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



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                          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
----------------------------------------------------------------------------------------------------------------




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                                                       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
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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  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.

[[Page 243]]

                 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

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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

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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

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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

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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.

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                   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

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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

[[Page 254]]

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

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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.