      -9,180
      Reflect market interest rates in lump sum payments...........  .........  .........         -3         -9        -17        -24        -53        -274
                                                                    ----------------------------------------------------------------------------------------
          Total strengthen the employer-based pension system.......          3        589      2,349        -85     -2,264     -1,535       -946      -8,415

    Close Loopholes and Improve Tax Compliance:
      Combat abusive foreign tax credit transactions...............  .........          1          2          2          3          3         11          26
      Modify the active trade or business test.....................  .........          6          8          8          8          8         38          89
      Impose penalties on charities that fail to enforce
       conservation
        easements..................................................  .........          3          8          8          9          9         37          91
      Eliminate the special exclusion from unrelated business
       taxable
        income for gain or loss on the sale or exchange of certain
        brownfields................................................  .........          2         14         30         43         41        130         201
      Limit related party interest deductions......................  .........         82        141        148        155        163        689       1,635
      Clarify and simplify qualified tuition programs..............  .........          4         12         13         14         20         63         222
                                                                    ----------------------------------------------------------------------------------------
          Total close loopholes and improve tax compliance.........  .........         98        185        209        232        244        968       2,264

    Tax Administration, Unemployment Insurance, and Other:
      Improve tax administration:
        Implement IRS administrative reforms and initiate cost
          saving measures \11\.....................................  .........  .........  .........  .........  .........  .........  .........  ..........
        Reduce the tax gap.........................................  .........        259        351        311        296        308      1,525       3,560
                                                                    ----------------------------------------------------------------------------------------
          Total improve tax administration.........................  .........        259        351        311        296        308      1,525       3,560
      Strengthen financial integrity of unemployment
        insurance:
        Strengthen the financial integrity of the unemployment
          insurance system by reducing improper benefit payments
          and tax avoidance \12\...................................  .........  .........         31         30       -106       -143       -188      -2,246
        Extend unemployment insurance surtax \12\..................  .........  .........      1,085      1,490      1,526      1,564      5,665         710
                                                                    ----------------------------------------------------------------------------------------
          Total strengthen integrity of unemployment insurance \12\  .........  .........      1,116      1,520      1,420      1,421      5,477      -1,536
      Other proposals:
        Increase Indian gaming activity fees.......................  .........  .........          5          5          5          5         20          45
                                                                    ----------------------------------------------------------------------------------------
          Total tax administration, unemployment insurance, and      .........        259      1,472      1,836      1,721      1,734      7,022       2,069
           other \12\..............................................

    Modify Energy Policy Act of 2005:
      Repeal reduced recovery period for natural gas distribution    .........         12         44         80        112        125        373         833
       lines.......................................................
      Modify amortization for certain geological and geophysical     .........         38        140        206        169         88        641         730
       expenditures................................................
                                                                    ----------------------------------------------------------------------------------------
          Total modify Energy Policy Act of 2005...................  .........         50        184        286        281        213      1,014       1,563

    Promote Trade:
      Implement free trade agreements \12\.........................  .........       -236       -456       -593       -741       -832     -2,858      -8,200
      Extend GSP \12\..............................................  .........       -412       -617       -666       -723       -786     -3,204      -3,445
                                                                    ----------------------------------------------------------------------------------------
        Total promote trade \12\...................................  .........       -648     -1,073     -1,259     -1,464     -1,618     -6,062     -11,645

    Extend Expiring Provisions:
        Minimum tax relief for individuals.........................    -13,664    -20,495  .........  .........  .........  .........    -20,495     -20,495
        Research & Experimentation (R&E) tax credit................     -2,097     -4,601     -5,944     -6,889     -7,669     -8,340    -33,443     -86,440
        Combined work opportunity/welfare-to-work tax credit.......        -80       -144        -86        -25         -7         -3       -265        -266
        First-time homebuyer credit for DC.........................         -1        -18  .........  .........  .........  .........        -18         -18
        Authority to issue Qualified Zone Academy Bonds............         -3         -8        -13        -18        -20        -20        -79        -179
        Disclosure of tax return information related to terrorist
          activity \7\.............................................  .........  .........  .........  .........  .........  .........  .........  ..........
        Excise tax on coal \12\....................................  .........  .........  .........  .........  .........  .........  .........         750
                                                                    ----------------------------------------------------------------------------------------
            Total extend expiring provisions \12\..................    -15,845    -25,266     -6,043     -6,932     -7,696     -8,363    -54,300    -106,648

