[JPRT, 105th Congress]
[From the U.S. Government Publishing Office]



                        [JOINT COMMITTEE PRINT]


 
                         ESTIMATES OF FEDERAL
                         TAX EXPENDITURES FOR
                        FISCAL YEARS 1999-2003

                            prepared for the

                      COMMITTEE ON WAYS AND MEANS

                                and the

                          COMMITTEE ON FINANCE

                          by the staff of the

                      JOINT COMMITTEE ON TAXATION

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


                           DECEMBER 14, 1998



                      JOINT COMMITTEE ON TAXATION

                      105th Congress, 2nd Session
                                 ------                                
               SENATE                               HOUSE
WILLIAM V. ROTH, Jr., Delaware,      BILL ARCHER, Texas,
  Chairman                             Vice Chairman
JOHN H. CHAFEE, Rhode Island         PHILIP M. CRANE, Illinois
CHARLES GRASSLEY, Iowa               WILLIAM M. THOMAS, California
DANIEL PATRICK MOYNIHAN, New York    CHARLES B. RANGEL, New York
MAX BAUCUS, Montana                  FORTNEY PETE STARK, California
                     Lindy L. Paull, Chief of Staff
              Mary M. Schmitt, Deputy Chief of Staff (Law)
      Bernard A. Schmitt, Deputy Chief of Staff (Revenue Analysis)



                            C O N T E N T S

                              ----------                              
                                                                   Page
Introduction.....................................................     1

 I. The Concept of Tax Expenditures...................................2

II. Measurement of Tax Expenditures..................................12

III.Tax Expenditure Estimates........................................14


        Table 1. Tax Expenditure Estimates by Budget Function, 
            Fiscal Years 1999-2003...............................    15

        Table 2. Distribution of All Returns, Taxable Returns, 
            Itemized Returns, and Tax Liability by Income Class..    25

        Table 3. Distribution of Selected Individual Tax 
            Expenditures by Income Class.........................    26


                              INTRODUCTION

    This report \1\ on tax expenditures for fiscal years 1999-
2003 is prepared by the staff of the Joint Committee on 
Taxation (``Joint Committee staff'') for the House Committee on 
Ways and Means and the Senate Committee on Finance. The report 
also is submitted to the House and Senate Committees on the 
Budget.
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    \1\ This report may be cited as follows: Joint Committee on 
Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1999-
2003 (JCS-7-98), December 14, 1998.
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    As in the case of earlier reports,\2\ the estimates of tax 
expenditures in this report were prepared in consultation with 
the staff of the Office of Tax Analysis in the Treasury 
Department (``the Treasury''). The Treasury published its 
estimates of tax expenditures for fiscal years 1997-2003 in the 
Administration's budgetary statement of February 1998.\3\ The 
lists of tax expenditures in this Joint Committee staff report 
and the Administration's budgetary statement overlap 
considerably; the differences are discussed in Part I of this 
report under the heading ``Comparisons with Treasury.''
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    \2\ Joint Committee on Taxation, Estimates of Federal Tax 
Expenditures, October 4, 1972, June 1, 1973, July 8, 1975, March 15, 
1976, March 16, 1977, March 14, 1978, March 15, 1979, March 6, 1980, 
March 16, 1981, March 8, 1982, March 7, 1983, November 9, 1984, April 
12, 1985, March 1, 1986, February 27, 1987, March 8, 1988, February 28, 
1989, March 9, 1990, March 11, 1991, April 24, 1992, April 22, 1993, 
November 9, 1994, September 1, 1995, November 26, 1996, and December 
15, 1997.
    \3\ Office of Management and Budget, ``Tax Expenditures,'' Budget 
of the United States Government: Analytical Perspectives, Fiscal Year 
1999, February 2, 1998, pp. 89-120.
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    The Joint Committee staff has made its estimates (as shown 
in Table 1) based on the provisions in tax law as enacted 
through December 1, 1998. Expired or repealed provisions are 
not listed unless they have continuing revenue effects that are 
associated with ongoing taxpayer activity. Proposed extensions 
or modifications of expiring provisions are not included until 
they have been enacted into law.
    Part I of this report contains a discussion of the concept 
of tax expenditures. Part II is a discussion of the measurement 
of tax expenditures. Estimates of tax expenditures for fiscal 
years 1999-2003 are presented in Table 1 in Part III. Table 2 
shows the distribution of tax returns by income class, and 
Table 3 presents distributions of selected individual tax 
expenditures by income class.

