[JPRT 107-5-2]
[From the U.S. Government Publishing Office]
[JOINT COMMITTEE PRINT]
ESTIMATES OF FEDERAL TAX
EXPENDITURES FOR
FISCAL YEARS 2003-2007
Prepared for the
COMMITTEE ON WAYS AND MEANS
and the
COMMITTEE ON FINANCE
__________
By the Staff of the
JOINT COMMITTEE ON TAXATION
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
DECEMBER 19, 2002
________
U.S. GOVERNMENT PRINTING OFFICE
83-132 WASHINGTON : 2002 JCS-5-2
C O N T E N T S
Page
Introduction..................................................... 1
I. The Concept of Tax Expenditures...................................2
II. Measurement of Tax Expenditures..................................15
III.Tax Expenditure Estimates........................................17
Table 1. Tax Expenditure Estimates by Budget Function,
Fiscal Years 2003-2007............................... 18
Table 2. Distribution of All Returns, Taxable Returns,
Itemized Returns, and Tax Liability by Income Class.. 28
Table 3. Distribution of Selected Individual Tax
Expenditures by Income Class......................... 29
INTRODUCTION
This report \1\ on tax expenditures for fiscal years 2003-
2007 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.
---------------------------------------------------------------------------
\1\ This report may be cited as follows: Joint Committee on
Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2003-
2007 (JCS-5-02), December 19, 2002.
---------------------------------------------------------------------------
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 2001-2007 in the
Administration's budgetary statement of February 2002.\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.''
---------------------------------------------------------------------------
\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, December 15,
1997, December 14, 1998, December 22, 1999, April 6, 2001, and January
17, 2002.
\3\ Office of Management and Budget, ``Tax Expenditures,'' Budget
of the United States Government: Analytical Perspectives, Fiscal Year
2003, February 4, 2002, pp. 95-127.
---------------------------------------------------------------------------
The Joint Committee staff has made its estimates (as shown
in Table 1) based on the provisions in tax law as enacted
through December 15, 2002. 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 2002-2006 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 income tax
liabilities that result from special tax provisions or
regulations that provide tax benefits to particular taxpayers.
---------------------------------------------------------------------------
\4\ Congressional Budget and Impoundment Control Act of 1974 (P.L.
93-344), sec. 3(3).
---------------------------------------------------------------------------
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 similar to those direct
spending programs that are available as entitlements to those
who meet the statutory criteria established for the programs.
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 determination of whether a provision is a tax
expenditure is made on the basis of a broad concept of income
that is larger in scope than ``income'' as defined under
general U.S. income tax principles. 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 2003-2007. 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 mandate, 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
income taxes on individuals and corporations.\5\ 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\
---------------------------------------------------------------------------
\5\ The Federal income tax on individuals also applies to estates
and trusts, which are subject to a separate income tax rate schedule
(Internal Revenue Code section 1(e)). Estates and trusts may benefit
from some of the same tax expenditure provisions that apply to
individuals. In Table 1 of this report, the tax expenditures that apply
to estates and trusts have been included in the estimates of tax
expenditures for individual taxpayers.
\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 4, 2002, pp. 95-127. 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.
---------------------------------------------------------------------------
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 two-
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.
The Joint Committee staff views the personal exemptions and
the standard deduction as defining the zero-rate bracket that
is a part of normal tax law. 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.
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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, and income earned on pension assets is not taxed
until distributed. 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 (including the 10-percent additional tax paid on
early withdrawals from pension plans).
Under present law, social security and tier 1 railroad
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 the retirement
benefits that represents a return of the payroll taxes that
they paid during their working years. Thus, the exclusion of
social security and railroad retirement benefits in excess of
payroll tax payments is classified as a tax expenditure.
---------------------------------------------------------------------------
\8\ For taxpayers with modified adjusted gross incomes above
certain levels, up to 85 percent of social security retirement benefits
are includable in income.
---------------------------------------------------------------------------
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 statute 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 benefits and Temporary Assistance for Needy Families
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
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.
Under the Joint Committee staff view of normal tax law,
compensatory stock options would be subject to regular income
tax at the time the options are exercised and employers would
receive a corresponding tax deduction.\11\ The employee's
income would be equal to the difference between the purchase
price of the stock and the market price on the day the option
is exercised. Present law provides for special tax treatment
for incentive stock options and options acquired under employee
stock purchase plans. When certain requirements are satisfied,
(1) the income that is received at the time the option is
exercised is excluded for purposes of the regular income tax
but included for purposes of the alternative minimum tax, (2)
the gain from any subsequent sale of the stock is taxed as a
capital gain, and (3) the employer does not receive a tax
deduction with respect to the option. The special tax treatment
provided to the employee is viewed as a tax expenditure by the
Joint Committee staff, and an estimate of this tax expenditure
is contained in Table 1. However, it should be noted that the
revenue loss from the special tax treatment provided to the
employee is accompanied by a significant revenue gain from the
denial of the deduction to the employer.
---------------------------------------------------------------------------
\11\ If the option has a readily ascertainable fair market value,
normal law would tax the option at the time it is granted and the
employer would be entitled to a deduction at that time.
---------------------------------------------------------------------------
The individual 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 the deduction for State and local income
taxes (for those taxpayers subject to the AMT) by not allowing
the deductions 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
individual 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.
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 Joint Committee staff uses several accounting standards
in evaluating the provisions in the Code that govern the
recognition of business receipts and expenses. Under the Joint
Committee staff view, normal income tax law is assumed to
require the accrual method of accounting, the standard of
``economic performance'' (used in the Code to test whether
liabilities are deductible), and the general concept of
matching income and expenses. In general, tax provisions that
do not satisfy all three standards are viewed as tax
expenditures. For example, the deduction for contributions to
taxpayer-controlled mining reclamation reserve accounts is
viewed as a tax expenditure because the contributions do not
satisfy the economic performance standard. (Adherence to the
standard would require that the taxpayer make an irrevocable
contribution toward future reclamation, involving a trust fund
or similar mechanism, as occurs in a number of areas in the
Code.) The deduction for contributions to nuclear
decommissioning trust accounts is not viewed as a tax
expenditure because the contributions are irrevocable (i.e.,
they satisfy the economic performance standard). However,
present law provides for a reduced rate of tax on the income of
nuclear decommissioning trust accounts, and this reduced rate
of tax is viewed as a tax expenditure.
