[JPRT 109-1-05]
[From the U.S. Government Publishing Office]


                                                               JCS-1-05


                        [JOINT COMMITTEE PRINT]
 
                        ESTIMATES OF FEDERAL TAX

                            EXPENDITURES FOR

                         FISCAL YEARS 2005-2009

                            Prepared for the

                   HOUSE COMMITTEE ON WAYS AND MEANS

                                and the

                      SENATE COMMITTEE ON FINANCE

                               __________

                          By the Staff of the

                      JOINT COMMITTEE ON TAXATION

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


                            JANUARY 12, 2005
















                            C O N T E N T S

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

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

II. Measurement of Tax Expenditures..................................26

III.Tax Expenditure Estimates........................................28


        Table 1. Tax Expenditure Estimates by Budget Function, 
            Estimates by Budget Function, Fiscal Years 2005-2009.    30

        Table 2. Distribution of All Returns, Taxable Returns, 
            Itemized Returns, and Tax Liability by Income Class..    41

        Table 3. Distribution of Selected Individual Tax 
            Expenditures by Income Class.........................    42
                              INTRODUCTION

    This report \1\ on tax expenditures for fiscal years 2005-
2009 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 2005-
2009 (JCS-1-05), January 12, 2005.
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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 2003-2009 in the 
Administration's budgetary statement of February 2004.\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 (JCS-28-72), June 1, 1973 (JCS-20-73), 
July 8, 1975 (JCS-11-75), March 15, 1976 (JCS-5-76), March 15, 1977 
(JCS-10-77), March 14, 1978 (JCS-9-78), March 15, 1979 (JCS-9-79), 
March 6, 1980 (JCS-8-80), March 16, 1981 (JCS-7-81), March 8, 1982 
(JCS-4-82), March 7, 1983 (JCS-4-83), November 9, 1984 (JCS-39-84), 
April 12, 1985 (JCS-8-85), March 1, 1986 (JCS-7-86), February 27, 1987 
(JCS-3-87), March 8, 1988 (JCS-3-88), February 28, 1989 (JCS-4-89), 
March 9, 1990 (JCS-7-90), March 11, 1991 (JCS-4-91), April 24, 1992 
(JCS-8-92), April 22, 1993 (JCS-6-93), November 9, 1994 (JCS-6-94), 
September 1, 1995 (JCS-21-95), November 26, 1996 (JCS-11-96), December 
15, 1997 (JCS-22-97), December 14, 1998 (JCS-7-98), December 22, 1999 
(JCS-13-99), April 6, 2001 (JCS-1-01), January 17, 2002 (JCS-1-02), 
December 19, 2002, and December 22, 2003 (JCS-8-03).
    \3\ Office of Management and Budget, ``Tax Expenditures,'' Budget 
of the United States Government: Analytical Perspectives, Fiscal Year 
2005, February 2, 2004, pp. 285-325.
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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 31, 2004. 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. The tax expenditure estimates 
in this report are based on the January 2004 Congressional 
Budget Office revenue baseline and Joint Committee staff 
projections of the gross income, deductions, and expenditures 
of individuals and corporations for calendar years 2004-2009.
    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 2005-2009 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.
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    \4\ Congressional Budget and Impoundment Control Act of 1974 (Pub. 
L. No. 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 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 2005-2009. 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 in this report.\6\
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    \5\ The Federal income tax on individuals also applies to estates 
and trusts, which are subject to a separate income tax rate schedule 
(Section 1(c) of the Internal Revenue Code of 1986, the ``Code''). 
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\ Other analysts have explored applying the concept of tax 
expenditures to 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. Prior to 2003, the 
President's budget contained a section that reviewed and tabulated 
estate and gift tax provisions that the Treasury considered tax 
expenditures. The Joint Committee staff considers estate and gift 
provisions as being outside of the normal income tax structure and thus 
omits them from its lists of tax expenditures.
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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 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. An itemized deduction that is not 
necessary for the generation of income is classified as a tax 
expenditure, but only to the extent that it, when added to a 
taxpayer's other itemized deductions, exceeds the standard 
deduction.
    All employee compensation is subject to tax unless the tax 
code contains a specific exclusion for the income. Specific 
exclusions for employer-provided benefits include the 
following: 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), dependent care assistance, adoption 
assistance, 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 (Code sec. 106) 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, 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 partially excluded or fully 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.
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    \8\ For taxpayers with modified adjusted gross incomes above 
certain levels, up to 85 percent of social security and tier 1 railroad 
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 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\ 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.
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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. However, a taxpayer-by-taxpayer accounting of 
imputed income would be necessary for a tax expenditure estimate.
    \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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    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.
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    \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.
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    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\
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    \12\ See discussion of individual AMT on page 6.
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    Certain income of pass-through entities is exempt from the 
corporate income tax. The income of sole proprietorships, S 
corporations, most partnerships, and other entities (such as 
regulated investment companies and real estate investment 
trusts) 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, as is the exclusion of income granted to holders 
of tax-exempt financing issued by charities.

