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

    [[Page 239]]

                              17. FEDERAL RECEIPTS

      Receipts (budget and off-budget) are taxes and other collections from
    the public that result from the exercise of the Federal Government's
    sovereign or governmental powers. The difference between receipts and
    outlays is the surplus or deficit.
      The Federal Government also collects income from the public from
    market-oriented activities. Collections from these activities, which are
    subtracted from gross outlays, rather than added to taxes and other
    governmental receipts, are discussed in the next Chapter.
      Total receipts in 2008 are estimated to be $2,662.5 billion, an
    increase of $122.4 billion or 4.8 percent relative to 2007. Receipts are
    projected to grow at an average annual rate of 5.6 percent between 2008
    and 2012, rising to $3,307.3 billion. This growth in receipts is largely
    due to assumed increases in incomes resulting from both real economic
    growth and inflation.
      As a share of Gross Domestic Product (GDP), receipts are projected to
    decline from 18.5 percent in 2007 to 18.3 percent in 2008, and to rise
    to 18.6 percent in 2012.

                                                            Table 17-1.  RECEIPTS BY SOURCE--SUMMARY
                                                                    (In billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                            Estimate
                                                      2006 Actual  -----------------------------------------------------------------------------------------
                                                                         2007           2008           2009           2010           2011           2012
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Individual income taxes........................     1,043.9        1,168.8        1,246.6        1,331.1        1,428.3        1,517.3        1,636.6
    Corporation income taxes.......................       353.9          342.1          314.9          319.8          325.5          340.6          366.6
    Social insurance and retirement receipts.......       837.8          873.4          927.2          974.2        1,029.3        1,085.7        1,138.8
      (On-budget)..................................      (229.4)        (239.2)        (253.1)        (262.8)        (276.0)        (289.9)        (303.4)
      (Off-budget).................................      (608.4)        (634.1)        (674.1)        (711.4)        (753.3)        (795.8)        (835.3)
    Excise taxes...................................        74.0           57.1           68.1           63.1           63.6           68.6           71.3
    Estate and gift taxes..........................        27.9           25.3           25.7           27.4           21.7            1.7            0.5
    Customs duties.................................        24.8           26.8           29.2           30.7           32.7           34.3           35.7
    Miscellaneous receipts.........................        45.0           46.7           50.7           52.0           53.6           55.5           57.8
                                                    --------------------------------------------------------------------------------------------------------
      Total receipts...............................     2,407.3        2,540.1        2,662.5        2,798.3        2,954.7        3,103.6        3,307.3
        (On-budget)................................    (1,798.9)      (1,906.0)      (1,988.4)      (2,086.9)      (2,201.4)      (2,307.8)      (2,472.0)
        (Off-budget)...............................      (608.4)        (634.1)        (674.1)        (711.4)        (753.3)        (795.8)        (835.3)

      Total receipts as a percentage of GDP........        18.4           18.5           18.3           18.3           18.3           18.3           18.6
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                 Table 17-2.  EFFECT ON RECEIPTS OF CHANGES IN THE SOCIAL SECURITY TAXABLE EARNINGS BASE
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                      Estimate
                                                              ------------------------------------------------------
                                                                  2008       2009       2010       2011       2012
    ----------------------------------------------------------------------------------------------------------------
    Social security (OASDI) taxable earnings base increases:
      $97,500 to $102,600 on Jan. 1, 2008....................        2.7        7.0        7.9        8.8        9.7
      $102,600 to $107,700 on Jan. 1, 2009...................  .........        2.7        7.0        7.9        8.8
      $107,700 to $113,100 on Jan. 1, 2010...................  .........  .........        2.8        7.4        8.3
      $113,100 to $118,500 on Jan. 1, 2011...................  .........  .........  .........        2.8        7.5
      $118,500 to $123,600 on Jan. 1, 2012...................  .........  .........  .........  .........        2.7
    ----------------------------------------------------------------------------------------------------------------

    [[Page 240]]

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

    [[Page 241]]

      Capital Gains               Tax rate on capital  ................  ................  ...................  ................  Tax on capital   ...............  ...............  Tax rate on
                                   gains reduced to 5/                                                                             gains                                              capital gains
                                   15 percent                                                                                      eliminated for                                     reverts to 10/
                                                                                                                                   taxpayers in                                       20 percent (8/
                                                                                                                                   10/15 percent                                      18 percent on
                                                                                                                                   tax brackets                                       assets held
                                                                                                                                                                                      over 5 years)
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Dividends                   Tax rate on          ................  ................  ...................  ................  Tax on           ...............  ...............  Dividends taxed
                                   dividends reduced                                                                               dividends                                          at standard
                                   to 5/15 percent                                                                                 eliminated for                                     income tax
                                                                                                                                   taxpayers in                                       rates
                                                                                                                                   10/15 percent
                                                                                                                                   tax brackets
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Bonus Depreciation          Bonus depreciation   ................  Bonus             ...................  ................  ...............  ...............  ...............  ...............
                                   increased to 50                        depreciation
                                   percent of                             expires
                                   qualified property
                                   aquired after 5/5/
                                   03
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Alternative Minimum Tax     AMT exemption        ................  ................  AMT exemption        AMT exemption     ...............  ...............  ...............  ...............
                                   amount increased                                         amount increased     amount reverts
                                   to $40,250/$58,000                                       to $42,500/$62,550   to $33,750/
                                   for single/joint                                         for single /joint    $45,000 for
                                   filers                                                   filers               single /joint
                                                                                                                 filers
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

                               ENACTED LEGISLATION

      Several laws were enacted in 2006 that have an effect on governmental
    receipts. The major legislative changes affecting receipts are described
    below.

             TAX INCREASE PREVENTION AND RECONCILIATION ACT OF 2005

      The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA),
    which was signed by President Bush on May 17, 2006, extended previously
    enacted tax cuts that helped spur investment and economic expansion,
    resulting in more jobs and higher wages for American workers. The
    provisions of this Act increased the Alternative Minimum Tax (AMT)
    exemption amount for 2006; temporarily extended increased expensing
    limits for small businesses; reduced tax rates on capital gains and
    dividends; and made other miscellaneous changes to tax law. The major
    provisions of this Act are described below.

                               Expiring Provisions

      Extend increased expensing for small business.--Under prior law,
    business taxpayers were allowed to expense up to $100,000 in annual
    investment expenditures for qualifying property (expanded to include
    off-the-shelf computer software) placed in service in taxable years
    beginning in 2003 through 2007. The maximum amount that could be
    expensed was reduced by the amount by which the taxpayer's cost of
    qualifying property exceeded $400,000. Both the deduction and annual
    investment limits were indexed annually for inflation, effective for
    taxable years beginning after 2003 and before 2008. Also, with respect
    to a taxable year beginning after 2002 and before 2008, taxpayers were
    permitted to make or revoke expensing elections on amended returns
    without the consent of the Internal Revenue Service (IRS) Commissioner.
    This Act extended each of these temporary provisions, applicable for
    qualifying property (including off-the-shelf computer software) placed
    in service in taxable years beginning in 2008 and 2009.
      Extend reductions in individual income taxes on capital gains and
    dividends.--Under prior law, the maximum individual income tax rate on
    net capital gains and dividends was 15 percent for taxpayers in
    individual income tax rate brackets above 15 percent and 5 percent (zero
    in 2008) for lower income taxpayers. This Act extended these reduced
    rates (15 percent and zero), which were scheduled to expire on December
    31, 2008, through December 31, 2010.
      Extend and modify exceptions provided under Subpart F.--Under the
    Subpart F rules, certain U.S. shareholders of a controlled foreign
    corporation (CFC) are subject to U.S. tax currently on certain income
    earned by the CFC, whether or not such income is distributed to the
    shareholders. The income subject to current inclusion under the Subpart
    F rules includes, among other things, ``foreign personal holding company

    [[Page 242]]

    income'' and insurance income. Foreign personal holding company income
    generally includes many types of income derived by a financial service
    company, such as dividends; interest; royalties; rents; annuities; net
    gains from the sale of certain property, including securities,
    commodities and foreign currency; and income from notional principal
    contracts and securities lending activities. Under prior law, for
    taxable years beginning before January 1, 2007, certain income derived
    in the active conduct of a banking, financing, insurance, or similar
    business was provided an exception from Subpart F. This Act extended the
    exception for two years, to apply to taxable years beginning before
    January 1, 2009. This Act also provided an exception from Subpart F for
    dividends, interest, rents, and royalties received by one CFC from a
    related CFC to the extent attributable or properly allocable to non-
    Subpart F income of the payor, effective for taxable years beginning
    after December 31, 2005 and before January 1, 2009.

                     Estimated Tax Payments by Corporations

      Modify the timing of estimated tax payments by corporations.--
    Corporations generally are required to pay their income tax liability in
    quarterly estimated payments. For corporations that keep their accounts
    on a calendar year basis, these payments are due on or before April 15,
    June 15, September 15, and December 15 (if these dates fall on a holiday
    or weekend, payment is due on the next business day). This Act increased
    the estimated tax payments due in July through September by corporations
    with assets of at least $1 billion to: 105 percent of the amount
    otherwise due in 2006, 106.25 percent of the amount otherwise due in
    2012, and 100.75 percent of the amount otherwise due in 2013. For
    corporations affected by this provision, the next required estimated tax
    payment is reduced accordingly. This Act also allowed corporations to
    delay 20.5 percent of the estimated tax payment otherwise due on
    September 15, 2010 until October 1, 2010, and 27.5 percent of the
    estimated tax payment otherwise due on September 15, 2011 until October
    1, 2011.

              Alternative Minimum Tax (AMT) Relief for Individuals

      Increase and extend AMT relief for individuals.--A temporary provision
    of prior law increased the AMT exemption amounts to $40,250 for single
    taxpayers, $58,000 for married taxpayers filing a joint return and
    surviving spouses, and $29,000 for married taxpayers filing a separate
    return and estates and trusts. These temporary increases were effective
    for taxable years beginning after December 31, 2002 and before January
    1, 2006. This Act increased the AMT exemption amounts, effective for
    taxable years beginning after December 31, 2005 and before January 1,
    2007, to $42,500 for single taxpayers, $62,550 for married taxpayers
    filing a joint return and surviving spouses, and $31,275 for married
    taxpayers filing a separate return and estates and trusts.
      Under a temporary provision of prior law, taxpayers were permitted to
    offset both the regular tax and the AMT with nonrefundable personal tax
    credits, effective for taxable years beginning before January 1, 2006.
    This Act extended minimum tax relief for nonrefundable personal tax
    credits for one year, to apply to taxable year 2006. The extension does
    not apply to the child credit, the new saver's credit, the earned income
    credit (EITC) or the adoption credit, which were provided AMT relief
    through December 31, 2010 under the 2001 tax cut. The refundable portion
    of the child credit and the earned income tax credit are also allowed
    against the AMT through December 31, 2010.

                                     Offsets

      Repeal income limitations on Roth Individual Retirement Account (IRA)
    conversions.--Under prior law, taxpayers with adjusted gross income
    (AGI) of less than $100,000 were eligible to roll over or convert all or
    a portion of a traditional IRA to a Roth IRA. Amounts converted were
    treated as distributions for income tax purposes, but the 10-percent tax
    on early withdrawals did not apply. This Act repealed the income
    limitation on conversions from traditional IRAs to Roth IRAs, effective
    for conversions occurring after December 31, 2009. Unless a taxpayer
    elects otherwise (or converted amounts are distributed before 2012),
    none of the amount converted in 2010 will be included in gross income
    for that year; instead, half of the amount converted will be included in
    gross income in each year, 2011 and 2012. If converted amounts are
    distributed before 2012, the amount included in income in the year of
    the distribution is increased by the amount distributed, and the amount
    included in income in 2012 (or 2011 and 2012 if the distribution was
    made in 2010) is the lesser of: (1) half of the amount includible in
    income as a result of the conversion, and (2) the remaining portion of
    such amount not already included in income.
      Repeal foreign sales corporation (FSC)/extraterritorial income (ETI)
    binding contract relief.--The FSC Repeal and ETI Exclusion Act of 2000
    replaced the FSC tax provisions of prior law, which the World Trade
    Organization (WTO) had found to be a prohibited export subsidy in
    violation of international tax standards, with an exclusion from U.S.
    tax for extraterritorial income. Transition rules delayed the repeal of
    the FSC rules and the effective date of ETI for transactions in the
    ordinary course of a trade or business if such transactions were
    pursuant to a binding contract between the taxpayer and an unrelated
    person and the contract was in effect on September 30, 2000 and at all
    other times thereafter. The ETI provisions also were declared a
    prohibited export subsidy by the WTO and were repealed by the American
    Jobs Creation Act of 2004, effective for transactions after December 31,
    2004. Certain transitional tax rules applied to transactions occurring
    in 2005 and 2006, providing taxpayers with 80 percent and 60 percent, re

    [[Page 243]]

    spectively, of the tax benefits that would have been otherwise allowed
    under the prior law ETI provisions. Moreover, the ETI provisions of
    prior law remained in effect for transactions in the ordinary course of
    a trade or business if such transactions were pursuant to a binding
    contract between the taxpayer and an unrelated person and the contract
    was in effect on September 17, 2003 and at all times thereafter. Both
    the FSC and ETI binding contract relief of prior law were repealed under
    this Act, effective for taxable years beginning after May 17, 2006.
      Impose withholding on certain payments made by government entities.--
    This Act imposed withholding on certain payments made by government
    entities (the Government of the United States, every State, and every
    political subdivision or instrumentality thereof, including multi-State
    agencies) to persons providing property or services. The requirement
    applies regardless of whether the government entity making the payment
    is the recipient of the property or service. The rate of withholding is
    three percent and applies to payments made after December 31, 2010.
    Political subdivisions of States (or any instrumentality thereof) with
    less than $100 million of annual expenditures for property or services
    are exempt from the withholding requirement. In addition, the provision
    does not apply to: (1) payments made through a public assistance or
    public welfare program for which eligibility is determined by a needs or
    income test; (2) payments, such as wages, that were subject to mandatory
    or voluntary withholding under prior law; (3) payments of interest; (4)
    payments for real property; (5) payments to tax-exempt entities or
    foreign governments; (6) intra-governmental payments; (7) payments made
    pursuant to a classified or confidential contract; and (8) payments to
    government employees that are not otherwise excludable from the new
    withholding provision with respect to the employees' services as an
    employee.
      Modify taxation of citizens living abroad.--U.S. citizens who earn
    income in a foreign country may be taxed on that income by the foreign
    country. Such individuals are allowed a credit against the U.S. income
    tax imposed on foreign-source income for foreign taxes paid on that
    income; the amount of the credit generally is limited to the amount of
    U.S. tax otherwise owed on that income.
      A U.S. citizen or resident living abroad may be eligible to exclude
    from U.S. taxable income certain foreign earned income and foreign
    housing costs, regardless of whether any foreign tax is paid on the
    foreign earned income or housing costs. To qualify for these exclusions,
    the taxpayer must have his or her tax home in a foreign country and must
    be either: (1) a U.S. citizen who is a bona fide resident of a foreign
    country or countries for an uninterrupted period that includes an entire
    taxable year, or (2) a U.S. citizen or resident present in a foreign
    country or countries for at least 330 full days in any 12-consecutive-
    month period.
      The foreign earned income exclusion generally is available for a
    qualified individual's non-U.S. source earned income attributable to
    personal services performed by that individual during the period of
    foreign residence or presence. Under prior law, the maximum amount of
    the foreign earned income exclusion was $80,000 in taxable years 2002
    through 2007 and was indexed annually for inflation beginning in taxable
    year 2008. This Act accelerated the annual indexation of the maximum
    amount of the foreign earned income exclusion by two years, increasing
    the limitation for taxable year 2006 to $82,400.
      The housing cost exclusion (or deduction for purposes of computing
    AGI, if the otherwise excludable housing costs are not paid or
    reimbursed by a taxpayer's employer) is equal to the excess of a
    taxpayer's ``housing expenses'' over a base housing amount. ``Housing
    expenses'' are the reasonable expenses paid or incurred during the
    taxable year for housing in a foreign country for the taxpayer, and, if
    they live with the taxpayer, the taxpayer's spouse and dependents.
    Housing expenses include costs attributable to housing, such as
    utilities and insurance, but do not include items that are separately
    deductible, such as mortgage interest and real estate taxes. If the
    taxpayer maintains a second household outside the United States for a
    spouse or dependents who do not reside with the taxpayer because of
    dangerous, unhealthful, or otherwise adverse living conditions, the
    housing expenses of the second household also are eligible for
    exclusion. Under prior law, the base housing amount above which costs
    were eligible for exclusion in a taxable year was 16 percent of the
    annual salary (computed on a daily basis) of a GS-14 step 1 Federal
    employee, multiplied by the number of days of foreign residence or
    presence in the taxable year. This Act modified the base housing amount
    used in calculating the foreign housing cost exclusion, effective for
    taxable years beginning after December 31, 2005, changing it to 16
    percent of the maximum amount (computed on a daily basis) of the foreign
    earned income exclusion, multiplied by the number of days of foreign
    residence or presence in the taxable year. Reasonable housing expenses
    in excess of the base housing amount may still be excluded from gross
    income (or, if paid by the taxpayer, deductible in computing AGI), but
    the amount of the exclusion is limited to 30 percent of the taxpayer's
    foreign earned income exclusion. Under this Act, the Secretary of the
    Treasury has authority to adjust this 30-percent limitation upwards or
    downwards, based on geographic differences in housing costs relative to
    housing costs in the United States.
      As provided under prior law, the combined foreign earned income
    exclusion and housing cost exclusion (including the amount deductible in
    computing AGI) may not exceed the taxpayer's total foreign earned income
    for the taxable year. Similarly, the taxpayer's foreign tax credit must
    be reduced by the amount of the credit attributable to excluded income.

    [[Page 244]]

      Under prior law, a taxpayer eligible for the foreign earned income and
    housing cost exclusions was subject to tax on income in excess of the
    exclusion amounts (after deductions), starting in the lowest tax rate
    bracket. Under this Act, effective for taxable years beginning after
    December 31, 2005, a taxpayer eligible for the foreign earned income and
    housing exclusions is subject to tax on income in excess of the
    exclusion amounts at the income tax rates that would have been
    applicable had the individual not elected to take the exclusions.

