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



[[Page 285]]


 
                          19.  TAX EXPENDITURES

  The Congressional Budget Act of 1974 (Public Law 93-344) requires that 
a list of ``tax expenditures'' be included in the budget. Tax 
expenditures are defined in the law as ``revenue losses attributable to 
provisions of the Federal tax laws which allow a special exclusion, 
exemption, or deduction from gross income or which provide a special 
credit, a preferential rate of tax, or a deferral of liability.'' These 
exceptions may be viewed as alternatives to other policy instruments, 
such as spending or regulatory programs. Identification and measurement 
of tax expenditures depends importantly on the baseline tax system 
against which the actual tax system is compared.
  The largest reported tax expenditures tend to be associated with the 
individual income tax. For example, sizeable deferrals, deductions and 
exclusions are provided for employer contributions for medical 
insurance, pension contributions and earnings, capital gains, and 
payments of State and local individual income and property taxes. 
Reported tax expenditures under the corporate income tax tend to be 
related to timing differences in the rate of cost recovery for various 
investments. As is discussed below, the extent to which these provisions 
are classified as tax expenditures varies according to the conceptual 
baseline used.
  Each tax expenditure estimate in this chapter was calculated assuming 
other parts of the tax code remained unchanged. The estimates would be 
different if all tax expenditures or major groups of tax expenditures 
were changed simultaneously because of potential interactions among 
provisions. For that reason, this chapter does not present a grand total 
for the estimated tax expenditures. Moreover, past tax changes entailing 
broad elimination of tax expenditures were generally accompanied by 
changes in tax rates or other basic provisions, so that the net effects 
on Federal revenues were considerably (if not totally) offset.
  Tax expenditures relating to the individual and corporate income taxes 
are estimated for fiscal years 2005-2011 using two methods of 
accounting: revenue effects and present values. The present value 
approach provides estimates of the revenue effects for tax expenditures 
that generally involve deferrals of tax payments into the future.
  The section of the chapter on performance measures and economic 
effects presents information related to assessment of the effect of tax 
expenditures on the achievement of program performance goals. This 
section is a complement to the Government-wide performance plan required 
by the Government Performance and Results Act of 1993.
  The 2004, 2005, and 2006 Budgets included a thorough review of 
important ambiguities in the tax expenditure concept. In particular, 
this review focused on defining tax expenditures relative to a 
comprehensive income tax baseline, defining tax expenditures relative to 
a broad-based consumption tax baseline, and defining negative tax 
expenditures, i.e., provisions of current law that over-tax certain 
items or activities. A similar review is presented in the Appendix again 
this year.

                   TAX EXPENDITURES IN THE INCOME TAX

                        Tax Expenditure Estimates

  All tax expenditure estimates presented here are based upon current 
tax law enacted as of December 31, 2005. Expired or repealed provisions 
are not listed if their revenue effects result only from taxpayer 
activity occurring before fiscal year 2005. Due to the time required to 
estimate the large number of tax expenditures, the estimates are based 
on Mid-Session economic assumptions; exceptions are the earned income 
tax credit and child credit provisions, which involve outlay components 
and hence are updated to reflect the economic assumptions used elsewhere 
in the Budget.
  The total revenue effects for tax expenditures for fiscal years 2005-
2011 are displayed according to the Budget's functional categories in 
Table 19-1. Descriptions of the specific tax expenditure provisions 
follow the tables of estimates and the discussion of general features of 
the tax expenditure concept.
  As in prior years, two baseline concepts, the normal tax baseline and 
the reference tax law baseline, are used to identify income tax 
expenditures. These baseline concepts are thoroughly discussed in 
Special Analysis G of the 1985 Budget, where the former is referred to 
as the pre-1983 method and the latter the post-1982 method. For the most 
part, the two concepts coincide. However, items treated as tax 
expenditures under the normal tax baseline, but not the reference tax 
law baseline, are indicated by the designation ``normal tax method'' in 
the tables. The revenue effects for these items are zero using the 
reference tax rules. The alternative baseline concepts are discussed in 
detail following the tables.
  Table 19-2 reports the respective portions of the total revenue 
effects that arise under the individual and corporate income taxes 
separately. The location of the estimates under the individual and 
corporate headings does not imply that these categories of filers 
benefit from

[[Page 286]]

the special tax provisions in proportion to the respective tax 
expenditure amounts shown. Rather, these breakdowns show the specific 
tax accounts through which the various provisions are cleared. The 
ultimate beneficiaries of corporate tax expenditures could be 
shareholders, employees, customers, or other providers of capital, 
depending on economic forces.
  Table 19-3 ranks the major tax expenditures by the size of their 2007-
2011 revenue effect. Outlay Equivalent Estimates of Income Tax 
Expenditures, which were included in prior volumes of Analytical 
Perspectives, are no longer included in this chapter.\1\
---------------------------------------------------------------------------
  \1\ The Administration has dropped the estimates of the outlay 
equivalents because they were often the same as the normal tax 
expenditure estimates, and the criteria for applying the concepts as to 
when they should differ were often judgmental and hard to apply with 
consistency across time and across tax expenditure items.
---------------------------------------------------------------------------

                 Interpreting Tax Expenditure Estimates

  The estimates shown for individual tax expenditures in Tables 19-1, 
19-2, and 19-3 do not necessarily equal the increase in Federal revenues 
(or the change in the budget balance) that would result from repealing 
these special provisions, for the following reasons:

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

[[Page 287]]



                                                 Table 19-1.  ESTIMATES OF TOTAL INCOME TAX EXPENDITURES
                                                                (in millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             Total from corporations and individuals
                                                                        --------------------------------------------------------------------------------
                                                                           2005      2006      2007      2008      2009      2010      2011     2007-11
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
             National Defense
       1       Exclusion of benefits and allowances to armed forces         2,990     3,020     3,050     3,070     3,110     3,140     3,170     15,390
                personnel..............................................
 
             International affairs:
       2       Exclusion of income earned abroad by U.S. citizens......     2,750     2,810     2,940     3,100     3,270     3,450     3,640     16,400
       3       Exclusion of certain allowances for Federal employees          900       950     1,000     1,050     1,100     1,160     1,230      5,540
                abroad.................................................
       4       Extraterritorial income exclusion.......................     5,220     4,370     1,720       110        50        50        40      1,970
       5       Inventory property sales source rules exception.........     1,560     1,680     1,840     2,040     2,230     2,380     2,540     11,030
       6       Deferral of income from controlled foreign corporations     10,500    11,160    11,940    12,770    13,650    14,600    15,620     68,580
                (normal tax method)....................................
       7       Deferred taxes for financial firms on certain income         2,190     2,260       960  ........  ........  ........  ........        960
                earned overseas........................................
 
             General science, space, and technology:
       8       Expensing of research and experimentation expenditures       4,110     7,920     6,990     6,260     5,360     4,800     4,840     28,250
                (normal tax method)....................................
       9       Credit for increasing research activities...............     5,160     2,160       920       390       180        50  ........      1,540
 
             Energy:
      10       Expensing of exploration and development costs, fuels...       390       680       870       830       650       500       380      3,230
      11       Excess of percentage over cost depletion, fuels.........       590       670       690       660       640       620       620      3,230
      12       Alternative fuel production credit......................     2,320     2,390     2,460       990  ........  ........  ........      3,450
      13       Exception from passive loss limitation for working              40        40        40        40        40        40        40        200
                interests in oil and gas properties....................
      14       Capital gains treatment of royalties on coal............        90        90        90       100        70        60        80        400
      15       Exclusion of interest on energy facility bonds..........        80        90        90       100       100       110       110        510
      16       Enhanced oil recovery credit............................       300  ........  ........  ........  ........  ........        20         20
      17       New technology credit...................................       240       510       690       800       850       860       860      4,060
      18       Alcohol fuel credits \1\................................        40        40        40        50        50        60        30        230
      19       Tax credit and deduction for clean-fuel burning vehicles        70        90       200       140       140       -20       -40        420
      20       Exclusion of utility conservation subsidies.............        80        80        80        80        80        70        70        380
      21       Credit for holding clean renewable energy bonds.........  ........  ........        10        30        40        50        50        180
      22       Deferral of gain from dispositions of transmission             490       620       530       230      -100      -360      -510       -210
                property to implement FERC restructuring policy........
      23       Credit for production from advanced nuclear power         ........  ........  ........  ........  ........  ........  ........  .........
                facilities.............................................
      24       Credit for investment in clean coal facilities..........  ........        50        50       100       150       200       280        780
      25       Temporary 50% expensing for equipment used in the         ........        10        30       120       240       260       180        830
                refining of liquid fuels...............................
      26       Pass through low sulfur diesel expensing to cooperative         40  ........       -10  ........       -10  ........       -10        -30
                owners.................................................
      27       Natural gas distribution pipelines treated as 15-year     ........        20        50        90       120       150       150        560
                property...............................................
      28       Amortize all geological and geophysical expenditures      ........        40       150       180       140       100        60        630
                over 2 years...........................................
      29       Allowance of deduction for certain energy efficient       ........        80       190       140        30       -10       -10        340
                commercial building property...........................
      30       Credit for construction of new energy efficient homes...  ........        10        20        10        10  ........  ........         40
      31       Credit for energy efficiency improvements to existing     ........       220       380       150  ........  ........  ........        530
                homes..................................................
      32       Credit for energy efficient appliances..................  ........       120        80  ........  ........  ........  ........         80
      33       30% credit for residential purchases/installations of     ........        10        10        10  ........  ........  ........         20
                solar and fuel cells...................................
      34       Credit for business installation of qualified fuel cells  ........        80       130        50       -10       -10       -10        150
                and stationary microturbine power plants...............
      35       Alternative Fuel and Fuel Mixture tax credit............       150       170  ........  ........  ........  ........  ........  .........
 
             Natural resources and environment:
      36       Expensing of exploration and development costs, nonfuel   ........  ........  ........  ........  ........  ........  ........  .........
                minerals...............................................
      37       Excess of percentage over cost depletion, nonfuel              270       280       300       310       310       330       340      1,590
                minerals...............................................
      38       Exclusion of interest on bonds for water, sewage, and          450       480       500       550       580       600       620      2,850
                hazardous waste facilities.............................
      39       Capital gains treatment of certain timber income........        90        90        90       100        70        60        80        400
      40       Expensing of multiperiod timber growing costs...........       350       370       380       400       410       430       430      2,050
      41       Tax incentives for preservation of historic structures..       350       370       380       400       420       440       470      2,110
      42       Expensing of capital costs with respect to complying            10        10        10        30        50        30  ........        120
                with EPA sulfur regulations............................
      43       Exclusion of gain or loss on sale or exchange of certain  ........  ........        10        30        40        70        60        210
                brownfield sites.......................................
 
             Agriculture:
      44       Expensing of certain capital outlays....................       110       130       130       130       140       140       150        690
      45       Expensing of certain multiperiod production costs.......        60        70        70        80        80        80        90        400
      46       Treatment of loans forgiven for solvent farmers.........        10        10        10        10        10        10        10         50
      47       Capital gains treatment of certain income...............       880       870       900     1,050       750       590       780      4,070
      48       Income averaging for farmers............................        40        40        40        40        40        40        50        210
      49       Deferral of gain on sale of farm refiners...............        10        10        20        20        20        20        20        100
      50       Bio-Diesel and small agri-biodiesel producer tax credits        30        90       100        90        40        20        20        270
 
             Commerce and housing:
               Financial institutions and insurance:
      51        Exemption of credit union income.......................     1,290     1,370     1,450     1,540     1,640     1,740     1,850      8,220
      52        Excess bad debt reserves of financial institutions.....        10        10        10  ........  ........  ........  ........         10
      53        Exclusion of interest on life insurance savings........    19,200    19,970    20,770    22,600    26,100    28,990    31,350    129,810
      54        Special alternative tax on small property and casualty         20        20        20        20        20        20        30        110
                 insurance companies...................................
      55        Tax exemption of certain insurance companies owned by         210       220       230       240       250       260       270      1,250
                 tax-exempt organizations..............................
      56        Small life insurance company deduction.................        60        60        60        60        60        60        50        290
      57        Exclusion of interest spread of financial institutions.     1,450     1,540     1,620     1,710     1,800     1,890     1,990     12,000

[[Page 288]]

 
               Housing:
      58        Exclusion of interest on owner-occupied mortgage              930       990     1,040     1,140     1,210     1,240     1,280      5,910
                 subsidy bonds.........................................
      59        Exclusion of interest on rental housing bonds..........       410       430       450       500       530       540       550      2,570
      60        Deductibility of mortgage interest on owner-occupied       62,160    72,060    79,860    87,820    94,490   100,980   108,280    471,430
                 homes.................................................
      61        Deductibility of State and local property tax on owner-    19,110    15,020    12,810    12,910    12,830    12,720    22,930     74,200
                 occupied homes........................................
      62        Deferral of income from post 1987 installment sales....     1,120     1,130     1,160     1,180     1,200     1,310     1,430      6,280
      63        Capital gains exclusion on home sales..................    35,990    39,750    43,900    48,490    59,900    78,860    87,100    318,250
      64        Exclusion of net imputed rental income.................    28,600    29,720    33,210    36,860    40,630    44,785    49,364    204,849
      65        Exception from passive loss rules for $25,000 of rental     6,470     6,370     6,230     6,060     5,880     5,700     5,510     29,380
                 loss..................................................
      66        Credit for low-income housing investments..............     3,880     4,060     4,250     4,460     4,710     4,950     5,220     23,590
      67        Accelerated depreciation on rental housing (normal tax      9,610    10,630    11,470    12,660    13,820    14,710    15,920     68,580
                 method)...............................................
               Commerce:
      68        Cancellation of indebtedness...........................        30       160       110        40        40        40        40        270
      69        Exceptions from imputed interest rules.................        50        50        50        50        50        50        50        250
      70        Capital gains (except agriculture, timber, iron ore,       26,170    25,990    26,760    31,280    22,340    17,580    23,410    121,370
                 and coal).............................................
      71        Capital gains exclusion of small corporation stock.....       200       230       260       300       320       350       470      1,700
      72        Step-up basis of capital gains at death................    26,820    29,510    32,460    35,700    36,480    34,560    38,010    177,210
      73        Carryover basis of capital gains on gifts..............       410       540       640       750       790     1,270     6,370      9,820
      74        Ordinary income treatment of loss from small business          50        50        50        50        50        50        50        250
                 corporation stock sale................................
      75        Accelerated depreciation of buildings other than rental      -910      -280        90       550       360       950     1,580      3,530
                 housing (normal tax method)...........................
      76        Accelerated depreciation of machinery and equipment        20,220    40,520    52,230    61,940    73,480    81,090    88,460    353,600
                 (normal tax method)...................................
      77        Expensing of certain small investments (normal tax          5,390     4,720     4,360       350       868     1,110     1,460      8,148
                 method)...............................................
      78        Graduated corporation income tax rate (normal tax           3,160     3,450     3,590     3,940     4,180     4,300     4,390     20,400
                 method)...............................................
      79        Exclusion of interest on small issue bonds.............       390       420       440       480       510       530       540      2,500
      80        Deduction for US production activities.................     6,220     5,150    10,670    12,190    13,110    20,320    22,270     78,560
      81        Special rules for certain film and TV production.......        90       110        90        70       -40       -90       -60        -30
 
             Transportation:
      82       Deferral of tax on shipping companies...................        20        20        20        20        20        20        20        100
      83       Exclusion of reimbursed employee parking expenses.......     2,590     2,730     2,880     3,030     3,180     3,330     3,420     15,840
      84       Exclusion for employer-provided transit passes..........       480       550       630       710       790       880       960      3,970
      85       Tax credit for certain expenditures for maintaining             70       140       150       110        50        30        10        350
                railroad tracks........................................
      86       Exclusion of interest on bonds for Financing of Highway   ........        25        50        75        95        95       100        415
                Projects and rail-truck transfer facilities............
 
             Community and regional development:
      87       Investment credit for rehabilitation of structures              40        40        40        40        40        40        40        200
                (other than historic)..................................
      88       Exclusion of interest for airport, dock, and similar           800       860       910       990     1,060     1,080     1,120      5,160
                bonds..................................................
      89       Exemption of certain mutuals' and cooperatives' income..        60        60        70        70        70        70        70        350
      90       Empowerment zones and renewal communities...............     1,120     1,210     1,340     1,480     1,740     1,130       420      6,110
      91       New markets tax credit..................................       430       610       830       870       790       670       520      3,680
      92       Expensing of environmental remediation costs............        70        60        40  ........       -20       -10       -10  .........
      93       Credit to holders of Gulf Tax Credit Bonds..............  ........  ........        10        10        10        10        10         50
 
             Education, training, employment, and social services:
               Education:
      94        Exclusion of scholarship and fellowship income (normal      1,380     1,450     1,510     1,580     1,640     1,720     1,790      8,240
                 tax method)...........................................
      95        HOPE tax credit........................................     3,710     3,650     3,060     3,090     3,220     3,240     3,480     16,090
      96        Lifetime Learning tax credit...........................     2,330     2,340     2,020     2,030     2,060     2,090     2,220     10,420
      97        Education Individual Retirement Accounts...............        70        90       110       140       180       230       280        940
      98        Deductibility of student-loan interest.................       780       800       810       820       830       840       780      4,080
      99        Deduction for higher education expenses................     1,830     1,840  ........  ........  ........  ........  ........  .........
     100        State prepaid tuition plans............................       430       540       620       710       810       930     1,090      4,160
     101        Exclusion of interest on student-loan bonds............       280       300       320       350       370       380       390      1,810
     102        Exclusion of interest on bonds for private nonprofit        1,080     1,160     1,220     1,330     1,410     1,450     1,500      6,910
                 educational facilities................................
     103        Credit for holders of zone academy bonds...............       110       130       140       150       150       150       150        740
     104        Exclusion of interest on savings bonds redeemed to             10        20        20        20        20        20        20        100
                 finance educational expenses..........................
     105        Parental personal exemption for students age 19 or over     3,760     2,500     1,760     1,650     1,510     1,420     2,740      9,080
     106        Deductibility of charitable contributions (education)..     3,420     3,680     4,030     4,260     4,550     4,870     5,210     22,920
     107        Exclusion of employer-provided educational assistance..       560       590       620       660       690       730        40      2,740
     108        Special deduction for teacher expenses.................       160       150  ........  ........  ........  ........  ........  .........
     109        Discharge of student loan indebtedness.................        20        20        20        20        20        20        20        100
               Training, employment, and social services:
     110        Work opportunity tax credit............................       160       210       190       130       110        70        30        530
     111        Welfare-to-work tax credit.............................        70        80        70        40        10  ........  ........        120
     112        Employer provided child care exclusion.................       610       810       920       960     1,010     1,060     1,070      5,020
     113        Employer-provided child care credit....................        10        10        10        20        20        20        10         80
     114        Assistance for adopted foster children.................       310       320       350       370       400       430       470      2,020
     115        Adoption credit and exclusion..........................       360       540       560       570       580       600       540      2,850
     116        Exclusion of employee meals and lodging (other than           850       890       930       970     1,010     1,060     1,110      5,080
                 military).............................................

[[Page 289]]

 
     117        Child credit \2\.......................................    41,790    42,090    42,120    42,070    41,830    41,870    31,730    199,620
     118        Credit for child and dependent care expenses...........     3,060     2,740     1,820     1,750     1,660     1,590     1,540      8,360
     119        Credit for disabled access expenditures................        30        30        30        40        40        40        40        190
     120        Deductibility of charitable contributions, other than      29,670    32,550    34,500    36,790    39,410    42,210    45,210    198,120
                 education and health..................................
     121        Exclusion of certain foster care payments..............       440       440       450       450       450       460       470      2,280
     122        Exclusion of parsonage allowances......................       460       480       510       540       580       610       640      2,880
     123        Employee retention credit for employers affected by      ........       140        20        20  ........  ........  ........         40
                 Hurricane Katrina, Rita, and Wilma....................
 
             Health:
     124       Exclusion of employer contributions for medical            118,420   132,730   146,780   161,120   176,290   191,980   212,820    888,990
                insurance premiums and medical care....................
     125       Self-employed medical insurance premiums................     3,790     4,240     4,630     5,080     5,570     6,050     6,730     28,060
     126       Medical Savings Accounts / Health Savings Accounts......     1,050     1,830     2,650     3,510     3,960     3,910     3,860     17,890
     127       Deductibility of medical expenses.......................     6,110     4,410     5,310     6,490     7,720     9,220    12,260     41,000
     128       Exclusion of interest on hospital construction bonds....     1,880     2,010     2,110     2,300     2,450     2,520     2,600     11,980
     129       Deductibility of charitable contributions (health)......     3,350     3,670     3,890     4,150     4,450     4,770     5,110     22,370
     130       Tax credit for orphan drug research.....................       210       230       260       290       320       360       410      1,640
     131       Special Blue Cross/Blue Shield deduction................       710       780       850       920       760       830       920      4,280
     132       Tax credit for health insurance purchased by certain            20        20        30        30        30        30        30        150
                displaced and retired individuals......................
 
             Income security:
     133       Exclusion of railroad retirement system benefits........       390       390       380       360       370       370       350      1,830
     134       Exclusion of workers' compensation benefits.............     5,770     6,000     6,180     6,390     6,630     6,860     7,090     33,150
     135       Exclusion of public assistance benefits (normal tax            430       450       470       490       510       530       550      2,550
                method)................................................
     136       Exclusion of special benefits for disabled coal miners..        50        50        50        40        40        40        40        210
     137       Exclusion of military disability pensions...............       100       110       110       120       120       130       130        610
               Net exclusion of pension contributions and earnings:
     138        Employer plans.........................................    50,630    50,360    52,470    48,100    45,760    44,760    36,910    228,000
     139        401(k) plans...........................................    37,440    37,330    39,800    43,100    48,810    53,870    47,290    232,870
     140        Individual Retirement Accounts.........................     3,100     4,230     5,970     7,180     8,300     8,840     8,060     38,350
     141        Low and moderate income savers credit..................     1,310     1,380       830  ........  ........  ........  ........        830
     142        Keogh plans............................................     9,400     9,990    10,670    11,630    12,670    13,800    15,040     63,810
               Exclusion of other employee benefits:
     143        Premiums on group term life insurance..................     2,020     2,070     2,180     2,250     2,310     2,380     2,490     11,610
     144        Premiums on accident and disability insurance..........       280       290       300       310       320       330       340      1,600
     145        Income of trusts to finance supplementary unemployment         20        20        20        20        20        20        20        100
                 benefits..............................................
     146        Special ESOP rules.....................................     1,650     1,760     1,890     2,030     2,170     2,330     2,490     10,910
     147        Additional deduction for the blind.....................        40        30        30        40        40        40        50        200
     148        Additional deduction for the elderly...................     1,850     1,740     1,740     1,880     1,930     1,980     2,940     10,470
     149        Tax credit for the elderly and disabled................        20        20        20        10        10        10        10         60
     150        Deductibility of casualty losses.......................       250       980       640       300       320       330       360      1,950
     151        Earned income tax credit \3\...........................     4,925     5,050     5,150     5,445     5,640     5,810     6,070     28,115
     152        Additional exemption for housing Hurricane Katrina       ........       110        20  ........  ........  ........  ........         20
                 displaced individuals.................................
 
             Social Security:
               Exclusion of social security benefits:
     153        Social Security benefits for retired workers...........    19,110    19,350    19,590    20,250    20,700    21,000    23,330    104,870
     154        Social Security benefits for disabled..................     3,600     3,810     4,110     4,330     4,570     4,960     5,530     23,500
     155        Social Security benefits for dependents and survivors..     3,940     3,980     4,040     4,070     4,100     4,180     4,360     20,750
 
             Veterans benefits and services:
     156       Exclusion of veterans death benefits and disability          3,320     3,600     3,770     3,900     4,050     4,140     4,350     20,210
                compensation...........................................
     157       Exclusion of veterans pensions..........................       130       140       140       140       140       150       150        720
     158       Exclusion of GI bill benefits...........................       150       170       210       240       280       330       400      1,460
     159       Exclusion of interest on veterans housing bonds.........        40        40        50        50        50        50        50        250
 
             General purpose fiscal assistance:
     160       Exclusion of interest on public purpose State and local     26,360    28,180    29,640    32,330    34,410    35,440    36,510    168,330
                bonds..................................................
     161       Deductibility of nonbusiness state and local taxes other    36,460    30,310    27,210    27,730    28,260    29,000    49,510    161,710
                than on owner-occupied homes...........................
     162       Tax credit for corporations receiving income from doing        800       400        40  ........  ........  ........  ........         40
                business in U.S. possessions...........................
 