Recent Legislation

    The Working Families Tax Relief Act of 2004 (H.R. 1308, 
Pub. L. No. 108-311), enacted on October 4, 2004, modified 
several tax expenditures:
    --The tax credit for children under age 17 was increased 
from $700 to $1,000 per child for taxable years beginning after 
December 31, 2004, and before December 31, 2008, and from $800 
to $1,000 per child for taxable years beginning after December 
31, 2008, and before December 31, 2009. Acceleration in 
refundability of the child credit from 10 percent to 15 percent 
of the taxpayer's earned income in excess of $10,750 (with 
indexing) was made effective for taxable years beginning in 
2004. For taxable years beginning after December 31, 2004, 
combat pay that is otherwise excluded from gross income will be 
counted as earned income for the purposes of computing taxable 
income with respect to calculating the refundable portion of 
the child credit. In Table 1, these changes are reflected in 
the tax expenditure estimate for ``Earned income credit 
(EIC).''
    --The earned income credit was modified to allow taxpayers 
to elect to treat combat pay that is otherwise excluded from 
gross income as earned income for the purposes of the earned 
income credit. The election was made available for taxable 
years beginning in 2004 and 2005. In Table 1, this change is 
reflected in the tax expenditure estimate for ``Earned income 
credit (EIC).''
    --A uniform definition of a qualifying child was 
established with respect to the following tax expenditures: the 
child credit, the earned income credit, and the dependent care 
credit. Under the uniform definition, in general, a child must 
satisfy each of the following tests to be defined as a 
qualifying child of a taxpayer: (1) the child has the same 
principal abode as the taxpayer for more than one half of the 
taxable year; (2) the child has a specified relationship to the 
taxpayer; and (3) the child has not yet attained a specified 
age. This provision is effective for taxable years beginning 
after December 31, 2004. In Table 1, these changes are 
reflected in the tax expenditure estimates for ``Tax credit for 
children under age 17,'' ``Earned income credit (EIC),'' and 
``Tax credit for child and dependent care expenses.''
    --The phaseout of the tax credit for electric vehicles was 
eliminated for taxable years beginning in 2004 and 2005. (Under 
prior law, the phaseout began for property placed in service 
after December 31, 2003. The credit was reduced by 25 percent 
for taxable years beginning in 2004 and 50 percent for taxable 
years beginning in 2005.) Under present law, the credit will 
retain a reduction of 75 percent for taxable years beginning in 
2006. No credit is available for taxable years beginning after 
December 31, 2006. This tax expenditure is not listed in Table 
1 because the estimated revenue loss is below the de minimis 
amount.
    The Working Families Tax Relief Act also extended a number 
of expired or expiring provisions:
    --The tax credit for research and experimentation expenses 
was extended for 18 months. The provision is effective for 
expenditures paid or incurred after June 30, 2004, and before 
January 1, 2006. The tax expenditure estimate in Table 1, ``Tax 
credit for qualified research expenditures,'' is based on 
expenses paid or incurred prior to the expiration date and 
reflects unused credits that are carried forward to succeeding 
taxable years.
    --The work opportunity tax credit was extended for two 
years. The credit is available for wages paid or incurred for 
workers beginning work after December 31, 2003, and on or 
before December 31, 2005. However, many employees who are hired 
in 2005 will earn credits for their employers in 2006 because 
the credit applies to wages paid during the first 12 months of 
employment. The tax expenditure estimate in Table 1, ``Work 
opportunity tax credit,'' is based on credits attributable to 
wages paid or incurred to employees who begin work in 2005 and 
credits that were earned in prior years and carried forward to 
subsequent taxable years.
    --The welfare-to-work tax credit was extended for two 
years. The credit is available for wages paid or incurred for 
workers beginning work after December 31, 2003, and on or 
before December 31, 2005. However, employees who are hired in 
2004 and 2005 will earn credits for their employers in 2006 and 
2007 respectively because the credit applies to wages paid 
during the first 24 months of employment. The tax expenditure 
estimate in Table 1, ``Welfare-to-work tax credit,'' is based 
on credits attributable to wages paid or incurred to employees 
who begin work in 2004 and 2005 and credits that were earned in 
prior years and carried forward to subsequent taxable years.
    --The authority to issue qualified zone academy bonds was 
extended for two years. The provision is effective for 
obligations issued after December 31, 2003. The authority will 
expire for obligations issued after December 31, 2005. Table 1 
contains a tax expenditure estimate for ``Tax credits for 
holders of qualified zone academy bonds'' that is based on tax 
credits that will be claimed for zone academy bonds issued 
prior to expiration.
    --The enhanced deduction for corporate contributions of 
computer equipment to public libraries and elementary and 
secondary schools was extended for two years. The deduction is 
available for contributions made during taxable years beginning 
after December 31, 2003, and before January 1, 2006. This 
deduction is reflected in Table 1 in the tax expenditure 
estimate for ``Deduction for charitable contributions to 
educational institutions.''
    --The above-the-line deduction for teacher classroom 
expenses was extended for two years. The deduction will be 
available for expenses incurred in taxable years beginning in 
2004 and 2005. The tax expenditure estimate in Table 1, 
``Above-the-line deduction for teacher classroom expenses,'' is 
based on deductions for expenses incurred in taxable years 
beginning before January 1, 2006.
    --The expensing of environmental remediation costs 
(``brownfields'') was extended for two years. The provision is 
effective for expenses paid or incurred after December 31, 
2003, and before January 1, 2006. In Table 1, this change is 
reflected in the tax expenditure estimate for ``Expensing of 
environmental remediation costs (``brownfields'').'' The 
negative tax expenditure estimates for fiscal years 2007 
through 2009 are attributable to two factors. First, the 
depreciation deductions in those years are smaller than the 
deductions that would have been claimed if the remediation 
costs in earlier years had not qualified for expensing. Second, 
larger capital gains taxes will be paid in those years on sales 
of property for which remediation costs had been incurred in 
prior years. The basis of the property is reduced by the amount 
of the expensed remediation costs, and this results in larger 
capital gains upon the sale of the property.
    --Certain tax incentives with respect to the New York City 
Liberty Zone were extended. These incentives are: (1) an 
extension of the authority to issue Liberty Zone bonds, which 
will expire for obligations issued after December 31, 2009; and 
(2) a one-year extension of the authority for one additional 
advance refunding for certain bonds for facilities located in 
New York City, which will expire after December 31, 2005. The 
Act also clarified that certain bonds issued by the Municipal 
Assistance Corporation are eligible for one additional advanced 
refunding. In Table 1, these changes are reflected in the tax 
expenditure estimate for ``New York City Liberty Zone tax 
incentives.''
    --Tax incentives for the District of Columbia enterprise 
zone were extended for two years. These incentives are: (1) a 
wage credit for workers who live in the District and work for a 
qualified District of Columbia enterprise zone business, which 
will expire for wages incurred after December 31, 2005; (2) a 
capital gains exclusion for qualified tangible property that is 
placed in service in the District of Columbia enterprise zone, 
which will expire for property acquired after December 31, 
2005; (3) an increase in section 179 expensing for District of 
Columbia enterprise zone businesses, which will expire for 
property placed in service after December 31, 2005; and (4) the 
authority to issue tax-exempt development bonds, which will 