    [[Page 267]]

      Total budget proposals, including proposals assumed in the       -15,874    -28,631    -14,888    -51,707    -36,183   -148,653   -280,062  -1,667,039
       baseline \12\...............................................
      Total budget proposals, excluding proposals assumed in the       -15,957    -28,100     -7,152    -14,684    -22,587    -28,939   -101,462    -314,006
       baseline \12\...............................................
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $45 million for 2011 and $51,809 million for 2007-
      2016.
    \2\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is -$371 million for 2011 and $7,346 million for 2007-
      2016.
    \3\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $91 million for 2007, $178 million for 2008, $253
      million for 2009, $310 million for 2010, $352 million for 2011, $1,184 million for 2007-2011 and $3,500 million for 2007-2016.
    \4\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $244 million for 2007, $315 million for 2008, $319
      million for 2009, $303 million for 2010, $305 million for 2011, $1,486 million for 2007-2011 and $3,200 million for 2007-2016.
    \5\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $381 million for 2007, $747 million for 2008, $1,095
      million for 2009, $1,249 million for 2010, $1,343 million for 2011, $4,815 million for 2007-2011 and $12,939 million for 2007-2016.
    \6\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $4 million for 2007, $10 million for 2008, $12
      million for 2009, $14 million for 2010, $15 million for 2011, $55 million for 2007-2011 and $139 million for 2007-2016.
    \7\ No net budgetary impact.
    \8\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is -$170 million for 2008, -$196 million for 2009, -$250
      million for 2010, -$234 million for 2011, -$850 million for 2007-2011 and -$2,224 million for 2007-2016.
    \9\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is -$188 million for 2007, $123 million for 2008, $102
      million for 2009, $96 million for 2010, $95 million for 2011, $228 million for 2007-2011 and $687 million for 2007-2016.
    \10\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is -$332 million for 2008, -$342 million for 2009, -
      $347 million for 2010, -$357 million for 2011, -$1,378 million for 2007-2011 and -$3,263 million for 2007-2016.
    \11\ Outlays from this proposal will be reflected in the Financial Management Service's budget.
    \12\ Net of income offsets.

    [[Page 268]]

