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

    [[Page 287]]

                              19.  TAX EXPENDITURES

      The Congressional Budget Act of 1974 (Public Law 93-344) requires that
    a list of ``tax expenditures'' be included in the budget. Tax
    expenditures are defined in the law as ``revenue losses attributable to
    provisions of the Federal tax laws which allow a special exclusion,
    exemption, or deduction from gross income or which provide a special
    credit, a preferential rate of tax, or a deferral of liability.'' These
    exceptions may be viewed as alternatives to other policy instruments,
    such as spending or regulatory programs.
      Identification and measurement of tax expenditures depends importantly
    on the baseline tax system against which the actual tax system is
    compared. In general, the tax expenditure estimates presented in this
    chapter are patterned on a comprehensive income tax, which defines
    income as the sum of consumption and the change in net wealth in a given
    period of time. An alternative approach would be to pattern the tax
    expenditure estimates on a comprehensive consumption tax. Which approach
    is used is perhaps the most important factor determining what is
    included as a tax expenditure. For example, because a consumption tax
    does not tax the return to saving or investment, using a comprehensive
    consumption tax as the normative baseline for determining tax
    expenditures would exclude current tax exemptions related to retirement
    and education saving accounts. Similarly, business provisions that
    provide accelerated depreciation or expensing of investment would also
    be excluded as tax expenditures because investment is generally deducted
    immediately under a comprehensive consumption tax.
      The choice of the baseline--a comprehensive income or a comprehensive
    consumption tax--is arbitrary when viewed from the perspective of the
    current so-called income tax system, which includes elements of both
    income and consumption taxes. According to Treasury Department analysis,
    roughly 35 percent of household financial assets receive consumption tax
    treatment because assets are held in tax-preferred accounts such as
    individual retirement accounts (IRAs), defined-contribution retirement
    plans (401(k) type plans), defined-benefit pension plans, and tax-
    preferred annuities and various life insurance products. The balance of
    household financial assets reflecting most other saving vehicles receive
    income tax treatment.
      The ambiguities in the tax expenditure concept are reviewed in greater
    detail in Appendix A. This review focuses on defining tax expenditures
    relative to a comprehensive income tax baseline and a consumption tax
    baseline, and defining negative tax expenditures, i.e., provisions of
    current law that over-tax certain items or activities.
      The tax expenditure estimates presented below differ from a
    comprehensive income tax in a number of other important respects. While
    under a comprehensive income tax all income is taxed once, the U.S.
    income tax system generally taxes corporate income twice, first at the
    corporate level through the corporate income tax and then again when the
    income is received by investors as dividends or capital gains. This
    ``double tax'' is accounted for in some of the tax expenditure
    estimates, such as those related to retirement savings, but not in the
    corporate tax expenditures. Indeed, the tax expenditure estimates, in
    large part, view the individual and corporation income taxes separately,
    rather than as an integrated system as appropriate under comprehensive
    income tax principles. Other areas of divergence from a comprehensive
    income tax are detailed below.
      An important assumption underlying each tax expenditure estimate
    reported below is that other parts of the tax code remain unchanged. The
    estimates would be different if tax expenditures were changed
    simultaneously because of potential interactions among provisions. For
    that reason, this chapter does not present a grand total for the
    estimated tax expenditures.
      Tax expenditures relating to the individual and corporate income taxes
    are estimated for fiscal years 2007-2013 using two methods of
    accounting: current revenue effects and present value effects. The
    present value approach provides estimates of the revenue effects for tax
    expenditures that generally involve deferrals of tax payments into the
    future.
      A discussion of performance measures and economic effects related to
    the assessment of the effect of tax expenditures on the achievement of
    program performance goals is presented in Appendix B. This section is a
    complement to the Government-wide performance plan required by the
    Government Performance and Results Act of 1993.

                       TAX EXPENDITURES IN THE INCOME TAX

                            Tax Expenditure Estimates

      All tax expenditure estimates presented here are based upon current
    tax law enacted as of December 31, 2007. Expired or repealed provisions
    are not listed if their revenue effects result only from taxpayer
    activity occurring before fiscal year 2007. Due to the time required to
    estimate the large number of tax expenditures, the estimates are based
    on Mid-Session economic assumptions; exceptions are the earned income
    tax credit and child credit provisions, which involve outlay

    [[Page 288]]

    components and hence are updated to reflect the economic assumptions
    used elsewhere in the Budget.
      The total revenue effects for tax expenditures for fiscal years 2007-
    2013 are displayed according to the Budget's functional categories in
    Table 19-1. Descriptions of the specific tax expenditure provisions
    follow the tables of estimates and the discussion of general features of
    the tax expenditure concept.
       Two baseline concepts--the normal tax baseline and the reference tax
    law baseline--are used to identify and estimate tax expenditures. \1\
    For the most part, the two concepts coincide. However, items treated as
    tax expenditures under the normal tax baseline, but not the reference
    tax law baseline, are indicated by the designation ``normal tax method''
    in the tables. The revenue effects for these items are zero using the
    reference tax rules. The alternative baseline concepts are discussed in
    detail following the tables.
    ---------------------------------------------------------------------------
      \1\ These baseline concepts are thoroughly discussed in Special
    Analysis G of the 1985 Budget, where the former is referred to as the
    pre-1983 method and the latter the post-1982 method.
    ---------------------------------------------------------------------------
      Table 19-2 reports the respective portions of the total revenue
    effects that arise under the individual and corporate income taxes
    separately. The location of the estimates under the individual and
    corporate headings does not imply that these categories of filers
    benefit from the special tax provisions in proportion to the respective
    tax expenditure amounts shown. Rather, these breakdowns show the
    specific tax accounts through which the various provisions are cleared.
    The ultimate beneficiaries of corporate tax expenditures could be
    shareholders, employees, customers, or other providers of capital,
    depending on economic forces.
       Table 19-3 ranks the major tax expenditures by the size of their
    2009-2013 revenue effect. The first column provides the number of the
    provision in order to cross reference this table to Tables 19-1 and 19-2
    as well as to the descriptions below. Outlay Equivalent Estimates of
    Income Tax Expenditures, which were included in the FY2007 and prior
    volumes of Analytical Perspectives, are no longer included in this
    chapter. \2\
    ---------------------------------------------------------------------------
      \2\ The Administration has dropped the estimates of the outlay
    equivalents because they were often the same as the normal tax
    expenditure estimates, and the criteria for applying the concepts as to
    when they should differ were often judgmental and hard to apply with
    consistency across time and across tax expenditure items.
    ---------------------------------------------------------------------------

                     Interpreting Tax Expenditure Estimates

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

                                                     Table 19-1.  ESTIMATES OF TOTAL INCOME TAX EXPENDITURES
                                                                    (in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Total from corporations and individuals
                                                                            --------------------------------------------------------------------------------
                                                                               2007      2008      2009      2010      2011      2012      2013     2009-13
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                 National Defense
           1     Exclusion of benefits and allowances to armed forces           3,220     3,350     3,480     3,620     3,780     3,930     4,090     18,900
                  personnel................................................

                 International affairs:
           2     Exclusion of income earned abroad by U.S. citizens........     2,630     2,760     2,900     3,050     3,200     3,360     3,530     16,040
           3     Exclusion of certain allowances for Federal employees            840       880       920       970     1,020     1,070     1,120      5,100
                  abroad...................................................
           4     Inventory property sales source rules exception...........     1,940     2,180     2,410     2,610     2,820     3,060     3,310     14,210
           5     Deferral of income from controlled foreign corporations       12,490    13,120    13,780    14,480    15,220    15,990    16,810     76,280
                  (normal tax method)......................................
           6     Deferred taxes for financial firms on certain income           2,370     2,490     1,060  ........  ........  ........  ........      1,060
                  earned overseas..........................................

                 General science, space, and technology:
           7     Expensing of research and experimentation expenditures         5,190     4,720     4,990     4,470     4,320     4,400     4,420     22,600
                  (normal tax method)......................................
           8     Credit for increasing research activities.................    10,320     4,660     2,100       920       360        70  ........      3,450

                 Energy:
           9     Expensing of exploration and development costs, fuels.....       530       510       460       390       310       240       150      1,550
          10     Excess of percentage over cost depletion, fuels...........       790       910       950       910       880       850       840      4,430

    [[Page 289]]

          11     Alternative fuel production credit........................     2,920     1,310        70        80        10        10  ........        170
          12     Exception from passive loss limitation for working                30        20        20        20        30        30        30        130
                  interests in oil and gas properties......................
          13     Capital gains treatment of royalties on coal..............       180       190       190       200       190       140       150        870
          14     Exclusion of interest on energy facility bonds............        30        30        30        30        30        30        30        150
          15     New technology credit.....................................       410       800     1,000     1,030     1,010     1,000       970      5,010
          16     Alcohol fuel credits \1\..................................        40        40        50        50        30  ........  ........        130
          17     Bio-Diesel and small agri-biodiesel producer tax credits..       180       200        30        20        10        10        10         80
          18     Tax credit and deduction for clean-fuel burning vehicles..       260       150       130       -20       -50       -60       -50        -50
          19     Exclusion of utility conservation subsidies...............       120       120       120       110       110       110       110        560
          20     Credit for holding clean renewable energy bonds...........        20        40        70        70        70        70        70        350
          21     Deferral of gain from dispositions of transmission               610       250       -60      -290      -490      -590      -570     -2,000
                  property to implement FERC restructuring policy..........
          22     Credit for investment in clean coal facilities............        30        50        80       130       180       245       290        925
          23     Temporary 50% expensing for equipment used in the refining        30       120       240       260       180       -50      -160        470
                  of liquid fuels..........................................
          24     Natural gas distribution pipelines treated as 15-year             60        80        90       110       120       110       100        530
                  property.................................................
          25     Amortize all geological and geophysical expenditures over         50        40        30        10        10        10        10         70
                  2 years..................................................
          26     Allowance of deduction for certain energy efficient              190       170        90        30  ........  ........  ........        120
                  commercial building property.............................
          27     Credit for construction of new energy efficient homes.....        20        30        20        10  ........  ........  ........         30
          28     Credit for energy efficiency improvements to existing            380       150  ........  ........  ........  ........  ........  .........
                  homes....................................................
          29     Credit for energy efficient appliances....................        80  ........  ........  ........  ........  ........  ........  .........
          30     30% credit for residential purchases/installations of             10        10        10  ........  ........  ........  ........         10
                  solar and fuel cells.....................................
          31     Credit for business installation of qualified fuel cells          80       130        50       -10       -10       -10       -10         10
                  and stationary microturbine power plants.................
          32     Partial expensing for advanced mine safety equipment......        10        20  ........  ........  ........  ........  ........  .........

                 Natural resources and environment:
          33     Expensing of exploration and development costs, nonfuel           10        10        10        10        10        10        10         50
                  minerals.................................................
          34     Excess of percentage over cost depletion, nonfuel minerals       380       400       410       440       450       460       480      2,240
          35     Exclusion of interest on bonds for water, sewage, and            370       390       410       420       430       440       450      2,150
                  hazardous waste facilities...............................
          36     Capital gains treatment of certain timber income..........       180       190       190       200       190       140       150        870
          37     Expensing of multiperiod timber growing costs.............       290       290       310       310       320       340       340      1,620
          38     Tax incentives for preservation of historic structures....       400       430       440       470       490       520       540      2,460
          39     Expensing of capital costs with respect to complying with         10        30        50        30       -10  ........  ........         70
                  EPA sulfur regulations...................................
          40     Exclusion of gain or loss on sale or exchange of certain          10        30        40        40        40        30        30        180
                  brownfield sites.........................................

                 Agriculture:
          41     Expensing of certain capital outlays......................       110       110       110       120       120       120       120        590
          42     Expensing of certain multiperiod production costs.........        80        80        80        80        90        90        90        430
          43     Treatment of loans forgiven for solvent farmers...........        10        10        10        20        20        20        20         90
          44     Capital gains treatment of certain income.................       980     1,030     1,030     1,090     1,060       760       800      4,740
          45     Income averaging for farmers..............................        80        80        80        80        80        80        80        400
          46     Deferral of gain on sale of farm refiners.................        20        20        20        20        20        20        20        100

                 Commerce and housing:
                 Financial institutions and insurance:
          47       Exemption of credit union income........................     1,310     1,380     1,450     1,530     1,610     1,690     1,780      8,060
          48       Excess bad debt reserves of financial institutions......        20        10        10        10  ........  ........  ........         20
          49       Exclusion of interest on life insurance savings.........    19,910    21,840    23,500    25,200    27,600    30,750    33,590    140,640
          50       Special alternative tax on small property and casualty          40        40        40        40        40        50        50        220
                    insurance companies....................................
          51       Tax exemption of certain insurance companies owned by          180       190       190       200       200       210       210      1,010
                    tax-exempt organizations...............................
          52       Small life insurance company deduction..................        50        50        50        50        50        60        60        270
          53       Exclusion of interest spread of financial institutions..       520       450       480       500       630       660       690      2,960
                 Housing:
          54       Exclusion of interest on owner-occupied mortgage subsidy       900       960       990     1,020     1,060     1,090     1,120      5,280
                    bonds..................................................
          55       Exclusion of interest on rental housing bonds...........       830       880       900       930       960       990     1,020      4,800
          56       Deductibility of mortgage interest on owner-occupied        84,850    94,790   100,810   107,020   115,280   123,130   130,440    576,680
                    homes..................................................
          57       Deductibility of State and local property tax on owner-     19,120    16,360    16,640    16,820    28,230    34,570    35,400    131,660
                    occupied homes.........................................
          58       Deferral of income from installment sales...............     1,210     1,230     1,250     1,370     1,500     1,650     1,810      7,580
          59       Capital gains exclusion on home sales...................    31,480    33,050    34,710    36,440    38,260    40,180    42,180    191,770
          60       Exclusion of net imputed rental income..................     3,890     5,440     7,550    10,478    14,543    20,183    28,012     80,766
          61       Exception from passive loss rules for $25,000 of rental      7,840     8,430     8,840     9,160     9,580    10,090    10,240     47,910
                    loss...................................................
          62       Credit for low-income housing investments...............     5,030     5,380     5,780     6,180     6,520     6,840     7,120     32,440
          63       Accelerated depreciation on rental housing (normal tax       9,860    10,780    11,760    12,720    14,570    16,160    17,550     72,760
                    method)................................................
          64       Discharge of mortgage indebtedness......................  ........       293       239       176  ........  ........  ........        415
                 Commerce:
          65       Cancellation of indebtedness............................       110        90        60        40        30        30        30        190
          66       Exceptions from imputed interest rules..................        50        50        50        50        50        50        50        250
          67       Capital gains (except agriculture, timber, iron ore, and    53,230    55,540    55,940    59,170    57,490    41,390    43,240    257,230
                    coal)..................................................
          68       Capital gains exclusion of small corporation stock......       270       320       340       370       490       540       590      2,330
          69       Step-up basis of capital gains at death.................    32,600    35,900    36,750    37,950    39,450    41,010    42,632    197,792
          70       Carryover basis of capital gains on gifts...............       650       760       800     1,270     6,340     1,500     1,600     11,510

    [[Page 290]]

          71       Ordinary income treatment of loss from small business           50        50        50        60        60        60        60        290
                    corporation stock sale.................................
          72       Accelerated depreciation of buildings other than rental     -4,610    -4,420    -4,140    -3,850    -3,920    -3,750    -3,110    -18,770
                    housing (normal tax method)............................
          73       Accelerated depreciation of machinery and equipment         26,410    35,180    44,120    49,760    53,330    58,440    64,390    270,040
                    (normal tax method)....................................
          74       Expensing of certain small investments (normal tax           3,660     3,660     3,400       500      -950      -960       -60      1,930
                    method)................................................
          75       Graduated corporation income tax rate (normal tax            5,400     5,220     5,290     5,510     5,660     5,840     6,090     28,390
                    method)................................................
          76       Exclusion of interest on small issue bonds..............       350       380       390       410       420       420       440      2,080
          77       Deduction for US production activities..................     9,800    14,020    15,330    21,110    26,030    27,710    29,090    119,270
          78       Special rules for certain film and TV production........        90        70       -40       -90       -60       -50       -40       -280

                 Transportation:
          79     Deferral of tax on shipping companies.....................        20        20        20        20        20        20        20        100
          80     Exclusion of reimbursed employee parking expenses.........     2,830     2,950     3,070     3,200     3,310     3,430     3,540     16,550
          81     Exclusion for employer-provided transit passes............       420       440       470       500       520       550       580      2,620
          82     Tax credit for certain expenditures for maintaining              130       130        40        20        10        10  ........         80
                  railroad tracks..........................................
          83     Exclusion of interest on bonds for Financing of Highway           40        80        90       100       100        90        60        440
                  Projects and rail-truck transfer facilities..............

                 Community and regional development:
          84     Investment credit for rehabilitation of structures (other         40        40        40        40        40        40        40        200
                  than historic)...........................................
          85     Exclusion of interest for airport, dock, and similar bonds       850       900       930       960       990     1,020     1,050      4,950
          86     Exemption of certain mutuals' and cooperatives' income....        70        70        70        70        70        70        80        360
          87     Empowerment zones and renewal communities.................     1,450     1,550     1,760     1,170       480       660       790      4,860
          88     New markets tax credit....................................       810       990       970       860       730       590       340      3,490
          89     Expensing of environmental remediation costs..............       300       130       -40       -20       -20       -20       -10       -110
          90     Credit to holders of Gulf Tax Credit Bonds................        10        10        10        10        10        10        10         50

                 Education, training, employment, and social services:
                 Education:
          91       Exclusion of scholarship and fellowship income (normal       1,870     1,960     2,050     2,150     2,250     2,360     2,470     11,280
                    tax method)............................................
          92       HOPE tax credit.........................................     3,370     3,380     3,640     3,750     4,400     4,790     4,980     21,560
          93       Lifetime Learning tax credit............................     2,210     2,220     2,340     2,420     2,810     3,050     3,180     13,800
          94       Education Individual Retirement Accounts................        20        30        50        60        70        80        90        350
          95       Deductibility of student-loan interest..................       810       820       830       840       780       530       540      3,520
          96       Deduction for higher education expenses.................     1,450     1,180  ........  ........  ........  ........  ........  .........
          97       State prepaid tuition plans.............................       850     1,040     1,290     1,600     2,020     2,280     2,430      9,620
          98       Exclusion of interest on student-loan bonds.............       440       460       480       490       510       520       540      2,540
          99       Exclusion of interest on bonds for private nonprofit         1,750     1,870     1,930     1,980     2,050     2,110     2,170     10,240
                    educational facilities.................................
         100       Credit for holders of zone academy bonds................       140       160       170       170       170       160       140        810
         101       Exclusion of interest on savings bonds redeemed to              20        20        20        20        20        20        20        100
                    finance educational expenses...........................
         102       Parental personal exemption for students age 19 or over.     2,690     1,880     1,760     1,710     2,790     3,130     2,860     12,250
         103       Deductibility of charitable contributions (education)...     4,330     4,880     5,270     5,670     6,110     6,600     7,010     30,660
         104       Exclusion of employer-provided educational assistance...       630       660       690       730        40  ........  ........      1,460
         105       Special deduction for teacher expenses..................       170       160  ........  ........  ........  ........  ........  .........
         106       Discharge of student loan indebtedness..................        20        20        20        20        20        20        20        100
                 Training, employment, and social services:
         107       Work opportunity tax credit.............................       370       490       600       680       670       500       260      2,710
         108       Welfare-to-work tax credit..............................        80        80        50        20        10        10  ........         90
         109       Employer provided child care exclusion..................     1,170     1,340     1,400     1,470     1,480     1,520     1,600      7,470
         110       Employer-provided child care credit.....................        10        10        10        20        10  ........  ........         40
         111       Assistance for adopted foster children..................       350       380       420       450       480       520       560      2,430
         112       Adoption credit and exclusion...........................       370       380       400       410       370        70        80      1,330
         113       Exclusion of employee meals and lodging (other than            930       970     1,010     1,060     1,110     1,170     1,230      5,580
                    military)..............................................
         114       Child credit \2\........................................    30,910    30,160    29,950    29,870    23,270    13,590    13,080    109,760
         115       Credit for child and dependent care expenses............     2,780     1,810     1,720     1,650     1,560     1,410     1,340      7,680
         116       Credit for disabled access expenditures.................        30        30        30        30        30        30        30        150
         117       Deductibility of charitable contributions, other than       38,200    43,370    46,980    50,550    54,600    59,070    62,790    273,990
                    education and health...................................
         118       Exclusion of certain foster care payments...............       420       420       420       420       420       420       420      2,100
         119       Exclusion of parsonage allowances.......................       510       550       580       610       640       670       700      3,200
         120       Employee retention credit for employers affected by             30        10  ........  ........  ........  ........  ........  .........
                    Hurricane Katrina, Rita, and Wilma.....................
         121       Exclusion for benefits provided to volunteer EMS and      ........        23        78        82        59  ........  ........        219
                    firefighters...........................................

                 Health:
         122     Exclusion of employer contributions for medical insurance    133,790   151,810   168,460   185,250   210,110   233,320   254,810  1,051,950
                  premiums and medical care................................
         123     Self-employed medical insurance premiums..................     4,260     4,680     5,170     5,710     6,590     7,450     8,180     33,100
         124     Medical Savings Accounts / Health Savings Accounts........       760     1,140     1,480     1,590     1,620     1,540     1,450      7,680
         125     Deductibility of medical expenses.........................     4,470     5,060     5,920     6,800     9,150    10,550    11,490     43,910
         126     Exclusion of interest on hospital construction bonds......     2,760     2,950     3,040     3,120     3,210     3,310     3,410     16,090
         127     Deductibility of charitable contributions (health)........     4,310     4,890     5,300     5,700     6,160     6,660     7,080     30,900
         128     Tax credit for orphan drug research.......................       260       290       320       360       410       460       510      2,060
         129     Special Blue Cross/Blue Shield deduction..................       620       640       650       660       670       680       680      3,340

    [[Page 291]]

         130     Tax credit for health insurance purchased by certain              10        10        10        10        10        20        20         70
                  displaced and retired individuals \3\....................
         131     Distributions from retirement plans for premiums for             250       240       280       310       340       380       420      1,730
                  health and long-term care insurance......................

                 Income security:
         132     Exclusion of railroad retirement system benefits..........       380       370       370       360       360       350       330      1,770
         133     Exclusion of workers' compensation benefits...............     5,740     5,830     5,920     6,010     6,110     6,200     6,300     30,540
         134     Exclusion of public assistance benefits (normal tax              470       490       510       530       550       580       600      2,770
                  method)..................................................
         135     Exclusion of special benefits for disabled coal miners....        50        40        40        40        40        40        40        200
         136     Exclusion of military disability pensions.................       100       110       130       150       180       220       260        940
                 Net exclusion of pension contributions and earnings:
         137       Employer plans..........................................    47,060    46,120    45,670    44,370    42,420    42,230    41,620    216,310
         138       401(k) plans............................................    46,000    49,000    51,000    55,000    68,000    74,000    77,000    325,000
         139       Individual Retirement Accounts..........................     9,500    10,800    11,700    12,200    13,400    14,900    15,200     67,400
         140       Low and moderate income savers credit...................       760       880       900       880       870       880       860      4,390
         141       Keogh plans.............................................    11,000    12,000    13,000    14,000    16,000    18,000    21,000     82,000
                 Exclusion of other employee benefits:
         142       Premiums on group term life insurance...................     2,100     2,170     2,250     2,290     2,400     2,570     2,620     12,130
         143       Premiums on accident and disability insurance...........       300       310       320       330       340       350       360      1,700
         144     Income of trusts to finance supplementary unemployment            30        30        30        40        40        50        50        210
                  benefits.................................................
         145     Special ESOP rules........................................     1,500     1,600     1,700     1,800     1,900     1,900     2,000      9,300
         146     Additional deduction for the blind........................        30        30        30        30        40        40        40        180
         147     Additional deduction for the elderly......................     1,590     1,610     1,710     1,850     2,460     2,920     3,070     12,010
         148     Tax credit for the elderly and disabled...................        10        10        10        10        10        10        10         50
         149     Deductibility of casualty losses..........................       560       600       630       670       730       760       790      3,580
         150     Earned income tax credit \4\..............................     4,990     5,200     5,440     5,720     5,860     7,890     8,170     33,080
         151     Additional exemption for housing Hurricane Katrina                20  ........  ........  ........  ........  ........  ........  .........
                  displaced individuals....................................

                 Social Security:
                 Exclusion of social security benefits:
         152       Social Security benefits for retired workers............    17,690    18,480    18,640    19,720    20,760    22,650    24,320    106,090
         153       Social Security benefits for disabled...................     5,050     5,540     5,810     6,150     6,590     7,110     7,560     33,220
         154       Social Security benefits for dependents and survivors...     3,270     3,320     3,240     3,340     3,400     3,600     3,740     17,320

                 Veterans benefits and services:
         155     Exclusion of veterans death benefits and disability            3,760     3,870     3,950     4,140     4,480     4,850     5,260     22,680
                  compensation.............................................
         156     Exclusion of veterans pensions............................       180       180       180       180       190       220       220        990
         157     Exclusion of GI bill benefits.............................       250       280       280       290       300       330       330      1,530
         158     Exclusion of interest on veterans housing bonds...........        30        30        30        30        30        30        30        150

                 General purpose fiscal assistance:
         159     Exclusion of interest on public purpose State and local       23,540    25,140    25,900    26,670    27,470    28,300    29,150    137,490
                  bonds....................................................
         160     Deductibility of nonbusiness state and local taxes other      37,500    32,730    33,200    34,450    54,470    66,030    68,390    256,540
                  than on owner-occupied homes.............................