expire after December 31, 2005. Also, the tax credit for first-
time homebuyers in the District of Columbia was extended for 
two years. The credit will expire for property purchased after 
December 31, 2005. In Table 1, all of these tax provisions are 
combined in the tax expenditure estimate for ``District of 
Columbia tax incentives.''
    --The tax credit for electricity production from renewable 
resources was extended for two years. The provision generally 
is effective for facilities placed in service after December 
31, 2003. Facilities placed in service prior to January 1, 2006 
are eligible to claim the credit. The tax expenditure estimate 
in Table 1, ``Tax credit for electricity production from 
renewable resources,'' is based on tax credits earned by 
facilities placed in service prior to the expiration date. This 
provision was further modified by the American Jobs Creation 
Act of 2004, which is described later in this section.
    --The wage credit for Indian reservation employment was 
extended for one year. The provision is effective January 1, 
2005. The credit will expire for wages incurred after December 
31, 2005. The tax expenditure estimate in Table 1, ``Wage 
credit for Indian reservation employment,'' is based on wages 
incurred through December 31, 2005, and credits carried forward 
to succeeding taxable years.
    --The availability of Archer medical savings accounts 
(``MSAs'') was extended through December 31, 2005. After that 
date, no new contributions may be made to Archer MSAs except by 
individuals who previously made Archer MSA contributions and by 
the employees of small employers with prior Archer MSA 
participation. The Archer MSA tax expenditure is not listed in 
Table 1 because the estimated revenue loss is below the de 
minimis amount.
    The American Jobs Creation Act of 2004 (H.R. 4520, Pub. L. 
No. 108-357), enacted on October 22, 2004, eliminated the 
following tax expenditures:
    --The exclusion of extraterritorial income (``ETI'') from 
gross income was eliminated. However, for transactions prior to 
2005, taxpayers retain 100 percent of their ETI benefits. For 
transactions after 2004, the Act provides taxpayers with 80 
percent of their otherwise-applicable ETI benefits for 
transactions during 2005 and 60 percent of their otherwise-
applicable ETI benefits during 2006. ETI exclusion provisions 
remain in effect for transactions in the ordinary course of a 
trade or business if such transactions are pursuant to a 
binding contract in effect on September 17, 2003. The provision 
is effective for transactions after December 31, 2004. In Table 
1, these changes are reflected in the tax expenditure estimate 
for ``Exclusion of extraterritorial income.''
    --The Act eliminated the reforestation tax credit, which 
provided a 10-percent credit on up to $10,000 of qualified 
amortizable basis in timber property. This tax expenditure was 
not previously listed in Table 1 because the estimated revenue 
loss was below the de minimis amount.
    The American Jobs Creation Act of 2004 also included 
several new tax expenditures:
    --A deduction relating to income attributable to United 
States production activities was created. The provision allows 
a deduction from taxable income (or, in the case of an 
individual, adjusted gross income) that is equal to a portion 
of the taxpayer's qualified production activities income. In 
general, qualified production activities income is equal to 
domestic production gross receipts minus the sum of: (1) the 
costs of goods sold that are allocable to such receipts; (2) 
other deductions, expenses, or losses that are directly 
allocable to such receipts; and (3) a proper share of other 
deductions, expenses, and losses that are not directly 
allocable to such receipts or another class of income. For 
taxable years beginning after 2009, the deduction is equal to 
nine percent of the lesser of (1) the qualified production 
activities income of the taxpayer for the taxable year, or (2) 
taxable income for the taxable year. For taxable years 
beginning in 2005 and 2006, the deduction is three percent of 
income, and for taxable years beginning in 2007, 2008, and 
2009, the deduction is six percent of income. However, the 
deduction for a taxable year is limited to 50 percent of the 
wages paid by the taxpayer during the relevant calendar year. 
The provision is effective for taxable years beginning after 
December 31, 2004. In Table 1, this provision is reflected in 
the tax expenditure estimate for ``Production activity 
deduction.''
    --The Act provided taxpayers the option to deduct the cost 
of qualifying film and television productions in the year the 
expenditure is incurred in lieu of capitalizing the cost and 
recovering it through depreciation allowances. The provision 
applies only to qualifying film and television productions the 
aggregate cost of which does not exceed $15 million. This 
threshold is increased to $20 million if a significant amount 
of the production expenditures are incurred in areas eligible 
for designation as a low-income community or eligible for 
designation by the Delta Regional Authority as a distressed 
county or isolated area of distress. The provision is effective 
for qualifying productions commencing after the date of 
enactment. The proposal expires for qualifying productions 
commencing after December 31, 2008. In Table 1, this provision 
is reflected in the tax expenditure estimate for ``Deduction of 
certain film and television production costs.''
    --A 50-percent business tax credit is provided for 
qualified railroad track maintenance expenditures paid or 
incurred in a taxable year by eligible taxpayers. The credit is 
limited to the product of $3,500 times the number of miles of 
railroad track owned or leased by an eligible taxpayer as of 
the close of its taxable year. Qualified railroad track 
maintenance expenditures are defined as amounts expended 
(whether or not chargeable to a capital account) for 
maintaining a railroad track (including roadbed, bridges, and 
related track structures) owned or leased as of January 1, 
2005, by a Class II or Class III railroad. The taxpayer's basis 
in railroad track is reduced by the amount of the credit. No 
portion of the credit may be carried back to any taxable year 
beginning before January 1, 2005. The provision is effective 
for expenses paid or incurred during taxable years beginning 
after December 31, 2004, and before January 1, 2008. In Table 
1, this provision is reflected in the tax expenditure estimate 
for ``Provide a 50-percent tax credit for certain expenditures 
for maintaining railroad tracks.''
    --Corporations were permitted to elect a ``tonnage tax'' in 
lieu of the corporate income tax on taxable income from certain 
shipping activities. An electing corporation is only subject to 
tax on these activities at the maximum corporate income tax 
rate on their notional shipping income, which is based on the 
net tonnage of the corporation's qualifying vessels. The 
provision is effective for taxable years beginning after the 
date of enactment. This tax expenditure is not listed on Table 
1 because the estimated revenue loss is below the de minimis 
amount.
    --An income tax credit is provided for biodiesel and 
qualified biodiesel mixtures. The credit is the sum of the 
biodiesel mixture credit plus the biodiesel credit and is 
treated as a general business credit. The biodiesel mixture 
credit is 50 cents for each gallon of biodiesel used by the 
taxpayer in the production of qualified biodiesel. For agri-
biodiesel, the credit is $1 per gallon. The biodiesel credit is 
50 cents for each gallon of biodiesel which is not in a mixture 
with diesel fuel and which during the taxable year is (1) used 
by the taxpayer as a fuel in a trade or business or (2) sold by 
the taxpayer at retail to a person and placed in the fuel tank 
of such person's vehicle. For agri-biodiesel, the credit is $1 
per gallon. The provision is effective for fuel produced, and 
sold or used after December 31, 2004. The provision expires 
December 31, 2006. In Table 1, this provision is reflected in 
the tax expenditure estimate for ``Tax credit for biodiesel 
blenders.''
    --The Act provided a charitable deduction for certain 
expenses incurred in carrying out sanctioned whaling 
activities. The deduction is limited to $10,000 per taxable 
year and is available only to an individual who is recognized 
by the Alaska Whaling Commission as a whaling captain charged 