The Joint Committee staff assumes that normal income tax
law would provide for the carryback and carryforward of net
operating losses. The staff also assumes that the general
limits on the number of years that such losses may be carried
back or forward were chosen for reasons of administrative
convenience and compliance concerns and may be assumed to
represent normal income tax law. Exceptions to the general
limits on carrybacks and carryforwards are viewed as 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.
Exceptions to the corporate alternative minimum tax are not
viewed as tax expenditures because the effects of the AMT
exceptions are already incorporated in the estimates of related
tax expenditures.\12\
---------------------------------------------------------------------------
\12\ See discussion of individual AMT on page 6.
---------------------------------------------------------------------------
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.
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 of income granted to holders
of tax-exempt financing issued by charities.
Recent Legislation
The Job Creation and Worker Assistance Act of 2002 (H.R.
3090), enacted on March 9, 2002 (P.L. 107-147), included
several new tax expenditures, as follows:
--An additional first-year depreciation deduction was
provided for qualified property to which the general rules of
MACRS apply. Qualified property includes (1) property with a
recovery period of 20 years or less, (2) water utility
property, (3) computer software other than software covered by
section 197, and (4) leasehold improvement property. The
original use of the property must commence with the taxpayer,
the taxpayer must purchase (or begin construction of) the
property after September 11, 2001, and before September 11,
2004, and the property must be placed in service on or after
September 11, 2001 (except for certain leased property) and
before January 1, 2005.
--An above-the-line deduction was provided for up to $250
per year of expenses paid or incurred by an eligible educator
for books, supplies, computer equipment, and other equipment
and materials used in the classroom. The expenses must be
otherwise deductible under section 162 as trade or business
expenses. An eligible educator is a kindergarten through grade
12 teacher, instructor, aide, counselor, or principal in a
school for at least 900 hours during the school year. The
provision is effective for taxable years beginning after
December 31, 2001, and before January 1, 2004.
The Job Creation and Worker Assistance Act also provided a
number of tax incentives for the area of New York City that was
damaged in the terrorist attacks of September 11, 2001. These
tax incentives apply only in the ``New York Liberty Zone,''
which is the area located on or south of Canal Street, south of
East Broadway (east of its intersection with Canal Street), and
south of Grand Street (east of its intersection with East
Broadway) in the Borough of Manhattan. The tax incentives are
as follows:
--The work opportunity tax credit (``WOTC'') was expanded
to include a new targeted group consisting of individuals who
perform all their services for a business located in the New
York Liberty Zone and individuals who perform substantially all
their services in New York City for a business that relocated
from the Liberty Zone elsewhere within New York City due to the
destruction or damage of their workplaces by the terrorist
attacks. This expansion of the WOTC is effective for wages paid
or incurred for work performed after December 31, 2001, and
before January 1, 2004.
--An additional first-year depreciation deduction was
provided for qualified New York Liberty Zone property. The
deduction is equal to 30 percent of the adjusted basis of the
qualified property. The original use of the property must
commence with the taxpayer on or after September 11, 2001
(except for certain leased property) and the property must be
acquired by the taxpayer by purchase after September 10, 2001,
and placed in service on or before December 31, 2006. For
qualifying nonresidential real property and residential rental
property, the property must be placed in service on or before
December 31, 2009.
--Authority was provided to issue $8 billion of tax-exempt
private activity bonds to finance the construction and
rehabilitation of nonresidential real property and residential
rental real property in the New York Liberty Zone. The
provision is effective for bonds issued before January 1, 2005.
--Authority was provided for one additional advance
refunding for certain bonds for facilities located in New York
City. The authority applies only to bonds for which all
present-law advance refunding authority was exhausted before
September 12, 2001, and with respect to which the advance
refunding bonds authorized under present law were outstanding
on September 11, 2001. The maximum amount of advance refunding
authorized under this provision is $9 billion. The advance
refunding must occur before January 1, 2005.
--The limits on section 179 expensing were increased for
qualified property used in the New York Liberty Zone. The
maximum amount that may be expensed under section 179 was
increased by the lesser of (1) $35,000 or (2) the cost of
qualifying property placed in service during the taxable year.
Qualifying property is section 179 property that is purchased
and placed in service by the taxpayer in the New York Liberty
Zone in the active conduct of a trade or business by the
taxpayer. The use of the property in the New York Liberty Zone
must commence with the taxpayer. The provision is effective for
taxable years beginning after December 31, 2001, and before
January 1, 2007.
--The replacement period for section 1033 involuntary
conversions was extended from two years to five years for
property that was involuntarily converted within the New York
Liberty Zone as a result of the terrorist attacks that occurred
on September 11, 2001. The five-year replacement period is
available only if substantially all of the use of the
replacement property is in New York City. The provision is
effective for involuntary conversions occurring on or after
September 11, 2001.
--A five-year recovery period was provided for qualified
New York Liberty Zone (``NYLZ'') leasehold improvement
property. Qualified NYLZ leasehold improvement property is
property defined in section 168(e)(6) that is placed in service
after September 10, 2001, and before January 1, 2007, in the
New York Liberty Zone. The straight-line method is required to
be used with respect to qualified NYLZ leasehold improvement
property.
In Table 1, the effects of all of the New York Liberty Zone
tax provisions are combined in the tax expenditure estimate for
``New York Liberty Zone tax incentives.''
The Job Creation and Worker Assistance Act also modified
several tax expenditures, as follows:
--The non-accrual experience method of accounting was
restricted to amounts received for the performance of certain
professional services and for services provided by certain
small businesses, effective for taxable years ending after the
date of enactment. This change is reflected in the tax
expenditure estimate for ``cash accounting, other than
agriculture.''