                   I. THE CONCEPT OF TAX EXPENDITURES

Overview
    ``Tax expenditures'' are defined under the Congressional 
Budget and Impoundment Control Act of 1974 (``the Budget Act'') 
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 tax liability.\4\ 
Thus, tax expenditures include any reductions in individual and 
corporate income tax liabilities that result from special tax 
provisions or regulations that provide tax benefits to 
particular taxpayers.
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    \4\ Congressional Budget and Impoundment Control Act of 1974 (P.L. 
93-344), sec. 3(3).
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    Special income tax provisions are referred to as tax 
expenditures because they may be considered to be analogous to 
direct outlay programs, and the two can be considered as 
alternative means of accomplishing similar budget policy 
objectives. Tax expenditures are most similar to those direct 
spending programs that have no spending limits, and that are 
available as entitlements to those who meet the statutory 
criteria established for the programs.\5\
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    \5\ There are a few tax expenditures that have statutorily imposed 
limits. One example is the tax credit for low-income rental housing. 
This credit is available only to those who have received credit 
allocations from State housing authorities. There are statutory limits 
on the total amounts of credit allocations that the States can make 
each year.
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    Estimates of tax expenditures are prepared for use in 
budget analysis. They are a measure of the economic benefits 
that are provided through the tax laws to various groups of 
taxpayers and sectors of the economy. The estimates also may be 
useful in determining the relative merits of achieving 
specified public goals through tax benefits or direct outlays.
    The legislative history of the Budget Act indicates that 
tax expenditures are to be defined with reference to a normal 
income tax structure (referred to here as ``normal income tax 
law''). The Joint Committee staff has used its judgment in 
distinguishing between those income tax provisions (and 
regulations) that can be viewed as a part of normal income tax 
law and those special provisions that result in tax 
expenditures. A provision traditionally has been listed as a 
tax expenditure by the Joint Committee staff if there is a 
reasonable basis for such classification and the provision 
results in more than a de minimis revenue loss, which solely 
for this purpose means a total revenue loss of at least $50 
million over the five fiscal years, 1999-2003. The Joint 
Committee staff emphasizes, however, that in the process of 
listing tax expenditures, no judgment is made, nor any 
implication intended, about the desirability of any special tax 
provision as a matter of public policy.
    If a tax expenditure provision were eliminated, Congress 
might choose to continue financial assistance through other 
means rather than terminate all Federal assistance for the 
activity. If a replacement spending program were enacted, the 
higher revenues received as a result of the elimination of a 
tax expenditure might not represent a net budget gain. A 
replacement program could involve direct expenditures, direct 
loans or loan guarantees, regulatory activity, a different form 
of tax expenditure, or a general reduction in tax rates. Joint 
Committee staff estimates of tax expenditures do not anticipate 
such policy responses.
    The Budget Act uses the term tax expenditure to refer to 
the special tax provisions that are contained in the Federal 
individual and corporate income taxes. Other Federal taxes such 
as excise taxes, employment taxes, and estate and gift taxes 
may also have exceptions, exclusions, and credits, but those 
special tax provisions are not included in this report because 
they are not part of the income tax. Thus, for example, the 
income tax exclusion for employer-paid health insurance is 
included, but the Federal Insurance Contributions Act 
(``FICA'') tax exclusion for employer-paid health insurance is 
not treated as a tax expenditure.\6\
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    \6\ In its budget statement, the Treasury Department identifies tax 
expenditures in the unified transfer tax (the estate and gift tax and 
the generation-skipping transfer tax). See, Office of Management and 
Budget, ``Tax Expenditures,'' February 2, 1998, pp. 119-120. Other 
analysts have explored applying the concept of tax expenditures to the 
payroll and excise taxes. See, Jonathan Barry Forman, ``Would a Social 
Security Tax Expenditure Budget Make Sense?'' Public Budgeting and 
Financial Management, 5, 1993, pp. 311-335, and Bruce F. Davie, ``Tax 
Expenditures in the Federal Excise Tax System,'' National Tax Journal, 
XLVII, March 1994, pp. 39-62.
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    Some provisions in the Internal Revenue Code provide for 
special tax treatment that is less favorable than normal income 
tax law. Examples of such provisions include (1) the denial of 
deductions for certain lobbying expenses, (2) the denial of 
deductions for certain executive compensation, and (3) the 2-
percent floor on itemized deductions for unreimbursed employee 
expenses. Tax provisions that provide treatment less favorable 
than normal income tax law are not shown in this report because 
they are not included in the statutory definition of a tax 
expenditure.
Individual Income Tax
    Under the Joint Committee staff methodology, the normal 
structure of the individual income tax includes the following 
major components: one personal exemption for each taxpayer and 
one for each dependent, the standard deduction, the existing 
tax rate schedule, and deductions for investment and employee 
business expenses. Most other tax benefits to individual 
taxpayers can be classified as exceptions to ``normal income 
tax law.''
    Personal exemptions and the standard deduction are treated 
as part of normal income tax law because one may consider these 
amounts as approximating the level of income below which it 
would be difficult for an individual or a family to obtain 
minimal amounts of food, clothing, and shelter. Those itemized 
deductions that are not necessary for the generation of income 
are classified as tax expenditures, but only to the extent that 
they exceed the standard deduction level.
    Under present law, all employee compensation is subject to 
tax unless the tax code contains a specific exclusion for the 
income. There are specific exclusions for the following 
employer-provided benefits: coverage under accident and health 
plans,\7\ accident and disability insurance, group term life 
insurance, educational assistance, transportation benefits 
(parking, van pools, and transit passes), child care, meals and 
lodging (furnished for the convenience of the employer), 
employee awards, and other miscellaneous fringe benefits (e.g., 
employee discounts, services provided to employees at no 
additional cost to employers, tuition reductions, and de 
minimis fringe benefits). Each of these exclusions is 
classified as a tax expenditure in this report.
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    \7\ Present law contains an exclusion for employer-provided 
coverage under accident and health plans (sec. 106 of the Internal 
Revenue Code of 1986, the ``Code'') and an exclusion for benefits 
received by employees under employer- provided accident and health 
plans (Code sec. 105(b)). These two exclusions are viewed as a single 
tax expenditure. Under normal income tax law, the value of employer-
provided accident and health coverage would be includable in the income 
of employees, but employees would not be subject to tax on the accident 
and health insurance benefits (reimbursements) that they might receive.
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    Under normal income tax law, employer contributions to 
pension plans and income earned on pension assets would be 
taxable to employees as the contributions are made and as the 
income is earned, and employees would not receive any deduction 
or exclusion for their pension contributions. Under present 
law, employer contributions to qualified pension plans and 
employee contributions made at the election of the employee 
through salary reduction are not taxed until distributed to the 
employee during retirement, and income earned on pension assets 
is not taxed until distributed during retirement. The tax 
expenditure for ``net exclusion of pension contributions and 
earnings'' is computed as the income taxes forgone on current 
tax-excluded pension contributions and earnings less the income 
taxes paid on current pension distributions to retirees.
    Under present law, social security retirement benefits are 
fully or partially excluded from gross income.\8\ Under normal 
income tax law, retirees would be entitled to an exclusion for 
only the portion of social security retirement benefits that 
represents a return of the social security taxes that they paid 
during their working years. Thus, the exclusion of social 
security retirement benefits in excess of social security tax 
payments is classified as a tax expenditure.
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    \8\ For taxpayers with modified adjusted gross incomes above 
certain levels, up to 85 percent of social security retirement benefits 
are includable in income.
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    All Medicare benefits are excluded from taxation. The value 
of Medicare Part A insurance generally is greater than the 
Health Insurance (``HI'') tax contributions that enrollees made 
during their working years, and the value of Medicare Part B 
insurance generally is greater than the Part B premium that 
enrollees must pay. The exclusion of the value of Medicare Part 
A insurance in excess of HI tax contributions is classified as 
a tax expenditure, and the exclusion of the value of Medicare 
Part B insurance in excess of premiums paid also is classified 
as a tax expenditure.
    Public assistance benefits are excluded from gross income 
by law or by Internal Revenue Service regulations. Table 1 
contains tax expenditure estimates for workers' compensation 
benefits, special benefits for disabled coal miners, and cash 
public assistance benefits (which include Supplemental Security 
Income (``SSI'') benefits and Aid to Families with Dependent 
Children (``AFDC'') benefits).
    The individual income tax does not include in gross income 
the imputed income that individuals receive from the services 
provided by owner-occupied homes and durable goods.\9\ However, 
the Joint Committee staff does not classify this exclusion as a 
tax expenditure. The measurement of imputed income for tax 
purposes presents administrative problems and its exclusion 
from taxable income may be regarded as an administrative 
necessity.\10\
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    \9\ The National Income and Product Accounts include estimates of 
this imputed income. The accounts appear in U.S. Department of 
Commerce, Bureau of Economic Analysis, Survey of Current Business, 
published monthly.
    \10\ If the imputed income from owner-occupied homes were included 
in adjusted gross income, it would be proper to include all mortgage 
interest deductions and related property tax deductions as part of the 
normal income tax structure, since interest and property tax deductions 
would be allowable as a cost of producing imputed income. It also would 
be appropriate to allow deductions for depreciation and maintenance 
expenses for owner-occupied homes.
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    Under normal income tax law, individuals would be allowed 
to deduct only the interest on indebtedness incurred in 
connection with a trade or business or an investment. Thus, the 
deduction for mortgage interest on a principal or second 
residence is classified as a tax expenditure.
    The Joint Committee staff assumes that, for administrative 
feasibility, normal income tax law would tax capital gains in 
full in the year the gains are realized through sale or 
exchange. Thus, the deferral of tax until realization is not 
classified as a tax expenditure, but reduced rates of tax, 
further deferrals of tax (beyond the year of sale or exchange), 
and exclusions of certain capital gains are classified as tax 
expenditures.
    It also is assumed that normal income tax law would not 
provide for any indexing of the basis of capital assets for 
changes in the general price level. Thus, under normal income 
tax law (as under present law), the income tax would be levied 
on nominal gains as opposed to real gains in asset values. If, 
as an alternative, normal income tax law were defined to 
include full indexing of the basis of capital assets, the 
capital gains tax expenditure estimates in Table 1 generally 
would be much lower than those shown. For consistency, if there 
were indexation of the basis of capital assets, it should be 
coupled with a general indexation of the income and expenses 
associated with capital assets and the indexation of interest. 
If normal income tax law were defined to include the indexation 
of interest paid and received, the tax expenditure estimates 
for exclusion of interest on State and local government debt 
would be much lower than those shown in Table 1.
    There are many types of State and local government bonds 
and private purpose bonds that qualify for tax-exempt status 
for Federal income tax purposes. Table 1 contains a separate 
tax expenditure listing for each type of bond.

Business Income Taxation

    Regardless of the legal form of organization (sole 
proprietorship, partnership, or S or C corporation), the same 
general principles are used in the computation of taxable 
business income. Thus, most business tax expenditures apply 
equally to unincorporated and incorporated businesses.
    One of the most difficult issues in defining tax 
expenditures for business income relates to the tax treatment 
of capital costs. Under present law, capital costs may be 
recovered under a variety of alternative methods, depending 
upon the nature of the costs and the status of the taxpayer. 
For example, investments in equipment and structures may 
qualify for tax credits, expensing, accelerated depreciation, 
or straight-line depreciation. The Joint Committee staff 
generally classifies as tax expenditures cost recovery 
allowances that are more favorable than those provided under 
the alternative depreciation system (sec. 168(g)), which 
provides for straight-line recovery over tax lives that are 
longer than those permitted under the accelerated system.
    As indicated above, the Joint Committee staff assumes that 
normal income tax law would not provide for any indexing of the 
basis of capital assets. Thus, normal income tax law would not 
take into account the effects of inflation on tax depreciation. 
The expensing and depreciation tax expenditure estimates in 
Table 1 are larger than would be the case if normal income tax 
law provided for inflation adjustments in the basis of assets 
for tax depreciation purposes.
    The alternative minimum tax (``AMT'') and the passive 
activity loss rules are not viewed by the Joint Committee staff 
as a part of normal income tax law. Instead, they are viewed as 
provisions that reduce the magnitude of the tax expenditures to 
which they apply. For example, the AMT reduces the value of 
business tax credits (for those taxpayers subject to the AMT) 
by not allowing the tax credits to be claimed in the 
calculation of AMT liability. Similarly, the passive loss rules 
defer otherwise allowable deductions and credits from passive 
activities until a time when the taxpayer has passive income or 
disposes of the assets associated with the passive activity. 
Exceptions to the AMT and the passive loss rules are not 
classified as tax expenditures by the Joint Committee staff 
because the effects of the exceptions already are incorporated 
in the estimates of related tax expenditures.