with the responsibility for maintaining and carrying out 
sanctioned whaling activities. The provision is effective for 
contributions made after December 31, 2004. This tax 
expenditure is not listed in Table 1 because the estimated 
revenue loss is below the de minimis amount.
    --The Act permitted small business refiners to expense up 
to 75 percent of the costs paid or incurred for the purpose of 
complying with the Highway Diesel Fuel Sulfur Control 
Requirements of the Environmental Protection Agency (``EPA''). 
In addition, the Act provided that a small business refiner may 
claim a credit equal to five cents per gallon of low sulfur 
diesel fuel produced during the taxable year that is in 
compliance with the Highway Diesel Fuel Sulfur Control 
Requirements of the EPA. The total production credit claimed by 
the taxpayer is limited to 25 percent of the capital costs 
incurred to comply with the EPA diesel fuel requirements. The 
taxpayer's basis in the property with respect to which the 
credit applies is reduced by the amount of the production 
credit claimed. Costs qualifying for the deduction and the 
credit are those costs paid or incurred with respect to any 
facility of a small business refiner during the period 
beginning January 1, 2003, and ending on the earlier of the 
date one year after the taxpayer must comply with the 
applicable EPA regulations or December 31, 2009. These new tax 
expenditures are listed in Table 1 as ``Incentives for small 
refiners to comply with EPA sulfur regulations.''
    --Certain dividends received by U.S. corporations from 
controlled foreign corporations were made eligible for an 85-
percent dividends-received deduction. At the taxpayer's 
election, the deduction is available for dividends received 
either during the taxpayer's first taxable year beginning on or 
after the date of enactment of the bill or during the 
taxpayer's last taxable year beginning before this date. 
Dividends received after the election period will be taxed in 
the normal manner under present law. In Table 1, this provision 
is reflected in the tax expenditure estimates for ``Deferral of 
active income of controlled foreign corporations'' and 
``Deferral of certain active financing income.'' This provision 
has two effects on these tax expenditure estimates: (1) some 
conceptually forgone U.S. tax is collected on ``old'' deferred 
income, and thereby reduces the tax expenditure for ``new'' 
deferred income; and (2) technical aspects of the provision 
enhance foreign tax creditability in the 2005 to 2009 period 
for some taxpayers, regardless of whether they have employed 
deferral for foreign income. On net, these two changes reduce 
the deferral tax expenditures for 2005 and 2006 and increase 
the tax expenditures for the 2007 through 2009 period.
    --The Act delayed the effective date for Treasury 
Department regulations regarding an exemption from gross income 
for earnings of a foreign corporation derived from the 
international operation of ships and aircraft if an equivalent 
exemption from tax is granted by the applicable foreign country 
to corporations organized in the United States. The Act 
provided that the regulations apply to taxable years of foreign 
corporations beginning after September 24, 2004. This tax 
expenditure is not listed on Table 1 because the estimated 
revenue loss is below the de minimis amount.
    --A new category of exempt-facility bonds was created: the 
qualified green building and sustainable design project bond 
(``qualified green bond''). A qualified green bond is defined 
as any bond issued as part of an issue that finances a project 
designated by the Secretary, after consultation with the 
Administrator of the Environmental Protection Agency, as a 
green building and sustainable design project that meets the 
following requirements: (1) at least 75 percent of the square 
footage of the commercial buildings that are part of the 
project is registered for the U.S. Green Building Council's 
Leadership in Energy and Environmental Design certification and 
is reasonably expected (at the time of designation) to meet 
such certification; (2) the project includes a brownfield site; 
(3) the project receives at least $5 million in specific State 
or local resources; and (4) the project includes at least one 
million square feet of building or at least 20 acres of land. 
Under the provision, qualified green bonds are not subject to 
the State bond volume limitations. Rather, there is a national 
limitation of $2 billion of qualified green bonds that the 
Secretary may allocate, in the aggregate, to qualified green 
building and sustainable design projects. Qualified green bonds 
may be currently refunded if certain conditions are met, but 
cannot be advanced refunded. The provision is effective for 
bonds issued after December 31, 2004, and before October 1, 
2009. In Table 1, this provision is reflected in the tax 
expenditure estimate for ``Exclusion of interest on State and 
local government bonds for qualified green building and 
sustainable design projects.''
    --To implement Federal Energy Regulatory Commission 
restructuring policy, the Act permitted taxpayers to elect to 
recognize gain from qualifying electric transmission 
transactions ratably over an eight-year period beginning in the 
year of sale if the amount realized from such sale is used to 
purchase exempt utility property within the applicable period. 
The applicable period is four years after the close of the 
taxable year in which the transaction occurs. If the amount 
realized exceeds the amount used to purchase reinvestment 
property, any realized gain shall be recognized as in the year 
of the transaction. Any remaining realized gain is recognized 
ratably over the eight-year period. A qualifying electric 
transmission transaction is the sale or other disposition of 
property used by the taxpayer in the trade or business of 
providing electric transmission services, or an ownership 
interest in such an entity, to an independent transmission 
company prior to January 1, 2007. The provision is effective 
for transactions occurring after the date of enactment. In 
Table 1, this provision is reflected in the tax expenditure 
estimate for ``Deferral of gain from the disposition of 
electric transmission property to implement Federal Energy 
Regulatory Commission restructuring policy.''
    The American Jobs Creation Act of 2004 also modified 
several tax expenditures:
    --The maximum dollar amount that may be deducted under 
section 179 was increased from $25,000 to $100,000 for property 
placed in service in taxable years beginning before 2008. In 
addition, for purposes of the phase-out of the deductible 
amount, the $200,000 amount is increased to $400,000 for 
property placed in service in taxable years beginning before 
2008. The provision extends through 2007 the indexing for 
inflation of both the maximum dollar amount that may be 
deducted and the $400,000 amount. Section 179 was also expanded 
to include off-the-shelf computer software placed in service in 
taxable years before 2008. These provisions are effective for 
taxable years beginning after December 31, 2005. In Table 1, 
these changes are reflected in the tax expenditure estimate for 
``Expensing under section 179 of depreciable business 
property.''
    --The Act provided a 15-year recovery period for qualified 
leasehold improvement property placed in service after October 
22, 2004, and before January 1, 2006. The provision requires 
that qualified leasehold improvement property be recovered 
using the straight-line method. The definition of qualified 
property was modified such that qualified property is not 
qualified for subsequent owners of such improvement. An 
exception to this rule applies in the case of death and certain 
transfers of property that qualify for non-recognition 
treatment. In addition, a 15-year recovery period was 
established for qualified restaurant property placed in service 
after the date of enactment and before January 1, 2006. The 
provision requires that the qualified restaurant property be 
recovered using the straight-line method. In Table 1, these 
changes are reflected in the tax expenditure estimate for 
``Depreciation of buildings other than rental housing in excess 
of alternative depreciation system.''
    --The Secretary of Housing and Urban Development was 
authorized to add contiguous census tracts to a renewal 