--The exclusion for qualified foster care payments was
modified in two ways. First, the definition of qualified foster
care payments was expanded to include payments by any placement
agency that is licensed or certified by a State or local
government, or an entity designated by a State or local
government to make payments to providers of foster care.
Second, the definition of a qualified foster care individual
was expanded to include all individuals placed by a qualified
foster care placement agency, regardless of age at time of
placement. The changes are effective for taxable years
beginning after December 31, 2001.
The Job Creation and Worker Assistance Act also extended a
number of expiring tax expenditure provisions, as follows:
--The phaseout of the tax credit for electric vehicles,
which was scheduled to commence in 2002, was deferred until
2004. Thus, the credit will be reduced by 25 percent for
property placed in service in 2004, 50 percent for property
placed in service in 2005, 75 percent for property placed in
service in 2006, and the credit will be unavailable for
property placed in service in 2007 and thereafter.
--The tax credit for electricity production from wind,
closed-loop biomass, and poultry litter, which was scheduled to
expire for property placed in service after December 31, 2001,
was extended for two years. Thus, the credit will be available
for property placed in service prior to January 1, 2004.
--The work opportunity tax credit, which was scheduled to
expire for wages paid or incurred to employees who began work
after December 31, 2001, was extended for two years. Thus, the
credit will be available for wages paid or incurred to
employees who begin work before January 1, 2004.
--The welfare-to-work tax credit, which was scheduled to
expire for wages paid or incurred to individuals who began work
after December 31, 2001, was extended for two years. Thus, the
credit will be available for wages paid or incurred to
qualified individuals who begin work before January 1, 2004.
--The phaseout of the deduction for clean-fuel vehicles,
which was scheduled to commence in 2002, was deferred until
2004. Thus, the deduction will be reduced by 25 percent for
property placed in service in 2004, 50 percent for property
placed in service in 2005, 75 percent for property placed in
service in 2006, and the deduction will be unavailable for
property placed in service in 2007 and thereafter.
--The suspension of the 100-percent-of-net-income limit on
percentage depletion for marginal wells, which was scheduled to
expire for taxable years beginning after December 31, 2001, was
extended to include taxable years beginning in 2002 and 2003.
--The authority to issue qualified zone academy bonds,
which was scheduled to expire after 2001, was extended for two
years. Up to $400 million of qualified zone academy bonds may
be issued each year in calendar years 2002 and 2003.
--The cut-off year for Archer medical savings accounts
(``MSAs'') was changed from 2002 to 2003. After the cut-off
year, no new contributions may be made to Archer MSAs except by
individuals who had previously made Archer MSA contributions
and employees who are employed by MSA-participating employers.
--The Indian employment tax credit, which was scheduled to
expire for wages paid after December 31, 2003, was extended for
one year. Thus, the credit will be available for wages paid
before January 1, 2005. The accelerated depreciation provisions
for Indian reservation property, which were scheduled to expire
for property placed in service after December 31, 2003, were
also extended one year. Thus, the accelerated depreciation will
be available for property placed in service prior to January 1,
2005. In Table 1, these two items are combined in the tax
expenditure estimate for ``Indian reservation tax incentives.''
--The exemptions from Subpart F for the active financing
income of controlled foreign corporations, which were scheduled
to expire for taxable years beginning after December 31, 2001,
were extended for five years. The extension is effective for
taxable years of foreign corporations beginning after December
31, 2001, and before January 1, 2007, and for taxable years of
U.S. shareholders with or within which such taxable years of
such foreign corporations end.
The Clergy Housing Allowance Clarification Act of 2002
(H.R. 4156), enacted on May 20, 2002 (P.L. 107-181), limited
the exclusion for parsonage allowances to the fair market
rental value of the home. The provision is generally effective
for taxable years beginning after December 31, 2001.
The Trade Act of 2002 (H.R. 3009), enacted on August 6,
2002 (P.L. 107-210), provided a new 65-percent refundable tax
credit for the purchase of health insurance coverage by certain
taxpayers eligible for Trade Adjustment Assistance (``TAA'')
and certain Pension Benefits Guaranty Corporation (``PBGC'')
pension recipients. The credit is effective for eligible health
insurance premiums paid for coverage after the date of
enactment.
The Holocaust Restitution Tax Fairness Act of 2002 (H.R.
4823), enacted on December 17, 2002, extended the exclusion for
restitution payments received by victims of the Nazi regime and
the victims' heirs and estates. The exclusion was scheduled to
expire for taxable years beginning after December 31, 2010.
Comparisons with Treasury Department
The Joint Committee staff and Treasury lists of tax
expenditures differ in three 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 to be 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 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
2001-2007. The Joint Committee staff estimates cover the
current fiscal year and the succeeding four fiscal years, i.e.,
fiscal years 2003-2007.
Third, 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 2003 through 2007. The Treasury rounds all yearly
estimates to the nearest $10 million and excludes those
provisions with estimates that round to zero in each year, i.e.
provisions that result in less than $5 million in revenue loss
in each of the years 2001 through 2007.
For the past nine 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 provisions that are
contained in the Joint Committee staff list of tax expenditures
(and are shown in Table 1) but are not contained in the
Treasury list:
Natural resources and environment
--Exclusion of contributions in aid of construction for water
and sewer utilities
--Special rules for mining reclamation reserves
--Special tax rate for nuclear decommissioning reserve funds
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 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
--Exclusion of spread on acquisition of stock under incentive
stock option plans and employee stock purchase
plans
Medicare
--Exclusion of untaxed Medicare benefits for Hospital Insurance
--Exclusion of untaxed Medicare benefits for Supplementary
Medical Insurance
The following tax provisions are not included in the Joint
Committee staff list of tax expenditures or the Treasury list.