             Interest:
     163       Deferral of interest on U.S. savings bonds..............     1,350     1,340     1,350     1,360     1,380     1,390     1,440      6,920
 
             Addendum: Aid to State and local governments:
               Deductibility of:
                Property taxes on owner-occupied homes.................    19,110    15,020    12,810    12,910    12,830    12,720    22,930     74,200
                Nonbusiness State and local taxes other than on owner-     36,460    30,310    27,210    27,730    28,260    29,000    49,510    161,710
                 occupied homes........................................
               Exclusion of interest on State and local bonds for:
                Public purposes........................................    26,360    28,180    29,640    32,330    34,410    35,440    36,510    168,330
                Energy facilities......................................        80        90        90       100       100       110       110        510
                Water, sewage, and hazardous waste disposal facilities.       450       480       500       550       580       600       620      2,850

[[Page 290]]

 
                Small-issues...........................................       390       420       440       480       510       530       540      2,500
                Owner-occupied mortgage subsidies......................       930       990     1,040     1,140     1,210     1,240     1,280      5,910
                Rental housing.........................................       410       430       450       500       530       540       550      2,570
                Airports, docks, and similar facilities................       800       860       910       990     1,060     1,080     1,120      5,160
                Student loans..........................................       280       300       320       350       370       380       390      1,810
                Private nonprofit educational facilities...............     1,080     1,160     1,220     1,330     1,410     1,450     1,500      6,910
                Hospital construction..................................     1,880     2,010     2,110     2,300     2,450     2,520     2,600     11,980
                Veterans' housing......................................        40        40        50        50        50        50        50        250
             Credit for holders of zone academy bonds..................       110       130       140       150       150       150       150        740
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ In addition, the alcohol fuel credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2005 $1,500; 2006 $2,110;
  2007 $2,400; 2008 $2,740; 2009 $3,080; 2010 $3,410 and 2011 $870.
\2\ The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as
  follows: 2005 $14,620; 2006 $14,110; 2007 $13,540; 2008 $12,950; 2009 $12,760 and 2010 $12,330:2011 $12,110
\3\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of
  dollars) is as follows: 2005 $34,559;2006 $35,098; 2007 $35,645; 2008 $36,955; 2009 $38,048; 2010 $38,823; and 2011 $40,278.
Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method.
All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.

                                     

                         Present-Value Estimates

  The annual value of tax expenditures for tax deferrals is reported on 
a cash basis in all tables except Table 19-4. Cash-based estimates 
reflect the difference between taxes deferred in the current year and 
incoming revenues that are received due to deferrals of taxes from prior 
years. Although such estimates are useful as a measure of cash flows 
into the Government, they do not accurately reflect the true economic 
cost of these provisions. For example, for a provision where activity 
levels have changed, so that incoming tax receipts from past deferrals 
are greater than deferred receipts from new activity, the cash-basis tax 
expenditure estimate can be negative, despite the fact that in present-
value terms current deferrals have a real cost to the Government. 
Alternatively, in the case of a newly enacted deferral provision, a 
cash-based estimate can overstate the real effect on receipts to the 
Government because the newly deferred taxes will ultimately be received. 
Present-value estimates, which are a useful complement to the cash-basis 
estimates for provisions involving deferrals, are discussed below.
  Discounted present-value estimates of revenue effects are presented in 
Table 19-4 for certain provisions that involve tax deferrals or other 
long-term revenue effects. These estimates complement the cash-based tax 
expenditure estimates presented in the other tables.
  The present-value estimates represent the revenue effects, net of 
future tax payments that follow from activities undertaken during 
calendar year 2005 which cause the deferrals or other long-term revenue 
effects. For instance, a pension contribution in 2005 would cause a 
deferral of tax payments on wages in 2005 and on pension earnings on 
this contribution (e.g., interest) in later years. In some future year, 
however, the 2005 pension contribution and accrued earnings will be paid 
out and taxes will be due; these receipts are included in the present-
value estimate. In general, this conceptual approach is similar to the 
one used for reporting the budgetary effects of credit programs, where 
direct loans and guarantees in a given year affect future cash flows.

[[Page 291]]



                                                                        Table 19-2.  ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL INCOME TAXES
                                                                                                        (in millions of dollars)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Corporations                                                                           Individuals
                                                             ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                2005     2006      2007       2008       2009       2010       2011     2007-11      2005       2006       2007       2008       2009       2010       2011     2007-11
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 
             National Defense
       1       Exclusion of benefits and allowances to armed  .......  .......  .........  .........  .........  .........  .........  .........      2,990      3,020      3,050      3,070      3,110      3,140      3,170     15,390
                forces personnel............................
 
             International affairs:
       2       Exclusion of income earned abroad by U.S.      .......  .......  .........  .........  .........  .........  .........  .........      2,750      2,810      2,940      3,100      3,270      3,450      3,640     16,400
                citizens....................................
       3       Exclusion of certain allowances for Federal    .......  .......  .........  .........  .........  .........  .........  .........        900        950      1,000      1,050      1,100      1,160      1,230      5,540
                employees abroad............................
       4       Extraterritorial income exclusion............    5,220    4,370      1,720        110         50         50         40      1,970  .........  .........  .........  .........  .........  .........  .........  .........
       5       Inventory property sales source rules            1,560    1,680      1,840      2,040      2,230      2,380      2,540     11,030  .........  .........  .........  .........  .........  .........  .........  .........
                exception...................................
       6       Deferral of income from controlled foreign      10,500   11,160     11,940     12,770     13,650     14,600     15,620     68,580  .........  .........  .........  .........  .........  .........  .........  .........
                corporations (normal tax method)............
       7       Deferred taxes for financial firms on certain    2,190    2,260        960  .........  .........  .........  .........        960  .........  .........  .........  .........  .........  .........  .........  .........
                income earned overseas......................
 
             General science, space, and technology:
       8       Expensing of research and experimentation        4,010    7,770      6,850      6,140      5,250      4,700      4,740     27,680        100        150        140        120        110        100        100        570
                expenditures (normal tax method)............
       9       Credit for increasing research activities....    5,110    2,120        920        390        180         50  .........      1,540         50         40  .........  .........  .........  .........  .........  .........
 
             Energy:
      10       Expensing of exploration and development           340      590        760        720        560        430        330      2,800         50         90        110        110         90         70         50        430
                costs, fuels................................
      11       Excess of percentage over cost depletion,          530      600        620        600        580        560        560      2,920         60         70         70         60         60         60         60        310
                fuels.......................................
      12       Alternative fuel production credit...........    2,220    2,290      2,360        950  .........  .........  .........      3,310        100        100        100         40  .........  .........  .........        140
      13       Exception from passive loss limitation for     .......  .......  .........  .........  .........  .........  .........  .........         40         40         40         40         40         40         40        200
                working interests in oil and gas properties.
      14       Capital gains treatment of royalties on coal.  .......  .......  .........  .........  .........  .........  .........  .........         90         90         90        100         70         60         80        400
      15       Exclusion of interest on energy facility            20       20         20         20         20         20         20        100         60         70         70         80         80         90         90        410
                bonds.......................................
      16       Enhanced oil recovery credit.................      270  .......  .........  .........  .........  .........         20         20         30  .........  .........  .........  .........  .........  .........  .........
      17       New technology credit........................      220      470        640        750        800        810        810      3,810         20         40         50         50         50         50         50        250
      18       Alcohol fuel credits \1\.....................       30       30         30         40         40         50         20        180         10         10         10         10         10         10         10         50
      19       Tax credit and deduction for clean-fuel             50       30        -10        -10        -20        -30        -30       -100         20         60        210        150        160         10        -10        520
                burning vehicles............................
      20       Exclusion of utility conservation subsidies..  .......  .......  .........  .........  .........  .........  .........  .........         80         80         80         80         80         70         70        380
      21       Credit for holding clean renewable energy      .......  .......         10         30         40         50         50        180  .........  .........  .........  .........  .........  .........  .........  .........
                bonds.......................................
      22       Deferral of gain from dispositions of              490      620        530        230       -100       -360       -510       -210  .........  .........  .........  .........  .........  .........  .........  .........
                transmission property to implement FERC
                restructuring policy........................
      23       Credit for production from advanced nuclear    .......  .......  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........
                power facilities............................
      24       Credit for investment in clean coal            .......       50         50        100        150        200        280        780  .........  .........  .........  .........  .........  .........  .........  .........
                facilities..................................
      25       Temporary 50% expensing for equipment used in  .......       10         30        120        240        260        180        830  .........  .........  .........  .........  .........  .........  .........  .........
                the refining of liquid fuels................
      26       Pass through low sulfur diesel expensing to    .......  .......  .........  .........  .........  .........  .........  .........         40  .........        -10  .........        -10  .........        -10        -30
                cooperative owners..........................
      27       Natural gas distribution pipelines treated as  .......       20         50         90        120        150        150        560  .........  .........  .........  .........  .........  .........  .........  .........
                15-year property............................
      28       Amortize all geological and geophysical        .......       30        120        140        110         80         50        500  .........         10         30         40         30         20         10        130
                expenditures over 2 years...................
      29       Allowance of deduction for certain energy      .......       60        150        110         20        -10        -10        260  .........         20         40         30         10  .........  .........         80
                efficient commercial building property......
      30       Credit for construction of new energy          .......       10         20         10         10  .........  .........         40  .........  .........  .........  .........  .........  .........  .........  .........
                efficient homes.............................
      31       Credit for energy efficiency improvements to   .......  .......  .........  .........  .........  .........  .........  .........  .........        220        380        150  .........  .........  .........        530
                existing homes..............................
      32       Credit for energy efficient appliances.......  .......      120         80  .........  .........  .........  .........         80  .........  .........  .........  .........  .........  .........  .........  .........
      33       30% credit for residential purchases/          .......  .......  .........  .........  .........  .........  .........  .........  .........         10         10         10  .........  .........  .........         20
                installations of solar and fuel cells.......
      34       Credit for business installation of qualified  .......       60        100         40        -10        -10        -10        110  .........         20         30         10  .........  .........  .........         40
                fuel cells and stationary microturbine power
                plants......................................
      35       Alternative Fuel and Fuel Mixture tax credit.  .......  .......  .........  .........  .........  .........  .........  .........        150        170  .........  .........  .........  .........  .........  .........
 
             Natural resources and environment:
      36       Expensing of exploration and development       .......  .......  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........
                costs, nonfuel minerals.....................
      37       Excess of percentage over cost depletion,          250      260        280        290        290        310        320      1,490         20         20         20         20         20         20         20        100
                nonfuel minerals............................
      38       Exclusion of interest on bonds for water,          100      100        100        110        110        110        120        550        350        380        400        440        470        490        500      2,300
                sewage, and hazardous waste facilities......
      39       Capital gains treatment of certain timber      .......  .......  .........  .........  .........  .........  .........  .........         90         90         90        100         70         60         80        400
                income......................................
      40       Expensing of multiperiod timber growing costs      240      250        260        280        290        300        300      1,430        110        120        120        120        120        130        130        620
      41       Tax incentives for preservation of historic        270      280        290        310        320        340        360      1,620         80         90         90         90        100        100        110        490
                structures..................................
      42       Expensing of capital costs with respect to          10       10         10         30         50         30  .........        120  .........  .........  .........  .........  .........  .........  .........  .........
                complying with EPA sulfur regulations.......

[[Page 292]]

 
      43       Exclusion of gain or loss on sale or exchange  .......  .......         10         20         30         50         40        150  .........  .........  .........         10         10         20         20         60
                of certain brownfield sites.................
 
             Agriculture:
      44       Expensing of certain capital outlays.........       20       20         20         20         20         20         30        110         90        110        110        110        120        120        120        580
      45       Expensing of certain multiperiod production         10       10         10         10         10         10         20         60         50         60         60         70         70         70         70        340
                costs.......................................
      46       Treatment of loans forgiven for solvent        .......  .......  .........  .........  .........  .........  .........  .........         10         10         10         10         10         10         10         50
                farmers.....................................
      47       Capital gains treatment of certain income....  .......  .......  .........  .........  .........  .........  .........  .........        880        870        900      1,050        750        590        780      4,070
      48       Income averaging for farmers.................  .......  .......  .........  .........  .........  .........  .........  .........         40         40         40         40         40         40         50        210
      49       Deferral of gain on sale of farm refiners....       10       10         20         20         20         20         20        100  .........  .........  .........  .........  .........  .........  .........  .........
      50       Bio-Diesel and small agri-biodiesel producer   .......  .......  .........  .........  .........  .........  .........  .........         30         90        100         90         40         20         20        270
                tax credits.................................
 
             Commerce and housing:
               Financial institutions and insurance:
      51        Exemption of credit union income............     1290     1370       1450       1540       1640      1,740      1,850      8,220  .........  .........  .........  .........  .........  .........  .........  .........
      52        Excess bad debt reserves of financial              10       10         10  .........  .........  .........  .........         10  .........  .........  .........  .........  .........  .........  .........  .........
                 institutions...............................
      53        Exclusion of interest on life insurance         1,760    1,830      1,910      2,120      2,400      2,620      2,810     11,860     17,440     18,140     18,860     20,480     23,700     26,370     28,540    117,950
                 savings....................................
      54        Special alternative tax on small property          20       20         20         20         20         20         30        110  .........  .........  .........  .........  .........  .........  .........  .........
                 and casualty insurance companies...........
      55        Tax exemption of certain insurance companies      210      220        230        240        250        260        270      1,250  .........  .........  .........  .........  .........  .........  .........  .........
                 owned by tax-exempt organizations..........
      56        Small life insurance company deduction......       60       60         60         60         60         60         50        290  .........  .........  .........  .........  .........  .........  .........  .........
      57        Exclusion of interest spread of financial     .......  .......  .........  .........  .........  .........  .........  .........      1,450      1,540      1,620      1,710      1,800      1,890      1,990     12,000
                 institutions...............................
             Housing:
      58       Exclusion of interest on owner-occupied            200      210        210        220        230        230        240      1,130        730        780        830        920        980      1,010      1,040      4,780
                mortgage subsidy bonds......................
      59       Exclusion of interest on rental housing bonds       90       90         90        100        100        100        100        490        320        340        360        400        430        440        450      2,080
      60       Deductibility of mortgage interest on owner-   .......  .......  .........  .........  .........  .........  .........  .........     62,160     72,060     79,860     87,820     94,490    100,980    108,280    471,430
                occupied homes..............................
      61       Deductibility of State and local property tax  .......  .......  .........  .........  .........  .........  .........  .........     19,110     15,020     12,810     12,910     12,830     12,720     22,930     74,200
                on owner-occupied homes.....................
      62       Deferral of income from post 1987 installment      290      290        300        300        310        310        310      1,530        830        840        860        880        890      1,000      1,120      4,750
                sales.......................................
      63       Capital gains exclusion on home sales........  .......  .......  .........  .........  .........  .........  .........  .........     35,990     39,750     43,900     48,490     59,900     78,860     87,100    318,250
      64       Exclusion of net imputed rental income.......  .......  .......  .........  .........  .........  .........  .........  .........     28,600     29,720     33,210     36,860     40,630     44,785     49,364    204,849
      65       Exception from passive loss rules for $25,000  .......  .......  .........  .........  .........  .........  .........  .........       6470       6370       6230       6060       5880       5700       5510     29,380
                of rental loss..............................
      66       Credit for low-income housing investments....    3,300    3,450      3,610      3,790      4,000      4,210      4,440     20,050        580        610        640        670        710        740        780      3,540
      67       Accelerated depreciation on rental housing         650      710        760        840        910        960      1,030      4,500      8,960      9,920     10,710     11,820     12,910     13,750     14,890     64,080
                (normal tax method).........................
             Commerce:
      68       Cancellation of indebtedness.................  .......  .......  .........  .........  .........  .........  .........  .........         30        160        110         40         40         40         40        270
      69       Exceptions from imputed interest rules.......  .......  .......  .........  .........  .........  .........  .........  .........         50         50         50         50         50         50         50        250
      70       Capital gains (except agriculture, timber,     .......  .......  .........  .........  .........  .........  .........  .........     26,170     25,990     26,760     31,280     22,340     17,580     23,410    121,370
                iron ore, and coal).........................
      71       Capital gains exclusion of small corporation   .......  .......  .........  .........  .........  .........  .........  .........        200        230        260        300        320        350        470      1,700
                stock.......................................
      72       Step-up basis of capital gains at death......  .......  .......  .........  .........  .........  .........  .........  .........     26,820     29,510     32,460     35,700     36,480     34,560     38,010    177,210
      73       Carryover basis of capital gains on gifts....  .......  .......  .........  .........  .........  .........  .........  .........        410        540        640        750        790      1,270      6,370      9,820
      74       Ordinary income treatment of loss from small   .......  .......  .........  .........  .........  .........  .........  .........         50         50         50         50         50         50         50        250
                business corporation stock sale.............
      75       Accelerated depreciation of buildings other        220      400        530        720        730        970      1,230      4,180     -1,130       -680       -440       -170       -370        -20        350       -650
                than rental housing (normal tax method).....
      76       Accelerated depreciation of machinery and       15,850   30,250     39,870     47,870     57,290     63,410     69,170    277,610      4,370     10,270     12,360     14,070     16,190     17,680     19,290     75,990
                equipment (normal tax method)...............
      77       Expensing of certain small investments           1,710    1,440      1,240       -280         -2        160        310      1,428      3,680      3,280      3,120        630        870        950      1,150      6,720
                (normal tax method).........................
      78       Graduated corporation income tax rate (normal    3,160    3,450      3,590      3,940      4,180      4,300      4,390     20,400  .........  .........  .........  .........  .........  .........  .........  .........
                tax method).................................
      79       Exclusion of interest on small issue bonds...       80       90         90         90        100        100        100        480        310        330        350        390        410        430        440      2,020
      80       Deduction for US production activities.......    4,870    3,980      8,320      9,770     10,630     16,550     16,880     62,150      1,350      1,170      2,350      2,420      2,480      3,770      5,390     16,410
      81       Special rules for certain film and TV               70       90         70         60        -30        -70        -50        -20         20         20         20         10        -10        -20        -10        -10
                production..................................
 
             Transportation:
      82       Deferral of tax on shipping companies........       20       20         20         20         20         20         20        100  .........  .........  .........  .........  .........  .........  .........  .........
      83       Exclusion of reimbursed employee parking       .......  .......  .........  .........  .........  .........  .........  .........      2,590      2,730      2,880      3,030      3,180      3,330      3,420     15,840
                expenses....................................
      84       Exclusion for employer-provided transit        .......  .......  .........  .........  .........  .........  .........  .........        480        550        630        710        790        880        960      3,970
                passes......................................
      85       Tax credit for certain expenditures for             70      140        150        110         50         30         10        350  .........  .........  .........  .........  .........  .........  .........  .........
                maintaining railroad tracks.................
      86       Exclusion of interest on bonds for Financing   .......       10         15         20         25         25         25        110  .........         15         35         55         70         70         75        305
                of Highway Projects and rail-truck transfer
                facilities..................................
 

[[Page 293]]

 
             Community and regional development:
      87       Investment credit for rehabilitation of             20       20         20         20         20         20         20        100         20         20         20         20         20         20         20        100
                structures (other than historic)............
      88       Exclusion of interest for airport, dock, and       170      180        190        190        200        200        210        990        630        680        720        800        860        880        910      4,170
                similar bonds...............................
      89       Exemption of certain mutuals' and                   60       60         70         70         70         70         70        350  .........  .........  .........  .........  .........  .........  .........  .........
                cooperatives' income........................
      90       Empowerment zones and renewal communities....      290      310        340        370        420        190         60      1,380        830        900      1,000      1,110      1,320        940        360      4,730
      91       New markets tax credit.......................      110      150        210        220        200        170        130        930        320        460        620        650        590        500        390      2,750
      92       Expensing of environmental remediation costs.       60       50         30  .........        -20        -10        -10        -10         10         10         10  .........  .........  .........  .........         10
      93       Credit to holders of Gulf Tax Credit Bonds...  .......  .......  .........  .........  .........  .........  .........  .........  .........  .........         10         10         10         10         10         50
 
             Education, training, employment, and social
              services:
               Education:
      94        Exclusion of scholarship and fellowship       .......  .......  .........  .........  .........  .........  .........  .........      1,380      1,450      1,510      1,580      1,640      1,720      1,790      8,240
                 income (normal tax method).................
      95        HOPE tax credit.............................  .......  .......  .........  .........  .........  .........  .........  .........      3,710      3,650      3,060      3,090      3,220      3,240      3,480     16,090
      96        Lifetime Learning tax credit................  .......  .......  .........  .........  .........  .........  .........  .........      2,330      2,340      2,020      2,030      2,060      2,090      2,220     10,420
      97        Education Individual Retirement Accounts....  .......  .......  .........  .........  .........  .........  .........  .........         70         90        110        140        180        230        280        940
      98        Deductibility of student-loan interest......  .......  .......  .........  .........  .........  .........  .........  .........        780        800        810        820        830        840        780      4,080
      99        Deduction for higher education expenses.....  .......  .......  .........  .........  .........  .........  .........  .........      1,830      1,840  .........  .........  .........  .........  .........  .........
     100        State prepaid tuition plans.................  .......  .......  .........  .........  .........  .........  .........  .........        430        540        620        710        810        930      1,090      4,160
     101        Exclusion of interest on student-loan bonds.       60       60         70         70         70         70         70        350        220        240        250        280        300        310        320      1,460
     102        Exclusion of interest on bonds for private        230      240        250        260        260        270        280      1,320        850        920        970       1070       1150       1180       1220      5,590
                 nonprofit educational facilities...........
     103        Credit for holders of zone academy bonds....      110      130        140        150        150        150        150        740  .........  .........  .........  .........  .........  .........  .........  .........
     104        Exclusion of interest on savings bonds        .......  .......  .........  .........  .........  .........  .........  .........         10         20         20         20         20         20         20        100
                 redeemed to finance educational expenses...
     105        Parental personal exemption for students age  .......  .......  .........  .........  .........  .........  .........  .........      3,760      2,500      1,760      1,650      1,510      1,420      2,740      9,080
                 19 or over.................................
     106        Deductibility of charitable contributions         540      560        590        620        660        700        740      3,310      2,880      3,120      3,440      3,640      3,890      4,170      4,470     19,610
                 (education)................................
     107        Exclusion of employer-provided educational    .......  .......  .........  .........  .........  .........  .........  .........        560        590        620        660        690        730         40      2,740
                 assistance.................................
     108        Special deduction for teacher expenses......  .......  .......  .........  .........  .........  .........  .........  .........        160        150  .........  .........  .........  .........  .........  .........
     109        Discharge of student loan indebtedness......  .......  .......  .........  .........  .........  .........  .........  .........         20         20         20         20         20         20         20        100
               Training, employment, and social services:
     110        Work opportunity tax credit.................      130      180        150        100         80         50         20        400         30         30         40         30         30         20         10        130
     111        Welfare-to-work tax credit..................       60       70         60         30         10  .........  .........        100         10         10         10         10  .........  .........  .........         20
     112        Employer provided child care exclusion......  .......  .......  .........  .........  .........  .........  .........  .........        610        810        920        960       1010       1060       1070      5,020
     113        Employer-provided child care credit.........  .......  .......  .........  .........  .........  .........  .........  .........         10         10         10         20         20         20         10         80
     114        Assistance for adopted foster children......  .......  .......  .........  .........  .........  .........  .........  .........        310        320        350        370        400        430        470      2,020
     115        Adoption credit and exclusion...............  .......  .......  .........  .........  .........  .........  .........  .........        360        540        560        570        580        600        540      2,850
     116        Exclusion of employee meals and lodging       .......  .......  .........  .........  .........  .........  .........  .........        850        890        930        970      1,010      1,060      1,110      5,080
                 (other than military)......................
     117        Child credit \2\............................  .......  .......  .........  .........  .........  .........  .........  .........     41,790     42,090     42,120     42,070     41,830     41,870     31,730    199,620
     118        Credit for child and dependent care expenses  .......  .......  .........  .........  .........  .........  .........  .........      3,060      2,740      1,820      1,750      1,660      1,590      1,540      8,360
     119        Credit for disabled access expenditures.....       10       10         10         10         10         10         10         50         20         20         20         30         30         30         30        140
     120        Deductibility of charitable contributions,      1,230    1,290      1,360      1,430      1,500      1,570       1640      7,500     28,440     31,260     33,140     35,360     37,910     40,640     43,570    190,620
                 other than education and health............
     121        Exclusion of certain foster care payments...  .......  .......  .........  .........  .........  .........  .........  .........        440        440        450        450        450        460        470      2,280
     122        Exclusion of parsonage allowances...........  .......  .......  .........  .........  .........  .........  .........  .........        460        480        510        540        580        610        640      2,880
     123        Employee retention credit for employers       .......       40  .........  .........  .........  .........  .........  .........  .........        100         20         20  .........  .........  .........         40
                 affected by Hurricane Katrina, Rita, and
                 Wilma......................................
 