community in the following general circumstances. First, the 
renewal community, including any tract to be added, must have 
met the renewal community eligibility requirements at the time 
of the community's original nomination. In addition, any tract 
to be added must have a poverty rate using 2000 Census data 
that exceeds the poverty rate of such tract using 1990 Census 
data. Second, a tract may be added to a renewal community even 
if the addition of such tract to such community would have 
caused the community to fail one or more eligibility 
requirements when originally nominated using the 1990 Census 
data, provided that: (1) the renewal community after the 
inclusion of such tract does not have a population that exceeds 
200,000 using either 1990 or 2000 Census data; (2) such tract 
has a poverty rate of at least 20 percent using 2000 Census 
data; and (3) such tract has a poverty rate using 2000 Census 
data that exceeds the poverty rate of such tract using 1990 
Census data. These provisions are effective as if included in 
the amendment made by section 101 of the ``Community Renewal 
Tax Relief Act of 2000.'' In Table 1, these changes are 
reflected in the tax expenditure estimate for ``Renewal 
community tax incentives.''
    --The Act extended the use of income averaging to 
individuals engaged in the trade or business of fishing. Under 
prior law income averaging was available only to farmers. An 
individual taxpayer engaged in a farming or fishing business 
may elect to compute his or her current year tax liability by 
averaging, over the prior 3-year period, all or a portion of 
his or her taxable income from the trade or business of 
farming. The extension of income averaging to fishermen is 
effective for taxable years beginning after December 31, 2003. 
In Table 1, this change is reflected in the tax expenditure 
estimate for ``Income averaging for farmers and fishermen.''
    --The Act provided an exclusion from gross income for 
education loan repayments provided under the National Health 
Service Corps (``NHSC'') Loan Repayment Program and State 
programs eligible for funds under the Public Health Service 
Act. This provision is effective for taxable years beginning 
after December 31, 2003. In Table 1, this change is reflected 
in the tax expenditure estimate for ``Exclusion of income 
attributable to the discharge of certain student loan debt and 
NHSC Educational Loan repayments.''
    --The Act permitted on a property-by-property basis up to 
$10,000 of qualified reforestation expenditures to be expensed. 
Qualified reforestation expenditures above $10,000 are to be 
amortized over 84 months. This provision is effective for 
expenditures paid or incurred after the date of enactment. In 
Table 1, this change is reflected in the tax expenditure 
estimate for ``Expensing of timber-growing costs.''
    --The alcohol fuels income tax credit was extended through 
December 31, 2010. In Table 1, this change is reflected in the 
tax expenditure estimate for ``Tax credit for alcohol fuel 
blenders.''
    --The placed in service date was extended for bonus 
depreciation for certain non-commercial aircraft. Qualifying 
aircraft are eligible for the additional first-year 
depreciation deduction if placed in service before January 1, 
2006. In order to qualify, the aircraft must: (1) be acquired 
by the taxpayer during the applicable time period as under 
prior law; (2) meet the appropriate placed-in-service date 
requirements; (3) not be tangible personal property used in the 
trade or business of transporting persons or property (except 
for agricultural or firefighting purposes); (4) be purchased by 
a purchaser who, at time of the contract for the purpose, has 
made a nonrefundable deposit of the lesser of ten percent of 
the cost or $100,000; and (5) have an estimated production 
period exceeding four months and a cost exceeding $200,000. 
This provision is effective as if included in the amendments 
made by section 101 of the ``Job Creation and Worker Assistance 
Act of 2000.'' In addition, a special rule was provided with 
respect to bonus depreciation in the case of multiple units of 
property subject to the same lease. In such cases, property 
will qualify as placed in service on the date of sale if sold 
within three months after the final unit is placed in service, 
provided the period between the time the first unit is placed 
in service and the last unit is placed in service does not 
exceed 12 months. This provision is effective for sales after 
June 4, 2004. In Table 1, these changes are reflected in the 
tax expenditure estimate for ``Depreciation of equipment in 
excess of the alternative depreciation system.''
    --The maximum allowable amount of total capital 
expenditures by an eligible business or a related party for the 
purpose of qualified small issue bond issuance was increased 
from $10 million to $20 million. This provision is effective 
for bonds issued after September 30, 2009. In Table 1, this 
change is reflected in the tax expenditure estimate for 
``Exclusion of interest on State and local government small-
issue bonds.''
    --The Act repealed the subpart F rules relating to foreign 
base company shipping income. The Act also amended the 
exception from foreign personal holding company income 
applicable to rent or royalties derived from unrelated persons 
in an active trade or business by providing safe harbor for 
rents derived from leasing an aircraft or vessel in foreign 
commerce. Such rents are excluded from foreign personal holding 
company income if the active leasing expenses comprise at least 
10 percent of the profit on the lease. This provision is 
effective for taxable years of foreign corporations beginning 
after December 31, 2004, and for taxable years of U.S. 
shareholders within which such taxable years of such foreign 
corporations end. In Table 1, these changes are reflected in 
the tax expenditure estimate for ``Deferral of active income of 
controlled foreign corporations.''
    --The Act modified the temporary exceptions from subpart F 
foreign personal holding company income and foreign base 
company services income for income derived in the active 
conduct of a banking, financing, or similar business. For the 
purposes of determining whether a controlled foreign 
corporation or a qualified business unit has conducted directly 
in its home country substantially all of the activities in 
connection with transactions with customers, the Act provided 
that an activity is treated as conducted directly by the 
controlled foreign corporation or qualified business unit in 
its home country if the activity is performed by employees of a 
related person and: (1) the related person is itself an 
eligible controlled foreign corporation the home country of 
which is the same as that of the controlled foreign corporation 
or qualified business unit; (2) the activity is performed in 
the home country of the related person; and (3) the related 
person is a compensated on an arm's length basis for the 
performance of the activity by its employees and such 
compensation is treated as earned by such person in its home 
country for the purposes of the tax laws of such country. This 
provision is effective for taxable years of foreign 
corporations beginning after December 31, 2004, and for taxable 
years of U.S. shareholders within which such taxable years of 
such foreign corporations end. In Table 1, these changes are 
reflected in the tax expenditure estimate for ``Deferral of 
certain active financing income.''
    --The deduction for State and local taxes paid was modified 
to provide that a taxpayer may elect to take an itemized 
deduction for State and local general sales taxes in lieu of 
the itemized deduction provided for State and local income 
taxes. Taxpayers have two options with respect to the sales tax 
deduction amount. Taxpayers may deduct the total amount of 
general State and local sales taxes paid by accumulating 
receipts showing general sales taxes paid. Alternatively, 
taxpayers may use tables created by the Secretary of the 
Treasury. The tables are to be based on average consumption by 
taxpayers on a State-by-State basis taking into account filing 
status, number of dependents, adjusted gross income and rates 
of State and local general sales taxation. Taxpayers who use 
the tables created by the Secretary may, in addition to the 
table amounts, deduct eligible general sales taxes paid with 
respect to the purchase of motor vehicles, boats and other 