However, these provisions are viewed as tax expenditures by the
Joint Committee staff. These provisions are not listed in Table
1 because the estimated revenue losses for fiscal years 2003
through 2007 are below the de minimis amount ($50 million):
Energy
--Expensing of tertiary injectants
Financial institutions
--Exclusion of investment income from structured settlement
arrangements
Income security
--Exclusion of survivor annuities paid to families of public
safety officers killed in the line of duty
Social services
--Exclusion of restitution payments received by victims of the
Nazi regime and the victims' heirs and estates
The following is a list of the tax provisions that are
included in the Treasury list and are viewed as tax
expenditures by the Joint Committee staff but are excluded from
Table 1 because the estimated revenue losses for fiscal years
2003 through 2007 are below the de minimis amount ($50
million):
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
Financial institutions
--Bad debt reserves of financial institutions
Insurance companies
--Special alternative tax on small property and casualty
insurance companies
--Tax exemption for certain small insurance companies
Business and commerce
--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: the exception for working interests in oil
and gas properties, and the exception for up to $25,000 of
rental losses. The Joint Committee staff does not classify
these two provisions as tax expenditures; the 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, above on page 6.
\14\ See discussion on pages 7-8, 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 2002-2007.
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 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
three 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. Third, some of the tax provisions that
provide an exclusion from income also apply to the FICA tax
base, and the repeal of the income tax provision would
automatically increase FICA tax revenues as well as income tax
revenues. There may also be interactions between income tax
provisions and other Federal taxes such as excise taxes and the
estate and gift tax.
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 (including filing
and nonfiling units), the number of taxable returns, the number
of 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 2003-2007
[Billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Corporations Individuals
Function ------------------------------------------------------------------------------------------ Total
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003-07
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Defense
Exclusion of benefits and allowances to Armed ....... ....... ....... ....... ....... 2.5 2.6 2.6 2.7 2.8 13.1
Forces personnel................................
Exclusion of military disability benefits........ ....... ....... ....... ....... ....... 0.1 0.1 0.1 0.1 0.1 0.6
International Affairs
Exclusion of income earned abroad by U.S. ....... ....... ....... ....... ....... 3.0 3.2 3.4 3.6 3.8 17.0
citizens........................................
Exclusion of certain allowances for Federal ....... ....... ....... ....... ....... 0.4 0.4 0.5 0.5 0.6 2.4
employees abroad................................
Exclusion of extraterritorial income............. 4.8 5.0 5.3 5.7 6.0 ....... ....... ....... ....... ....... 26.8
Deferral of active income of controlled foreign 4.4 4.6 4.8 5.0 5.2 ....... ....... ....... ....... ....... 24.0
corporations....................................
Inventory property sales source rule exception... 5.1 5.4 5.7 6.0 6.3 ....... ....... ....... ....... ....... 28.5
Deferral of certain financing income............. 1.7 1.9 2.1 2.3 1.7 ....... ....... ....... ....... ....... 9.7
General Science, Space, and Technology
Tax credit for qualified research expenditures... 5.1 4.5 2.7 1.4 0.7 (\1\) (\1\) (\1\) (\1\) (\1\) 14.7
Expensing of research and experimental 3.8 4.7 5.4 5.9 6.2 (\1\) (\1\) (\1\) (\1\) (\1\) 26.6
expenditures....................................
Energy
Expensing of exploration and development costs:
Oil and gas.................................... 0.6 0.4 0.3 0.4 0.5 (\1\) (\1\) (\1\) (\1\) (\1\) 2.2
Other fuels.................................... (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
Excess of percentage over cost depletion:
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
Tax credit for enhanced oil recovery costs....... 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 production of non-conventional 0.8 0.5 0.5 0.5 0.6 0.2 0.1 0.1 0.1 0.1 3.6
fuels...........................................
Tax credits for alcohol fuels \2\................ (\1\) (\1\) (\1\) (\1\) (\1\) ....... ....... ....... ....... ....... 0.1
Exclusion of interest on State and local (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.1 0.1 0.1 0.1 0.8
government industrial development bonds for
energy production facilities....................
Exclusion of energy conservation subsidies ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
provided by public utilities....................
Tax credit for investments in solar and (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
geothermal energy facilities....................
Tax credit for electricity production from wind, (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.3
biomass, and poultry waste......................
Natural Resources and Environment
Expensing of exploration and development costs, (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.3
nonfuel minerals................................
Excess of percentage over cost depletion, nonfuel 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.8
minerals........................................
Expensing of multiperiod timber-growing costs.... 0.2 0.2 0.2 0.2 0.2 (\1\) (\1\) (\1\) (\1\) (\1\) 0.9
Exclusion of interest on State and local 0.2 0.2 0.2 0.2 0.2 0.4 0.4 0.4 0.4 0.5 3.1
governments sewage, water, and hazardous waste
facilities bonds................................
Special rules for mining reclamation reserves.... (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
Special tax rate for nuclear decommissioning 0.3 0.3 0.3 0.3 0.3 ....... ....... ....... ....... ....... 1.5
reserve fund....................................
Exclusion of contributions in aid of construction (\1\) (\1\) (\1\) (\1\) (\1\) ....... ....... ....... ....... ....... 0.1
for water and sewer utilities...................
Agriculture
Expensing of soil and water conservation (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
expenditures....................................
Expensing of fertilizer and soil conditioner (\3\) (\1\) (\1\) (\1\) (\1\) (\3\) (\1\) (\1\) (\1\) (\1\) 0.1
costs...........................................
Expensing of the costs of raising dairy and (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 (\1\) (\1\) (\1\) (\1\) 0.2
breeding cattle.................................
Exclusion of cost-sharing payments............... (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Exclusion of cancellation of indebtedness income ....... ....... ....... ....... ....... 0.1 0.1 0.1 0.1 0.1 0.4
of farmers......................................
Cash accounting for agriculture.................. (\1\) 0.1 0.1 0.1 0.1 0.4 0.6 0.6 0.6 0.6 3.2
Income averaging for farmers..................... ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Five-year carryback period for net operating (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
losses atrributable to farming..................