                                             Table 17-4. RECEIPTS BY SOURCE
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                             Estimate
               Source                2005    -----------------------------------------------------------------------
                                    Actual       2006        2007        2008        2009        2010        2011
    ----------------------------------------------------------------------------------------------------------------
    Individual income taxes
     (federal funds):
      Existing law..............     927,222   1,011,324   1,118,314   1,215,823   1,309,725   1,393,917   1,587,316
        Proposed Legislation....  ..........     -13,725     -21,948      -7,339     -41,279     -23,785    -120,447
                                 -----------------------------------------------------------------------------------
    Total individual income          927,222     997,599   1,096,366   1,208,484   1,268,446   1,370,132   1,466,869
     taxes......................
                                 ===================================================================================
    Corporation income taxes:
      Federal funds:
        Existing law............     278,278     279,273     265,124     274,333     286,170     292,789     302,649
          Proposed Legislation..  ..........      -2,151      -4,557      -5,835      -9,034     -10,829     -10,637
                                 -----------------------------------------------------------------------------------
      Total Federal funds            278,278     277,122     260,567     268,498     277,136     281,960     292,012
       corporation income taxes.
                                 -----------------------------------------------------------------------------------
      Trust funds:
        Hazardous substance                4  ..........  ..........  ..........  ..........  ..........  ..........
         superfund..............
                                 -----------------------------------------------------------------------------------
    Total corporation income         278,282     277,122     260,567     268,498     277,136     281,960     292,012
     taxes......................
                                 ===================================================================================
    Social insurance and
     retirement receipts (trust
     funds):
      Employment and general
       retirement:
        Old-age and survivors        493,646     521,440     549,083     580,545     612,254     648,363     685,218
         insurance (Off-budget).
        Disability insurance          83,830      88,525      93,236      98,584     103,968     110,099     116,357
         (Off-budget)...........
        Hospital insurance......     166,068     177,592     187,940     198,380     209,455     221,926     234,675
        Railroad retirement:
          Social Security              1,836       1,866       1,937       1,986       2,032       2,066       2,105
           equivalent account...
          Rail pension and             2,284       2,360       2,322       2,365       2,421       2,471       2,520
           supplemental annuity.
                                 -----------------------------------------------------------------------------------
      Total employment and           747,664     791,783     834,518     881,860     930,130     984,925   1,040,875
       general retirement.......
                                 -----------------------------------------------------------------------------------
        On-budget...............     170,188     181,818     192,199     202,731     213,908     226,463     239,300
        Off-budget..............     577,476     609,965     642,319     679,129     716,222     758,462     801,575
                                 -----------------------------------------------------------------------------------
      Unemployment insurance:
        Deposits by States \1\ .      35,076      37,477      38,100      38,644      38,814      40,574      43,294
          Proposed Legislation..  ..........  ..........  ..........          39          38        -132        -178
        Federal unemployment           6,829       7,269       7,084       5,911       5,585       5,946       6,689
         receipts \1\ ..........
          Proposed Legislation..  ..........  ..........  ..........       1,356       1,862       1,907       1,955
        Railroad unemployment             97          86          90         104         119         122         122
         receipts \1\ ..........
                                 -----------------------------------------------------------------------------------
      Total unemployment              42,002      44,832      45,274      46,054      46,418      48,417      51,882
       insurance................
                                 -----------------------------------------------------------------------------------
      Other retirement:
        Federal employees'             4,409       4,423       4,285       4,186       4,083       3,989       3,895
         retirement--employee
         share..................
        Non-Federal employees             50          49          49          49          48          48          46
         retirement \2\ ........
                                 -----------------------------------------------------------------------------------
      Total other retirement....       4,459       4,472       4,334       4,235       4,131       4,037       3,941
                                 -----------------------------------------------------------------------------------
    Total social insurance and       794,125     841,087     884,126     932,149     980,679   1,037,379   1,096,698
     retirement receipts........
                                 ===================================================================================
      On-budget.................     216,649     231,122     241,807     253,020     264,457     278,917     295,123
      Off-budget................     577,476     609,965     642,319     679,129     716,222     758,462     801,575
                                 ===================================================================================
    Excise taxes:
      Federal funds:
        Alcohol taxes...........       8,111       8,179       8,299       8,454       8,617       8,768       8,967
          Proposed Legislation..  ..........         -69         -95         -24  ..........  ..........  ..........
        Tobacco taxes...........       7,920       7,710       7,570       7,437       7,312       7,197       7,081
        Transportation fuels tax        -770      -1,948      -2,451      -2,814      -2,921      -3,226        -780
        Telephone and teletype         6,047       6,069       6,106       6,143       6,182       6,222       6,261
         services...............
        Other Federal fund             1,239       1,080       1,300       1,373       1,423       1,477       1,534
         excise taxes...........
          Proposed Legislation..  ..........          69          58          -3         -29         -42         -60
                                 -----------------------------------------------------------------------------------
      Total Federal fund excise       22,547      21,090      20,787      20,566      20,584      20,396      23,003
       taxes....................
                                 -----------------------------------------------------------------------------------
      Trust funds:
        Highway.................      37,892      39,066      39,727      40,576      41,415      42,190      42,974
        Airport and airway......      10,314      10,651      11,341      11,995      12,694      13,436      14,222

    [[Page 269]]