items specified by the Secretary. Sales taxes for items that 
may be added to the tables are not to be reflected in the 
tables themselves. This provision is effective for taxable 
years beginning after December 31, 2003, and before January 1, 
2006. In Table 1, this change is reflected in the tax 
expenditure estimate for ``Deduction of nonbusiness State and 
local government income, sales, and personal property taxes.''
    --The Act provided a statutory seven-year recovery period 
for permanent motorsports racetrack complexes. For this 
purpose, motorsports racetrack complexes include land 
improvements and support facilities but do not include 
transportation equipment, warehouses, administrative buildings, 
hotels, or motels. This provision is effective for property 
placed in service after the date of enactment and before 2008. 
In Table 1, this change is reflected in the tax expenditure 
estimate for ``Depreciation of equipment in excess of the 
alternative depreciation system.''
    --The Act established a statutory seven-year recovery 
period and a class life of 22 years for any Alaska natural gas 
pipeline. In order to qualify for the seven-year recovery 
period, otherwise qualifying property must be placed in service 
after December 13, 2013. A taxpayer who places qualifying 
property in service before January 1, 2014 may elect to treat 
the pipeline as placed in service on January 1, 2014. This 
change is not reflected in Table 1 because the provision 
affects only tax expenditure estimates beyond 2009.
    --The enhanced oil recovery cost credit was extended such 
that expenses in connection with the construction of any 
qualifying natural gas processing plant capable of processing 
two trillion British thermal units of Alaskan natural gas into 
a natural gas pipeline system on a daily basis are qualified 
enhanced oil recovery costs eligible for the credit. The 
provision is effective for costs paid or incurred in taxable 
years beginning after December 31, 2004. This change is not 
reflected in Table 1 because the provision affects only tax 
expenditure estimates beyond 2009.
    --The Act provided that qualified naval ship contracts may 
be accounted for using the 40/60 percentage of completion/
capitalized cost method during the first five taxable years of 
the contract. The cumulative reduction in tax resulting from 
the provision over the five-year period is recaptured and 
included in the taxpayer's tax liability in the sixth year. 
This provision is effective for contracts entered into after 
the date of enactment. This change in reflected in the tax 
expenditure estimate for ``Completed contract rules.''
    --The Act modified the income tax credit for the production 
of electricity from qualified wind energy, qualified closed-
loop biomass, or qualified poultry waste facilities. In 
general, the Act defined five new qualifying resources for the 
production of electricity: open-loop biomass (including 
agricultural livestock waste nutrients), geothermal energy, 
solar energy, small irrigation power, and municipal solid 
waste. Two different qualifying facilities use municipal solid 
waste as a qualifying resource: landfill gas facilities and 
trash combustion facilities. In addition, refined coal was 
defined as a qualifying resource. The credit period for the new 
qualifying resources is five years commencing on the date the 
facility is placed into service. In general, for facilities 
placed in service prior to January 1, 2005, the credit period 
commences on January 1, 2005. The credit amount allowable for 
the new qualifying resources is defined as one-half the amount 
of the existing credit (1.5 cents per kilowatt-hour indexed for 
inflation and currently 1.8 cents per kilowatt-hour). An 
alternative credit was applied for the production of refined 
coal. A qualified refined coal facility may claim a credit at a 
rate of $4.375 per ton (indexed for inflation after 1992) of 
refined coal sold to an unrelated person. As is the case for 
facilities that produce electricity, the credit a taxpayer may 
claim for the production of refined coal is phased out as the 
market price of refined coal exceeds certain threshold levels. 
This provision is effective for property placed in service 
after the date of enactment. In Table 1, these changes are 
reflected in the tax expenditure estimate for ``Tax credit for 
electricity production from renewable resources.''
    --The rules regarding charitable contribution donations of 
patents and other intellectual property were modified. If a 
taxpayer contributes a patent or other intellectual property 
(other than certain copyrights or inventory) to a charitable 
organization, the taxpayer's initial charitable contribution is 
limited to the lesser of the taxpayer's basis in the 
contributed property or the fair market value of the property. 
In addition, the taxpayer is permitted to deduct, as a 
charitable deduction, certain additional amounts in the year of 
the contribution or in subsequent taxable years based on a 
specified percentage of the qualified donee income received or 
accrued by the charitable donee with respect to the contributed 
property. The amount of any additional deduction is calculated 
as a sliding-scale percentage of qualified donee income that is 
allocable to the contributed property of the applicable taxable 
year. No charitable contribution is permitted with respect to 
any revenues or income received or accrued by the charitable 
donee after the expiration of the legal life of the patent or 
intellectual property, or after the tenth anniversary of the 
date the contribution was made by the donor. The provision is 
effective for contributions made after June 30, 2004. In Table 
1, this change is reflected in the tax expenditure estimates 
for ``Deduction for charitable contributions to educational 
institutions'' and ``Deduction for charitable contributions for 
health organizations.''
    --The Act required increased donor reporting for certain 
charitable contributions of property other than cash, 
inventory, or publicly traded securities. The provision in 
general extends to all C corporations the prior law requirement 
that the donor must obtain a qualified appraisal of the 
property if the amount of the deduction claimed exceeds $5,000. 
The provision is effective for contributions made after June 
30, 2004. In Table 1, this change is reflected in the tax 
expenditure estimates for ``Deduction for charitable 
contributions to educational institutions,'' ``Deduction for 
charitable contributions for health organizations,'' and 
``Deduction for charitable contributions, other than for 
education and health.''
    --The amount of the deduction for charitable contributions 
of vehicles (generally including automobiles, boats, and 
airplanes for which the claimed value exceeds $500 and 
excluding inventory property) was made dependent upon the use 
of the vehicle by the donee organization. If the organization 
sells the vehicle without any significant intervening use or 
material improvement of such vehicle by the organization, then 
the amount of the deduction shall not exceed the gross proceeds 
received from the sale. The provision also in general imposed 
new substantiation requirements for contributions of vehicles 
for which the claimed value exceeds $500. The provision is 
effective for contributions made after December 31, 2004. In 
Table 1, this change is reflected in the tax expenditure 
estimates for ``Deduction for charitable contributions to 
educational institutions,'' ``Deduction for charitable 
contributions for health organizations,'' and ``Deduction for 
charitable contributions, other than for education and 
health.''
    The Ronald W. Reagan National Defense Authorization Act for 
Fiscal Year 2005 (H.R. 4200, Pub. L. No. 108-3755), enacted on 
October 28, provided for the exclusion from gross income of 
qualified travel benefits received under the Operation Hero 
Miles program. Travel benefits include frequent traveler miles, 
credits for tickets, and tickets for air or surface 
transportation to facilitate the travel of: (1) an armed 
services member on active duty outside the United States, or 
(2) family members of an armed services member who is 
recuperating from injury sustained in the course of such duty. 
In Table 1, this change is reflected in the tax expenditure 
estimate for ``Exclusion of benefits and allowances to Armed 
Forces personnel.''