             Health:
     124       Exclusion of employer contributions for        .......  .......  .........  .........  .........  .........  .........  .........    118,420    132,730    146,780    161,120    176,290    191,980    212,820    888,990
                medical insurance premiums and medical care.
     125       Self-employed medical insurance premiums.....  .......  .......  .........  .........  .........  .........  .........  .........      3,790      4,240      4,630      5,080      5,570      6,050      6,730     28,060
     126       Medical Savings Accounts / Health Savings      .......  .......  .........  .........  .........  .........  .........  .........      1,050      1,830      2,650      3,510      3,960      3,910      3,860     17,890
                Accounts....................................
     127       Deductibility of medical expenses............  .......  .......  .........  .........  .........  .........  .........  .........      6,110      4,410      5,310      6,490      7,720      9,220     12,260     41,000
     128       Exclusion of interest on hospital                  410      420        430        440        460        470        490      2,290      1,470      1,590      1,680      1,860      1,990      2,050      2,110      9,690
                construction bonds..........................
     129       Deductibility of charitable contributions          160      160        170        180        190        200        210        950      3,190      3,510      3,720      3,970      4,260      4,570      4,900     21,420
                (health)....................................
     130       Tax credit for orphan drug research..........      210      230        260        290        320        360        410      1,640  .........  .........  .........  .........  .........  .........  .........  .........
     131       Special Blue Cross/Blue Shield deduction.....      710      780        850        920        760        830        920      4,280  .........  .........  .........  .........  .........  .........  .........  .........

[[Page 294]]

 
     132       Tax credit for health insurance purchased by   .......  .......  .........  .........  .........  .........  .........  .........         20         20         30         30         30         30         30        150
                certain displaced and retired individuals...
 
             Income security:
     133       Exclusion of railroad retirement system        .......  .......  .........  .........  .........  .........  .........  .........        390        390        380        360        370        370        350      1,830
                benefits....................................
     134       Exclusion of workers' compensation benefits..  .......  .......  .........  .........  .........  .........  .........  .........      5,770      6,000      6,180      6,390      6,630      6,860      7,090     33,150
     135       Exclusion of public assistance benefits        .......  .......  .........  .........  .........  .........  .........  .........        430        450        470        490        510        530        550      2,550
                (normal tax method).........................
     136       Exclusion of special benefits for disabled     .......  .......  .........  .........  .........  .........  .........  .........         50         50         50         40         40         40         40        210
                coal miners.................................
     137       Exclusion of military disability pensions....  .......  .......  .........  .........  .........  .........  .........  .........        100        110        110        120        120        130        130        610
               Net exclusion of pension contributions and
                earnings:
     138       Employer plans...............................  .......  .......  .........  .........  .........  .........  .........  .........     50,630     50,360     52,470     48,100     45,760     44,760     36,910    228,000
     139       401(k) plans.................................  .......  .......  .........  .........  .........  .........  .........  .........     37,440     37,330     39,800     43,100     48,810     53,870     47,290    232,870
     140       Individual Retirement Accounts...............  .......  .......  .........  .........  .........  .........  .........  .........      3,100      4,230      5,970      7,180      8,300      8,840      8,060     38,350
     141       Low and moderate income savers credit........  .......  .......  .........  .........  .........  .........  .........  .........      1,310      1,380        830  .........  .........  .........  .........        830
     142       Keogh plans..................................  .......  .......  .........  .........  .........  .........  .........  .........      9,400      9,990     10,670     11,630     12,670     13,800     15,040     63,810
               Exclusion of other employee benefits:
     143        Premiums on group term life insurance.......  .......  .......  .........  .........  .........  .........  .........  .........      2,020      2,070      2,180      2,250      2,310      2,380      2,490     11,610
     144        Premiums on accident and disability           .......  .......  .........  .........  .........  .........  .........  .........        280        290        300        310        320        330        340      1,600
                 insurance..................................
     145        Income of trusts to finance supplementary     .......  .......  .........  .........  .........  .........  .........  .........         20         20         20         20         20         20         20        100
                 unemployment benefits......................
     146        Special ESOP rules..........................     1310     1410       1520       1640       1780       1940       2100      8,980        340        350        370        390        390        390        390      1,930
     147        Additional deduction for the blind..........  .......  .......  .........  .........  .........  .........  .........  .........         40         30         30         40         40         40         50        200
     148        Additional deduction for the elderly........  .......  .......  .........  .........  .........  .........  .........  .........      1,850      1,740      1,740      1,880      1,930      1,980      2,940     10,470
     149        Tax credit for the elderly and disabled.....  .......  .......  .........  .........  .........  .........  .........  .........         20         20         20         10         10         10         10         60
     150        Deductibility of casualty losses............  .......  .......  .........  .........  .........  .........  .........  .........        250        980        640        300        320        330        360      1,950
     151        Earned income tax credit \3\................  .......  .......  .........  .........  .........  .........  .........  .........      4,925      5,050      5,150      5,445      5,640      5,810      6,070     28,115
     152        Additional exemption for housing Hurricane    .......  .......  .........  .........  .........  .........  .........  .........  .........        110         20  .........  .........  .........  .........         20
                 Katrina displaced individuals..............
 
             Social Security:
               Exclusion of social security benefits:
     153        Social Security benefits for retired workers  .......  .......  .........  .........  .........  .........  .........  .........     19,110     19,350     19,590     20,250     20,700     21,000     23,330    104,870
     154        Social Security benefits for disabled.......  .......  .......  .........  .........  .........  .........  .........  .........      3,600      3,810      4,110      4,330      4,570      4,960      5,530     23,500
     155        Social Security benefits for dependents and   .......  .......  .........  .........  .........  .........  .........  .........      3,940      3,980      4,040      4,070      4,100      4,180      4,360     20,750
                 survivors..................................
 
             Veterans benefits and services:
     156       Exclusion of veterans death benefits and       .......  .......  .........  .........  .........  .........  .........  .........      3,320      3,600      3,770      3,900      4,050      4,140      4,350     20,210
                disability compensation.....................
     157       Exclusion of veterans pensions...............  .......  .......  .........  .........  .........  .........  .........  .........        130        140        140        140        140        150        150        720
     158       Exclusion of GI bill benefits................  .......  .......  .........  .........  .........  .........  .........  .........        150        170        210        240        280        330        400      1,460
     159       Exclusion of interest on veterans housing           10       10         10         10         10         10         10         50         30         30         40         40         40         40         40        200
                bonds.......................................
 
             General purpose fiscal assistance:
     160       Exclusion of interest on public purpose State    5,710    5,880      6,060      6,240      6,430      6,620      6,820     32,170     20,650     22,300     23,580     26,090     27,980     28,820     29,690    136,160
                and local bonds.............................
     161       Deductibility of nonbusiness state and local   .......  .......  .........  .........  .........  .........  .........  .........     36,460     30,310     27,210     27,730     28,260     29,000     49,510    161,710
                taxes other than on owner-occupied homes....
     162       Tax credit for corporations receiving income       800      400         40  .........  .........  .........  .........         40  .........  .........  .........  .........  .........  .........  .........  .........
                from doing business in U.S. possessions.....
 
             Interest:
     163       Deferral of interest on U.S. savings bonds...  .......  .......  .........  .........  .........  .........  .........  .........      1,350      1,340      1,350      1,360      1,380      1,390      1,440      6,920
 
             Addendum: Aid to State and local governments:
               Deductibility of:
                Property taxes on owner-occupied homes......  .......  .......  .........  .........  .........  .........  .........  .........     19,110     15,020     12,810     12,910     12,830     12,720     22,930     74,200
                Nonbusiness State and local taxes other than  .......  .......  .........  .........  .........  .........  .........  .........     36,460     30,310     27,210     27,730     28,260     29,000     49,510    161,710
                 on owner-occupied homes....................
               Exclusion of interest on State and local
                bonds for:
                Public purposes.............................    5,710    5,880      6,060      6,240      6,430      6,620      6,820     32,170     20,650     22,300     23,580     26,090     27,980     28,820     29,690    136,160
                Energy facilities...........................       20       20         20         20         20         20         20        100         60         70         70         80         80         90         90        410
                Water, sewage, and hazardous waste disposal       100      100        100        110        110        110        120        550        350        380        400        440        470        490        500      2,300
                 facilities.................................
                Small-issues................................       80       90         90         90        100        100        100        480        310        330        350        390        410        430        440      2,020
                Owner-occupied mortgage subsidies...........      200      210        210        220        230        230        240      1,130        730        780        830        920        980      1,010      1,040      4,780
                Rental housing..............................       90       90         90        100        100        100        100        490        320        340        360        400        430        440        450      2,080
                Airports, docks, and similar facilities.....      170      180        190        190        200        200        210        990        630        680        720        800        860        880        910      4,170
                Student loans...............................       60       60         70         70         70         70         70        350        220        240        250        280        300        310        320      1,460
                Private nonprofit educational facilities....      230      240        250        260        260        270        280      1,320        850        920        970      1,070      1,150      1,180      1,220      5,590
                Hospital construction.......................      410      420        430        440        460        470        490      2,290      1,470      1,590      1,680      1,860      1,990      2,050      2,110      9,690
                Veterans' housing...........................       10       10         10         10         10         10         10         50         30         30         40         40         40         40         40        200

[[Page 295]]

 
             Credit for holders of zone academy bonds.......      110      130        140        150        150        150        150        740  .........  .........  .........  .........  .........  .........  .........  .........
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ In addition, the alcohol fuel credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2005 $1,500; 2006 $2,110; 2007 $2,400; 2008 $2,740; 2009 $3,080; 2010 $3,410 and 2011 $870.
\2\ The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2005 $14,620; 2006 $14,110; 2007 $13,540; 2008 $12,950; 2009 $12,760
  and 2010 $12,330:2011 $12,110.
\3\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2005 $34,559;2006 $35,098; 2007 $35,645; 2008 $36,955; 2009
  $38,048; 2010 $38,823; and 2011 $40,278.
Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method.
All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.

                        Tax Expenditure Baselines

  A tax expenditure is an exception to baseline provisions of the tax 
structure that usually results in a reduction in the amount of tax owed. 
The 1974 Congressional Budget Act, which mandated the tax expenditure 
budget, did not specify the baseline provisions of the tax law. As noted 
previously, deciding whether provisions are exceptions, therefore, is a 
matter of judgment. As in prior years, most of this year's tax 
expenditure estimates are presented using two baselines: the normal tax 
baseline and the reference tax law baseline. An exception is provided 
for the lower tax rate on dividends and capital gains on corporate 
shares as discussed below.
  The normal tax baseline is patterned on a comprehensive income tax, 
which defines income as the sum of consumption and the change in net 
wealth in a given period of time. The normal tax baseline allows 
personal exemptions, a standard deduction, and deduction of expenses 
incurred in earning income. It is not limited to a particular structure 
of tax rates, or by a specific definition of the taxpaying unit.
  In the case of income taxes, the reference tax law baseline is also 
patterned on a comprehensive income tax, but it is closer to existing 
law. Tax expenditures under the reference law baseline are generally tax 
expenditures under the normal tax baseline, but the reverse is not 
always true.
  Both the normal and reference tax baselines allow several major 
departures from a pure comprehensive income tax. For example, under the 
normal and reference tax baselines:
    Income is taxable only when it is realized in exchange. 
          Thus, either the deferral of tax on unrealized capital gains 
          nor the tax exclusion of imputed income (such as the rental 
          value of owner-occupied housing or farmers' consumption of 
          their own produce) is regarded as a tax expenditure. Both 
          accrued and imputed income would be taxed under a 
          comprehensive income tax.
    A comprehensive income tax would generally not exclude from 
          the tax base amounts for personal exemptions or a standard 
          deduction, except perhaps to ease tax administration.
    There generally is a separate corporate income tax.
    Tax rates vary by level of income.
    Tax rates are allowed to vary with marital status.
    Values of assets and debt are not generally adjusted for 
          inflation. A comprehensive income tax would adjust the cost 
          basis of capital assets and debt for changes in the price 
          level during the time the assets or debt are held. Thus, under 
          a comprehensive income tax baseline, the failure to take 
          account of inflation in measuring depreciation, capital gains, 
          and interest income would be regarded as a negative tax 
          expenditure (i.e., a tax penalty), and failure to take account 
          of inflation in measuring interest costs would be regarded as 
          a positive tax expenditure (i.e., a tax subsidy).
  Although the reference law and normal tax baselines are generally 
similar, areas of difference include:

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

             Income subject to the tax. Income subject to tax is defined 
          as gross income less the costs of earning that income. The 
          Federal income tax defines gross income to include: (1) 
          consideration received in the exchange of goods and services, 
          including labor services or property; and (2) the taxpayer's 
          share of gross or net income earned and/or reported by another 
          entity (such as a partnership). Under the reference tax rules, 
          therefore, gross income does not include gifts defined as 
          receipts of money or property that are not consideration in an 
          exchange or most transfer payments, which can be thought of as 
          gifts from the Government.\2\ The normal tax baseline also 
          excludes gifts between individuals from gross income. Under 
          the normal tax baseline, however, all cash transfer payments 
          from the Gov

[[Page 296]]

          ernment to private individuals are counted in gross income, 
          and exemptions of such transfers from tax are identified as 
          tax expenditures. The costs of earning income are generally 
          deductible in determining taxable income under both the 
          reference and normal tax baselines. \3\
---------------------------------------------------------------------------
  \2\ Gross income does, however, include transfer payments associated 
with past employment, such as Social Security benefits.
  \3\ In the case of individuals who hold ``passive'' equity interests 
in businesses, however, the pro-rata shares of sales and expense 
deductions reportable in a year are limited. A passive business activity 
is defined to be one in which the holder of the interest, usually a 
partnership interest, does not actively perform managerial or other 
participatory functions. The taxpayer may generally report no larger 
deductions for a year than will reduce taxable income from such 
activities to zero. Deductions in excess of the limitation may be taken 
in subsequent years, or when the interest is liquidated. In addition, 
costs of earning income may be limited under the alternative minimum 
tax.

             Capital recovery. Under the reference tax law baseline no 
          tax expenditures arise from accelerated depreciation. Under 
          the normal tax baseline, the depreciation allowance for 
          property is computed using estimates of economic depreciation. 
          The latter represents a change in the calculation of the tax 
          expenditure under normal law first made in the 2004 Budget. 
          The Appendix provides further details on the new methodology 
          and how it differs from the prior methodology.
   Treatment of foreign income. Both the normal and reference tax 
baselines allow a tax credit for foreign income taxes paid (up to the 
amount of U.S. income taxes that would otherwise be due), which prevents 
double taxation of income earned abroad. Under the normal tax method, 
however, controlled foreign corporations (CFCs) are not regarded as 
entities separate from their controlling U.S. shareholders. Thus, the 
deferral of tax on income received by CFCs is regarded as a tax 
expenditure under this method. In contrast, except for tax haven 
activities, the reference law baseline follows current law in treating 
CFCs as separate taxable entities whose income is not subject to U.S. 
tax until distributed to U.S. taxpayers. Under this baseline, deferral 
of tax on CFC income is not a tax expenditure because U.S. taxpayers 
generally are not taxed on accrued, but unrealized, income.
  In addition to these areas of difference, the Joint Committee on 
Taxation considers a somewhat broader set of tax expenditures under its 
normal tax baseline than is considered here.

                                     

             Table 19-3.  INCOME TAX EXPENDITURES RANKED BY TOTAL 2007-2011 PROJECTED REVENUE EFFECT
                                            (in millions of dollars)
----------------------------------------------------------------------------------------------------------------
                                   Provision                                          2007           2007-11
----------------------------------------------------------------------------------------------------------------
 
Exclusion of employer contributions for medical insurance premiums and medical     146,780          888,990
Deductibility of mortgage interest on owner-occupied homes....................      79,860          471,430
Accelerated depreciation of machinery and equipment (normal tax method).......      52,230          357,200
Capital gains exclusion on home sales.........................................      43,900          318,250
401(k) plans..................................................................      39,800          232,870
Employer plans................................................................      52,470          228,000
Exclusion of net imputed rental income........................................      33,210          204,849
Child credit..................................................................      42,120          199,620
Deductibility of charitable contributions, other than education and health....      34,430          198,120
Step-up basis of capital gains at death.......................................      32,460          177,210
Exclusion of interest on public purpose State and local bonds.................      29,640          168,330
Deductibility of nonbusiness state and local taxes other than on owner-             27,210          161,710
 occupied homes...............................................................
Exclusion of interest on life insurance savings...............................      20,770          129,810
Capital gains (except agriculture, timber, iron ore, and coal)................      26,760          121,370
Social Security benefits for retired workers..................................      19,590          104,870
Deduction for US production activities........................................      10,670           78,560
Deductibility of State and local property tax on owner-occupied homes.........      12,810           74,200
Deferral of income from controlled foreign corporations (normal tax method)...      11,940           68,580
Keogh plans...................................................................      10,670           63,810
Deductibility of medical expenses.............................................       5,310           41,000
Individual Retirement Accounts................................................       5,970           38,350
Exclusion of workers' compensation benefits...................................       6,180           33,150
Exception from passive loss rules for $25,000 of rental loss..................       6,230           29,380
Expensing of research and experimentation expenditures (normal tax method)....       6,990           28,250
Earned income tax credit......................................................       5,147           28,104
Self-employed medical insurance premiums......................................       4,630           28,060
Credit for low-income housing investments.....................................       4,250           23,590
Social Security benefits for disabled.........................................       4,110           23,500
Deductibility of charitable contributions (education).........................       4,030           22,920
Deductibility of charitable contributions (health)............................       3,890           22,370
Social Security benefits for dependents and survivors.........................       4,040           20,750
Graduated corporation income tax rate (normal tax method).....................       3,590           20,400
Exclusion of veterans death benefits and disability compensation..............       3,770           20,210
Medical Savings Accounts/Health Savings Accounts..............................       2,650           17,890
Exclusion of income earned abroad by U.S. citizens............................       2,940           16,400
HOPE tax credit...............................................................       3,060           16,090
Exclusion of reimbursed employee parking expenses.............................       2,880           15,840

[[Page 297]]

 
Exclusion of benefits and allowances to armed forces personnel................       3,050           15,390
Exclusion of interest spread of financial institutions........................       1,620           12,000
Exclusion of interest on hospital construction bonds..........................       2,110           11,980
Premiums on group term life insurance.........................................       2,180           11,610
Inventory property sales source rules exception...............................       1,840           11,030
Special ESOP rules............................................................       1,890           10,910
Additional deduction for the elderly..........................................       1,740           10,470
Lifetime Learning tax credit..................................................       2,020           10,420
Carryover basis of capital gains on gifts.....................................         640            9,820
Parental personal exemption for students age 19 or over.......................       1,760            9,080
Credit for child and dependent care expenses..................................       1,820            8,360
Exclusion of scholarship and fellowship income (normal tax method)............       1,510            8,240
Exemption of credit union income..............................................       1,450            8,220
Expensing of certain small investments (normal tax method)....................       4,360            8,148
Deferral of interest on U.S. savings bonds....................................       1,350            6,920
Exclusion of interest on bonds for private nonprofit educational facilities...       1,220            6,910
Deferral of income from post 1987 installment sales...........................       1,160            6,280
Empowerment zones, Enterprise communities, and Renewal communities............       1,340            6,110
Exclusion of interest on owner-occupied mortgage subsidy bonds................       1,040            5,910
Exclusion of certain allowances for Federal employees abroad..................       1,000            5,540
Exclusion of interest for airport, dock, and similar bonds....................         910            5,160
Exclusion of employee meals and lodging (other than military).................         930            5,080
Employer provided child care exclusion........................................         920            5,020
Special Blue Cross/Blue Shield deduction......................................         850            4,280
State prepaid tuition plans...................................................         620            4,160
Deductibility of student-loan interest........................................         810            4,080
Capital gains treatment of certain income.....................................         900            4,070
New technology credit.........................................................         690            4,060
Exclusion for employer-provided transit passes................................         630            3,970
New markets tax credit........................................................         830            3,680
Accelerated depreciation of buildings other than rental housing (normal tax             90            3,530
 method)......................................................................
Alternative fuel production credit............................................       2,460            3,450
Excess of percentage over cost depletion, fuels...............................         690            3,230
Expensing of exploration and development costs, fuels.........................         870            3,230
Exclusion of parsonage allowances.............................................         510            2,880
Exclusion of interest on bonds for water, sewage, and hazardous waste                  500            2,850
 facilities...................................................................
Adoption credit and exclusion.................................................         560            2,850
Exclusion of employer-provided educational assistance.........................         620            2,740
Exclusion of interest on rental housing bonds.................................         450            2,570
Exclusion of public assistance benefits (normal tax method)...................         470            2,550
Exclusion of interest on small issue bonds....................................         440            2,500
Extraterritorial income exclusion.............................................       1,960            2,350
Exclusion of certain foster care payments.....................................         450            2,280
Tax incentives for preservation of historic structures........................         380            2,110
Expensing of multiperiod timber growing costs.................................         380            2,050
Assistance for adopted foster children........................................         350            2,020
Deductibility of casualty losses..............................................         640            1,950
Exclusion of railroad retirement system benefits..............................         380            1,830
Exclusion of interest on student-loan bonds...................................         320            1,810
Capital gains exclusion of small corporation stock............................         260            1,700
Tax credit for orphan drug research...........................................         260            1,640
Premiums on accident and disability insurance.................................         300            1,600
Excess of percentage over cost depletion, nonfuel minerals....................         300            1,590
Credit for increasing research activities.....................................         920            1,540
Exclusion of GI bill benefits.................................................         210            1,460
Tax exemption of certain insurance companies owned by tax-exempt organizations         230            1,250
Deferred taxes for financial firms on certain income earned overseas..........         960              960
Education Individual Retirement Accounts......................................         110              940
Low and moderate income savers credit.........................................         830              830
Temporary 50% expensing for equipment used in the refining of liquid fuels....          30              830
Credit for investment in clean coal facilities................................          50              780
Credit for holders of zone academy bonds......................................         140              740
Exclusion of veterans pensions................................................         140              720
Expensing of certain capital outlays..........................................         130              690
Amortize all geological and geophysical expenditures over 2 years.............         150              630
Exclusion of military disability pensions.....................................         110              610
Natural gas distribution pipelines treated as 15-year property................          50              560

[[Page 298]]