                 Interest:
         161     Deferral of interest on U.S. savings bonds................     1,290     1,310     1,320     1,330     1,380     1,470     1,490      6,990

                 Addendum: Aid to State and local governments:
                 Deductibility of:
                   Property taxes on owner-occupied homes..................    19,120    16,360    16,640    16,820    28,230    34,570    35,400    131,660
                   Nonbusiness State and local taxes other than on owner-      37,500    32,730    33,200    34,450    54,470    66,030    68,390    256,540
                    occupied homes.........................................
                 Exclusion of interest on State and local bonds for:
                   Public purposes.........................................    23,540    25,140    25,900    26,670    27,470    28,300    29,150    137,490
                   Energy facilities.......................................        30        30        30        30        30        30        30        150
                   Water, sewage, and hazardous waste disposal facilities..       370       390       410       420       430       440       450      2,150
                   Small-issues............................................       350       380       390       410       420       420       440      2,080
                   Owner-occupied mortgage subsidies.......................       900       960       990     1,020     1,060     1,090     1,120      5,280
                   Rental housing..........................................       830       880       900       930       960       990     1,020      4,800
                   Airports, docks, and similar facilities.................       850       900       930       960       990     1,020     1,050      4,950
                   Student loans...........................................       440       460       480       490       510       520       540      2,540
                   Private nonprofit educational facilities................     1,750     1,870     1,930     1,980     2,050     2,110     2,170     10,240
                   Hospital construction...................................     2,760     2,950     3,040     3,120     3,210     3,310     3,410     16,090
                   Veterans' housing.......................................        30        30        30        30        30        30        30        150
                 Credit for holders of zone academy bonds..................       140       160       170       170       170       160       140        810
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ In addition, the alcohol fuel credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2007 $3,320; 2008 $4,020;
      2009 $4,560; 2010 $4,740; 2011 $1,330; 2012 $0; 2013 $0.
    \2\ The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as
      follows: 2007 $16,159; 2008 $16,321; 2009 $16,780; 2010 $16,738; 2011 $16,394; 2012 $1,554; and 2013 $1,537
    \3\ The figures in the table indicate the effect of the health insurance tax credit on receipts. The effect of the credit on outlays (in millions of
      dollars) is as follows: 2007 $100; 2008 $110; 2009 $120; 2010 $130; 2011 $140; 2012 $150; and 2013 $160.
    \4\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of
      dollars) is as follows: 2007 $38,270;2008 $39,460; 2009 $41,020; 2010 $42,940; 2011 $43,460; 2012 $39,890; and 2013 $40,850.
    Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method.
    All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.

    [[Page 292]]

                             Present-Value Estimates

      The annual value of tax expenditures for tax deferrals is reported on
    a cash basis in all tables except Table 19-4. Cash-based estimates
    reflect the difference between taxes deferred in the current year and
    incoming revenues that are received due to deferrals of taxes from prior
    years. Although such estimates are useful as a measure of cash flows
    into the Government, they do not accurately reflect the true economic
    cost of these provisions. For example, for a provision where activity
    levels have changed, so that incoming tax receipts from past deferrals
    are greater than deferred receipts from new activity, the cash-basis tax
    expenditure estimate can be negative, despite the fact that in present-
    value terms current deferrals have a real cost to the Government.
    Alternatively, in the case of a newly enacted deferral provision, a
    cash-based estimate can overstate the real effect on receipts to the
    Government because the newly deferred taxes will ultimately be received.
    Present-value estimates, which are a useful complement to the cash-basis
    estimates for provisions involving deferrals, are discussed below.
      Discounted present-value estimates of revenue effects are presented in
    Table 19-4 for certain provisions that involve tax deferrals or other
    long-term revenue effects. These estimates complement the cash-based tax
    expenditure estimates presented in the other tables.
      The present-value estimates represent the revenue effects, net of
    future tax payments that follow from activities undertaken during
    calendar year 2007 which cause the deferrals or other long-term revenue
    effects. For instance, a pension contribution in 2007 would cause a
    deferral of tax payments on wages in 2007 and on pension earnings on
    this contribution (e.g., interest) in later years. In some future year,
    however, the 2007 pension contribution and accrued earnings will be paid
    out and taxes will be due; these receipts are included in the present-
    value estimate. In general, this conceptual approach is similar to the
    one used for reporting the budgetary effects of credit programs, where
    direct loans and guarantees in a given year affect future cash flows.

    [[Page 293]]

                                                                            Table 19-2.  ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL INCOME TAXES
                                                                                                            (in millions of dollars)
    ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     Corporations                                                                           Individuals
                                                                 ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    2007     2008      2009       2010       2011       2012       2013     2009-13      2007       2008       2009       2010       2011       2012       2013     2009-13
    ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

                 National Defense
           1     Exclusion of benefits and allowances to armed    .......  .......  .........  .........  .........  .........  .........  .........      3,220      3,350      3,480      3,620      3,780      3,930      4,090     18,900
                  forces personnel..............................

                 International affairs:
           2     Exclusion of income earned abroad by U.S.        .......  .......  .........  .........  .........  .........  .........  .........      2,630      2,760      2,900      3,050      3,200      3,360      3,530     16,040
                  citizens......................................
           3     Exclusion of certain allowances for Federal      .......  .......  .........  .........  .........  .........  .........  .........        840        880        920        970       1020       1070       1120      5,100
                  employees abroad..............................
           4     Inventory property sales source rules exception    1,940    2,180      2,410      2,610      2,820      3,060      3,310     14,210  .........  .........  .........  .........  .........  .........  .........  .........
           5     Deferral of income from controlled foreign        12,490   13,120     13,780     14,480     15,220     15,990     16,810     76,280  .........  .........  .........  .........  .........  .........  .........  .........
                  corporations (normal tax method)..............
           6     Deferred taxes for financial firms on certain      2,370    2,490      1,060  .........  .........  .........  .........      1,060  .........  .........  .........  .........  .........  .........  .........  .........
                  income earned overseas........................

                 General science, space, and technology:
           7     Expensing of research and experimentation          5,090    4,620      4,890      4,380      4,220      4,300      4,320     22,110        100        100        100         90        100        100        100        490
                  expenditures (normal tax method)..............
           8     Credit for increasing research activities......   10,260    4,610      2,100        920        360         70  .........      3,450         60         50  .........  .........  .........  .........  .........  .........

                 Energy:
           9     Expensing of exploration and development costs,      460      440        400        340        270        210        130      1,350         70         70         60         50         40         30         20        200
                  fuels.........................................
          10     Excess of percentage over cost depletion, fuels      710      820        860        820        790        770        760      4,000         80         90         90         90         90         80         80        430
          11     Alternative fuel production credit.............    2,800    1,260         70         80         10         10  .........        170        120         50  .........  .........  .........  .........  .........  .........
          12     Exception from passive loss limitation for       .......  .......  .........  .........  .........  .........  .........  .........         30         20         20         20         30         30         30        130
                  working interests in oil and gas properties...
          13     Capital gains treatment of royalties on coal...  .......  .......  .........  .........  .........  .........  .........  .........        180        190        190        200        190        140        150        870
          14     Exclusion of interest on energy facility bonds.       10       10         10         10         10         10         10         50         20         20         20         20         20         20         20        100
          15     New technology credit..........................      380      730        910        940        920        910        880      4,560         30         70         90         90         90         90         90        450
          16     Alcohol fuel credits \1\.......................       30       30         40         40         20  .........  .........        100         10         10         10         10         10  .........  .........         30
          17     Bio-Diesel and small agri-biodiesel producer     .......  .......  .........  .........  .........  .........  .........  .........        180        200         30         20         10         10         10         80
                  tax credits...................................
          18     Tax credit and deduction for clean-fuel burning       30  .......        -30        -30        -40        -50        -40       -190        230        150        160         10        -10        -10        -10        140
                  vehicles......................................
          19     Exclusion of utility conservation subsidies....  .......  .......  .........  .........  .........  .........  .........  .........        120        120        120        110        110        110        110        560
          20     Credit for holding clean renewable energy bonds       10       10         20         20         20         20         20        100         10         30         50         50         50         50         50        250
          21     Deferral of gain from dispositions of                610      250        -60       -290       -490       -590       -570     -2,000  .........  .........  .........  .........  .........  .........  .........  .........
                  transmission property to implement FERC
                  restructuring policy..........................
          22     Credit for investment in clean coal facilities.       30       50         80        130        180        245        290        925  .........  .........  .........  .........  .........  .........  .........  .........
          23     Temporary 50% expensing for equipment used in         30      120        240        260        180        -50       -160        470  .........  .........  .........  .........  .........  .........  .........  .........
                  the refining of liquid fuels..................
          24     Natural gas distribution pipelines treated as         60       80         90        110        120        110        100        530  .........  .........  .........  .........  .........  .........  .........  .........
                  15-year property..............................
          25     Amortize all geological and geophysical               40       30         20         10         10         10         10         60         10         10         10  .........  .........  .........  .........         10
                  expenditures over 2 years.....................
          26     Allowance of deduction for certain energy            140      130         70         20  .........  .........  .........         90         50         40         20         10  .........  .........  .........         30
                  efficient commercial building property........
          27     Credit for construction of new energy efficient       20       20         20         10  .........  .........  .........         30  .........         10  .........  .........  .........  .........  .........  .........
                  homes.........................................
          28     Credit for energy efficiency improvements to     .......  .......  .........  .........  .........  .........  .........  .........        380        150  .........  .........  .........  .........  .........  .........
                  existing homes................................
          29     Credit for energy efficient appliances.........       80  .......  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........
          30     30% credit for residential purchases/            .......  .......  .........  .........  .........  .........  .........  .........         10         10         10  .........  .........  .........  .........         10
                  installations of solar and fuel cells.........
          31     Credit for business installation of qualified         20       30         10  .........  .........  .........  .........         10         60        100         40        -10        -10        -10        -10  .........
                  fuel cells and stationary microturbine power
                  plants........................................
          32     Partial expensing for advanced mine safety            10       20  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........
                  equipment.....................................

                 Natural resources and environment:
          33     Expensing of exploration and development costs,       10       10         10         10         10         10         10         50  .........  .........  .........  .........  .........  .........  .........  .........
                  nonfuel minerals..............................
          34     Excess of percentage over cost depletion,            360      380        390        410        420        430        450      2,100         20         20         20         30         30         30         30        140
                  nonfuel minerals..............................
          35     Exclusion of interest on bonds for water,            120      120        130        130        130        140        140        670        250        270        280        290        300        300        310      1,480
                  sewage, and hazardous waste facilities........
          36     Capital gains treatment of certain timber        .......  .......  .........  .........  .........  .........  .........  .........        180        190        190        200        190        140        150        870
                  income........................................
          37     Expensing of multiperiod timber growing costs..      180      180        190        190        200        210        210      1,000        110        110        120        120        120        130        130        620
          38     Tax incentives for preservation of historic          310      330        340        360        380        400        420      1,900         90        100        100        110        110        120        120        560
                  structures....................................
          39     Expensing of capital costs with respect to            10       30         50         30        -10  .........  .........         70  .........  .........  .........  .........  .........  .........  .........  .........
                  complying with EPA sulfur regulations.........
          40     Exclusion of gain or loss on sale or exchange         10       20         30         30         30         20         20        130  .........         10         10         10         10         10         10         50
                  of certain brownfield sites...................

                 Agriculture:
          41     Expensing of certain capital outlays...........       10       10         10         10         10         10         10         50        100        100        100        110        110        110        110        540
          42     Expensing of certain multiperiod production           10       10         10         10         10         10         10         50         70         70         70         70         80         80         80        380
                  costs.........................................

    [[Page 294]]

          43     Treatment of loans forgiven for solvent farmers  .......  .......  .........  .........  .........  .........  .........  .........         10         10         10         20         20         20         20         90
          44     Capital gains treatment of certain income......  .......  .......  .........  .........  .........  .........  .........  .........        980       1030       1030       1090       1060        760        800      4,740
          45     Income averaging for farmers...................  .......  .......  .........  .........  .........  .........  .........  .........         80         80         80         80         80         80         80        400
          46     Deferral of gain on sale of farm refiners......       20       20         20         20         20         20         20        100  .........  .........  .........  .........  .........  .........  .........  .........

                 Commerce and housing:
                 Financial institutions and insurance:
          47       Exemption of credit union income.............     1310     1380       1450       1530       1610       1690       1780      8,060  .........  .........  .........  .........  .........  .........  .........  .........
          48       Excess bad debt reserves of financial               20       10         10         10  .........  .........  .........         20  .........  .........  .........  .........  .........  .........  .........  .........
                    institutions................................
          49       Exclusion of interest on life insurance           2540     2740       2920       3100       3260       3480       3740     16,500      17370      19100      20580      22100      24340      27270      29850    124,140
                    savings.....................................
          50       Special alternative tax on small property and       40       40         40         40         40         50         50        220  .........  .........  .........  .........  .........  .........  .........  .........
                    casualty insurance companies................
          51       Tax exemption of certain insurance companies       180      190        190        200        200        210        210      1,010  .........  .........  .........  .........  .........  .........  .........  .........
                    owned by tax-exempt organizations...........
          52       Small life insurance company deduction.......       50       50         50         50         50         60         60        270  .........  .........  .........  .........  .........  .........  .........  .........
          53       Exclusion of interest spread of financial      .......  .......  .........  .........  .........  .........  .........  .........        520        450        480        500        630        660        690      2,960
                    institutions................................
                 Housing:
          54       Exclusion of interest on owner-occupied            280      300        310        320        330        340        350      1,650        620        660        680        700        730        750        770      3,630
                    mortgage subsidy bonds......................
          55       Exclusion of interest on rental housing bonds      260      270        280        290        300        310        320      1,500        570        610        620        640        660        680        700      3,300
          56       Deductibility of mortgage interest on owner-   .......  .......  .........  .........  .........  .........  .........  .........     84,850     94,790    100,810    107,020    115,280    123,130    130,440    576,680
                    occupied homes..............................
          57       Deductibility of State and local property tax  .......  .......  .........  .........  .........  .........  .........  .........     19,120     16,360     16,640     16,820     28,230     34,570     35,400    131,660
                    on owner-occupied homes.....................
          58       Deferral of income from installment sales....      310      310        320        320        320        330        330      1,620        900        920        930      1,050      1,180      1,320      1,480      5,960
          59       Capital gains exclusion on home sales........  .......  .......  .........  .........  .........  .........  .........  .........     31,480     33,050     34,710     36,440     38,260     40,180     42,180    191,770
          60       Exclusion of net imputed rental income.......  .......  .......  .........  .........  .........  .........  .........  .........      3,890      5,440      7,550     10,478     14,543     20,183     28,012     80,766
          61       Exception from passive loss rules for $25,000  .......  .......  .........  .........  .........  .........  .........  .........      7,840      8,430      8,840      9,160      9,580     10,090     10,240     47,910
                    of rental loss..............................
          62       Credit for low-income housing investments....    4,660    4,980      5,360      5,720      6,040      6,330      6,590     30,040        370        400        420        460        480        510        530      2,400
          63       Accelerated depreciation on rental housing         620      660        700        740        800        860        920      4,020      9,240     10,120     11,060     11,980     13,770     15,300     16,630     68,740
                    (normal tax method).........................
          64       Discharge of mortgage indebtedness...........  .......  .......  .........  .........  .........  .........  .........  .........  .........        293        239        176  .........  .........  .........        415
                 Commerce:
          65       Cancellation of indebtedness.................  .......  .......  .........  .........  .........  .........  .........  .........        110         90         60         40         30         30         30        190
          66       Exceptions from imputed interest rules.......  .......  .......  .........  .........  .........  .........  .........  .........         50         50         50         50         50         50         50        250
          67       Capital gains (except agriculture, timber,     .......  .......  .........  .........  .........  .........  .........  .........     53,230     55,540     55,940     59,170     57,490     41,390     43,240    257,230
                    iron ore, and coal).........................
          68       Capital gains exclusion of small corporation   .......  .......  .........  .........  .........  .........  .........  .........        270        320        340        370        490        540        590      2,330
                    stock.......................................
          69       Step-up basis of capital gains at death......  .......  .......  .........  .........  .........  .........  .........  .........     32,600     35,900     36,750     37,950     39,450     41,010     42,632    197,792
          70       Carryover basis of capital gains on gifts....  .......  .......  .........  .........  .........  .........  .........  .........        650        760        800      1,270      6,340      1,500      1,600     11,510
          71       Ordinary income treatment of loss from small   .......  .......  .........  .........  .........  .........  .........  .........         50         50         50         60         60         60         60        290
                    business corporation stock sale.............
          72       Accelerated depreciation of buildings other     -1,320   -1,240     -1,110       -990       -900       -800       -650     -4,450     -3,290     -3,180     -3,030     -2,860     -3,020     -2,950     -2,460    -14,320
                    than rental housing (normal tax method).....
          73       Accelerated depreciation of machinery and       14,760   21,540     28,600     34,130     38,090     41,690     45,440    187,950     11,650     13,640     15,520     15,630     15,240     16,750     18,950     82,090
                    equipment (normal tax method)...............
          74       Expensing of certain small investments             730      720        630       -220       -380       -380       -140       -490       2930       2940       2770        720       -570       -580         80      2,420
                    (normal tax method).........................
          75       Graduated corporation income tax rate (normal    5,400    5,220      5,290      5,510      5,660      5,840      6,090     28,390  .........  .........  .........  .........  .........  .........  .........  .........
                    tax method).................................
          76       Exclusion of interest on small issue bonds...      110      120        120        130        130        130        140        650        240        260        270        280        290        290        300      1,430
          77       Deduction for US production activities.......    7,380   10,710     11,690     16,030     19,340     20,310     21,320     88,690      2,420      3,310      3,640      5,080      6,690      7,400      7,770     30,580
          78       Special rules for certain film and TV               70       60        -30        -70        -50        -40        -30       -220         20         10        -10        -20        -10        -10        -10        -60
                    production..................................

                 Transportation:
          79     Deferral of tax on shipping companies..........       20       20         20         20         20         20         20        100  .........  .........  .........  .........  .........  .........  .........  .........
          80     Exclusion of reimbursed employee parking         .......  .......  .........  .........  .........  .........  .........  .........      2,830      2,950      3,070      3,200      3,310      3,430      3,540     16,550
                  expenses......................................
          81     Exclusion for employer-provided transit passes.  .......  .......  .........  .........  .........  .........  .........  .........        420        440        470        500        520        550        580      2,620
          82     Tax credit for certain expenditures for              120      120         40         20         10         10  .........         80         10         10  .........  .........  .........  .........  .........  .........
                  maintaining railroad tracks...................
          83     Exclusion of interest on bonds for Financing of       10       20         20         30         30         20         10        110         30         60         70         70         70         70         50        330
                  Highway Projects and rail-truck transfer
                  facilities....................................

                 Community and regional development:
          84     Investment credit for rehabilitation of               20       20         20         20         20         20         20        100         20         20         20         20         20         20         20        100
                  structures (other than historic)..............
          85     Exclusion of interest for airport, dock, and         270      280        290        300        310        320        330      1,550        580        620        640        660        680        700        720      3,400
                  similar bonds.................................
          86     Exemption of certain mutuals' and cooperatives'       70       70         70         70         70         70         80        360  .........  .........  .........  .........  .........  .........  .........  .........
                  income........................................
          87     Empowerment zones and renewal communities......      360      380        420        200         70        110        140        940      1,090      1,170      1,340        970        410        550        650      3,920
          88     New markets tax credit.........................      210      250        240        210        180        140         80        850        600        740        730        650        550        450        260      2,640

    [[Page 295]]

          89     Expensing of environmental remediation costs...      250      110        -30        -20        -20        -20        -10       -100         50         20        -10  .........  .........  .........  .........        -10
          90     Credit to holders of Gulf Tax Credit Bonds.....  .......  .......  .........  .........  .........  .........  .........  .........         10         10         10         10         10         10         10         50

                 Education, training, employment, and social
                  services:
                 Education:
          91       Exclusion of scholarship and fellowship        .......  .......  .........  .........  .........  .........  .........  .........      1,870      1,960      2,050      2,150      2,250      2,360      2,470     11,280
                    income (normal tax method)..................
          92       HOPE tax credit..............................  .......  .......  .........  .........  .........  .........  .........  .........      3,370      3,380      3,640      3,750      4,400      4,790      4,980     21,560
          93       Lifetime Learning tax credit.................  .......  .......  .........  .........  .........  .........  .........  .........      2,210      2,220      2,340      2,420      2,810      3,050      3,180     13,800
          94       Education Individual Retirement Accounts.....  .......  .......  .........  .........  .........  .........  .........  .........         20         30         50         60         70         80         90        350
          95       Deductibility of student-loan interest.......  .......  .......  .........  .........  .........  .........  .........  .........        810        820        830        840        780        530        540      3,520
          96       Deduction for higher education expenses......  .......  .......  .........  .........  .........  .........  .........  .........      1,450      1,180  .........  .........  .........  .........  .........  .........
          97       State prepaid tuition plans..................  .......  .......  .........  .........  .........  .........  .........  .........        850      1,040      1,290      1,600      2,020      2,280      2,430      9,620
          98       Exclusion of interest on student-loan bonds..      140      140        150        150        160        160        170        790        300        320        330        340        350        360        370      1,750
          99       Exclusion of interest on bonds for private         550      580        600        620        640        660        680      3,200       1200       1290       1330       1360       1410       1450       1490      7,040
                    nonprofit educational facilities............
         100       Credit for holders of zone academy bonds.....      140      160        170        170        170        160        140        810  .........  .........  .........  .........  .........  .........  .........  .........
         101       Exclusion of interest on savings bonds         .......  .......  .........  .........  .........  .........  .........  .........         20         20         20         20         20         20         20        100
                    redeemed to finance educational expenses....
         102       Parental personal exemption for students age   .......  .......  .........  .........  .........  .........  .........  .........      2,690      1,880      1,760      1,710      2,790      3,130      2,860     12,250
                    19 or over..................................
         103       Deductibility of charitable contributions          600      630        670        710        750        790        830      3,750      3,730      4,250      4,600      4,960      5,360      5,810      6,180     26,910
                    (education).................................
         104       Exclusion of employer-provided educational     .......  .......  .........  .........  .........  .........  .........  .........        630        660        690        730         40  .........  .........      1,460
                    assistance..................................
         105       Special deduction for teacher expenses.......  .......  .......  .........  .........  .........  .........  .........  .........        170        160  .........  .........  .........  .........  .........  .........
         106       Discharge of student loan indebtedness.......  .......  .......  .........  .........  .........  .........  .........  .........         20         20         20         20         20         20         20        100
                 Training, employment, and social services:
         107       Work opportunity tax credit..................      330      440        510        560        550        410        220      2,250         40         50         90        120        120         90         40        460
         108       Welfare-to-work tax credit...................       70       60         40         20         10         10  .........         80         10         20         10  .........  .........  .........  .........         10
         109       Employer provided child care exclusion.......  .......  .......  .........  .........  .........  .........  .........  .........       1170       1340       1400       1470       1480       1520       1600      7,470
         110       Employer-provided child care credit..........       10       10         10         20         10  .........  .........         40  .........  .........  .........  .........  .........  .........  .........  .........
         111       Assistance for adopted foster children.......  .......  .......  .........  .........  .........  .........  .........  .........        350        380        420        450        480        520        560      2,430
         112       Adoption credit and exclusion................  .......  .......  .........  .........  .........  .........  .........  .........        370        380        400        410        370         70         80      1,330
         113       Exclusion of employee meals and lodging        .......  .......  .........  .........  .........  .........  .........  .........        930        970      1,010      1,060      1,110      1,170      1,230      5,580
                    (other than military).......................
         114       Child credit \2\.............................  .......  .......  .........  .........  .........  .........  .........  .........     30,910     30,160     29,950     29,870     23,270     13,590     13,080    109,760
         115       Credit for child and dependent care expenses.  .......  .......  .........  .........  .........  .........  .........  .........      2,780      1,810      1,720      1,650      1,560      1,410      1,340      7,680
         116       Credit for disabled access expenditures......       10       10         10         10         10         10         10         50         20         20         20         20         20         20         20        100
         117       Deductibility of charitable contributions,       1,370    1,440      1,510      1,580      1,650      1,720       1790      8,250     36,830     41,930     45,470     48,970     52,950     57,350     61,000    265,740
                    other than education and health.............
         118       Exclusion of certain foster care payments....  .......  .......  .........  .........  .........  .........  .........  .........        420        420        420        420        420        420        420      2,100
         119       Exclusion of parsonage allowances............  .......  .......  .........  .........  .........  .........  .........  .........        510        550        580        610        640        670        700      3,200
         120       Employee retention credit for employers             10  .......  .........  .........  .........  .........  .........  .........         20         10  .........  .........  .........  .........  .........  .........
                    affected by Hurricane Katrina, Rita, and
                    Wilma.......................................
         121       Exclusion for benefits provided to volunteer   .......  .......  .........  .........  .........  .........  .........  .........  .........         23         78         82         59  .........  .........        219
                    EMS and firefighters........................