Corporate Income Tax

    The income of corporations (other than S corporations) 
generally is subject to the corporate income tax. The corporate 
income tax includes a graduated tax rate schedule. The lower 
tax rates in the schedule are classified by the Joint Committee 
staff as a tax expenditure (as opposed to normal income tax 
law) because they are intended to provide tax benefits to small 
business and, unlike the graduated individual income tax rates, 
are unrelated to concerns about ability of individuals to pay 
taxes.
    Certain income of pass-through entities is exempt from the 
corporate income tax. The income of sole proprietorships, S 
corporations, and most partnerships is taxed only at the 
individual level. The special tax rules for these pass-through 
entities are not classified as tax expenditures because the tax 
benefits are available to any entity that chooses to organize 
itself and operate in the required manner in order to avoid the 
corporate income tax.
    Nonprofit corporations that satisfy the requirements of 
Code section 501 also generally are exempt from corporate 
income tax. The tax exemption of certain nonprofit cooperative 
business organizations, such as trade associations, is not 
treated as a tax expenditure for the same reason applicable to 
for-profit pass-through business entities. With respect to 
other nonprofit organizations, such as charities, tax-exempt 
status is not classified as a tax expenditure because the 
nonbusiness activities of such organizations generally must 
predominate and their unrelated business activities are subject 
to tax. In general, the imputed income derived from nonbusiness 
activities conducted by individuals or collectively by certain 
nonprofit organizations is outside the normal income tax base. 
However, the ability of donors to such nonprofit organizations 
to claim a charitable contribution deduction is a tax 
expenditure (because such contributions do not generate income 
to the donor), as is the exclusion from income granted to 
holders of tax-exempt financing issued by charities.

Recent Legislation

            Surface Transportation Revenue Act of 1998
    The Surface Transportation Revenue Act of 1998, enacted on 
June 9, 1998, as part of the Transportation Equity Act for the 
21st Century (Title IX of H.R. 2400) (P.L. 105-178), modified 
two existing tax expenditures:
    --The excise tax exemptions and income tax credits for 
alcohol fuels were extended through September 30, 2007 (excise 
tax exemptions), and December 31, 2007 (income tax credits), 
and the tax incentives will be reduced from 54 cents per gallon 
to 51 cents per gallon over a five-year period beginning on 
January 1, 2001. (The income tax credits are classified as a 
tax expenditure, but not the excise tax exemptions.)
    --The exclusion for employer-provided parking and transit 
benefits was modified as follows: (1) no parking or 
transportation benefit is includible in gross income or wages 
of an employee merely because the employee is offered the 
choice of cash in lieu of one or more qualified transportation 
benefits, effective for taxable years beginning after December 
31, 1997; (2) there is no indexing of the dollar limits on the 
exclusions for qualified transportation benefits in 1999; and 
(3) the exclusion for employer-provided transit passes and 
vanpooling is increased to $100 per month effective for taxable 
years beginning after December 31, 2001.
            Internal Revenue Service Restructuring and Reform Act of 
                    1998
    The Internal Revenue Service Restructuring and Reform Act 
of 1998 (``IRS Reform Act'') (H.R. 2676), enacted on July 22, 
1998 (P.L. 105-206), modified two existing tax expenditures:
    --Property held more than one year (rather than more than 
18 months) is eligible for reduced capital gains tax rates, 
effective January 1, 1998.
    --All of the meals provided to employees on the business 
premises of an employer are generally treated as being provided 
for the convenience of the employer (and are thus excludable 
under section 119) if more than one-half of the employees who 
are provided meals are being provided meals for the convenience 
of the employer, effective for taxable years beginning before, 
on, or after July 22, 1998.
            Tax and Trade Relief Extension Act of 1998
    The Tax and Trade Relief Extension Act of 1998 (``the Tax 
Extension Act''), enacted on October 21, 1998, as part of the 
Omnibus Consolidated and Emergency Supplemental Appropriations 
Act, 1999 (Division J of H.R. 4328) (P.L. 105-277), extended 
and modified some existing tax expenditures and added a new tax 
expenditure to the Internal Revenue Code.
    Extensions of expiring tax provisions.--The Tax Extension 
Act extended a number of tax expenditure provisions that had 
recently expired or were scheduled to expire. The tax credit 
for qualified research expenditures (Code sec. 41), which 
expired after June 30, 1998, was extended for the period July 
1, 1998, through June 30, 1999. The work opportunity tax 
credit, which expired after June 30, 1998, was extended through 
June 30, 1999. The welfare-to-work tax credit, which was 
scheduled to expire after April 30, 1999, was extended through 
June 30, 1999. The deduction equal to the fair market value of 
``qualified appreciated stock'' contributed to a private 
foundation, which expired after June 30, 1998, was permanently 
extended. (The effects of this provision are reflected in the 
tax expenditure estimates for ``deduction for charitable 
contributions'' in Table 1.) Income averaging for farmers, 
which was scheduled to expire for taxable years beginning after 
December 31, 2000, was permanently extended.
    Modifications to existing tax expenditures.--The Tax 
Extension Act also modified two existing tax expenditures:
    --The rates of deduction for health insurance expenses of 
self-employed individuals are increased as follows: the 
deduction is 45 percent in 1998, 60 percent in 1999 through 
2001, 70 percent in 2002, and 100 percent in 2003 and 
thereafter.
    --The limit on State private activity tax-exempt bonds is 
increased to $75 per resident of each State or $225 million (if 
greater) beginning in calendar year 2007. The increase is 
phased in, beginning with $55 per resident or $165 million (if 
greater) in calendar year 2003.
    New tax expenditure.--The Tax Extension Act provided a 
special five-year carryback period for net operating losses 
attributable to farming businesses. The provision is effective 
for net operating losses arising in taxable years beginning 
after December 31, 1997.
    Alternative minimum tax effects on personal credits.--The 
Tax Extension Act contained a provision that allows 
nonrefundable personal credits to offset the regular tax in 
full for taxable years beginning in 1998, thereby reducing or 
eliminating the alternative minimum tax liabilities of some 
taxpayers. This provision will allow taxpayers to receive 
greater benefits from the nonrefundable personal credits. Thus, 
in Table 1, the tax expenditure estimates for these credits are 
larger than would otherwise be the case.

Cancelled Tax Provisions

    The Taxpayer Relief Act of 1997 contained two tax 
expenditure provisions that were cancelled by the President 
pursuant to the Line Item Veto Act of 1996. In June 1998, the 
Supreme Court held that the provisions of the Line Item Veto 
Act were unconstitutional. Thus, the two cancelled tax 
provisions are now present law. The first provision provides a 
temporary exception from foreign personal holding company 
income (for subpart F purposes) for certain income that is 
derived in the active conduct of an insurance, banking, 
financing, or similar business, for taxable years beginning in 
1998. The Tax Extension Act modified and extended this 
provision through taxable years beginning in 1999. The 
provision is listed in Table 1. The second cancelled tax 
provision provides for a deferral of tax on gains from the sale 
of stock in a qualified refiner or processor to an eligible 
farmer's cooperative, effective for sales after December 31, 
1997. This provision is not listed in Table 1 because the 
associated revenue loss is less than the de minimis amount 
required for inclusion in the table.