        Sport fish restoration           429         524         539         554         571         587         603
         and boating............
        Tobacco.................         899       1,033         955         955         955         955         955
        Black lung disability            610         602         617         634         646         653         660
         insurance..............
        Inland waterway.........          91          81          77          76          77          78          80
        Oil spill liability.....  ..........          88         183         192         203         212         223
        Vaccine injury                   123         182         186         188         190         192         194
         compensation...........
        Leaking underground              189         194         196         201         206         207         210
         storage tank...........
                                 -----------------------------------------------------------------------------------
      Total trust funds excise        50,547      52,421      53,821      55,371      56,957      58,510      60,121
       taxes....................
                                 -----------------------------------------------------------------------------------
    Total excise taxes..........      73,094      73,511      74,608      75,937      77,541      78,906      83,124
                                 ===================================================================================
    Estate and gift taxes:
      Federal funds.............      24,764      27,521      24,925      26,041      27,603      21,504      18,688
        Proposed Legislation....  ..........           2      -1,225      -1,655      -1,591      -1,356     -17,133
                                 -----------------------------------------------------------------------------------
    Total estate and gift taxes.      24,764      27,523      23,700      24,386      26,012      20,148       1,555
                                 ===================================================================================
    Customs duties:
      Federal funds.............      22,260      24,693      27,643      31,437      31,863      34,246      36,559
        Proposed Legislation....  ..........  ..........        -864      -1,432      -1,679      -1,951      -2,158
      Trust funds...............       1,119       1,194       1,290       1,392       1,515       1,655       1,809
                                 -----------------------------------------------------------------------------------
    Total customs duties........      23,379      25,887      28,069      31,397      31,699      33,950      36,210
                                 ===================================================================================
    MISCELLANEOUS RECEIPTS: \3\
      Miscellaneous taxes.......         342         342         443         438         438         438         438
        Proposed Legislation....  ..........  ..........  ..........           5           5           5           5
      Exercise of warrants......           1  ..........  ..........  ..........  ..........  ..........  ..........
      United Mine Workers of             125         119         128         125         122         119         117
       America combined benefit
       fund.....................
      Deposit of earnings,            19,297      27,455      32,679      35,431      38,454      41,282      43,686
       Federal Reserve System...
      Defense cooperation.......          46           8           8           8           8           8           8
      Fees for permits and             9,825      10,110      10,442      10,609      10,860      11,018      11,304
       regulatory and judicial
       services.................
      Fines, penalties, and            3,149       4,583       4,572       2,643       2,657       2,670       2,682
       forfeitures..............
      Gifts and contributions...         234         201         200         204         206         208         209
      Refunds and recoveries....         -26         -56         -56         -56         -56         -56         -56
                                 -----------------------------------------------------------------------------------
    Total miscellaneous receipts      32,993      42,762      48,416      49,407      52,694      55,692      58,393
                                 ===================================================================================
    Total budget receipts.......   2,153,859   2,285,491   2,415,852   2,590,258   2,714,207   2,878,167   3,034,861
      On-budget.................   1,576,383   1,675,526   1,773,533   1,911,129   1,997,985   2,119,705   2,233,286
      Off-budget................     577,476     609,965     642,319     679,129     716,222     758,462     801,575
                                 -----------------------------------------------------------------------------------
             MEMORANDUM
      Federal funds.............   1,310,401   1,391,759   1,481,180   1,603,674   1,677,442   1,783,065   1,878,730
      Trust funds...............     546,513     620,753     672,520     699,346     727,925     761,693     805,257
      Interfund transactions....    -280,531    -336,986    -380,167    -391,891    -407,382    -425,053    -450,701
                                 -----------------------------------------------------------------------------------
    Total on-budget.............   1,576,383   1,675,526   1,773,533   1,911,129   1,997,985   2,119,705   2,233,286
                                 -----------------------------------------------------------------------------------
    Off-budget (trust funds)....     577,476     609,965     642,319     679,129     716,222     758,462     801,575
                                 ===================================================================================
    Total.......................   2,153,859   2,285,491   2,415,852   2,590,258   2,714,207   2,878,167   3,034,861
    ----------------------------------------------------------------------------------------------------------------
    \1\ Deposits by States cover the benefit part of the program. Federal unemployment receipts cover administrative
      costs at both the Federal and State levels. Railroad unemployment receipts cover both the benefits and
      adminstrative costs of the program for the railroads.
    \2\ Represents employer and employee contributions to the civil service retirement and disability fund for
      covered employees of Government-sponsored, privately owned enterprises and the District of Columbia municipal
      government.
    \3\ Includes both Federal and trust funds.