Commerce and Housing
Financial institutions:
Exemption of credit union income............... 1.1 1.1 1.2 1.3 1.3 ....... ....... ....... ....... ....... 6.0
Insurance companies:
Exclusion of investment income on life 1.4 1.4 1.4 1.5 1.5 24.0 24.6 25.2 25.8 26.5 133.2
insurance and annuity contracts...............
Small life insurance company taxable income 0.1 0.1 0.1 0.1 0.1 ....... ....... ....... ....... ....... 0.5
adjustment....................................
Special treatment of life insurance company 1.3 1.3 1.3 1.4 1.4 ....... ....... ....... ....... ....... 6.8
reserves......................................
Deduction of unpaid property loss reserves for 1.4 1.4 1.4 1.5 1.5 ....... ....... ....... ....... ....... 7.2
property and casualty insurance companies.....
Special deduction for Blue Cross and Blue 0.3 0.3 0.3 0.3 0.3 ....... ....... ....... ....... ....... 1.5
Shield companies..............................
Housing:
Deduction for mortgage interest on owner- ....... ....... ....... ....... ....... 69.9 72.6 76.5 80.5 85.5 384.9
occupied residences...........................
Deduction for property taxes on owner-occupied ....... ....... ....... ....... ....... 22.1 21.7 19.0 15.4 14.0 92.1
residences....................................
Exclusion of capital gains on sales of ....... ....... ....... ....... ....... 17.8 17.9 18.2 18.4 18.7 91.0
principal residences..........................
Exclusion of interest on State and local 0.3 0.3 0.3 0.3 0.3 0.7 0.8 0.8 0.8 0.8 5.3
government bonds for owner-occupied housing...
Exclusion of interest on State and local 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2 1.1
government bonds for rental housing...........
Depreciation of rental housing in excess of 0.3 0.3 0.4 0.4 0.5 2.8 3.1 3.4 3.8 4.4 19.4
alternative depreciation system...............
Tax credit for low-income housing.............. 2.9 3.0 3.2 3.3 3.4 1.2 1.3 1.4 1.4 1.5 22.5
Tax credit for first-time homebuyers in the ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) (\1\)
District of Columbia..........................
Tax credit for rehabilitation of historic 0.4 0.4 0.4 0.4 0.4 0.1 0.1 0.1 0.1 0.1 2.5
structures....................................
Other business and commerce:
Reduced rates of tax on long-term capital gains ....... ....... ....... ....... ....... 55.3 54.7 52.8 53.2 48.6 264.6
Exclusion of capital gains at death............ ....... ....... ....... ....... ....... 38.1 41.1 44.3 47.6 49.1 220.2
Carryover basis of capital gains on gifts...... ....... ....... ....... ....... ....... 4.5 4.7 5.0 5.3 5.6 25.1
Deferral of gain on non-dealer installment 0.7 0.7 0.7 0.7 0.7 0.5 0.5 0.5 0.5 0.5 6.0
sales.........................................
Deferral of gain on like-kind exchanges........ 1.4 1.4 1.5 1.5 1.5 0.5 0.5 0.5 0.5 0.5 9.8
Deferral of gain on involuntary conversions ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
resulting from Presidentially-declared
disasters.....................................
Depreciation of buildings other than rental 1.5 1.4 1.1 0.9 1.2 0.9 0.9 0.6 0.2 0.3 9.1
housing in excess of alternative depreciation
system........................................
Depreciation of equipment in excess of 39.3 36.2 19.1 10.3 14.4 10.5 9.2 4.2 1.6 2.7 147.5
alternative depreciation system...............
Expensing of depreciable business property..... -0.1 (\3\) 0.1 0.2 0.2 -0.6 -0.2 0.5 0.8 0.7 1.5
Amortization of business startup costs......... (\1\) (\1\) (\1\) (\1\) (\1\) 0.6 0.6 0.6 0.6 0.6 3.0
Reduced rates on first $10,000,000 of corporate 4.4 4.6 4.8 4.9 5.1 ....... ....... ....... ....... ....... 23.7
taxable income................................
Permanent exemption from imputed interest rules (\1\) (\1\) (\1\) (\1\) (\1\) 0.3 0.3 0.3 0.3 0.3 1.5
Expensing of magazine circulation expenditures. (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
Special rules for magazine, paperback book, and (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
record returns................................
Completed contract rules....................... 0.2 0.2 0.2 0.2 0.2 (\1\) (\1\) (\1\) (\1\) (\1\) 1.2
Cash accounting, other than agriculture........ (\1\) (\1\) (\1\) (\1\) (\1\) 0.5 0.5 0.5 0.5 0.5 2.5
Exclusion of interest on State and local 0.1 0.1 0.1 0.1 0.1 0.3 0.3 0.3 0.3 0.3 2.0
government small-issue industrial development
bonds.........................................
Exception from net operating loss limitations 0.8 0.6 0.6 0.6 0.6 ....... ....... ....... ....... ....... 3.2
for corporations in bankruptcy proceedings....
Tax credit for employer-paid FICA taxes on tips 0.1 0.1 0.1 0.2 0.2 0.2 0.3 0.3 0.3 0.3 1.9
Transportation
Deferral of tax on capital construction funds of 0.1 0.1 0.1 0.1 0.1 ....... ....... ....... ....... ....... 0.5
shipping companies..............................
Exclusion of employer-paid transportation ....... ....... ....... ....... ....... 3.7 3.8 3.8 3.9 3.9 19.1
benefits........................................
Exclusion of interest on State and local (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.1 0.1 0.1 0.1 0.5
government bonds for high-speed rail............