 
Work opportunity tax credit...................................................         190              530
Credit for energy efficiency improvements to existing homes...................         380              530
Exclusion of interest on energy facility bonds................................          90              510
Tax credit and deduction for clean-fuel burning vehicles......................         200              420
Exclusion of interest on bonds for Financing of Highway Projects and rail-              50              415
 truck transfer facilities....................................................
Capital gains treatment of royalties on coal..................................          90              400
Capital gains treatment of certain timber income..............................          90              400
Expensing of certain multiperiod production costs.............................          70              400
Exclusion of utility conservation subsidies...................................          80              380
Tax credit for certain expenditures for maintaining railroad tracks...........         150              350
Exemption of certain mutuals' and cooperatives' income........................          70              350
Allowance of deduction for certain energy efficient commercial building                190              340
 property.....................................................................
Small life insurance company deduction........................................          60              290
Cancellation of indebtedness..................................................         110              270
Bio-Diesel tax credit.........................................................         100              270
Exclusion of interest on veterans housing bonds...............................          50              250
Exceptions from imputed interest rules........................................          50              250
Ordinary income treatment of loss from small business corporation stock sale..          50              250
Alcohol fuel credits..........................................................          40              230
Exclusion of special benefits for disabled coal miners........................          50              210
Income averaging for farmers..................................................          40              210
Exclusion of gain or loss on sale or exchange of certain brownfield sites.....          10              210
Investment credit for rehabilitation of structures (other than historic)......          40              200
Additional deduction for the blind............................................          30              200
Exception from passive loss limitation for working interests in oil and gas             40              200
 properties...................................................................
Credit for disabled access expenditures.......................................          30              190
Credit for holding clean renewable energy bonds...............................          10              180
Tax credit for health insurance purchased by certain displaced and retired              30              150
 individuals..................................................................
Credit for business installation of qualified fuel cells and stationary                130              150
 microturbine power plants....................................................
Welfare-to-work tax credit....................................................          70              120
Expensing of capital costs with respect to complying with EPA sulfur                    11              113
 regulations..................................................................
Special alternative tax on small property and casualty insurance companies....          20              110
Deferral of tax on shipping companies.........................................          20              100
Exclusion of interest on savings bonds redeemed to finance educational                  20              100
 expenses.....................................................................
Discharge of student loan indebtedness........................................          20              100
Income of trusts to finance supplementary unemployment benefits...............          20              100
Deferral of gain on sale of farm refiners.....................................          20              100
Employer-provided child care credit...........................................          10               80
Credit for energy efficient appliances........................................          80               80
Tax credit for the elderly and disabled.......................................          20               60
Treatment of loans forgiven for solvent farmers...............................          10               50
Credit to holders of Gulf Tax Credit Bonds....................................          10               50
Tax credit for corporations receiving income from doing business in U.S.                40               40
 possessions..................................................................
Credit for construction of new energy efficient homes.........................          20               40
Employee retention credit for employers affected by Hurricane Katrina, Rita,            20               40
 and Wilma....................................................................
Enhanced oil recovery credit..................................................  ...............          20
30% credit for residential purchases/installations of solar and fuel cells....          10               20
Additional exemption for housing Hurricane Katrina displaced individuals......          20               20
Excess bad debt reserves of financial institutions............................          10               10
Deduction for higher education expenses.......................................  ...............  ...............
Expensing of exploration and development costs, nonfuel minerals..............  ...............  ...............
Special deduction for teacher expenses........................................  ...............  ...............
Expensing of environmental remediation costs..................................          40       ...............
Alternative Fuel and Fuel Mixture tax credit..................................  ...............  ...............
Credit for production from advanced nuclear power facilities..................  ...............  ...............
Special rules for certain film and TV production..............................          90              -30
Pass through low sulfur diesel expensing to cooperative owners................         -10              -30
Deferral of gain from dispositions of transmission property to implement FERC          530             -210
 restructuring policy.........................................................
----------------------------------------------------------------------------------------------------------------


[[Page 299]]


           Table 19-4.  PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR ACTIVITY IN CALENDAR YEAR 2005
                                            (in millions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                                                   2005  Present
                                                 Provision                                           Value  of
                                                                                                    Revenue Loss
----------------------------------------------------------------------------------------------------------------
 
       1     Deferral of income from controlled foreign corporations (normal tax method).........     10,020
       2     Deferred taxes for financial firms on income earned overseas........................      2,270
       3     Expensing of research and experimentation expenditures (normal tax method)..........      2,390
       4     Expensing of exploration and development costs--fuels...............................        180
       5     Expensing of exploration and development costs--nonfuels............................         10
       6     Expensing of multiperiod timber growing costs.......................................        200
       7     Expensing of certain multiperiod production costs--agriculture......................        140
       8     Expensing of certain capital outlays--agriculture...................................        180
       9     Deferral of income on life insurance and annuity contracts..........................     19,640
      10     Accelerated depreciation on rental housing..........................................     16,088
      11     Accelerated depreciation of buildings other than rental.............................     15,980
      12     Accelerated depreciation of machinery and equipment.................................     64,330
      13     Expensing of certain small investments (normal tax method)..........................      1,100
      14     Deferral of tax on shipping companies...............................................         20
      15     Credit for holders of zone academy bonds............................................        210
      16     Credit for low-income housing investments...........................................      3,970
      17     Deferral for state prepaid tuition plans............................................      1,190
      18     Exclusion of pension contributions--employer plans..................................     81,160
      19     Exclusion of 401(k) contributions...................................................    102,640
      20     Exclusion of IRA contributions and earnings.........................................      4,460
      21     Exclusion of contributions and earnings for Keogh plans.............................      3,190
      22     Exclusion of interest on public-purpose bonds.......................................     19,830
      23     Exclusion of interest on non-public purpose bonds...................................      6,700
      24     Deferral of interest on U.S. savings bonds..........................................        410
      25     Exclusion of Roth earnings and distributions........................................      8,170
      26     Exclusion of non-deductible IRA earnings............................................        370
----------------------------------------------------------------------------------------------------------------

                  Double Taxation of Corporate Profits

  In a gradual transition to a more economically neutral tax system 
where corporate income is subject to a single layer of tax, the lower 
tax rates on dividends and capital gains on corporate equity have not 
been considered tax preferences since the 2005 Budget. Thus, the 
difference between ordinary tax rates and the lower tax rates on 
dividends, introduced by the Jobs and Growth Tax Relief Reconciliation 
Act of 2003 (JGTRRA), does not give rise to a tax expenditure. 
Similarly, the lower capital gains tax rates applied to gains realized 
from the disposition of corporate equity do not give rise to a tax 
expenditure. As a consequence, tax expenditure estimates for the lower 
tax rates on capital, step-up in basis, and the inside build-up on 
pension assets, 401k plans, IRAs, among others, are limited to capital 
gains from sources other than corporate equity. The Appendix provides a 
greater discussion of alternative baselines.

    Performance Measures and the Economic Effects of Tax Expenditures

  The Government Performance and Results Act of 1993 (GPRA) directs 
Federal agencies to develop annual and strategic plans for their 
programs and activities. These plans set out performance objectives to 
be achieved over a specific time period. Most of these objectives will 
be achieved through direct expenditure programs. Tax expenditures, 
however, may also contribute to achieving these goals. The report of the 
Senate Governmental Affairs Committee on GPRA \4\ calls on the Executive 
Branch to undertake a series of analyses to assess the effect of 
specific tax expenditures on the achievement of agencies' performance 
objectives.
---------------------------------------------------------------------------
  \4\ Committee on Government Affairs, United States Senate, 
``Government Performance and Results Act of 1993'' (Report 103-58, 
1993).
---------------------------------------------------------------------------
  The Executive Branch is continuing to focus on the availability of 
data needed to assess the effects of the tax expenditures designed to 
increase savings. Treasury's Office of Tax Analysis and Statistics of 
Income Division (IRS) have developed a new sample of individual income 
tax filers as one part of this effort. This new ``panel'' sample will 
follow the same taxpayers over a period of at least ten years. The first 
year of this panel sample was drawn from tax returns filed in 2000 for 
tax year 1999. The sample will capture the changing demographic and 
economic circumstances of individuals and the effects of changes in tax 
law over an extended period of time. Data from the sample will therefore 
permit more extensive, and better, analyses of many tax provisions than 
can be performed using only annual (``cross-section'') data. In 
particular, data from this panel sample will enhance our ability to 
analyze the effect of tax expenditures designed to increase savings. 
Other efforts by OMB, Treasury, and other agencies to improve data 
available for the analysis of savings tax expenditures will continue 
over the next several years.

[[Page 300]]

   Comparison of tax expenditure, spending, and regulatory policies. Tax 
expenditures by definition work through the tax system and, 
particularly, the income tax. Thus, they may be relatively advantageous 
policy approaches when the benefit or incentive is related to income and 
is intended to be widely available.\5\ Because there is an existing 
public administrative and private compliance structure for the tax 
system, the incremental administrative and compliance costs for a tax 
expenditure may be low in many cases. In addition, some tax expenditures 
actually simplify the operation of the tax system, (for example, the 
exclusion for up to $500,000 of capital gains on home sales). Tax 
expenditures also implicitly subsidize certain activities. Spending, 
regulatory or tax-disincentive policies can also modify behavior, but 
may have different economic effects. Finally, a variety of tax 
expenditure tools can be used e.g., deductions, credits, exemptions, 
deferrals, floors, ceilings; phase-ins; phase-outs; dependent on income, 
expenses, or demographic characteristics (age, number of family members, 
etc.). This wide range of policy instruments means that tax expenditures 
can be flexible and can have very different economic effects.
---------------------------------------------------------------------------
  \5\ Although this chapter focuses upon tax expenditures under the 
income tax, tax expenditures also arise under the unified transfer, 
payroll, and excise tax systems. Such provisions can be useful when they 
relate to the base of those taxes, such as an excise tax exemption for 
certain types of consumption deemed meritorious.
---------------------------------------------------------------------------
  Tax expenditures also have limitations. In many cases they add to the 
complexity of the tax system, which raises both administrative and 
compliance costs. For example, personal exemptions, deductions, credits 
and phase-outs can complicate filing and decision-making. The income tax 
system may have little or no contact with persons who have no or very 
low incomes, and does not require information on certain characteristics 
of individuals used in some spending programs, such as wealth. These 
features may reduce the effectiveness of tax expenditures for addressing 
certain income-transfer objectives. Tax expenditures also generally do 
not enable the same degree of agency discretion as an outlay program. 
For example, grant or direct Federal service delivery programs can 
prioritize activities to be addressed with specific resources in a way 
that is difficult to emulate with tax expenditures.
  Outlay programs have advantages where direct Government service 
provision is particularly warranted such as equipping and providing the 
armed forces or administering the system of justice. Outlay programs may 
also be specifically designed to meet the needs of low-income families 
who would not otherwise be subject to income taxes or need to file a tax 
return. Outlay programs may also receive more year-to-year oversight and 
fine tuning through the legislative and executive budget process. In 
addition, many different types of spending programs including direct 
Government provision; credit programs; and payments to State and local 
governments, the private sector, or individuals in the form of grants or 
contracts provide flexibility for policy design. On the other hand, 
certain outlay programs such as direct Government service provision may 
rely less directly on economic incentives and private-market provision 
than tax incentives, which may reduce the relative efficiency of 
spending programs for some goals. Spending programs also require 
resources to be raised via taxes, user charges, or Government borrowing, 
which can impose further costs by diverting resources from their most 
efficient uses. Finally, spending programs, particularly on the 
discretionary side, may respond less readily to changing activity levels 
and economic conditions than tax expenditures.
  Regulations have more direct and immediate effects than outlay and 
tax-expenditure programs because regulations apply directly and 
immediately to the regulated party (i.e., the intended actor) generally 
in the private sector. Regulations can also be fine-tuned more quickly 
than tax expenditures because they can often be changed as needed by the 
Executive Branch without legislation. Like tax expenditures, regulations 
often rely largely on voluntary compliance, rather than detailed 
inspections and policing. As such, the public administrative costs tend 
to be modest relative to the private resource costs associated with 
modifying activities. Historically, regulations have tended to rely on 
proscriptive measures, as opposed to economic incentives. This reliance 
can diminish their economic efficiency, although this feature can also 
promote full compliance where (as in certain safety-related cases) 
policymakers believe that trade-offs with economic considerations are 
not of paramount importance. Also, regulations generally do not directly 
affect Federal outlays or receipts. Thus, like tax expenditures, they 
may escape the degree of scrutiny that outlay programs receive. However, 
major regulations are subjected to a formal regulatory analysis that 
goes well beyond the analysis required for outlays and tax-expenditures. 
To some extent, the GPRA requirement for performance evaluation will 
address this lack of formal analysis.
  Some policy objectives are achieved using multiple approaches. For 
example, minimum wage legislation, the earned income tax credit, and the 
food stamp program are regulatory, tax expenditure, and direct outlay 
programs, respectively, all having the objective of improving the 
economic welfare of low-wage workers.
  Tax expenditures, like spending and regulatory programs, have a 
variety of objectives and effects. When measured against a comprehensive 
income tax, for example, these include: encouraging certain types of 
activities (e.g., saving for retirement or investing in certain 
sectors); increasing certain types of after-tax income (e.g., favorable 
tax treatment of Social Security income); reducing private compliance 
costs and Government administrative costs (e.g., the exclusion for up to 
$500,000 of capital gains on home sales); and promoting tax neutrality 
(e.g., accelerated depreciation in the presence of inflation). Some of 
these objectives are well suited to quantitative measurement, while 
others are less well suited. Also, many tax expenditures, including 
those cited above, may have more than one objective. For example, 
accelerated depreciation may encourage investment. In addition, the 
economic effects of particular provisions can extend beyond their in

[[Page 301]]

tended objectives (e.g., a provision intended to promote an activity or 
raise certain incomes may have positive or negative effects on tax 
neutrality).
  Performance measurement is generally concerned with inputs, outputs, 
and outcomes. In the case of tax expenditures, the principal input is 
usually the revenue effect. Outputs are quantitative or qualitative 
measures of goods and services, or changes in income and investment, 
directly produced by these inputs. Outcomes, in turn, represent the 
changes in the economy, society, or environment that are the ultimate 
goals of programs.
  Thus, for a provision that reduces taxes on certain investment 
activity, an increase in the amount of investment would likely be a key 
output. The resulting production from that investment, and, in turn, the 
associated improvements in national income, welfare, or security, could 
be the outcomes of interest. For other provisions, such as those 
designed to address a potential inequity or unintended consequence in 
the tax code, an important performance measure might be how they change 
effective tax rates (the discounted present-value of taxes owed on new 
investments or incremental earnings) or excess burden (an economic 
measure of the distortions caused by taxes). Effects on the incomes of 
members of particular groups may be an important measure for certain 
provisions.
   An overview of evaluation issues by budget function. The discussion 
below considers the types of measures that might be useful for some 
major programmatic groups of tax expenditures. The discussion is 
intended to be illustrative and not all encompassing. However, it is 
premised on the assumption that the data needed to perform the analysis 
are available or can be developed. In practice, data availability is 
likely to be a major challenge, and data constraints may limit the 
assessment of the effectiveness of many provisions. In addition, such 
assessments can raise significant challenges in economic modeling.
   National defense. Some tax expenditures are intended to assist 
governmental activities. For example, tax preferences for military 
benefits reflect, among other things, the view that benefits such as 
housing, subsistence, and moving expenses are intrinsic aspects of 
military service, and are provided, in part, for the benefit of the 
employer, the U.S. Government. Tax benefits for combat service are 
intended to reduce tax burdens on military personnel undertaking 
hazardous service for the Nation. A portion of the tax expenditure 
associated with foreign earnings is targeted to benefit U.S. Government 
civilian personnel working abroad by offsetting the living costs that 
can be higher than those in the United States. These tax expenditures 
should be considered together with direct agency budget costs in making 
programmatic decisions.
   International affairs. Tax expenditures are also aimed at goals such 
as tax neutrality. These include the exclusion for income earned abroad 
by nongovernmental employees and exclusions for income of U.S.-
controlled foreign corporations. Measuring the effectiveness of these 
provisions raises challenging issues.
   General science, space and technology; energy; natural resources and 
the environment; agriculture; and commerce and housing. A series of tax 
expenditures reduces the cost of investment, both in specific activities 
such as research and experimentation, extractive industries, and certain 
financial activities and more generally, through accelerated 
depreciation for plant and equipment. These provisions can be evaluated 
along a number of dimensions. For example, it could be useful to 
consider the strength of the incentives by measuring their effects on 
the cost of capital (the interest rate which investments must yield to 
cover their costs) and effective tax rates. The impact of these 
provisions on the amounts of corresponding forms of investment (e.g., 
research spending, exploration activity, equipment) might also be 
estimated. In some cases, such as research, there is evidence that the 
investment can provide significant positive externalities that is, 
economic benefits that are not reflected in the market transactions 
between private parties. It could be useful to quantify these 
externalities and compare them with the size of tax expenditures. 
Measures could also indicate the effects on production from these 
investments such as numbers or values of patents, energy production and 
reserves, and industrial production. Issues to be considered include the 
extent to which the preferences increase production (as opposed to 
benefiting existing output) and their cost-effectiveness relative to 
other policies. Analysis could also consider objectives that are more 
difficult to measure but still are ultimate goals, such as promoting the 
Nation's technological base, energy security, environmental quality, or 
economic growth. Such an assessment is likely to involve tax analysis as 
well as consideration of non-tax matters such as market structure, 
scientific, and other information (such as the effects of increased 
domestic fuel production on imports from various regions, or the effects 
of various energy sources on the environment).
  Housing investment also benefits from tax expenditures. The imputed 
net rental income from owner-occupied housing is excluded from the tax 
base. The mortgage interest deduction and property tax deduction on 
personal residences also are reported as tax expenditures because the 
value of owner-occupied housing services is not included in a taxpayer's 
taxable income. Taxpayers also may exclude up to $500,000 of the capital 
gains from the sale of personal residences. Measures of the 
effectiveness of these provisions could include their effects on 
increasing the extent of home ownership and the quality of housing. 
Similarly, analysis of the extent of accumulated inflationary gains is 
likely to be relevant to evaluation of the capital gains for home sales. 
Deductibility of State and local property taxes assists with making 
housing more affordable as well as easing the cost of providing 
community services through these taxes. Provisions intended to promote 
investment in rental housing could be evaluated for their effects on 
making such housing more available and affordable. These provisions 
should then be com

[[Page 302]]

pared with alternative programs that address housing supply and demand.
   Transportation. Employer-provided parking is a fringe benefit that, 
for the most part, is excluded from taxation. The tax expenditure 
estimates reflect the cost of parking that is leased by employers for 
employees; an estimate is not currently available for the value of 
parking owned by employers and provided to their employees. The 
exclusion for employer-provided transit passes is intended to promote 
use of this mode of transportation, which has environmental and 
congestion benefits. The tax treatments of these different benefits 
could be compared with alternative transportation policies.
   Community and regional development. A series of tax expenditures is 
intended to promote community and regional development by reducing the 
costs of financing specialized infrastructure, such as airports, docks, 
and stadiums. Empowerment zone and enterprise community provisions are 
designed to promote activity in disadvantaged areas. These provisions 
can be compared with grants and other policies designed to spur economic 
development.
   Education, training, employment, and social services. Major 
provisions in this function are intended to promote post-secondary 
education, to offset costs of raising children, and to promote a variety 
of charitable activities. The education incentives can be compared with 
loans, grants, and other programs designed to promote higher education 
and training. The child credits are intended to adjust the tax system 
for the costs of raising children; as such, they could be compared to 
other Federal tax and spending policies, including related features of 
the tax system, such as personal exemptions (which are not defined as a 
tax expenditure). Evaluation of charitable activities requires 
consideration of the beneficiaries of these activities, who are 
generally not the parties receiving the tax reduction.
   Health. Individuals also benefit from favorable treatment of 
employer-provided health insurance. Measures of these benefits could 
include increased coverage and pooling of risks. The effects of 
insurance coverage on final outcome measures of actual health (e.g., 
infant mortality, days of work lost due to illness, or life expectancy) 
or intermediate outcomes (e.g., use of preventive health care or health 
care costs) could also be investigated.
   Income security, Social Security, and veterans benefits and services. 
Major tax expenditures in the income security function benefit 
retirement savings, through employer-provided pensions, individual 
retirement accounts, and Keogh plans. These provisions might be 
evaluated in terms of their effects on boosting retirement incomes, 
private savings, and national savings (which would include the effect on 
private savings as well as public savings or deficits). Interactions 
with other programs, including Social Security, also may merit analysis. 
As in the case of employer-provided health insurance, analysis of 
employer-provided pension programs requires imputing the value of 
benefits funded at the firm level to individuals.
  Other provisions principally affect the incomes of members of certain 
groups, rather than affecting incentives. For example, tax-favored 
treatment of Social Security benefits, certain veterans' benefits, and 
deductions for the blind and elderly provide increased incomes to 
eligible parties. The earned-income tax credit, in contrast, should be 
evaluated for its effects on labor force participation as well as the 
income it provides lower-income workers.
   General purpose fiscal assistance and interest. The tax-exemption for 
public purpose State and local bonds reduces the costs of borrowing for 
a variety of purposes (borrowing for non-public purposes is reflected 
under other budget functions). The deductibility of certain State and 
local taxes reflected under this function primarily relates to personal 
income taxes (property tax deductibility is reflected under the commerce 
and housing function). Tax preferences for Puerto Rico and other U.S. 
possessions are also included here. These provisions can be compared 
with other tax and spending policies as means of benefiting fiscal and 
economic conditions in the States, localities, and possessions. Finally, 
the tax deferral for interest on U.S. savings bonds benefits savers who 
invest in these instruments. The extent of these benefits and any 
effects on Federal borrowing costs could be evaluated.
  The above illustrative discussion, although broad, is nevertheless 
incomplete, omitting important details both for the provisions mentioned 
and the many that are not explicitly cited. Developing a framework that 
is sufficiently comprehensive, accurate, and flexible to reflect the 
objectives and effects of the wide range of tax expenditures will be a 
significant challenge. OMB, Treasury, and other agencies will work 
together, as appropriate, to address this challenge. As indicated above, 
over the next few years the Executive Branch's focus will be on the 
availability of the data needed to assess the effects of the tax 
expenditures designed to increase savings.

                  Descriptions of Income Tax Provisions

  Descriptions of the individual and corporate income tax expenditures 
reported on in this chapter follow. These descriptions relate to current 
law as of December 31, 2005, and do not reflect proposals made elsewhere 
in the Budget. Legislation enacted in 2005, such as the Safe, 
Accountable, Flexible, Efficient Transportation Equity Act: A Legacy For 
Users, The Energy Tax Incentives Act of 2005, The Katrina Emergency Tax 
Relief Act of 2005, and the Gulf Opportunity Zone Act of 2005, expanded 
the scope of existing tax expenditures and introduced several new 
provisions. These include: (1) Exclusion of interest on clean renewable 
energy bonds; (2) Deferral of gain from dispositions of transmission 
property to implement FERC restructuring policy; (3) Credit for 
production from advanced nuclear power facilities; (4) Credit for 
investment in clean coal facilities; (5) Temporary 50 percent expensing 
for equip

[[Page 303]]

ment used in the refining of liquid fuels; (6) Pass-through low-sulfur 
diesel expensing to cooperative owners; (7) Natural gas distribution 
pipelines treated as 15-year property; (8) Amortize all geological and 
geophysical expenditures over 2 years; (9) Allowance of deduction for 
certain energy efficient commercial building property; (10) Credit for 
construction of new energy efficient homes; (11) Credit for energy 
efficiency improvements to existing homes; (12) Credit for energy 
efficient appliances; (13) 30 percent credit for residential purchases/
installations of solar and fuel cells; (14) Credit for business 
installation of qualified fuel cells and stationary microturbine power 
plants; (15) Business solar investment tax credit; (16) Alternative 
motor vehicle credit; (17) Credit for installation of alternative 
fueling stations; (18) Small agri-biodiesel producer credit; (19) 
Alternative fuel and fuel mixture tax credit; (20) Exclusion of interest 
spread of financial institutions; (21) Exclusion of interest on bonds 
for financing of highway projects and rail-truck transfer facilities; 
and (22) expanded and extended scope of a number of existing benefits to 
taxpayers in areas affected by hurricanes Katrina, Rita, and Wilma.