      Require partial payment with submission of offers-in-compromise.--
    Offers-in-compromise are offers to the IRS by a taxpayer to settle
    outstanding tax liability for less than the full amount due, generally
    based on doubt as to liability for, or collectibility of, the tax. There
    are two general categories of offers-in-compromise: (1) lump-sum offers,
    in which the taxpayer proposes to make one lump-sum payment of a
    specified dollar amount in settlement of the outstanding tax liability,
    and (2) periodic-payment offers, in which the taxpayer proposes to make
    a series of payments over time in settlement of the outstanding tax
    liability. The IRS imposes a user fee of $150 on most offers-in-
    compromise, payable upon submission of the offer to the IRS. Enforcement
    action generally is suspended during the period that the IRS evaluates
    an offer. Under prior law, taxpayers were permitted (but not required)
    to make a deposit with their offer; if the offer was rejected, the
    deposit generally was returned to the taxpayer. This Act made the
    following changes, effective with respect to offers-in-compromise
    submitted to the IRS on and after July 16, 2006: (1) Taxpayers making
    lump-sum offers (offers to pay in five or fewer installments) are
    required to make a down payment of 20 percent of the amount of the offer
    upon submission of the offer to the IRS. (2) Taxpayers making periodic-
    payment offers are required to comply with the payment schedule proposed
    in the offer while the offer is being considered. (3) Offers submitted
    to the IRS that do not comply with these payment requirements are
    returned to the taxpayer as unprocessable and immediate enforcement
    action is permitted. (4) The $150 user fee is applied to the taxpayer's
    outstanding tax liability. (5) An offer-in-compromise is deemed accepted
    if the IRS does not make a decision with respect to the offer within two
    years from the date the offer was submitted. (6) The Secretary of the
    Treasury is authorized to issue regulations providing exceptions to the
    partial payment requirements in the case of offers from certain low-
    income taxpayers and offers based on doubt as to liability.
      Modify amortization for certain geological and geophysical
    expenditures.--Geological and geophysical expenditures (G&G costs) are
    costs incurred by a taxpayer for the purpose of obtaining and
    accumulating data that will serve as the basis for the acquisition and
    retention of mineral properties by taxpayers exploring for minerals.
    Under prior law, G&G costs paid or incurred in taxable years beginning
    after August 8, 2005, in connection with oil and gas exploration in the
    United States, could be amortized over two years. This Act increased the
    amortization period to five years for G&G costs paid or incurred by
    certain major integrated oil companies after May 17, 2006. This five-
    year amortization rule applies only to integrated oil companies that
    have an average daily worldwide production of crude oil of at least
    500,000 barrels for the taxable year, have gross receipts in excess of
    $1 billion in the last taxable year ending during calendar year 2005,
    and either are a crude oil refiner or have an ownership interest in a
    crude oil refiner of 15 percent or more.
      Modify taxation of unearned income of minors.--An unmarried individual
    eligible to be claimed as a dependent on another taxpayer's individual
    income tax return generally must file an individual income tax return if
    he or she has: (1) earned income only over $5,150 (for 2006); (2)
    unearned income only over the minimum standard deduction amount for
    dependents ($850 in 2006); or (3) both earned income and unearned income
    totaling more than the smaller of (a) $5,150 (for 2006) or (b) the
    larger of (i) $850 (for 2006) or (ii) earned income plus $300. Under
    prior law, unearned income of a child was taxed under special rules if:
    (1) the child had not reached the age of 14 by the close of the taxable
    year, (2) the child's unearned income (income other than wages,
    salaries, professional fees, or other amounts received as compensation
    for personal services actually rendered) was more than $1,700 (for
    2006), and (3) the child was required to file a return for the year.
    These special rules (referred to as the ``kiddie tax'') applied if the
    child could have been claimed as a dependent on the parent's return,
    regardless of whether the parent actually claimed the child as a
    dependent. Under the kiddie tax, the child's net unearned income over
    $1,700 (for 2006) was taxed at the parent's tax rate if that rate was
    higher than the child's rate. The remainder of a child's taxable income
    was taxed at the child's tax rate, regardless of whether the kiddie tax
    applied. Effective for taxable years beginning after December 31, 2005,
    this Act increased the age to which the kiddie tax applies from under 14
    years of age to under 18 years of age.
      Provide other offsets.--Other offsets provided in this Act included:
    (1) application of earnings stripping rules to partners that are C
    corporations, (2) amendment of information reporting requirements to
    include interest paid on tax-exempt bonds, (3) modification of the scope
    of the application of the Foreign Investment in Real Property Tax Act of
    1980 regime, (4) denial of tax-free treatment to certain corporate spin-
    off transactions, (5) imposition of new requirements on pooled financing
    bonds, (6) clarification of the domestic manufacturing deduction wage
    limitation, and (7) imposition of penalties on certain exempt entities
    for participation in prohibited tax shelter transactions as
    accommodation parties.

    [[Page 245]]

                                Other Provisions

      Provide other changes.--Other changes provided in this Act included:
    (1) modification of the tax treatment of income earned by certain
    environmental cleanup funds, (2) modification of the rules relating to
    taxation of distributions of stock and securities of a controlled
    corporation, (3) expansion of eligibility for the qualified veterans'
    mortgage bond program, (4) treatment of the sale or exchange of certain
    self-created musical works as capital gains, (5) modification of the
    vessel tonnage tax, (6) extension of the exemption for a portion of the
    Permanent University Fund from the tax-exempt bond arbitrage rules, (7)
    election of five-year amortization for the costs of creating or
    acquiring a musical composition, (8) acceleration of the increased
    capital expenditure limitation on the issuance of qualified small issue
    tax-exempt bonds to apply to bonds issued after December 31, 2006, and
    (9) modification of the tax treatment of loans to qualified continuing
    care facilities.

                         PENSION PROTECTION ACT OF 2006

      The Pension Protection Act of 2006, which was signed by President Bush
    on August 17, 2006, was the most sweeping reform of America's pension
    system enacted in 30 years. The provisions of this Act strengthened the
    private retirement system by making it more difficult for employers to
    underfund their pension plans and by preventing employers with
    underfunded plans from making promises to their employees that they
    cannot keep. Provisions of this Act also provided more incentives to
    individuals to save for retirement, modified tax provisions related to
    spending for health care, temporarily suspended certain customs duties,
    provided incentives for certain charitable contributions, and modified
    certain rules relating to activities of tax-exempt organizations. The
    major provisions of this Act that affect receipts are described below.

                              Pension Funding Rules

      Reform funding rules for single-employer defined-benefit pension
    plans.--Under prior law, defined-benefit pension plans were subject to
    minimum funding requirements imposed under both the Internal Revenue
    Code and the Employee Retirement Income Security Act of 1974 (ERISA). In
    the case of a qualified plan, the Internal Revenue Code excluded such
    contributions from gross income and allowed a deduction for the
    contributions, subject to certain limits on the maximum deductible
    amount. The calculation of the minimum funding requirements and the
    limits on deductible contributions were determined under a series of
    complex rules and measures of assets and liability, many of which were
    manipulable and none of which entailed the use of an accurate measure of
    the plan's assets and its true liabilities. This Act replaced the
    funding rules of prior law, effective for plan years beginning after
    December 31, 2007, with a minimum funding requirement of 100 percent of
    plan liabilities, phased in over four years, as follows: 92 percent in
    2008, 94 percent in 2009, 96 percent in 2010, and 100 percent in 2011
    and subsequent years. Other funding rules provided in this Act: (1)
    changed the calculation of the value of credit balances and restricted
    the use of credit balances in lieu of cash to fund required
    contributions; (2) changed the method of calculating liabilities for
    plans considered to be at risk; (3) reduced the time period over which
    asset values can be averaged to two years, and limited averaged asset
    values to no less than 90 percent and to no more than 110 percent of
    current fair market value; (4) required amortization of unfunded
    liabilities over seven years, in most cases; (5) updated the mortality
    table used to project future benefits; (6) allowed plan sponsors to
    deduct from taxable income contributions of up to 150 percent of plan
    liability; and (7) modified the interest rate used to calculate pension
    liability, requiring the use of a yield curve based on 24-month averages
    of the rates on corporate bonds of relevant maturities in the top three
    rating categories (AAA, AA and A), phased in at 33\1/3\ percent in 2008,
    66\2/3\ percent in 2009 and 100 percent beginning in 2010.
      Reform funding rules for multiemployer defined-benefit plans.--
    Multiemployer plans are subject to the same general funding rules as the
    pre-2006 rules for single-employer plans, except that different rules
    apply in some cases. This Act modified the funding of multiemployer
    plans by: (1) providing additional funding rules for certain plans that
    are in endangered or critical status; and (2) allowing plan sponsors to
    deduct from taxable income contributions of up to 140 percent of plan
    liability. These changes were effective for plan years beginning after
    2007; however, the additional funding rules for plans in endangered or
    critical status do no apply to plan years beginning after December 31,
    2014.

                            Other Pension Provisions

      Encourage automatic enrollment in pension plans.--Under current law,
    most defined-contribution plans may include a qualified cash or deferred
    arrangement under which employees may elect to receive cash or to have
    contributions made to the plan by the employer on behalf of the employee
    in lieu of receiving cash. Contributions made to the plan at the
    election of the employee are referred to as ``elective deferrals.'' Such
    a plan may be designed so that the employee will receive cash unless an
    affirmative election to make contributions is made. Alternatively, a
    plan may provide that elective contributions are made at a specified
    rate unless the employee elects otherwise; such a plan is sometimes
    referred to as an ``automatic enrollment'' plan. In either case, the
    employee must have an opportunity to elect to receive cash in lieu of
    contributions.
      This Act made changes to address employers' concerns about
    implementing automatic enrollment plans and to provide incentives for
    automatic enrollment, generally effective for plan years beginning after
    2007. The

    [[Page 246]]

    changes provided in the Act: (1) exempted such plans from State payroll
    withholding laws; (2) provided fiduciary relief for investment of
    participant account balances in certain default investments; (3)
    provided a 90-day period from the initial payroll reduction during which
    participants are allowed to opt out of automatic enrollment and receive
    a penalty-free return of their automatic elective contributions; and (4)
    provided that plans with ``a qualified automatic enrollment feature''
    satisfy the nondiscrimination rules regarding elective deferrals and
    employer matching contributions, and are not subject to the top-heavy
    rules.

      Allow certain small employers to establish combined defined-benefit
    plans and qualified cash or deferred arrangements.--Under prior law, a
    defined-benefit plan could not be combined with a qualified cash or
    deferred arrangement (Section 401(k) plan); they had to be structured as
    two separate plans. This Act allowed small employers to establish
    combined defined-benefit and 401(k) plans, effective for plan years
    beginning after December 31, 2009. A small employer is an employer with
    an average of at least two and no more than 500 employees on business
    days during the preceding calendar year and at least two employees on
    the first day of the plan year. The assets of the combined plan must be
    held in a single trust and they must be clearly identified and allocated
    to the defined-benefit plan and the 401(k) plan to the extent necessary
    for the separate application of the Internal Revenue Code and ERISA; in
    addition, the combined plan must meet certain benefit, contribution,
    vesting, and nondiscrimination requirements.
      Make other miscellaneous changes affecting pension plans.--Other
    changes in pension plans that affect receipts: (1) permitted workers in
    publicly held companies to divest themselves of company stock
    attributable to employer contributions after three years of service and
    prohibited employers from requiring workers to invest their own
    retirement savings in company stock; (2) improved portability of
    retirement savings, such as allowing direct rollovers from retirement
    plans to Roth IRAs and faster vesting of employer non-elective
    contributions; (3) gave taxpayers the option to deposit part of their
    individual income tax refund directly into an IRA; and (4) allowed
    members of the National Guard and reservists called to active duty to
    withdraw money from their IRA or pension without penalty and to repay
    the money within two years.

                               Expiring Provisions

      Extend permanently IRA maximum contribution limits and index income
    limitations on IRA contributions.--The maximum annual contribution that
    can be made to a traditional or Roth IRA by or on behalf of an
    individual varies depending on the particular circumstances, including
    the individual's income. However, under prior law, the maximum annual
    contribution that could be made to all of an Individual's IRAs was the
    lesser of: (1) the individual's compensation or (2) $4,000 for taxable
    years 2005 through 2007, and $5,000 for taxable year 2008, indexed
    thereafter in increments of $500. In the case of a married couple,
    contributions could be made up to the dollar limit for each spouse if
    the combined compensation of the spouses was at least equal to the
    contributed amount. Individuals who attained age 50 before the end of a
    taxable year were allowed to make additional ``catch-up'' contributions.
    For those individuals, the otherwise maximum contribution limit was
    increased by $1,000 for taxable years 2006 through 2010. These
    contribution limits, which had been scheduled to expire after December
    31, 2010, were extended permanently under this Act.
      An individual may make nondeductible contributions to a traditional
    IRA up to the IRA contribution limits specified above (to the extent the
    taxpayer cannot or does not make deductible contributions). An
    individual may make deductible contributions to a traditional IRA up to
    the IRA contribution limits specified above, if neither the individual
    nor the individual's spouse is an active participant in an employer-
    sponsored retirement plan. If an individual (or the individual's spouse)
    is an active participant in an employer-sponsored retirement plan, the
    deduction is phased out for taxpayers with AGI above certain levels.
    Under prior law, the AGI phase-out ranges were: (1) $50,000 to $60,000
    for single taxpayers; (2) $80,000 to $100,000 for married taxpayers
    filing a joint return for 2007 and subsequent years; and (3) $0 to
    $10,000 for married taxpayers filing a separate return. If an individual
    was not an active participant in an employer-sponsored retirement plan,
    but the individual's spouse was an active participant in such a plan,
    the deduction was phased out for taxpayers with AGI between $150,000 and
    $160,000. An individual may make nondeductible contributions to a Roth
    IRA subject to the IRA contribution limits specified above. However, the
    maximum annual contribution is phased out for taxpayers with AGI over
    certain levels. Under prior law, the AGI phase-out ranges were: (1)
    $95,000 to $110,000 for single taxpayers; (2) $150,000 to $160,000 for
    married taxpayers filing a joint return; and (3) $0 to $10,000 for
    married taxpayers filing a separate return. Under this Act, the income
    thresholds that determine eligibility to make IRA contributions are
    indexed for inflation in increments of $1,000 beginning in 2007.

      Extend permanently maximum contribution and benefit limits under
    qualified pension plans.--Limits on contributions and benefits under
    qualified pension plans are based on the type of plan. Under prior law,
    annual contributions to a defined-contribution plan with respect to each
    plan participant were limited to the lesser of 100 percent of
    compensation or $40,000 (adjusted annually for inflation in $1,000
    increments after 2002). The maximum annual benefit payable under a
    defined-benefit plan was generally the lesser of 100 percent of average
    compensation or $160,000 (adjusted annually for inflation for plans
    ending after

    [[Page 247]]

    December 31, 2002, in increments of $1,000). The annual compensation of
    each participant that could be taken into account for purposes of
    determining contributions and benefits under a plan generally was
    limited to $200,000 in 2002 (indexed annually thereafter in $5,000
    increments). The dollar limit on annual elective deferrals under section
    401(k) plans, section 403(b) annuities and salary reduction SEPs was
    $15,000 in 2006, indexed annually thereafter in $500 increments. The
    dollar limit on annual elective deferrals to a SIMPLE plan was $10,000
    in 2005 (adjusted for inflation in increments of $500 after 2006). The
    dollar limit on contributions to an eligible section 457 plan was the
    lesser of 100 percent of includable compensation or $15,000 in 2006,
    indexed annually thereafter in increments of $500. Individuals who
    attained age 50 before the end of a taxable year were allowed to make
    ``catch-up'' contributions to a 401(k) plan, section 403(b) annuity, SEP
    or SIMPLE plan, or section 457 plan. The amount of catch-up
    contributions permitted was the lesser of: (1) the applicable dollar
    amount or (2) the participant's compensation for the year after
    reduction by any other elective deferrals of the participant for the
    year. The applicable dollar amount under a 401(k) plan, section 403(b)
    annuity, SEP or section 457 plan was $5,000 for 2006, indexed annually
    thereafter in increments of $500. The applicable dollar amount under a
    SIMPLE plan was $2,500 in 2006, indexed annually thereafter in
    increments of $500. These contribution and benefit limits, which were
    scheduled to expire after December 31, 2010, were extended permanently
    under this Act.
      Extend permanently the ability to make tax-free distributions from
    qualified tuition programs (section 529 of the Internal Revenue Code).--
    Qualified State tuition programs generally take two forms--prepaid
    tuition plans and savings plans. Under a prepaid tuition plan, an
    individual may purchase tuition credits or certificates on behalf of a
    designated beneficiary, which entitle the beneficiary to the waiver or
    payment of qualified higher education expenses at participating
    educational institutions. Under a savings plan, an individual may make
    contributions to an account established for the purpose of meeting the
    qualified higher education expenses of a designated beneficiary. Private
    educational institutions are also allowed to establish qualified prepaid
    tuition plans (but not savings plans), provided the institution is
    eligible to participate in Federal financial aid programs under Title IV
    of the Higher Education Act of 1965. Earnings in a qualified savings
    program accumulate tax free. Under current law, if a distribution is
    used to pay qualified higher education expenses, the distribution is tax
    free. Qualified expenses include: tuition and fees; certain expenses for
    room and board; certain expenses for books, supplies and equipment; and
    expenses for a special needs beneficiary that are necessary in
    connection with enrollment or attendance at an eligible education
    institution. This Act permanently extended the preferred tax treatment
    of the distributions, which was scheduled to expire with respect to
    withdrawals after December 31, 2010. This Act also granted broad
    authority to the Secretary of the Treasury to issue regulations to carry
    out the purposes of section 529 and to prevent abuse of those purposes.
      Extend permanently the nonrefundable tax credit (saver's credit) for
    certain elective deferrals and IRA contributions.--Under prior law,
    effective for taxable years beginning after December 31, 2001 and before
    January 1, 2007, a nonrefundable tax credit was provided for up to
    $2,000 in contributions made by eligible taxpayers to a qualified plan
    or to a traditional or Roth IRA. The credit, which was in addition to
    any deduction or exclusion that would otherwise apply with respect to
    the contribution, was available to single taxpayers with AGI less than
    or equal to $25,000 ($37,500 for heads of household and $50,000 for
    married taxpayers filing a joint return). The credit was available to
    individuals who were 18 years of age or older (other than individuals
    who were full-time students or claimed as a dependent on another
    taxpayer's return) and was offset against both the regular and
    alternative minimum tax. The credit rate was 50 percent for single
    taxpayers with AGI less than or equal to $15,000 ($30,000 for married
    taxpayers filing a joint return and $22,500 for heads of household), 20
    percent for single taxpayers with AGI between $15,000 and $16,250
    (between $30,000 and $32,500 for married taxpayers filing a joint return
    and between $22,500 and $24,375 for heads of household), and 10 percent
    for single taxpayers with AGI between $16,250 and $25,000 (between
    $32,500 and $50,000 for married taxpayers filing a joint return and
    between $24,375 and $37,500 for heads of household). The saver's credit
    was extended permanently under this Act. In addition, this Act provided
    for annual indexing of the income limits applicable to the credit in
    increments of $500 beginning in 2007.