Comparisons with Treasury Department

    The Joint Committee staff and Treasury lists of tax 
expenditures differ in two respects. First, the Treasury uses a 
different classification of those provisions that can be 
considered a part of normal income tax law under both the 
individual and business income taxes. In general, the Joint 
Committee staff methodology involves a narrower concept of 
normal income tax law. Thus, the Joint Committee list of tax 
expenditures includes some provisions that are not contained in 
the Treasury list. The cash method of accounting provides an 
example. The Treasury considers the cash accounting option for 
certain businesses as a part of normal income tax law, but the 
Joint Committee staff methodology treats it as a departure from 
normal income tax law that constitutes a tax expenditure.
    Second, the Joint Committee staff list excludes those 
provisions that are estimated to result in revenue losses below 
the de minimis amount, i.e., less than $50 million over the 
five fiscal years, 1999-2003. The Treasury does not have a de 
minimis exception. Thus, the Treasury list of tax expenditures 
includes some provisions that are not contained in the Joint 
Committee staff list.
    The Joint Committee staff and Treasury estimates of tax 
expenditures span slightly different sets of years. The 
Treasury's estimates cover a seven-year period--the last fiscal 
year, the current fiscal year when the President's budget is 
submitted, and the next five fiscal years, i.e., fiscal years 
1997-2003. The Joint Committee staff estimates cover the 
current fiscal year and the succeeding four fiscal years, i.e., 
fiscal years 1999-2003.
    For the past seven years, the President's budget has 
contained a section that reviews and tabulates the estate and 
gift tax provisions that the Treasury considers as tax 
expenditures. The Joint Committee staff considers estate and 
gift tax provisions as being outside of the normal income tax 
structure and thus omits them from its list of tax 
expenditures.
    In some cases, two or more of the tax expenditure items in 
the Treasury list have been combined into a single item in the 
Joint Committee staff list, and vice versa. The Table 1 
descriptions of some tax expenditures also may vary from the 
descriptions used by the Treasury.
    The following is a list of tax expenditure provisions in 
the Joint Committee staff list that are not classified as tax 
expenditures by the Treasury: \11\
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    \11\ There are two additional tax expenditure provisions in the 
Joint Committee staff list that are not classified a tax expenditures 
by the Treasury: the expensing of tertiary injectants and the exclusion 
of investment income from structured settlement amounts. These 
provisions are not listed in Table 1 because the estimated revenue 
losses are below the de minimis amount ($50 million over the five 
fiscal years, 1999-2003).
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Natural resources and environment

--Exclusion of contributions in aid of construction for water 
            and sewer utilities

Agriculture

--Exclusion of cost-sharing payments
--Cash accounting for agriculture
--Five-year carryback period for net operating losses 
            attributable to farming

Insurance companies

--Special treatment of life insurance company reserves
--Deduction of unpaid property loss reserves of property and 
            casualty companies

Business and commerce

--Expensing of magazine circulation expenditures
--Special rules for magazine, paperback book, and record 
            returns
--Completed contract rules
--Cash accounting, other than agriculture
--Deferral of gain on like-kind exchanges
--Exception from net operating loss limitations for 
            corporations in bankruptcy
--Tax credit for employer-paid FICA taxes on tips
--Deferral of gain on involuntary conversions resulting from 
            Presidentially-declared disasters

Employment

--Exclusion of miscellaneous fringe benefits
--Exclusion of employee awards
--Exclusion of income earned by voluntary employee beneficiary 
            associations

Medicare

--Exclusion of untaxed Medicare benefits for Hospital Insurance
--Exclusion of untaxed Medicare benefits for Supplementary 
            Medical Insurance

    The following is a list of the tax expenditure provisions 
that are included in the Treasury list but are excluded from 
the Joint Committee staff list because the estimated revenue 
losses are below the de minimis amount (less than $50 million 
over the five fiscal years, 1999-2003):

Energy

--Tax credit for electric vehicles
--Deductions for clean-fuel vehicles and refueling property

Natural resources and environment

--Tax credit and seven-year amortization for reforestation 
            expenditures

Agriculture

--Deferral of tax on gains from the sale of stock in a 
            qualified refiner or processor to an eligible 
            farmer's cooperative \12\
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    \12\ This provision was not included in the Treasury list of tax 
expenditures that was published as part of the budget statement on 
February 2, 1998. However, it is expected that the provision will be 
included in the Treasury list that will accompany the budget statement 
forthcoming in February 1999.
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Financial institutions

--Bad debt reserves of financial institutions

Insurance companies

--Special alternative tax on small property and casualty 
            insurance companies
--Tax exemption for insurance companies owned by tax-exempt 
            organizations

Business and commerce

--Ordinary income treatment of losses from sales of small 
            business corporation stock
--Exclusion of income from discharge of indebtedness incurred 
            in connection with qualified real property

Social services

--Expensing of costs for removing architectural barriers

    There are three additional tax expenditure provisions in 
the Treasury list that are not included in the Joint Committee 
staff list. Two of the provisions involve exceptions to the 
passive loss rules: (1) the exception for working interests in 
oil and gas properties; and (2) the exception for up to $25,000 
of rental losses. The Joint Committee staff does not classify 
these two provisions as tax expenditures; the revenue effects 
of the passive loss rules (and exceptions to the rules) are 
included in the estimates of the tax expenditure provisions 
that are affected by the rules.\13\ The third tax expenditure 
in the Treasury list that is not included in the Joint 
Committee staff list is the exemption of certain income of 
telephone and electric cooperatives. The Joint Committee staff 
does not classify this provision as a tax expenditure because 
the special tax rules for pass-through entities are assumed to 
be a part of normal tax law.\14\
---------------------------------------------------------------------------
    \13\ See discussion of the alternative minimum tax and passive loss 
rules on p. 6, above.
    \14\ See discussion of pass-through entities on p. 6, above.

                  II. MEASUREMENT OF TAX EXPENDITURES

Tax Expenditure Estimates Generally
    A tax expenditure is measured by the difference between tax 
liability under present law and the tax liability that would 
result from a recomputation of tax without benefit of the tax 
expenditure provision. Taxpayer behavior is assumed to remain 
unchanged for tax expenditure estimate purposes.\15\
---------------------------------------------------------------------------
    \15\ An alternative way to measure tax expenditures is to express 
their values in terms of ``outlay equivalents.'' An outlay equivalent 
is the dollar size of a direct spending program that would provide 
taxpayers with net benefits that would equal what they now receive from 
a tax expenditure. The Treasury Department presents estimates of outlay 
equivalents in the President's budget in addition to presenting 
estimates in the same manner as the Joint Committee staff.
---------------------------------------------------------------------------
    The tax expenditure estimates in this report are based on 
Congressional Budget Office and Joint Committee staff 
projections of the gross income, deductions, and expenditures 
of individuals and corporations for calendar years 1998-2003. 
These projections are used to compute tax liabilities for the 
present-law revenue baseline and tax liabilities for the 
alternative baseline that assumes that the tax expenditure 
provision does not exist.
    Internal Revenue Service (``IRS'') statistics from recent 
tax returns are used to develop projections of the tax credits, 
deductions, and exclusions that will be claimed under the 
present-law baseline. These IRS statistics show the actual 
usage of the various tax expenditure provisions. In the case of 
some tax expenditures, such as the earned income tax credit, 
there is evidence that some taxpayers are not claiming all of 
the benefits to which they are entitled, while others are 
filing claims that exceed their entitlements. The tax 
expenditure estimates in this report are based on projections 
of actual claims under the various tax provisions, not the tax 
benefits to which taxpayers are entitled.
    Some tax expenditure estimates are based partly on 
statistics for income, deductions, and expenses for prior 
years. Accelerated depreciation is an example. Estimates for 
this tax expenditure are based on the difference between tax 
depreciation deductions under present law and the deductions 
that would have been claimed in the current year if investments 
in the current year and all prior years had been depreciated 
using the alternative (normal income tax law) depreciation 
system.
    Each tax expenditure is estimated separately, under the 
assumption that all other tax expenditures remain in the tax 
code. If two or more tax expenditures were estimated 
simultaneously, the total change in tax liability could be 
smaller or larger than the sum of the amounts shown for each 
item separately, as a result of interactions among the tax 
expenditure provisions.
    Year-to-year differences in the estimates for each tax 
expenditure reflect changes in tax law, including phaseouts of 
tax expenditure provisions and changes that alter the 
definition of the normal income tax structure, such as the tax 
rate schedule, the personal exemption amount, and the standard 
deduction. Some of the estimates for this tax expenditure 
report may differ from estimates made in previous years because 
of changes in law and economic conditions, the availability of 
better data, and improved estimating techniques.
Tax Expenditures versus Revenue Estimates
    A tax expenditure estimate is not the same as a revenue 
estimate for the repeal of the tax expenditure provision for 
two reasons. First, tax expenditure estimates do not 
incorporate any changes in taxpayer behavior, whereas revenue 
estimates incorporate the effects of the behavioral changes 
that are anticipated to occur in response to the repeal of a 
tax provision. Second, tax expenditure estimates are concerned 
with changes in the tax liabilities of taxpayers. Because the 
tax expenditure focus is on tax liabilities as opposed to 
Federal Government tax receipts, there is no concern for the 
timing of tax payments. Revenue estimates are concerned with 
changes in Federal tax receipts, which are affected by the 
timing of tax payments.
    If a tax expenditure provision were repealed, it is likely 
that the repeal would be made effective at the beginning of a 
calendar year. In this case, the revenue estimate for repeal 
would show a smaller revenue gain in the first fiscal year than 
in subsequent years, because the repeal would be occurring 
after the start of the government's fiscal year. The revenue 
estimate might also reflect some delay in the timing of the 
revenue gains as a result of the taxpayer tendency to postpone 
or forgo changes in tax withholding and estimated tax payments.