                            National Defense

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

                          International Affairs

  2. Income earned abroad.--U.S. citizens who lived abroad, worked in 
the private sector, and satisfied a foreign residency requirement may 
exclude up to $80,000 in foreign earned income from U.S. taxes. In 
addition, if these taxpayers receive a specific allowance for foreign 
housing from their employers, they may also exclude the value of that 
allowance. If they do not receive a specific allowance for housing 
expenses, they may deduct against their U.S. taxes that portion of such 
expenses that exceeds one-sixth the salary of a civil servant at grade 
GS-14, step 1 ($76,193 in 2005).
  3. Exclusion of certain allowances for Federal employees abroad.--U.S. 
Federal civilian employees and Peace Corps members who work outside the 
continental United States are allowed to exclude from U.S. taxable 
income certain special allowances they receive to compensate them for 
the relatively high costs associated with living overseas. The 
allowances supplement wage income and cover expenses like rent, 
education, and the cost of travel to and from the United States.
  4. Extraterritorial income exclusion.\6\--The exclusion for 
extraterritorial income was repealed by the American Jobs Creation Act 
of 2004. Under the transition rules, taxpayers retain 80% of ETI 
benefits for 2005, 60% of ETI benefits for 2006, and no ETI benefits 
thereafter. The exclusion for extraterritorial income remains in effect 
for certain transactions which occur pursuant to a binding contract 
entered into on or before September 17, 2003.
---------------------------------------------------------------------------
  \6\ The determination of whether a provision is a tax expenditure is 
made on the basis of a broad concept of ``income'' that is larger in 
scope than is ``income'' as defined under general U.S. income tax 
principles. For that reason, the tax expenditure estimates include, for 
example, estimates related to the exclusion of extraterritorial income, 
as well as other exclusions, notwithstanding that such exclusions define 
income under the general rule of U.S. income taxation.
---------------------------------------------------------------------------
  5. Sales source rule exceptions.--The worldwide income of U.S. persons 
is taxable by the United States and a credit for foreign taxes paid is 
allowed. The amount of foreign taxes that can be credited is limited to 
the pre-credit U.S. tax on the foreign source income. The sales source 
rules for inventory property allow U.S. exporters to use more foreign 
tax credits by allowing the exporters to attribute a larger portion of 
their earnings abroad than would be the case if the allocation of 
earnings was based on actual economic activity.
  6. Income of U.S.-controlled foreign corporations.--The income of 
foreign corporations controlled by U.S. shareholders is not subject to 
U.S. taxation. The income becomes taxable only when the controlling U.S. 
shareholders receive dividends or other distributions from their foreign 
stockholding. Under the normal tax method, the currently attributable 
foreign source pre-tax income from such a controlling interest is 
considered to be subject to U.S. taxation, whether or not distributed. 
Thus, the normal tax method considers the amount of controlled foreign 
corporation income not yet distributed to a U.S. shareholder as tax-
deferred income.
  7. Exceptions under subpart F for active financing income.--Financial 
firms can defer taxes on income earned overseas in an active business. 
Taxes on income earned through December 31, 2006 can be deferred.

                 General Science, Space, and Technology

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

[[Page 304]]

for a taxpayer's payments to universities for basic research. A 20-
percent ``flat'' credit with no threshold base amount is available for 
energy research expenditures paid to certain research consortia. The 
credit applies to research conducted before January 1, 2006 and extends 
to research conducted in Puerto Rico and the U.S. possessions.

                                 Energy

  10. Exploration and development costs.--For successful investments in 
domestic oil and gas wells, intangible drilling costs (e.g., wages, the 
costs of using machinery for grading and drilling, the cost of 
unsalvageable materials used in constructing wells) may be expensed 
rather than amortized over the productive life of the property. 
Integrated oil companies may deduct only 70 percent of such costs and 
must amortize the remaining 30 percent over five years. The same rule 
applies to the exploration and development costs of surface stripping 
and the construction of shafts and tunnels for other fuel minerals.
  11. Percentage depletion.--Independent fuel mineral producers and 
royalty owners are generally allowed to take percentage depletion 
deductions rather than cost depletion on limited quantities of output. 
Under cost depletion, outlays are deducted over the productive life of 
the property based on the fraction of the resource extracted. Under 
percentage depletion, taxpayers deduct a percentage of gross income from 
mineral production at rates of 22 percent for uranium; 15 percent for 
oil, gas and oil shale; and 10 percent for coal. The deduction is 
limited to 50 percent of net income from the property, except for oil 
and gas where the deduction can be 100 percent of net property income. 
Production from geothermal deposits is eligible for percentage depletion 
at 65 percent of net income, but with no limit on output and no 
limitation with respect to qualified producers. Unlike depreciation or 
cost depletion, percentage depletion deductions can exceed the cost of 
the investment.
  12. Alternative fuel production credit.--A credit of $3 per oil-
equivalent barrel of production (in 1979 dollars) is provided for gas 
produced from biomass and liquid, gaseous, or solid synthetic fuels 
produced from coal. The credit is generally available if the price of 
oil stays below $29.50 (in 1979 dollars). The credit applies only to 
fuel (1) produced at a facility placed in service before July 1, 1998, 
and (2) sold before January 1, 2008.
  13. Oil and gas exception to passive loss limitation.--Owners of 
working interests in oil and gas properties are exempt from the 
``passive income'' limitations. As a result, the working interest-
holder, who manages on behalf of himself and all other owners the 
development of wells and incurs all the costs of their operation, may 
aggregate negative taxable income from such interests with his income 
from all other sources.
  14. Capital gains treatment of royalties on coal.--Sales of certain 
coal under royalty contracts can be treated as capital gains rather than 
ordinary income.
  15. Energy facility bonds.--Interest earned on State and local bonds 
used to finance construction of certain energy facilities is tax-exempt. 
These bonds are generally subject to the State private-activity bond 
annual volume cap.
  16. Enhanced oil recovery credit.--A credit is provided equal to 15 
percent of the taxpayer's costs for tertiary oil recovery on U.S. 
projects. Eligible costs include the cost of constructing a gas 
treatment plant to prepare Alaska natural gas for pipeline 
transportation and any of the following costs with respect to a 
qualified EOR project: (1) the cost of depreciable or amortizable 
tangible property that is an integral part of the project; (2) 
intangible drilling costs (IDCs) that the taxpayer can elect to deduct; 
and (3) deductible tertiary injectant costs. The credit rate is reduced 
in taxable years following calendar years during which the annual 
average unregulated wellhead price per barrel of domestic crude oil 
exceeds an inflation adjusted threshold of $28 (adjusted for inflation).
  17. New technology, refined coal, Indian coal and coke and coke gas 
credits.--A credit is provided equal to 10 percent of the basis of solar 
property (30 percent for purchases beginning in 2006 through 2007) and 
10 percent of the basis of geothermal property placed in service during 
the taxable year. Equipment that uses fiber-optic distributed sunlight 
to illuminate the inside of a structure is solar energy property 
eligible for a 30 percent credit in 2006 and 2007. A credit is also 
available for certain electricity produced from wind energy, biomass, 
poultry waste, geothermal energy, solar energy, small irrigation power, 
municipal solid waste, or qualified hydropower and sold to an unrelated 
party. The credit rate in 2005 is 1.9 cents per kilowatt hour (0.9 cents 
per kilowatt hour for open-loop biomass, small irrigation power, 
municipal solid waste and qualified hydropower) and the rate is indexed 
in subsequent years. To qualify for the credit the electricity must be 
produced at a facility placed in service after a specified date 
(December 31, 1992, in the case of a closed-loop biomass facility, 
December 31, 1993, in the case of a wind energy facility, December 31, 
1999, in the case of a poultry waste facility, August 8, 2005 in the 
case of qualified hydropower and October 22, 2004, in all other cases) 
and before January 1, 2006 for solar facilities and January 1, 2008 for 
all other qualifying facilities with the exception of hydropower 
facilities. To qualify for the credit, qualifying hydropower facilities 
must be placed in service before January 1, 2009. In addition, the 
electricity must be produced during the 10-year period after the 
facility is originally placed in service. A credit is available for 
refined coal produced at facilities placed in service during the period 
from October 22, 2004, through December 31, 2008, and sold during the 
10-year period beginning on the date the facility was placed in service. 
The credit rate in 2005 is $5.481 per ton and the rate is indexed in 
subsequent years. A credit is available for Indian coal. The taxpayer 
may claim a credit for sales of coal to an unrelated third party from a 
quali

[[Page 305]]

fied facility for the seven-year period beginning on January 1, 2006, 
and ending after December 31, 2012. The value of the credit is $1.50 per 
ton for the first four years of the seven-year production period and 
$2.00 per ton for the last three years of the seven-year period. The 
credit amounts are indexed for inflation. A credit is available for the 
production of coke or coke gas from a qualified facility. Qualified 
facilities must have been placed in service before January 1, 1993, or 
after June 30, 1998, and before January 1, 2010.
  18. Alcohol fuel credits.--An income tax credit is provided for 
ethanol that is derived from renewable sources and used as fuel. The 
credit equals 51 cents per gallon through 2010. In lieu of the alcohol 
mixture credit, the taxpayer may claim a refundable excise tax credit. 
In addition, small ethanol producers are eligible for a separate 10 
cents per gallon credit.
  19. Credit and deduction for clean-fuel vehicles and property and 
alternative motor vehicle credits.--A tax credit of 10 percent (not to 
exceed $4,000) is provided for purchasers of electric vehicles. The 
credit is reduced by 75 percent for vehicles placed in service in 2006 
and is not available for vehicles placed in service after December 31, 
2006. Purchasers of other clean-fuel burning vehicles and owners of 
clean-fuel refueling property may deduct part of their expenditures. No 
deduction is available to taxpayers for vehicles placed in service after 
December 31, 2005. The deduction for clean-fuel property is available 
for costs incurred before January 1, 2007. A taxpayer may claim a 30 
percent credit for the cost of installing clean-fuel vehicle refueling 
property for property placed in service after December 31, 2005 and 
before January 1, 2008. The taxpayer may not claim deductions with 
respect to property for which the credit is claimed. A tax credit is 
also available for the purchase of hybrid vehicles, fuel cell vehicles, 
alternative fuel vehicles and advanced lean burn vehicles. The provision 
applies to vehicles placed in service after December 31, 2005, in the 
case of qualified fuel cell motor vehicles, before January 1, 2015; in 
the case of qualified hybrid motor vehicles that are automobiles and 
light trucks and in the case of advanced lean-burn technology vehicles, 
before January 1, 2011; in the case of qualified hybrid motor vehicles 
that are medium and heavy trucks, before January 1, 2010; and in the 
case of qualified alternative fuel motor vehicles, before January 1, 
2011. A tax credit is available for the purchase of hybrid vehicles, 
fuel cell vehicles, alternative fuel vehicles and advanced lean burn 
vehicles. The provision applies to vehicles placed in service after 
December 31, 2005, in the case of qualified fuel cell motor vehicles, 
before January 1, 2015; in the case of qualified hybrid motor vehicles 
that are automobiles and light trucks and in the case of advanced lean-
burn technology vehicles, before January 1, 2011; in the case of 
qualified hybrid motor vehicles that are medium and heavy trucks, before 
January 1, 2010; and in the case of qualified alternative fuel motor 
vehicles, before January 1, 2011.
  20. Exclusion of utility conservation subsidies.--Non-business 
customers can exclude from gross income subsidies received from public 
utilities for expenditures on energy conservation measures.
  21. Credit to holders of clean renewable energy bonds.--The Energy Tax 
Incentives Act of 2005 introduced this provision which provides for up 
to $800 million in aggregate issuance of Clean Renewable Energy Bonds 
(CREBs) through December 31, 2007. Taxpayers holding CREBs on a credit 
allowance date are entitled to a tax credit.
  22. Deferral of gain from dispositions of transmission property to 
implement FERC restructuring policy.--Utilities that sell their 
transmission assets to a FERC-approved independent transmission company 
are allowed a longer recognition period for their gains from sale. 
Rather than paying tax on any gain from the sale in the year that the 
sale is completed, utilities will have 8 years to pay the tax on any 
gain from the sale. The rule expires at the end of 2007.
  23. Credit for production from advanced nuclear power facilities.--
This provision was introduced by the Energy Tax Incentives Act of 2005. 
A taxpayer producing electricity at a qualifying advanced nuclear power 
facility may claim a credit equal to 1.8 cents per kilowatt-hour of 
electricity produced for the eight-year period starting when the 
facility is placed in service, limited no more than $125 million in tax 
credits per 1,000 megawatts of allocated capacity in any one year.
  24. Credit for investment in clean coal facilities.--This provision 
was introduced by the Energy Tax Incentives Act of 2005. Three 
investment tax credits for clean coal facilities are available: a 15 
percent and 20 percent investment tax credit for clean coal facilities 
producing electricity; and a 20 percent credit for industrial 
gasification projects. Integrated gasification combined cycle (IGCC) 
projects get a 20 percent investment tax credit and other advanced coal-
based projects that produce electricity get a 15 percent credit. The 
Secretary of the Treasury may allocate up to $800 million for IGCC 
projects and up to $500 million for other advanced coal-based 
technologies and up to $350 million for industrial gasification.
  25. Temporary 50 percent expensing for equipment used in the refining 
of liquid fuels.--This provision was introduced by the Energy Tax 
Incentives Act of 2005. Taxpayers may expense 50 percent of the cost of 
refinery investments which increase the capacity of an existing refinery 
by at least 5 percent or increase the throughput of qualified fuels by 
at least 25 percent. Qualified fuels include oil from shale and tar 
sands. Investments must be placed in service before January 1, 2012.
  26. Pass through low sulfur diesel expensing to cooperative owners.--
This provision was introduced by the Energy Tax Incentives Act of 2005. 
Taxpayers may expense certain costs for investments to comply with EPA 
low sulfur diesel regulations. The deduction

[[Page 306]]

may be passed-through to members of a cooperative if the cooperative 
makes an election on their tax return.
  27. Natural gas distribution pipelines treated as 15-year property.--
This provision was introduced by the Energy Tax Incentives Act of 2005. 
The depreciation period is shortened to 15 years for any gas 
distribution lines the original use of which occurred after April 11, 
2004 and before January 1, 2011. The provision does not apply to any 
property which the taxpayer or a related party had entered into a 
binding contract for the construction thereof or self-constructed on or 
before April 11, 2005.
  28. Amortize all geological and geophysical expenditures over 2 
years.--This provision was introduced by the Energy Tax Incentives Act 
of 2005. Geological and geophysical amounts incurred in connection with 
oil and gas exploration in the United States may be amortized over two 
years. In the case of abandoned property, any remaining basis may no 
longer be recovered in the year of abandonment of a property as all 
basis is recovered over the two-year amortization period.
  29. Allowance of deduction for certain energy efficient commercial 
building property.--This provision was introduced by the Energy Tax 
Incentives Act of 2005. A deduction for energy efficient commercial 
buildings that reduce annual energy and power consumption by 50 percent 
compared to the American Society of Heating, Refrigerating, and Air 
Conditioning Engineers (ASHRAE) standard is allowed. The provision is 
effective for property placed in service after December 31, 2005 and 
prior to January 1, 2008.
  30. Credit for construction of new energy efficient homes.--This 
provision was introduced by the Energy Tax Incentives Act of 2005. A 
credit is available to eligible contractors for construction of a 
qualified new energy-efficient home. The credit applies to homes whose 
construction is substantially completed after December 31, 2005 and 
which are purchased after December 31, 2005 and prior to January 1, 
2008.
  31. Credit for energy efficiency improvements to existing homes.--This 
provision was introduced by the Energy Tax Incentives Act of 2005. A 10 
percent investment tax credit for expenditures with respect to 
improvements to building envelope is available. Credits for purchases of 
advanced main air circulating fans, natural gas, propane, or oil 
furnaces or hot water boilers, and other qualified energy efficient 
property are also available. Credit applies to property placed in 
service after December 31, 2005 and prior to January 1, 2008.
  32. Credit for energy efficient appliances.--This provision was 
introduced by the Energy Tax Incentives Act of 2005. Tax credits for the 
manufacture of efficient dishwashers, clothes washers, and refrigerators 
are available. Credits vary depending on the efficiency of the unit. The 
provision is effective for appliances manufactured in 2006 and 2007.
  33. Credit for residential purchases/installations of solar and fuel 
cells.--This provision was introduced by the Energy Tax Incentives Act 
of 2005. A credit, equal to 30 percent of qualifying expenditures, for 
purchase for qualified photovoltaic property and solar water heating 
property is available. A 30 percent credit for the purchase of qualified 
fuel cell power plants is also allowed and applies to property placed in 
service after December 31, 2005 and prior to January 1, 2008.
  34. Credit for business installation of qualified fuel cells and 
stationary microturbine power plants.--This provision was introduced by 
the Energy Tax Incentives Act of 2005. A 30 percent business energy 
credit for purchase of qualified fuel cell power plants for businesses 
and a 10 percent credit for purchase of qualifying stationary 
microturbine power plants are allowed.
  35. Alternative fuel and fuel mixture tax credit.--This provision was 
introduced in the Safe, Accountable, Flexible, Efficient Transportation 
Equity Act of 2005. A tax credit is available against the excise tax 
imposed on the retail sale or use of alternative fuels or mixture of 
alternative fuel and other taxable fuel. The credit is 50 cents per 
gallon of alternative fuel.

                    Natural Resources and Environment

  36. Exploration and development costs.--Certain capital outlays 
associated with exploration and development of nonfuel minerals may be 
expensed rather than depreciated over the life of the asset.
  37. Percentage depletion.--Most nonfuel mineral extractors may use 
percentage depletion rather than cost depletion, with percentage 
depletion rates ranging from 22 percent for sulfur to 5 percent for sand 
and gravel.
  38. Sewage, water, solid and hazardous waste facility bonds.--Interest 
earned on State and local bonds used to finance the construction of 
sewage, water, or hazardous waste facilities is tax-exempt. These bonds 
are generally subject to the State private-activity bond annual volume 
cap.
  39. Capital gains treatment of certain timber.--Certain timber sales 
can be treated as a capital gain rather than ordinary income.
  40. Expensing multiperiod timber growing costs.--Most of the 
production costs of growing timber may be expensed rather than 
capitalized and deducted when the timber is sold. In most other 
industries, these costs are capitalized under the uniform capitalization 
rules.
  41. Historic preservation.--Expenditures to preserve and restore 
historic structures qualify for a 20-percent investment credit, but the 
depreciable basis must be reduced by the full amount of the credit 
taken.
  42. Expensing of capital costs with respect to complying with EPA 
sulfur regulations.--Small refiners are allowed to deduct 75 percent of 
qualified capital costs incurred by the taxpayer during the taxable 
year. This provision was introduced by the American Jobs Creation Act 
(AJCA) enacted in 2004.

[[Page 307]]

  43. Exclusion of gain or loss on sale or exchange of certain 
brownfield sites.--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 purpose. The AJCA of 2004 created a 
special exclusion from unrelated business taxable income of the gain or 
loss from the sale or exchange of certain qualifying brownfield 
properties. The exclusion applies regardless of whether the property is 
debt-financed. In order to qualify, a minimum amount of remediation 
expenditures must be incurred by the organization.

                               Agriculture

  44. Expensing certain capital outlays.--Farmers, except for certain 
agricultural corporations and partnerships, are allowed to expense 
certain expenditures for feed and fertilizer, as well as for soil and 
water conservation measures. Expensing is allowed, even though these 
expenditures are for inventories held beyond the end of the year, or for 
capital improvements that would otherwise be capitalized.
  45. Expensing multiperiod livestock and crop production costs.--The 
production of livestock and crops with a production period of less than 
two years is exempt from the uniform cost capitalization rules. Farmers 
establishing orchards, constructing farm facilities for their own use, 
or producing any goods for sale with a production period of two years or 
more may elect not to capitalize costs. If they do, they must apply 
straight-line depreciation to all depreciable property they use in 
farming.
  46. Loans forgiven solvent farmers.--Farmers are forgiven the tax 
liability on certain forgiven debt. Normally, debtors must include the 
amount of loan forgiveness as income or reduce their recoverable basis 
in the property to which the loan relates. If the debtor elects to 
reduce basis and the amount of forgiveness exceeds the basis in the 
property, the excess forgiveness is taxable. For insolvent (bankrupt) 
debtors, however, the amount of loan forgiveness reduces carryover 
losses, then unused credits, and then basis; any remainder of the 
forgiven debt is excluded from tax. Farmers with forgiven debt are 
considered insolvent for tax purposes, and thus qualify for income tax 
forgiveness.
  47. Capital gains treatment of certain income.--Certain agricultural 
income, such as unharvested crops, can be treated as capital gains 
rather than ordinary income.
  48. Income averaging for farmers.--Taxpayers can lower their tax 
liability by averaging, over the prior three-year period, their taxable 
income from farming and fishing.
  49. Deferral of gain on sales of farm refiners.--A taxpayer who sells 
stock in a farm refiner to a farmers' cooperative can defer recognition 
of gain if the taxpayer reinvests the proceeds in qualified replacement 
property.
  50. Bio-Diesel tax credit.--An income tax credit of $0.50, similar to 
Ethanol benefits, is available for each gallon of biodiesel used or 
sold. Biodiesel derived from virgin sources (agri-biodiesel) receives an 
increased credit of $1.00 per gallon. The provision was introduced by 
the AJCA in 2004. The Energy Tax Incentives Act of 2005 extends the 
income tax credit, excise tax credit, and payment provisions through 
December 31, 2008 and adds a credit for small agri-biodiesel producers. 
The conference agreement also creates a similar income tax credit, 
excise tax credit and payment system for renewable diesel, however there 
is no credit for small producers of renewable diesel. Renewable diesel 
means diesel fuel derived form biomass using thermal depolymerization 
process.