                           Health and Medical Benefits

      Modify tax treatment of annuity and life insurance contracts with a
    long-term care insurance feature.--Under prior law, annuity contracts
    were not allowed to have a qualified long-term care insurance feature;
    however, long-term care insurance could be provided by a rider on or as
    a part of a life insurance contract. This Act allowed qualified long-
    term care insurance to be provided by a rider on or as a part of an
    annuity contract and provided special tax treatment for the long-term
    care component of a life insurance or annuity contract. Under this Act:
    (1) payments for a qualified long-term care insurance contract, which is
    a rider on or is part of a life insurance contract or annuity contract,
    that are charged against the cash value of the annuity contract or the
    cash surrender value of the life insurance contract are not includable
    in income and the investment in the contract is reduced (but not below
    zero) by the charge; (2) the rules for tax-free exchanges of certain
    insurance contracts are expanded to include exchanges of a life
    insurance con

    [[Page 248]]

    tract, an endowment contract, an annuity contract, or a qualified long-
    term care insurance contract for a qualified long-term care insurance
    contract; and (3) except as otherwise provided in regulations, the
    portion of an annuity or life insurance contract providing long-term
    care insurance coverage is treated as a separate contract for Federal
    tax purposes. These, and other rules concerning the taxation of long-
    term care insurance provided as a rider on or as part of an annuity or
    life insurance contract generally will be effective for taxable years
    beginning after December 31, 2009 for contracts issued after December
    31, 1996.
      Permit tax-free distributions from governmental retirement plans for
    premiums for health and long-term care insurance for public safety
    officers.--Under current law, a distribution from a qualified retirement
    plan, a tax-sheltered annuity (a 403(b) annuity), an eligible deferred
    compensation plan maintained by a State or local government (a
    governmental 457 plan), or an IRA generally is included in the
    taxpayer's gross income in the year of distribution, except to the
    extent the amount received constitutes a return of after-tax
    contributions or a qualified distribution from a Roth IRA. This Act
    provided an annual exclusion from gross income for up to $3,000 in
    otherwise taxable distributions from an eligible retirement plan of a
    qualified public safety officer for the payment of qualified health
    insurance premiums made directly to the insurer. Eligible retired public
    safety officers are individuals who, by reason of disability or
    attainment of normal retirement age, are separated from service with the
    employer who maintains the eligible retirement plan from which pension
    benefits are received. Qualified health insurance premiums include
    premiums for accident or health insurance or qualified long-term care
    insurance contracts covering the taxpayer and the taxpayer's spouse and
    dependents. Amounts excluded from income are not taken into account in
    determining the itemized deduction for medical expenses or the deduction
    for health insurance of self-employed individuals. The provision is
    effective for distributions in taxable years beginning after December
    31, 2006.

              Charitable Contributions and Tax-Exempt Organizations

      Permit tax-free withdrawals from IRAs for charitable contributions.--
    Eligible individuals may make deductible or non-deductible contributions
    to a traditional IRA and nondeductible contributions to a Roth IRA. Pre-
    tax contributions and earnings in a traditional IRA are included in
    income when withdrawn. Qualified withdrawals from a Roth IRA are
    excluded from gross income; withdrawals that are not qualified are
    included in gross income to the extent attributable to earnings. This
    Act provided an exclusion from gross income for otherwise taxable
    distributions from a traditional or a Roth IRA made directly to a
    qualified charitable organization. The exclusion may not exceed $100,000
    per taxpayer per taxable year, is applicable only to distributions made
    on or after the date the IRA owner attains age 70\1/2\, and is effective
    for distributions made in taxable years beginning after December 31,
    2005 and before January 1, 2008. The exclusion applies only if a
    charitable contribution deduction for the entire distribution would
    otherwise be allowable under current law, determined without regard to
    the percentage-of-AGI limitation. No charitable deduction is allowed
    with respect to any amount excludable from income under this provision.
      Expand enhanced charitable deduction for contributions of food
    inventory.--A taxpayer's deduction for charitable contributions of
    inventory generally is limited to the taxpayer's basis (typically cost)
    in the inventory, or, if less, the fair market value of the inventory.
    However, for certain contributions of inventory, C corporations may
    claim an enhanced deduction equal to the lesser of: (1) basis plus one
    half of the fair market value in excess of basis or (2) two times basis.
    To be eligible for the enhanced deduction, the contributed property
    generally must be inventory of the taxpayer contributed to a charitable
    organization and the donee must: (1) use the property consistent with
    the donee's exempt purpose solely for the care of the ill, the needy, or
    infants; (2) not transfer the property in exchange for money, other
    property, or services; and (3) provide the taxpayer a written statement
    that the donee's use of the property will be consistent with such
    requirements. To use the enhanced deduction, the taxpayer must establish
    that the fair market value of the donated item exceeds basis.
      The Katrina Emergency Tax Relief Act of 2005 expanded the enhanced
    deduction to apply to qualified contributions of food inventory made
    after August 27, 2005 and before January 1, 2006 by all taxpayers (not
    just C corporations) engaged in a trade or business. This Act extended
    the enhanced charitable deduction for contributions of food inventory
    provided under the Katrina Emergency Tax Relief Act of 2005 to apply to
    contributions made after December 31, 2005 and before January 1, 2008.
    The donated food must meet certain quality and labeling standards, and,
    for taxpayers other than C corporations, the total deduction for donated
    food inventory may not exceed 10 percent of the taxpayer's net income
    from the related trade or business.

      Modify basis adjustment to stock of S corporations contributing
    appreciated property.--Each shareholder of an S corporation must take
    into account his or her pro rata share of a charitable contribution by
    the S corporation in determining his or her income tax liability. For
    donations of property, this generally is the pro rata share of the
    property's fair market value. Under prior law, the shareholder's basis
    in the stock of the company was reduced by the amount of the charitable
    contribution that flowed through to the shareholder. Under this Act,
    effective for charitable contributions made by an S corporation in
    taxable years beginning after December 31, 2005 and before January 1,

    [[Page 249]]

    2008, shareholders are allowed to adjust their basis in the stock of the
    company by their pro rata share of the adjusted basis of the contributed
    property instead of by their pro rata share of the market value of the
    contributed property.
      Make other changes affecting charitable contributions and tax-exempt
    organizations.--Other incentives for charitable contributions or
    modifications in the tax treatment of tax-exempt organizations provided
    in this Act included: (1) extension of the enhanced deduction for
    contributions of books to public schools for two years; (2) modification
    of the tax treatment of certain payments to controlling exempt
    organizations; (3) modification of the deduction for qualified
    conservation contributions; (4) modification of the deduction for
    charitable contributions of clothing and household items that are not in
    good condition and for items of minimal monetary value; (5) expansion of
    the definition of gross investment income of private foundations; (6)
    increases in penalty excise taxes applicable to certain activities of
    charities, social welfare organizations, and private foundations; (7)
    modification of recordkeeping and substantiation requirements; and (8)
    provision of new rules governing donor advised funds and supporting
    organizations.

                     TAX RELIEF AND HEALTH CARE ACT OF 2006

      The Tax Relief and Health Care Act of 2006, which was signed by
    President Bush on December 20, 2006, extended a number of expired or
    expiring tax provisions, modified health savings accounts, modified
    various trade measures, and made a number of other changes to tax law.
    This Act also authorized drilling for oil in the Gulf of Mexico, rolled
    back a cut in Medicare physician payments, and amended the Surface
    Mining Control and Reclamation Act. The major provisions of this Act
    that affect receipts are described below.

                               Expiring Provisions

      Extend deduction for qualified tuition and related expenses.--An
    above-the-line deduction of up to $4,000 is provided for qualified
    higher education expenses paid by a qualified taxpayer during the
    taxable year. For a given taxable year, the deduction may not be claimed
    if an education tax credit is claimed for the same student. In addition,
    the deduction may not be claimed for amounts taken into account in
    determining the amount excludable from income due to a distribution from
    a Coverdell education IRA or the amount of interest excludable from
    income with respect to education savings bonds. A taxpayer may not claim
    a deduction for the amount of a distribution from a qualified tuition
    plan that is excludable from income; however, the deduction may be
    claimed for the amount of a distribution from a qualified tuition plan
    that is not attributable to earnings. This Act extended the deduction,
    which had expired with respect to expenses incurred in taxable years
    beginning after December 31, 2005, to apply to expenses incurred in
    taxable years beginning before January 1, 2008.
      Extend and modify the new markets tax credit.--The new markets tax
    credit is provided for qualified equity investments made to acquire
    stock in a corporation or a capital interest in a partnership that is a
    qualified community development entity (CDE). A credit of five percent
    is provided to the investor for the first three years of investment. The
    credit increases to six percent for the next four years. The maximum
    amount of annual qualifying equity investment is capped at $2.0 billion
    for calendar years 2004 and 2005, and $3.5 billion for calendar years
    2006 and 2007. This Act extended the new markets tax credit through 2008
    and permitted up to $3.5 billion in qualified equity investment for that
    calendar year. This Act also required the Secretary of the Treasury to
    prescribe regulations to ensure that non-metropolitan counties receive a
    proportional allocation of qualified equity investments.
      Extend optional deduction for State and local general sales taxes.--
    Under prior law, effective for taxable years beginning after December
    31, 2003 and before January 1, 2006, a taxpayer was allowed to elect to
    take an itemized deduction for State and local general sales taxes in
    lieu of the itemized deduction for State and local income taxes. This
    Act extended this deduction for two years, effective for taxable years
    beginning before January 1, 2008.
      Extend and modify the research and experimentation (R&E) tax credit.--
    The 20-percent tax credit for qualified research and experimentation
    expenditures above a base amount and the alternative incremental credit
    expired with respect to expenditures incurred after December 31, 2005.
    This Act: (1) extended the research credit for two years, to apply to
    expenditures incurred before January 1, 2008; (2) extended the
    alternative incremental credit for one year, without modification, to
    apply to expenditures incurred before January 1, 2007; and (3) modified
    the alternative incremental credit and established an alternative
    simplified credit, to apply to expenditures incurred after December 31,
    2006 and before January 1, 2008.
      Extend and modify the work opportunity tax credit and the welfare-to-
    work tax credit.--The work opportunity tax credit (WOTC) provides
    incentives for hiring individuals from certain targeted groups. The
    credit generally applies to the first $6,000 of wages paid to several
    categories of economically disadvantaged or handicapped workers. The
    credit rate is 25 percent of qualified wages for employment of at least
    120 hours but less than 400 hours and 40 percent for employment of 400
    or more hours.
      The welfare-to-work tax credit provides an incentive for hiring
    certain recipients of long-term family assistance. The credit is 35
    percent of up to $10,000 of eligible wages in the first year of
    employment and 50 per

    [[Page 250]]

    cent of wages up to $10,000 in the second year of employment. Eligible
    wages include cash wages plus the cash value of certain employer-paid
    health, dependent care, and educational fringe benefits. The minimum
    employment period that employees must work before employers can claim
    the credit is 400 hours.
      This Act extended both the WOTC and the welfare-to-work tax credit for
    one year without modification, effective for wages paid to qualified
    individuals who began work for the employer after December 31, 2005 and
    before January 1, 2007. For wages paid to individuals who begin work for
    the employer after December 31, 2006 and before January 1, 2008, this
    Act combined and modified the two credits. Modifications included: (1)
    use of the WOTC definition of wages; (2) repeal of the requirement that
    a qualified ex-felon be certified as a member of an economically
    disadvantaged family; (3) expansion of eligibility by increasing the age
    ceiling for the food stamp recipient category; and (4) extension of the
    paperwork filing deadline from 21 days to 28 days.

      Extend treatment of combat pay for purposes of computing the EITC.--
    This Act extended for one year, through December 31, 2007, the prior law
    election that allowed combat pay, which is otherwise excluded from gross
    income, to be treated as earned income for purposes of calculating the
    EITC.
      Extend and modify authority to issue Qualified Zone Academy Bonds.--
    State and local governments are allowed to issue ``qualified zone
    academy bonds,'' the interest on which is effectively paid by the
    Federal government in the form of an annual income tax credit. The
    proceeds of the bonds must be used for teacher training, purchases of
    equipment, curriculum development, or rehabilitation and repairs at
    certain public school facilities. Under prior law, a nationwide total of
    $400 million of qualified zone academy bonds were authorized to be
    issued in each of calendar years 1998 through 2005 and unused authority
    could be carried forward for up to two years. This Act authorized the
    issuance of an additional $400 million of qualified zone academy bonds
    in each of calendar years 2006 and 2007. This Act also: (1) extended the
    arbitrage requirements that apply to interest-bearing tax-exempt bonds
    to qualified zone academy bonds, (2) imposed new spending requirements
    on the issuers of these bonds, and (3) imposed new reporting
    requirements on the issuers of these bonds.
      Extend the above-the-line deduction for qualified out-of-pocket
    classroom expenses.--Taxpayers who itemize deductions (do not use the
    standard deduction) and incur unreimbursed, job-related expenses may
    deduct those expenses to the extent that when combined with other
    miscellaneous itemized deductions they exceed two percent of AGI.
    Through 2005, certain teachers and other elementary and secondary school
    professionals could deduct up to $250 in annual qualified out-of-pocket
    classroom expenses above-the-line. Expenses claimed as an above-the-line
    deduction could not be claimed as an itemized deduction. This Act
    extended this above-the-line deduction to apply to expenses incurred
    before January 1, 2008.
      Extend and expand expensing of brownfields remediation costs.--
    Taxpayers may elect to treat certain environmental remediation
    expenditures that would otherwise be chargeable to a capital account as
    deductible in the year paid or incurred. This Act extended this
    provision, making it available for environmental remediation
    expenditures paid or incurred after December 31, 2005 and before January
    1, 2008. In addition, this Act expanded the provision to apply to
    expenditures paid or incurred to abate contamination at sites
    contaminated by petroleum products, which include crude oil, crude oil
    condensates and natural gasoline.
      Extend tax incentives for the District of Columbia (DC).--A one-time,
    nonrefundable $5,000 tax credit is available to purchasers of a
    principal residence in DC who have not owned a residence in DC during
    the year preceding the purchase. The credit phases out for taxpayers
    with modified AGI between $70,000 and $90,000 ($110,000 and $130,000 for
    joint returns). This Act extended the credit for two years, making it
    available with respect to purchases after December 31, 2005 and before
    January 1, 2008.
       The DC Enterprise Zone includes the DC Enterprise Community and DC
    census tracts with a poverty rate of at least 20 percent. Businesses in
    the zone are eligible for: (1) A wage credit equal to 20 percent of the
    first $15,000 in annual wages paid to qualified employees who reside
    within DC; (2) $35,000 in increased section 179 expensing; and (3) in
    certain circumstances, tax-exempt bond financing. In addition, a capital
    gains exclusion is allowed for certain investments held more than five
    years and made within the DC Enterprise Zone, or within any DC census
    tract with a poverty rate of at least 10 percent. This Act extended the
    DC Enterprise Zone incentives for two years, through December 31, 2007.

      Extend tax incentives for employment and investment on Indian
    reservations.--This Act extended for two years, through December 31,
    2007, the employment tax credit for qualified workers employed on an
    Indian reservation and the accelerated depreciation rules for qualified
    property used in the active conduct of a trade or business within an
    Indian reservation. The employment tax credit is not available for
    employees involved in certain gaming activities or who work in a
    building that houses certain gaming activities. Similarly, property used
    to conduct or house certain gaming activities is not eligible for the
    accelerated depreciation recovery periods.
      Extend modified recovery period for qualified leasehold improvements
    and qualified restaurant property.--A taxpayer generally must capitalize
    the cost of property used in a trade or business and recover