Expiring Tax Expenditure Provisions

    A number of tax expenditure provisions expired in 2004 or 
are scheduled to expire in 2005:
    --The designation of certain enterprise communities 
designated during 1994 expired. Code section 1391(d)(1) 
specifies that designation of enterprise communities ends upon 
the earliest of: (1) the close of the 10th calendar year on or 
after designation, (2) the termination date designated by the 
nominating State and local governments, or (3) the date the 
appropriate Secretary revokes the designation. The tax 
incentives of enterprise communities include the authority to 
issue tax-exempt facility bonds and residence eligibility with 
respect to the work opportunity tax credit, the welfare-to-work 
tax credit, and the Indian employment tax credit. In Table 1, 
this expiration is reflected in the tax expenditure estimate 
for ``Empowerment zone tax incentives.''
    --The additional first-year depreciation deduction (sec. 
168(k)) is scheduled to expire for property placed in service 
after December 31, 2004. The deduction is equal to 30 percent 
of the adjusted basis of qualifying MACRS property for property 
acquired after September 10, 2001 and before May 6, 2003, and 
placed in service before January 1, 2005. The deduction is 
equal to 50 percent of the adjusted basis of qualifying MACRS 
property for property acquired after May 5, 2003 and placed in 
service before January 1, 2005. However, the qualifying placed 
in service date for the 30 and 50 percent rates is January 1, 
2006 for property which (1) is produced by a taxpayer and 
subject to uniform capitalization rules (sec. 263A), (2) has a 
production period greater than two years, or greater than one 
year and a cost exceeding $1 million, or (3) has a MACRS 
recovery period of at least 10 years or is used in the trade or 
business of transporting persons for hire, such as commercial 
aircraft. The January 1, 2006 placed in service date also 
applies to certain noncommercial aircraft acquired by purchase. 
In Table 1, this expiration is reflected in the tax expenditure 
estimate for ``Depreciation of equipment in excess of the 
alternative depreciation system.''
    --The income tax credit for the production of electricity 
from renewable resources, as modified by the American Jobs 
Creation Act of 2004, is scheduled to expire for facilities 
placed in service after December 31, 2005. The tax expenditure 
estimate in Table 1 is based on tax credits earned by 
facilities placed in service prior to the expiration date.
    --The work opportunity credit, as extended by the Working 
Families Tax Relief Act of 2004, expires for employees who 
begin work after December 31, 2005. The tax expenditure 
estimate in Table 1 is based on credits attributable to wages 
paid or incurred to employees who begin work before December 
31, 2005 and credits that are earned in prior years and are 
carried forward to subsequent taxable years.
    --The welfare-to-work tax credit, as extended by the 
Working Families Tax Relief Act of 2004, expires for employees 
who begin work after December 31, 2005. The tax expenditure 
estimate in Table 1 is based on credits attributable to wages 
paid or incurred to employees who begin work before December 
31, 2005 and credits that were earned in prior years and 
carried forward to subsequent taxable years.
    --The above-the-line deduction for teacher classroom 
expenses, as extended by the Working Families Tax Relief Act of 
2004, is scheduled to expire for expenses incurred in taxable 
years beginning after December 31, 2005. The tax expenditure 
estimate in Table 1 is based on deductions for expenses 
incurred in taxable years beginning before December 31, 2005.
    --The option to deduct State and local sales taxes in lieu 
of State and local income taxes, as allowed by the American 
Jobs Creation Act of 2004, is scheduled to expire for taxable 
years beginning after December 31, 2005. The tax expenditure 
estimate ``Deduction of nonbusiness State and local government 
income, sales, and personal property taxes'' in Table 1 is 
based on deductions for taxes paid in taxable years beginning 
before December 31, 2005.
    --As extended by the Working Families Tax Relief Act of 
2004, the enhanced deduction for corporate contributions of 
computer equipment to public libraries and elementary and 
secondary schools is scheduled to expire for contributions made 
after December 31, 2005. In Table 1, this expiration is 
reflected in the tax expenditure estimate for ``Deduction for 
charitable contributions to educational institutions.''
    --The expensing of environmental remediation costs 
(``brownfields''), as extended by the Working Families Tax 
Relief Act of 2004, is scheduled to expire for expenses paid or 
incurred after December 31, 2005. In Table 1, this expiration 
is reflected in the tax expenditure estimate for ``Expensing 
for environmental remediation costs (``brownfields'').''
    --The availability of Archer medical savings accounts 
(``MSAs''), as extended by the Working Families Tax Relief Act 
of 2004, is scheduled to expire for contributions made after 
December 31, 2005. The Archer MSA tax expenditure is not listed 
in Table 1 because the estimated revenue loss is below the de 
minimis amount.
    --The authority to issue qualified zone academy bonds, as 
extended by the Working Families Tax Relief Act of 2004, 
expires for obligations issued after December 31, 2005. Table 1 
contains a tax expenditure estimate for ``Tax credits for 
holders of qualified zone academy bonds'' that is based on tax 
credits that will be claimed for zone academy bonds issued 
prior to the expiration.
    --The tax incentives for the District of Columbia 
enterprise zone, as extended by the Working Families Tax Relief 
Act of 2004, scheduled to expire include (1) a wage credit for 
workers who live in the District and work for a qualified 
District of Columbia enterprise zone business, which expires 
for wages incurred after December 31, 2005; (2) a capital gains 
exclusion for qualified tangible property that is placed in 
service in the District of Columbia enterprise zone, which 
expires for property acquired after December 31, 2005; (3) an 
increase in section 179 expensing for District of Columbia 
enterprise zone businesses, which expires for property placed 
in service after December 31, 2005; and (4) the authority to 
issue tax-exempt development bonds, which expires after 
December 31, 2005. In addition, the tax credit for first-time 
homebuyers in the District of Columbia expires for property 
purchased after December 31, 2005. In Table 1, all of these tax 
provisions are combined in the tax expenditure estimate for 
``District of Columbia tax incentives.'' The tax expenditure 
estimates for fiscal years 2006 through 2009 are primarily 
attributable to (1) the capital gains exclusion for tangible 
property that is placed in service prior to December 31, 2005, 
and sold during those fiscal years and (2) the exclusion of 
interest received during those fiscal years by the holders of 
tax-exempt bonds issued prior to December 31, 2005.
    --The tax incentives for the New York City Liberty Zone 
include (1) an additional first-year depreciation deduction for 
qualified Liberty Zone property, which expires for property 
placed in service after December 31, 2009; (2) the authority to 
issue tax-exempt private activity bonds, which was extended by 
the Working Families Tax Relief Act of 2004 and expires after 
December 31, 2009; (4) the authority for one additional advance 
refunding for certain bonds for facilities located in New York 
City, which was extended by the Working Families Tax Relief Act 
of 2004 and expires after December 31, 2005; (5) an increase in 
section 179 expensing for qualified property used in the 
Liberty Zone, which expires for taxable years beginning after 
December 31, 2006; and (6) a five-year recovery period for 
Liberty Zone leasehold improvement property, which expires for 
property placed in service after December 31, 2006. In Table 1, 
all of these tax provisions are combined in the tax expenditure 
estimate for ``New York City Liberty Zone tax incentives.''
    --The tax credit for research and experimentation expenses, 
which was extended by the Working Families Tax Relief Act of 
2004, expires for expenses paid or incurred after December 31, 
2005. The tax expenditure estimates in Table 1 are based on 
expenses paid or incurred prior to the expiration date and 
unused credits carried forward to succeeding taxable years.
    --The wage credit for Indian reservation employment expires 
for wages incurred after December 31, 2005. The tax expenditure 
estimate in Table 1 is based on wages incurred through December 
31, 2005, and credits carried forward to succeeding taxable 
years.
    --The 15-year straight-line cost recovery for qualified 
leasehold improvement property and qualified restaurant 
property expires for property placed in service after December 
31, 2005. In Table 1, these expirations are reflected in the 
tax expenditure estimate for ``Depreciation of buildings other 
than rental housing in excess of the alternative depreciation 
system.''