                     III. TAX EXPENDITURE ESTIMATES

    Tax expenditures are grouped in Table 1 in the same 
functional categories as outlays in the Federal budget. 
Estimates are shown separately for individuals and 
corporations. Those tax expenditures that do not fit clearly 
into any single budget category have been placed in the most 
appropriate category.
    Several of the tax expenditure items involve small amounts 
of revenue, and those estimates are indicated in Table 1 by 
footnote 1. For each of these items, the footnote means that 
the tax expenditure is less than $50 million in the fiscal 
year.
    Table 2 presents tax return information for each of nine 
income classes on the number of all returns filed, the number 
of all returns and taxable returns with itemized deductions, 
and the amount of tax liability.
    Table 3 provides distributional estimates by income class 
for some of the tax expenditures that affect individual 
taxpayers. Not all tax expenditures that affect individuals are 
shown in this table because of the difficulty in making 
reliable estimates of the income distribution of items that do 
not appear on tax returns under present law.

                                     Table 1.--Tax Expenditure Estimates By Budget Function, Fiscal Years 1999-2003
                                                                  [Billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Corporations                                 Individuals
                      Function                      ------------------------------------------------------------------------------------------   Total
                                                       1999     2000     2001     2002     2003     1999     2000     2001     2002     2003   1999-2003
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Defense
  Exclusion of benefits and allowances to Armed
   Forces personnel................................  .......  .......  .......  .......  .......      2.0      2.0      2.0      2.1      2.1      10.2
  Exclusion of military disability benefits........  .......  .......  .......  .......  .......      0.1      0.1      0.1      0.1      0.1       0.5
International Affairs
  Exclusion of income earned abroad by U.S.
   citizens........................................  .......  .......  .......  .......  .......      1.9      2.0      2.2      2.3      2.5      10.9
  Exclusion of certain allowances for Federal
   employees abroad................................  .......  .......  .......  .......  .......      0.2      0.2      0.2      0.2      0.2       1.0
  Exclusion of income of foreign sales corporations
   (FSCs)..........................................      1.8      1.9      2.0      2.1      2.2  .......  .......  .......  .......  .......      10.0
  Deferral of active income of controlled foreign
   corporations....................................      1.3      1.4      1.4      1.5      1.6  .......  .......  .......  .......  .......       7.2
  Inventory property sales source rule exception...      3.9      4.0      4.1      4.2      4.3  .......  .......  .......  .......  .......      20.5
Footnotes at end of table.
  Deferral of certain active financing income......      0.2      0.3  .......  .......  .......  .......  .......  .......  .......  .......       0.5
General Science, Space, and Technology
  Tax credit for qualified research expenditures...      1.6      0.9      0.5      0.3      0.1  .......  .......  .......  .......  .......       3.4
  Expensing of research and experimental
   expenditures....................................      1.9      2.4      2.7      2.8      3.0  .......  .......  .......  .......  .......      12.7
Energy
  Expensing of exploration and development costs:
    Oil and gas....................................      0.4      0.4      0.4      0.5      0.5    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       2.2
    Other fuels....................................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.1
  Excess of percentage over cost depletion:
    Oil and gas....................................      0.4      0.4      0.4      0.4      0.4      0.1      0.1      0.1      0.1      0.1       2.4
    Other fuels....................................      0.2      0.2      0.2      0.2      0.2      0.1      0.1      0.1      0.1      0.1       1.5
  Tax credit for enhanced oil recovery costs.......    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.3
  Tax credit for production of non-conventional
   fuels...........................................      1.0      1.0      1.0      1.0      0.8      0.3      0.3      0.3      0.3      0.2       6.2
  Tax credits for alcohol fuels (\2\)..............    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  .......  .......  .......  .......  .......     (\1\)
  Exclusion of interest on State and local
   government industrial development bonds for
   energy production facilities....................      0.1    (\1\)    (\1\)    (\1\)    (\1\)      0.1      0.1      0.1      0.1      0.1       0.8
  Exclusion of energy conservation subsidies
   provided by public utilities....................  .......  .......  .......  .......  .......    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.1
  Tax credit for investments in solar and
   geothermal energy facilities....................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.3
  Tax credit for electricity production from wind
   and biomass.....................................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.1      0.1      0.1      0.1      0.1       0.4
Natural Resources and Environment
  Expensing of exploration and development costs,
   nonfuel minerals................................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.2
  Excess of percentage over cost depletion, nonfuel
   minerals........................................      0.2      0.2      0.2      0.2      0.2      0.1      0.1      0.1      0.1      0.1       1.5
  Expensing of multiperiod timber-growing costs....      0.1      0.1      0.2      0.2      0.2    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.9
  Exclusion of interest on State and local
   government sewage, water, and hazardous waste
   facilities bonds................................      0.2      0.2      0.2      0.2      0.2      0.4      0.5      0.5      0.5      0.5       3.4
  Special rules for mining reclamation reserves....    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.2
  Exclusion of contributions in aid of construction
   for water and sewer utilities...................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  .......  .......  .......  .......  .......       0.1
Agriculture
  Expensing of soil and water conservation
   expenditures....................................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.2
  Expensing of fertilizer and soil conditioner
   costs...........................................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.1      0.1      0.1       0.3
  Expensing of the costs of raising dairy and
   breeding cattle.................................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.1      0.2      0.2      0.2      0.2       0.9
  Exclusion of cost-sharing payments...............    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.1
  Exclusion of cancellation of indebtedness income
   of farmers......................................  .......  .......  .......  .......  .......      0.1      0.1      0.1    (\1\)    (\1\)       0.3
  Cash accounting for agriculture..................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.4      0.5      0.6      0.6      0.6       3.0
  Income averaging for farmers.....................  .......  .......  .......  .......  .......    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.1
  Five-year carryback period for net operating
   losses attributable to farming..................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.1      0.1      0.1    (\1\)    (\1\)       0.3
Commerce and Housing
  Financial institutions:
    Exemption of credit union income...............      0.9      0.9      1.0      1.0      1.1  .......  .......  .......  .......  .......       4.8
  Insurance companies:
    Exclusion of investment income on life
     insurance and annuity contracts...............     22.6     23.3     24.0     24.8     25.6      1.3      1.3      1.4      1.4      1.5     127.1
    Small life insurance company taxable income
     adjustment....................................      0.1      0.1      0.1      0.1      0.1  .......  .......  .......  .......  .......       0.7
    Special treatment of life insurance company
     reserves......................................      1.3      1.4      1.4      1.5      1.5  .......  .......  .......  .......  .......       7.1
    Deduction of unpaid property loss reserves for
     property and casualty insurance companies.....      3.3      3.4      3.4      3.5      3.5  .......  .......  .......  .......  .......      17.1
    Special deduction for Blue Cross and Blue