    [[Page 251]]

    such cost over time through annual deductions for depreciation or
    amortization. Tangible property generally is depreciated under the
    modified accelerated cost recovery system (MACRS). Under this system,
    depreciation is determined by applying specified recovery periods,
    placed-in-service conventions, and depreciation methods to the cost of
    various types of depreciable property. Depreciation allowances for
    improvements made on leased property are determined under MACRS, even if
    the recovery period assigned to the property is longer than the term of
    the lease. Under prior law, the recovery period for qualified leasehold
    improvement property and qualified restaurant property was temporarily
    reduced from 39 years to 15 years, effective for such property placed in
    service after October 22, 2004 and before January 1, 2006. This Act
    extended the 15-year recovery period applicable to qualified leasehold
    improvement property and qualified restaurant property, effective for
    such property placed in service before January 1, 2008.
      Extend tax on failure to comply with mental health parity requirements
    applicable to group health plans.--Group health plans that provide both
    mental health benefits and medical and surgical benefits cannot impose
    aggregate lifetime or annual dollar limits on mental health benefits
    that are not imposed on substantially all medical and surgical benefits.
    An excise tax of $100 per day for each individual affected (during the
    period of noncompliance) is imposed on an employer sponsoring a group
    plan that fails to meet these requirements. For a given taxable year,
    the tax is limited to the lesser of 10 percent of the employer's group
    health insurance expenses for the prior taxable year or $500,000. This
    Act extended the mental health parity requirements and excise tax for
    failure to comply with these requirements, which had been scheduled to
    expire with respect to benefits furnished after December 31, 2006,
    through December 31, 2007.
      Extend deduction for corporate donations of computer technology.--The
    charitable contribution deduction that may be claimed by corporations
    for donations of inventory property generally is limited to the lesser
    of fair market value or the corporation's basis in the property.
    However, corporations are provided enhanced deductions, not subject to
    this limitation, for: (1) a ``qualified research contribution'', or (2)
    a ``qualified computer contribution.'' The enhanced deduction is equal
    to the lesser of: (1) basis plus one-half of the item's fair market
    value in excess of basis, or (2) two times basis. This Act extended the
    enhanced deduction for a qualified computer contribution, which expired
    with respect to donations made after December 31, 2005, to apply to
    donations made before January 1, 2008. (The enhanced deduction for
    ``qualified research contributions'' does not expire.) In addition, this
    Act expanded the definition of property eligible for either the enhanced
    deduction relating to research equipment or computers to property
    assembled by the taxpayer; under prior law the deduction was restricted
    to property constructed by the taxpayer.
      Extend Archer Medical Savings Accounts (Archer MSAs).--Self-employed
    individuals and employees of small firms are allowed to establish Archer
    MSAs; the number of accounts is capped at 750,000. In addition to other
    requirements: (1) individuals who establish Archer MSAs must be covered
    by a high-deductible health plan (and no other plan) with a deductible
    of at least $1,750 but not greater than $2,650 for policies covering a
    single person and a deductible of at least $3,500 but not greater than
    $5,250 in all other cases (these amounts are indexed annually for
    inflation); (2) tax-preferred contributions are limited to 65 percent of
    the deductible for single policies and 75 percent of the deductible for
    other policies; and (3) either an individual or an employer, but not
    both, may make a tax-preferred contribution to an Archer MSA for a
    particular year. Under prior law, no new contributions could be made to
    an Archer MSA after December 31, 2005, except for the following: (1)
    those made by or on behalf of individuals who previously had Archer MSA
    contributions and (2) those made by individuals employed by a
    participating employer. This Act extended the Archer MSA program for two
    years, through December 31, 2007.
      Extend suspension of net income limitation on percentage depletion for
    marginal oil and gas wells.--Taxpayers are allowed to recover their
    investment in oil and gas wells through depletion deductions. For
    certain properties, deductions may be determined using the percentage of
    depletion method; however, in any year, the amount deducted generally
    may not exceed 100 percent of the net income from the property. Under
    prior law, for taxable years beginning after December 31, 1997 and
    before January 1, 2006, domestic oil and gas production from
    ``marginal'' properties was exempt from the 100-percent-of-net-income
    limitation. This Act extended the exemption to apply to taxable years
    beginning after December 31, 2005 and before January 1, 2008.
      Extend economic development credit for American Samoa.--Certain
    domestic corporations with business operations in the U.S. possessions
    are eligible for the possession tax credit, which offsets the U.S. tax
    imposed on certain income related to operations in the U.S. possessions
    (including, among other places, American Samoa). The possession tax
    credit is available only to a corporation that qualifies as an existing
    credit claimant; the determination of whether a corporation is an
    existing credit claimant is made separately for each possession. The
    credit is computed separately for each possession with respect to which
    the corporation is an existing claimant and the credit is subject to
    either an economic activity-based limitation or an income-based limit.
    Under prior law, the possession tax credit was repealed for new
    claimants for taxable years beginning after December 31, 1995, and was
    phased

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    out for existing credit claimants for taxable years beginning after
    December 31, 1995 and before December 31, 2006. This Act extended and
    modified the credit with respect to American Samoa. Under the provision,
    a domestic corporation that was an existing credit claimant with respect
    to American Samoa and that elected the application of the possession tax
    credit for its last taxable year beginning before January 1, 2006 is
    allowed to claim a possession tax credit based on the economic activity-
    based limitation rules for the first two taxable years beginning after
    December 31, 2005 and before January 1, 2008.
      Extend placed-in-service deadline for certain Gulf Opportunity Zone
    property.--Taxpayers are allowed to recover the cost of certain property
    used in a trade or business or for the production of income through
    annual depreciation deductions. The amount of the allowable depreciation
    deduction for a taxable year generally is determined under MACRS, which
    assigns applicable recovery periods and depreciation methods to
    different types of property. Under the Gulf Opportunity Zone Act of
    2005, qualifying Gulf Opportunity Zone (GO Zone) property was provided
    an additional first-year depreciation deduction equal to 50 percent of
    the adjusted basis of the property. In order to qualify, property
    generally had to be tangible property with a recovery period of 20 years
    or less and included: (1) certain computer software; (2) water utility
    property; (3) leasehold improvement property; (4) nonresidential real
    property; and (5) residential rental property. In addition: (1)
    substantially all of the use of the property had to be in the GO Zone
    and in the active conduct of a trade or business by the taxpayer in the
    GO Zone; (2) the original use of the property in the GO Zone had to
    commence with the taxpayer on or after August 28, 2005; and (3) the
    property had to be acquired by purchase by the taxpayer on or after
    August 28, 2005 and placed in service on or before December 31, 2007
    (December 31, 2008 in the case of nonresidential real property and
    residential rental property). This Act extended the placed-in-service
    deadline to December 31, 2010 for nonresidential real property and
    residential rental property located in those portions of the GO Zone in
    a county or parish in which hurricanes occurring in 2005 damaged more
    than 60 percent of the housing units. However, only the adjusted basis
    of such property attributable to manufacture, construction, or
    production before January 1, 2010 (``progress expenditures'') is
    eligible for the additional first-year depreciation.
      Extend IRS authority to fund undercover operations.--The IRS is
    permitted to fund certain necessary and reasonable expenses of
    undercover operations, which places it on equal footing with other
    Federal law enforcement agencies. These undercover operations include
    international and domestic money laundering and narcotics operations.
    This Act extended this funding authority, which expired on December 31,
    2006, through December 31, 2007.
      Extend provisions permitting disclosure of tax return information
    relating to terrorist activity.--The disclosure of tax return
    information relating to terrorism is permitted in two situations. The
    first is when an executive of a Federal law enforcement or intelligence
    agency has reason to believe that the return information is relevant to
    a terrorist incident, threat or activity and submits a written request.
    The second is when the IRS wishes to apprise a Federal law enforcement
    agency of a terrorist incident, threat or activity. This Act extended
    this disclosure authority, which expired on December 31, 2006, through
    December 31, 2007.
      Extend provisions permitting disclosure of certain other tax return
    information.--Certain law permits disclosure of taxpayer identity
    information and signatures to any agency, body, or commission of any
    State for the purpose of carrying out with such agency, body or
    commission a combined Federal and State employment tax reporting program
    approved by the Secretary of the Treasury. This Act extended this
    disclosure authority, which expired on December 31, 2006, through
    December 31, 2007.

                                Energy Provisions

      Extend placed-in-service date for tax credit for energy produced from
    certain renewable sources.--Taxpayers are allowed a tax credit for
    electricity produced from wind, closed-loop biomass, open-loop biomass,
    geothermal energy, solar energy, small irrigation power, municipal solid
    waste, and qualified hydropower. The credit rate is 1.5 cents per
    kilowatt hour for electricity produced from wind, closed-loop biomass,
    geothermal, and solar power, and 0.75 cent per kilowatt hour for
    electricity produced from open-loop biomass, small irrigation power,
    municipal solid waste, and qualified hydropower (both rates are adjusted
    for inflation since 1992). A credit is also provided for the production
    of refined coal and Indian coal at qualified facilities. The credit for
    refined coal is $4.375 per ton (adjusted for inflation since 1992) and
    the credit for Indian coal is $1.50 per ton for coal produced after
    December 31, 2005 and before January 1, 2010 and $2.00 per ton for coal
    produced after December 31, 2009 and before January 1, 2013. To qualify
    for the credit under prior law, electricity generally had to be produced
    at a facility placed in service before January 1, 2008 (January 1, 2006,
    in the case of solar facilities) and coal had to be produced at a
    facility placed in service before January 1, 2009. This Act extended the
    placed-in-service date by one year, through December 31, 2008, for all
    facilities except solar energy, refined coal, and Indian coal
    facilities. For these facilities the placed-in-service termination dates
    of prior law were not changed.
      Extend and modify other energy tax provisions.--Other energy tax
    provisions provided in this Act: (1) authorized the issuance of an
    additional $400 million

    [[Page 253]]

    of clean renewable energy bonds and extended the authority to issue such
    bonds through December 31, 2008; (2) modified the advanced coal credit
    with respect to sub-bituminous coal; (3) extended the deduction for
    expenditures associated with the installation of energy-efficient
    property in a commercial building; (4) extended the tax credit for the
    construction of qualified new energy-efficient homes to apply to homes
    the construction of which is substantially completed after December 31,
    2005 and that are purchased after December 31, 2005 and before January
    1, 2009; (5) extended the tax credit for the purchase of certain
    residential solar energy property to apply to property placed in service
    after December 31, 2005 and before January 1, 2009; and (6) extended the
    business energy tax credit for the cost of certain solar energy,
    microturbine, and fuel cell property to apply to property purchased
    before January 1, 2009.

                             Health Savings Accounts

      Modify health savings accounts.--Individuals with a high-deductible
    health plan (and no other health plan other than a plan that provides
    certain permitted coverage) may establish a health savings account
    (HSA). Individuals who may be claimed as a dependent on another person's
    tax return cannot establish HSAs and individuals who enroll in Medicare
    cannot make contributions to an HSA. In general, HSAs provide tax-
    favored treatment for current medical expenses as well as the ability to
    save on a tax-favored basis for future medical expenses. Contributions
    to an HSA may be made by both an individual and the individual's
    employer, all contributions are aggregated for purposes of the maximum
    annual contribution limit, and contributions to Archer MSAs reduce the
    annual contribution limit for HSAs. Contributions to an HSA made by an
    employer are excluded from income and employment taxes and, within
    limits, contributions to an HSA made by or on behalf of an eligible
    individual are deductible by the individual in determining AGI (whether
    or not the individual itemizes deductions). Earnings on amounts in an
    HSA are not taxable and distributions for qualified medical expenses are
    not included in gross income; however, distributions from an HSA that
    are not used for qualified medical expenses are included in gross income
    and except in the case of death, disability or the attainment of age 65,
    are subject to an additional tax of 10 percent. Under prior law, the
    maximum aggregate annual contribution that could be made to an HSA was
    the lesser of: (1) 100 percent of the annual deductible under the high
    deductible health plan or (2) for 2007, $2,850 in the case of self-only
    coverage and $5,650 in the case of family coverage. In the case of
    policy holders and covered spouses who were age 55 or older, the HSA
    annual contribution limit was greater than the otherwise applicable
    limit by $700 in 2006, $800 in 2007, $900 in 2008, and $1,000 in 2009
    and subsequent years. This Act modified HSAs by: (1) allowing one-time
    rollovers of certain amounts (not greater than the balance on September
    21, 2006) from flexible spending arrangements (FSAs) and health
    reimbursement arrangements (HRAs) directly to HSAs, effective for
    distributions on or after December 20, 2006 and before January 1, 2012;
    (2) treating certain FSA coverage as disregarded coverage for purposes
    of determining if tax deductible contributions can be made to an HSA,
    effective for taxable years beginning after December 31, 2006; (3)
    repealing the provision that limited the maximum deductible contribution
    to the annual deductible under the high-deductible health plan,
    effective for taxable years beginning after December 31, 2006; (4)
    modifying the 12-month period over which the Consumer Price Index (CPI)
    for a calendar year is determined for purposes of making cost-of-living
    adjustments to HSA contribution limits and high-deductible health plan
    requirements, effective for adjustments for taxable years beginning
    after 2007; (5) allowing individuals who become eligible individuals in
    a month other than January to make the full deductible HSA contribution
    for the year, effective for taxable years beginning after December 31,
    2006; (6) modifying employer comparable contribution requirements for
    contributions made to non-highly compensated employees; and (7) allowing
    one-time rollovers from IRAs directly to HSAs up to the annual HSA
    maximum contribution, effective for taxable years beginning after
    December 31 2006.

                                 Trade Measures

      Extend Generalized System of Preferences (GSP).--Under GSP, duty-free
    access is provided to approximately 3,400 products from eligible
    beneficiary developing countries that meet certain worker rights,
    intellectual property protection, and other statutory criteria. This Act
    extended this program, which was scheduled to expire after December 31,
    2006, through December 31, 2008. This Act also provided that the
    President should revoke any existing competitive need limitation (CNL)
    waiver that has been in effect for at least five years, if a GSP-
    eligible product from a specific country has an annual trade level in
    the previous calendar year that exceeds 150 percent of the annual trade
    cap or 75 percent of all U.S. imports of that product.
      Extend Andean Trade Preference Act (ATPA).--The ATPA, which was
    scheduled to expire after December 31, 2006, was designed to provide
    economic alternatives for Bolivia, Columbia, Ecuador, and Peru in their
    fight against narcotics production and trafficking. This Act extended
    the ATPA for six-months through June 30, 2007. An additional six-month
    extension, through December 31, 2007, was granted to any ATPA
    beneficiary country that concludes a trade promotion agreement with the
    United States, provided the Congress and that country's legislature both
    approve the agreement by June 30, 2007.
      Modify African Growth and Opportunity Act (AGOA) and AGOA Acceleration
    Act.--The African Growth and Opportunity Act (AGOA) and the AGOA

    [[Page 254]]

    Acceleration Act, enacted in 2000 and 2004, respectively, reduced
    barriers to trade, thereby increasing U.S.-Africa trade, creating jobs,
    and increasing opportunities for Africans and Americans alike. This Act
    modified previous AGOA legislation by: (1) extending the deadline for
    use of third country fabric benefits, which was scheduled to expire
    after September 30, 2007, through September 30, 2012, with a 3.5 percent
    cap; (2) providing an exception to the third country fabric benefit for
    apparel goods made from fabric or yarn components that are in ``abundant
    supply'' in Africa; and (3) providing duty-free treatment to certain
    textiles and textile articles (non-apparel) of wholly made African
    fabric imported from lesser-developed AGOA beneficiaries.
      Other trade measures.--This Act also: (1) authorized the President to
    grant permanent normal trade relations status to Vietnam; (2) provided
    new rules of origin for duty-free apparel imports from Haiti, subject to
    meeting statutory criteria; (3) offered temporary duty reductions on a
    variety of items not manufactured in the United States; and (5) extended
    the period from 15 to 30 days before changes made in the Harmonized
    Tariff Schedule of the United States to implement certain international
    tariff nomenclature obligations become effective.

                                Other Provisions

      Expand qualified mortgage bond program.--Under current law, State and
    local governments may issue mortgage revenue bond (MRBs) to provide low-
    interest rate financing to qualified individuals for the purchase,
    improvement, or rehabilitation of owner-occupied residences. Several
    restrictions, including purchase price limitations, mortgagor income,
    and the first-time homebuyer requirement (except with regard to
    residences in certain targeted areas) apply to the financing of
    mortgages with MRBs. Effective for bonds issued after December 20, 2006
    and before January 1, 2008, this Act waived the first-time homebuyer
    requirement with respect to financing for veterans who served in the
    active military. The exception applies without regard to the date the
    veteran last served on active duty or the date on which the veteran
    applied for the loan after leaving active duty; however, each veteran
    may use the exception only one time.
      Allow prepayment of premium liability for coal industry health
    benefits.--The United Mine Workers of America (UMWA) Combined Benefit
    Fund was established by the Coal Industry Retiree Health Benefit Act of
    1992 to assume responsibility of payments for medical care expenses of
    certain retired miners and their dependents. The Combined Benefit Fund
    is financed by assessments on current and former signatories to labor
    agreements with the UMWA, past transfers from an overfunded United Mine
    Workers pension fund, and transfers from the Abandoned Mine Reclamation
    Fund. The Social Security Administration is responsible for assigning
    eligible retired miners and their dependents to current and former
    signatories to labor agreements with the UMWA and calculating annual
    contributions to be paid by each such signatory for each beneficiary
    assigned to the signatory. The term ``assigned operator'' is used to
    refer to the signatory to whom liability for a particular beneficiary of
    the Combined Benefit Fund has been assigned. Effective December 20,
    2006, this Act allowed certain assigned operators to prepay their
    premium liability to the Combined Benefit Fund. Under this Act: (1) the
    payment by the assigned operator (or any related person on behalf of the
    assigned operator) must be no less than the present value of the total
    premium liability of the assigned operator, as determined by the
    operator's enrolled actuary, using actuarial methods and assumptions
    each of which is reasonable and which are reasonable in the aggregate;
    and (2) the enrolled actuary must file with the Department of Labor an
    actuarial report regarding the valuation made by the actuary.
      Provide other changes.--Other provisions in this Act: (1) allowed U.S.
    businesses operating as branches in Puerto Rico to claim the domestic
    manufacturing deduction for two years; (2) allowed individuals to take
    advantage of a refundable credit with respect to certain long-term
    unused AMT credits existing prior to January 1, 2013; (3) allowed
    individuals to treat premiums paid or accrued before December 31, 2007
    on qualified mortgage insurance contracts issued after January 1, 2007
    as qualified mortgage interest (subject to income limits); (4) modified
    the excise tax on unrelated business taxable income of charitable
    remainder trusts; and (5) reformed the reward program for individuals
    who provide information regarding violations of the tax laws.

           UNITED STATES-OMAN FREE TRADE AGREEMENT IMPLEMENTATION ACT

      This Act, which was signed by President Bush on September 26, 2006,
    approved and provided for U.S implementation of the United States-Oman
    Free Trade Agreement, as signed by the United States and Oman on January
    19, 2006. When this Agreement enters into force, it will level the
    playing field for U.S. workers and businesses, provide additional market
    access for U.S. goods, help Oman's leaders develop long-term
    opportunities for their people, and advance our shared goal of building
    a Middle East Free Trade Area. By strengthening our relations with a
    strategic friend and ally in the Middle East, this Agreement will also
    help protect America's national security interests.

    [[Page 255]]

                            ADMINISTRATION PROPOSALS

            IMPROVE THE TAX SYSTEM TO MAKE THE U.S. MORE COMPETITIVE

      Americans deserve a tax system that is simple, fair, and pro-growth--
    in tune with our dynamic, 21st century economy. The tax system should
    allow taxpayers to make decisions based on economic merit, free of tax-
    induced distortions. The tax system should promote the competitiveness
    of American workers and businesses in the global economy. The Report of
    the President's Advisory Panel on Federal Tax Reform has helped lay
    groundwork on ways to ensure that our tax system better meets the needs
    of today's economy.
       The President's tax relief enacted in 2001 and 2003 helped move the
    tax code in this direction. The President has proposed changes that
    would move the tax code yet further in this direction. The Budget
    includes proposals to make health care more affordable and consumer-
    driven, to promote savings for all Americans, and to encourage
    investment by entrepreneurs. The Budget also recognizes that tax policy
    analysis needs to account fully for the economic benefits of policy
    changes on our economy. In the coming months, the Treasury Department
    will engage in a public dialogue on how our tax system can be improved
    to make the U.S. more competitive in the global economy.