                 Health:
         122     Exclusion of employer contributions for medical  .......  .......  .........  .........  .........  .........  .........  .........    133,790    151,810    168,460    185,250    210,110    233,320    254,810  1,051,950
                  insurance premiums and medical care...........
         123     Self-employed medical insurance premiums.......  .......  .......  .........  .........  .........  .........  .........  .........      4,260      4,680      5,170      5,710      6,590      7,450      8,180     33,100
         124     Medical Savings Accounts / Health Savings        .......  .......  .........  .........  .........  .........  .........  .........        760      1,140      1,480      1,590      1,620      1,540      1,450      7,680
                  Accounts......................................
         125     Deductibility of medical expenses..............  .......  .......  .........  .........  .........  .........  .........  .........      4,470      5,060      5,920      6,800      9,150     10,550     11,490     43,910
         126     Exclusion of interest on hospital construction       870      920        950        970      1,000      1,030      1,060      5,010      1,890      2,030      2,090      2,150      2,210      2,280      2,350     11,080
                  bonds.........................................
         127     Deductibility of charitable contributions            180      190        200        210        220        230        240      1,100      4,130      4,700      5,100      5,490      5,940      6,430      6,840     29,800
                  (health)......................................
         128     Tax credit for orphan drug research............      260      290        320        360        410        460        510      2,060  .........  .........  .........  .........  .........  .........  .........  .........
         129     Special Blue Cross/Blue Shield deduction.......      620      640        650        660        670        680        680      3,340  .........  .........  .........  .........  .........  .........  .........  .........
         130     Tax credit for health insurance purchased by     .......  .......  .........  .........  .........  .........  .........  .........         10         10         10         10         10         20         20         70
                  certain displaced and retired individuals \3\.
         131     Distributions from retirement plans for          .......  .......  .........  .........  .........  .........  .........  .........        250        240        280        310        340        380        420      1,730
                  premiums for health and long-term care
                  insurance.....................................

                 Income security:
         132     Exclusion of railroad retirement system          .......  .......  .........  .........  .........  .........  .........  .........        380        370        370        360        360        350        330      1,770
                  benefits......................................
         133     Exclusion of workers' compensation benefits....  .......  .......  .........  .........  .........  .........  .........  .........      5,740      5,830      5,920      6,010      6,110      6,200      6,300     30,540
         134     Exclusion of public assistance benefits (normal  .......  .......  .........  .........  .........  .........  .........  .........        470        490        510        530        550        580        600      2,770
                  tax method)...................................
         135     Exclusion of special benefits for disabled coal  .......  .......  .........  .........  .........  .........  .........  .........         50         40         40         40         40         40         40        200
                  miners........................................
         136     Exclusion of military disability pensions......  .......  .......  .........  .........  .........  .........  .........  .........        100        110        130        150        180        220        260        940
                 Net exclusion of pension contributions and
                  earnings:
         137       Employer plans...............................  .......  .......  .........  .........  .........  .........  .........  .........     47,060     46,120     45,670     44,370     42,420     42,230     41,620    216,310

    [[Page 296]]

         138       401(k) plans.................................  .......  .......  .........  .........  .........  .........  .........  .........     46,000     49,000     51,000     55,000     68,000     74,000     77,000    325,000
         139       Individual Retirement Accounts...............  .......  .......  .........  .........  .........  .........  .........  .........      9,500     10,800     11,700     12,200     13,400     14,900     15,200     67,400
         140       Low and moderate income savers credit........  .......  .......  .........  .........  .........  .........  .........  .........        760        880        900        880        870        880        860      4,390
         141       Keogh plans..................................  .......  .......  .........  .........  .........  .........  .........  .........     11,000     12,000     13,000     14,000     16,000     18,000     21,000     82,000
                 Exclusion of other employee benefits:
         142       Premiums on group term life insurance........  .......  .......  .........  .........  .........  .........  .........  .........      2,100      2,170      2,250      2,290      2,400      2,570      2,620     12,130
         143       Premiums on accident and disability insurance  .......  .......  .........  .........  .........  .........  .........  .........        300        310        320        330        340        350        360      1,700
         144     Income of trusts to finance supplementary        .......  .......  .........  .........  .........  .........  .........  .........         30         30         30         40         40         50         50        210
                  unemployment benefits.........................
         145     Special ESOP rules.............................    1,100    1,200      1,300      1,300      1,400      1,400      1,500      6,900        400        400        400        500        500        500        500      2,400
         146     Additional deduction for the blind.............  .......  .......  .........  .........  .........  .........  .........  .........         30         30         30         30         40         40         40        180
         147     Additional deduction for the elderly...........  .......  .......  .........  .........  .........  .........  .........  .........      1,590      1,610      1,710      1,850      2,460      2,920      3,070     12,010
         148     Tax credit for the elderly and disabled........  .......  .......  .........  .........  .........  .........  .........  .........         10         10         10         10         10         10         10         50
         149     Deductibility of casualty losses...............  .......  .......  .........  .........  .........  .........  .........  .........        560        600        630        670        730        760        790      3,580
         150     Earned income tax credit \4\...................  .......  .......  .........  .........  .........  .........  .........  .........      4,990      5,200      5,440      5,720      5,860      7,890      8,170     33,080
         151     Additional exemption for housing Hurricane       .......  .......  .........  .........  .........  .........  .........  .........         20  .........  .........  .........  .........  .........  .........  .........
                  Katrina displaced individuals.................

                 Social Security:
                 Exclusion of social security benefits:
         152       Social Security benefits for retired workers.  .......  .......  .........  .........  .........  .........  .........  .........     17,690     18,480     18,640     19,720     20,760     22,650     24,320    106,090
         153       Social Security benefits for disabled........  .......  .......  .........  .........  .........  .........  .........  .........      5,050      5,540      5,810      6,150      6,590      7,110      7,560     33,220
         154       Social Security benefits for dependents and    .......  .......  .........  .........  .........  .........  .........  .........      3,270      3,320      3,240      3,340      3,400      3,600      3,740     17,320
                    survivors...................................

                 Veterans benefits and services:
         155     Exclusion of veterans death benefits and         .......  .......  .........  .........  .........  .........  .........  .........      3,760      3,870      3,950      4,140      4,480      4,850      5,260     22,680
                  disability compensation.......................
         156     Exclusion of veterans pensions.................  .......  .......  .........  .........  .........  .........  .........  .........        180        180        180        180        190        220        220        990
         157     Exclusion of GI bill benefits..................  .......  .......  .........  .........  .........  .........  .........  .........        250        280        280        290        300        330        330      1,530
         158     Exclusion of interest on veterans housing bonds       10       10         10         10         10         10         10         50         20         20         20         20         20         20         20        100

                 General purpose fiscal assistance:
         159     Exclusion of interest on public purpose State      7,410    7,840      8,080      8,320      8,570      8,830      9,090     42,890     16,130     17,300     17,820     18,350     18,900     19,470     20,060     94,600
                  and local bonds...............................
         160     Deductibility of nonbusiness State and local     .......  .......  .........  .........  .........  .........  .........  .........     37,500     32,730     33,200     34,450     54,470     66,030     68,390    256,540
                  taxes other than on owner-occupied homes......

                 Interest:
         161     Deferral of interest on U.S. savings bonds.....  .......  .......  .........  .........  .........  .........  .........  .........      1,290      1,310      1,320      1,330      1,380      1,470      1,490      6,990

                 Addendum: Aid to State and local governments:
                 Deductibility of:
                   Property taxes on owner-occupied homes.......  .......  .......  .........  .........  .........  .........  .........  .........     19,120     16,360     16,640     16,820     28,230     34,570     35,400    131,660
                   Nonbusiness State and local taxes other than   .......  .......  .........  .........  .........  .........  .........  .........     37,500     32,730     33,200     34,450     54,470     66,030     68,390    256,540
                    on owner-occupied homes.....................
                 Exclusion of interest on State and local bonds
                  for:
                   Public purposes..............................    7,410    7,840      8,080      8,320      8,570      8,830      9,090     42,890     16,130     17,300     17,820     18,350     18,900     19,470     20,060     94,600
                   Energy facilities............................       10       10         10         10         10         10         10         50         20         20         20         20         20         20         20        100
                   Water, sewage, and hazardous waste disposal        120      120        130        130        130        140        140        670        250        270        280        290        300        300        310      1,480
                    facilities..................................
                   Small-issues.................................      110      120        120        130        130        130        140        650        240        260        270        280        290        290        300      1,430
                   Owner-occupied mortgage subsidies............      280      300        310        320        330        340        350      1,650        620        660        680        700        730        750        770      3,630
                   Rental housing...............................      260      270        280        290        300        310        320      1,500        570        610        620        640        660        680        700      3,300
                   Airports, docks, and similar facilities......      270      280        290        300        310        320        330      1,550        580        620        640        660        680        700        720      3,400
                   Student loans................................      140      140        150        150        160        160        170        790        300        320        330        340        350        360        370      1,750
                   Private nonprofit educational facilities.....      550      580        600        620        640        660        680      3,200      1,200      1,290      1,330      1,360      1,410      1,450      1,490      7,040
                   Hospital construction........................      870      920        950        970       1000       1030       1060      5,010      1,890      2,030      2,090      2,150      2,210      2,280      2,350     11,080
                   Veterans' housing............................       10       10         10         10         10         10         10         50         20         20         20         20         20         20         20        100
                 Credit for holders of zone academy bonds.......      140      160        170        170        170        160        140        810  .........  .........  .........  .........  .........  .........  .........  .........
    ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ In addition, the alcohol fuel credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2007 $3,380; 2008 $4,300; 2009 $5,140; 2010 $5,940; 2011 $1,720; 2012 $0; 2013 $0.
    \2\ The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2007 $16,159; 2008 $16,321; 2009 $16,780; 2010 $16,738; 2011 $16,394;
      2012 $1,554; and 2013 $1,537
    \3\ The figures in the table indicate the effect of the health insurance tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2007 $100; 2008 $110; 2009 $120; 2010 $130; 2011 $140; 2012
      $150; and 2013 $160.
    \4\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2007 $38,270;2008 $39,460; 2009 $41,020; 2010 $42,940; 2011
      $43,460; 2012 $39,890; and 2013 $40,850.
    Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method.
    All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.

                            Tax Expenditure Baselines

      A tax expenditure is an exception to baseline provisions of the tax
    structure that usually results in a reduction in the amount of tax owed.
    The 1974 Congressional Budget Act, which mandated the tax expenditure
    budget, did not specify the baseline provisions of the tax law. As noted
    previously, deciding whether provisions are exceptions, therefore, is a
    matter of judgment. As in prior years, most of this year's tax
    expenditure estimates are presented using two baselines: the normal tax
    baseline and the reference tax law baseline. An

    [[Page 297]]

    exception is provided for the lower tax rate on dividends and capital
    gains on corporate shares as discussed below.
      The normal tax baseline is patterned on a comprehensive income tax,
    which defines income as the sum of consumption and the change in net
    wealth in a given period of time. The normal tax baseline allows
    personal exemptions, a standard deduction, and deduction of expenses
    incurred in earning income. It is not limited to a particular structure
    of tax rates, or by a specific definition of the taxpaying unit.
      In the case of income taxes, the reference tax law baseline is also
    patterned on a comprehensive income tax, but it is closer to existing
    law. Tax expenditures under the reference law baseline are generally tax
    expenditures under the normal tax baseline, but the reverse is not
    always true.
      Both the normal and reference tax baselines allow several major
    departures from a pure comprehensive income tax. For example, under the
    normal and reference tax baselines:
        Income is taxable only when it is realized in exchange.
              Thus, the deferral of tax on unrealized capital gains is not
              regarded as tax expenditure. Accrued income would be taxed
              under a comprehensive income tax.
        A comprehensive income tax would generally not exclude from
              the tax base amounts for personal exemptions or a standard
              deduction, except perhaps to ease tax administration.
        A separate corporate income tax is not part of a
              comprehensive income tax.
        Tax rates vary by level of income. Multiple tax rates exist
              as a means to facilitate the redistribution of income.
        Tax rates are allowed to vary with marital status.
        Values of assets and debt are not generally adjusted for
              inflation. A comprehensive income tax would adjust the cost
              basis of capital assets and debt for changes in the price
              level during the time the assets or debt are held. Thus, under
              a comprehensive income tax baseline, the failure to take
              account of inflation in measuring depreciation, capital gains,
              and interest income would be regarded as a negative tax
              expenditure (i.e., a tax penalty), and failure to take account
              of inflation in measuring interest costs would be regarded as
              a positive tax expenditure (i.e., a tax subsidy).
      Although the reference law and normal tax baselines are generally
    similar, areas of difference include:
       Tax rates . The separate schedules applying to the various taxpaying
    units are included in the reference law baseline. Thus, corporate tax
    rates below the maximum statutory rate do not give rise to a tax
    expenditure. The normal tax baseline is similar, except that, by
    convention, it specifies the current maximum rate as the baseline for
    the corporate income tax. The lower tax rates applied to the first $10
    million of corporate income are thus regarded as a tax expenditure.
    Again, by convention, the Alternative Minimum Tax is treated as part of
    the baseline rate structure under both the reference and normal tax
    methods.
       Income subject to the tax . Income subject to tax is defined as gross
    income less the costs of earning that income. The Federal income tax
    defines gross income to include: (1) consideration received in the
    exchange of goods and services, including labor services or property;
    and (2) the taxpayer's share of gross or net income earned and/or
    reported by another entity (such as a partnership). Under the reference
    tax rules, therefore, gross income does not include gifts defined as
    receipts of money or property that are not consideration in an exchange
    nor does gross income include most transfer payments which can be
    thought of as gifts from the Government. \3\ The normal tax baseline
    also excludes gifts between individuals from gross income. Under the
    normal tax baseline, however, all cash transfer payments from the
    Government to private individuals are counted in gross income, and
    exemptions of such transfers from tax are identified as tax
    expenditures. The costs of earning income are generally deductible in
    determining taxable income under both the reference and normal tax
    baselines. \4\
    ---------------------------------------------------------------------------
      \3\ Gross income does, however, include transfer payments associated
    with past employment, such as Social Security benefits.
      \4\ In the case of individuals who hold ``passive'' equity interests
    in businesses, however, the pro-rata shares of sales and expense
    deductions reportable in a year are limited. A passive business activity
    is defined to be one in which the holder of the interest, usually a
    partnership interest, does not actively perform managerial or other
    participatory functions. The taxpayer may generally report no larger
    deductions for a year than will reduce taxable income from such
    activities to zero. Deductions in excess of the limitation may be taken
    in subsequent years, or when the interest is liquidated. In addition,
    costs of earning income may be limited under the Alternative Minimum
    Tax.
    ---------------------------------------------------------------------------
       Capital recovery . Under the reference tax law baseline no tax
    expenditures arise from accelerated depreciation. Under the normal tax
    baseline, the depreciation allowance for property is computed using
    estimates of economic depreciation. The latter represents a change in
    the calculation of the tax expenditure under normal law first made in
    the 2004 Budget. Appendix A provides further details on the new
    methodology and how it differs from the prior methodology.
       Treatment of foreign income . Both the normal and reference tax
    baselines allow a tax credit for foreign income taxes paid (up to the
    amount of U.S. income taxes that would otherwise be due), which prevents
    double taxation of income earned abroad. Under the normal tax method,
    however, controlled foreign corporations (CFCs) are not regarded as
    entities separate from their controlling U.S. shareholders. Thus, the
    deferral of tax on income received by CFCs is regarded as a tax
    expenditure under this method. In contrast, except for tax haven
    activities, the reference law baseline follows current law in treating
    CFCs as separate taxable entities whose income is not subject to U.S.
    tax until distributed to U.S. taxpayers. Under this baseline, deferral
    of tax on CFC income is not a tax expenditure because U.S. taxpayers
    generally are not taxed on accrued, but unrealized, income.
      In addition to these areas of difference, the Joint Committee on
    Taxation considers a somewhat broader set of tax expenditures under its
    normal tax baseline than is considered here.

    [[Page 298]]

                                     Table 19-3.  INCOME TAX EXPENDITURES RANKED BY TOTAL 2009-2013 PROJECTED REVENUE EFFECT
                                                                    (in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Provision                                                        2009           2009-13
    --------------------------------------------------------------------------------------------------------------------------------------------------------

         122     Exclusion of employer contributions for medical insurance premiums and medical care......................     168,460        1,051,950
          56     Deductibility of mortgage interest on owner-occupied homes...............................................     100,810          576,680
         138     401(k) plans.............................................................................................      51,000          325,000
         117     Deductibility of charitable contributions, other than education and health...............................      46,980          273,990
          73     Accelerated depreciation of machinery and equipment (normal tax method)..................................      44,120          270,040
          67     Capital gains (except agriculture, timber, iron ore, and coal)...........................................      55,940          257,230
         160     Deductibility of nonbusiness State and local taxes other than on owner-occupied homes....................      33,200          256,540
         137     Employer plans...........................................................................................      45,670          216,310
          69     Step-up basis of capital gains at death..................................................................      36,750          197,792
          59     Capital gains exclusion on home sales....................................................................      34,710          191,770
          49     Exclusion of interest on life insurance savings..........................................................      23,500          140,640
         159     Exclusion of interest on public purpose State and local bonds............................................      25,900          137,490
          57     Deductibility of State and local property tax on owner-occupied homes....................................      16,640          131,660
          77     Deduction for U.S. production activities.................................................................      15,330          119,270
         114     Child credit.............................................................................................      29,950          109,760
         152     Social Security benefits for retired workers.............................................................      18,640          106,090
         141     Keogh plans..............................................................................................      13,000           82,000
          60     Exclusion of net imputed rental income...................................................................       7,550           80,766
           5     Deferral of income from controlled foreign corporations (normal tax method)..............................      13,780           76,280
          63     Accelerated depreciation on rental housing (normal tax method)...........................................      11,760           72,760
         139     Individual Retirement Accounts...........................................................................      11,700           67,400
          61     Exception from passive loss rules for $25,000 of rental loss.............................................       8,840           47,910
         125     Deductibility of medical expenses........................................................................       5,920           43,910
         153     Social Security benefits for disabled....................................................................       5,810           33,220
         123     Self-employed medical insurance premiums.................................................................       5,170           33,100
         150     Earned income tax credit.................................................................................       5,440           33,080
          62     Credit for low-income housing investments................................................................       5,780           32,440
         127     Deductibility of charitable contributions (health).......................................................       5,300           30,900
         103     Deductibility of charitable contributions (education)....................................................       5,270           30,660
         133     Exclusion of workers' compensation benefits..............................................................       5,920           30,540
          75     Graduated corporation income tax rate (normal tax method)................................................       5,290           28,390
         155     Exclusion of veterans death benefits and disability compensation.........................................       3,950           22,680
           7     Expensing of research and experimentation expenditures (normal tax method)...............................       4,990           22,600
          92     HOPE tax credit..........................................................................................       3,640           21,560
           1     Exclusion of benefits and allowances to armed forces personnel...........................................       3,480           18,900
         154     Social Security benefits for dependents and survivors....................................................       3,240           17,320
          80     Exclusion of reimbursed employee parking expenses........................................................       3,070           16,550
         126     Exclusion of interest on hospital construction bonds.....................................................       3,040           16,090
           2     Exclusion of income earned abroad by U.S. citizens.......................................................       2,900           16,040
           4     Inventory property sales source rules exception..........................................................       2,410           14,210
          93     Lifetime Learning tax credit.............................................................................       2,340           13,800
         102     Parental personal exemption for students age 19 or over..................................................       1,760           12,250
         142     Premiums on group term life insurance....................................................................       2,250           12,130
         147     Additional deduction for the elderly.....................................................................       1,710           12,010
          70     Carryover basis of capital gains on gifts................................................................         800           11,510
          91     Exclusion of scholarship and fellowship income (normal tax method).......................................       2,050           11,280
          99     Exclusion of interest on bonds for private nonprofit educational facilities..............................       1,930           10,240
          97     State prepaid tuition plans..............................................................................       1,290            9,620
         145     Special ESOP rules.......................................................................................       1,700            9,300
          47     Exemption of credit union income.........................................................................       1,450            8,060
         115     Credit for child and dependent care expenses.............................................................       1,720            7,680
         124     Medical Savings Accounts / Health Savings Accounts.......................................................       1,480            7,680
          58     Deferral of income from installment sales................................................................       1,250            7,580
         109     Employer provided child care exclusion...................................................................       1,400            7,470
         161     Deferral of interest on U.S. savings bonds...............................................................       1,320            6,990
         113     Exclusion of employee meals and lodging (other than military)............................................       1,010            5,580
          54     Exclusion of interest on owner-occupied mortgage subsidy bonds...........................................         990            5,280
           3     Exclusion of certain allowances for Federal employees abroad.............................................         920            5,100
          15     New technology credit....................................................................................       1,000            5,010
          85     Exclusion of interest for airport, dock, and similar bonds...............................................         930            4,950
          87     Empowerment zones, Enterprise communities, and Renewal communities.......................................       1,760            4,860
          55     Exclusion of interest on rental housing bonds............................................................         900            4,800
          44     Capital gains treatment of certain income................................................................       1,030            4,740
          10     Excess of percentage over cost depletion, fuels..........................................................         950            4,430
         140     Low and moderate income savers credit....................................................................         900            4,390
         149     Deductibility of casualty losses.........................................................................         630            3,580

    [[Page 299]]

          95     Deductibility of student-loan interest...................................................................         830            3,520
          88     New markets tax credit...................................................................................         970            3,490
           8     Credit for increasing research activities................................................................       2,100            3,450
         129     Special Blue Cross/Blue Shield deduction.................................................................         650            3,340
         119     Exclusion of parsonage allowances........................................................................         580            3,200
          53     Exclusion of interest spread of financial institutions...................................................         480            2,960
         134     Exclusion of public assistance benefits (normal tax method)..............................................         510            2,770
         107     Work opportunity tax credit..............................................................................         600            2,710
          81     Exclusion for employer-provided transit passes...........................................................         470            2,620
          98     Exclusion of interest on student-loan bonds..............................................................         480            2,540
          38     Tax incentives for preservation of historic structures...................................................         440            2,460
         111     Assistance for adopted foster children...................................................................         420            2,430
          68     Capital gains exclusion of small corporation stock.......................................................         340            2,330
          34     Excess of percentage over cost depletion, nonfuel minerals...............................................         410            2,240
          35     Exclusion of interest on bonds for water, sewage, and hazardous waste facilities.........................         410            2,150
         118     Exclusion of certain foster care payments................................................................         420            2,100
          76     Exclusion of interest on small issue bonds...............................................................         390            2,080
         128     Tax credit for orphan drug research......................................................................         320            2,060
          74     Expensing of certain small investments (normal tax method)...............................................       3,400            1,930
         132     Exclusion of railroad retirement system benefits.........................................................         370            1,770
         131     Distributions from retirement plans for premiums for health and long-term care insurance.................         280            1,730
         143     Premiums on accident and disability insurance............................................................         320            1,700
          37     Expensing of multiperiod timber growing costs............................................................         310            1,620
           9     Expensing of exploration and development costs, fuels....................................................         460            1,550
         157     Exclusion of GI bill benefits............................................................................         280            1,530
         104     Exclusion of employer-provided educational assistance....................................................         690            1,460
         112     Adoption credit and exclusion............................................................................         400            1,330
           6     Deferred taxes for financial firms on certain income earned overseas.....................................       1,060            1,060
          51     Tax exemption of certain insurance companies owned by tax-exempt organizations...........................         190            1,010
         156     Exclusion of veterans pensions...........................................................................         180              990
         136     Exclusion of military disability pensions................................................................         130              940
          22     Credit for investment in clean coal facilities...........................................................          80              925
          13     Capital gains treatment of royalties on coal.............................................................         190              870
          36     Capital gains treatment of certain timber income.........................................................         190              870
         100     Credit for holders of zone academy bonds.................................................................         170              810
          41     Expensing of certain capital outlays.....................................................................         110              590
          19     Exclusion of utility conservation subsidies..............................................................         120              560
          24     Natural gas distribution pipelines treated as 15-year property...........................................          90              530
          23     Temporary 50% expensing for equipment used in the refining of liquid fuels...............................         240              470
          83     Exclusion of interest on bonds for Financing of Highway Projects and rail-truck transfer facilities......          90              440
          42     Expensing of certain multiperiod production costs........................................................          80              430
          64     Discharge of mortgage indebtedness.......................................................................         239              415
          45     Income averaging for farmers.............................................................................          80              400
          86     Exemption of certain mutuals' and cooperatives' income...................................................          70              360
          20     Credit for holding clean renewable energy bonds..........................................................          70              350
          94     Education Individual Retirement Accounts.................................................................          50              350
          71     Ordinary income treatment of loss from small business corporation stock sale.............................          50              290
          52     Small life insurance company deduction...................................................................          50              270
          66     Exceptions from imputed interest rules...................................................................          50              250
          50     Special alternative tax on small property and casualty insurance companies...............................          40              220
         121     Exclusion for benefits provided to volunteer EMS and firefighters........................................          78              219
         144     Income of trusts to finance supplementary unemployment benefits..........................................          30              210
          84     Investment credit for rehabilitation of structures (other than historic).................................          40              200
         135     Exclusion of special benefits for disabled coal miners...................................................          40              200
          65     Cancellation of indebtedness.............................................................................          60              190
          40     Exclusion of gain or loss on sale or exchange of certain brownfield sites................................          40              180
         146     Additional deduction for the blind.......................................................................          30              180
          11     Alternative fuel production credit.......................................................................          70              170
          14     Exclusion of interest on energy facility bonds...........................................................          30              150
         116     Credit for disabled access expenditures..................................................................          30              150
         158     Exclusion of interest on veterans housing bonds..........................................................          30              150
          12     Exception from passive loss limitation for working interests in oil and gas properties...................          20              130
          16     Alcohol fuel credits.....................................................................................          50              130
          26     Allowance of deduction for certain energy efficient commercial building property.........................          90              120
          46     Deferral of gain on sale of farm refiners................................................................          20              100
          79     Deferral of tax on shipping companies....................................................................          20              100
         101     Exclusion of interest on savings bonds redeemed to finance educational expenses..........................          20              100
         106     Discharge of student loan indebtedness...................................................................          20              100