Community and Regional Development
New York City Liberty Zone tax incentives........ 0.4 0.2 0.5 0.7 0.6 0.4 0.3 0.4 0.5 0.3 4.4
Empowerment zone tax incentives.................. 0.3 0.3 0.3 0.4 0.4 0.3 0.3 0.4 0.4 0.4 3.5
Renewal community tax incentives................. 0.1 0.1 0.2 0.2 0.3 0.3 0.3 0.4 0.4 0.4 2.7
New markets tax credit........................... (\1\) 0.1 0.2 0.2 0.3 0.1 0.1 0.2 0.3 0.4 2.0
District of Columbia tax incentives.............. (\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................ 0.4 0.5 0.3 -0.1 -0.3 0.2 0.2 0.2 (\3\) -0.1 1.3
Expensing of environmental remediation costs 0.1 (\1\) (\3\) (\3\) (\3\) 0.1 0.1 (\3\) (\3\) (\3\) 0.3
(``Brownfields'')...............................
Tax credit for rehabilitation of structures, (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
other than historic structures..................
Exclusion of interest on State and local 0.2 0.2 0.2 0.2 0.2 0.5 0.6 0.6 0.6 0.6 3.9
government bonds for private airports, docks,
and mass-commuting facilities...................
Education, Training, Employment, and Social
Services
Education and training:
Tax credits for tuition for post-secondary ....... ....... ....... ....... ....... 4.3 4.3 4.3 4.4 4.4 21.7
education.....................................
Deduction for interest on student loans........ ....... ....... ....... ....... ....... 0.6 0.7 0.8 0.8 0.9 3.8
Deduction for higher education expenses........ ....... ....... ....... ....... ....... 2.1 2.7 2.9 0.7 ....... 8.4
Exclusion of earnings of trust accounts for ....... ....... ....... ....... ....... 0.4 0.5 0.6 0.7 0.8 3.0
higher education (``education IRAs'').........
Exclusion of interest on educational savings ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
bonds.........................................
Deferral of tax on earnings of qualified State ....... ....... ....... ....... ....... 0.2 0.2 0.3 0.3 0.4 1.4
tuition programs..............................
Exclusion of scholarship and fellowship income. ....... ....... ....... ....... ....... 1.4 1.5 1.5 1.6 1.6 7.6
Exclusion of employer-provided education ....... ....... ....... ....... ....... 0.7 0.8 0.8 0.9 0.9 4.1
assistance benefits...........................
Parental personal exemption for students age 19 ....... ....... ....... ....... ....... 1.5 1.4 1.2 0.7 0.5 5.3
to 23.........................................
Exclusion of interest on State and local 0.1 0.1 0.1 0.1 0.1 0.3 0.3 0.3 0.3 0.3 1.8
government student loan bonds.................
Exclusion of interest on State and local 0.3 0.3 0.3 0.3 0.3 0.7 0.7 0.8 0.8 0.8 5.3
government bonds for private nonprofit
educational facilities 4......................
Tax credit for holders of qualified zone (\1\) 0.1 0.1 0.1 0.1 ....... ....... ....... ....... ....... 0.4
academy bonds.................................
Deduction for charitable contributions to 1.0 1.1 1.1 1.1 1.2 6.2 6.4 6.6 6.8 7.0 38.3
educational institutions......................
Above the line deduction for teacher classroom ....... ....... ....... ....... ....... 0.2 0.1 ....... ....... ....... 0.3
expenses......................................
Employment:
Exclusion of employee meals and lodging (other ....... ....... ....... ....... ....... 0.9 0.9 0.9 0.9 0.9 4.5
than military)................................
Exclusion of benefits provided under cafeteria ....... ....... ....... ....... ....... 14.0 14.8 16.0 16.8 18.0 79.5
plans 5.......................................
Exclusion of housing allowances for ministers.. ....... ....... ....... ....... ....... 0.4 0.5 0.5 0.5 0.5 2.4
Exclusion of miscellaneous fringe benefits..... ....... ....... ....... ....... ....... 6.0 6.2 6.4 6.7 7.0 32.3
Exclusion of employee awards................... ....... ....... ....... ....... ....... 0.1 0.1 0.2 0.2 0.2 0.8
Exclusion of income earned by voluntary ....... ....... ....... ....... ....... 3.0 3.2 3.4 3.5 3.7 16.8
employees' beneficiary associations...........
Special tax provisions for employee stock 0.8 0.9 0.9 0.9 0.9 0.2 0.2 0.3 0.3 0.3 5.6
ownership plans (``ESOPs'')...................
Work opportunity tax credit.................... 0.3 0.2 0.1 (\1\) (\1\) 0.1 (\1\) (\1\) (\1\) (\1\) 0.8
Welfare-to-work tax credit..................... 0.1 0.1 (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.3
Deferral of taxation on spread on acquisition ....... ....... ....... ....... ....... 0.3 0.4 0.4 0.5 0.5 2.1
of stock under incentive stock option plans
and employee stock purchase plans \6\.........
Social services:
Tax credit for children under age 17 \7\....... ....... ....... ....... ....... ....... 27.1 26.9 30.1 31.7 31.0 146.8
Tax credit for child and dependent care ....... ....... ....... ....... ....... 3.2 3.0 2.5 2.0 1.9 12.6
expenses......................................
Exclusion of employer-provided child care \8\.. ....... ....... ....... ....... ....... 0.8 0.8 0.9 0.9 1.0 4.4
Tax credit for employer-provided child care.... 0.1 0.1 0.1 0.1 0.2 (\1\) (\1\) (\1\) (\1\) (\1\) 0.7
Exclusion of certain foster care payments...... ....... ....... ....... ....... ....... 0.6 0.6 0.7 0.7 0.8 3.4
Adoption credit and employee adoption benefits ....... ....... ....... ....... ....... 0.2 0.3 0.4 0.4 0.4 1.7
exclusion.....................................
Deduction for charitable contributions, other 1.7 1.8 1.9 1.9 2.0 32.5 33.5 34.5 35.6 36.7 182.0
than for education and health.................
Tax credit for disabled access expenditures.... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.1 0.1 0.1 0.1 0.4
Health
Exclusion of employer contributions for health ....... ....... ....... ....... ....... 79.6 85.1 91.8 98.7 106.6 461.8
care, health insurance premiums, and long-term
care insurance premiums \9\.....................