           MAKE PERMANENT CERTAIN TAX RELIEF ENACTED IN 2001 AND 2003

      Extend permanently reductions in individual income taxes on capital
    gains and dividends.--The maximum individual income tax rate on net
    capital gains and dividends is 15 percent for taxpayers in individual
    income tax rate brackets above 15 percent and 5 percent (zero in 2008,
    2009 and 2010) for lower income taxpayers. The Administration proposes
    to extend permanently these reduced rates (15 percent and zero), which
    are scheduled to expire on December 31, 2010.
      Extend permanently increased expensing for small business.--Under
    current law, beginning in 2010, taxpayers may expense up to $25,000 in
    annual investment expenditures for qualifying property, and the maximum
    amount that may be expensed is reduced by the amount by which the
    taxpayer's cost of qualifying property exceeds $200,000. Neither of
    these dollar amounts is indexed for inflation. However, under temporary
    provisions first enacted in 2003, business taxpayers are allowed to
    expense up to $100,000 in annual investment expenditures for qualifying
    property (expanded to include off-the-shelf computer software) placed in
    service in taxable years beginning in 2003 through 2009. The maximum
    amount that may be expensed is reduced by the amount by which the
    taxpayer's cost of qualifying property exceeds $400,000. Both the
    temporary deduction and annual investment limits are indexed annually
    for inflation, effective for taxable years beginning after 2003 and
    before 2010. Also, with respect to a taxable year beginning after 2002
    and before 2010, taxpayers are permitted to make or revoke expensing
    elections on amended returns without the consent of the IRS
    Commissioner. The Administration proposes to extend permanently each of
    these temporary provisions, applicable for qualifying property
    (including off-the-shelf computer software) placed in service in taxable
    years beginning after 2009.
      Extend permanently provisions expiring in 2010.--Most of the
    provisions of the 2001 tax cut sunset on December 31, 2010. The
    Administration proposes to extend those provisions permanently.

                                 TAX INCENTIVES

                          Simplify and Encourage Saving

      Expand tax-free savings opportunities.--Under current law, individuals
    can contribute to traditional IRAs, nondeductible IRAs, and Roth IRAs,
    each subject to different sets of rules. For example, contributions to
    traditional IRAs are deductible, while distributions are taxed;
    contributions to Roth IRAs are taxed, but distributions are excluded
    from income. In addition, eligibility to contribute is subject to
    various age and income limits. While primarily intended for retirement
    saving, withdrawals for certain education, medical, and other non-
    retirement expenses are penalty free. The eligibility and withdrawal
    restrictions for these accounts complicate compliance and limit
    incentives to save.
      The Administration proposes to replace current law IRAs with two new
    savings accounts: a Lifetime Savings Account (LSA) and a Retirement
    Savings Account (RSA). Regardless of age or income, individuals could
    make annual nondeductible contributions of $2,000 to an LSA and $5,000
    (or earnings if less) to an RSA. Distributions from an LSA would be
    excluded from income and could be made at any time for any purpose
    without restriction. Distributions from an RSA would be excluded from
    income after attaining age 58 or in the event of death or disability.
    All other distributions would be included in income (to the extent they
    exceed basis) and subject to an additional tax. Distributions would be
    deemed to come from basis first. The proposal would be effective for
    contributions made after December 31, 2007 and future year contribution
    limits would be indexed for inflation.
      Existing Roth IRAs would be renamed RSAs and would be subject to the
    new rules for RSAs. Existing traditional and nondeductible IRAs could be
    converted into an RSA by including the conversion amount (excluding
    basis) in gross income, similar to a current-law Roth conversion.
    However, no income limit would apply to the ability to convert.
    Taxpayers who convert IRAs to RSAs before January 1, 2009 could spread
    the included conversion amount over four years. Existing traditional or
    nondeductible IRAs that are not converted to RSAs could not accept new
    contributions. New traditional IRAs could be created to accommodate roll

    [[Page 256]]

    overs from employer plans, but they could not accept new individual
    contributions. Individuals wishing to roll an amount directly from an
    employer plan to an RSA could do so by including the rollover amount
    (excluding basis) in gross income (i.e., ``converting'' the rollover,
    similar to a current law Roth conversion).
      Saving will be further simplified and encouraged by administrative
    changes already planned for the 2007 filing season that will allow
    taxpayers to have their tax refunds directly deposited into more than
    one account. Consequently, taxpayers will be able, for example, to
    direct that a portion of their tax refunds be deposited into an LSA or
    RSA.

      Consolidate employer-based savings accounts.--Current law provides
    multiple types of tax-preferred employer-based savings accounts to
    encourage saving for retirement. The accounts have similar goals but are
    subject to different sets of rules regulating eligibility, contribution
    limits, tax treatment, and withdrawal restrictions. For example, 401(k)
    plans for private employers, SIMPLE 401(k) plans for small employers,
    403(b) plans for 501(c)(3) organizations and public schools, and 457
    plans for State and local governments are all subject to different
    rules. To qualify for tax benefits, plans must satisfy multiple
    requirements. Among the requirements, the plan generally may not
    discriminate in favor of highly compensated employees with regard either
    to coverage or to amount or availability of contributions or benefits.
    Rules covering employer-based savings accounts are among the lengthiest
    and most complicated sections of the tax code and associated
    regulations. This complexity imposes substantial costs on employers,
    participants, and the Government, and likely has inhibited the adoption
    of retirement plans by employers, especially small employers.
      The Administration proposes to consolidate 401(k), SIMPLE 401(k),
    403(b), and 457 plans, as well as SIMPLE IRAs and SARSEPs, into a single
    type of plan--Employee Retirement Savings Accounts (ERSAs) that would be
    available to all employers. ERSA non-discrimination rules would be
    simpler and include a new ERSA non-discrimination safe-harbor. Under one
    of the safe-harbor options, a plan would satisfy the nondiscrimination
    rules with respect to employee deferrals and employee contributions if
    it provided a 50-percent match on elective contributions up to six
    percent of compensation. By creating a simplified and uniform set of
    rules, the proposal would substantially reduce complexity. The proposal
    would be effective for taxable years beginning after December 31, 2007.

                    Encourage Entrepreneurship and Investment

      Increase expensing for small business.--Business taxpayers are
    currently allowed to expense up to $100,000 in annual investment
    expenditures for qualifying property (expanded to include off-the-shelf
    computer software) placed in service in taxable years beginning in 2003
    through 2009. The maximum amount that may be expensed is reduced by the
    amount by which the taxpayer's cost of qualifying property exceeds
    $400,000. Both the deduction and annual investment limits are indexed
    annually for inflation, effective for taxable years beginning after 2003
    and before 2010. Also, with respect to a taxable year beginning after
    2002 and before 2010, taxpayers are permitted to make or revoke
    expensing elections on amended returns without the consent of the IRS
    Commissioner. The Administration proposes to increase the amount of
    annual investment expenditures that taxpayers are allowed to expense to
    $200,000, and to raise the amount of qualifying investment at which the
    phase-out begins to $800,000, effective for qualifying property placed
    in service in taxable years beginning after 2007. These higher amounts
    would be indexed for inflation, effective for taxable years beginning
    after 2008.

                              Invest in Health Care

      Provide a flat $15,000 deduction for family coverage ($7,500 for
    individual coverage) for those with and who purchase health insurance.--
    The Administration proposes to provide a flat $15,000 deduction to all
    families who purchase health insurance ($7,500 for those purchasing
    individual coverage), whether directly or through an employer, that
    meets minimum requirements. The full deduction would apply regardless of
    how much a family or individual spends on health insurance; that is, a
    family or individual that spends less than the full deduction on health
    insurance would still receive the full deduction. The deduction would
    apply for purposes of both the income and payroll tax.
      The new, flat deduction would replace the existing exclusion for
    employer-provided health insurance, the self-employed premium deduction,
    and the medical itemized deduction for those under 65 years of age. The
    current exclusion or deduction from income of health care spending,
    whether for insurance premiums or out-of-pocket expenses, except under a
    Health Savings Account (HSA), would also be repealed. Employers would be
    required to report the value of health insurance coverage to their
    employees on their annual Form W-2 and such amounts would be subject to
    withholding and employment taxes. Businesses would continue to deduct
    employer-provided health insurance as a business expense. In addition,
    the phase-out rate for the EITC for taxpayers with qualifying children
    would be reduced to 15 percent. These provisions would be effective for
    tax years beginning after December 31, 2008.

      Expand and make health savings accounts (HSAs) more flexible.--Current
    law allows individuals to accumulate funds in an HSA or medical savings
    account (MSA) on a tax-preferred basis to pay for medical expenses,
    provided they are covered by an HSA-qualified high-deductible health
    plan (HDHP), and no other health plan. Under current law, individual
    contributions to HSAs are deductible for income tax purposes, while
    employer contributions to HSAs are excluded from both the income and
    payroll tax. The higher de

    [[Page 257]]

    ductible under HSA-qualified health plans increases the cost
    consciousness of health care consumers by increasing their exposure to
    the cost of health care.
      In addition to higher deductibles, the Administration also recognizes
    that higher coinsurance levels encourage cost consciousness among health
    care consumers. Therefore, the Administration proposes to allow health
    plans to be considered HSA-eligible if they meet all the existing
    requirements of an HDHP except that, in lieu of satisfying the minimum
    deductible requirement, they have at least a 50 percent coinsurance
    requirement and a minimum out-of-pocket exposure that would result in
    the same (or lower) premium as coverage under a high-deductible health
    plan under the current requirements for the same family or individual.
      The Administration also proposes that additional changes be made to
    HSAs to encourage the use of HSAs and coverage under the HSA-eligible
    high-deductible health plans including: (1) allowing family coverage to
    include coverage where each individual in the family can receive
    benefits once they have reached the minimum deductible for an individual
    HDHP; (2) allowing both spouses to contribute the catch-up contribution
    to a single HSA owned by one spouse if both spouses are eligible
    individuals; (3) allowing an individual to be covered by a flexible
    spending arrangement (FSA) or health reimbursement arrangement (HRA)
    with first dollar coverage and still contribute to an HSA, but offset
    the maximum allowable HSA contribution by the level of FSA or HRA
    coverage; (4) allowing qualified medical expenses to include any medical
    expense incurred on or after the first day of HDHP coverage if
    individuals have established an HSA by their return filing date for that
    year; and (5) excluding from the comparability rules extra employer
    contributions to HSAs on behalf of employees who are chronically ill or
    employees who have spouses or dependents who are chronically ill. All of
    the HSA-related proposals would be effective for years beginning after
    December 31, 2007.

      Improve the Health Coverage Tax Credit.--The Health Coverage Tax
    Credit (HCTC) was created under the Trade Act of 2002 for the purchase
    of qualified health insurance. Eligible persons include certain
    individuals who are receiving benefits under the Trade Adjustment
    Assistance (TAA) or the Alternative TAA (ATAA) program and certain
    individuals between the ages of 55 and 64 who are receiving pension
    benefits from the Pension Benefit Guaranty Corporation (PBGC). The tax
    credit is refundable and can be claimed through an advance payment
    mechanism at the time the insurance is purchased.
      To make the requirements for qualified State-based coverage under the
    HCTC more consistent with the rules applicable under the Health
    Insurance Portability and Accountability Act (HIPAA) and thus encourage
    more plans to participate in the HCTC program, the Administration
    proposes to allow State-based coverage to impose a pre-existing
    condition restriction for a period of up to 12 months, provided the plan
    reduces the restriction period by the length of the eligible
    individual's creditable coverage (as of the date the individual applied
    for the State-based coverage). This provision would be effective for
    eligible individuals applying for coverage after December 31, 2007.
    Also, in order to prevent an individual from losing the benefit of the
    HCTC just because his or her spouse becomes eligible for Medicare, the
    Administration proposes to permit spouses of HCTC-eligible individuals
    to claim the HCTC when the HCTC-eligible individual becomes entitled to
    Medicare coverage. The spouse, however, would have to be at least 55
    years old and meet the other HCTC eligibility requirements. This
    provision would be effective for taxable years beginning after December
    31, 2007.
      To improve the administration of the HCTC, the Administration proposes
    to: (1) modify the definition of ``other specified coverage'' for
    ``eligible ATAA recipients,'' to be the same as the definition applied
    to ``eligible TAA recipients;'' (2) clarify that certain PBGC pension
    recipients are eligible for the tax credit; (3) allow State-based
    continuation coverage to qualify without meeting the requirements for
    State-based qualified coverage; and (4) for purposes of the State-based
    coverage rules, permit the Commonwealths of Puerto Rico and Northern
    Mariana Islands, as well as American Samoa, Guam, and the U.S. Virgin
    Islands to be deemed as States.

      Allow the orphan drug tax credit for certain pre-designation
    expenses.--Current law provides a 50-percent credit for expenses related
    to human clinical testing of drugs for the treatment of certain rare
    diseases and conditions (``orphan drugs''). A taxpayer may claim the
    credit only for expenses incurred after the Food and Drug Administration
    (FDA) designates a drug as a potential treatment for a rare disease or
    condition. This creates an incentive to defer clinical testing for
    orphan drugs until the taxpayer receives the FDA's approval and
    increases complexity for taxpayers by treating pre-designation and post-
    designation clinical expenses differently. The Administration proposes
    to allow taxpayers to claim the orphan drug credit for expenses incurred
    prior to FDA designation if designation occurs before the due date
    (including extensions) for filing the tax return for the year in which
    the FDA application was filed. The proposal would be effective for
    qualified expenses incurred after December 31, 2006.

                    Provide Incentives for Charitable Giving

      Extend permanently tax-free withdrawals from IRAs for charitable
    contributions.--Under current law, eligible individuals may make
    deductible or non-deductible contributions to a traditional IRA and
    nondeductible contributions to a Roth IRA. Pre-tax contributions and
    earnings in a traditional IRA are included in income when withdrawn.
    Qualified withdrawals from a Roth IRA are excluded from gross income;
    withdrawals that are not qualified are included

    [[Page 258]]

    in gross income to the extent attributable to earnings. The Pension
    Protection Act of 2006 provided an exclusion from gross income for
    otherwise taxable distributions from a traditional or a Roth IRA made
    directly to a qualified charitable organization. The exclusion may not
    exceed $100,000 per taxpayer per taxable year, is applicable only to
    distributions made on or after the date the IRA owner attains age 70\1/
    2\, and is effective for distributions made in taxable years beginning
    after December 31, 2005 and before January 1, 2008. The exclusion
    applies only if a charitable contribution deduction for the entire
    distribution would otherwise be allowable under current law, determined
    without regard to the percentage-of-AGI limitation. No charitable
    deduction is allowed with respect to any amount excludable from income
    under this provision.
      The Administration proposes to permanently extend this exclusion,
    effective for distributions made in taxable years beginning after
    December 31, 2007.

      Extend permanently the enhanced charitable deduction for contributions
    of food inventory.--A taxpayer's deduction for charitable contributions
    of inventory generally is limited to the taxpayer's basis (typically
    cost) in the inventory, or, if less, the fair market value of the
    inventory. However, for certain contributions of inventory, C
    corporations may claim an enhanced deduction equal to the lesser of: (1)
    basis plus one half of the fair market value in excess of basis, or (2)
    two times basis. To be eligible for the enhanced deduction, the
    contributed property generally must be inventory of the taxpayer
    contributed to a charitable organization and the donee must: (1) use the
    property consistent with the donee's exempt purpose solely for the care
    of the ill, the needy, or infants; (2) not transfer the property in
    exchange for money, other property, or services; and (3) provide the
    taxpayer a written statement that the donee's use of the property will
    be consistent with such requirements. To use the enhanced deduction, the
    taxpayer must establish that the fair market value of the donated item
    exceeds basis.
      The Katrina Emergency Tax Relief Act of 2005 expanded the enhanced
    deduction to apply to qualified contributions of food inventory made
    after August 27, 2005 and before January 1, 2006 by all taxpayers (not
    just C corporations) engaged in a trade or business. The Pension
    Protection Act of 2006 extended the enhanced charitable deduction for
    contributions of food inventory provided under the Katrina Emergency Tax
    Relief Act of 2005 to apply to contributions made after December 31,
    2005 and before January 1, 2008. The donated food must meet certain
    quality and labeling standards, and, for taxpayer's other than C
    corporations, the total deduction for donated food inventory may not
    exceed 10 percent of the taxpayer's net income from the related trade or
    business. The Administration proposes to permanently extend the enhanced
    charitable deduction for contributions of food inventory to apply to
    contributions made after December 31, 2007.