    [[Page 300]]

          43     Treatment of loans forgiven for solvent farmers..........................................................          10               90
         108     Welfare-to-work tax credit...............................................................................          50               90
          17     Alcohol fuel credits.....................................................................................          30               80
          82     Tax credit for certain expenditures for maintaining railroad tracks......................................          40               80
          25     Amortize all geological and geophysical expenditures over 2 years........................................          30               70
          39     Expensing of capital costs with respect to complying with EPA sulfur regulations.........................          50               70
         130     Tax credit for health insurance purchased by certain displaced and retired individuals...................          10               70
          33     Expensing of exploration and development costs, nonfuel minerals.........................................          10               50
          90     Credit to holders of Gulf Tax Credit Bonds...............................................................          10               50
         148     Tax credit for the elderly and disabled..................................................................          10               50
         110     Employer-provided child care credit......................................................................          10               40
          27     Credit for construction of new energy efficient homes....................................................          20               30
          48     Excess bad debt reserves of financial institutions.......................................................          10               20
          30     30% credit for residential purchases/installations of solar and fuel cells...............................          10               10
          31     Credit for business installation of qualified fuel cells and stationary microturbine power plants........          50               10
          28     Credit for energy efficiency improvements to existing homes..............................................  ...............  ...............
          29     Credit for energy efficient appliances...................................................................  ...............  ...............
          32     Partial expensing for advanced mine safety equipment.....................................................  ...............  ...............
          96     Deduction for higher education expenses..................................................................  ...............  ...............
         105     Special deduction for teacher expenses...................................................................  ...............  ...............
         120     Employee retention credit for employers affected by Hurricane Katrina, Rita, and Wilma...................  ...............  ...............
         151     Additional exemption for housing Hurricane Katrina displaced individuals.................................  ...............  ...............
          18     Tax credit and deduction for clean-fuel burning vehicles.................................................         130              -50
          89     Expensing of environmental remediation costs.............................................................         -40             -110
          78     Special rules for certain film and TV production.........................................................         -40             -280
          21     Deferral of gain from dispositions of transmission property to implement FERC restructuring policy.......         -60           -2,000
          72     Accelerated depreciation of buildings other than rental housing (normal tax method)......................      -4,140          -18,770
    --------------------------------------------------------------------------------------------------------------------------------------------------------

    [[Page 301]]

               Table 19-4.  PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR ACTIVITY IN CALENDAR YEAR 2007
                                                (in millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                                       2007  Present
                                                     Provision                                           Value  of
                                                                                                        Revenue Loss
    ----------------------------------------------------------------------------------------------------------------

           5     Deferral of income from controlled foreign corporations (normal tax method).........     11,460
           6     Deferred taxes for financial firms on income earned overseas........................      2,500
           7     Expensing of research and experimentation expenditures (normal tax method)..........      2,620
          18     Credit for holding clean renewable energy bonds.....................................        360
           9     Expensing of exploration and development costs--fuels...............................        220
          33     Expensing of exploration and development costs--nonfuels............................         10
          37     Expensing of multiperiod timber growing costs.......................................        190
          42     Expensing of certain multiperiod production costs--agriculture......................        150
          41     Expensing of certain capital outlays--agriculture...................................        200
          49     Deferral of income on life insurance and annuity contracts..........................     19,060
          63     Accelerated depreciation on rental housing..........................................     12,860
          72     Accelerated depreciation of buildings other than rental.............................      3,000
          73     Accelerated depreciation of machinery and equipment.................................     39,040
          74     Expensing of certain small investments (normal tax method)..........................        680
          79     Deferral of tax on shipping companies...............................................         20
         100     Credit for holders of zone academy bonds............................................        160
          62     Credit for low-income housing investments...........................................      5,630
          97     Deferral for state prepaid tuition plans............................................      7,000
         137     Exclusion of pension contributions--employer plans..................................     74,120
         138     Exclusion of 401(k) contributions...................................................    121,000
         139     Exclusion of IRA contributions and earnings.........................................      4,300
         139     Exclusion of Roth earnings and distributions........................................      9,200
         139     Exclusion of non-deductible IRA earnings............................................        480
         141     Exclusion of contributions and earnings for Keogh plans.............................      8,600
         159     Exclusion of interest on public-purpose bonds.......................................     19,930
                 Exclusion of interest on non-public purpose bonds...................................      6,980
         161     Deferral of interest on U.S. savings bonds..........................................        320
    ----------------------------------------------------------------------------------------------------------------

                      Double Taxation of Corporate Profits

      In a gradual transition to a more economically neutral tax system
    under which all income is taxed no more than once, the lower tax rates
    on dividends and capital gains on corporate equity under current law
    have not been considered tax preferences since the 2005 Budget. Thus,
    the difference between ordinary tax rates and the lower tax rates on
    dividends, introduced by the Jobs and Growth Tax Relief Reconciliation
    Act of 2003 (JGTRRA), does not give rise to a tax expenditure.
    Similarly, the lower capital gains tax rates applied to gains realized
    from the disposition of corporate equity do not give rise to a tax
    expenditure. As a consequence, tax expenditure estimates for the lower
    tax rates on capital, step-up in basis, and the inside build-up on
    pension assets, 401k plans, IRAs, among others, are limited to capital
    gains from sources other than corporate equity. Appendix A provides a
    greater discussion of alternative baselines.

                      Descriptions of Income Tax Provisions

      Descriptions of the individual and corporate income tax expenditures
    reported on in this chapter follow. These descriptions relate to current
    law as of December 31, 2007, and do not reflect proposals made elsewhere
    in the Budget. Legislation enacted in 2007, such as the Small Business
    and Work Opportunity Tax Act of 2007 and the Mortgage Forgiveness Debt
    Relief Act of 2007, expanded the scope of a number of provisions.
      Provisions extended or expanded by the Small Business and Work
    Opportunity Tax Act include:
        enhanced and extended expensing
        enhanced and extended expensing for property used in highly
              damaged Gulf Opportunity (GO) Zone areas
        eased tax-exempt qualified mortgage bond treatment for
              rehabilitating GO Zone residences
        eased low-income housing credit rules for buildings in the
              GO Zones
      Provisions in the Mortgage Forgiveness Debt Relief Act include:
        exclude discharges of principal residence acquisition
              indebtedness from gross income
        extension of deduction for private mortgage insurance as
              deductible qualified interest for three years
        exclusion from income for benefits provided to volunteer
              Emergency Medical Services (EMS) and firefighters
      Other changes also introduced in 2007 are not listed as they have
    small revenue consequences.
      Chapter 17 on Federal Receipts has more detailed descriptions of the
    provisions of these three bills.

    [[Page 302]]

                                National Defense

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

                              International Affairs

      2. Income earned abroad.--U.S. citizens who lived abroad, worked in
    the private sector, and satisfied a foreign residency requirement may
    exclude up to $80,000 in foreign earned income from U.S. taxes. In
    addition, if these taxpayers receive a specific allowance for foreign
    housing from their employers, then they may also exclude the value of
    that allowance. If they do not receive a specific allowance for housing
    expenses, they may deduct against their U.S. taxes that portion of such
    expenses that exceeds one-sixth the salary of a civil servant at grade
    GS-14, step 1 ($79,115 in 2007).
      3. Exclusion of certain allowances for Federal employees abroad.--U.S.
    Federal civilian employees and Peace Corps members who work outside the
    continental United States are allowed to exclude from U.S. taxable
    income certain special allowances they receive to compensate them for
    the relatively high costs associated with living overseas. The
    allowances supplement wage income and cover expenses like rent,
    education, and the cost of travel to and from the United States.
      4. Sales source rule exceptions.--The worldwide income of U.S. persons
    is taxable by the United States and a credit for foreign taxes paid is
    allowed. The amount of foreign taxes that can be credited is limited to
    the pre-credit U.S. tax on the foreign source income. The sales source
    rules for inventory property allow U.S. exporters to use more foreign
    tax credits by allowing the exporters to attribute a larger portion of
    their earnings abroad than would be the case if the allocation of
    earnings was based on actual economic activity.
      5. Income of U.S.-controlled foreign corporations.--Certain active
    income of foreign corporations controlled by U.S. shareholders is not
    subject to U.S. taxation when it is earned. The income becomes taxable
    only when the controlling U.S. shareholders receive dividends or other
    distributions from their foreign stockholding. Under the normal tax
    method, the currently attributable foreign source pre-tax income from
    such a controlling interest is considered to be subject to U.S.
    taxation, whether or not distributed. Thus, the normal tax method
    considers the amount of controlled foreign corporation income not yet
    distributed to a U.S. shareholder as tax-deferred income.
      6. Exceptions under subpart F for active financing income.--Financial
    firms can defer taxes on income earned overseas in an active business.
    Taxes on income earned through December 31, 2006 can be deferred.

                     General Science, Space, and Technology

      7. Expensing R&E expenditures.--Research and experimentation (R&E)
    projects can be viewed as investments because, if successful, their
    benefits accrue for several years. It is often difficult, however, to
    identify whether a specific R&E project is successful and, if
    successful, what its expected life will be. Under the normal tax method,
    the expensing of R&E expenditures is viewed as a tax expenditure. The
    baseline assumed for the normal tax method is that all R&E expenditures
    are successful and have an expected life of five years.
      8. R&E credit.--The research and experimentation (R&E) credit is 20
    percent of qualified research expenditures in excess of a base amount.
    The base amount is generally determined by multiplying a ``fixed-base
    percentage'' by the average amount of the company's gross receipts for
    the prior four years. The taxpayer's fixed base percentage generally is
    the ratio of its research expenses to gross receipts for 1984 through
    1988. Taxpayers may also elect an alternative incremental credit regime.
    Under the alternative incremental credit regime the taxpayer is assigned
    a three-tiered fixed-base percentage that is lower than the fixed-base
    percentage that would otherwise apply, and the credit rate is reduced
    (the rates range from 2.65 percent to 3.75 percent). Beginning in 2007,
    the rates for the alternative incremental credit increases to a range of
    3 percent to 5 percent. An alternative simplified credit is also allowed
    which is equal to 12 percent of qualified research expenses that exceed
    50 percent of the average qualified research expenses for the three
    preceding taxable years. A 20-percent credit with a separate threshold
    is provided for a taxpayer's payments to universities for basic
    research. A 20-percent ``flat'' credit with no threshold base amount is
    available for energy research expenditures paid to certain research
    consortia. The credit applies to research conducted before January 1,
    2008 and extends to research conducted in Puerto Rico and the U.S.
    possessions.

                                     Energy

      9. Exploration and development costs.--For successful investments in
    domestic oil and gas wells, intangible drilling costs (e.g., wages, the
    costs of using machinery for grading and drilling, the cost of
    unsalvageable materials used in constructing wells) may be expensed
    rather than amortized over the productive life of the property.
    Integrated oil companies may deduct only 70 percent of such costs and
    must amortize the remaining 30 percent over five years. The same rule
    applies to the exploration and development costs of surface stripping
    and the construction of shafts and tunnels for other fuel minerals.
      10. Percentage depletion.--Independent fuel mineral producers and
    royalty owners are generally allowed to take percentage depletion
    deductions rather than cost depletion on limited quantities of output.
    Under cost depletion, outlays are deducted over the productive life of
    the property based on the fraction of the resource extracted. Under
    percentage depletion, taxpayers deduct a percentage of gross income from
    mineral production at rates of 22 percent for uranium; 15 percent for
    oil, gas and oil shale; and 10 percent for coal. The

    [[Page 303]]

    deduction is limited to 50 percent of net income from the property,
    except for oil and gas where the deduction can be 100 percent of net
    property income. Production from geothermal deposits is eligible for
    percentage depletion at 65 percent of net income, but with no limit on
    output and no limitation with respect to qualified producers. Unlike
    depreciation or cost depletion, percentage depletion deductions can
    exceed the cost of the investment.
      11. Alternative fuel production credit.--A credit of $3 per oil-
    equivalent barrel of production (in 1979 dollars) is provided for gas
    produced from biomass and liquid, gaseous, or solid synthetic fuels
    produced from coal. The credit is generally available if the price of
    oil stays below $29.50 (in 1979 dollars). The credit applies only to
    fuel (1) produced at a facility placed in service before July 1, 1998,
    and (2) sold before January 1, 2008. A credit is also available for the
    production of coke or coke gas from a qualified facility. Qualified
    facilities must have been placed in service before January 1, 1993, or
    after June 30, 1998, and before January 1, 2010.
      12. Oil and gas exception to passive loss limitation.--Owners of
    working interests in oil and gas properties are exempt from the
    ``passive income'' limitations. As a result, the working interest-
    holder, who manages on behalf of himself and all other owners the
    development of wells and incurs all the costs of their operation, may
    aggregate negative taxable income from such interests with his income
    from all other sources.
      13. Capital gains treatment of royalties on coal.--Sales of certain
    coal under royalty contracts can be treated as capital gains rather than
    ordinary income.
      14. Energy facility bonds.--Interest earned on State and local bonds
    used to finance construction of certain energy facilities is taxexempt.
    These bonds are generally subject to the State private-activity bond
    annual volume cap.
      15. New technology, refined coal, and Indian coal credits.--A credit
    is provided equal to 10 percent of the basis of solar energy property
    (30 percent for purchases beginning in 2006 through 2008) and 10 percent
    of the basis of geothermal energy property placed in service during the
    taxable year. A credit is also available for certain electricity
    produced from wind energy, biomass, geothermal energy, solar energy,
    small irrigation power, municipal solid waste, or qualified hydropower
    and sold to an unrelated party. The credit rate in 2007 is 2.0 cents per
    kilowatt hour (1.0 cents per kilowatt hour for open-loop biomass, small
    irrigation power, municipal solid waste and qualified hydropower) and
    the rate is indexed in subsequent years. Another credit is available for
    refined coal. The credit rate in 2007 is $5.877 per ton and the rate is
    indexed in subsequent years. An additional credit is available for the
    production of Indian coal. The value of the credit is $1.544 per ton in
    2007 and indexed for inflation in subsequent years.
      16. Alcohol fuel credits.--An income tax credit is provided for
    ethanol that is derived from renewable sources and used as fuel. The
    credit equals 51 cents per gallon through 2010. In lieu of the alcohol
    mixture credit, the taxpayer may claim a refundable excise tax credit.
    In addition, small ethanol producers are eligible for a separate 10
    cents per gallon credit.
      17. Bio-Diesel tax credit.--An income tax credit of $0.50, similar to
    Ethanol benefits, is available for each gallon of biodiesel used or
    sold. Biodiesel derived from virgin sources (agri-biodiesel) receives an
    increased credit of $1.00 per gallon. The Energy Tax Incentives Act of
    2005 extends the income tax credit, excise tax credit, and payment
    provisions through December 31, 2008 and adds a credit for small agri-
    biodiesel producers. The conference agreement also creates a similar
    income tax credit, excise tax credit and payment system for renewable
    diesel, however there is no credit for small producers of renewable
    diesel. Renewable diesel means diesel fuel derived form biomass using
    thermal depolymerization process.
      18. Credit and deduction for clean-fuel vehicles and property and
    alternative motor vehicle credits.--A tax credit of 10 percent (not to
    exceed $4,000) is provided for purchasers of electric vehicles. The
    credit is reduced by 75 percent for vehicles placed in service in 2006
    and is not available for vehicles placed in service after December 31,
    2006. No deduction is available to taxpayers for vehicles placed in
    service after December 31, 2005. The deduction for clean-fuel property
    is available for costs incurred before January 1, 2007. A taxpayer may
    claim a 30 percent credit for the cost of installing clean-fuel vehicle
    refueling property for property placed in service after December 31,
    2005 and before January 1, 2008. The taxpayer may not claim deductions
    with respect to property for which the credit is claimed. A tax credit
    is also available for the purchase of hybrid vehicles, fuel cell
    vehicles, alternative fuel vehicles and advanced lean burn vehicles. The
    provision applies to vehicles placed in service after December 31, 2005,
    in the case of qualified fuel cell motor vehicles, before January 1,
    2015; in the case of qualified hybrid motor vehicles that are
    automobiles and light trucks and in the case of advanced lean-burn
    technology vehicles, before January 1, 2011; in the case of qualified
    hybrid motor vehicles that are medium and heavy trucks, before January
    1, 2010; and in the case of qualified alternative fuel motor vehicles,
    before January 1, 2011. The credit ranges from $250 to $40,000 per
    vehicle depending upon the vehicle's energy efficiency, weight and other
    characteristics. The number of hybrid and lean burn vehicles eligible
    for the credit phases out when a manufacturer has sold 60,000 vehicles.
      19. Exclusion of utility conservation subsidies.--Non-business
    customers can exclude from gross income subsidies received from public
    utilities for expenditures on energy conservation measures.
      20. Credit to holders of clean renewable energy bonds.--This provision
    provides for up to $1.2 billion in aggregate issuance of Clean Renewable
    Energy Bonds (CREBs) through December 31, 2008. Taxpayers

    [[Page 304]]

    holding CREBs on a credit allowance date are entitled to a tax credit in
    lieu of interest.
      21. Deferral of gain from dispositions of transmission property to
    implement FERC restructuring policy.--Utilities that sell their
    transmission assets to a FERC-approved independent transmission company
    are allowed a longer recognition period for their gains from sale.
    Rather than paying tax on any gain from the sale in the year that the
    sale is completed, utilities will have 8 years to pay the tax on any
    gain from the sale. The rule expires at the end of 2007.
      22. Credit for investment in clean coal facilities.--Three investment
    tax credits for clean coal facilities are available: a 15 percent and 20
    percent investment tax credit for clean coal facilities producing
    electricity; and a 20 percent credit for industrial gasification
    projects. Integrated gasification combined cycle (IGCC) projects get a
    20 percent investment tax credit and other advanced coal-based projects
    that produce electricity get a 15 percent credit. The Secretary of the
    Treasury may allocate up to $800 million for IGCC projects and up to
    $500 million for other advanced coal-based technologies and up to $350
    million for industrial gasification. These credits are effective for
    investments made after August 8, 2005.
      23. Temporary 50 percent expensing for equipment used in the refining
    of liquid fuels.--Taxpayers may expense 50 percent of the cost of
    refinery investments which increase the capacity of an existing refinery
    by at least 5 percent or increase the throughput of qualified fuels by
    at least 25 percent. Qualified fuels include oil from shale and tar
    sands. Investments must be placed in service before January 1, 2012.
      24. Natural gas distribution pipelines treated as 15-year property.--
    The depreciation period is shortened to 15 years for any gas
    distribution lines the original use of which occurred after April 11,
    2004 and before January 1, 2011. The provision does not apply to any
    property which the taxpayer or a related party had entered into a
    binding contract for the construction thereof or self-constructed on or
    before April 11, 2005.
      25. Amortize all geological and geophysical expenditures over 2
    years.--Geological and geophysical amounts incurred in connection with
    oil and gas exploration in the United States may be amortized over two
    years for non-integrated oil companies and seven years for certain major
    integrated oil companies. In the case of abandoned property, any
    remaining basis may no longer be recovered in the year of abandonment of
    a property as all basis is recovered over the two-year amortization
    period.
      26. Allowance of deduction for certain energy efficient commercial
    building property.--A deduction for energy efficient commercial
    buildings that reduce annual energy and power consumption by 50 percent
    compared to the American Society of Heating, Refrigerating, and Air
    Conditioning Engineers (ASHRAE) standard is allowed. The deduction
    generally is limited to $1.80 per square foot. The provision is
    effective for property placed in service after December 31, 2005 and
    prior to January 1, 2008.
      27. Credit for construction of new energy efficient homes.--A credit
    is available to eligible contractors for construction of a qualified new
    energy-efficient home. The maximum credit is $2,000. The credit applies
    to homes whose construction is substantially completed after December
    31, 2005 and which are purchased after December 31, 2005 and prior to
    January 1, 2009.
      28. Credit for energy efficiency improvements to existing homes.--A 10
    percent investment tax credit up to a maximum credit of $500 per
    dwelling is available for expenditures on insulation, exterior windows
    and doors that improve the energy efficiency of homes and meet certain
    standards. Credits for purchases of advanced main air circulating fans,
    natural gas, propane, or oil furnaces or hot water boilers, and other
    qualified energy efficient property are also available. Credit applies
    to property placed in service after December 31, 2005 and prior to
    January 1, 2009.
      29. Credit for energy efficient appliances.--Tax credits for the
    manufacture of efficient dishwashers, clothes washers, and refrigerators
    are available. Credits vary depending on the efficiency of the unit. The
    provision is effective for appliances manufactured in 2006 and 2007.
      30. Credit for residential purchases/installations of solar and fuel
    cell property.--A credit, equal to 30 percent of qualifying
    expenditures, for purchase for qualified photovoltaic property and solar
    water heating property is available. The maximum credit for each of
    these types of property is $2,000 per tax year. A 30 percent credit for
    the purchase of qualified fuel cell power plants up to $500 for each 0.5
    kilowatt of capacity is also allowed. The credit applies to property
    placed in service after December 31, 2005 and prior to January 1, 2009.
      31. Credit for business installation of qualified fuel cells and
    stationary microturbine power plants.--A 30 percent business energy
    credit for purchase of qualified fuel cell power plants for businesses
    (up to $500 for each 0.5 kilowatt of capacity) and a 10 percent credit
    for purchase of qualifying stationary microturbine power plants (up to a
    maximum of $200 for each kilowatt of capacity) are allowed. The credit
    applies to property placed in service prior to January 1, 2009.
      32. Expensing for advanced mine safety equipment.--The cost of
    qualified mine safety equipment may be expensed rather than recovered
    through depreciation (subject to certain limitations). Provision limited
    to property placed in service on or before December 31, 2008.

                        Natural Resources and Environment

      33. Exploration and development costs.--Certain capital outlays
    associated with exploration and development of nonfuel minerals may be
    expensed rather than depreciated over the life of the asset.

    [[Page 305]]

      34. Percentage depletion.--Most nonfuel mineral extractors may use
    percentage depletion rather than cost depletion, with percentage
    depletion rates ranging from 22 percent for sulfur to 5 percent for sand
    and gravel.
      35. Sewage, water, solid and hazardous waste facility bonds.--Interest
    earned on State and local bonds used to finance the construction of
    sewage, water, or hazardous waste facilities is tax-exempt. These bonds
    are generally subject to the State private-activity bond annual volume
    cap.
      36. Capital gains treatment of certain timber.--Certain timber sales
    can be treated as a capital gain rather than ordinary income.
      37. Expensing multi-period timber growing costs.--Most of the
    production costs of growing timber may be expensed rather than
    capitalized and deducted when the timber is sold. In most other
    industries, these costs are capitalized under the uniform capitalization
    rules.
      38. Historic preservation.--Expenditures to preserve and restore
    historic structures qualify for a 20-percent investment tax credit, but
    the depreciable basis must be reduced by the full amount of the credit
    taken.
      39. Expensing of capital costs with respect to complying with EPA
    sulfur regulations.--Small refiners are allowed to deduct 75 percent of
    qualified capital costs incurred by the taxpayer during the taxable
    year.
      40. Exclusion of gain or loss on sale or exchange of certain
    brownfield sites.--In general, an organization that is otherwise exempt
    from federal income tax is taxed on income from any trade or business
    regularly carried on by the organization that is not substantially
    related to the organization's exempt purpose. The AJCA of 2004 created a
    special exclusion from unrelated business taxable income of the gain or
    loss from the sale or exchange of certain qualifying brownfield
    properties. The exclusion applies regardless of whether the property is
    debt-financed. In order to qualify, a minimum amount of remediation
    expenditures must be incurred by the organization.

                                   Agriculture

      41. Expensing certain capital outlays.--Farmers, except for certain
    agricultural corporations and partnerships, are allowed to expense
    certain expenditures for feed and fertilizer, as well as for soil and
    water conservation measures. Expensing is allowed, even though these
    expenditures are for inventories held beyond the end of the year, or for
    capital improvements that would otherwise be capitalized.
      42. Expensing multi-period livestock and crop production costs.--The
    production of livestock and crops with a production period of less than
    two years is exempt from the uniform cost capitalization rules. Farmers
    establishing orchards, constructing farm facilities for their own use,
    or producing any goods for sale with a production period of two years or
    more may elect not to capitalize costs. If they do, they must apply
    straight-line depreciation to all depreciable property they use in
    farming.
      43. Loans forgiven solvent farmers.--Farmers are forgiven the tax
    liability on certain forgiven debt. Normally, debtors must include the
    amount of loan forgiveness as income or reduce their recoverable basis
    in the property to which the loan relates. If the debtor elects to
    reduce basis and the amount of forgiveness exceeds the basis in the
    property, the excess forgiveness is taxable. For insolvent (bankrupt)
    debtors, however, the amount of loan forgiveness reduces carryover
    losses, then unused credits, and then basis; any remainder of the
    forgiven debt is excluded from tax. Farmers with forgiven debt are
    considered insolvent for tax purposes, and thus qualify for income tax
    forgiveness.
      44. Capital gains treatment of certain income.--Certain agricultural
    income, such as unharvested crops, can be treated as capital gains
    rather than ordinary income.
      45. Income averaging for farmers.--Taxpayers can lower their tax
    liability by averaging, over the prior three-year period, their taxable
    income from farming and fishing.
      46. Deferral of gain on sales of farm refiners.--A taxpayer who sells
    stock in a farm refiner to a farmers' cooperative can defer recognition
    of gain if the taxpayer reinvests the proceeds in qualified replacement
    property.