     Shield companies..............................      0.4      0.4      0.4      0.4      0.3  .......  .......  .......  .......  .......       1.9
Footnotes at end of table.
  Housing:
    Deduction for mortgage interest on owner-
     occupied residences...........................  .......  .......  .......  .......  .......     48.5     50.4     52.4     54.5     56.8     262.6
    Deduction for property taxes on owner-occupied
     residences....................................  .......  .......  .......  .......  .......     17.8     18.4     19.1     19.7     20.3      95.3
    Exclusion of capital gains on sales of
     principal residences..........................  .......  .......  .......  .......  .......      5.8      6.0      6.2      6.4      6.6      31.0
    Exclusion of interest on State and local
     government bonds for owner-occupied housing...      0.6      0.6      0.6      0.7      0.7      1.4      1.5      1.5      1.6      1.7      10.9
    Exclusion of interest on State and local
     government bonds for rental housing...........      0.3      0.3      0.3      0.3      0.3      0.7      0.8      0.8      0.8      0.8       5.4
    Depreciation of rental housing in excess of
     alternative depreciation system...............      0.2      0.2      0.2      0.2      0.2      1.6      1.5      1.5      1.6      1.7       8.6
    Tax credit for low-income housing..............      1.2      1.4      1.5      1.7      1.9      2.3      2.6      2.8      3.1      3.4      22.0
    Tax credit for first-time homebuyers in the
     District of Columbia..........................  .......  .......  .......  .......  .......    (\1\)    (\1\)    (\1\)  .......  .......       0.1
    Tax credit for rehabilitation of historic
     structures....................................      0.3      0.4      0.4      0.4      0.4      0.1      0.1      0.1      0.1      0.1       2.3
  Other business and commerce:
    Reduced rates of tax on long-term capital gains  .......  .......  .......  .......  .......     35.1     32.0     33.8     34.9     36.1     171.9
    Exclusion of capital gains at death............  .......  .......  .......  .......  .......     19.2     20.7     22.2     23.9     25.2     111.2
    Carryover basis of capital gains on gifts......  .......  .......  .......  .......  .......      1.9      2.1      2.3      2.5      2.7      11.5
    Deferral of gain on non-dealer installment
     sales.........................................      0.5      0.5      0.5      0.5      0.6      0.4      0.4      0.4      0.4      0.4       4.7
    Deferral of gain on like-kind exchanges........      0.4      0.4      0.4      0.4      0.4      0.3      0.3      0.3      0.3      0.3       3.5
    Deferral of gain on involuntary conversions
     resulting from Presidentially-declared
     disasters.....................................  .......  .......  .......  .......  .......    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.1
    Depreciation of buildings other than rental
     housing in excess of alternative depreciation
     system........................................      1.9      1.5      1.2      1.2      1.1      0.9      0.7      0.5      0.5      0.4       9.9
    Depreciation of equipment in excess of
     alternative depreciation system...............     23.7     24.8     25.3     25.7     26.1      6.3      6.7      6.9      6.8      6.7     158.9
    Expensing of depreciable business property.....      0.5      0.5      0.7      0.7      0.5      0.3      0.2      0.3      0.4      0.2       4.4
    Amortization of business startup costs.........    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.3      0.3      0.3      0.3      0.3       1.6
    Reduced rates on first $10,000,000 of corporate
     taxable income................................      4.4      4.4      4.4      4.4      4.5  .......  .......  .......  .......  .......      22.1
    Permanent exemption from imputed interest rules    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.2      0.2      0.2      0.2      0.2       1.1
    Expensing of magazine circulation expenditures.    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.2
    Special rules for magazine, paperback book, and
     record returns................................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.1
    Completed contract rules.......................      0.2      0.2      0.2      0.2      0.2    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       1.1
    Cash accounting, other than agriculture........    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.1      0.1      0.1      0.1      0.1       0.6
    Exclusion of interest on State and local
     government small-issue industrial development
     bonds.........................................      0.1      0.1      0.1      0.1      0.1      0.2      0.2      0.2      0.2      0.2       1.3
    Exception from net operating loss limitations
     for corporations in bankruptcy proceedings....      0.5      0.5      0.5      0.4      0.4  .......  .......  .......  .......  .......       2.3
    Tax credit for employer-paid FICA taxes on tips      0.1      0.2      0.2      0.2      0.2      0.2      0.2      0.3      0.3      0.3       2.1
Footnotes at end of table.
Transportation
  Deferral of tax on capital construction funds of
   shipping companies..............................      0.1      0.1      0.1      0.1      0.1  .......  .......  .......  .......  .......       0.5
  Exclusion of employer-paid transportation
   benefits........................................  .......  .......  .......  .......  .......      3.5      3.6      3.6      3.7      3.7      18.1
  Exclusion of interest on State and local
   government bonds for high-speed rail............    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.5
Community and Regional Development
  Empowerment zone tax incentives..................      0.2      0.2      0.2      0.2      0.2      0.1      0.1      0.2      0.1      0.1       1.8
  District of Columbia tax incentives..............      0.1      0.1      0.1      0.1      0.1      0.1      0.1      0.1      0.1      0.1       0.7
  Indian reservation tax incentives................      0.1      0.1      0.1      0.1    (\1\)      0.1      0.1      0.1    (\1\)    (\1\)       0.8
  Expensing of redevelopment costs in certain
   environmentally contaminated areas
   (``Brownfields'')...............................      0.1      0.1      0.1    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.3
  Tax credit for rehabilitation of structures,
   other than historic structures..................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.1
  Exclusion of interest on State and local
   government bonds for private airports, docks,
   and mass-commuting facilities...................      0.3      0.3      0.3      0.4      0.4      0.7      0.8      0.9      0.9      1.0       6.1
Education, Training, Employment, and Social
 Services
  Education and training:
    Tax credits for tuition for post-secondary
     education.....................................  .......  .......  .......  .......  .......      5.6      6.4      6.2      6.2      6.2      30.6
    Deduction for interest on student loans........  .......  .......  .......  .......  .......      0.1      0.2      0.2      0.3      0.3       1.1
    Exclusion of earnings of trust accounts for
     higher education (``education IRAs'').........  .......  .......  .......  .......  .......      0.3      0.5      0.5      0.6      0.7       2.6
    Exclusion of interest on educational savings
     bonds.........................................  .......  .......  .......  .......  .......    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.1
    Deferral of tax on earnings of qualified State
     tuition programs..............................  .......  .......  .......  .......  .......      0.2      0.2      0.2      0.3      0.4       1.2
    Exclusion of scholarship and fellowship income.  .......  .......  .......  .......  .......      0.9      1.0      1.0      1.1      1.2       5.3
    Exclusion of employer-provided education
     assistance benefits...........................  .......  .......  .......  .......  .......      0.2      0.2      0.2      0.2      0.2       1.1
    Parental personal exemption for students age 19
     to 23.........................................  .......  .......  .......  .......  .......      0.8      0.8      0.8      0.9      0.9       4.2
    Exclusion of interest on State and local
     government student loan bonds.................      0.1      0.1      0.1      0.1      0.1      0.2      0.2      0.2      0.2      0.2       1.3
    Exclusion of interest on State and local
     government bonds for private nonprofit
     educational facilities........................      0.3      0.3      0.3      0.4      0.4      0.7      0.8      0.8      0.9      0.9       5.9
    Tax credit for holders of qualified education
     bonds.........................................    (\1\)      0.1      0.1      0.1      0.1  .......  .......  .......  .......  .......       0.3