                          Commerce and Housing

  This category includes a number of tax expenditure provisions that 
also affect economic activity in other functional categories. For 
example, provisions related to investment, such as accelerated 
depreciation, could be classified under the energy, natural resources 
and environment, agriculture, or transportation categories.
  51. Credit union income.--The earnings of credit unions not 
distributed to members as interest or dividends are exempt from income 
tax.
  52. Bad debt reserves.--Small (less than $500 million in assets) 
commercial banks, mutual savings banks, and savings and loan 
associations may deduct additions to bad debt reserves in excess of 
actually experienced losses.
  53. Deferral of income on life insurance and annuity contracts.--
Favorable tax treatment is provided for investment income within 
qualified life insurance and annuity contracts. Investment income earned 
on qualified life insurance contracts held until death is permanently 
exempt from income tax. Investment income distributed prior to the death 
of the insured is tax-deferred, if not tax-exempt. Investment income 
earned on annuities is treated less favorably than income earned on life 
insurance contracts, but it benefits from tax deferral without annual 
contribution or income limits generally applicable to other tax-favored 
retirement income plans.
  54. Small property and casualty insurance companies.--For taxable 
years beginning before January 1, 2004, insurance companies that were 
not life insurance companies and which had annual net premiums of less 
than $350,000 were exempt from tax; those with $350,000 to $1.2 million 
of annual net premiums could elect to pay tax only on the income earned 
by their taxable investment portfolio. For taxable years beginning after 
December 31, 2003, stock non-life insurance companies are generally 
exempt from tax if their gross receipts for the taxable year do not 
exceed $600,00 and more than 50 percent of such gross receipts consists 
of premiums. Mutual non-life insurance companies are generally tax-
exempt if their annual gross receipts do not exceed $150,000 and more 
than 35 percent of gross receipts consist of premiums. Also, for taxable 
years

[[Page 308]]

beginning after December 31, 2003, non-life insurance companies with no 
more than $1.2 million of annual net premiums may elect to pay tax only 
on their taxable investment income.
  55. Insurance companies owned by exempt organizations.--Generally, the 
income generated by life and property and casualty insurance companies 
is subject to tax, albeit by special rules. Insurance operations 
conducted by such exempt organizations as fraternal societies and 
voluntary employee benefit associations, however, are exempt from tax.
  56. Small life insurance company deduction.--Small life insurance 
companies (gross assets of less than $500 million) can deduct 60 percent 
of the first $3 million of otherwise taxable income. The deduction 
phases out for otherwise taxable income between $3 million and $15 
million.
  57. Exclusion of interest spread of financial institutions.--Consumers 
and non-profit organizations pay for some deposit-linked services, such 
as check cashing, by accepting a below-market interest rate on their 
demand deposits. If they received a market rate of interest on those 
deposits and paid explicit fees for the associated services, they would 
pay taxes on the full market rate and (unlike businesses) could not 
deduct the fees. The government thus foregoes tax on the difference 
between the risk-free market interest rate and below-market interest 
rates on demand deposits, which under competitive conditions should 
equal the value added of deposit services.
  58. Mortgage housing bonds.--Interest earned on State and local bonds 
used to finance homes purchased by first-time, low-to-moderate-income 
buyers is tax-exempt. The amount of State and local tax-exempt bonds 
that can be issued to finance these and other private activity is 
limited. The combined volume cap for private activity bonds, including 
mortgage housing bonds, rental housing bonds, student loan bonds, and 
industrial development bonds was $62.50 per capita ($187.5 million 
minimum) per State in 2001, and $75 per capita ($225 million minimum) in 
2002. The Community Renewal Tax Relief Act of 2000 accelerated the 
scheduled increase in the state volume cap and indexed the cap for 
inflation, beginning in 2003. States may issue mortgage credit 
certificates (MCCs) in lieu of mortgage revenue bonds. MCCs entitle home 
buyers to income tax credits for a specified percentage of interest on 
qualified mortgages. The total amount of MCCs issued by a State cannot 
exceed 25 percent of its annual ceiling for mortgage-revenue bonds.
  59. Rental housing bonds.--Interest earned on State and local 
government bonds used to finance multifamily rental housing projects is 
tax-exempt. At least 20 percent (15 percent in targeted areas) of the 
units must be reserved for families whose income does not exceed 50 
percent of the area's median income; or 40 percent for families with 
incomes of no more than 60 percent of the area median income. Other tax-
exempt bonds for multifamily rental projects are generally issued with 
the requirement that all tenants must be low or moderate income 
families. Rental housing bonds are subject to the volume cap discussed 
in the mortgage housing bond section above.
  60. Interest on owner-occupied homes.--Owner-occupants of homes may 
deduct mortgage interest on their primary and secondary residences as 
itemized nonbusiness deductions. The mortgage interest deduction is 
limited to interest on debt no greater than the owner's basis in the 
residence and, for debt incurred after October 13, 1987; it is limited 
to no more than $1 million. Interest on up to $100,000 of other debt 
secured by a lien on a principal or second residence is also deductible, 
irrespective of the purpose of borrowing, provided the debt does not 
exceed the fair market value of the residence. Mortgage interest 
deductions on personal residences are tax expenditures because the value 
of owner-occupied housing services is not included in a taxpayer's 
taxable income.
  61. Taxes on owner-occupied homes.--Owner-occupants of homes may 
deduct property taxes on their primary and secondary residences even 
though they are not required to report the value of owner-occupied 
housing services as gross income.
  62. Installment sales.--Dealers in real and personal property (i.e., 
sellers who regularly hold property for sale or resale) cannot defer 
taxable income from installment sales until the receipt of the loan 
repayment. Nondealers (i.e., sellers of real property used in their 
business) are required to pay interest on deferred taxes attributable to 
their total installment obligations in excess of $5 million. Only 
properties with sales prices exceeding $150,000 are includable in the 
total. The payment of a market rate of interest eliminates the benefit 
of the tax deferral. The tax exemption for nondealers with total 
installment obligations of less than $5 million is, therefore, a tax 
expenditure.
  63. Capital gains exclusion on home sales.--A homeowner can exclude 
from tax up to $500,000 ($250,000 for singles) of the capital gains from 
the sale of a principal residence. The exclusion may not be used more 
than once every two years.
  64. Imputed net rental income on owner occupied housing.--The implicit 
rental value of home ownership, net of expenses such as mortgage 
interest and depreciation, is excluded from income. The appendix 
provides a greater explanation of this new addition to the tax 
expenditure budget.
  65. Passive loss real estate exemption.--In general, passive losses 
may not offset income from other sources. Losses up to $25,000 
attributable to certain rental real estate activity, however, are exempt 
from this rule.
  66. Low-income housing credit.--Taxpayers who invest in certain low-
income housing are eligible for a tax credit. The credit rate is set so 
that the present value of the credit is equal to 70 percent for new 
construction and 30 percent for (1) housing receiving other Federal 
benefits (such as tax-exempt bond financing), or (2) substantially 
rehabilitated existing housing. The credit is allowed in equal amounts 
over 10 years. State

[[Page 309]]

agencies determine who receives the credit; States are limited in the 
amount of credit they may authorize annually. The Community Renewal Tax 
Relief Act of 2000 increased the per-resident limit to $1.50 in 2001 and 
to $1.75 in 2002 and indexed the limit for inflation, beginning in 2003. 
The Act also created a $2 million minimum annual cap for small States 
beginning in 2002; the cap is indexed for inflation, beginning in 2003.
  67. Accelerated depreciation of rental property.--The tax depreciation 
allowance provisions are part of the reference law rules, and thus do 
not give rise to tax expenditures under the reference method. Under the 
normal tax method, however, economic depreciation is assumed. This 
calculation is described in more detail in the Appendix.
  68. Cancellation of indebtedness.--Individuals are not required to 
report the cancellation of certain indebtedness as current income. If 
the canceled debt is not reported as current income, however, the basis 
of the underlying property must be reduced by the amount canceled.
  69. Imputed interest rules.--Holders (issuers) of debt instruments are 
generally required to report interest earned (paid) in the period it 
accrues, not when paid. In addition, the amount of interest accrued is 
determined by the actual price paid, not by the stated principal and 
interest stipulated in the instrument. In general, any debt associated 
with the sale of property worth less than $250,000 is excepted from the 
general interest accounting rules. This general $250,000 exception is 
not a tax expenditure under reference law but is under normal law. 
Exceptions above $250,000 are a tax expenditure under reference law; 
these exceptions include the following: (1) sales of personal residences 
worth more than $250,000, and (2) sales of farms and small businesses 
worth between $250,000 and $1 million.
  70. Capital gains (other than agriculture, timber, iron ore, and 
coal).--Capital gains on assets held for more than 1 year are taxed at a 
lower rate than ordinary income. Under the revised reference law 
baseline used for the 2005 Budget, the lower rate on capital gains is 
considered a tax expenditure under the reference law method, but only 
for capital gains that have not been previously taxed under the 
corporate income tax. As discussed above, this treatment partially 
adjusts for the double tax on corporate income and is more consistent 
with a comprehensive income tax base.
  Prior to passage of the Jobs Growth Tax Relief Reconciliation Act 
(JGTRRA), the top capital gains tax rate for most assets held for more 
than 1 year was 20 percent. For assets acquired after December 31, 2000, 
the top capital gains tax rate for assets held for more than 5 years was 
18 percent. Since January 1, 2001, taxpayers may mark-to-market existing 
assets to start the 5-year holding period. Losses from the mark-to-
market are not recognized.
  For assets held for more than 1 year by taxpayers in the 15-percent 
ordinary tax bracket, the top capital gains tax rate was 10 percent. 
After December 31, 2000, the top capital gains tax rate for assets held 
by these taxpayers for more than 5 years was 8 percent. JGTRRA reduced 
the previous 20 percent and 18 percent rates on net capital gains to 15 
percent and the previous 10 percent and 8 percent rates to 5 percent (0 
percent, in 2008). The lower rates apply to assets held for more than 
one year. The lower rates apply to assets sold after May 6, 2003 through 
2008.
  71. Capital gains exclusion for small business stock.--An exclusion of 
50 percent is provided for capital gains from qualified small business 
stock held by individuals for more than 5 years. A qualified small 
business is a corporation whose gross assets do not exceed $50 million 
as of the date of issuance of the stock.
  72. Step-up in basis of capital gains at death.--Capital gains on 
assets held at the owner's death are not subject to capital gains taxes. 
The cost basis of the appreciated assets is adjusted upward to the 
market value at the owner's date of death. After repeal of the estate 
tax for 2010 under the Economic Growth and Tax Relief Reconciliation Act 
(EGTRRA) of 2001, the basis for property acquired from a decedent will 
be the lesser of fair market value or the decedent's basis. Certain 
types of additions to basis will be allowed so that assets in most 
estates that are not currently subject to estate tax will not be subject 
to capital gains tax in the hands of the heirs.
  73. Carryover basis of capital gains on gifts.--When a gift is made, 
the donor's basis in the transferred property (the cost that was 
incurred when the transferred property was first acquired) carries-over 
to the donee. The carryover of the donor's basis allows a continued 
deferral of unrealized capital gains. Even though the estate tax is 
repealed for 2010 under EGTRRA, the gift tax is retained with a lifetime 
exemption of $1 million.
  74. Ordinary income treatment of losses from sale of small business 
corporate stock shares.--Up to $100,000 in losses from the sale of small 
business corporate stock (capitalization less than $1 million) may be 
treated as ordinary losses. Such losses would, thus, not be subject to 
the $3,000 annual capital loss write-off limit.
  75. Accelerated depreciation of non-rental-housing buildings.--The tax 
depreciation allowance provisions are part of the reference law rules, 
and thus do not give rise to tax expenditures under reference law. Under 
normal law, however, economic depreciation is assumed. This calculation 
is described in more detail in the Appendix.
  76. Accelerated depreciation of machinery and equipment.--The tax 
depreciation allowance provisions are part of the reference law rules, 
and thus do not give rise to tax expenditures under reference law. Under 
the normal tax baseline, this tax depreciation allowance is measured 
relative to economic depreciation. This calculation is described in more 
detail in the Appendix.

[[Page 310]]

  77. Expensing of certain small investments.--As of 2003, under prior 
law, qualifying investments in tangible property up to $25,000 could 
have been expensed rather than depreciated over time. The amount 
eligible for expensing was decreased to the extend the taxpayer's 
qualifying investment during the year exceeded $200,000. For 2003, 
however, the expensing limit was temporarily increased to $100,000, the 
phase-out limit was temporarily increased to $400,000, and computer 
software became temporarily eligible for expensing treatment. For 2004, 
through 2007, these higher limits are indexed for inflation, and 
computer software continues to be an eligible investment. In all years, 
the amount expensed cannot exceed the taxpayer's taxable income for the 
year. The prior rules will apply for taxable years beginning after 2007.
  78. Graduated corporation income tax rate schedule.--The corporate 
income tax schedule is graduated, with rates of 15 percent on the first 
$50,000 of taxable income, 25 percent on the next $25,000, and 34 
percent on the next $9.925 million. Compared with a flat 34-percent 
rate, the lower rates provide an $11,750 reduction in tax liability for 
corporations with taxable income of $75,000. This benefit is recaptured 
for corporations with taxable incomes exceeding $100,000 by a 5-percent 
additional tax on corporate incomes in excess of $100,000 but less than 
$335,000.
  The corporate tax rate is 35 percent on income over $10 million. 
Compared with a flat 35-percent tax rate, the 34-percent rate provides a 
$100,000 reduction in tax liability for corporations with taxable 
incomes of $10 million. This benefit is recaptured for corporations with 
taxable incomes exceeding $15 million by a 3-percent additional tax on 
income over $15 million but less than $18.33 million. Because the 
corporate rate schedule is part of reference tax law, it is not 
considered a tax expenditure under the reference method. A flat 
corporation income tax rate is taken as the baseline under the normal 
tax method; therefore the lower rates is considered a tax expenditure 
under this concept.
  79. Small issue industrial development bonds.--Interest earned on 
small issue industrial development bonds (IDBs) issued by State and 
local governments to finance manufacturing facilities is tax-exempt. 
Depreciable property financed with small issue IDBs must be depreciated, 
however, using the straight-line method. The annual volume of small 
issue IDBs is subject to the unified volume cap discussed in the 
mortgage housing bond section above.
  80. Deduction for U.S. production activities.--This provision was 
introduced by the AJCA in 2004 and allows for a deduction equal to a 
portion of taxable income attributable to domestic production. For 
taxable years beginning in 2004, 2005, 2006, 2007, and 2008, the amount 
of the deduction is 5, 5, 5, 6, and 7 percent, respectively. For taxable 
years beginning after 2008, the amount of the deduction is 9 percent.
  81. Special rules for certain film and TV production.--Taxpayers may 
deduct up to $15 million ($15 million in certain distressed areas) per 
production expenditures in the year incurred. Excess expenditures may be 
deducted over three years using the straight line method. This provision 
was introduced by the AJCA enacted in 2004. Under prior law, production 
expenses were depreciated.

                             Transportation

  82. Deferral of tax on U.S. shipping companies.--Certain companies 
that operate U.S. flag vessels can defer income taxes on that portion of 
their income used for shipping purposes, primarily construction, 
modernization and major repairs to ships, and repayment of loans to 
finance these investments. Once indefinite, the deferral has been 
limited to 25 years since January 1, 1987.
  83. Exclusion of employee parking expenses.--Employee parking expenses 
that are paid for by the employer or that are received in lieu of wages 
are excludable from the income of the employee. In 2005, the maximum 
amount of the parking exclusion is $200 (indexed) per month. The tax 
expenditure estimate does not include parking at facilities owned by the 
employer.
  84. Exclusion of employee transit pass expenses.--Transit passes, 
tokens, fare cards, and vanpool expenses paid for by an employer or 
provided in lieu of wages to defray an employee's commuting costs are 
excludable from the employee's income. In 2005, the maximum amount of 
the exclusion is $105 (indexed) per month.
  85. Tax credit for certain expenditures for maintaining railroad 
tracks.--Eligible taxpayers may claim a credit equal to the lesser of 50 
percent of maintenance expenditures and the product of $3,500 and the 
number of miles of track owned or leased. This provision was introduced 
by the AJCA in 2004.
  86. Exclusion of interest on bonds for Financing of Highway Projects 
and Rail-Truck Transfer Facilities.--This provision provides for $15 
billion of tax-exempt bond authority to finance qualified highway or 
surface freight transfer facilities. It was introduced by the Safe, 
Accountable, Flexible, Efficient Transportation Equity Act: A Legacy For 
Users enacted in 2005. The authority to issue these bonds expires on 
December 31, 2015.

                   Community and Regional Development

  87. Rehabilitation of structures.--A 10-percent investment tax credit 
is available for the rehabilitation of buildings that are used for 
business or productive activities and that were erected before 1936 for 
other than residential purposes. The taxpayer's recoverable basis must 
be reduced by the amount of the credit.
  88. Airport, dock, and similar facility bonds.--Interest earned on 
State and local bonds issued to finance high-speed rail facilities and 
government-owned airports, docks, wharves, and sport and convention 
facilities is tax-exempt. These bonds are not subject to a volume cap.

[[Page 311]]

  89. Exemption of income of mutuals and cooperatives.--The incomes of 
mutual and cooperative telephone and electric companies are exempt from 
tax if at least 85 percent of their revenues are derived from patron 
service charges.
  90. Empowerment zones and renewal communities.--Qualifying businesses 
in designated economically depressed areas can receive tax benefits such 
as an employer wage credit, increased expensing of investment in 
equipment, special tax-exempt financing, accelerated depreciation, and 
certain capital gains incentives. Empowerment zone and renewal community 
designations expire at the end of 2009. The Job Creation and Worker 
Assistance Act of 2002 expanded the existing provisions by adding the 
``New York City Liberty Zone.'' In addition, the Working Families Tax 
Relief Act of 2004 extended the District of Columbia Enterprise Zone and 
the District of Columbia first time homebuyer credit by two years 
through 2005.
  The Gulf Opportunity Zone Act of 2005 added several provisions 
targeted to encourage the redevelopment of areas affected by hurricanes 
Katrina, Rita and Wilma, including some provisions that have already 
been listed elsewhere in this table. Gulf Opportunity Zone Act 
provisions not listed elsewhere include additional tax-exempt bond 
financing authority, accelerated depreciation of investment in both 
structures and equipment, partial expensing for certain demolition and 
clean-up costs, increased carryback of certain net operating losses, 
increased authority to allocate low-income housing tax credits and new 
markets tax credits within the affected areas and other provisions.
  91. New markets tax credit.--Taxpayers who make qualified equity 
investments in a community development entity (CDE), which then makes 
qualified investments in low-income communities, are eligible for a tax 
credit received over 7 years. The amount of the credit equals (1) 5 
percent in the year of purchase and the following 2 years, and (2) 6 
percent in the following 4 years. A CDE is any domestic firm whose 
primary mission is to serve or provide investment capital for low-income 
communities/individuals; a CDE must be accountable to residents of low-
income communities. The total equity investment available for the credit 
across all CDEs is $1.0 billion in 2001, $1.5 billion in 2002 and 2003, 
$2.0 billion in 2004 and 2005, and $3.5 billion in 2006 and 2007. Credit 
authority is allocated to CDEs through a competitive application 
process.
  92. Expensing of environmental remediation costs.--Taxpayers who clean 
up certain hazardous substances at a qualified site may expense the 
clean-up costs, even though the expenses will generally increase the 
value of the property significantly or appreciably prolong the life of 
the property. The Working Families Tax Relief Act of 2004 extended this 
provision for two years, allowing remediation expenditures incurred 
before December 31, 2005 to be eligible for expensing.
  The Gulf Opportunity Zone Act of 2005 extends this provision through 
December 31, 2007 for sites located in the Gulf Opportunity Zone and 
expands the allowable costs to include petroleum product remediation.
  93. Credit to holders of Gulf Tax Credit Bonds.--Taxpayers that own 
Gulf Tax Credit bonds receive a non-refundable tax credit (at a rate set 
by the Treasury Department) rather than interest. The credit is included 
in gross income. The maximum amount that can be issued is $200 million 
in the case of Louisiana, $100 million in the case of Mississippi, and 
$50 million in the case of Alabama.

          Education, Training, Employment, and Social Services

  94. Scholarship and fellowship income.--Scholarships and fellowships 
are excluded from taxable income to the extent they pay for tuition and 
course-related expenses of the grantee. Similarly, tuition reductions 
for employees of educational institutions and their families are not 
included in taxable income. From an economic point of view, scholarships 
and fellowships are either gifts not conditioned on the performance of 
services, or they are rebates of educational costs. Thus, under the 
reference law method, this exclusion is not a tax expenditure because 
this method does not include either gifts or price reductions in a 
taxpayer's gross income. The exclusion, however, is considered a tax 
expenditure under the normal tax method, which includes gift-like 
transfers of Government funds in gross income (many scholarships are 
derived directly or indirectly from Government funding).
  95. HOPE tax credit.--The non-refundable HOPE tax credit allows a 
credit for 100 percent of an eligible student's first $1,000 of tuition 
and fees and 50 percent of the next $1,000 of tuition and fees. The 
credit only covers tuition and fees paid during the first two years of a 
student's post-secondary education. In 2005, the credit is phased out 
ratably for taxpayers with modified AGI between $87,000 and $107,000 
($43,000 and $53,000 for singles), indexed.
  96. Lifetime Learning tax credit.--The non-refundable Lifetime 
Learning tax credit allows a credit for 20 percent of an eligible 
student's tuition and fees, up to a maximum credit per return is $2,000. 
The credit is phased out ratably for taxpayers with modified AGI between 
$87,000 and $107,000 ($43,000 and $53,000 for singles) (indexed 
beginning in 2002). The credit applies to both undergraduate and 
graduate students.
  97. Deduction for Higher Education Expenses.--The maximum annual 
deduction for qualified higher education expenses is $4,000 in 2005 for 
taxpayers with adjusted gross income up to $130,000 on a joint return 
($65,000 for singles). Taxpayers with adjusted gross income up to 
$160,000 on a joint return ($80,000 for singles) may deduct up to $2,000 
beginning in 2004. No deduction is allowed for expenses paid after 
December 31, 2005.
  98. Education Individual Retirement Accounts.--Contributions to an 
education IRA are not tax-deductible. Investment income earned by 
education IRAs is not taxed when earned, and investment income from

[[Page 312]]

an education IRA is tax-exempt when withdrawn to pay for a student's 
tuition and fees. The maximum contribution to an education IRA in 2005 
is $2000 per beneficiary. The maximum contribution is phased down 
ratably for taxpayers with modified AGI between $190,000 and $220,000 
($95,000 and $110,000 for singles).
  99. Student-loan interest.--Taxpayers may claim an above-the-line 
deduction of up to $2,500 on interest paid on an education loan. 
Interest may only be deducted for the first five years in which interest 
payments are required. In 2005, the maximum deduction is phased down 
ratably for taxpayers with modified AGI between $105,000 and $135,000 
($50,000 and $65,000 for singles), indexed.
  100. State prepaid tuition plans.--Some States have adopted prepaid 
tuition plans and prepaid room and board plans, which allow persons to 
pay in advance for college expenses for designated beneficiaries. In 
2001 taxes on the earnings from these plans are paid by the 
beneficiaries and are deferred until tuition is actually paid. Beginning 
in 2002, investment income is not taxed when earned, and is tax-exempt 
when withdrawn to pay for qualified expenses.
  101. Student-loan bonds.--Interest earned on State and local bonds 
issued to finance student loans is tax-exempt. The volume of all such 
private activity bonds that each State may issue annually is limited.
  102. Bonds for private nonprofit educational institutions.--Interest 
earned on State and local Government bonds issued to finance the 
construction of facilities used by private nonprofit educational 
institutions is not taxed.
  103. Credit for holders of zone academy bonds.--Financial institutions 
that own zone academy bonds receive a non-refundable tax credit (at a 
rate set by the Treasury Department) rather than interest. The credit is 
included in gross income. Proceeds from zone academy bonds may only be 
used to renovate, but not construct, qualifying schools and for certain 
other school purposes. The total amount of zone academy bonds that may 
be issued is limited to $1.6 billion--$400 million in each year from 
1998 to 2005.
  104. U.S. savings bonds for education.--Interest earned on U.S. 
savings bonds issued after December 31, 1989 is tax-exempt if the bonds 
are transferred to an educational institution to pay for educational 
expenses. The tax exemption is phased out for taxpayers with AGI between 
$91,850 and $121.850 ($61,200 and $76,200 for singles) in 2005.
  105. Dependent students age 19 or older.--Taxpayers may claim personal 
exemptions for dependent children who are over the age of 18 or under 
the age of 24 and who (1) reside with the taxpayer for over half the 
year (with exceptions for temporary absences from home, such as for 
school attendance), (2) are full-time students, and (3) do not claim a 
personal exemption on their own tax returns.
  106. Charitable contributions to educational institutions.--Taxpayers 
may deduct contributions to nonprofit educational institutions. 
Taxpayers who donate capital assets to educational institutions can 
deduct the asset's current value without being taxed on any appreciation 
in value. An individual's total charitable contribution generally may 
not exceed 50 percent of adjusted gross income; a corporation's total 
charitable contributions generally may not exceed 10 percent of pre-tax 
income.
  107. Employer-provided educational assistance.--Employer-provided 
educational assistance is excluded from an employee's gross income even 
though the employer's costs for this assistance are a deductible 
business expense. EGTRRA permanently extended this exclusion and 
extended the exclusion to also include graduate education (beginning in 
2002).
  108. Special deduction for teacher expenses.--Educators in both public 
and private elementary and secondary schools, who work at least 900 
hours during a school year as a teacher, instructor, counselor, 
principal or aide, may subtract up to $250 of qualified expenses when 
figuring their adjusted gross income (AGI).
  109. Discharge of student loan indebtedness.--Certain professionals 
who perform in underserved areas, and as a consequence get their student 
loans discharged, may not recognize such discharge as income. This 
provision was expanded by the AJCA to include health professionals.
  110. Work opportunity tax credit.--Employers can claim a tax credit 
for qualified wages paid to individuals who begin work on or before 
December 31, 2005 and who are certified as members of various targeted 
groups. The amount of the credit that can be claimed is 25 percent for 
employment of less than 400 hours and 40 percent for employment of 400 
hours or more. The maximum credit per employee is $2,400 and can only be 
claimed on the first year of wages an individual earns from an employer. 
Employers must reduce their deduction for wages paid by the amount of 
the credit claimed. The Katrina Emergency Tax Relief Act of 2005 
expanded WOTC eligibility to Hurricane Katrina Employees, defined as 
persons whose principal places of abode on August 28, 2005 were in the 
core disaster area and who beginning on such date and through August 28, 
2007, are hired for a position principally located in the core disaster 
area; and beginning on such date and through December 31, 2005, are 
hired for a position regardless of its location. The usual certification 
process rules are waived for Hurricane Katrina employees.
  111. Welfare-to-work tax credit.--An employer is eligible for a tax 
credit on the first $20,000 of eligible wages paid to qualified long-
term family assistance recipients during the first two years of 
employment. The credit is 35 percent of the first $10,000 of wages in 
the first year of employment and 50 percent of the first $10,000 of 
wages in the second year of employment. The maximum credit is $8,500 per 
employee. The credit applies to wages paid to employees who are hired on 
or before December 31, 2005.