                              Commerce and Housing

      This category includes a number of tax expenditure provisions that
    also affect economic activity in other functional categories. For
    example, provisions related to investment, such as accelerated
    depreciation, could be classified under the energy, natural resources
    and environment, agriculture, or transportation categories.
      47. Credit union income.--The earnings of credit unions not
    distributed to members as interest or dividends are exempt from income
    tax.
      48. Bad debt reserves.--Small (less than $500 million in assets)
    commercial banks, mutual savings banks, and savings and loan
    associations may deduct additions to bad debt reserves in excess of
    actually experienced losses.
      49. Deferral of income on life insurance and annuity contracts.--
    Favorable tax treatment is provided for investment income within
    qualified life insurance and annuity contracts. Investment income earned
    on qualified life insurance contracts held until death is permanently
    exempt from income tax. Investment income distributed prior to the death
    of the insured is tax-deferred, if not tax-exempt. Investment income
    earned on annuities is treated less favorably than income earned on life
    insurance contracts, but it benefits from tax deferral without annual
    contribution or income limits generally applicable to other tax-favored
    retirement income plans.
      50. Small property and casualty insurance companies.--For taxable
    years beginning before January 1, 2004, insurance companies that were
    not life insur

    [[Page 306]]

    ance companies and which had annual net premiums of less than $350,000
    were exempt from tax; those with $350,000 to $1.2 million of annual net
    premiums could elect to pay tax only on the income earned by their
    taxable investment portfolio. For taxable years beginning after December
    31, 2003, stock non-life insurance companies are generally exempt from
    tax if their gross receipts for the taxable year do not exceed $600,00
    and more than 50 percent of such gross receipts consists of premiums.
    Mutual non-life insurance companies are generally tax-exempt if their
    annual gross receipts do not exceed $150,000 and more than 35 percent of
    gross receipts consist of premiums. Also, for taxable years beginning
    after December 31, 2003, non-life insurance companies with no more than
    $1.2 million of annual net premiums may elect to pay tax only on their
    taxable investment income.
      51. Insurance companies owned by exempt organizations.--Generally, the
    income generated by life and property and casualty insurance companies
    is subject to tax, albeit by special rules. Insurance operations
    conducted by such exempt organizations as fraternal societies and
    voluntary employee benefit associations, however, are exempt from tax.
      52. Small life insurance company deduction.--Small life insurance
    companies (gross assets of less than $500 million) can deduct 60 percent
    of the first $3 million of otherwise taxable income. The deduction
    phases out for otherwise taxable income between $3 million and $15
    million.
      53. Exclusion of interest spread of financial institutions.--Consumers
    and non-profit organizations pay for some deposit-linked services, such
    as check cashing, by accepting a below-market interest rate on their
    demand deposits. If they received a market rate of interest on those
    deposits and paid explicit fees for the associated services, they would
    pay taxes on the full market rate and (unlike businesses) could not
    deduct the fees. The government thus foregoes tax on the difference
    between the risk-free market interest rate and below-market interest
    rates on demand deposits, which under competitive conditions should
    equal the value added of deposit services.
      54. Mortgage housing bonds.--Interest earned on State and local bonds
    used to finance homes purchased by first-time, low-to-moderate-income
    buyers is tax-exempt. The amount of State and local tax-exempt bonds
    that can be issued to finance these and other private activity is
    limited. The combined volume cap for private activity bonds, including
    mortgage housing bonds, rental housing bonds, student loan bonds, and
    industrial development bonds was $62.50 per capita ($187.5 million
    minimum) per State in 2001, and $75 per capita ($225 million minimum) in
    2002. The Community Renewal Tax Relief Act of 2000 accelerated the
    scheduled increase in the state volume cap and indexed the cap for
    inflation, beginning in 2003. States may issue mortgage credit
    certificates (MCCs) in lieu of mortgage revenue bonds. MCCs entitle home
    buyers to income tax credits for a specified percentage of interest on
    qualified mortgages. The total amount of MCCs issued by a State cannot
    exceed 25 percent of its annual ceiling for mortgage-revenue bonds.
      55. Rental housing bonds.--Interest earned on State and local
    government bonds used to finance multifamily rental housing projects is
    tax-exempt. At least 20 percent (15 percent in targeted areas) of the
    units must be reserved for families whose income does not exceed 50
    percent of the area's median income; or 40 percent for families with
    incomes of no more than 60 percent of the area median income. Other tax-
    exempt bonds for multifamily rental projects are generally issued with
    the requirement that all tenants must be low or moderate income
    families. Rental housing bonds are subject to the volume cap discussed
    in the mortgage housing bond section above.
      56. Interest on owner-occupied homes.--Owner-occupants of homes may
    deduct mortgage interest on their primary and secondary residences as
    itemized nonbusiness deductions. In general, the mortgage interest
    deduction is limited to interest on debt no greater than the owner's
    basis in the residence, and is also limited to no more than $1 million.
    Interest on up to $100,000 of other debt secured by a lien on a
    principal or second residence is also deductible, irrespective of the
    purpose of borrowing, provided the debt does not exceed the fair market
    value of the residence. Mortgage interest deductions on personal
    residences are tax expenditures because the value of owner-occupied
    housing services is not included in a taxpayer's taxable income.
      57. Taxes on owner-occupied homes.--Owner-occupants of homes may
    deduct property taxes on their primary and secondary residences even
    though they are not required to report the value of owner-occupied
    housing services as gross income.
      58. Installment sales.--Dealers in real and personal property (i.e.,
    sellers who regularly hold property for sale or resale) cannot defer
    taxable income from installment sales until the receipt of the loan
    repayment. Nondealers (i.e., sellers of real property used in their
    business) are required to pay interest on deferred taxes attributable to
    their total installment obligations in excess of $5 million. Only
    properties with sales prices exceeding $150,000 are includable in the
    total. The payment of a market rate of interest eliminates the benefit
    of the tax deferral. The tax exemption for nondealers with total
    installment obligations of less than $5 million is, therefore, a tax
    expenditure.
      59. Capital gains exclusion on home sales.--A homeowner can exclude
    from tax up to $500,000 ($250,000 for singles) of the capital gains from
    the sale of a principal residence. The exclusion may not be used more
    than once every two years.
      60. Imputed net rental income on owner-occupied housing.--The implicit
    rental value of home ownership, net of expenses such as mortgage
    interest and depreciation, is excluded from income. Appendix A provides
    a fuller explanation of this new addition to the tax expenditure budget.

    [[Page 307]]

      61. Passive loss real estate exemption.--In general, passive losses
    may not offset income from other sources. Losses up to $25,000
    attributable to certain rental real estate activity, however, are exempt
    from this rule.
      62. Low-income housing credit.--Taxpayers who invest in certain low-
    income housing are eligible for a tax credit. The credit rate is set so
    that the present value of the credit is equal to 70 percent for new
    construction and 30 percent for (1) housing receiving other Federal
    benefits (such as tax-exempt bond financing), or (2) substantially
    rehabilitated existing housing. The credit is allowed in equal amounts
    over 10 years. State agencies determine who receives the credit; States
    are limited in the amount of credit they may authorize annually. The
    Community Renewal Tax Relief Act of 2000 increased the per-resident
    limit to $1.50 in 2001 and to $1.75 in 2002 and indexed the limit for
    inflation, beginning in 2003. The Act also created a $2 million minimum
    annual cap for small States beginning in 2002; the cap is indexed for
    inflation, beginning in 2003.
      63. Accelerated depreciation of rental property.--The tax depreciation
    allowance provisions are part of the reference law rules, and thus do
    not give rise to tax expenditures under the reference method. Under the
    normal tax method, however, economic depreciation is assumed. This
    calculation is described in more detail in Appendix A.
      64. Discharge of mortgage indebtedness.--This provision excludes from
    the income of a taxpayer any discharge of indebtedness of a qualified
    principal residence. Provision sunsets on December 31, 2009.
      65. Cancellation of indebtedness.--Individuals are not required to
    report the cancellation of certain indebtedness as current income. If
    the canceled debt is not reported as current income, however, the basis
    of the underlying property must be reduced by the amount canceled.
      66. Imputed interest rules.--Holders (issuers) of debt instruments are
    generally required to report interest earned (paid) in the period it
    accrues, not when paid. In addition, the amount of interest accrued is
    determined by the actual price paid, not by the stated principal and
    interest stipulated in the instrument. In general, any debt associated
    with the sale of property worth less than $250,000 is excepted from the
    general interest accounting rules. This general $250,000 exception is
    not a tax expenditure under reference law but is under normal law.
    Exceptions above $250,000 are a tax expenditure under reference law;
    these exceptions include the following: (1) sales of personal residences
    worth more than $250,000, and (2) sales of farms and small businesses
    worth between $250,000 and $1 million.
      67. Capital gains (other than agriculture, timber, iron ore, and coal
    ).--Capital gains on assets held for more than 1 year are taxed at a
    lower rate than ordinary income. Under the revised reference law
    baseline used for the 2005 Budget, the lower rate on capital gains is
    considered a tax expenditure under the reference law method, but only
    for capital gains that have not been previously taxed under the
    corporate income tax. As discussed above, this treatment partially
    adjusts for the double tax on corporate income and is more consistent
    with a comprehensive income tax base.
      The Jobs Growth Tax Relief Reconciliation Act (JGTRRA) lowered the top
    tax rate on capital gains from 20 percent to 15 percent, which is
    effective through 2010. For taxpayers in the 15 percent or below
    ordinary tax bracket, JGTRRA lowered the tax rate on capital gains to 5
    percent (0 percent in 2008). These lower rates apply to assets held for
    more than one year.
      Previously, for assets acquired after December 31, 2000, the top
    capital gains tax rate for assets held for more than 5 years was 18
    percent. Since January 1, 2001, taxpayers may mark-to-market existing
    assets to start the 5-year holding period. Losses from the mark-to-
    market are not recognized. For assets held for more than 1 year by
    taxpayers in the 15-percent ordinary tax bracket, the top capital gains
    tax rate was 10 percent. After December 31, 2000, the top capital gains
    tax rate for assets held by these taxpayers for more than 5 years was 8
    percent.
      68. Capital gains exclusion for small business stock.--An exclusion of
    50 percent is provided for capital gains from qualified small business
    stock held by individuals for more than 5 years. A qualified small
    business is a corporation whose gross assets do not exceed $50 million
    as of the date of issuance of the stock.
      69. Step-up in basis of capital gains at death.--Capital gains on
    assets held at the owner's death are not subject to capital gains taxes.
    The cost basis of the appreciated assets is adjusted upward to the
    market value at the owner's date of death. After repeal of the estate
    tax for 2010 under the Economic Growth and Tax Relief Reconciliation Act
    (EGTRRA) of 2001, the basis for property acquired from a decedent will
    be the lesser of fair market value or the decedent's basis. Certain
    types of additions to basis will be allowed so that assets in most
    estates that are not currently subject to estate tax will not be subject
    to capital gains tax in the hands of the heirs.
      70. Carryover basis of capital gains on gifts.--When a gift is made,
    the donor's basis in the transferred property (the cost that was
    incurred when the transferred property was first acquired) carries-over
    to the donee. The carryover of the donor's basis allows a continued
    deferral of unrealized capital gains.
      71. Ordinary income treatment of losses from sale of small business
    corporate stock shares.--Up to $100,000 in losses from the sale of small
    business corporate stock (capitalization less than $1 million) may be
    treated as ordinary losses. Such losses would, thus, not be subject to
    the $3,000 annual capital loss write-off limit.

    [[Page 308]]

      72. Accelerated depreciation of non-rental-housing buildings.--The tax
    depreciation allowance provisions are part of the reference law rules,
    and thus do not give rise to tax expenditures under reference law. Under
    normal law, however, economic depreciation is assumed. This calculation
    is described in more detail in Appendix A.
      73. Accelerated depreciation of machinery and equipment.--The tax
    depreciation allowance provisions are part of the reference law rules,
    and thus do not give rise to tax expenditures under reference law. Under
    the normal tax baseline, this tax depreciation allowance is measured
    relative to economic depreciation. This calculation is described in more
    detail in Appendix A.
      74. Expensing of certain small investments.--As of 2003, under prior
    law, qualifying investments in tangible property up to $25,000 could
    have been expensed rather than depreciated over time. The amount
    eligible for expensing was decreased to the extent the taxpayer's
    qualifying investment during the year exceeded $200,000. For 2003,
    however, the expensing limit was temporarily increased to $100,000, the
    phase-out limit was temporarily increased to $400,000, and computer
    software became temporarily eligible for expensing treatment. For 2004
    through 2009, these higher limits are indexed for inflation, and
    computer software continues to be an eligible investment. In all years,
    the amount expensed cannot exceed the taxpayer's taxable income for the
    year. The prior rules will apply for taxable years beginning after 2009.
      75. Graduated corporation income tax rate schedule.--The corporate
    income tax schedule is graduated, with rates of 15 percent on the first
    $50,000 of taxable income, 25 percent on the next $25,000, and 34
    percent on the next $9.925 million. Compared with a flat 34-percent
    rate, the lower rates provide an $11,750 reduction in tax liability for
    corporations with taxable income of $75,000. This benefit is recaptured
    for corporations with taxable incomes exceeding $100,000 by a 5-percent
    additional tax on corporate incomes in excess of $100,000 but less than
    $335,000.
      The corporate tax rate is 35 percent on income over $10 million.
    Compared with a flat 35-percent tax rate, the 34-percent rate provides a
    $100,000 reduction in tax liability for corporations with taxable
    incomes of $10 million. This benefit is recaptured for corporations with
    taxable incomes exceeding $15 million by a 3-percent additional tax on
    income over $15 million but less than $18.33 million. Because the
    corporate rate schedule is part of reference tax law, it is not
    considered a tax expenditure under the reference method. A flat
    corporation income tax rate is taken as the baseline under the normal
    tax method; therefore the lower rate is considered a tax expenditure
    under this concept.
      76. Small issue industrial development bonds.--Interest earned on
    small issue industrial development bonds (IDBs) issued by State and
    local governments to finance manufacturing facilities is tax exempt.
    Depreciable property financed with small issue IDBs must be depreciated,
    however, using the straight-line method. The annual volume of small
    issue IDBs is subject to the unified volume cap discussed in the
    mortgage housing bond section above.
      77. Deduction for U.S. production activities.--This provision was
    introduced by the AJCA in 2004 and allows for a deduction equal to a
    portion of taxable income attributable to domestic production. For
    taxable years beginning in 2004, 2005, 2006, 2007, and 2008, the amount
    of the deduction is 5, 5, 5, 6, and 7 percent, respectively. For taxable
    years beginning after 2008, the amount of the deduction is 9 percent.
      78. Special rules for certain film and TV production.--Taxpayers may
    deduct up to $15 million ($15 million in certain distressed areas) per
    production expenditures in the year incurred. Excess expenditures may be
    deducted over three years using the straight line method. This provision
    was introduced by the AJCA enacted in 2004. Under prior law, production
    expenses were depreciated.

                                 Transportation

      79. Deferral of tax on U.S. shipping companies.--Certain companies
    that operate U.S. flag vessels can defer income taxes on that portion of
    their income used for shipping purposes, primarily construction,
    modernization and major repairs to ships, and repayment of loans to
    finance these investments. Once indefinite, the deferral has been
    limited to 25 years since January 1, 1987.
      80. Exclusion of employee parking expenses.--Employee parking expenses
    that are paid for by the employer or that are received in lieu of wages
    are excludable from the income of the employee. In 2007, the maximum
    amount of the parking exclusion is $215 (indexed) per month. The tax
    expenditure estimate does not include parking at facilities owned by the
    employer.
      81. Exclusion of employee transit pass expenses.--Transit passes,
    tokens, fare cards, and vanpool expenses paid for by an employer or
    provided in lieu of wages to defray an employee's commuting costs are
    excludable from the employee's income. In 2007, the maximum amount of
    the exclusion is $110 (indexed) per month.
      82. Tax credit for certain expenditures for maintaining railroad
    tracks.--Eligible taxpayers may claim a credit equal to the lesser of 50
    percent of maintenance expenditures and the product of $3,500 and the
    number of miles of track owned or leased.
      83. Exclusion of interest on bonds for Financing of Highway Projects
    and Rail-Truck Transfer Facilities.--This provision provides for $15
    billion of tax-exempt bond authority to finance qualified highway or
    surface freight transfer facilities. The authority to issue these bonds
    expires on December 31, 2015.

                       Community and Regional Development

      84. Rehabilitation of structures.--A 10-percent investment tax credit
    is available for the rehabilitation of buildings that are used for
    business or productive

    [[Page 309]]

    activities and that were erected before 1936 for other than residential
    purposes. The taxpayer's recoverable basis must be reduced by the amount
    of the credit.
      85. Airport, dock, and similar facility bonds.--Interest earned on
    State and local bonds issued to finance high-speed rail facilities and
    government-owned airports, docks, wharves, and sport and convention
    facilities is tax-exempt. These bonds are not subject to a volume cap.
      86. Exemption of income of mutuals and cooperatives.--The incomes of
    mutual and cooperative telephone and electric companies are exempt from
    tax if at least 85 percent of their revenues are derived from patron
    service charges.
      87. Empowerment zones and renewal communities.--Qualifying businesses
    in designated economically depressed areas can receive tax benefits such
    as an employer wage credit, increased expensing of investment in
    equipment, special tax-exempt financing, accelerated depreciation, and
    certain capital gains incentives. Empowerment zone and renewal community
    designations expire at the end of 2009. The Job Creation and Worker
    Assistance Act of 2002 expanded the existing provisions by adding the
    ``New York City Liberty Zone.'' In addition, the Working Families Tax
    Relief Act of 2004 extended the District of Columbia Enterprise Zone and
    the District of Columbia first time homebuyer credit by two years
    through 2007.
      The Gulf Opportunity Zone Act of 2005 added several provisions
    targeted to encourage the redevelopment of areas affected by hurricanes
    Katrina, Rita and Wilma, including some provisions that have already
    been listed elsewhere in this table. Gulf Opportunity Zone Act
    provisions not listed elsewhere include additional tax-exempt bond
    financing authority, accelerated depreciation of investment in both
    structures and equipment, partial expensing for certain demolition and
    clean-up costs, increased carryback of certain net operating losses,
    increased authority to allocate low-income housing tax credits and new
    markets tax credits within the affected areas and other provisions.
      88. New markets tax credit.--Taxpayers who make qualified equity
    investments in a community development entity (CDE), which then makes
    qualified investments in low-income communities, are eligible for a tax
    credit received over 7 years. The amount of the credit equals (1) 5
    percent in the year of purchase and the following 2 years, and (2) 6
    percent in the following 4 years. A CDE is any domestic firm the primary
    mission of which is to serve or provide investment capital for low-
    income communities/individuals; a CDE must be accountable to residents
    of low-income communities. The total equity investment available for the
    credit across all CDEs is $1.0 billion in 2001, $1.5 billion in 2002 and
    2003, $2.0 billion in 2004 and 2005, and $3.5 billion in 2006 and 2008.
    Credit authority is allocated to CDEs through a competitive application
    process.
      89. Expensing of environmental remediation costs.--Taxpayers who clean
    up certain hazardous substances at a qualified site may expense the
    clean-up costs, even though the expenses will generally increase the
    value of the property significantly or appreciably prolong the life of
    the property. The Working Families Tax Relief Act of 2004 extended this
    provision for two years, allowing remediation expenditures incurred
    before December 31, 2007 to be eligible for expensing.
      90. Credit to holders of Gulf Tax Credit Bonds.--Taxpayers that own
    Gulf Tax Credit bonds receive a non-refundable tax credit (at a rate set
    by the Treasury Department) rather than interest. The credit is included
    in gross income. The maximum amount that can be issued is $200 million
    in the case of Louisiana, $100 million in the case of Mississippi, and
    $50 million in the case of Alabama.

              Education, Training, Employment, and Social Services

      91. Scholarship and fellowship income.--Scholarships and fellowships
    are excluded from taxable income to the extent they pay for tuition and
    course-related expenses of the grantee. Similarly, tuition reductions
    for employees of educational institutions and their families are not
    included in taxable income. From an economic point of view, scholarships
    and fellowships are either gifts not conditioned on the performance of
    services, or they are rebates of educational costs. Thus, under the
    reference law method, this exclusion is not a tax expenditure because
    this method does not include either gifts or price reductions in a
    taxpayer's gross income. The exclusion, however, is considered a tax
    expenditure under the normal tax method, which includes gift-like
    transfers of Government funds in gross income (many scholarships are
    derived directly or indirectly from Government funding).
      92. HOPE tax credit.--The non-refundable HOPE tax credit allows a
    credit for 100 percent of an eligible student's first $1,100 of tuition
    and fees and 50 percent of the next $1,100 of tuition and fees. The
    credit only covers tuition and fees paid during the first two years of a
    student's post-secondary education. In 2007, the credit is phased out
    ratably for taxpayers with modified AGI between $94,000 and $114,000
    ($47,000 and $57,000 for singles), indexed.
      93. Lifetime Learning tax credit.--The non-refundable Lifetime
    Learning tax credit allows a credit for 20 percent of an eligible
    student's tuition and fees, up to a maximum credit per return is $2,000.
    The credit is phased out ratably for taxpayers with modified AGI between
    $90,000 and $110,000 ($47,000 and $57,000 for singles) (indexed
    beginning in 2002). The credit applies to both undergraduate and
    graduate students.
      94. Education Individual Retirement Accounts.--Contributions to an
    education IRA are not tax-deductible. Investment income earned by
    education IRAs is not taxed when earned, and investment income from an
    education IRA is tax-exempt when withdrawn to pay for a student's
    tuition and fees. The maximum contribution to an education IRA in 2007
    is $2000 per beneficiary. The maximum contribution is phased down

    [[Page 310]]

    ratably for taxpayers with modified AGI between $190,000 and $220,000
    ($95,000 and $110,000 for singles).
      95. Student-loan interest.--Taxpayers may claim an above-the-line
    deduction of up to $2,500 on interest paid on an education loan.
    Interest may only be deducted for the first five years in which interest
    payments are required. In 2007, the maximum deduction is phased down
    ratably for taxpayers with modified AGI between $110,000 and $140,000
    ($55,000 and $70,000 for singles), indexed.
      96. Deduction for Higher Education Expenses.--The maximum annual
    deduction for qualified higher education expenses is $4,000 in 2007 for
    taxpayers with adjusted gross income up to $130,000 on a joint return
    ($65,000 for singles). Taxpayers with adjusted gross income up to
    $160,000 on a joint return ($80,000 for singles) may deduct up to $2,000
    beginning in 2004. No deduction is allowed for expenses paid after
    December 31, 2007.
      97. State prepaid tuition plans.--Some States have adopted prepaid
    tuition plans and prepaid room and board plans, which allow persons to
    pay in advance for college expenses for designated beneficiaries. In
    2001 taxes on the earnings from these plans are paid by the
    beneficiaries and are deferred until tuition is actually paid. Beginning
    in 2002, investment income is not taxed when earned, and is tax-exempt
    when withdrawn to pay for qualified expenses.
      98. Student-loan bonds.--Interest earned on State and local bonds
    issued to finance student loans is tax-exempt. The volume of all such
    private activity bonds that each State may issue annually is limited.
      99. Bonds for private nonprofit educational institutions.--Interest
    earned on State and local Government bonds issued to finance the
    construction of facilities used by private nonprofit educational
    institutions is not taxed.
      100. Credit for holders of zone academy bonds.--Financial institutions
    that own zone academy bonds receive a non-refundable tax credit (at a
    rate set by the Treasury Department) rather than interest. The credit is
    included in gross income. Proceeds from zone academy bonds may only be
    used to renovate, but not construct, qualifying schools and for certain
    other school purposes. The total amount of zone academy bonds that may
    be issued is limited to $1.6 billion--$400 million in each year from
    1998 to 2007.
      101. U.S. savings bonds for education.--Interest earned on U.S.
    savings bonds issued after December 31, 1989 is tax-exempt if the bonds
    are transferred to an educational institution to pay for educational
    expenses. The tax exemption is phased out for taxpayers with AGI between
    $98,400 and $128,400 ($65,600 and $80,600 for singles) in 2007.
      102. Dependent students age 19 or older.--Taxpayers may claim personal
    exemptions for dependent children who are over the age of 18 or under
    the age of 24 and who (1) reside with the taxpayer for over half the
    year (with exceptions for temporary absences from home, such as for
    school attendance), (2) are full-time students, and (3) do not claim a
    personal exemption on their own tax returns.
      103. Charitable contributions to educational institutions.--Taxpayers
    may deduct contributions to nonprofit educational institutions.
    Taxpayers who donate capital assets to educational institutions can
    deduct the asset's current value without being taxed on any appreciation
    in value. An individual's total charitable contribution generally may
    not exceed 50 percent of adjusted gross income; a corporation's total
    charitable contributions generally may not exceed 10 percent of pre-tax
    income.
      104. Employer-provided educational assistance.--Employer-provided
    educational assistance is excluded from an employee's gross income even
    though the employer's costs for this assistance are a deductible
    business expense.
      105. Special deduction for teacher expenses.--Educators in both public
    and private elementary and secondary schools, who work at least 900
    hours during a school year as a teacher, instructor, counselor,
    principal or aide, may subtract up to $250 of qualified expenses when
    figuring their adjusted gross income (AGI). Provision expires at end of
    December 31, 2007.
      106. Discharge of student loan indebtedness.--Certain professionals
    who perform in underserved areas, and as a consequence get their student
    loans discharged, may not recognize such discharge as income.
      106. Work opportunity tax credit.-- Employers can claim a tax credit
    for qualified wages paid to individuals who begin work on or before
    August 31, 2011 and who are certified as members of various targeted
    groups. The amount of the credit that can be claimed is 25 percent of
    qualified wages for employment less than 400 hours and 40 percent for
    employment of 400 hours or more. The maximum credit per employee is
    generally $2,400 and can only be claimed on the first year of wages an
    individual earns from an employer. Employees must work at least 120
    hours to be eligible for the credit. Employers must reduce their
    deduction for wages paid by the amount of the credit claimed. The
    Katrina Emergency Tax Relief Act of 2005 expanded WOTC eligibility to
    Hurricane Katrina Employees, defined as persons whose principal places
    of abode on August 28, 2005 were in the core disaster area and who
    beginning on such date and through August 28, 2007 are hired for a
    position principally located in the core disaster area; and beginning on
    such date and through December 31, 2005, are hired for a position
    regardless of its location. The usual certification process rules are
    waived for Hurricane Katrina employees. The Tax Relief and Health Care
    Act of 2006 modified the Work opportunity tax credit by changing
    definitions of the Food Stamp and Ex-Convict target groups and adding
    persons eligible for the Welfare-to-work credit as a new WOTC target
    group with a $10,000 ceiling on qualified first year wages and a 50
    percent credit on qualified second year wages up to $10,000. The 2006