    Deduction for charitable contributions to
     educational institutions......................      1.0      1.1      1.2      1.4      1.5      2.8      2.9      3.1      3.3      3.5      21.8
  Employment:
    Exclusion of employee meals and lodging (other
     than military)................................  .......  .......  .......  .......  .......      0.7      0.8      0.8      0.8      0.9       4.0
    Exclusion of benefits provided under cafeteria
     plans (\3\)...................................  .......  .......  .......  .......  .......      4.3      4.5      4.9      5.3      5.7      24.6
    Exclusion of housing allowances for ministers..  .......  .......  .......  .......  .......      0.4      0.4      0.4      0.4      0.4       2.0
    Exclusion of miscellaneous fringe benefits.....  .......  .......  .......  .......  .......      6.2      6.5      6.9      7.3      7.8      34.7
    Exclusion of employee awards...................  .......  .......  .......  .......  .......      0.1      0.1      0.1      0.1      0.1       0.7
    Exclusion of income earned by voluntary
     employees' beneficiary associations...........  .......  .......  .......  .......  .......      0.5      0.5      0.6      0.6      0.6       2.8
    Special tax provisions for employee stock
     ownership plans (ESOPs).......................      0.8      0.8      0.9      0.9      0.9    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       4.6
    Work opportunity tax credit....................      0.3      0.2      0.1    (\1\)    (\1\)      0.1    (\1\)    (\1\)    (\1\)  .......       0.7
    Welfare-to-work tax credit.....................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  .......  .......       0.1
Footnotes at end of table.
  Social services:
    Tax credit for children under age 17 (\4\).....  .......  .......  .......  .......  .......     19.1     20.0     20.0     19.8     19.5      98.4
    Tax credit for child and dependent care
     expenses......................................  .......  .......  .......  .......  .......      2.5      2.5      2.5      2.5      2.5      12.6
    Exclusion of employer-provided child care (\5\)  .......  .......  .......  .......  .......      0.4      0.4      0.5      0.5      0.6       2.4
    Exclusion of certain foster care payments......  .......  .......  .......  .......  .......    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.2
    Adoption credit and employee adoption benefits
     exclusion.....................................  .......  .......  .......  .......  .......      0.4      0.4      0.4      0.2      0.1       1.5
    Deduction for charitable contributions, other
     than for education and health.................      1.0      1.1      1.2      1.3      1.4     19.8     20.9     22.1     23.3     24.6     116.6
    Tax credit for disabled access expenditures....    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.1      0.1      0.1      0.1      0.1       0.3
Health
  Exclusion of employer contributions for health
   care, health insurance premiums, and long-term
   care insurance premiums (\6\)...................  .......  .......  .......  .......  .......     57.9     61.3     65.1     69.2     73.8     327.3
  Exclusion of medical care and CHAMPUS/TRICARE
   medical insurance for military dependents,
   retirees, and retiree dependents................  .......  .......  .......  .......  .......      1.5      1.6      1.6      1.6      1.6       7.9
  Deduction for health insurance premiums and long-
   term care insurance premiums by the self-
   employed........................................  .......  .......  .......  .......  .......      1.0      1.2      1.2      1.5      2.4       7.3
  Deducation for medical expenses and long-term
   care expenses...................................  .......  .......  .......  .......  .......      4.2      4.3      4.5      4.7      4.9      22.6
  Exclusion of workers' compensation benefits
   (medical benefits)..............................  .......  .......  .......  .......  .......      4.3      4.5      4.7      4.9      5.1      23.4
  Medical savings accounts.........................  .......  .......  .......  .......  .......    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.1
  Exclusion of interest on State and local
   government bonds for private nonprofit hospital
   facilities......................................      0.5      0.6      0.6      0.7      0.7      1.3      1.5      1.5      1.6      1.7      10.8
  Deduction for charitable contributions to health
   organizations...................................      0.7      0.8      0.9      1.0      1.1      2.0      2.1      2.3      2.4      2.5      15.8
  Tax credit for orphan drug research..............    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  .......  .......  .......  .......  .......       0.2
Medicare
  Exclusion of untaxed medicare benefits:
    Hospital insurance.............................  .......  .......  .......  .......  .......     14.7     15.2     15.9     16.8     17.8      80.4
    Supplementary medical insurance................  .......  .......  .......  .......  .......      7.2      8.0      9.1     10.4     11.8      46.5
Income Security
  Exclusion of workers' compensation benefits
   (disability and survivors payments).............  .......  .......  .......  .......  .......      3.7      3.8      3.9      4.0      4.2      19.7
  Exclusion of special benefits for disabled coal
   miners..........................................  .......  .......  .......  .......  .......      0.1      0.1      0.1      0.1      0.1       0.4
  Exclusion of cash public assistance benefits.....  .......  .......  .......  .......  .......      0.5      0.5      0.5      0.5      0.5       2.5
  Net exclusion of pension contributions and
   earnings:
    Employer plans.................................  .......  .......  .......  .......  .......     76.1     78.3     78.2     78.1     78.4     388.9
    Individual retirement plans....................  .......  .......  .......  .......  .......     11.4     12.4     13.1     14.2     15.5      66.6
    Keogh plans....................................  .......  .......  .......  .......  .......      4.8      5.1      5.2      5.4      5.7      26.1
  Exclusion of other employee benefits:
    Premiums on group term life insurance..........  .......  .......  .......  .......  .......      2.0      2.0      2.1      2.2      2.3      10.5
    Premiums on accident and disability insurance..  .......  .......  .......  .......  .......      0.2      0.2      0.2      0.2      0.2       1.0
  Additional standard deduction for the blind and
   the elderly.....................................  .......  .......  .......  .......  .......      2.0      2.0      2.0      2.1      2.2      10.3
  Tax credit for the elderly and disabled..........  .......  .......  .......  .......  .......    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)       0.1
  Deduction for casualty and theft losses..........  .......  .......  .......  .......  .......      0.3      0.3      0.3      0.3      0.4       1.6
  Earned income credit (EIC) (\7\).................  .......  .......  .......  .......  .......      4.2      4.3      4.5      4.6      4.7      22.3
Footnotes at end of table.
Social Security and Railroad Retirement
  Exclusion of untaxed social security and railroad
   retirement benefits.............................  .......  .......  .......  .......  .......     25.4     26.1     27.0     28.0     28.9     135.4
Veterans' Benefits and Services
  Exclusion of veterans' disability compensation...  .......  .......  .......  .......  .......      2.0      2.1      2.2      2.2      2.3      10.8
  Exclusion of veterans' pensions..................  .......  .......  .......  .......  .......      0.1      0.1      0.1      0.1      0.1       0.6
  Exclusion of GI bill benefits....................  .......  .......  .......  .......  .......      0.1      0.1      0.1      0.1      0.1       0.5
  Exclusion of interest on State and local
   government bonds for veterans' housing..........    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.1      0.1      0.1      0.1      0.1       0.4
General Purpose Fiscal Assistance
  Exclusion of interest on public purpose State and
   local government debt...........................      4.2      4.8      4.9      5.2      5.6     10.4     11.7     11.9     12.8     13.8      85.3
  Deduction of nonbusiness State and local
   government income and personal property taxes...  .......  .......  .......  .......  .......     31.2     32.1     33.0     33.9     34.8     165.0
  Tax credit for Puerto Rico and possession income.      3.6      3.8      4.0      3.6      3.2  .......  .......  .......  .......  .......      18.2
Interest
  Deferral of interest on savings bonds............  .......  .......  .......  .......  .......      1.2      1.2      1.2      1.2      1.2       6.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Footnotes for Table 1:

