[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.