    [[Page 311]]

    Act extended credits to qualified employees of WOTC target groups as
    defined by the 2006 Act hired through December 31, 2007 . The Small
    Business and Work Opportunity Act of 2007 expanded WOTC's Vocational
    Rehabilitation and Zone target groups and made WOTC credits useable
    against both the regular and AMT taxes. Specifically the Act authorized
    enhanced WOTC credits of up to $4,800 for qualified Veterans with
    service connected disabilities and increased the qualifying age limit
    for the Enterprise Zone/Enterprise Community/Renewal Community target
    group from 18-24 to 18-39. The 2007 Act extended credits to qualified
    employees of WOTC target groups as defined by the 2007 Act hired through
    August 31, 2011.
      108. Welfare-to-work tax credit.--An employer is eligible for a tax
    credit on the first $20,000 of eligible wages paid to qualified long-
    term family assistance recipients during the first two years of
    employment. The credit is 35 percent of the first $10,000 of wages in
    the first year of employment and 50 percent of the first $10,000 of
    wages in the second year of employment. Employees must work at least 400
    hours to be eligible for the credit. The maximum credit is $8,500 per
    employee. The credit applies to wages paid to employees who are hired on
    or before December 31, 2006. The Tax Relief and Health Care Act of 2006
    modified the Welfare to Work credit by making qualified long-term family
    assistance recipients a WOTC target group after December 31, 2007.
      109. Employer-provided child care exclusion.--Up to $5,000 of
    employer-provided child care is excluded from an employee's gross income
    even though the employer's costs for the child care are a deductible
    business expense.
      110. Employer-provided child care credit.--The credit is equal to 25
    percent of qualified expenses for employee child care and 10 percent of
    qualified expenses for child care resource and referral services.
    Employer deductions for such expenses are reduced by the amount of the
    credit. The maximum total credit is limited to $150,000 per taxable
    year.
      111. Assistance for adopted foster children.--Taxpayers who adopt
    eligible children from the public foster care system can receive monthly
    payments for the children's significant and varied needs and a
    reimbursement of up to $2,000 for nonrecurring adoption expenses. These
    payments are excluded from gross income.
      112. Adoption credit and exclusion.--Taxpayers can receive a
    nonrefundable tax credit for qualified adoption expenses. The maximum
    credit is $11,390per child for 2007, and is phased-out ratably for
    taxpayers with modified AGI between $170,820 and $210,820. The credit
    amounts and the phase-out thresholds are indexed for inflation beginning
    in 2003. Unused credits may be carried forward and used during the five
    subsequent years. Taxpayers may also exclude qualified adoption expenses
    from income, subject to the same maximum amounts and phase-out as the
    credit. The same expenses cannot qualify for tax benefits under both
    programs; however, a taxpayer may use the benefits of the exclusion and
    the tax credit for different expenses. Stepchild adoptions are not
    eligible for either benefit.
      113. Employer-provided meals and lodging.--Employer-provided meals and
    lodging are excluded from an employee's gross income even though the
    employer's costs for these items are a deductible business expense.
      114. Child credit.--Taxpayers with children under age 17 can qualify
    for a $1,000 partially refundable per child credit. The maximum credit
    declines to $500 in 2011 and later years. The credit is phased out for
    taxpayers at the rate of $50 per $1,000 of modified AGI above $110,000
    ($75,000 for singles).
      115. Child and dependent care expenses.--Married couples with child
    and dependent care expenses may claim a tax credit when one spouse works
    full time and the other works at least part time or goes to school. The
    credit may also be claimed by single parents and by divorced or
    separated parents who have custody of children. In 2007, expenditures up
    to a maximum $3,000 for one dependent and $6,000 for two or more
    dependents are eligible for the credit. The credit is equal to 35
    percent of qualified expenditures for taxpayers with incomes of $15,000.
    The credit is reduced to a minimum of 20 percent by one percentage point
    for each $2,000 of income in excess of $15,000.
      116. Disabled access expenditure credit.--Small businesses (less than
    $1 million in gross receipts or fewer than 31 full-time employees) can
    claim a 50-percent credit for expenditures in excess of $250 to remove
    access barriers for disabled persons. The credit is limited to $5,000.
      117. Charitable contributions, other than education and health.--
    Taxpayers may deduct contributions to charitable, religious, and certain
    other nonprofit organizations. Taxpayers who donate capital assets to
    charitable organizations can deduct the assets' current value without
    being taxed on any appreciation in value. An individual's total
    charitable contribution generally may not exceed 50 percent of adjusted
    gross income; a corporation's total charitable contributions generally
    may not exceed 10 percent of pre-tax income.
      118. Foster care payments.--Foster parents provide a home and care for
    children who are wards of the State, under contract with the State.
    Compensation received for this service is excluded from the gross
    incomes of foster parents; the expenses they incur are nondeductible.
      119. Parsonage allowances.--The value of a minister's housing
    allowance and the rental value of parsonages are not included in a
    minister's taxable income.
      120. Provide an employee retention credit to employers affected by
    hurricane Katrina, Rita, and Wilma.--Businesses located within the Gulf
    Opportunity (GO) Zone on August 28, 2005 are eligible for a 40 percent
    tax credit on the first $6,000 in qualified wages paid to qualified
    employees employed within the GO Zone. Qualified wages are those paid by
    an eligible employer to an eligible employee on any day after Au

    [[Page 312]]

    gust 28, 2005 and before January 1, 2006 during the period beginning on
    the date on which the trade or business first became inoperable at the
    principal place of employment of the employee by reason of hurricane
    Katrina and ending on the date on which such trade or business resumed
    significant operations at such principal place of employment. Similar
    rules apply to the Rita GO Zone and the Wilma GO Zone with initial
    effective dates of September 23, 2005, and October 23, 2005,
    respectively.
      121. Exclusion for benefits provided to volunteer EMS and
    firefighters.--Certain benefits received by volunteer EMS and
    firefighters excluded from income. This provision sunsets on December
    31, 2010.

                                     Health

      122. Employer-paid medical insurance and expenses.--Employer-paid
    health insurance premiums and other medical expenses (including long-
    term care) are deducted as a business expense by employers, but they are
    not included in employee gross income. The self-employed also may deduct
    part of their family health insurance premiums.
      123. Self-employed medical insurance premiums.--Self-employed
    taxpayers may deduct a percentage of their family health insurance
    premiums. Taxpayers without self-employment income are not eligible for
    the special percentage deduction. The deductible percentage is 60
    percent in 2001, 70 percent in 2002, and 100 percent in 2003 and
    thereafter.
      124. Medical and health savings accounts.--Individual contributions to
    Archer Medical Savings Accounts (Archer MSAs) and Health Savings
    Accounts (HSAs) are allowed as a deduction in determining adjusted gross
    income whether or not the individual itemizes deductions. Employer
    contributions to Archer MSAs and HSAs are excluded from income and
    employment taxes. Archer MSAs and HSAs require that the individual have
    coverage by a qualifying high deductible health plan. Earnings from the
    accounts are excluded from taxable income. Distributions from the
    accounts used for medical expenses are not taxable. The rules for HSAs
    are generally more flexible than for Archer MSAs and the deductible
    contribution amounts are greater (in 2007, $2850 for taxpayers with
    individual coverage and $5,650 for taxpayers with family coverage).
    Thus, HSAs have largely replaced MSAs.
      125. Medical care expenses.--Personal expenditures for medical care
    (including the costs of prescription drugs) exceeding 7.5 percent of the
    taxpayer's adjusted gross income are deductible.
      126. Hospital construction bonds.--Interest earned on State and local
    government debt issued to finance hospital construction is excluded from
    income subject to tax.
      127. Charitable contributions to health institutions.--Individuals and
    corporations may deduct contributions to nonprofit health institutions.
    Tax expenditures resulting from the deductibility of contributions to
    other charitable institutions are listed under the education, training,
    employment, and social services function.
      128. Orphan drugs.--Drug firms can claim a tax credit of 50 percent of
    the costs for clinical testing required by the Food and Drug
    Administration for drugs that treat rare physical conditions or rare
    diseases.
      129. Blue Cross and Blue Shield.--Blue Cross and Blue Shield health
    insurance providers in existence on August 16, 1986 and certain other
    nonprofit health insurers are provided exceptions from otherwise
    applicable insurance company income tax accounting rules that
    substantially reduce (or even eliminate) their tax liabilities.
      130. Tax credit for health insurance purchased by certain displaced
    and retired individuals.--The Trade Act of 2002 provided a refundable
    tax credit of 65 percent for the purchase of health insurance coverage
    by individuals eligible for Trade Adjustment Assistance and certain PBGC
    pension recipients.
      131. Distributions for premiums for health and long-term care
    insurance.--This provision provides for tax-free distributions of up to
    $3,000 from governmental retirement plans for premiums for health and
    long term care premiums of public safety officers.

                                 Income Security

      132. Railroad retirement benefits.--Railroad retirement benefits are
    not generally subject to the income tax unless the recipient's gross
    income reaches a certain threshold. The threshold is discussed more
    fully under the Social Security function.
      133. Workers' compensation benefits.--Workers compensation provides
    payments to disabled workers. These benefits, although income to the
    recipients, are not subject to the income tax.
      134. Public assistance benefits.--Public assistance benefits are
    excluded from tax. The normal tax method considers cash transfers from
    the Government as taxable and, thus, treats the exclusion for public
    assistance benefits as a tax expenditure.
      135. Special benefits for disabled coal miners.--Disability payments
    to former coal miners out of the Black Lung Trust Fund, although income
    to the recipient, are not subject to the income tax.
      136. Military disability pensions.--Most of the military pension
    income received by current disabled retired veterans is excluded from
    their income subject to tax.
      137. Employer-provided pension contributions and earnings.--Certain
    employer contributions to pension plans are excluded from an employee's
    gross income even though the employer can deduct the contributions. In
    addition, the tax on the investment income earned by the pension plans
    is deferred until the money is withdrawn.
      138. 401(k) plans.--Individual taxpayers can make tax-preferred
    contributions to certain types of employer-provided 401(k) plans (and
    401(k)-type plans like 403(b) plans and the Federal government's Thrift
    Savings Plan). In 2007, an employee could exclude up to $15,500

    [[Page 313]]

    (indexed) of wages from AGI under a qualified arrangement with an
    employer's 401(k) plan. The tax on the investment income earned by
    401(k)-type plans is deferred until withdrawn.
      Employees are allowed to make after-tax contributions to 401(k) and
    401(k)-type plans. These contributions are not excluded from AGI, but
    the investment income of such after-tax contributions is not taxed when
    earned or withdrawn.
      139. Individual Retirement Accounts.--Individual taxpayers can take
    advantage of several different Individual Retirement Accounts (IRAs):
    deductible IRAs, non-deductible IRAs, and Roth IRAs. The annual
    contributions limit applies to the total of a taxpayer's deductible,
    non-deductible, and Roth IRAs contributions. The IRA contribution limit
    is $4,000 in 2006 and 2007, and $5,000 in 2008 (indexed thereafter) and
    allows taxpayers over age 50 to make additional ``catch-up''
    contributions of $1,000.
      Taxpayers whose AGI is below $83,000 ($62,000 for non-joint filers) in
    2007 can claim a deduction for IRA contributions. The IRA deduction is
    phased out for taxpayers with AGI between $83,000 to $103,000 in 2007.
    Taxpayers whose AGI is above the phase-out range can also claim a
    deduction for their IRA contributions depending on whether they (or
    their spouse) are an active participant in an employer-provided
    retirement plan. The tax on the investment income earned by 401(k)
    plans, non-deductible IRAs, and deductible IRAs is deferred until the
    money is withdrawn.
      Taxpayers with incomes below $166,000 ($114,000 for nonjoint filers)
    can make contributions to Roth IRAs. The maximum contribution to a Roth
    IRA is phased out for taxpayers with AGI between $156,000 and $166,000
    ($99,000 and $114,000 for singles). Investment income of a Roth IRA is
    not taxed when earned nor when withdrawn. Withdrawals from a Roth IRA
    are penalty free if: (1) the Roth IRA was opened at least 5 years before
    the withdrawal, and (2) the taxpayer either (a) is at least 591/2, (b)
    dies, (c) is disabled, or (d) purchases a first-time house.
      Taxpayers can contribute to a non-deductible IRA regardless of their
    income and whether they are an active participant in an employer-
    provided retirement plan. The tax on investment income earned by non-
    deductible IRAs is deferred until the money is withdrawn.
      140. Low and moderate-income savers' credit.--The Tax Code provides an
    additional incentive for lower-income taxpayers to save through a
    nonrefundable credit of up to 50 percent on IRA and other retirement
    contributions of up to $2,000. This credit is in addition to any
    deduction or exclusion. The credit is completely phased out by $52,000
    for joint filers and $26,000 for single filers.
      141. Keogh plans.--Self-employed individuals can make deductible
    contributions to their own retirement (Keogh) plans equal to 25 percent
    of their income, up to a maximum of $45,000 in 2007. Total plan
    contributions are limited to 25 percent of a firm's total wages. The tax
    on the investment income earned by Keogh plans is deferred until
    withdrawn.
      142. Employer-provided life insurance benefits.--Employer-provided
    life insurance benefits are excluded from an employee's gross income
    even though the employer's costs for the insurance are a deductible
    business expense, but only to the extent that the employer's share of
    the total costs does not exceed the cost of $50,000 of such insurance.
      143. Employer-provided accident and disability benefits.--Employer-
    provided accident and disability benefits are excluded from an
    employee's gross income even though the employer's costs for the
    benefits are a deductible business expense.
      144. Employer-provided supplementary unemployment benefits.--Employers
    may establish trusts to pay supplemental unemployment benefits to
    employees separated from employment. Interest payments to such trusts
    are exempt from taxation.
      145. Employer Stock Ownership Plan (ESOP) provisions.--ESOPs are a
    special type of tax-exempt employee benefit plan. Employer-paid
    contributions (the value of stock issued to the ESOP) are deductible by
    the employer as part of employee compensation costs. They are not
    included in the employees' gross income for tax purposes, however, until
    they are paid out as benefits. The following special income tax
    provisions for ESOPs are intended to increase ownership of corporations
    by their employees: (1) annual employer contributions are subject to
    less restrictive limitations; (2) ESOPs may borrow to purchase employer
    stock, guaranteed by their agreement with the employer that the debt
    will be serviced by his payment (deductible by him) of a portion of
    wages (excludable by the employees) to service the loan; (3) employees
    who sell appreciated company stock to the ESOP may defer any taxes due
    until they withdraw benefits; and (4) dividends paid to ESOP-held stock
    are deductible by the employer.
      146. Additional deduction for the blind.--Taxpayers who are blind may
    take an additional $1,300 standard deduction if single, or $1,050 if
    married in 2007.
      147. Additional deduction for the elderly.--Taxpayers who are 65 years
    or older may take an additional $1,300 standard deduction if single, or
    $1,050 if married in 2007.
      148. Tax credit for the elderly and disabled.--Individuals who are 65
    years of age or older, or who are permanently disabled, can take a tax
    credit equal to 15 percent of the sum of their earned and retirement
    income. Income is limited to no more than $5,000 for single individuals
    or married couples filing a joint return where only one spouse is 65
    years of age or older, and up to $7,500 for joint returns where both
    spouses are 65 years of age or older. These limits are reduced by one-
    half of the taxpayer's adjusted gross income over $7,500 for single
    individuals and $10,000 for married couples filing a joint return.

    [[Page 314]]

      149. Casualty losses.--Neither the purchase of property nor insurance
    premiums to protect its value are deductible as costs of earning income;
    therefore, reimbursement for insured loss of such property is not
    reportable as a part of gross income. Taxpayers, however, may deduct
    uninsured casualty and theft losses of more than $100 each, but only to
    the extent that total losses during the year exceed 10 percent of AGI.
      150. Earned income tax credit (EITC ).--The EITC may be claimed by
    low-income workers. For a family with one qualifying child, the credit
    is 34 percent of the first $8,080 of earned income in 2007. The credit
    is 40 percent of the first $11,790 of income for a family with two or
    more qualifying children. The credit is phased out beginning when the
    taxpayer's income exceeds $15,390 at the rate of 15.98 percent (21.06
    percent if two or more qualifying children are present). It is
    completely phased out when the taxpayer's modified adjusted gross income
    reaches $33,241 ($37,783 if two or more qualifying children are
    present), $35,241 (or $39,783) for those married.
      The credit may also be claimed by workers who do not have children
    living with them. Qualifying workers must be at least age 25 and may not
    be claimed as a dependent on another taxpayer's return. The credit is
    not available to workers age 65 or older. In 2007, the credit is 7.65
    percent of the first $5,590 of earned income. When the taxpayer's income
    exceeds $7,000 (9,000 if married), the credit is phased out at the rate
    of 7.65 percent. It is completely phased out at $12,590 ($14,590 for
    married) of modified adjusted gross income.
      For workers with or without children, the income levels at which the
    credit begins to phase-out and the maximum amounts of income on which
    the credit can be taken are adjusted for inflation. For married
    taxpayers filing a joint return, the base amount for the phase-out
    increases by $2,000 in 2006 through 2007, and $3,000 in 2008 (indexed
    thereafter).
      Earned income tax credits in excess of tax liabilities owed through
    the individual income tax system are refundable to individuals. This
    portion of the credit is shown as an outlay, while the amount that
    offsets tax liabilities is shown as a tax expenditure.
      151. Additional exemption for housing Hurricane Katrina displaced
    individuals.--This provision, introduced by the Katrina Emergency Tax
    Relief Act of 2005, provides an additional exemption of $500 for each
    Hurricane Katrina displaced individual for whom the taxpayer is
    providing shelter in his or her home, for a maximum additional exemption
    amount is $2,000.

                                 Social Security

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

                         Veterans Benefits and Services

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

                               General Government

      159. Public purpose State and local bonds.--Interest earned on State
    and local government bonds issued to finance public-purpose construction
    (e.g., schools, roads, sewers), equipment acquisition, and other public
    purposes is tax-exempt. Interest on bonds issued by Indian tribal
    governments for essential governmental purposes is also tax-exempt.
      160. Deductibility of certain nonbusiness State and local taxes.--
    Taxpayers may deduct State and local income taxes and property taxes
    even though these taxes primarily pay for services that, if purchased
    directly by taxpayers, would not be deductible. The deductibility of
    state and local sales taxes is set to expire at the end of 2007.

                                    Interest

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

    [[Page 315]]

                                   Appendix A

               TREASURY REVIEW OF THE TAX EXPENDITURE PRESENTATION

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

        DIFFERENCES BETWEEN OFFICIAL TAX EXPENDITURES AND THOSE BASED ON
                              COMPREHENSIVE INCOME

      As discussed in the main body of the chapter, tax expenditures are
    measured relative to normal law or reference law baselines that deviate
    from a comprehensive concept of income. Consequently, tax expenditures
    identified in the Budget can differ from those that would be identified
    under a comprehensive income tax baseline. This appendix compares major
    tax expenditures listed in the tax expenditure budget with those implied
    by a comprehensive income baseline.
      Current budgetary practice excludes from the list of tax expenditures
    those provisions that over-tax certain items of income because the
    original motivation for the analysis was to identify tax provisions that
    substitute for direct Government spending programs. However, this
    treatment gives a one-sided picture of how current law deviates from the
    baseline tax system. Relative to comprehensive income, a number of
    current tax provisions would be negative tax expenditures. Some of these
    also might be negative tax expenditures under the reference law or
    normal law baselines, expanded to admit negative tax expenditures.

    Major Tax Expenditures from the Traditional Budget under a Comprehensive
    Income Tax Baseline

      Comprehensive income, also called Haig-Simons income, is the real,
    inflation-adjusted accretion to one's economic power arising between two
    points in time, e.g., the beginning and ending of the year. It includes
    all accretions to wealth, whether or not realized, whether or not
    related to a market transaction, and whether a return to capital or
    labor. Inflation-adjusted capital gains (and losses) would be included
    in comprehensive income as they accrue. Business investment and casualty
    losses, including losses caused by depreciation, would be deducted.
    Implicit returns, such as those accruing to homeowners, also would be
    included in comprehensive income. A comprehensive income tax baseline
    would tax all sources of income once and only once. Thus, it would not
    levy a separate tax on corporate income leading to the double taxation
    of corporate profits.
       Comprehensive income is widely held to be the idealized base for an
    income tax even though it is not a perfectly defined concept. \5\ It
    suffers from conceptual ambiguities, some of which are discussed below,
    as well as practical problems in measurement and tax administration,
    e.g., how to implement a practicable deduction for economic depreciation
    or include in income the return earned on consumer durable goods such as
    housing, automobiles, and major appliances.
    ---------------------------------------------------------------------------
      \5\ See, e.g., David F. Bradford, Untangling the Income Tax
    (Cambridge, MA: Harvard University Press, 1986), pp. 15-31, and Richard
    Goode, ``The Economic Definition of Income'' in Joseph Pechman, ed.,
    Comprehensive Income Taxation (Washington, D.C.: The Brookings
    Institution, 1977), pp. 1-29.
    ---------------------------------------------------------------------------
      Furthermore, comprehensive income does not necessarily represent an
    ideal tax base; economic efficiency would be improved by deviating from
    comprehensive income as a tax base by reducing the tax on capital income
    to spur economic growth further or by subsidizing certain types of
    activities to correct for market failures. In addition, some elements of
    comprehensive income would be difficult or impossible to include in a
    tax system that is administrable.
      Classifying individual tax provisions relative to a comprehensive
    income baseline is difficult in part because of the ambiguity of the
    baseline. It also is difficult because of interactions between tax
    provisions (or their absence). These interactions mean that it may not
    always be appropriate to consider each provision in isolation.
    Nonetheless, Appendix Table 1 attempts such a classification for each of
    thirty illustrative large tax expenditures from the Budget.
       Table 1 classifies fifteen of the thirty items as tax expenditures
    under a comprehensive tax base (those in panel A). Most of these give
    preferential tax treatment to the return on certain types of savings or
    investment. They reflect the hybrid nature of the existing tax system
    and arise out of policy decisions to reduce the high tax rate on capital
    income that would otherwise arise. Even these relatively clear-cut
    items, how