\1\ Positive tax expenditure of less than $50 million.
\2\ In addition, the exemption from excise tax for alcohol fuels results in a reduction in excise tax receipts, net of income tax effect, of $0.5
  billion in fiscal year 1999 and $0.6 billion per year in fiscal years 2000 through 2003.
\3\ Estimate includes amounts of employer-provided health insurance purchased through cafeteria plans and employer-provided child care  purchased
  dependent care flexible spending accounts. These amounts are also included in other line items in this table.
\4\ The figures in the table show the effect of the child credit on receipts. The increase in outlays is: $0.9 billion in 1999, $1.2 billion in  2000,
  $1.2 billion in 2001, $1.2 billion in 2002, and $1.2 billion in 2003.
\5\ Estimate includes employer-provided child care purchased through dependent care flexible spending accounts.
\6\ Estimate includes employer-provided health insurance purchased through cafeteria plans.
\7\ The figures in the table show the effect of the earned income credit on receipts. The increase in outlays is: $25.6 billion in 1999, $26.2  billion
  in 2000, $26.8 billion in 2001, $27.3 billion in 2002, and $27.9 billion in 2003.

Note: Details may not add to totals due to rounding.

Source: Joint Committee on Taxation.


            Table 2.--Distribution by Income Class of All Returns, Taxable Returns, Itemized Returns,
                     and Tax Liability at 1998 Rates and 1998 Law and 1998 Income Levels \1\
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                    All returns       Taxable        Itemized
          Income class [thousands] \2\                  \3\           returns         returns      Tax liability
----------------------------------------------------------------------------------------------------------------
Below $10.......................................          19,763           1,388             110         -$5,401
$10 to $20......................................          25,158           8,527             858          -6,186
$20 to $30......................................          20,397          12,446           2,015          14,101
$30 to $40......................................          16,189          12,860           3,258          29,025
$40 to $50......................................          12,434          11,269           3,918          38,022
$50 to $75......................................          19,469          19,167           9,711          99,413
$75 to $100.....................................          10,015           9,976           7,322          94,567
$100 to $200....................................           8,383           8,367           7,240         164,726
$200 and over...................................           2,129           2,125           1,936         272,265
                                                 ---------------------------------------------------------------
      Total.....................................         133,938          86,125          36,367        $700,532
----------------------------------------------------------------------------------------------------------------
\1\ Tax law as in effect on January 1, 1998, is applied to the 1998 level and sources of income and their
  distribution among taxpayers.
\2\ The income concept used to place tax returns into classes is adjusted gross income (AGI) plus: (a) tax-
  exempt interest, (b) employer  contributions for health plans and life insurance, (c) employer share of FICA
  tax, (d) workers' compensation, (e) nontaxable Social Security  benefits, (f) insurance value of Medicare
  benefits, (g) alternative minimum tax preference items, and (h) excluded income of U.S. citizens  living
  abroad.
\3\ Includes filing and nonfiling units. Filing units include all taxable and nontaxable returns. Nonfiling
  units include individuals with  income that is exempt from Federal income taxation (e.g., transfer payments,
  interest from tax-exempt bonds, etc.). Excludes individuals  who are dependents of other taxpayers and
  taxpayers with negative income.

Note: Details may not add to totals due to rounding.

Source: Joint Committee on Taxation.


              Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items,
                                    at 1998 Rates and 1998 Income Levels \1\
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                       Medical deduction \3\         Real estate tax deduction
          Income class [thousands] \2\           ---------------------------------------------------------------
                                                      Returns         Amount          Returns         Amount
----------------------------------------------------------------------------------------------------------------
Below $10.......................................               7              $2               9              $1
$10 to $20......................................             170              49             373              59
$20 to $30......................................             556             172           1,257             206
$30 to $40......................................             827             352           2,405             498
$40 to $50......................................             794             406           3,199             825
$50 to $75......................................           1,424             934           8,452           2,803
$75 to $100.....................................             578             683           6,616           3,611
$100 to $200....................................             306             830           6,668           5,682
$200 and over...................................              38             319           1,614           3,672
                                                 ---------------------------------------------------------------
    Total.......................................           4,701          $3,746          30,594         $17,358
----------------------------------------------------------------------------------------------------------------
Footnotes at end of table.


              Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items,
                               at 1998 Rates and 1998 Income Levels \1\--Continued
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                    State and local income and       Charitable contributions
                                                       personal property tax                 deduction
          Income class [thousands] \2\                       deduction           -------------------------------
                                                 --------------------------------
                                                      Returns         Amount          Returns         Amount
----------------------------------------------------------------------------------------------------------------
Below $10.......................................              20           (\6\)              54              $4
$10 to $20......................................             487             $20             930             113
$20 to $30......................................           1,460              84           2,196             302
$30 to $40......................................           2,833             299           3,187             598
$40 to $50......................................           3,554             775           3,830             955
$50 to $75......................................           9,201           2,925           9,221           3,511
$75 to $100.....................................           6,719           4,526           5,593           3,482
$100 to $200....................................           6,594           8,721           5,151           5,223
$200 and over...................................           1,697          13,121           1,617           9,395
                                                 ---------------------------------------------------------------
      Total.....................................          32,565         $30,469          31,777         $23,583
----------------------------------------------------------------------------------------------------------------
Footnotes at end of table.


              Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items,
                               at 1998 Rates and 1998 Income Levels \1\--Continued
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                         Child care credit           Earned income credit \4\
          Income class [thousands] \2\           ---------------------------------------------------------------
                                                      Returns         Amount          Returns         Amount
----------------------------------------------------------------------------------------------------------------
Below $10.......................................               3           (\6\)           4,976          $5,732
$10 to $20......................................             346            $102           6,683          13,805
$20 to $30......................................             935             389           5,279           7,543
$30 to $40......................................             831             349           2,061           1,722
$40 to $50......................................             718             296             160             145
$50 to $75......................................           1,473             662              41              53
$75 to $100.....................................             804             391           (\5\)           (\6\)
$100 to $200....................................             531             267              --              --
$200 and over...................................              95              49              --              --
                                                 ---------------------------------------------------------------
      Total.....................................           5,738          $2,504          19,201         $29,000
----------------------------------------------------------------------------------------------------------------
Footnotes at end of table.


              Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items,
                               at 1998 Rates and 1998 Income Levels \1\--Continued
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                    Untaxed Social Security and         Child tax credit \4\
                                                   Railroad Retirement benefits  -------------------------------
          Income class [thousands] \2\           --------------------------------
                                                      Returns         Amount          Returns         Amount
----------------------------------------------------------------------------------------------------------------
Below $10.......................................             172             $30              19              $6
$10 to $20......................................           3,977           1,664           1,676             545
$20 to $30......................................           4,902           4,705           3,697           1,802
$30 to $40......................................           4,467           5,783           4,125           2,775
$40 to $50......................................           3,561           5,561           3,396           2,447
$50 to $75......................................           4,228           5,768           7,322           5,339
$75 to $100.....................................           1,432             583           4,397           3,223
$100 to $200....................................           1,312             320           2,131           1,369
$200 and over...................................             362             122               3               2
                                                 ---------------------------------------------------------------
      Total.....................................          24,411         $24,536          26,766         $17,508
----------------------------------------------------------------------------------------------------------------
Footnotes at end of table.


              Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items,
                               at 1998 Rates and 1998 Income Levels \1\--Continued
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                                         Mortgage interest deduction
                     Income class [thousands] \2\                     -------------------------------
                                                                           Returns         Amount
----------------------------------------------------------------------------------------------------- -------------
Below $10............................................................              14              $3
$10 to $20...........................................................             345             128
$20 to $30...........................................................           1,134             466
$30 to $40...........................................................           2,375           1,238
$40 to $50...........................................................           3,080           2,270
$50 to $75...........................................................           8,201           7,667
$75 to $100..........................................................           6,538          10,029
$100 to $200.........................................................           6,306          15,739
$200 and over........................................................           1,554           9,438
                                                                      ------------------------------------------
      Total..........................................................          29,548         $46,977
----------------------------------------------------------------------------------------------------------------
Footnotes for Table 3:

\1\ Excludes individuals who are dependents of other taxpayers and taxpayers with negative income.
\2\ The income concept used to place tax returns into classes is adjusted gross income (AGI) plus: (a) tax-
  exempt interest, (b) employer  contributions for health plans and life insurance, (c) employer share of FICA
  tax, (d) workers' compensation, (e) nontaxable Social Security  benefits, (f) insurance value of Medicare
  benefits, (g) alternative minimum tax preference items, and (h) excluded income of U.S. citizens  living
  abroad.
\3\ Tax expenditure estimate does not include revenue losses attributable to deductions for long-term care and
  long-term care insurance  premiums.
\4\ Includes the refundable portion.
\5\ Less than 500 returns.
\6\ Less than $500,000.

Note: Details may not add to totals due to rounding.

Source: Joint Committee on Taxation.