      Extend permanently the deduction for corporate donations of computer
    technology.--The charitable contribution deduction that may be claimed
    by corporations for donations of inventory property generally is limited
    to the lesser of fair market value or the corporation's basis in the
    property. However, corporations are provided enhanced deductions, not
    subject to this limitation, for contributions of computer technology and
    equipment for education purposes. The enhanced deduction is equal to the
    lesser of: (1) basis plus one-half of the item's fair market value in
    excess of basis, or (2) two times basis. To qualify for the enhanced
    deduction, equipment contributed must have been constructed or assembled
    by the taxpayer and be donated no later than three years after
    completion. This provision expires with respect to donations made after
    December 31, 2007. The Administration proposes to permanently extend
    this deduction, effective for distributions made in taxable years
    beginning after December 31, 2007.
      Permanently increase limits on contributions of property interests
    made for conservation purposes.--In general, a deduction is permitted
    for charitable contributions, subject to certain limitations that depend
    on the type of taxpayer, the property contributed, and the donee
    organization. Exceptions to these general rules are provided for certain
    types of contributions, including qualified conservation contributions.
    The special rules for qualified conservation contributions were enhanced
    under the Pension Reform Act of 2006, applicable for qualified
    conservation contributions made in taxable years beginning after
    December 31, 2005 and before January 1, 2008. These special rules: (1)
    increased the cap on deductions for qualified conservation contributions
    from 30 percent to 50 percent of the excess of the donor's contribution
    base over the amount of all other allowable charitable contributions,
    (2) increased the cap on deductions for qualified conservation
    contributions applicable to qualified ranchers and farmers to 100
    percent of the excess of the donor's contribution base over the amount
    of all other allowable charitable contributions in the case of
    individuals and to 100 percent of the excess of taxable income over the
    amount of all other allowable charitable contributions in the case of
    corporations, and (3) increased the number of years qualified
    conservation contributions in excess of the 50- and 100-percent caps may
    be carried forward from five to 15 years. The Administration proposes to
    permanently extend these special rules, applicable for qualified
    conservation contributions made in taxable years beginning after
    December 31, 2007.
      Extend permanently basis adjustment to stock of S corporations
    contributing appreciated property.--Each shareholder of an S corporation
    must take into account his or her pro rata share of a charitable
    contribution by the S corporation in determining his or her income tax
    liability. For donations of property, this generally is the pro rata
    share of the property's fair market value. Under prior law, the
    shareholder's

    [[Page 259]]

    basis in the stock of the company was reduced by the amount of the
    charitable contribution that flowed through to the shareholder. Under
    the Pension Protection Act of 2006, effective for charitable
    contributions made by an S corporation in taxable years beginning after
    December 31, 2005 and before January 1, 2008, shareholders are allowed
    to adjust their basis in the stock of the company by their pro rata
    share of the adjusted basis of the contributed property instead of by
    their pro rata share of the market value of the contributed property.
    The Administration proposes to permanently extend this provision,
    effective for charitable contributions made by an S corporation in
    taxable years beginning after December 31, 2007.
      Reform excise tax based on investment income of private foundations.--
    Under current law, private foundations that are exempt from Federal
    income tax are subject to a two-percent excise tax on their net
    investment income (one-percent if certain requirements are met). The
    excise tax on private foundations that are not exempt from Federal
    income tax, such as certain charitable trusts, is equal to the excess of
    the sum of the excise tax that would have been imposed if the foundation
    were tax exempt and the amount of the unrelated business income tax that
    would have been imposed if the foundation were tax exempt, over the
    income tax imposed on the foundation. To encourage increased charitable
    activity and simplify the tax laws, the Administration proposes to
    replace the two rates of tax on the net investment income of private
    foundations that are exempt from Federal income tax with a single tax
    rate of one percent. The excise tax on private foundations not exempt
    from Federal income tax would be equal to the excess of the sum of the
    one-percent excise tax that would have been imposed if the foundation
    were tax exempt and the amount of the unrelated business income tax that
    would have been imposed if the foundation were tax exempt, over the
    income tax imposed on the foundation. The proposed change would be
    effective for taxable years beginning after December 31, 2007.
      Repeal the $150 million limitation on qualified 501(c)(3) bonds.--
    Current law contains a $150 million limitation on the volume of
    outstanding, non-hospital, tax-exempt bonds for the benefit of any one
    501(c)(3) organization. The limitation was repealed in 1997 for bonds
    issued after August 5, 1997, at least 95 percent of the net proceeds of
    which are used to finance capital expenditures incurred after that date.
    However, the limitation continues to apply to bonds more than five
    percent of the net proceeds of which finance or refinance working
    capital expenditures, or capital expenditures incurred on or before
    August 5, 1997. In order to simplify the tax laws and provide consistent
    treatment of bonds for 501(c)(3) organizations, the Administration
    proposes to repeal the $150 million limitation in its entirety.
      Repeal certain restrictions on the use of qualified 501(c)(3) bonds
    for residential rental property.--Tax-exempt, 501(c)(3) organizations
    generally may utilize tax-exempt financing for charitable purposes.
    However, existing law contains a special limitation under which
    501(c)(3) organizations may not use tax-exempt financing to acquire
    existing residential rental property for charitable purposes unless the
    property is rented to low-income tenants or is substantially
    rehabilitated. In order to simplify the tax laws and provide consistent
    treatment of bonds for 501(c)(3) organizations, the Administration
    proposes to repeal the residential rental property limitation.

                              Strengthen Education

      Extend permanently the above-the-line deduction for qualified out-of-
    pocket classroom expenses.--Under current law, teachers who itemize
    deductions (do not use the standard deduction) and incur unreimbursed,
    job-related expenses are allowed to deduct those expenses to the extent
    that, when combined with other miscellaneous itemized deductions, they
    exceeded two percent of AGI. Current law also allows certain teachers
    and other elementary and secondary school professionals to treat up to
    $250 in annual qualified out-of-pocket classroom expenses as a non-
    itemized deduction (deductible above-the-line). Unreimbrsed expenditures
    for certain books, supplies, and equipment related to classroom
    instruction qualify for the above-the-line deduction. Expenses claimed
    as an above-the-line deduction may not be claimed as an itemized
    deduction. This additional deduction is effective for expenses incurred
    in table years beginning after December 31, 2001 and before January 1,
    2008. The Administration proposes to extend permanently the above-the-
    line deduction to apply to qualified out-of-pocket expenditures incurred
    in taxable years beginning after December 31, 2007.
      Allow the saver's credit for contributions to qualified tuition
    programs (section 529 of the Internal Revenue Code).--Under current law,
    taxpayers age 18 or older who are not dependents or full-time students
    may receive a nonrefundable credit (the saver's credit) on up to $2,000
    of their compensation contributed to employer-sponsored qualified
    retirement plans and IRAs. The credit ranges between 10 and 50 percent
    of the amount contributed, depending on the taxpayer's filing status and
    AGI (adjusted for inflation). In determining the credit, qualified
    contributions are reduced by distributions from qualified plans and IRAs
    during the current tax year, the two preceding tax years, and the
    following year, up to the due date of the return, including extensions.
      Under current law, taxpayers may contribute to a section 529 qualified
    tuition program (QTP) to save for higher education expenses of a
    designated beneficiary. Contributions to a QTP are not deductible from
    income for Federal tax purposes, but earnings on contributions
    accumulate tax-free. Taxpayers may exclude from gross

    [[Page 260]]

    income amounts distributed from a QTP and used for qualified higher
    education expenses, provided the distribution is not used for the same
    educational expenses for which another tax benefit is claimed.
    Nonqualified distributions are subject to an additional tax.
      The Administration proposes to allow the saver's credit for qualified
    contributions to QTPs controlled by the taxpayer. AGI would be modified
    to include the excludable portion of the taxpayer's Social Security
    benefits in determining the applicable rate for the saver's credit. The
    credit would apply to an annual aggregate contribution of up to $2,000
    (or earnings includible in gross income, if less) to the taxpayer's
    elective deferral plans, IRAs, and QTPs. For an individual who is
    married filing a joint return, the earnings limitation would be binding
    only if the combined includible compensation of the spouses was less
    than $4,000. Qualified contributions would be reduced by distributions
    from elective deferral plans, IRAs, and QTPs during the current tax
    year, the two preceding tax years, and the following tax year up to the
    due date of the return, including extensions. The credit would be
    effective for years beginning after December 31, 2007.

                             Protect the Environment

      Extend permanently expensing of brownfields remediation costs.--
    Taxpayers may elect, with respect to expenditures paid or incurred
    before January 1, 2008, to treat certain environmental remediation
    expenditures that would otherwise be chargeable to a capital account as
    deductible in the year paid or incurred. The Administration proposes to
    extend this provision permanently, making it available for expenditures
    paid or incurred after December 31, 2007, and facilitating its use by
    businesses to undertake projects that may be uncertain in overall
    duration.
      Eliminate the volume cap for private activity bonds for water
    infrastructure.--Bonds are classified as private activity bonds if they
    meet a private business use test and a private payments test. Private
    activity bonds may be issued on a tax-exempt basis only if they meet
    specified requirements, including targeting requirements that limit such
    bond financing to specifically defined facilities and programs. For
    example, qualified private activity bonds can be used to finance
    facilities for the furnishing of water and for sewer facilities.
    Qualified private activity bonds are subject to the same general rules
    applicable to governmental bonds. Most qualified private activity bonds
    are also subject to a number of additional rules and limitations, in
    particular an annual State volume cap limitation.
      The Administration proposes to remove from the annual State volume cap
    limitation qualified private activity bonds issued to finance water and
    sewage facilities. Municipalities that use these bonds for wastewater
    and drinking water systems must implement (if they have not already)
    full-cost pricing for services, to help their systems become self-
    financing like the electric and gas utilities and minimize the need for
    future Federal financing. The volume cap would be removed for
    obligations issued after December 31, 2007.

    Restructure Assistance to New York City for Continued Recovery from the
                                   Attacks of

                            September 11th

      Provide tax incentives for transportation infrastructure.--The
    Administration proposes to restructure the tax benefits for New York
    recovery that were enacted in 2002. Some of the tax benefits that were
    provided to New York following the attacks of September 11, 2001, likely
    will not be usable in the form in which they were originally provided.
    As such, the Administration proposed in the Mid-Session Review of the
    2005 Budget to sunset certain existing New York Liberty Zone tax
    benefits and in their place provide tax credits to New York State and
    New York City for expenditures incurred in building or improving
    transportation infrastructure in or connecting with the New York Liberty
    Zone. The tax credit would be available as of the date of enactment,
    subject to an annual limit of $200 million ($2 billion in total over 10
    years), evenly divided between the State and the City. Any unused credit
    limit in a given year would be added to the $200 million allowable in
    the following year, including years beyond the 10-year period of the
    credit. Similarly, expenditures that could not be credited in a given
    year because of the credit limit would be carried forward and used
    against the next year's limitation. The credit would be allowed against
    any payments (e.g., income tax withholding) made by the City and State
    under any provision of the Internal Revenue Code, other than Social
    Security and Medicare payroll taxes and excise taxes. The Secretary of
    the Treasury may prescribe such rules as are necessary to ensure that
    the expenditures are made for the intended purpose. The Administration
    also proposes to terminate the additional first-year depreciation
    deduction for certain real property, which was provided to eligible
    property within the New York Liberty Zone under the 2002 economic
    stimulus act.

                       SIMPLIFY THE TAX LAWS FOR FAMILIES

      Clarify uniform definition of a child.--The 2004 tax relief act
    created a uniform definition of a child, allowing, in many
    circumstances, a taxpayer to claim the same child for five different
    child-related tax benefits. Under the new rules, a qualifying child must
    meet relationship, residency, and age tests. While the new rules
    simplify the determination of eligibility for many child-related tax
    benefits, the elimination of certain complicated factual tests to
    determine if siblings and certain other family members are eligible to
    claim a qualifying child may have some unintended consequences. The new
    rules effectively deny the EITC to some young taxpayers who are the sole
    guardians of their younger siblings. Yet some taxpayers are able to
    avoid income limitations on child-related tax benefits by allowing other
    family members, who have lower in

    [[Page 261]]

    comes, to claim the taxpayers' sons or daughters as qualifying children.
    The 2004 tax relief act had other unintended consequences, which made
    some of the eligibility rules less uniform. For example, it allowed
    dependent filers to claim the child tax credit, even though they are
    generally ineligible for most other child-related tax benefits. It also
    allowed taxpayers to claim the child tax credit on behalf of a married
    child who files a joint return with his or her spouse, even though the
    taxpayer generally cannot claim other benefits for the married child.
    These exceptions create confusion and add complexity to the tax code.
      To ensure that deserving taxpayers receive child-related tax benefits,
    the Administration proposes to clarify the uniform definition of a
    child. First, the definition of a qualifying child would be further
    simplified. A taxpayer would not be a qualifying child of another
    individual if the taxpayer is older than that individual. However, an
    individual could be a qualifying child of a younger sibling if the
    individual is permanently and totally disabled. Also, under the
    proposal, an individual who is married and filing jointly (for any
    reason other than to obtain a refund of overwithheld taxes) would not be
    considered a qualifying child for the child-related tax benefits,
    including the child tax credit. Second, the proposal clarifies when a
    taxpayer is eligible to claim child-related tax benefits. If a parent
    resides with his or her child for over half the year, the parent would
    be the only individual eligible to claim the child as a qualifying
    child. The parent could waive the child-related tax benefits to another
    member of the household who has higher AGI and is otherwise eligible for
    the tax benefits. In addition, dependent filers would not be allowed to
    claim qualifying children. The proposal is effective for taxable years
    beginning after December 31, 2007.

      Simplify EITC eligibility requirement regarding filing status,
    presence of children, and work and immigrant status.--To qualify for the
    EITC, taxpayers must satisfy requirements regarding filing status, the
    presence of children in their households, and their work and immigration
    status in the United States. These rules are confusing, require
    significant record-keeping, and are costly to administer. Under the
    proposal, married taxpayers who reside with children could claim the
    EITC without satisfying a complicated household maintenance test if they
    live apart from their spouse for the last six months of the year. In
    addition, certain taxpayers who live with children but do not qualify
    for the larger child-related EITC could claim the smaller EITC for very
    low-income childless workers. The simplification of the filing status
    and residency requirements would be effective for taxable years
    beginning after December 31, 2007. Effective January 1, 2008, the
    proposal would also improve the administration of the EITC with respect
    to eligibility requirements for undocumented workers.
      Reduce computational complexity of refundable child tax credit.--
    Taxpayers with earned income in excess of $11,750 may qualify for a
    refundable (or ``additional'') child tax credit even if they do not have
    any income tax liability. Over 70 percent of additional child tax credit
    claimants also claim the EITC. However, the two credits have a different
    definition of earned income and different U.S. residency requirements.
    In addition, some taxpayers have to perform multiple computations to
    determine the amount of the additional child tax credit they can claim.
    First, they must compute the additional child tax credit using a formula
    based on earned income. Then, if they have three or more children, they
    may recalculate the credit using a formula based on social security
    taxes and claim the higher of the two amounts.
      Under the proposal, the additional child tax credit would use the same
    definition of earned income as is used for the EITC. Taxpayers (other
    than members of the Armed Forces stationed overseas) would be required
    to reside with a child in the United States to claim the additional
    child tax credit (as they are currently required to do for the EITC).
    Taxpayers with three or more children would do only one computation
    based on earned income to determine the credit amount. The proposal
    would be effective for taxable years beginning after December 31, 2007.

                             IMPROVE TAX COMPLIANCE

      The Federal tax system is based on voluntary compliance with the tax
    laws. Under this system, taxpayers report and pay their taxes
    voluntarily with minimal interaction with the IRS. While the vast
    majority of American taxpayers pay their taxes timely and accurately,
    there remains in aggregate a difference between what taxpayers should
    pay and what they actually pay on a timely basis. In 2001, the overall
    compliance rate was 86 percent, after including late payments and
    recoveries from IRS enforcement activities. While this rate of
    compliance is high, a large amount of the tax that should be paid is
    not, resulting in the so-called ``tax gap''. \1\
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      \1\ See Chapter 13, Stewardship, in the Analytical Perspectives
    volume.
    ---------------------------------------------------------------------------
      In September 2006, the Treasury Department released a comprehensive
    strategy to improve tax compliance. \2\ The strategy builds upon the
    demonstrated experience and current efforts of the Treasury Department
    and IRS to improve compliance.
    ---------------------------------------------------------------------------
      \2\ Comprehensive Strategy for Reducing the Tax Gap, U.S. Treasury
    Department, September 26, 2006.
    ---------------------------------------------------------------------------
      Four key principles guided development of the strategy:
        Unintentional taxpayer errors and intentional taxpayer
              evasion should both be addressed.
        Sources of non-compliance should be targeted with
              specificity.
        Enforcement activities should be combined with a commitment
              to taxpayer service.
        Tax policy and compliance proposals should be sensitive to
              taxpayer rights and maintain an appropriate balance between
              enforcement activity and imposition of taxpayer burden.

    [[Page 262]]

      These principles point to the need for a comprehensive, integrated,
    multi-year strategy to improve tax compliance. Components of this
    strategy must include: (1) legislative proposals to reduce opportunities
    for evasion; (2) a multi-year commitment to compliance research; (3)
    continued improvements in information technology; (4) improvements in
    IRS compliance activities; (5) enhancements of taxpayer service; (6)
    simplification of the tax law; and (7) coordination between the
    government and its partners and stakeholders.
      The IRS has taken a number of steps to improve compliance. To enhance
    the IRS' efforts, the Administration's Budget includes a number of
    legislative proposals intended to improve tax compliance with minimum
    taxpayer burden. The Administration proposes to expand information
    reporting, improve compliance by businesses, strengthen tax
    administration, and expand penalties.

      Expand information reporting.--Compliance with the tax laws is highest
    when payments are subject to information reporting to the IRS. Specific
    information reporting proposals would: (1) require information reporting
    on payments to corporations; (2) require basis reporting on security
    sales; (3) expand broker information reporting; (4) require information
    reporting on merchant payment card reimbursements; (5) require a
    certified tax identification number (TIN) from non-employee service
    providers; (6) require increased information reporting for certain
    government payments for property and services; and (7) increase
    information return penalties.
      Improve compliance by businesses.--Improving compliance by businesses
    of all sizes is important. Specific proposals to improve compliance by
    businesses would: (1) require electronic filing by certain large
    businesses; (2) implement standards clarifying when employee leasing
    companies can be held liable for their clients' Federal employment
    taxes; and (3) amend collection due process procedures applicable to
    employment tax liabilities.
      Strengthen tax administration.--The IRS has taken a number of steps
    under existing law to improve compliance. These efforts would be
    enhanced by specific tax administration proposals that would: (1) expand
    IRS access to information in the National Directory of New Hires
    database; (2) permit the IRS to disclose to prison officials return
    information about tax violations; and (3) make repeated failure to file
    a tax return a felony.
      Expand penalties.--Penalties play an important role in discouraging
    intentional non-compliance. Specific proposals to expand penalties
    would: (1) expand preparer penalties; (2) impose a penalty on failure to
    comply with electronic filing requirements; and (3) create an erroneous
    refund claim penalty.

          IMPROVE TAX ADMINISTRATION AND OTHER MISCELLANEOUS PROPOSALS

      Implement IRS administrative reforms.--The Administration has four
    proposals relating to administrative reforms. The first proposal
    modifies employee infractions subject to mandatory termination and
    permits a broader range of available penalties. It strengthens taxpayer
    privacy while reducing employee anxiety resulting from unduly harsh
    discipline or unfounded allegations. The second proposal allows the IRS
    to terminate installment agreements when taxpayers fail to make timely
    tax deposits and file tax returns on current liabilities. The third
    proposal eliminates the requirement that the IRS Chief Counsel provide
    an opinion for any accepted offer-in-compromise of unpaid tax (including
    interest and penalties) equal to or exceeding $50,000. This proposal
    requires that the Secretary of the Treasury establish standards to
    determine when an opinion is appropriate. The fourth proposal modifies
    the way that Financial Management Services (FMS) recovers its
    transaction fees for processing IRS levies by permitting FMS to add the
    fee to the liability being recovered thereby shifting the cost of
    collection to the delinquent taxpayer. The offset amount would be
    included as part of the 15-percent limit on continuous levies against
    income.
      Extend IRS authority to fund undercover operations.--The IRS is
    permitted to fund certain necessary and reasonable expenses of
    undercover operations, placing it on equal footing with other Federal
    law enforcement agencies. These undercover operations include
    international and domestic money laundering and narcotics operations.
    The Administration proposes to extend this funding authority, which
    expires on December 31, 2007, through December 31, 2010.
      Eliminate the special exclusion from unrelated business taxable income
    for gain or loss on the sale or exchange of certain brownfields.--In
    general, an organization that is otherwise exempt from Federal income
    tax is taxed on income from any trade or business regularly carried on
    by the organization that is not substantially related to the
    organization's exempt purposes. In addition, income derived from
    property that is debt-financed generally is subject to unrelated
    business income tax. The 2004 job creation act created a special
    exclusion from unrelated business taxable income of gain or loss from
    the sale or exchange of certain qualifying brownfield properties. The
    exclusion applies regardless of whether the property is debt-financed.
    The new provision adds considerable complexity to the Internal Revenue
    Code and, because there is no limit on the amount of tax-free gain,
    could exempt from tax real estate development considerably beyond mere
    environmental remediation. The proposal would eliminate this special
    exclusion effective for taxable years beginning after December 31, 2007.