    [[Page 316]]

    ever, can raise ambiguities in light of the absence of integration of
    the corporate and individual tax systems. For example, the reduction or
    elimination of individual level tax on income from investment in
    corporate equities might not be a tax expenditure relative to a
    comprehensive income baseline because the income is taxed first at the
    corporate level. A similar line of reasoning suggests that in the case
    of corporations, expensing \6\ of R&E or accelerated depreciation are
    not tax expenditures because they offset the corporate tax penalty.
    ---------------------------------------------------------------------------
      \6\ Expensing means immediate deduction. Proper income tax treatment
    requires capitalization followed by annual depreciation allowances
    reflecting the decay in value of the associated R&E spending.
    ---------------------------------------------------------------------------
      Because net rental income (gross rents minus depreciation, interest,
    taxes, and other expenses) would be in the homeowner's tax base under a
    comprehensive income tax baseline, this item would continue to be a tax
    expenditure relative to a comprehensive income baseline.
       The exclusion of worker's compensation benefits also would be a tax
    expenditure under comprehensive income tax principles; if the worker
    were to buy the insurance himself, he would be able to deduct the
    premium (since it represents a reduction in net worth) but should
    include in income the benefits when paid (since it represents an
    increase in net worth). \7\ If the employer pays the premium, the proper
    treatment would allow the employer a deduction and allow the employee to
    disregard the premium, but he would take any proceeds into income.
    Current law allows the employer to deduct the premium and excludes both
    the premium and the benefits from the employee's tax base.
    ---------------------------------------------------------------------------
      \7\ Suppose a taxpayer buys a one year term unemployment insurance
    policy at the beginning of the year. At that time he exchanges one
    asset, cash, for another, the insurance policy, so there is no change in
    net worth. But, at the end of the year, the policy expires and so is
    worthless, hence the taxpayer has a reduction in net worth equal to the
    premium. If the policy pays off during the year (i.e., the taxpayer has
    a work related injury), then the taxpayer would include the proceeds in
    income because they represent an increase in his net worth.
    ---------------------------------------------------------------------------
       Panel B displays items that probably are tax expenditures, but that
    raise additional issues. Current law, for instance, allows deductions
    for home mortgage interest and for property taxes on owner-occupied
    housing. The tax expenditure budget includes both of these provisions. A
    comprehensive tax base would allow both deductions, but it would also
    include imputed gross rental income. Current law does not include gross
    rental income, however, and so on this basis the home mortgage interest
    deduction and the deduction for property taxes on owner-occupied housing
    are properly tax expenditures under a comprehensive income tax base. \8\
    Indeed, the sum of the tax expenditure for these two deductions, plus
    the tax expenditure for the failure to include net rental income, sums
    to the tax expenditure for owner-occupied housing relative to a
    comprehensive income tax base.
    ---------------------------------------------------------------------------
      \8\ If there were no deduction for interest and property taxes, the
    tax expenditure base (i.e., the proper tax base minus the actual tax
    base) for owner-occupied housing would equal the homeowner's net rental
    income: gross rents minus(depreciation+interest+property taxes+other
    expenses). With the deduction for interest and property taxes, the tax
    expenditure base rises to gross rents minus (depreciation+other
    expenses).
    ---------------------------------------------------------------------------
      The deduction of nonbusiness State and local taxes other than on
    owner-occupied homes also is included in Panel B. The justification for
    this tax expenditure is that taxpayers may deduct State and local income
    taxes and property taxes even though these taxes primarily pay for
    services that, if purchased directly by taxpayers, would not be
    deductible. \9\ The difficulty is that this presumes that one's
    consumption of State and local services relates directly to the amount
    of State and local taxes paid. Such a presumption is difficult to
    sustain when taxes are levied inconsistently across taxpayers. \10\
    ---------------------------------------------------------------------------
      \9\ Fiscal Year 2003 Budget of the United States Government,
    Analytical Perspectives (Washington, D.C.: U.S. Government Printing
    Office, 2002) p. 127.
      \10\  Property taxes on owner-occupied housing also might serve as a
    proxy for the value of untaxed local services provided to homeowners. As
    such, they would be listed in the tax expenditure budget (as configured,
    i.e., building on the estimate for the failure to tax net rents) twice,
    once because current law does not tax rental income and again as a proxy
    for government services received. Property taxes on other consumer
    durables such as automobiles also might be included twice, owing to
    current law's exclusion from income of the associated service flow.
    ---------------------------------------------------------------------------
       In contrast to the view in the official Budget, however, the
    deduction for State and local taxes might not be a tax expenditure if
    the baseline were comprehensive income. Properly measured comprehensive
    income would include the value of State and local government benefits
    received, but would allow a deduction for State and local taxes paid.
    \11\ Thus, in this sense the deductibility of State and local taxes is
    consistent with comprehensive income tax principles; it should not be a
    tax expenditure. Nonetheless, imputing the value of State and local
    services is difficult and is not done under current law. Consequently, a
    deduction for taxes might sensibly be viewed as a (roughly measured) tax
    expenditure relative to a comprehensive income baseline. \12\
    ---------------------------------------------------------------------------
      \11\ U.S. Treasury, Blueprints for Basic Tax Reform (Washington, D.C.:
    U.S. Government Printing Office, 1977) p. 92.
      \12\ Under the normal tax method employed by the Joint Committee on
    Taxation, the value of some public assistance benefits provided by State
    Governments is included as a tax expenditure, thereby raising a
    potential double counting issue.
    ---------------------------------------------------------------------------
      The comprehensive income tax base is an objective measure of income.
    Traditionally, this measure is modified to reflect a subjective or
    social economic policy concern regarding the financial ability of an
    individual to pay tax. Absent this modification, provisions such as the
    personal exemption and the child tax credit would be treated as tax
    expenditures. However, once the definition of income is modified to
    reflect the ability of an individual to pay tax, then these and similar
    provisions are typically dropped from the list of tax expenditures.
      The step-up of basis at death lowers the tax on capital gains for
    those who inherit assets. From that perspective it would be a tax
    expenditure under a comprehensive income baseline. Nonetheless, there
    are ambiguities. Under a comprehensive income baseline, all inflation-
    adjusted gains would be taxed as accrued, so there would be no deferred
    unrealized gains on assets held at death.
       The partial exclusion of Social Security benefits from tax is also
    listed in panel B. To the extent Social Security is viewed as a pension,
    comprehensive income would include all contributions to Social Security
    retirement funds (payroll taxes) and tax accretions to value as they
    arise. \13\ Benefits paid out of contributions and the inside build-up
    in value, however, would not be

    [[Page 317]]

    included because the fall in the value of the individual's Social
    Security account would be offset by an increase in cash. In contrast, to
    the extent that Social Security is viewed as a transfer program, all
    contributions should be deductible from income and all benefits received
    should be included.
    ---------------------------------------------------------------------------
      \13\ As a practical matter, this may be impossible to do. Valuing
    claims subject to future contingencies is very difficult, as discussed
    in Bradford, Untangling the Income Tax, pp. 23-24.
    ---------------------------------------------------------------------------
      In contrast to any of these treatments, current law excludes one-half
    of Social Security contributions (employer-paid payroll taxes) from the
    base of the income tax, makes no attempt to tax accretions, and subjects
    some, but not all, benefits to taxation. The difference between current
    law's treatment of Social Security benefits and their treatment under a
    comprehensive income tax would qualify as a tax expenditure, but such a
    tax expenditure differs in concept from that included in the official
    Budget.
      The tax expenditures in the official Budget \14\ reflect exemptions
    for lower-income beneficiaries from the tax on 85 percent of Social
    Security benefits. \15\ Historically, payroll taxes paid by the employee
    represented no more than 15 percent of the expected value of the
    retirement benefits received by a lower-earning Social Security
    beneficiary. The 85 percent inclusion rate is intended to tax upon
    distribution the remaining amount of the retirement benefit payment--the
    portion arising from the payroll tax contributions made by employers and
    the implicit return on the employee and employer contributions. Thus,
    the tax expenditure conceived and measured in the current budget is not
    intended to capture the deviation from a comprehensive income baseline,
    which would additionally account for the deferral of tax on the
    employer's contributions and on the rate of return (less an inflation
    adjustment attributable to the employee's payroll tax contributions).
    Rather, it is intended to approximate the taxation of private pensions
    with employee contributions made from after-tax income. \16\ Hence, the
    tax expenditure budget understates the tax advantage accorded Social
    Security retirement benefits relative to a comprehensive income
    baseline.
    ---------------------------------------------------------------------------
      \14\ This includes the tax expenditure for benefits paid to workers,
    that for benefits paid to survivors and dependents, and that for
    benefits paid to dependents.
      \15\ The current Budget does not include as a tax expenditure the
    absence of income taxation on the employer's contributions (payroll
    taxes) to Social Security retirement at the time these contributions are
    made.
      \16\ Private pensions allow the employee to defer tax on all inside
    build-up. They also allow the employee to defer tax on contributions
    made by the employer, but not on contributions made directly by the
    employee. Applying these tax rules to Social Security would require the
    employee to include in his taxable income benefits paid out of inside
    build-up and out of the employer's contributions, but would allow the
    employee to exclude from his taxable income benefits paid out of his own
    contributions.
    ---------------------------------------------------------------------------
      The deduction for U.S. production activities also raises problems. To
    the extent it is viewed as a tax break for certain qualifying businesses
    (``manufacturers''), it would be a tax expenditure. In contrast, the
    deduction may prove to be so broad that it is available to most U.S.
    businesses, in which case it might not be seen as a tax expenditure.
    Rather, it would then represent a feature of the baseline tax rate
    system because the deduction is equivalent to a lower tax rate. In
    addition, it might not be a tax expenditure to the extent it is viewed
    as providing relief from the double tax on corporate profits.
       The next category (panel C) includes items whose treatment is less
    certain. The proper treatment of some of these items under a
    comprehensive income tax is ambiguous, while others may serve as proxies
    for provisions that would be a tax expenditure under a comprehensive
    income base. \17\
    ---------------------------------------------------------------------------
      \17\ See, for example, Goode, The Economic Definition of Income, pp.
    16-17, and Bradford, Untangling the Income Tax, pp. 19-21, and pp.30-31.
    ---------------------------------------------------------------------------
       For example, under existing law charitable contributions are
    deductible, and this deduction is considered on its face a tax
    expenditure in the current budget. \18\ The treatment of charitable
    donations, however, is ambiguous under a comprehensive income tax. If
    charitable contributions are a consumption item for the giver, then they
    are properly included in his taxable income and a deduction for
    contributions would be a tax expenditure under a comprehensive income
    tax base. In contrast, charitable contributions could represent a
    transfer of purchasing power from the giver to the receiver. As such,
    they would represent a reduction in the giver's net worth, not an item
    of consumption, and so properly would be deductible, implying that the
    charitable deduction is not a tax expenditure. At the same time,
    however, the value of the charitable benefits received is income to the
    recipient. Under current law, such income is not taxed. \19\
    ---------------------------------------------------------------------------
      \18\ The item also includes gifts of appreciated property, at least
    part of which represents a tax expenditure relative to an ideal income
    tax, even if one assumes that charitable donations are not consumption.
      \19\ If recipients tend to be in lower tax brackets, then the tax
    expenditure is smaller than when measured at the donor's tax rates.
    ---------------------------------------------------------------------------
      Medical expenditures may or may not be an element of income. These
    expenditures may be viewed as a reduction of net worth (e.g. cost of
    earning income) rather than as discretionary spending, and so are not
    really consumption and should be excluded from the tax base. However,
    expenditures for medical care may be considered as indistinguishable
    from other consumption items which are not excluded from a comprehensive
    income base.
      The exemption of full taxation of Social Security benefits paid to the
    disabled also raises issues. Social Security benefits for the disabled
    most closely resemble either Government transfers or insurance. From
    either perspective, a comprehensive income tax would require that the
    benefit be included in income and would allow a deduction for associated
    Social Security taxes. If viewed as insurance, an equivalent treatment
    would allow the taxpayer to include the premium (i.e., tax) and exclude
    the benefit. The deviation between either of these treatments and
    current law's treatment (described above) would be a tax expenditure
    under a comprehensive income baseline.
      In contrast, as described above, the tax expenditure budget displays
    the benefit of exempting low-income beneficiaries from the tax on 85
    percent of Social Security benefits. This measurement does not
    correspond closely to that required under a comprehensive income base.
    If the payment of the benefit is viewed as a transfer and divorced from
    the treatment of Social Security taxes, then the current tax expenditure
    understates the tax expenditure measured relative to a comprehensive

    [[Page 318]]

    income baseline. If the payment of the benefit is viewed as a transfer
    but the inability to deduct the employee's share of the Social Security
    tax is simultaneously considered, then it is less likely that the
    current tax expenditure overstates the tax expenditure relative to a
    comprehensive income baseline, and in some cases it may generate a
    negative tax expenditure. If the benefit is viewed as insurance and the
    tax as a premium, then the current tax expenditure overstates the tax
    expenditure relative to a comprehensive income baseline. Indeed, in the
    insurance model, the ability to exclude from tax only half of the
    premium might suggest that half of the payout should be taxed, so that
    the current tax rules impose a greater tax burden than that implied by a
    comprehensive income tax, i.e., a negative tax expenditure.
       The final category (panel D) includes items that would not be tax
    expenditures under a comprehensive income tax base. A tax based on
    comprehensive income would allow all losses to be deducted. Hence, the
    exception from the passive loss rules would not be a tax expenditure.
    \20\
    ---------------------------------------------------------------------------
      \20\ In contrast, the passive loss rules themselves, which restrict
    the deduction of losses, would be a negative tax expenditure when
    compared to a comprehensive tax base.

    Major Tax Expenditures under a Comprehensive Income Tax That Are
    Excluded from the Current Budget
       While most of the major tax expenditures in the current budget also
    would be tax expenditures under a comprehensive income base, there also
    are tax expenditures relative to a comprehensive income base that are
    not found on the existing tax expenditure list. These additional tax
    expenditures include the imputed return from certain consumer durables
    (e.g., automobiles), the difference between capital gains (and losses)
    as they accrue and capital gains as they are realized, private gifts and
    inheritances received, in-kind benefits from such Government programs as
    food-stamps, Medicaid, and public housing, the value of payouts from
    insurance policies, \21\ and benefits received from private charities.
    Under some theories of comprehensive income, the value of leisure and of
    household production of goods and services also would be included as tax
    expenditures. The personal exemption and standard deduction also might
    be considered tax expenditures, although they can be viewed differently,
    e.g., as elements of the basic tax rate schedule. The foreign tax credit
    also might be a tax expenditure since a deduction for foreign taxes,
    rather than a credit, might measure the income of U.S. residents
    properly.
    ---------------------------------------------------------------------------
      \21\ To the extent that premiums are deductible.

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

      The passive loss rules, restrictions on the deductibility of capital
    losses, and net operating loss (NOL) carry-forward requirements each
    would generate a negative tax expenditure, since a comprehensive income
    tax would allow full deductibility of losses.
       Human capital is generally considered a productive asset, and so its
    cost (e.g., certain education and training expenses, including perhaps
    the cost of college and professional school) should be amortizable under
    a comprehensive income tax, but it is not under current law. \22\
    ---------------------------------------------------------------------------
      \22\ Current law offers favorable treatment to some education costs,
    thereby creating (positive) tax expenditures. Current law allows
    expensing of that part of the cost of education and career training that
    is related to foregone earnings and this would be a tax expenditure
    under a comprehensive income baseline.
    ---------------------------------------------------------------------------
       Some restricted deductions under the individual AMT might be negative
    tax expenditures as might the phase-out of personal exemptions and of
    itemized deductions. The inability to deduct consumer interest also
    might be a negative tax expenditure, as an interest deduction may be
    required to measure income properly, as seen by the equivalence between
    borrowing and reduced lending. \23\ As discussed above, the current
    treatment of Social Security payments to the disabled also might
    represent a negative tax expenditure if viewed as payments on an
    insurance policy.
    ---------------------------------------------------------------------------
      \23\ See Bradford, Untangling the Income Tax, p. 41.
    ---------------------------------------------------------------------------
      Current tax law also fails to index for inflation interest receipts,
    capital gains, depreciation, and inventories. This failure leads to
    negative tax expenditures because comprehensive income would be indexed
    for inflation. Current law, however, also fails to index for inflation
    the deduction for interest payments and so this represents a (positive)
    tax expenditure.
       The issue of indexing also highlights that even if one wished to
    focus only on tax policies that are similar to spending programs,
    accounting for some negative tax expenditures may be required. For
    example, the net subsidy created by accelerated depreciation is properly
    measured by the difference between depreciation allowances specified
    under existing tax law and economic depreciation, which is indexed for
    inflation. \24\
    ---------------------------------------------------------------------------
      \24\ Accelerated depreciation can be described as the equivalent of an
    interest free loan from the Government to the taxpayer. Under federal
    budget accounting principles, such a loan would be treated as an outlay
    equal to the present value of the foregone interest.
    ---------------------------------------------------------------------------

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

      This section compares tax expenditures listed in the tax expenditure
    budget with those implied by a comprehensive consumption tax baseline.
    It first discusses some of the difficulties encountered in contemplating
    current tax provisions as part of a comprehensive consumption tax. Next,
    it assesses which of thirty large income tax expenditures would be tax
    expenditures under the consumption tax baseline, concluding that about
    half would remain under a consumption tax baseline. Most that fall off
    the list are incentives for saving and investment.
      The section next discusses some major differences between current law
    and a comprehensive consumption tax baseline. These differences include
    the consumption

    [[Page 319]]

    value of owner-occupied housing and other consumer durables, benefits
    from in-kind Government transfers, and gifts. It concludes with a
    discussion of negative tax expenditures relative to a consumption tax
    baseline.
    Ambiguities in Determining Tax Expenditures Relative to a Consumption
    Baseline
      A broad-based consumption tax can be viewed as a combination of an
    income tax plus a deduction for net saving. This follows from the
    definition of comprehensive income as consumption plus the change in net
    worth. It therefore seems straightforward to say that current law's
    deviations from a consumption base are the sum of (a) tax expenditures
    on an income base associated with exemptions and deductions for certain
    types of income, plus (b) overpayments of tax, or negative tax
    expenditures, to the extent net saving is not deductible from the tax
    base. In reality, however, the situation is more complicated. Some
    issues arise which are also problems in defining a comprehensive income
    tax, but seem more severe, or at least only more obvious, for the
    consumption tax baseline.
      It is not always clear how to treat certain items under a consumption
    tax. One problem discussed earlier in the context of the comprehensive
    income tax is determining whether a particular expenditure, such as
    spending on medical care and charitable donations, is an item of
    consumption.
      Also, there may be more than one way to treat various items under a
    consumption tax. For example, a consumption tax might ignore borrowing
    and lending by excluding from the borrower's tax base the proceeds from
    loans, denying the borrower a deduction for payments of interest and
    principal, and excluding interest and principal payments received from
    the lender's tax base. On the other hand, a consumption tax might
    include borrowing and lending in the tax base by requiring the borrower
    to add the proceeds from loans in his tax base, allowing the lender to
    deduct loans from his tax base, allowing the borrower to deduct payments
    of principal and interest, and requiring the lender to include receipt
    of principal and interest payments. In present value terms, the two
    approaches are equivalent for both the borrower and the lender; in
    particular both allow the tax base to measure consumption and both
    impose a zero effective tax rate on interest income. But which approach
    is taken obviously has different implications (at least on an annual
    flow basis) for the treatment of many important items of income and
    expense such as the home mortgage interest deduction. The classification
    below suggests that the deduction for home mortgage interest could well
    be a tax expenditure, but takes note of alternative views.
      Some exclusions of income are equivalent in many respects to
    consumption tax treatment that immediately deducts the cost of an
    investment while taxing the future cash flow. For example, exempting an
    investment's income (or yield) is equivalent to consumption tax
    treatment with respect to the normal rate of return on new investment;
    expensing generates a tax reduction that offsets in present value terms
    the tax paid on the investment's future normal returns. Because of this
    equivalence, in the context of consumption taxes, a yield exemption
    approach is sometimes called a tax prepayment approach. That is, tax is
    paid on an asset's purchase price rather than on the consumption flow
    that it generates.
      However, a yield exemption approach differs from a pure consumption
    tax with respect to the distribution of income and Government revenue.
    Pure profits in excess of the normal rate of return would be taxed under
    a consumption tax because pure profits are an element of cash flow;
    however, pure profits would not be taxed under a yield exemption tax
    system. The question arises whether an exemption of certain kinds of
    investment income, and certain investment tax credits, should be
    regarded as the equivalent of consumption tax treatment. The
    classification that follows takes a fairly broad view of this
    equivalence and considers many tax provisions that reduce or eliminate
    the tax on capital income to be roughly consistent with a broad-based
    consumption tax.
      Considering provisions individually can be misleading. The hybrid
    character of the existing tax system reflects many provisions that might
    be good policy in the context of a consumption tax, but that generate
    inefficiencies because of the problem of the ``uneven playing field''
    when evaluated within the context of the existing tax rules. It is not
    clear how these should be classified. For example, many saving
    incentives are targeted to specific tax-favored sources of capital
    income. The inability to save on a similar tax-favored basis
    irrespective of the ultimate purpose to which the saving is applied
    potentially distorts economic choices in ways that would not occur under
    a broad-based consumption tax.
      In addition, provisions can interact even once an appropriate
    treatment is determined. For example, if financial flows are excluded
    from the tax base, then the deduction for home mortgage interest would
    be a tax expenditure except that current law generally taxes interest
    income. When combined with the mortgage interest deduction, this offsets
    the inclusion of the interest flow, consistent with consumption tax
    treatment.
      Capital gains would not be a part of a comprehensive consumption tax
    base. Proceeds from asset sales and sometimes borrowing would be part of
    the cash-flow tax base, but, for transactions between domestic investors
    at a flat tax rate, the effects of these transactions would cancel out
    in the economy as a whole. The classification below generally views
    available capital gains tax relief as consistent with a broad-based
    consumption tax because they lower tax rate on capital income is
    consistent with a consumption-based tax.
      Such considerations suggest that, as with an income tax, computing the
    current tax's deviations from ``the'' base of a consumption tax is
    difficult because deviations cannot always be uniquely determined,
    making it problematic to do a consistent accounting of the differences
    between the current tax base and a consumption tax

    [[Page 320]]

    base. Nonetheless, Appendix Table 2 attempts a classification based on
    the judgments outlined above.
    Treatment of Major Tax Expenditures under a Comprehensive Consumption
    Baseline
      As noted above, the major difference between a comprehensive
    consumption tax and a comprehensive income tax is in the treatment of
    saving, or in the taxation of capital income. Consequently, many current
    tax expenditures related to preferential taxation of capital income
    would not be tax expenditures under a consumption tax. However,
    preferential treatment of items of income that is unrelated to saving or
    investment incentives would remain tax expenditures under a consumption
    baseline. In addition, several official tax expenditures relating to
    items of income and expense are difficult to classify properly, while
    others may serve as proxies for properly measured tax expenditures.
      Appendix Table 2 shows thirty large tax expenditures from the Budget
    classified according to whether they would be considered a tax
    expenditure under a consumption tax. One of the thirty items clearly
    would be a tax expenditure (shown in panel A) under a consumption tax,
    while an additional six (those in panel B) probably would be tax
    expenditures.
      Exclusion of workers' compensation benefits allows an exclusion from
    income that is unrelated to investment, and so should be included in the
    base of a comprehensive consumption tax.
      In one respect the deductibility of home mortgage interest is a strong
    candidate for inclusion as a tax expenditure. A consumption tax would
    seek to tax the entire value of the flow of services from housing, and
    so would not allow a deduction for home mortgage interest. This would be
    the case regardless of whether the tax base included the annual flow of
    housing services, or instead used a tax-prepayment or yield exemption
    approach (discussed more completely below) to taxing housing services. A
    deduction for interest would be allowed under a consumption tax applied
    to both real and financial cash flows, but current law does not require
    the homeowner to take into income the proceeds of a home loan, nor does
    it allow a deduction for principal repayments.
       From another perspective, however, the home mortgage interest
    deduction would not be a tax expenditure under a consumption tax. Under
    a consumption tax, the interest income accruing to the mortgage lender
    generally would not be taxed (at least in present value terms). As
    interest income is subject to tax under current law, the homeowner's
    mortgage interest deduction could be viewed as counterbalancing the
    lender's inclusion, eliminating interest flows from the tax base, as
    would be appropriate under many types of consumption taxes. \25\
    ---------------------------------------------------------------------------
      \25\ One must guard against double counting here, however, to the
    extent that current law's general taxation of capital income is
    calculated elsewhere in the tax expenditure budget as a negative tax
    expenditure.
    ---------------------------------------------------------------------------
      The deductibility of property taxes on owner-occupied housing also is
    a strong candidate for inclusion as a tax expenditure under a
    consumption tax baseline, although there is a bit of ambiguity. Property
    taxes would be deducted under a consumption tax under which the base
    allowed expensing of the cost of the house and included the rental value
    of the house in the annual tax base. But, as discussed above in the
    income tax section, this deduction nonetheless is a strong candidate for
    inclusion as a tax expenditure because the current tax system does not
    impute the consumption value of housing services to the homeowner's tax
    base.
      Under a consumption tax based on the yield exemption or tax prepayment
    approach to housing, property taxes would not be deducted by the
    homeowner because the cash flows (positive and negative) related to the
    investment are simply ignored for tax purposes--they are outside the tax
    base. Their deduction under current law would represent a tax
    expenditure. As discussed below, current law's taxation of housing
    approximates a yield exemption approach; no deduction of the purchase
    price of the house, no tax on the house's service flow. Consequently,
    the deduction for property taxes probably would be a tax expenditure
    relative to a consumption base.
      As discussed in the section on comprehensive income, whether the
    deduction for State and local income taxes gives rise to a tax
    expenditure under a consumption tax depends on whether the services paid
    for with these taxes constitute consumption value to the taxpayer. If
    there is not a firm relationship between the taxes paid and the services
    received, then the deduction may not be viewed as a tax expenditure.
      Property taxes on assets other than housing would seem to be best
    thought of using the model discussed above for housing. These taxes
    typically are paid on assets, such as automobiles and boats, yielding a
    stream of services that current federal tax law fails to impute to
    income.
       The tax expenditures for Social Security benefits discussed in the
    section on comprehensive income measure a tax benefit relative to a
    baseline that is somewhere between a comprehensive income tax and a
    consumption tax. The properly measured tax expenditure relative to a
    consumption tax baseline would include only those Social Security
    benefits that are accorded treatment more favorable than that implied by
    a consumption tax, which would correspond to including 50 percent of
    Social Security benefits in the recipient's tax base. \26\ Thus, the
    existing tax expenditure is correct conceptually, but is not measured
    properly relative to a comprehensive income tax. A similar analysis
    would