[[Page 313]]

  112. Employer-provided child care exclusion.--Up to $5,000 of 
employer-provided child care is excluded from an employee's gross income 
even though the employer's costs for the child care are a deductible 
business expense.
  113. Employer-provided child care credit.--Employers can deduct 
expenses for supporting child care or child care resource and referral 
services. EGTRRA provides a tax credit to employers for qualified 
expenses beginning in 2002. The credit is equal to 25 percent of 
qualified expenses for employee child care and 10 percent of qualified 
expenses for child care resource and referral services. Employer 
deductions for such expenses are reduced by the amount of the credit. 
The maximum total credit is limited to $150,000 per taxable year.
  114. Assistance for adopted foster children.--Taxpayers who adopt 
eligible children from the public foster care system can receive monthly 
payments for the children's significant and varied needs and a 
reimbursement of up to $2,000 for nonrecurring adoption expenses. These 
payments are excluded from gross income.
  115. Adoption credit and exclusion.--Taxpayers can receive a 
nonrefundable tax credit for qualified adoption expenses. The maximum 
credit is $10,630 per child for 2005, and is phased-out ratably for 
taxpayers with modified AGI between $159,450 and $199,450. The credit 
amounts and the phase-out thresholds are indexed for inflation beginning 
in 2003. Unused credits may be carried forward and used during the five 
subsequent years. Taxpayers may also exclude qualified adoption expenses 
from income, subject to the same maximum amounts and phase-out as the 
credit. The same expenses cannot qualify for tax benefits under both 
programs; however, a taxpayer may use the benefits of the exclusion and 
the tax credit for different expenses. Stepchild adoptions are not 
eligible for either benefit.
  116. Employer-provided meals and lodging.--Employer-provided meals and 
lodging are excluded from an employee's gross income even though the 
employer's costs for these items are a deductible business expense.
  117. Child credit.--Taxpayers with children under age 17 can qualify 
for a $1,000 partially refundable per child credit. The maximum credit 
declines to $500 in 2011 and later years. The credit is phased out for 
taxpayers at the rate of $50 per $1,000 of modified AGI above $110,000 
($75,000 for singles).
  118. Child and dependent care expenses.--Married couples with child 
and dependent care expenses may claim a tax credit when one spouse works 
full time and the other works at least part time or goes to school. The 
credit may also be claimed by single parents and by divorced or 
separated parents who have custody of children. Expenditures up to a 
maximum $3,000 for one dependent and $6,000 for two or more dependents 
are eligible for the credit. The credit is equal to 35 percent of 
qualified expenditures for taxpayers with incomes of $15,000. The credit 
is reduced to a minimum of 20 percent by one percentage point for each 
$2,000 of income in excess of $15,000.
  119. Disabled access expenditure credit.--Small businesses (less than 
$1 million in gross receipts or fewer than 31 full-time employees) can 
claim a 50-percent credit for expenditures in excess of $250 to remove 
access barriers for disabled persons. The credit is limited to $5,000.
  120. Charitable contributions, other than education and health.--
Taxpayers may deduct contributions to charitable, religious, and certain 
other nonprofit organizations. Taxpayers who donate capital assets to 
charitable organizations can deduct the assets' current value without 
being taxed on any appreciation in value. An individual's total 
charitable contribution generally may not exceed 50 percent of adjusted 
gross income; a corporation's total charitable contributions generally 
may not exceed 10 percent of pre-tax income.
  121. Foster care payments.--Foster parents provide a home and care for 
children who are wards of the State, under contract with the State. 
Compensation received for this service is excluded from the gross 
incomes of foster parents; the expenses they incur are nondeductible.
  122. Parsonage allowances.--The value of a minister's housing 
allowance and the rental value of parsonages are not included in a 
minister's taxable income.
  123. Provide an employee retention credit to employers affected by 
hurricane Katrina, Rita, and Wilma.--Businesses located within the Gulf 
Opportunity (GO) Zone on August 28, 2005 are eligible for a 40 percent 
tax credit on the first $6,000 in qualified wages paid to qualified 
employees employed within the GO Zone. 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 by reason of hurricane Katrina and 
ending on the date on which such trade or business resumed significant 
operations at such principal place of employment. Similar rules apply to 
the Rita GO Zone and the Wilma GO Zone with initial effective dates of 
September 23, 2005, and October 23, 2005, respectively.

                                 Health

  124. Employer-paid medical insurance and expenses.--Employer-paid 
health insurance premiums and other medical expenses (including long-
term care) are deducted as a business expense by employers, but they are 
not included in employee gross income. The self-employed also may deduct 
part of their family health insurance premiums.
  125. Self-employed medical insurance premiums.--Self-employed 
taxpayers may deduct a percentage of their family health insurance 
premiums. Taxpayers without self-employment income are not eligible for 
the special percentage deduction. The deduct

[[Page 314]]

ible percentage is 60 percent in 2001, 70 percent in 2002, and 100 
percent in 2003 and thereafter.
  126. Medical and health savings accounts.--Some employees may deduct 
annual contributions to a medical savings account (MSA); employer 
contributions to MSAs (except those made through cafeteria plans) for 
qualified employees are also excluded from income. An employee may 
contribute to an MSA in a given year only if the employer does not 
contribute to the MSA in that year. MSAs are only available to self-
employed individuals or employees covered under an employer-sponsored 
high deductible health plan of a small employer. The maximum annual MSA 
contribution is 75 percent of the deductible under the high deductible 
plan for family coverage (65 percent for individual coverage). Earnings 
from MSAs are excluded from taxable income. Distributions from an MSA 
for medical expenses are not taxable. The number of taxpayers who may 
benefit annually from MSAs is generally limited to 750,000. No new MSAs 
may be established after December 31, 2003. The Medicare Prescription 
Drug, Improvement, and Modernization Act of 2003 introduced health 
savings accounts (HSA) which provides a tax-favored savings for health 
care expenses. The definition of a high-deductible health plan is less 
restrictive for HSAs than for MSAs.
  127. Medical care expenses.--Personal expenditures for medical care 
(including the costs of prescription drugs) exceeding 7.5 percent of the 
taxpayer's adjusted gross income are deductible.
  128. Hospital construction bonds.--Interest earned on State and local 
government debt issued to finance hospital construction is excluded from 
income subject to tax.
  129. Charitable contributions to health institutions.--Individuals and 
corporations may deduct contributions to nonprofit health institutions. 
Tax expenditures resulting from the deductibility of contributions to 
other charitable institutions are listed under the education, training, 
employment, and social services function.
  130. Orphan drugs.--Drug firms can claim a tax credit of 50 percent of 
the costs for clinical testing required by the Food and Drug 
Administration for drugs that treat rare physical conditions or rare 
diseases.
  131. Blue Cross and Blue Shield.--Blue Cross and Blue Shield health 
insurance providers in existence on August 16, 1986 and certain other 
nonprofit health insurers are provided exceptions from otherwise 
applicable insurance company income tax accounting rules that 
substantially reduce (or even eliminate) their tax liabilities.
  132. Tax credit for health insurance purchased by certain displaced 
and retired individuals.--The Trade Act of 2002 provided a refundable 
tax credit of 65 percent for the purchase of health insurance coverage 
by individuals eligible for Trade Adjustment Assistance and certain PBGC 
pension recipients.

                             Income Security

  133. Railroad retirement benefits.--Railroad retirement benefits are 
not generally subject to the income tax unless the recipient's gross 
income reaches a certain threshold. The threshold is discussed more 
fully under the Social Security function.
  134. Workers' compensation benefits.--Workers compensation provides 
payments to disabled workers. These benefits, although income to the 
recipients, are not subject to the income tax.
  135. Public assistance benefits.--Public assistance benefits are 
excluded from tax. The normal tax method considers cash transfers from 
the Government as taxable and, thus, treats the exclusion for public 
assistance benefits as a tax expenditure.
  136. Special benefits for disabled coal miners.--Disability payments 
to former coal miners out of the Black Lung Trust Fund, although income 
to the recipient, are not subject to the income tax.
  137. Military disability pensions.--Most of the military pension 
income received by current disabled retired veterans is excluded from 
their income subject to tax.
  138. Employer-provided pension contributions and earnings.--Certain 
employer contributions to pension plans are excluded from an employee's 
gross income even though the employer can deduct the contributions. In 
addition, the tax on the investment income earned by the pension plans 
is deferred until the money is withdrawn.
  139. 401(k) plans.--Individual taxpayers can make tax-preferred 
contributions to certain types of employer-provided 401(k) plans (and 
401(k)-type plans like 403(b) plans and the Federal government's Thrift 
Savings Plan). In 2004, an employee could exclude up to $14,000 of wages 
from AGI under a qualified arrangement with an employer's 401(k) plan. 
This increases to $15,000 in 2006 (indexed thereafter). The tax on the 
investment income earned by 401(k)-type plans is deferred until 
withdrawn.
  Employees are allowed to make after-tax contributions to 401(k) and 
401(k)-type plans. These contributions are not excluded from AGI, but 
the investment income of such after-tax contributions is not taxed when 
earned or withdrawn.
  140. Individual Retirement Accounts.--Individual taxpayers can take 
advantage of several different Individual Retirement Accounts (IRAs): 
deductible IRAs, non-deductible IRAs, and Roth IRAs. The annual 
contributions limit applies to the total of a taxpayer's deductible, 
non-deductible, and Roth IRAs contributions. The IRA contribution limit 
is $4,000 in 2005, and $5,000 in 2008 (indexed thereafter) and allows 
taxpayers over age 50 to make additional ``catch-up'' contributions of 
$1,000 (by 2006).
  Taxpayers whose AGI is below $80,000 ($60,000 for non-joint filers) in 
2005 can claim a deduction for IRA contributions. The IRA deduction is 
phased out for taxpayers with AGI between $70,000 and $80,000 ($50,000 
and $60,000 for non-joint). The phase-out range in

[[Page 315]]

creases annually until it reaches $80,000 to $100,000 in 2007. Taxpayers 
whose AGI is above the phase-out range can also claim a deduction for 
their IRA contributions depending on whether they (or their spouse) are 
an active participant in an employer-provided retirement plan. The tax 
on the investment income earned by 401(k) plans, non-deductible IRAs, 
and deductible IRAs is deferred until the money is withdrawn.
  Taxpayers with incomes below $160,000 ($110,000 for nonjoint filers) 
can make contributions to Roth IRAs. The maximum contribution to a Roth 
IRA is phased out for taxpayers with AGI between $150,000 and $160,000 
($95,000 and $110,000 for singles). Investment income of a Roth IRA is 
not taxed when earned nor when withdrawn. Withdrawals from a Roth IRA 
are penalty free if: (1) the Roth IRA was opened at least 5 years before 
the withdrawal, and (2) the taxpayer either (a) is at least 591/2, (b) 
dies, (c) is disabled, or (d) purchases a first-time house.
  Taxpayers can contribute to a non-deductible IRA regardless of their 
income and whether they are an active participant in an employer-
provided retirement plan. The tax on investment income earned by non-
deductible IRAs is deferred until the money is withdrawn.
  141. Low and moderate income savers' credit.--The Tax Code provides an 
additional incentive for lower-income taxpayers to save through a 
nonrefundable credit of up to 50 percent on IRA and other retirement 
contributions of up to $2,000. This credit is in addition to any 
deduction or exclusion. The credit is completely phased out by $50,000 
for joint filers and $25,000 for single filers. This temporary credit is 
in effect from 2002 through 2006.
  142. Keogh plans.--Self-employed individuals can make deductible 
contributions to their own retirement (Keogh) plans equal to 25 percent 
of their income, up to a maximum of $42,000 in 2005. Total plan 
contributions are limited to 25 percent of a firm's total wages. The tax 
on the investment income earned by Keogh plans is deferred until 
withdrawn.
  143. Employer-provided life insurance benefits.--Employer-provided 
life insurance benefits are excluded from an employee's gross income 
even though the employer's costs for the insurance are a deductible 
business expense, but only to the extent that the employer's share of 
the total costs does not exceed the cost of $50,000 of such insurance.
  144. Employer-provided accident and disability benefits.--Employer-
provided accident and disability benefits are excluded from an 
employee's gross income even though the employer's costs for the 
benefits are a deductible business expense.
  145. Employer-provided supplementary unemployment benefits.--Employers 
may establish trusts to pay supplemental unemployment benefits to 
employees separated from employment. Interest payments to such trusts 
are exempt from taxation.
  146. Employer Stock Ownership Plan (ESOP) provisions.--ESOPs are a 
special type of tax-exempt employee benefit plan. Employer-paid 
contributions (the value of stock issued to the ESOP) are deductible by 
the employer as part of employee compensation costs. They are not 
included in the employees' gross income for tax purposes, however, until 
they are paid out as benefits. The following special income tax 
provisions for ESOPs are intended to increase ownership of corporations 
by their employees: (1) annual employer contributions are subject to 
less restrictive limitations; (2) ESOPs may borrow to purchase employer 
stock, guaranteed by their agreement with the employer that the debt 
will be serviced by his payment (deductible by him) of a portion of 
wages (excludable by the employees) to service the loan; (3) employees 
who sell appreciated company stock to the ESOP may defer any taxes due 
until they withdraw benefits; and (4) dividends paid to ESOP-held stock 
are deductible by the employer.
  147. Additional deduction for the blind.--Taxpayers who are blind may 
take an additional $1,200 standard deduction if single, or $1,000 if 
married in 2005.
  148. Additional deduction for the elderly.--Taxpayers who are 65 years 
or older may take an additional $1,200 standard deduction if single, or 
$1,000 if married in 2005.
  149. Tax credit for the elderly and disabled.--Individuals who are 65 
years of age or older, or who are permanently disabled, can take a tax 
credit equal to 15 percent of the sum of their earned and retirement 
income. Income is limited to no more than $5,000 for single individuals 
or married couples filing a joint return where only one spouse is 65 
years of age or older, and up to $7,500 for joint returns where both 
spouses are 65 years of age or older. These limits are reduced by one-
half of the taxpayer's adjusted gross income over $7,500 for single 
individuals and $10,000 for married couples filing a joint return.
  150. Casualty losses.--Neither the purchase of property nor insurance 
premiums to protect its value are deductible as costs of earning income; 
therefore, reimbursement for insured loss of such property is not 
reportable as a part of gross income. Taxpayers, however, may deduct 
uninsured casualty and theft losses of more than $100 each, but only to 
the extent that total losses during the year exceed 10 percent of AGI.
  151. Earned income tax credit (EITC).--The EITC may be claimed by low 
income workers. For a family with one qualifying child, the credit is 34 
percent of the first $7,830 of earned income in 2005. The credit is 40 
percent of the first $11,000 of income for a family with two or more 
qualifying children. The credit is phased out beginning when the 
taxpayer's income exceeds $14,370 at the rate of 15.98 percent (21.06 
percent if two or more qualifying children are present). It is 
completely phased out when the taxpayer's modified adjusted gross income 
reaches $31,030 ($35,263 if two or more qualifying children are 
present), $33,030 (or $37,263) for those married.
  The credit may also be claimed by workers who do not have children 
living with them. Qualifying workers

[[Page 316]]

must be at least age 25 and may not be claimed as a dependent on another 
taxpayer's return. The credit is not available to workers age 65 or 
older. In 2005, the credit is 7.65 percent of the first $5,220 of earned 
income. When the taxpayer's income exceeds $6,530 (8,530 if married), 
the credit is phased out at the rate of 7.65 percent. It is completely 
phased out at $11,750 ($13,750 for married) of modified adjusted gross 
income.
  For workers with or without children, the income levels at which the 
credit begins to phase-out and the maximum amounts of income on which 
the credit can be taken are adjusted for inflation. For married 
taxpayers filing a joint return, the base amount for the phase-out 
increases by $2,000 in 2005 through 2007, and $3,000 in 2008 (indexed 
thereafter).
  Earned income tax credits in excess of tax liabilities owed through 
the individual income tax system are refundable to individuals. This 
portion of the credit is shown as an outlay, while the amount that 
offsets tax liabilities is shown as a tax expenditure.
  152. Additional exemption for housing Hurricane Katrina displaced 
individuals.--This provision, introduced by the Katrina Emergency Tax 
Relief Act of 2005, provides an additional exemption of $500 for each 
Hurricane Katrina displaced individual for whom the taxpayer is 
providing shelter in his or her home, for a maximum additional exemption 
amount is $2,000.

                             Social Security

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

                     Veterans Benefits and Services

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

                           General Government

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

                                Interest

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

                                Appendix:

           TREASURY REVIEW OF THE TAX EXPENDITURE PRESENTATION

  This appendix provides a presentation of the Treasury Department's 
continuing review of the tax expenditure budget. The review focuses on 
three issues: (1) using comprehensive income as a baseline tax system; 
(2) using a consumption tax as a baseline tax system; and (3) defining 
negative tax expenditures (provisions that cause taxpayers to pay too 
much tax).

[[Page 317]]

  The first section of this appendix compares major tax expenditures in 
the current budget to those implied by a comprehensive income baseline. 
This comparison includes a discussion of negative tax expenditures. The 
second section compares the major tax expenditures in the current budget 
to those implied by a consumption tax baseline, and also discusses 
negative tax expenditures. The final section addresses concerns that 
have been raised over the measurement of some current tax expenditures 
by describing new estimates of the tax expenditure caused by accelerated 
depreciation and by the tax exemption of the return earned on owner-
occupied housing, and an alternative estimate of the tax expenditure for 
the preferential treatment of capital gains. The final section also 
provides an estimate of the negative tax expenditure caused by the 
double tax on corporate profits.

    DIFFERENCES BETWEEN OFFICIAL TAX EXPENDITURES AND THOSE BASED ON 
                          COMPREHENSIVE INCOME

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

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

  Comprehensive income, also called Haig-Simons income, is the real, 
inflation-adjusted accretion to one's economic power arising between two 
points in time, e.g., the beginning and ending of the year. It includes 
all accretions to wealth, whether or not realized, whether or not 
related to a market transaction, and whether a return to capital or 
labor. Inflation-adjusted capital gains (and losses) would be included 
in comprehensive income as they accrue. Business investment and casualty 
losses, including losses caused by depreciation, would be deducted. 
Implicit returns, such as those accruing to homeowners, also would be 
included in comprehensive income. A comprehensive income tax baseline 
would tax all sources of income once. Thus, it would not include a 
separate tax on corporate income that leads to the double taxation of 
corporate profits.
  While comprehensive income can be defined on the sources side of the 
consumer's balance sheet, it sometimes is instructive to use the 
identity between the sources of wealth and the uses of wealth to 
redefine it as the sum of consumption during the period plus the change 
in net worth between the beginning and the end of the period.
  Comprehensive income is widely held to be the idealized base for an 
income tax even though it is not a perfectly defined concept.\7\ It 
suffers from conceptual ambiguities, some of which are discussed below, 
as well as practical problems in measurement and tax administration, 
e.g., how to implement a practicable deduction for economic depreciation 
or include in income the return earned on consumer durable goods, 
including housing, automobiles, and major appliances.
---------------------------------------------------------------------------
  \7\ See, e.g., David F. Bradford, Untangling the Income Tax 
(Cambridge, MA: Harvard University Press, 1986), pp. 15-31, and Richard 
Goode, ``The Economic Definition of Income'' in Joseph Pechman, ed., 
Comprehensive Income Taxation (Washington, D.C.: The Brookings 
Institution, 1977), pp. 1-29..
---------------------------------------------------------------------------
  Furthermore, comprehensive income does not necessarily represent an 
ideal tax base; efficiency or equity would be improved by deviating from 
comprehensive income as a tax base, e.g., by reducing the tax on capital 
income in order to spur economic growth further or by subsidizing 
certain types of activities to correct for market failures or to improve 
the after-tax distribution of income. In addition, some elements of 
comprehensive income would be difficult or impossible to include in a 
tax system that is administrable.
  Classifying individual tax provisions relative to a comprehensive 
income baseline is difficult, in part because of the ambiguity of the 
baseline. It also is difficult because of interactions between tax 
provisions (or their absence). These interactions mean that it may not 
always be appropriate to consider each provision in isolation. 
Nonetheless, Appendix Table 1 attempts such a classification for each of 
the thirty largest tax expenditures from the Budget.
  We classify fourteen of the thirty items as tax expenditures under a 
comprehensive tax base (those in panel A). Most of these give 
preferential tax treatment to the return on certain types of savings or 
investment. They are a result of the explicitly hybrid nature of the 
existing tax system and arise out of policy decisions that reflect 
discomfort with the high tax rate on capital income that would otherwise 
arise under the current

[[Page 318]]

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

[[Page 319]]

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

[[Page 320]]

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

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

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

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

  Under current budgetary practice, negative tax expenditures, tax 
provisions that raise rather than lower taxes, are excluded from the 
official tax expenditure list. This exclusion conforms with the view 
that tax expenditures are intended to be similar to Government spending 
programs.
  If attention is expanded from a focus on spending-like programs to 
include any deviation from the baseline tax system, negative tax 
expenditures would be of interest. Relative to a comprehensive income 
baseline, there are a number of important negative tax ex

[[Page 321]]

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

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

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

Ambiguities in Determining Tax Expenditures Relative to a Consumption 
Baseline

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

[[Page 322]]

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

Treatment of Major Tax Expenditures under a Comprehensive Consumption 
Baseline

  As noted above, the major difference between a comprehensive 
consumption tax and a comprehensive income tax is in the treatment of 
saving, or in the taxation of capital income. Consequently, many current 
tax expenditures related to preferential taxation of capital income 
would not be tax expenditures under a consumption tax. However, 
preferential treatment of items of income that is unrelated to saving or 
investment incentives would remain tax expenditures under a consumption 
baseline. In addition, several official tax expenditures relating to 
items of income and expense are difficult to classify properly, while 
others may serve as proxies for properly measured tax expenditures.
  Appendix Table 2 shows thirty large official tax expenditures from the 
Budget classified according to whether they would be considered a tax 
expenditure under a consumption tax. One of the thirty items clearly 
would be a tax expenditure (shown in panel A) under a consumption tax, 
while an additional seven (those in panel B) probably would be tax 
expenditures.
  Exclusion of workers' compensation benefits allows an exclusion from 
income that is unrelated to investment, and so should be included in the 
base of a comprehensive consumption tax.
  The deductibility of home mortgage interest is a strong candidate for 
inclusion as a tax expenditure. A consumption tax would seek to tax the 
entire value of the flow of services from housing, and so would not 
allow a deduction for home mortgage interest. This would be the case 
regardless of whether the tax base included the annual flow of housing 
services, or instead