    [[Page 263]]

      Limit related party interest deductions.--Current law (section 163(j)
    of the Internal Revenue Code) denies U.S. tax deductions for certain
    interest expenses paid to a related party where: (1) the corporation's
    debt-to-equity ratio exceeds 1.5 to 1, and (2) net interest expenses
    exceed 50 percent of the corporation's adjusted taxable income (computed
    by adding back net interest expense, depreciation, amortization,
    depletion, and any net operating loss deduction). If these thresholds
    are exceeded, no deduction is allowed for interest in excess of the 50-
    percent limit that is paid to a related party or paid to an unrelated
    party but guaranteed by a related party, and that is not subject to U.S.
    tax. Any interest that is disallowed in a given year is carried forward
    indefinitely and may be deductible in a subsequent taxable year. A
    three-year carryforward for any excess limitation (the amount by which
    interest expense for a given year falls short of the 50-percent limit)
    is also allowed. Because of the opportunities available under current
    law to reduce inappropriately U.S. tax on income earned on U.S.
    operations through the use of foreign related-party debt, the
    Administration proposes to tighten the interest disallowance rules of
    section 163(j) as follows: (1) the current law 1.5 to 1 debt-to-equity
    safe harbor would be eliminated; (2) the adjusted taxable income
    threshold for the limitation would be reduced from 50 percent to 25
    percent of adjusted taxable income with respect to disqualified interest
    other than interest paid to unrelated parties on debt that is subject to
    a related-party guarantee, which generally would remain subject to the
    current law 50 percent threshold; and (3) the indefinite carryforward
    for disallowed interest would be limited to ten years and the three-year
    carryforward of excess limitation would be eliminated. The Department of
    Treasury also is conducting a study of these rules and the potential for
    further modifications to ensure the prevention of inappropriate income-
    reduction opportunities.
      Repeal telephone tax on local telephone service.--Under prior law, a
    three-percent Federal excise tax was imposed on amounts paid for local
    telephone service, toll telephone service (essentially long distance
    telephone service), and teletypewriter exchange service. In accordance
    with multiple court decisions that concluded that the tax did not apply
    to long distance services sold at flat per-minute rates for interstate,
    intrastate, and international calls, the IRS is no longer collecting tax
    on telephone service other than local-only telephone service. The
    Administration proposes to repeal the tax on local telephone service
    effective for amounts paid pursuant to bills first rendered more than 90
    days after enactment of legislation repealing the tax.
      Modify financing of the Airport and Airway trust fund.--The
    Administration supports a reauthorization proposal that would make the
    Federal Aviation Administration's (FAA's) financing system more cost-
    based. The FAA's current excise tax system, largely based on taxes on
    the price of airline tickets, does not have a direct relationship
    between the taxes paid by users and the air traffic control services
    provided by the FAA. Under the reauthorization proposal, FAA would
    collect user fees from commercial aviation operators for air traffic
    control services starting in 2009. For non-commercial users, FAA would
    continue to recover its costs for air traffic control services via a
    fuel tax. Both commercial and non-commercial users would continue to pay
    fuel taxes to support FAA's Airport Improvement Program.
      Anticipated receipt of donations to the National Park Service through
    the National Park Centennial Challenge Fund.--The President's National
    Parks Centennial Challenge encourages the public to increase donations
    to national parks by proposing to match contributions for signature
    projects and programs on a dollar-for-dollar basis up to $100 million a
    year for ten years. As part of a broader initiative to prepare for the
    National Park Service Centennial in 2016, this Challenge continues the
    National Park Service's legacy of leveraging philanthropic investment
    for the benefit of our national parks.
      Transition from the non-foreign cost-of-living adjustment (COLA) to
    locality pay for employees in non-foreign areas.--Federal employees
    working outside the continental United States in Alaska, Hawaii or the
    US territories presently receive a COLA, which is an untaxed annual pay
    adjustment that is not creditable for retirement. By transitioning to
    locality pay, Federal employees in the non-foreign areas will contribute
    a larger percentage of their pay into the Federal retirement fund as
    locality pay is retirement-creditable. The proposal would establish a
    yearly reduction in the COLA, offset by a yearly increase in applicable
    locality pay, with the intent of eliminating the COLA over seven years.

                         IMPROVE UNEMPLOYMENT INSURANCE

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

    [[Page 264]]

    accuracy of hiring data in the National Directory of New Hires, which
    would reduce benefit overpayments. The Administration's proposal would
    also permit States to request waivers of certain Federal requirements in
    order to carry out demonstration projects that improve the
    administration of the UI program, such as speeding reemployment of UI
    beneficiaries. These efforts to strengthen the financial integrity of
    the UI system and encourage early reemployment of UI beneficiaries will
    keep State UI taxes down and improve the solvency of the State trust
    funds.
      Extend unemployment insurance surtax.--The Federal unemployment tax on
    employers is scheduled to drop from 0.8 percent to 0.6 percent with
    respect to wages paid after December 31, 2007. The 0.8 percent rate is
    proposed to be extended for five years, through December 31, 2012.

                            MODIFY ENERGY PROVISIONS

      Repeal reduced recovery period for natural gas distribution lines.--
    The Energy Policy Act of 2005 reduced the recovery period for new
    natural gas distribution lines that are placed in service before January
    1, 2011 from 20 years to 15 years. The Administration proposes to repeal
    this provision for natural gas distribution lines placed in service
    after December 31, 2007.
      Modify amortization for certain geological and geophysical
    expenditures.--Geological and geophysical expenditures (G&G costs) are
    costs incurred by a taxpayer for the purpose of obtaining and
    accumulating data that will serve as the basis for the acquisition and
    retention of mineral properties by taxpayers exploring for minerals.
    Under the Energy Policy Act of 2005, G&G costs paid or incurred in
    taxable years beginning after August 8, 2005, in connection with oil and
    gas exploration in the United States, could be amortized over two years.
    The Tax Increase Prevention and Reconciliation Act of 2006 increased the
    amortization period to five years for G&G costs paid or incurred by
    certain major integrated oil companies after May 17, 2006. This five-
    year amortization rule applies only to integrated oil companies that
    have an average daily worldwide production of crude oil of at least
    500,000 barrels for the taxable year, have gross receipts in excess of
    $1 billion in the last taxable year ending during calendar year 2005,
    and either are a crude oil refiner or have an ownership interest in a
    crude oil refiner of 15 percent or more. The Administration proposes to
    increase the amortization period to five years for all companies,
    effective for amounts paid or incurred in taxable years beginning after
    December 31, 2007.

                                  PROMOTE TRADE

      Implement free trade agreements.--Free trade agreement negotiations
    with Panama were completed, with the expectation that implementation
    could begin as early as FY 2008. The FTA signed with Peru and the
    recently completed agreement with Colombia could also begin
    implementation in FY 2008. Free trade agreements are expected to be
    completed with Korea, Malaysia, and the United Arab Emirates (UAE), with
    implementation to begin in FY 2009. These agreements will continue the
    Administration's effort to use free trade agreements to benefit U.S.
    consumers and producers as well as strengthen the economies of our
    partner countries.
      Establish Reconstruction Opportunity Zones (ROZs) in Pakistan and
    Afghanistan.--In March 2006, the President announced his intention to
    establish ROZs in Afghanistan and the border regions of Pakistan. ROZs
    are a critical part of the Administration's broader counterterrorism
    strategy in these areas, designed to connect isolated regions to the
    global economy and create vital employment opportunities in territories
    prone to extremism. The creation of ROZs will encourage investment and
    economic development in these areas by granting duty-free entry to the
    United States for certain goods produced in designated territories. By
    stimulating economic activity in remote and underdeveloped regions, ROZs
    can also serve as a powerful catalyst for peace, prosperity, stability,
    growth and good governance. In early 2007, the Administration will work
    closely with Congress and private sector stakeholders to implement this
    important initiative.

                           EXTEND EXPIRING PROVISIONS

      Extend AMT relief for individuals.--A temporary provision of current
    law increased the AMT exemption amounts to $42,500 for single taxpayers,
    $62,550 for married taxpayers filing a joint return and surviving
    spouses, and $31,275 for married taxpayers filing a separate return and
    estates and trusts. Effective for taxable years beginning after December
    31, 2006, the AMT exemption amounts decline to $33,750 for single
    taxpayers, $45,000 for married taxpayers filing a joint return and
    surviving spouses, and $22,500 for married taxpayers filing a separate
    return and estates and trusts. A temporary provision of current law
    permits nonrefundable personal tax credits to offset both the regular
    tax and the AMT for taxable years beginning before January 1, 2007.
      The Administration proposes to increase the AMT exemption amounts to
    $43,900 for single taxpayers, $65,350 for married taxpayers filing a
    joint return, and $32,675 for married taxpayers filing a separate return
    and estates and trusts through taxable year 2007 to prevent the number
    of AMT taxpayers from increasing. Non-refundable personal tax credits
    also would be allowed to offset both the regular tax and the AMT through
    taxable year 2007.

      Extend permanently the research and experimentation (R&E) tax
    credit.--The Administration proposes to extend permanently the tax
    credits for research and experimentation expenditures, which are

    [[Page 265]]

    scheduled to expire with respect to expenditures incurred after December
    31, 2007.
      Extend the work opportunity tax credit.--The work opportunity tax
    credit provides incentives for hiring individuals from certain targeted
    groups. The credit applies to wages paid to qualified individuals who
    begin work for the employer before January 1, 2008. The Administration
    proposes to extend the credit for one year, making it applicable to
    wages paid to qualified individuals who begin work after December 31,
    2007 and before January 1, 2009.
      Extend the first-time homebuyer credit for the District of Columbia.--
    A one-time nonrefundable $5,000 credit is available to purchasers of a
    principal residence in the District of Columbia who have not owned a
    residence in the District during the year preceding the purchase. The
    credit phases out for taxpayers with modified adjusted gross income
    between $70,000 and $90,000 ($110,000 and $130,000 for joint returns).
    The credit does not apply to purchases after December 31, 2007. The
    Administration proposes to extend the credit for one year, making the
    credit available with respect to purchases after December 31, 2007 and
    before January 1, 2009.
      Extend authority to issue Qualified Zone Academy Bonds.--Current law
    allows State and local governments to issue ``qualified zone academy
    bonds,'' the interest on which is effectively paid by the Federal
    government in the form of an annual income tax credit. The proceeds of
    the bonds have to be used for teacher training, purchases of equipment,
    curriculum development, or rehabilitation and repairs at certain public
    school facilities. A nationwide total of $400 million of qualified zone
    academy bonds were authorized to be issued in each of calendar years
    1998 through 2007. In addition, unused authority arising in 1998 and
    1999 can be carried forward for up to three years and unused authority
    arising in 2000 through 2007 can be carried forward for up to two years.
    The Administration proposes to authorize the issuance of an additional
    $400 million of qualified zone academy bonds in calendar year 2008;
    unused authority could be carried forward for up to two years. Reporting
    of issuance would be required.
      Extend deferral of gains from sales of electric transmission
    property.--Generally, the gain on the sale of business assets is subject
    to current income tax unless a special rule provides for nonrecognition
    or deferral of the gain. One such special rule applies to qualifying
    electric transmission transactions. Under this rule, a taxpayer may
    elect to recognize the gain from a qualifying electric transmission
    transaction ratably over the eight-year period beginning with the year
    of the transaction. Deferral is allowed only with respect to proceeds
    that are used to purchase other gas or electric utility property during
    the four-year period beginning on the date of the transaction (the
    reinvestment period). A sale or other disposition of property is a
    qualifying electric transmission transaction if: (1) the property is
    used in the trade or business of providing electric transmission
    services or is an ownership interest in a entity whose principal trade
    or business is providing electric transmission services, and (2) the
    sale or other disposition is to an independent transmission company and
    occurs before January 1, 2008. In general, whether the purchaser
    qualifies as an independent transmission company depends on
    determinations by the Federal Energy Regulatory Commission (FERC) or, in
    the case of facilities subject to the jurisdiction of the Public Utility
    Commission of Texas, by that Commission. The special rule allowing the
    deferral of tax on the gain from the sale or disposition of electric
    transmission property would be extended for one year, allowing taxpayers
    to elect deferral with respect to sales or dispositions that occur
    before January 1, 2009.
      Extend provisions permitting disclosure of tax return information
    relating to terrorist activity.--The disclosure of tax return
    information relating to terrorism is permitted in two situations. The
    first is when an executive of a Federal law enforcement or intelligence
    agency has reason to believe that the return information is relevant to
    a terrorist incident, threat or activity and submits a written request.
    The second is when the IRS wishes to apprise a Federal law enforcement
    agency of a terrorist incident, threat or activity. The Administration
    proposes to extend this disclosure authority, which expires on December
    31, 2007, through December 31, 2008.
      Extend excise tax on coal at current rates.--Excise taxes levied on
    coal mined and sold for use in the United States are deposited in the
    Black Lung Disability Trust Fund. Amounts deposited in the Fund are used
    to cover the cost of program administration and compensation, medical,
    and survivor benefits to eligible miners and their survivors, when mine
    employment terminated prior to 1970 or when no mine operator can be
    assigned liability. Current tax rates on coal sold by a producer are
    $1.10 per ton of coal from underground mines and $0.55 per ton of coal
    from surface mines; however, these rates may not exceed 4.4 percent of
    the price at which the coal is sold. Effective for coal sold after
    December 31, 2013, the tax rates on coal from underground mines and
    surface mines will decline to $0.50 per ton and $0.25 per ton,
    respectively, and will be capped at 2 percent of the price at which the
    coal is sold. The Administration proposes to repeal the reduction in
    these tax rates effective for sales after December 31, 2013, and keep
    current rates in effect until the Black Lung Disability Trust Fund debt
    is repaid.

    [[Page 266]]

      Extend the exception for retirement plan distributions provided
    individuals called to active duty for at least 179 days.--Under current
    law, a taxpayer who receives a distribution from a qualified retirement
    plan prior to age 59\1/2\, death or disability is subject to a 10-
    percent early withdrawal tax unless a specific exception to the tax
    applies. One of the exceptions to the tax applies to qualified reservist
    distributions. An individual who receives a qualified reservist
    distribution may, at any time during a two-year period beginning on the
    day after the end of the active duty period, make contributions to an
    IRA in an amount not exceeding the amount of the qualified reservist
    distribution. Such contributions are not subject to the dollar
    limitations otherwise applicable to contributions to IRAs. The exception
    to the tax for qualified reservist distributions applies to individuals
    ordered or called to active duty after September 11, 2001 and before
    December 31, 2007. The Administration proposes to extend the exception
    to individuals ordered or called to active duty before December 31,
    2008.

                                                          Table 17-3.  EFFECT OF PROPOSALS ON RECEIPTS
                                                                    (In millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        2007       2008       2009       2010       2011       2012     2008-12     2008-17
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Make Permanent Certain Tax Relief Enacted in 2001 and 2003
     (assumed in the baseline):
        Dividends tax rate structure...............................        344        683        695     -3,595    -13,789      1,491    -14,515     -89,973
        Capital gains tax rate structure...........................  .........  .........  .........     -3,405    -17,477     -7,269    -28,151     -79,059
        Expensing for small business...............................  .........  .........  .........     -3,728     -4,947     -3,376    -12,051     -20,158
        Marginal individual income tax rate reductions.............  .........  .........  .........  .........    -71,892   -113,251   -185,143    -793,780
        Child tax credit \1\.......................................  .........  .........  .........  .........     -5,265    -21,128    -26,393    -135,380
        Marriage penalty relief \1\................................  .........  .........  .........  .........     -5,380     -7,971    -13,351     -41,317
        Education incentives.......................................  .........  .........  .........  .........       -739     -1,336     -2,075      -9,673
        Repeal of estate and generation-skipping transfer taxes,          -156     -1,373     -2,290     -3,067    -26,845    -57,652    -91,227    -442,490
         and modification of gift taxes............................
        Other incentives for families and children.................  .........  .........  .........          6       -179       -866     -1,039      -5,341
                                                                    ----------------------------------------------------------------------------------------
          Total, make permanent certain tax relief enacted in 2001         188       -690     -1,595    -13,789   -146,513   -211,358   -373,945  -1,617,171
           and 2003................................................