    [[Page 321]]

    apply to the exclusion of Social Security benefits of dependents and
    retirees.
    ---------------------------------------------------------------------------
      \26\ The current tax expenditure estimates reflect exceptions for low-
    income taxpayers from the general rule that 85 percent of Social
    Security benefits are included in the recipient's tax base. The 85
    percent inclusion is intended as a simplified mechanism for taxing
    Social Security benefits as if the Social Security program were a
    private pension with employee contributions made from after-tax income.
    Under these tax rules, income earned on contributions made by both
    employers and employees benefits from tax deferral, but employer
    contributions also benefit because the employee may exclude them from
    his taxable income, while the employee's own contributions are included
    in his taxable income. These tax rules give the equivalent of
    consumption tax treatment, a zero effective tax rate on the return, to
    the extent that the original pension contributions are made by the
    employer, but give less generous treatment to the extent that the
    original contributions are made by the employee. Income earned on
    employee contributions is taxed at a low, but positive, effective tax
    rate. Based on historical calculations, the 85 percent inclusion
    reflects roughly the outcome of applying these tax rules to a lower-
    income earner when one-half of the contributions are from the employer
    and one-half from the employee.
    ---------------------------------------------------------------------------
      There is a strong case for viewing the child tax credit and the earned
    income tax credit as social welfare programs (transfers). As such, they
    would be tax expenditures relative to a consumption baseline. These
    credits could alternatively be viewed as relieving tax on
    ``nondiscretionary'' consumption, and so not properly considered a tax
    expenditure.
      The treatment of the items in panel C is less uncertain. Several of
    these items relate to the costs of medical care or to charitable
    contributions. As discussed in the previous section of the appendix,
    there is disagreement within the tax policy community over the extent to
    which medical care and charitable giving represent consumption items.
      There also is the issue of how to tax medical insurance premiums.
    Under current law, employees may exclude insurance premiums paid for by
    employers from their income. The self-employed also may exclude (via a
    deduction) medical insurance premiums from their taxable income. From
    some perspectives, these premiums should be included in the tax base
    because they represent consumption. Yet an alternative perspective would
    support excluding the premium from the tax base as long as the value of
    any medical services paid for by the insurance policy were included. But
    even from this alternative perspective, the official tax expenditure
    might continue to be a tax expenditure under a consumption tax baseline
    because current law excludes the value of medical services paid with
    insurance benefits from the employee's taxable income.
      Current law does not tax the annual rental value of owner-occupied
    housing. In contrast, the annual rental value of the housing would be
    taxed under a consumption tax. Hence, from one perspective, the
    exclusion of the net annual rental value of owner-occupied housing would
    be a tax expenditure relative to a consumption tax baseline.
      However, a consumption tax that included in its base the annual rental
    value of housing also would allow the homeowner a deduction for the
    price of the house in the year it was purchased; the investment in
    housing would be expensed. Current law fails to allow such a deduction,
    raising doubt about classifying as a tax expenditure the exclusion of
    net rental income from owner-occupied housing. Indeed, it is possible to
    interpret current law as applying the tax pre-payment or yield exemption
    method to housing, so it is not clear whether the failure to tax the
    rental income from housing represents a tax expenditure.
      The taxation of Social Security benefits for the disabled also is
    difficult to classify. As discussed in this appendix above, these
    benefits generally ought to be taxed because they represent purchasing
    power. However, the associated Social Security taxes ought to be fully
    deductible, but they are not. Hence the proper treatment is unclear.
    Moreover, if the insurance model is applied, the taxation of Social
    Security benefits might be a negative tax expenditure.
      The credit for low-income housing acts to lower the tax burden on
    qualified investment, and so from one perspective would not be a tax
    expenditure under a consumption tax baseline. However, in some cases the
    credit is too generous; it can give a negative tax on income from
    qualified investment rather than the zero tax called for under
    consumption tax principles. In addition, the credit is very narrowly
    targeted. Consequently, it could be considered a tax expenditure
    relative to a consumption tax baseline.
      The final panel (D) shows items that are not tax expenditures under a
    consumption base. Most of these relate to tax provisions that eliminate
    or reduce the tax on various types of capital income because a zero tax
    on capital income is consistent with consumption tax principles.
      The deduction for U.S. production activities is not classified as a
    tax expenditure. This reflects the view that it represents a widespread
    reduction in taxes on capital income or an offset to the corporate
    income tax. The exception from the passive loss rules probably would not
    be a tax expenditure because proper measurement of income, and hence of
    consumption, requires full deduction of losses.

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

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

    Negative Tax Expenditures

      Importantly, current law also deviates from a consumption tax norm in
    ways that increase, rather than decrease, tax liability. These
    provisions are called negative tax expenditures.
      A large item on this list would be the inclusion of capital income in
    the current individual income tax

    [[Page 322]]

    base, including the income earned on inside-build up in Social Security
    accounts. The revenue from the corporate income tax, or more generally a
    measure of the double tax on corporate profits, also would be a negative
    tax expenditure. Depreciation allowances, even if accelerated, would be
    a negative tax expenditure since consumption tax treatment generally
    requires expensing. Depending on the treatment of loans, the borrower's
    inability to deduct payments of principal and the lender's inability to
    deduct loans might be a negative tax expenditure. The passive loss rules
    and net operating loss carry-forward provisions also might generate
    negative tax expenditures, because the change in net worth requires a
    deduction for losses (consumption = income--the change in net worth).
    Human capital is a productive asset, and so its cost (e.g., certain
    education and training expenses, including perhaps costs of college and
    professional school) should be expensed, but it is not under current
    law. Certain restrictions under the individual Alternative Minimum Tax
    as well as the phase-out of personal exemptions and of itemized
    deductions also might be considered negative tax expenditures. Under
    some views, the current tax treatment of Social Security benefits paid
    to the disabled would be a negative tax expenditure.

                 REVISED ESTIMATES OF SELECTED TAX EXPENDITURES

    Accelerated Depreciation

      Under the reference tax law baseline no tax expenditures arise from
    accelerated depreciation. In the past, tax expenditure estimates of
    accelerated depreciation under the normal tax law baseline compared tax
    allowances based on the historic cost of an asset with allowances
    calculated using the straight-line method over relatively long recovery
    periods. Normal law allowances also were determined by the historical
    cost of the asset and so did not adjust for inflation, although such an
    adjustment is required when measuring economic depreciation, the age
    related fall in the real value of the asset.
       Beginning with the 2004 Budget, the tax expenditures for accelerated
    depreciation under the normal law concept have been recalculated using
    as a baseline depreciation rates and replacement cost indexes from the
    National Income and Product Accounts. \27\ The revised estimates are
    intended to approximate the degree of acceleration provided by current
    law over a baseline determined by real, inflation adjusted, and economic
    depreciation. Current law depreciation allowances for machinery and
    equipment include the benefits of a temporary expensing provision. \28\
    The estimates are shown in tables in the body of the main text, e.g.,
    Table 19-1.
    ---------------------------------------------------------------------------
      \27\ See Barbara Fraumeni, ``The Measurement of Depreciation in the
    U.S. National Income and Product Accounts,'' in Survey of Current
    Business 77 No. 7 (Washington, D.C.: Department of Commerce, Bureau of
    Economic Analysis, July, 1997), pp. 7-42, and the National Income and
    Product Accounts of the United States, Table 7.6, ``Chain-type Quantity
    and Price Indexes for Private Fixed Investment by Type,'' U.S.
    Department of Commerce, Bureau of Economic Analysis.
      \28\ The temporary provision allows 30 percent of the cost of a
    qualifying investment to be deducted immediately rather than capitalized
    and depreciated over time. It is generally effective for qualifying
    investments made after September 10, 2001 and before September 11, 2004.
    The Jobs and Growth Tax Relief Reconciliation Act of 2003 raised the
    deduction to 50 percent depreciation (up from 30 percent) of the cost
    new equipment purchased after May 5, 2003 and placed into service before
    January 1, 2005. Qualifying investments generally are limited to
    tangible property with depreciation recovery periods of 20 years or
    less, certain software, and leasehold improvements, but this set of
    assets corresponds closely to machinery and equipment.

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

      A homeowner receives a flow of housing services equal in gross value
    to the rent that could have been earned had the owner chosen to rent the
    house to others. Comprehensive income would include in the homeowner's
    tax base this gross rental flow, and would allow the homeowner a
    deduction for expenses such as interest, depreciation, property taxes,
    and other costs associated with earning the rental income. Thus, a
    comprehensive tax base would include in its base the homeowner's
    implicit net rental income (gross income minus deductions) earned on
    investment in owner-occupied housing.
       In contrast to a comprehensive income tax, current law makes no
    imputation for gross rental income and allows no deduction for
    depreciation or for other expenses, such as utilities and maintenance.
    Current law does, however, allow a deduction for home mortgage interest
    and for property taxes. Consequently, relative to a comprehensive income
    baseline, the total tax expenditure for owner-occupied housing is the
    sum of tax on net rental income plus the tax saving from the deduction
    for property taxes and for home mortgage interest. \29\
    ---------------------------------------------------------------------------
      \29\ The homeowner's tax base under a comprehensive income tax is net
    rents. Under current law, the homeowner's tax base is -(interest +
    property taxes). The tax expenditure base is the difference between the
    comprehensive income base and current law's tax base, which for
    homeowners is the sum of net rents plus interest plus property taxes.
    ---------------------------------------------------------------------------
       Prior to 2006, the official list of tax expenditures did not include
    the exclusion of net implicit rental income on owner-occupied housing.
    Instead, it included as tax expenditures deductions for home mortgage
    interest and for property taxes. While these deductions are legitimately
    considered tax expenditures, given current law's failure to impute
    rental income, they are highly flawed as estimates of the total income
    tax advantage to housing; they overlook the additional exclusion of
    implicit net rental income. To the extent a homeowner owns his house
    outright, unencumbered by a mortgage, he would have no home mortgage
    interest deduction, yet he still would enjoy the benefits of receiving
    tax free the implicit rental income earned on his house. On the other
    hand, a homeowner with a mortgage approximately matching the value of
    the house might make interest payments that exceed the implicit rental
    income. The treatment of owner-occupied housing has been revised
    beginning in the 2006 budget, which now includes an item for the
    exclusion of net rental income of homeowners. \30\
    ---------------------------------------------------------------------------
      \30\ This estimate combines the positive tax expenditure for the
    failure to impute rental income with the negative tax expenditure for
    the failure to allow a deduction for depreciation and other costs.

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

    [[Page 323]]

       Appendix Table 3, as well as the tables in the body of the main text,
    e.g., Tables 19-1 and 19-2, show estimates of the tax expenditure caused
    by the exclusion of implicit net rental income from investment in owner-
    occupied housing. This estimate starts with the NIPA calculated value of
    gross rent on owner-occupied housing, and subtracts interest, taxes,
    economic depreciation, and other costs in arriving at an estimate of
    net-rental income from owner-occupied housing. \31\
    ---------------------------------------------------------------------------
      \31\ National Income and Production Accounts, Table 2.4.

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

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

    Double Tax on Corporate Profits

      A comprehensive income tax would tax all sources of income once. Taxes
    would not vary by type or source of income.
      In contrast to this benchmark, current law taxes income that
    shareholders earn on investment in corporate stocks at least twice, and
    at combined rates that generally are higher than those imposed on other
    sources of income. Corporate profits are taxed once at the company level
    under the corporation income tax. They are taxed again at the
    shareholder level when received as a dividend or recognized as a capital
    gain. Corporate profits can be taxed more then twice when they pass
    through multiple corporations before being distributed to noncorporate
    shareholders. Corporate level taxes cascade because corporations are
    taxed on capital gains they realize on the sale of stock shares and on
    some dividend income received. Compared to a comprehensive income tax,
    current law's double (or more) tax on corporate profits is an example of
    a negative tax expenditure because it subjects income to a larger tax
    burden than implied by a comprehensive income baseline.
      Appendix A Table 3 provides an estimate of the negative tax
    expenditure caused by the multiple levels of tax on corporate profits.
    This negative tax expenditure is measured as the shareholder level tax
    on dividends paid and capital gains realized out of earnings that have
    been fully taxed at the corporate level. It also includes the corporate
    tax paid on inter-corporate dividends and on corporate capital gains
    attributable to the sale of stock shares. The estimate includes the
    reduction in the dividends and capital gains tax rates enacted in
    JGTRRA.
      The negative tax expenditure is large in magnitude; it exceeds $41
    billion in the years 2007 through 2013. It is comparable in size (but
    opposite in sign) to all but the largest official tax expenditures.
    JGTRRA reduced but did not eliminate the double tax on corporate
    profits.

    [[Page 324]]

                         Appendix Table 1.  COMPARISON OF CURRENT TAX EXPENDITURES WITH THOSE IMPLIED BY A COMPREHENSIVE INCOME TAX \1\
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                              Revenue Effect
                                                                 Description                                                                       2009
    --------------------------------------------------------------------------------------------------------------------------------------------------------

    A. Tax Expenditure Under a Comprehensive Income Tax

    Capital gains (except agriculture, timber, iron ore, and coal).........................................................................      55,940
    Net exclusion of pension contributions and earnings: 401(k) plans......................................................................      51,000
    Net exclusion of pension contributions and earnings: Employer plans....................................................................      45,670
    Accelerated depreciation of machinery and equipment (normal tax method)................................................................      44,120
    Capital gains exclusion on home sales..................................................................................................      34,710
    Exclusion of interest on public purpose State and local bonds..........................................................................      25,900
    Exclusion of interest on life insurance savings........................................................................................      23,500
    Deferral of income from controlled foreign corporations (normal tax method)............................................................      13,780
    Net exclusion of pension contributions and earnings: Keogh plans.......................................................................      13,000
    Accelerated depreciation on rental housing (normal tax method).........................................................................      11,760
    Net exclusion of pension contributions and earnings: Individual Retirement Accounts....................................................      11,700
    Exclusion of net imputed rental income on owner-occupied housing.......................................................................       7,550
    Exclusion of workers' compensation benefits............................................................................................       5,920
    Credit for low-income housing investments..............................................................................................       5,780
    Expensing of research and experimentation expenditures (normal tax method).............................................................       4,990

    B. Possibly a Tax Expenditure Under a Comprehensive Income Tax, But With Some Qualifications

    Deductibility of mortgage interest on owner-occupied homes.............................................................................     100,810
    Step-up basis of capital gains at death................................................................................................      36,750
    Deductibility of nonbusiness State and local taxes other than on owner-occupied homes..................................................      33,200
    Child credit...........................................................................................................................      29,950
    Exclusion of Social Security benefits for retired workers..............................................................................      18,640
    Deductibility of State and local property tax on owner-occupied homes..................................................................      16,640
    Deduction for U.S. production activities...............................................................................................      15,330
    Earned income tax credit...............................................................................................................       5,440

    C. Uncertain

    Exclusion of employer contributions for medical insurance premiums and medical care....................................................     168,460
    Deductibility of charitable contributions, other than education and health.............................................................      46,980
    Deductibility of medical expenses......................................................................................................       5,920
    Social Security benefits for the disabled..............................................................................................       5,810
    Deductibility of charitable contributions, health......................................................................................       5,300
    Deductibility of charitable contributions, education...................................................................................       5,270

    D. Probably Not a Tax Expenditure Under a Comprehensive Income Tax

      Exception from passive loss rules for $25,000 of rental loss.........................................................................       8,840
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ The measurement of certain tax expenditures under a comprehensive income tax baseline may differ from the official budget estimate even when the
      provision would be a tax expenditure under both baselines.Source: Table 19-2, Tax Expenditure Budget.

    [[Page 325]]

                       Appendix Table 2.  COMPARISON OF CURRENT TAX EXPENDITURES WITH THOSE IMPLIED BY A COMPREHENSIVE CONSUMPTION TAX \1\
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                              Revenue Effect
                                                                 Description                                                                       2009
    --------------------------------------------------------------------------------------------------------------------------------------------------------

    A. Tax Expenditure Under a Consumption Base

    Exclusion of workers' compensation benefits............................................................................................       5,920

    B. Probably a Tax Expenditure Under a Consumption Base

    Deductibility of mortgage interest on owner-occupied homes.............................................................................     100,810
    Deductibility of nonbusiness State and local taxes other than on owner-occupied homes..................................................      33,200
    Child credit...........................................................................................................................      29,950
    Exclusion of Social Security benefits for retired workers..............................................................................      18,640
    Deductibility of State and local property tax on owner-occupied homes..................................................................      16,640
    Earned income tax credit...............................................................................................................       5,440

    C. Uncertain

    Exclusion of employer contributions for medical insurance premiums and medical care....................................................     168,460
    Deductibility of charitable contributions, other than education and health.............................................................      46,980
    Exclusion of net imputed rental income on owner-occupied housing.......................................................................       7,550
    Deductibility of medical expenses......................................................................................................       5,920
    Social Security benefits for disabled..................................................................................................       5,810
    Credit for low-income housing investments..............................................................................................       5,780
    Deductibility of charitable contributions, health......................................................................................       5,300
    Deductibility of charitable contributions, education...................................................................................       5,270

    D. Not a Tax Expenditure Under a Consumption Base

    Capital gains (except agriculture, timber, iron ore, and coal).........................................................................      55,940
    Net exclusion of pension contributions and earnings: 401(k) plans......................................................................      51,000
    Net exclusion of pension contributions and earnings: Employer plans....................................................................      45,670
    Accelerated depreciation of machinery and equipment (normal tax method)................................................................      44,120
    Step-up basis of capital gains at death................................................................................................      36,750
    Capital gains exclusion on home sales..................................................................................................      34,710
    Exclusion of interest on public purpose State and local bonds..........................................................................      25,900
    Exclusion of interest on life insurance savings........................................................................................      23,500
    Deduction for U.S. production activities...............................................................................................      15,330
    Deferral of income from controlled foreign corporations (normal tax method)............................................................      13,780
    Net exclusion of pension contributions and earnings: Keogh plans.......................................................................      13,000
    Accelerated depreciation on rental housing (normal tax method).........................................................................      11,760
    Net exclusion of pension contributions and earnings: Individual Retirement Accounts....................................................      11,700
    Exception from passive loss rules for $25,000 of rental loss...........................................................................       8,840
    Expensing of research and experimentation expenditures (normal tax method).............................................................       4,990
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ The measurement of certain tax expenditures under a consumption tax baseline may differ from the official budget estimate even when the provision
      would be a tax expenditure under both baselines.Source: Table 19-2, Tax Expenditure Budget.

                                Appendix Table 3.  REVISED TAX EXPENDITURE ESTIMATES \1\
    ----------------------------------------------------------------------------------------------------------------
                                                                            Revenue Loss
                   Provision                   ---------------------------------------------------------------------
                                                  2007      2008      2009      2010      2011      2012      2013
    ----------------------------------------------------------------------------------------------------------------
    Imputed Rent On Owner-Occupied Housing....     3,890     5,440     7,550    10,480    14,540    20,180    28,010
    Double Tax on corporate profit \2\........   -41,230   -44,340   -46,860   -49,520   -52,340   -55,310   -58,460
    ----------------------------------------------------------------------------------------------------------------
    \1\ Calculations described in the appendix text.
    \2\ This is a negative tax expenditure, a tax provision that overtaxes income relative to the treatment
      specified by the baseline tax system.

                                   Appendix B

        PERFORMANCE MEASURES AND THE ECONOMIC EFFECTS OF TAX EXPENDITURES

       The Government Performance and Results Act of 1993 (GPRA) directs
    Federal agencies to develop annual and strategic plans for their
    programs and activities. These plans set out performance objectives to
    be achieved over a specific time period. Most of these objectives will
    be achieved through direct expenditure programs. Tax expenditures,
    however, may also contribute to achieving these goals. This Appendix
    responds to the report of the Senate Governmental Affairs Committee on
    GPRA4 \32\ calling on the Executive Branch to undertake a series of
    analyses to assess the effect

    [[Page 326]]

    of specific tax expenditures on the achievement of agencies' performance
    objectives.
    ---------------------------------------------------------------------------
      \32\ Committee on Government Affairs, United States Senate,
    ``Government Performance and Results Act of 1993'' (Report 103-58,
    1993).
    ---------------------------------------------------------------------------
       Comparison of tax expenditure, spending, and regulatory policies. Tax
    expenditures by definition work through the tax system and,
    particularly, the income tax. Thus, they may be relatively advantageous
    policy approaches when the benefit or incentive is related to income and
    is intended to be widely available. \33\ Because there is an existing
    public administrative and private compliance structure for the tax
    system, the incremental administrative and compliance costs for a tax
    expenditure may be low in many cases. In addition, some tax expenditures
    actually simplify the operation of the tax system, (for example, the
    exclusion for up to $500,000 of capital gains on home sales). Tax
    expenditures also implicitly subsidize certain activities. Spending,
    regulatory or tax-disincentive policies can also modify behavior, but
    may have different economic effects. Finally, a variety of tax
    expenditure tools can be used e.g., deductions, credits, exemptions,
    deferrals, floors, ceilings; phase-ins; phase-outs; dependent on income,
    expenses, or demographic characteristics (age, number of family members,
    etc.). This wide range of policy instruments means that tax expenditures
    can be flexible and can have very different economic effects.
    ---------------------------------------------------------------------------
      \33\ Although this chapter focuses upon tax expenditures under the
    income tax, tax expenditures also arise under the unified transfer,
    payroll, and excise tax systems. Such provisions can be useful when they
    relate to the base of those taxes, such as an excise tax exemption for
    certain types of consumption deemed meritorious.
    ---------------------------------------------------------------------------
      Tax expenditures also have limitations. In many cases they add to the
    complexity of the tax system, which raises both administrative and
    compliance costs. For example, personal exemptions, deductions, credits,
    and phase-outs can complicate filing and decision-making. The income tax
    system may have little or no contact with persons who have no or very
    low incomes, and does not require information on certain characteristics
    of individuals used in some spending programs, such as wealth. These
    features may reduce the effectiveness of tax expenditures for addressing
    certain income-transfer objectives. Tax expenditures also generally do
    not enable the same degree of agency discretion as an outlay program.
    For example, grant or direct Federal service delivery programs can
    prioritize activities to be addressed with specific resources in a way
    that is difficult to emulate with tax expenditures.
      Outlay programs have advantages where direct Government service
    provision is particularly warranted such as equipping and providing the
    armed forces or administering the system of justice. Outlay programs may
    also be specifically designed to meet the needs of low-income families
    who would not otherwise be subject to income taxes or need to file a tax
    return. Outlay programs may also receive more year-to-year oversight and
    fine tuning through the legislative and executive budget process. In
    addition, many different types of spending programs including direct
    Government provision; credit programs; and payments to State and local
    governments, the private sector, or individuals in the form of grants or
    contracts provide flexibility for policy design. On the other hand,
    certain outlay programs such as direct Government service provision may
    rely less directly on economic incentives and private-market provision
    than tax incentives, which may reduce the relative efficiency of
    spending programs for some goals. Spending programs also require
    resources to be raised via taxes, user charges, or Government borrowing,
    which can impose further costs by diverting resources from their most
    efficient uses. Finally, spending programs, particularly on the
    discretionary side, may respond less readily to changing activity levels
    and economic conditions than tax expenditures.
      Regulations have more direct and immediate effects than outlay and
    tax-expenditure programs because regulations apply directly and
    immediately to the regulated party (i.e., the intended actor) generally
    in the private sector. Regulations can also be fine-tuned more quickly
    than tax expenditures because they can often be changed as needed by the
    Executive Branch without legislation. Like tax expenditures, regulations
    often rely largely on voluntary compliance, rather than detailed
    inspections and policing. As such, the public administrative costs tend
    to be modest relative to the private resource costs associated with
    modifying activities. Historically, regulations have tended to rely on
    proscriptive measures, as opposed to economic incentives. This reliance
    can diminish their economic efficiency, although this feature can also
    promote full compliance where (as in certain safety-related cases)
    policymakers believe that trade-offs with economic considerations are
    not of paramount importance. Also, regulations generally do not directly
    affect Federal outlays or receipts. Thus, like tax expenditures, they
    may escape the degree of scrutiny that outlay programs receive. However,
    major regulations are subjected to a formal regulatory analysis that
    goes well beyond the analysis required for outlays and tax-expenditures.
    To some extent, the GPRA requirement for performance evaluation will
    address this lack of formal analysis.
      Some policy objectives are achieved using multiple approaches. For
    example, minimum wage legislation, the earned income tax credit, and the
    food stamp program are regulatory, tax expenditure, and direct outlay
    programs, respectively, all having the objective of improving the
    economic welfare of low-wage workers.
      Tax expenditures, like spending and regulatory programs, have a
    variety of objectives and effects. When measured against a comprehensive
    income tax, for example, these include: encouraging certain types of
    activities (e.g., saving for retirement or investing in certain
    sectors); increasing certain types of after-tax income (e.g., favorable
    tax treatment of Social Security income); reducing private compliance
    costs and Government administrative costs (e.g., the exclusion for up to
    $500,000 of capital gains on home sales); and promoting tax neutrality
    (e.g., accelerated depreciation in the presence of inflation). Some of
    these objectives are well suited to quantitative measurement, while
    others are less well suited. Also, many tax expenditures, including
    those cited above, may have more than one objective. For example,
    accelerated depreciation may

    [[Page 327]]

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

    [[Page 328]]

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