Exclusion of medical care and CHAMPUS/TRICARE ....... ....... ....... ....... ....... 1.8 1.8 1.8 1.9 1.9 9.1
medical insurance for military dependents,
retirees, and retiree dependents................
Deduction for health insurance premiums and long- ....... ....... ....... ....... ....... 2.5 2.9 3.1 3.2 3.4 15.1
term care insurance premiums by the self-
employed........................................
Deduction for medical expenses and long-term care ....... ....... ....... ....... ....... 5.9 6.1 6.3 6.5 6.9 31.6
expenses........................................
Exclusion of workers' compensation benefits ....... ....... ....... ....... ....... 3.8 3.9 4.0 4.1 4.1 20.0
(medical benefits)..............................
Medical savings accounts......................... ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Exclusion of interest on State and local 0.4 0.4 0.4 0.4 0.4 1.1 1.1 1.1 1.1 1.1 7.7
government bonds for private nonprofit hospital
facilities......................................
Deduction for charitable contributions to health 0.9 0.9 1.0 1.0 1.0 4.2 4.4 4.5 4.6 4.8 27.4
organizations...................................
Tax credit for orphan drug research.............. 0.2 0.2 0.2 0.2 0.2 ....... ....... ....... ....... ....... 1.0
Tax credit for purchase of health insurance by ....... ....... ....... ....... ....... 0.3 0.4 0.5 0.5 0.5 2.1
certain displaced persons.......................
Medicare
Exclusion of untaxed Medicare benefits:
Hospital insurance............................. ....... ....... ....... ....... ....... 13.9 15.1 16.3 17.5 18.7 81.5
Supplementary medical insurance................ ....... ....... ....... ....... ....... 9.1 9.7 10.4 11.3 12.4 52.9
Income Security
Exclusion of workers' compensation benefits ....... ....... ....... ....... ....... 4.7 4.8 4.9 5.0 5.3 24.7
(disability and survivors payments).............
Exclusion of damages on account of personal ....... ....... ....... ....... ....... 1.4 1.4 1.4 1.4 1.7 7.1
physical injuries or physical sickness..........
Exclusion of special benefits for disabled coal ....... ....... ....... ....... ....... 0.1 0.1 0.1 0.1 0.1 0.3
miners..........................................
Exclusion of cash public assistance benefits..... ....... ....... ....... ....... ....... 3.0 3.2 3.3 3.5 3.6 16.6
Net exclusion of pension contributions and
earnings:
Employer plans................................. ....... ....... ....... ....... ....... 83.5 94.7 99.7 104.9 110.3 493.1
Individual retirement plans.................... ....... ....... ....... ....... ....... 10.4 13.7 16.1 17.8 19.3 77.3
Keogh plans.................................... ....... ....... ....... ....... ....... 5.7 5.8 6.0 6.4 6.7 30.5
Tax credit for certain individuals for elective ....... ....... ....... ....... ....... 1.6 1.5 1.4 1.3 0.4 6.3
deferrals and IRA contributions.................
Tax credit for new retirement plan expenses of (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
small businesses................................
Exclusion of other employee benefits:
Premiums on group term life insurance.......... ....... ....... ....... ....... ....... 2.4 2.5 2.6 2.7 2.7 12.6
Premiums on accident and disability insurance.. ....... ....... ....... ....... ....... 2.3 2.4 2.5 2.7 2.8 12.7
Additional standard deduction for the blind and ....... ....... ....... ....... ....... 2.0 2.1 2.2 2.3 2.2 10.7
the elderly.....................................
Tax credit for the elderly and disabled.......... ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Deduction for casualty and theft losses.......... ....... ....... ....... ....... ....... 0.2 0.2 0.2 0.2 0.2 1.1
Earned income credit (``EIC'') \7\............... ....... ....... ....... ....... ....... 34.1 34.6 35.9 36.8 37.3 178.8
Social Security and Railroad Retirement
Exclusion of untaxed Social Security and railroad ....... ....... ....... ....... ....... 21.6 22.2 22.8 23.4 24.2 114.2
retirement benefits.............................
Veterans' Benefits and Services
Exclusion of veterans' disability compensation... ....... ....... ....... ....... ....... 2.6 2.7 2.8 2.8 2.8 13.7
Exclusion of veterans' pensions.................. ....... ....... ....... ....... ....... 0.1 0.1 0.1 0.1 0.1 0.6
Exclusion of veterans' readjustment benefits..... ....... ....... ....... ....... ....... 0.1 0.1 0.1 0.1 0.1 0.6
Exclusion of interest on State and local (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
government bonds for veterans' housing..........
General Purpose Fiscal Assistance
Exclusion of interest on public purpose State and 6.6 6.7 6.8 6.9 7.0 16.9 17.3 17.6 17.9 18.2 121.6
local government debt...........................
Deduction of nonbusiness State and local ....... ....... ....... ....... ....... 50.9 50.4 46.7 39.0 36.4 223.5
government income and personal property taxes...
Tax credit for Puerto Rico and possession income, 1.8 1.6 1.4 0.4 ....... ....... ....... ....... ....... ....... 5.2
and Puerto Rico economic activity...............
Interest
Deferral of interest on savings bonds............ ....... ....... ....... ....... ....... 1.6 1.6 1.6 1.6 1.6 8.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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 $0.7
billion in fiscal year 2003, and $0.8 billion per year in fiscal years 2004 through 2007.
\3\ Negative tax expenditure of less than $50 million.
\4\ Estimate includes tax-exempt bonds for qualified educational facilities.
\5\ Estimate includes amounts of employer-provided health insurance purchased through cafeteria plans and employer-provided child care purchased
through dependent care flexible spending accounts. These amounts are also included in other line items in this table.
\6\ Tax expenditure estimate does not include offsetting denial of corporate deduction for qualified stock option compensation.