    Tax Incentives:
      Simplify and encourage saving:
        Expand tax-free savings opportunities......................  .........      1,527      3,545      3,023      1,075     -1,314      7,856        -592
        Consolidate employer-based savings accounts................  .........        -80       -120       -132       -141       -150       -623      -1,484
                                                                    ----------------------------------------------------------------------------------------
          Total, simplify and encourage saving.....................  .........      1,447      3,425      2,891        934     -1,464      7,233      -2,076
      Encourage entrepreneurship and investment:
        Increase expensing for small business......................  .........     -1,597     -2,180     -1,541     -1,135       -847     -7,300     -10,095
      Invest in health care:
        Provide a flat $15,000 deduction for family coverage         .........  .........    -31,433    -38,892    -30,843    -20,033   -121,201       5,150
         ($7,500 for individual coverage) for those with and who
         purchase health insurance \1\.............................
        Expand and make health savings accounts (HSAs) more          .........       -318       -593       -784       -937     -1,037     -3,669     -10,366
         flexible..................................................
        Improve the Health Coverage Tax Credit \1\.................  .........         -1         -3         -4         -5         -5        -18         -51
        Allow the orphan drug tax credit for certain pre-            .........  .........  .........  .........  .........  .........  .........          -1
         designation expenses......................................
                                                                    ----------------------------------------------------------------------------------------
          Total, invest in health care.............................  .........       -319    -32,029    -39,680    -31,785    -21,075   -124,888      -5,268
      Provide incentives for charitable giving:
        Extend permanently tax-free withdrawals from IRAs for        .........       -120       -255       -235       -171       -147       -928      -1,867
         charitable contributions..................................
        Extend permanently the enhanced charitable deduction for     .........        -44        -96       -106       -116       -127       -489      -1,345
         contributions of food inventory...........................
        Extend permanently the deduction for corporate donations of  .........        -50       -118       -147       -154       -162       -631      -1,570
         computer technology.......................................
        Permanently increase limits on contributions of property     .........        -48        -35        -22        -18        -21       -144        -265
         interests made for conservation purposes..................
        Extend permanently basis adjustment to stock of S            .........         -3        -15        -21        -25        -28        -92        -301
         corporations contributing appreciated property............
        Reform excise tax based on investment income of private      .........        -61        -91        -97       -103       -110       -462      -1,163
         foundations...............................................
        Repeal the $150 million limitation on qualified 501(c)(3)    .........         -2         -3         -9        -13        -14        -41        -104
         bonds.....................................................
        Repeal certain restrictions on the use of qualified          .........         -2         -5        -10        -17        -24        -58        -286
         501(c)(3) bonds for residential rental property...........
                                                                    ----------------------------------------------------------------------------------------
          Total, provide incentives for charitable giving..........  .........       -330       -618       -647       -617       -633     -2,845      -6,901
      Strengthen education:
        Extend permanently the above-the-line deduction for          .........        -18       -180       -183       -185       -188       -754      -1,739
         qualified out-of-pocket classroom expenses................

    [[Page 267]]

        Allow the saver's credit for contributions to qualified      .........        -63       -163       -176       -189       -200       -791      -1,966
         tuition programs..........................................
                                                                    ----------------------------------------------------------------------------------------
          Total, strengthen education..............................  .........        -81       -343       -359       -374       -388     -1,545      -3,705
      Protect the environment:
        Extend permanently expensing of brownfields remediation             61       -244       -400       -352       -342       -331     -1,669      -2,851
         costs.....................................................
        Eliminate the volume cap for private activity bonds for      .........         -1         -3         -5         -9        -13        -31        -184
         water infrastructure......................................
                                                                    ----------------------------------------------------------------------------------------
          Total, protect the environment...........................         61       -245       -403       -357       -351       -344     -1,700      -3,035
      Restructure assistance to New York City for continued
       recovery from the attacks of September 11th:
        Provide tax incentives for transportation infrastructure...  .........       -200       -200       -200       -200       -200     -1,000      -2,000
                                                                    ----------------------------------------------------------------------------------------
          Total, tax incentives....................................         61     -1,325    -32,348    -39,893    -33,528    -24,951   -132,045     -33,080

    Simplify the Tax Laws for Families:
      Clarify uniform definition of a child \1\....................         17         64         48         31         40         15        198         350
      Simplify EITC eligibility requirement regarding filing         .........         31        -25        -22        -22        -21        -59        -164
       status, presence of children, and work and immigration
       status \1\..................................................
      Reduce computational complexity of refundable child tax        .........  .........  .........  .........  .........  .........  .........  ..........
       credit \1\..................................................
                                                                    ----------------------------------------------------------------------------------------
        Total, simplify the tax laws for families..................         17         95         23          9         18         -6        139         186

    Improve Tax Compliance: \5\
      Expand information reporting.................................  .........        232      1,075      1,848      2,488      2,903      8,546      28,849
      Improve compliance by businesses.............................  .........        143         91         38         21         20        313         421
      Strengthen tax administration................................  .........  .........  .........          1          1          1          3          17
      Expand penalties.............................................  .........          3          5         11         18         20         57         178
                                                                    ----------------------------------------------------------------------------------------
        Total, improve tax compliance..............................  .........        378      1,171      1,898      2,528      2,944      8,919      29,465

    Improve Tax Administration and Other Miscellaneous Proposals:
      Implement IRS administrative reforms and extend IRS authority  .........  .........  .........  .........  .........  .........  .........  ..........
       to fund undercover operations \4\...........................
      Eliminate the special exclusion from unrelated business        .........          2         14         28         28         23         95         126
       taxable income for gain or loss on the sale or exchange of
       certain brownfields.........................................
      Limit related party interest deductions......................         86        148        155        163        171        180        817       1,859
      Repeal excise tax on local telephone service \2\.............       -552       -463       -148        -74        -74        -74       -833      -1,211
      Modify financing of the Airport and Airway trust fund \2\....  .........  .........     -6,407     -6,705     -7,005     -7,326    -27,443     -69,732
      Anticipated receipt of donations to the National Park Service  .........        100        100        100        100        100        500       1,000
       through the National Park Centennial Challenge Fund.........
      Transition from the non-foreign COLA to locality pay for       .........          1          2          3          4          5         15          50
       employees in non-foreign areas..............................
                                                                    ----------------------------------------------------------------------------------------
        Total, improve tax administration and other miscellaneous         -466       -212     -6,284     -6,485     -6,776     -7,092    -26,849     -67,908
         proposals \2\.............................................

    Improve Unemployment Insurance:
      Strengthen the financial integrity of the unemployment         .........  .........         29         29        -16        -64        -22      -1,469
       insurance system by reducing improper benefit payments and
       tax avoidance \2\...........................................
      Extend unemployment insurance surtax \2\.....................  .........      1,073      1,542      1,580      1,617      1,633      7,445       1,526
                                                                    ----------------------------------------------------------------------------------------
        Total, improve unemployment insurance \2\..................  .........      1,073      1,571      1,609      1,601      1,569      7,423          57

    Modify Energy Provisions:
      Repeal reduced recovery period for natural gas distribution    .........         52         88        107        119        106        472         906
       lines.......................................................
      Modify amortization for certain geological and geophysical     .........         15         55         81         67         56        274         582
       expenditures................................................
      Indirect effect of energy proposals \3\......................  .........        -45        -93       -163        -92        -98       -491      -1,019
                                                                    ----------------------------------------------------------------------------------------
        Total, modify energy provisions............................  .........         22         50         25         94         64        255         469

    Promote Trade:
      Implement free trade agreements and modify other trade-        .........       -241       -502       -760       -994     -1,240     -3,737     -13,072
       related provisions \2\......................................

    Extend Expiring Provisions:
      AMT relief for individuals...................................     -9,123    -47,922     11,431  .........  .........  .........    -36,491     -36,491
      Research & Experimentation (R&E) tax credit..................  .........     -3,221     -7,071     -9,145    -10,601    -11,799    -41,837    -117,309
      Work opportunity tax credit..................................  .........        -71       -192       -162        -80        -51       -556        -582
      First-time homebuyer credit for DC...........................  .........         -1        -19  .........  .........  .........        -20         -20
      Authority to issue Qualified Zone Academy Bonds..............  .........         -3         -8        -13        -18        -20        -62        -162
      Deferral of gains from sales of electric transmission                -63        -48        -52        -65        -39          5       -199          41
       property....................................................
      Disclosure of tax return information related to terrorist      .........  .........  .........  .........  .........  .........  .........  ..........
       activity \4\................................................
      Excise tax on coal \2\.......................................  .........  .........  .........  .........  .........  .........  .........       1,081

    [[Page 268]]

      Exception for retirement plan distributions provided                  -*         -*         -*         -*         -*         -*         -*          -*
       individuals called to active duty for at least 179 days.....
                                                                    ----------------------------------------------------------------------------------------
        Total, extend expiring provisions \2\......................     -9,186    -51,266      4,089     -9,385    -10,738    -11,865    -79,165    -153,442

      Total budget proposals, including proposals assumed in the        -9,386    -52,166    -33,825    -66,771   -194,308   -251,935   -599,005  -1,854,496
       baseline \2\................................................
      Total budget proposals, excluding proposals assumed in the        -9,574    -51,476    -32,230    -52,982    -47,795    -40,577   -225,060    -237,325
       baseline \2\................................................
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    * $500,000 or less.
    \1\ Affects both receipts and outlays. Only the receipt effect is shown here. For the outlay effect, see summary Table S-5 of the Budget volume.
    \2\ Net of income offsets.
    \3\ Indirect effect on receipts of proposed alternative fuels and fuel efficiency standards. These proposals are discussed in the Energy chapter of the
      Budget volume.
    \4\ No net budgetary impact.
    \5\ ``Tax gap''-related proposals.

    [[Page 269]]

                                             Table 17-4. RECEIPTS BY SOURCE
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                             Estimate
               Source                2006    -----------------------------------------------------------------------
                                    Actual       2007        2008        2009        2010        2011        2012
    ----------------------------------------------------------------------------------------------------------------
    Individual income taxes
     (federal funds):
      Existing law..............   1,043,908   1,177,703   1,294,636   1,349,248   1,476,448   1,673,666   1,819,724
        Proposed legislation....  ..........      -8,857     -48,022     -18,111     -48,131    -156,377    -183,157
                                 -----------------------------------------------------------------------------------
    Total individual income        1,043,908   1,168,846   1,246,614   1,331,137   1,428,317   1,517,289   1,636,567
     taxes......................
                                 ===================================================================================
    Corporation income taxes:
      Federal funds:
        Existing law............     353,914     341,867     318,385     326,647     334,665     350,891     377,546
          Proposed legislation..  ..........         190      -3,444      -6,837      -9,206     -10,314     -10,910
                                 -----------------------------------------------------------------------------------
      Total Federal funds            353,914     342,057     314,941     319,810     325,459     340,577     366,636
       corporation income taxes.
                                 -----------------------------------------------------------------------------------
      Trust funds:
        Hazardous substance                1  ..........  ..........  ..........  ..........  ..........  ..........
         superfund..............
                                 -----------------------------------------------------------------------------------
    Total corporation income         353,915     342,057     314,941     319,810     325,459     340,577     366,636
     taxes......................
                                 ===================================================================================
    Social insurance and
     retirement receipts (trust
     funds):
      Employment and general
       retirement:
        Old-age and survivors        520,069     542,098     576,237     608,106     643,935     680,272     714,061
         insurance (Off-budget).
        Disability insurance          88,313      92,032      97,848     103,264     109,347     115,518     121,256
         (Off-budget)...........
        Hospital insurance......     177,429     185,163     198,726     208,700     221,160     233,811     245,766
        Railroad retirement:
          Social Security              1,894       1,993       2,073       2,137       2,203       2,258       2,319
           equivalent account...
          Rail pension and             2,338       2,364       2,441       2,529       2,473       2,507       2,712
           supplemental annuity.
                                 -----------------------------------------------------------------------------------
      Total employment and           790,043     823,650     877,325     924,736     979,118   1,034,366   1,086,114
       general retirement.......
                                 -----------------------------------------------------------------------------------
        On-budget...............     181,661     189,520     203,240     213,366     225,836     238,576     250,797
        Off-budget..............     608,382     634,130     674,085     711,370     753,282     795,790     835,317
                                 -----------------------------------------------------------------------------------
      Unemployment insurance:
        Deposits by States \1\ .      35,938      37,574      37,584      36,792      37,203      38,150      39,352
          Proposed legislation..  ..........  ..........  ..........          36          36         -20        -108
        Federal unemployment           7,394       7,323       6,183       5,785       5,925       6,065       6,207
         receipts \1\ ..........
          Proposed legislation..  ..........  ..........       1,341       1,928       1,975       2,022       2,069
        Railroad unemployment             88          88          95         106         112         114         122
         receipts \1\ ..........
                                 -----------------------------------------------------------------------------------
      Total unemployment              43,420      44,985      45,203      44,647      45,251      46,331      47,642
       insurance................
                                 -----------------------------------------------------------------------------------
      Other retirement:
        Federal employees'             4,308       4,704       4,633       4,798       4,909       4,964       4,972
         retirement--employee
         share..................
          Proposed legislation..  ..........  ..........           1           2           3           4           5
        Non-Federal employees             50          38          33          31          28          26          23
         retirement \2\ ........
                                 -----------------------------------------------------------------------------------
      Total other retirement....       4,358       4,742       4,667       4,831       4,940       4,994       5,000
                                 -----------------------------------------------------------------------------------
    Total social insurance and       837,821     873,377     927,195     974,214   1,029,309   1,085,691   1,138,756
     retirement receipts........
                                 ===================================================================================
      On-budget.................     229,439     239,247     253,110     262,844     276,027     289,901     303,439
      Off-budget................     608,382     634,130     674,085     711,370     753,282     795,790     835,317
                                 ===================================================================================
    Excise taxes:
      Federal funds:
        Alcohol taxes...........       8,484       8,614       8,798       8,953       9,109       9,318       9,524
          Proposed legislation..  ..........  ..........         -76         -26  ..........  ..........  ..........
        Tobacco taxes...........       7,710       7,605       7,496       7,393       7,298       7,208       7,123
        Transportation fuels tax      -2,386      -2,960      -3,459      -4,101      -4,798      -1,227         234
          Proposed legislation..  ..........  ..........         -74        -139        -190         -57  ..........
        Telephone and teletype         4,897     -10,892      -1,712         197         100         100         100
         services...............
          Proposed legislation..  ..........        -736        -616        -197        -100        -100        -100
        Other Federal fund             3,755       1,493       1,932       1,987       2,057       2,128       2,208
         excise taxes...........
          Proposed legislation..  ..........  ..........          15        -121        -155        -163        -172
                                 -----------------------------------------------------------------------------------
      Total Federal fund excise       22,460       3,124      12,304      13,946      13,321      17,207      18,917
       taxes....................
                                 -----------------------------------------------------------------------------------

    [[Page 270]]

      Trust funds:
        Highway.................      38,378      39,707      40,858      41,911      42,696      43,402      44,045
          Proposed legislation..  ..........  ..........          12          14         -27         -65        -131
        Airport and airway......      10,590      11,426      12,094      12,808      13,556      14,341      15,162
          Proposed legislation..  ..........  ..........  ..........      -8,485      -8,882      -9,279      -9,706
        Sport fish restoration           519         547         564         581         600         619         638
         and boating safety.....
        Tobacco assessments.....         891         960         960         960         960         960         960
        Black lung disability            607         624         629         640         659         679         692
         insurance..............
        Inland waterway.........          81          84          85          86          87          88          89
        Oil spill liability.....          54         199         205         214         225         233         244
        Vaccine injury                   184         195         196         198         199         202         203
         compensation...........
        Leaking underground              197         196         199         204         206         210         212
         storage tank...........
                                 -----------------------------------------------------------------------------------
      Total trust funds excise        51,501      53,938      55,802      49,131      50,279      51,390      52,408
       taxes....................
                                 -----------------------------------------------------------------------------------
    Total excise taxes..........      73,961      57,062      68,106      63,077      63,600      68,597      71,325
                                 ===================================================================================
    Estate and gift taxes:
      Federal funds.............      27,877      25,260      26,786      28,757      22,920      20,407      48,691
        Proposed legislation....  ..........          17      -1,081      -1,318      -1,179     -18,733     -48,170
                                 -----------------------------------------------------------------------------------
    Total estate and gift taxes.      27,877      25,277      25,705      27,439      21,741       1,674         521
                                 ===================================================================================
    Customs duties:
      Federal funds.............      23,533      25,430      28,105      29,786      32,066      33,837      35,501
        Proposed legislation....  ..........  ..........        -322        -671      -1,015      -1,326      -1,655
      Trust funds...............       1,277       1,336       1,440       1,536       1,637       1,740       1,849
                                 -----------------------------------------------------------------------------------
    Total customs duties........      24,810      26,766      29,223      30,651      32,688      34,251      35,695
                                 ===================================================================================
    MISCELLANEOUS RECEIPTS: \3\
      Miscellaneous taxes.......         423         534         542         549         558         567         577
      Exercise of warrants......         118  ..........  ..........  ..........  ..........  ..........  ..........
      United Mine Workers of             119          72          65          44          24           5           3
       America combined benefit
       fund.....................
      Deposit of earnings,            29,945      32,638      36,115      37,625      39,040      40,680      42,804
       Federal Reserve System...
      Defense cooperation.......          12           8           8           8           8           8           8
      Fees for permits and            10,226      10,083      10,468      10,600      10,806      11,020      11,213
       regulatory and judicial
       services.................
      Fines, penalties, and            3,796       3,243       3,254       2,910       2,929       2,948       2,969
       forfeitures..............
      Gifts and contributions...         378         189         194         199         201         203         206
        Proposed legislation....  ..........  ..........         100         100         100         100         100
      Refunds and recoveries....         -55         -56         -56         -56         -56         -56         -56
                                 -----------------------------------------------------------------------------------
    Total miscellaneous receipts      44,962      46,711      50,690      51,979      53,610      55,475      57,824
                                 ===================================================================================
    Total budget receipts.......   2,407,254   2,540,096   2,662,474   2,798,307   2,954,724   3,103,554   3,307,324
      On-budget.................   1,798,872   1,905,966   1,988,389   2,086,937   2,201,442   2,307,764   2,472,007
      Off-budget................     608,382     634,130     674,085     711,370     753,282     795,790     835,317
                                 -----------------------------------------------------------------------------------
             MEMORANDUM
      Federal funds.............   1,517,453   1,635,493   1,681,337   1,774,042   1,874,190   1,965,503   2,115,280
      Trust funds...............     616,863     653,127     692,062     709,365     747,034     789,414     827,684
      Interfund transactions....    -335,444    -382,654    -385,010    -396,470    -419,782    -447,153    -470,957
                                 -----------------------------------------------------------------------------------
    Total on-budget.............   1,798,872   1,905,966   1,988,389   2,086,937   2,201,442   2,307,764   2,472,007
                                 -----------------------------------------------------------------------------------
    Off-budget (trust funds)....     608,382     634,130     674,085     711,370     753,282     795,790     835,317
                                 ===================================================================================
    Total.......................   2,407,254   2,540,096   2,662,474   2,798,307   2,954,724   3,103,554   3,307,324
    ----------------------------------------------------------------------------------------------------------------
    \1\ Deposits by States cover the benefit part of the program. Federal unemployment receipts cover administrative
      costs at both the Federal and State levels. Railroad unemployment receipts cover both the benefits and
      adminstrative costs of the program for the railroads.
    \2\ Represents employer and employee contributions to the civil service retirement and disability fund for
      covered employees of Government-sponsored, privately owned enterprises and the District of Columbia municipal
      government.
    \3\ Includes both Federal and trust funds.