[[Page 323]]

used a tax-prepayment or yield exemption approach (discussed more 
completely below) to taxing housing services. A deduction for interest 
would be allowed under a consumption tax applied to both real and 
financial cash flows, but current law does not require the homeowner to 
take into income the proceeds of a home loan, nor does it allow him a 
deduction for principle repayments.
  Nonetheless, an ambiguity about the treatment if home mortgage 
interest arises as a result of current law's taxation of interest 
income. Under a consumption tax, interest income generally would not be 
taxed (at least in present value terms). In a sense, the homeowner's 
mortgage interest deduction could be viewed as counterbalancing the 
lender's inclusion, eliminating interest flows from the tax base, as 
would be appropriate under many types of consumption taxes.\27\
---------------------------------------------------------------------------
  \27\ One must guard against double counting here, however, to the 
extent that current law's general taxation of capital income is 
calculated elsewhere in the tax expenditure budget as a negative tax 
expenditure..
---------------------------------------------------------------------------
  The deductibility of property taxes on owner-occupied housing also is 
a strong candidate for inclusion as a tax expenditure under a 
consumption tax baseline, although there is a bit of ambiguity. Property 
taxes would be deducted under a consumption tax under which the base 
allowed expensing of the cost of the house and included the rental value 
of the house in the annual tax base. But, as discussed above in the 
income tax section, this deduction nonetheless is a strong candidate for 
inclusion as a tax expenditure because the current tax system does not 
impute the consumption value of housing services to the homeowner's tax 
base.
  Under a consumption tax that applied the yield exemption or tax 
prepayment approach to housing, property taxes would not be deducted by 
the homeowner because the cash flows (positive and negative) related to 
the investment are simply ignored for tax purposes--they are outside the 
tax base. Their deduction under current law would represent a clear case 
of a tax expenditure. As discussed below, current law's taxation of 
housing approximates a yield exemption approach; no deduction of the 
purchase price of the house, no tax on the house's service flow. 
Consequently, the deduction for property taxes probably should be a tax 
expenditure relative to a consumption base--there is not even the 
slightest ambiguity here.
  With respect to the household sector's deduction of state and local 
income taxes, some ambiguity arises because these taxes, when considered 
separately from the value of any consumption type government services 
they might fund, should be excluded from the base of a consumption tax 
because they represent a reduction in net worth. Under a consumed income 
tax collected from the household, they would need to be deducted to 
properly measure consumption.
  But state and local income taxes are used to fund government services, 
many of which would be included in the base of a consumption tax if paid 
for privately. The value of these services probably should be included 
in the base of a broad consumption tax. The value of such services is 
generally not imputed to the household under current tax law. One rough 
proxy for their value is the tax payments made to support them.\28\ 
Stated another way, the payment of state and local income taxes might 
not represent a reduction in net worth (or a real net cost to the 
household) to the extent that the payment is accompanied by the 
provision of services of equal value.
---------------------------------------------------------------------------
  \28\ The failure to impute the value of government provided services 
casts doubt on the appropriateness of deducting property taxes on owner-
occupied housing even under a consumption tax that allowed the homeowner 
to deduct the cost of the house from his taxable consumption and imputed 
to his tax base the house's annual consumption flow. .
---------------------------------------------------------------------------
  The analysis of state and local sales taxes on consumption items would 
seem to parallel that of income taxes. When these taxes are considered 
in isolation from government services they might fund, they should be 
excluded from the base of a federal consumption tax. But to the extent 
sales taxes represent a user charges for government provided consumption 
goods, their deduction might be inappropriate because current federal 
tax law fails to impute to income the value of the state and local 
services funded by sales tax payments.
  Property taxes on assets other than housing would seem to be best 
thought of using the model discussed above for housing. These taxes 
typically are paid on assets, such as automobiles and boats, that yield 
a stream of services that current federal tax law fails to impute to 
income.
  The official tax expenditures for Social Security benefits reflects 
exceptions for low-income taxpayers from the general rule that 85 
percent of Social Security benefits are included in the recipient's tax 
base. The 85 percent inclusion is intended as a simplified mechanism for 
taxing Social Security benefits as if the Social Security program were a 
private pension with employee contributions made from after-tax income. 
Under these tax rules, income earned on contributions made by both 
employers and employees benefits from tax deferral, but employer 
contributions also benefit because the employee may exclude them from 
his taxable income, while the employee's own contributions are included 
in his taxable income. These tax rules give the equivalent of 
consumption tax treatment, a zero effective tax rate on the return, to 
the extent that the original pension contributions are made by the 
employer, but give less generous treatment to the extent that the 
original contributions are made by the employee. Income earned on 
employee contributions is taxed at a low, but positive, effective tax 
rate. Based on historical calculations, the 85 percent inclusion 
reflects roughly the outcome of applying these tax rules to a lower-
income earner when one-half of the contributions are from the employer 
and one-half from the employee.
  The current tax expenditure measures a tax benefit relative to a 
baseline that is somewhere between a comprehensive income tax and a 
consumption tax. The properly measured tax expenditure relative to a 
consumption tax baseline would include only those Social Security 
benefits that are accorded treatment more favorable than that implied by 
a consumption tax, which

[[Page 324]]

would correspond to including 50 percent of Social Security benefits in 
the recipient's tax base. Thus, the existing tax expenditure is correct 
conceptually, but is not measured properly relative to a comprehensive 
income tax. A similar analysis would apply to exclusion of Social 
Security benefits of dependents and retirees.
  There is a strong case for viewing the child credit and the earned 
income tax credit as social welfare programs (transfers). As such, they 
would be tax expenditures relative to a consumption baseline. 
Nonetheless, these credits could alternatively be viewed as relieving 
tax on ``nondiscretionary'' consumption, and so not properly considered 
a tax expenditure.
  The treatment of the items in panel C is less uncertain. Several of 
these items relate to the costs of medical care or to charitable 
contributions. As discussed in the previous section of the appendix, 
there is disagreement within the tax policy community over the extent to 
which medical care and charitable giving represent consumption items. 
Medical care is widely held to be consumption, except perhaps the 
medical care that actually raises, rather than simply sustains the 
individual's ability to work. Charitable giving, on the other hand, may 
be considered to be a reduction in net worth that should be excluded 
from the tax base because it does not yield direct satisfaction to 
taxpayer who makes the expenditure. In this case, the tax expenditure 
lies not with the individual making the charitable deduction, but with 
the exclusion from taxation of the amounts received by the recipient.
  There also is the issue of how to tax medical insurance premiums. 
Under current law, employees do not have to include insurance premiums 
paid for by employers in their income. The self-employed also may 
exclude (via a deduction) medical insurance premiums from their taxable 
income. From some perspectives, these premiums should be in the tax base 
because they appear to represent consumption. Yet an alternative 
perspective would support excluding the premium from tax as long as the 
consumption tax base included the value of any medical services paid for 
by the insurance policy, because the premium equals the expected value 
of insurance benefits received. But even from this alternative 
perspective, the official tax expenditure might continue to be a tax 
expenditure under a consumption tax baseline because current law 
excludes the value of medical services paid with insurance benefits from 
the employee's taxable income.
  If medical spending is not consumption, one approach to measuring the 
consumption base would ignore insurance, but allow the consumer to 
deduct the value of all medical services obtained. An alternative 
approach would allow a deduction for the premium but include the value 
of any insurance benefits received, while continuing to allow a 
deduction for a value of all medical services obtained. In either case, 
the official tax expenditure for the exclusion of employer-provided 
medical insurance and expenses would not be a tax expenditure relative 
to a consumption tax baseline.
  Current law does not tax the annual rental value of owner-occupied 
housing. In contrast, the annual rental value of the housing would be 
taxed under a consumption tax. Hence, from one perspective, the 
exclusion of the net annual rental value of owner-occupied housing would 
be a tax expenditure relative to a consumption tax baseline.
  However, a consumption tax that included in its base the annual rental 
value of housing also would allow the homeowner a deduction for the 
price of the house in the year it was purchased; the investment in 
housing would be expensed. Current law fails to allow such a deduction, 
raising doubt about classifying as a tax expenditure the exclusion of 
net rental income from owner-occupied housing. Indeed, it is possible to 
interpret current law as applying the tax pre-payment or yield exemption 
method to housing, in which the purchase price of an investment, rather 
than the annual cash flow generated by the investment, is taxed. In the 
textbook case, the tax pre-payment approach is equivalent in expected 
present value terms to taxing directly the annual consumption value of 
the house. So it is not clear whether the failure to tax the rental 
income from housing represents a tax expenditure.
  The taxation of Social Security benefits for the disabled also is 
difficult to classify. As discussed in this appendix above, these 
benefits generally ought to be taxed because they represent purchasing 
power. However, the associated Social Security taxes ought to be fully 
deductible, but they are not. Hence the proper treatment is unclear. 
Moreover, if the insurance model is applied, the taxation of Social 
Security benefits might be a negative tax expenditure.
  The credit for low-income housing acts to lower the tax burden on 
qualified investment, and so from one perspective would not be a tax 
expenditure under a consumption tax baseline. However, in some cases the 
credit is too generous; it can give a negative tax on income from 
qualified investment rather than the zero tax called for under 
consumption tax principles. In addition, the credit is very narrowly 
targeted. Consequently, it could be considered a tax expenditure 
relative to a consumption tax baseline.
  The final panel (D) shows items that are not likely to be tax 
expenditures under a consumption base. Most of these relate to tax 
provisions that eliminate or reduce the tax on various types of capital 
income because a zero tax on capital income is consistent with 
consumption tax principles.
  The deduction for U.S. production activities is not classified as a 
tax expenditure. This reflects the view that it represents a widespread 
reduction in taxes on capital income or an offset to the corporate 
income tax. In contrast to this classification, however, it would be a 
tax expenditure to the extent that it is viewed as a targeted tax 
incentive.
  The exception from the passive loss rules probably would not be a tax 
expenditure because proper measurement of income, and hence of 
consumption, requires full deduction of losses.


[[Page 325]]


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

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

Negative Tax Expenditures

  Importantly, current law also deviates from a consumption tax norm in 
ways that increase, rather than decrease, tax liability. These could be 
called negative tax expenditures. The official Budget excludes negative 
tax expenditures on the theory that tax expenditures are intended to 
substitute for Government spending programs. Yet excluding negative tax 
expenditures gives a very one-sided look at the differences between the 
existing tax system and a consumption tax.
  A large item on this list would be the inclusion of capital income in 
the current individual income tax base, including the income earned on 
inside-build up in Social Security accounts. The revenue from the 
corporate income tax, or more generally a measure of the double tax on 
corporate profits, also would be a negative tax expenditure. 
Depreciation allowances, even if accelerated, would be a negative tax 
expenditure since consumption tax treatment generally would require 
expensing. Depending on the treatment of loans, the borrower's inability 
to deduct payments of principal and the lender's inability to deduct 
loans might be a negative tax expenditure. The passive loss rules and 
NOL carry-forward provisions also might generate negative tax 
expenditures, because the change in net worth requires a deduction for 
losses (consumption = income--the change in net worth). If human capital 
were considered an asset, then its cost (e.g., certain education and 
training expenses, including perhaps costs of college and professional 
school) should be expensed, but it is not under current law. Certain 
restrictions under the individual AMT as well as the phase-out of 
personal exemptions and of itemized deductions also might be considered 
negative tax expenditures. Under some views, the current tax treatment 
of Social Security benefits paid to the disabled would be a negative tax 
expenditure.

             REVISED ESTIMATES OF SELECTED TAX EXPENDITURES

Accelerated Depreciation

  Under the reference tax law baseline no tax expenditures arise from 
accelerated depreciation. In the past, official tax expenditure 
estimates of accelerated depreciation under the normal tax law baseline 
compared tax allowances based on the historic cost of an asset with 
allowances calculated using the straight-line method over relatively 
long recovery periods. Normal law allowances also were determined by the 
historical cost of the asset and so did not adjust for inflation, 
although such an adjustment is required when measuring economic 
depreciation, the age related fall in the real value of the asset.
  Beginning with the 2004 Budget, the tax expenditures for accelerated 
depreciation under the normal law concept have been recalculated using 
as a baseline depreciation rates and replacement cost indexes from the 
National Income and Product Accounts.\29\ The revised estimates are 
intended to approximate the degree of acceleration provided by current 
law over a baseline determined by real, inflation adjusted, and economic 
depreciation. Current law depreciation allowances for machinery and 
equipment include the benefits of a temporary expensing provision.\30\ 
The estimates are shown in tables in the body of the main text, e.g., 
Table 19-1.
---------------------------------------------------------------------------
  \29\ See Barbara Fraumeni, ``The Measurement of Depreciation in the 
U.S. National Income and Product Accounts,'' in Survey of Current 
Business 77 No. 7 (Washington, D.C.: Department of Commerce, Bureau of 
Economic Analysis, July, 1997), pp. 7-42, and the National Income and 
Product Accounts of the United States, Table 7.6, ``Chain-type Quantity 
and Price Indexes for Private Fixed Investment by Type,'' U.S. 
Department of Commerce, Bureau of Economic Analysis.
  \30\ The temporary provision allows 30 percent of the cost of a 
qualifying investment to be deducted immediately rather than capitalized 
and depreciated over time. It is generally effective for qualifying 
investments made after September 10, 2001 and before September 11, 2004. 
The Jobs and Growth Tax Relief Reconciliation Act of 2003 raised the 
deduction to 50 percent depreciation (up from 30 percent) of the cost 
new equipment purchased after May 5, 2003 and placed into service before 
January 1, 2005. Qualifying investments generally are limited to 
tangible property with depreciation recovery periods of 20 years or 
less, certain software, and leasehold improvements, but this set of 
assets corresponds closely to machinery and equipment.

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

  A homeowner receives a flow of housing services equal in gross value 
to the rent that could have been earned had the owner chosen to rent the 
house to others. Comprehensive income would include in the homeowner's 
tax base this gross rental flow, and would allow the homeowner a 
deduction for expenses such as interest, depreciation, property taxes, 
and other costs associated with earning the rental income. Thus, a com

[[Page 326]]

prehensive tax base would include in its base the homeowner's implicit 
net rental income (gross income minus deductions) earned on investment 
in owner-occupied housing.
  In contrast to a comprehensive income tax, current law makes no 
imputation for gross rental income and allows no deduction for 
depreciation or for other expenses, such as utilities and maintenance. 
Current law does, however, allow a deduction for home mortgage interest 
and for property taxes. Consequently, relative to a comprehensive income 
baseline, the total tax expenditure for owner-occupied housing is the 
sum of tax on net rental income plus the tax saving from the deduction 
for property taxes and for home mortgage interest.\31\
---------------------------------------------------------------------------
  \31\ The homeowner's tax base under a comprehensive income tax is net 
rents. Under current law, the homeowner's tax base is -(interest + 
property taxes). The tax expenditure base is the difference between the 
comprehensive income base and current law's tax base, which for 
homeowners is the sum of net rents plus interest plus property taxes.
---------------------------------------------------------------------------
  Prior to 2006, the official list of tax expenditures did not include 
the exclusion of net implicit rental income on owner-occupied housing. 
Instead, it included as tax expenditures deductions for home mortgage 
interest and for property taxes. While these deductions are legitimately 
considered tax expenditures, given current law's failure to impute 
rental income, they are highly flawed as estimates of the total tax 
advantage to housing; they overlook the additional exclusion of implicit 
net rental income. To the extent that a homeowner owns his house 
outright, unencumbered by a mortgage, he would have no home mortgage 
interest deduction, yet he still would enjoy the benefits of receiving 
tax free the implicit rental income earned on his house. The treatment 
of owner-occupied housing has been revised beginning in the 2006 budget, 
which now includes an item for the exclusion of net rental income of 
homeowners.\32\
---------------------------------------------------------------------------
  \32\ This estimate combines the positive tax expenditure for the 
failure to impute rental income with the negative tax expenditure for 
the failure to allow a deduction for depreciation and other costs.
---------------------------------------------------------------------------
  Appendix Table 3, as well as the tables in the body of the main text, 
e.g., Tables 19-1 and 19-2, show estimates of the tax expenditure caused 
by the exclusion of implicit net rental income from investment in owner-
occupied housing. This estimate starts with the NIPA calculated value of 
gross rent on owner-occupied housing, and subtracts interest, taxes, 
economic depreciation, and other costs in arriving at an estimate of 
net-rental income from owner-occupied housing.\33\
---------------------------------------------------------------------------
  \33\ National Income and Production Accounts, Table 2.4.

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

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

Double Tax on Corporate Profits

  A comprehensive income tax would tax all sources of income once. Taxes 
would not vary by type or source of income.
  In contrast to this benchmark, current law taxes income that 
shareholders earn on investment in corporate stocks at least twice, and 
at combined rates that generally are higher than those imposed on other 
sources of income. Corporate profits are taxed once at the company level 
under the corporation income tax. They are taxed again at the 
shareholder level when received as a dividend or recognized as a capital 
gain. Corporate profits can be taxed more then twice when they pass 
through multiple corporations before being distributed to noncorporate 
shareholders. Corporate level taxes cascade because corporations are 
taxed on capital gains they realize on the sale of stock shares and on 
some dividend income received. Compared to a comprehensive income tax, 
current law's double (or more) tax on corporate profits is an example of 
a negative tax expenditure because it subjects income to a larger tax 
burden than implied by a comprehensive income baseline.
  Appendix Table 3 provides an estimate of the negative tax expenditure 
caused by the multiple levels of tax on corporate profits. This negative 
tax expenditure is measured as the shareholder level tax on dividends 
paid and capital gains realized out of earnings that have been fully 
taxed at the corporate level. It also includes the corporate tax paid on 
inter-corporate dividends and on corporate capital gains attributable to 
the sale of stock shares. The estimate includes the reduction in the 
dividends and capital gains tax rates enacted in JGTRRA.
  The negative tax expenditure is large in magnitude; it exceeds $34 
billion in the years 2007 through in 2011. It is comparable in size (but 
opposite in sign) to all but the largest official tax expenditures. 
JGTRRA reduced but did not eliminate the double tax on corporate 
profits.

[[Page 327]]



                     Appendix Table 1.  COMPARISON OF CURRENT TAX EXPENDITURES WITH THOSE IMPLIED BY A COMPREHENSIVE INCOME TAX \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Revenue Effect
                                                             Description                                                                       2007
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
A. Tax Expenditure Under a Comprehensive Income Tax
 
  Net exclusion of pension contributions and earnings: Employer plans..................................................................      52,470
  Accelerated depreciation of machinery and equipment (normal tax method)..............................................................      52,230
  Net exclusion of pension contributions and earnings: 401(k) plans....................................................................      39,800
  Capital gains exclusion on home sales................................................................................................      43,900
  Exclusion of net imputed rental income on owner-occupied housing.....................................................................      33,210
  Capital gains (except agriculture, timber, iron ore, and coal).......................................................................      26,760
  Exclusion of interest on public purpose State and local bonds........................................................................      29,640
  Exclusion of interest on life insurance savings......................................................................................      20,770
  Net exclusion of pension contributions and earnings: Keogh plans.....................................................................      10,670
  Expensing of research and experimentation expenditures (normal tax method)...........................................................       6,990
  Deferral of income from controlled foreign corporations (normal tax method)..........................................................      11,940
  Net exclusion of pension contributions and earnings: Individual Retirement Accounts..................................................       5,970
  Exclusion of workers' compensation benefits..........................................................................................       6,180
  Credit for low-income housing investments............................................................................................       4,250
 
 
B. Possibly a Tax Expenditure Under a Comprehensive Income Tax, But With Some Qualifications
 
  Deductibility of mortgage interest on owner-occupied homes...........................................................................      79,860
  Child credit.........................................................................................................................      42,120
  Step-up basis of capital gains at death..............................................................................................      32,460
  Deductibility of nonbusiness state and local taxes other than on owner-occupied homes................................................      27,210
  Exclusion of Social Security benefits for retired workers............................................................................      19,590
  Deductibility of State and local property tax on owner-occupied homes................................................................      12,810
  Deduction for U.S. production activities.............................................................................................      10,670
  Earned income tax credit.............................................................................................................       5,150
  Exclusion of Social security benefits of dependents and survivors....................................................................       4,040
 
 
C. Uncertain
 
  Exclusion of employer contributions for medical insurance premiums and medical care..................................................     146,780
  Deductibility of charitable contributions, other than education and health...........................................................      34,500
  Deductibility of medical expenses....................................................................................................       5,310
  Deductibility of self-employed medical insurance premiums............................................................................       4,630
  Social security benefits for the disabled............................................................................................       4,110
  Deductibility of charitable contributions, education.................................................................................       4,030
 
D. Probably Not a Tax Expenditure Under a Comprehensive Income Tax
 
  Exception from passive loss rules for $25,000 of rental loss.........................................................................       6,230
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The measurement of certain tax expenditures under a comprehensive income tax baseline may differ from the official budget estimate even when the
  provision would be a tax expenditure under both baselines.Source: Table 19-2, Tax Expenditure Budget.


[[Page 328]]


                   Appendix Table 2.  COMPARISON OF CURRENT TAX EXPENDITURES WITH THOSE IMPLIED BY A COMPREHENSIVE CONSUMPTION TAX \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Revenue Effect
                                                             Description                                                                       2007
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
A. Tax Expenditure Under a Consumption Base
 
  Exclusion of workers' compensation benefits..........................................................................................       6,180
 
B. Probably a Tax Expenditure Under a Consumption Base
 
  Deductibility of mortgage interest on owner-occupied homes...........................................................................      79,860
  Child credit.........................................................................................................................      42,120
  Deductibility of nonbusiness state and local taxes other than on owner-occupied homes................................................      27,210
  Exclusion of Social Security benefits for retired workers............................................................................      19,590
  Deductibility of State and local property tax on owner-occupied homes................................................................      12,810
  Earned income tax credit.............................................................................................................       5,150
  Exclusion of Social Security benefits of dependents and survivors....................................................................       4,040
 
C. Uncertain
 
  Exclusion of employer contributions for medical insurance premiums and medical care..................................................     146,780
  Deductibility of charitable contributions, other than education and health...........................................................      34,500
  Exclusion of net imputed rental income on owner-occupied housing.....................................................................      33,210
  Deductibility of medical expenses....................................................................................................       5,310
  Deductibility of self-employed medical insurance premiums............................................................................       4,630
  Credit for low-income housing investments............................................................................................       4,250
  Social Security benefits for disabled................................................................................................       4,110
  Deductibility of charitable contributions, education.................................................................................       3,440
 
D. Not a Tax Expenditure Under a Consumption Base
 
  Net exclusion of pension contributions and earnings: Employer plans..................................................................      52,470
  Accelerated depreciation of machinery and equipment (normal tax method)..............................................................      52,230
  Capital gains exclusion on home sales................................................................................................      43,900
  Net exclusion of pension contributions and earnings: 401(k) plans....................................................................      39,800
  Step-up basis of capital gains at death..............................................................................................      32,460
  Exclusion of interest on public purpose State and local bonds........................................................................      29,640
  Capital gains (except agriculture, timber, iron ore, and coal).......................................................................      26,760
  Exclusion of interest on life insurance savings......................................................................................      20,770
  Deferral of income from controlled foreign corporations (normal tax method)..........................................................      11,940
  Net exclusion of pension contributions and earnings: Keogh plans.....................................................................      10,670
  Deduction for U.S. production activities.............................................................................................      10,670
  Expensing of research and experimentation expenditures (normal tax method)...........................................................       6,990
  Exception from passive loss rules for $25,000 of rental loss.........................................................................       6,230
  Net exclusion of pension contributions and earnings: Individual Retirement Accounts..................................................       5,970
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The measurement of certain tax expenditures under a consumption tax baseline may differ from the official budget estimate even when the provision
  would be a tax expenditure under both baselines.Source: Table 19-2, Tax Expenditure Budget.

                                     

                            Appendix Table 3.  REVISED TAX EXPENDITURE ESTIMATES \1\
----------------------------------------------------------------------------------------------------------------
                                                                        Revenue Loss
               Provision                   ---------------------------------------------------------------------
                                              2005      2006      2007      2008      2009      2010      2011
----------------------------------------------------------------------------------------------------------------
Imputed Rent On Owner-Occupied Housing....    28,600    29,720    33,210    36,860    40,630    44,785    49,364
Double Tax on corporate profit \2\........   -33,940   -33,320   -34,660   -35,900   -37,040   -38,216   -39,430
----------------------------------------------------------------------------------------------------------------
\1\ Calculations described in the appendix text.
\2\ This is a negative tax expenditure, a tax provision that overtaxes income relative to the treatment
  specified by the baseline tax system.