\7\ The amount of refundable child tax credit and earned income tax credit used to offset taxes other than income tax or paid out as refunds is: $38.1
billion in 2003, $37.9 billion in 2004, $38.5 billion in 2005, $41.7 billion in 2006, and $42.3 billion in 2007.
\8\ Estimate includes employer-provided child care purchased through dependent care flexible spending accounts.
\9\ Estimate includes employer-provided health insurance purchased through cafeteria plans.
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 for Calendar Year 2002 \1\
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
Taxable Itemized
Income class [thousands] \2\ All returns \3\ returns returns Tax liability
----------------------------------------------------------------------------------------------------------------
Below $10................................... 21,483 1,061 223 -$6,706
$10 to $20.................................. 27,714 9,343 1,069 -10,952
$20 to $30.................................. 20,439 10,443 2,132 3,442
$30 to $40.................................. 16,654 12,487 3,182 21,603
$40 to $50.................................. 12,068 10,461 3,598 29,159
$50 to $75.................................. 21,869 21,008 9,835 94,031
$75 to $100................................. 12,669 12,566 8,736 95,316
$100 to $200................................ 13,366 13,324 11,718 220,062
$200 and over............................... 3,376 3,370 3,216 419,596
-------------------------------------------------------------------
Total................................. 149,638 94,061 43,708 $865,551
----------------------------------------------------------------------------------------------------------------
\1\ Tax law as in effect on January 1, 2002, is applied to the 2002 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
for Calendar Year 2002 \1\
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
Medical deduction Real estate tax deduction
Income class [thousands] \2\ -------------------------------------------------------------------
Returns Amount Returns Amount
----------------------------------------------------------------------------------------------------------------
Below $10................................... 56 $5 51 $2
$10 to $20.................................. 714 232 1,166 117
$20 to $30.................................. 845 405 2,165 341
$30 to $40.................................. 766 466 2,900 597
$40 to $50.................................. 699 619 3,377 947
$50 to $75.................................. 1,237 1,545 9,252 3,519
$75 to $100................................. 511 958 6,983 4,275
$100 to $200................................ 306 1,203 7,255 6,654
$200 and over............................... 32 433 2,068 4,786
-------------------------------------------------------------------
Total................................. 5,165 $5,867 35,217 $21,238
----------------------------------------------------------------------------------------------------------------
Footnotes at end of table.
Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items
for Calendar Year 2002 \1\--Continued
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
State and local income and Charitable contributions
personal property tax deduction deduction
Income class [thousands] \2\ -------------------------------------------------------------------
Returns Amount Returns Amount
----------------------------------------------------------------------------------------------------------------
Below $10................................... 50 $2 59 $2
$10 to $20.................................. 1,183 66 1,257 122
$20 to $30.................................. 2,435 241 2,498 365
$30 to $40.................................. 3,197 584 3,171 695
$40 to $50.................................. 3,712 1,176 3,645 1,066
$50 to $75.................................. 9,723 4,871 9,705 4,058
$75 to $100................................. 7,007 6,744 7,219 5,251
$100 to $200................................ 7,378 12,369 7,890 8,913
$200 and over............................... 2,247 22,841 2,592 19,959
-------------------------------------------------------------------
Total................................. 36,933 $48,894 38,035 $40,428
----------------------------------------------------------------------------------------------------------------
Footnotes at end of table.
Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items
for Calendar Year 2002 \1\--Continued
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
Child care credit Earned income credit \3\
Income class [thousands] \2\ -------------------------------------------------------------------
Returns Amount Returns Amount
----------------------------------------------------------------------------------------------------------------
Below $10................................... 1 (\4\) 5,370 $6,760
$10 to $20.................................. 68 $20 5,868 15,053
$20 to $30.................................. 429 222 4,434 9,254
$30 to $40.................................. 583 348 2,520 2,703
$40 to $50.................................. 638 364 352 212
$50 to $75.................................. 1,508 745 16 21
$75 to $100................................. 1,163 604 ............... ...............
$100 to $200................................ 1,500 806 ............... ...............
$200 and over............................... 227 128 ............... ...............
-------------------------------------------------------------------
Total................................. 6,117 $3,236 18,560 $34,002
----------------------------------------------------------------------------------------------------------------
Footnotes at end of table.
Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items
for Calendar Year 2002 \1\--Continued
[Money amounts in millions of dollars, returns in thousands]
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Untaxed Social Security and Child Tax Credit \3\
Railroad Retirement benefits
Income class [thousands] \2\ ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Returns Amount Returns Amount
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Below $10........................................ 38 $3 52 $22
$10 to $20....................................... 2,688 594 3,256 1,203
$20 to $30....................................... 5,653 4,062 4,158 3,147
$30 to $40....................................... 3,925 5,288 3,671 3,399
$40 to $50....................................... 2,670 3,479 3,247 3,153
$50 to $75....................................... 4,740 5,826 7,149 7,216
$75 to $100...................................... 2,096 1,042 4,973 5,178
$100 to $200..................................... 1,649 400 4,204 3,857
$200 and over.................................... 496 164 1 -1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total...................................... 23,955 $20,858 30,709 $27,176
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Footnotes at end of table.
Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items
for Calendar Year 2002 \1\--Continued
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
Mortgage interest deduction
Income class [thousands] \2\ ---------------------------------
Returns Amount
----------------------------------------------------------------------------------------------------------------
Below $10..................................................................... 67 $13
$10 to $20.................................................................... 1,076 239
$20 to $30.................................................................... 1,938 817
$30 to $40.................................................................... 2,759 1,646
$40 to $50.................................................................... 3,233 2,930
$50 to $75.................................................................... 8,879 10,704
$75 to $100................................................................... 6,666 14,070
$100 to $200.................................................................. 6,976 21,945
$200 and over................................................................. 2,110 14,570
---------------------------------
Total................................................................... 33,704 $66,934
----------------------------------------------------------------------------------------------------------------
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\ Includes the refundable portion.
\4\ Less than $500,000.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.