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 broader definition of 
the normal income tax base. Thus, the Joint Committee list of 
tax expenditures includes some provisions that are not 
contained in the Treasury list. The cash method of accounting 
by certain businesses 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 
2003-2009. The Joint Committee staff estimates cover the 
current fiscal year and the succeeding four fiscal years, i.e., 
fiscal years 2005-2009.
    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 2005 through 2009. 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 2003 through 2009.
    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:

National defense

--Deduction for overnight-travel expenses of National Guard and 
            Reserve Members

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

Employment

--Exclusion of miscellaneous fringe benefits
--Exclusion of employee awards
--Exclusion of income earned by voluntary employee beneficiary 
            associations
--Deferral of taxation on spread on acquisition of stock under 
            incentive stock option plans and employee stock 
            purchase plans

Medicare

--Exclusion of Medicare benefits for Hospital Insurance
--Exclusion of untaxed Medicare benefits for Supplementary 
            Medical Insurance
--Prescription drug insurance
--Exclusion of certain subsidies to employers who maintain 
            prescription drug plans for Medicare

    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 2005 
through 2009 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

Health

--Archer medical savings accounts

    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 
2005 through 2009 are below the de minimis amount ($50 
million):

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

    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 
the January 2004 Congressional Budget Office revenue baseline 
and Joint Committee staff projections of the gross income, 
deductions, and expenditures of individuals and corporations 
for calendar years 2004-2009. 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, unlike revenue estimates, tax expenditure 
estimates do not incorporate the effects of the behavioral 
changes that are anticipated to occur in response to the repeal 
of a tax expenditure 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 
that 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 for taxable years 
beginning after a certain date. Because most individual 
taxpayers have taxable years that coincide with the calendar 
year, the repeal of a provision affecting the individual income 
tax most likely would be effective for taxable years beginning 
after December 31 of a certain year. However, the Federal 
government's fiscal year begins October 1. Thus, the revenue 
estimate for repeal of a provision would show a smaller revenue 
gain in the first fiscal year than in subsequent fiscal years. 
This is due to the fact that the repeal would be effective 
after the start of the Federal 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 projections of 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 2005-2009
                                                                  [Billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Corporations                                 Individuals
                      Function                      ------------------------------------------------------------------------------------------   Total
                                                       2005     2006     2007     2008     2009     2005     2006     2007     2008     2009    2005-09
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Defense
  Exclusion of benefits and allowances to Armed      .......  .......  .......  .......  .......      2.9      2.9      3.0      3.1      3.1       15.0
   Forces personnel................................
  Exclusion of military disablity benefits.........  .......  .......  .......  .......  .......      0.1      0.1      0.1      0.1      0.1        0.5
  Deduction for overnight-travel expenses of         .......  .......  .......  .......  .......      0.1      0.1      0.1      0.1      0.1        0.4
   National Guard and Reserve Members..............
International Affairs
  Exclusion of income earned abroad by U.S.          .......  .......  .......  .......  .......      3.6      3.8      4.0      4.2      4.4       20.1
   citizens........................................
  Exclusion of certain allowances for Federal        .......  .......  .......  .......  .......      0.5      0.6      0.6      0.7      0.7        3.0
   employees abroad................................
  Exclusion of extraterritorial income.............      3.1      3.9      1.9      0.1      0.1      0.1      0.1    (\1\)    (\1\)    (\1\)        9.4
  Deferral of active income of controlled foreign        3.2      3.4      5.8      6.4      7.0  .......  .......  .......  .......  .......       25.8
   corporations....................................
  Inventory property sales source rule exception...      5.9      6.2      6.4      6.3      6.1  .......  .......  .......  .......  .......       30.9
  Deferral of certain active financing income......      1.0      1.1      1.7  .......  .......  .......  .......  .......  .......  .......        3.8
General Science, Space, and Technology
  Tax credit for qualified research expenditures...      4.8      3.0      1.5      1.0      0.4      0.1      0.1    (\1\)    (\1\)    (\1\)       11.0
  Expensing of research and experimental                 4.0      5.5      6.3      6.4      6.3      0.1      0.1      0.1      0.1      0.1       31.7
   expenditures....................................
Energy
  Expensing of exploration and development costs:
    Oil and gas....................................      0.5      0.4      0.4      0.5      0.5    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)        2.4
    Other fuels....................................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)        0.3
  Excess of percentage over cost depletion:
    Oil and gas....................................      0.5      0.5      0.5      0.6      0.6    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)        2.8
    Other fuels....................................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)        0.2
  Incentives for small refiners to comply with EPA     (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  .......  .......  .......  .......  .......        0.1
   sulfur regulations..............................
  Tax credit for enhanced oil recovery costs.......      0.2      0.3      0.3      0.3      0.4      0.1      0.1      0.1      0.1      0.1        2.0
  Tax credit for production of non-conventional          1.0      1.1      1.3      0.5      0.1      0.2      0.3      0.3      0.1    (\1\)        5.1
   fuels...........................................
  Tax credit for alcohol fuel blenders \2\.........    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  .......  .......  .......  .......  .......        0.1
  Tax credit for biodiesel blenders \3\............    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  .......  .......  .......  .......  .......      (\1\)
  Exclusion of interest on State and local               0.1      0.1      0.1      0.1      0.1      0.1      0.1      0.1      0.1      0.2        1.0
   government 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             0.2      0.2      0.3      0.4      0.4      0.1      0.1      0.1      0.1      0.1        2.0
   renewable resources.............................
  Deferral of gain from the disposition of electric      2.7      2.1     -0.2     -1.0     -1.0  .......  .......  .......  .......  .......        2.6
   transmission property to implement Federal
   Energy Regulatory Commission restructuring
   policy..........................................
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        0.9
   minerals........................................
  Expensing and amortization of timber-growing           0.2      0.2      0.2      0.2      0.2    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)        1.1
   costs...........................................
  Exclusion of interest on State and local               0.2      0.2      0.2      0.2      0.2      0.5      0.5      0.6      0.6      0.6        3.8
   government 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           0.4      0.5      0.6      0.7      0.8  .......  .......  .......  .......  .......        3.0
   reserve fund....................................
  Exclusion of contributions in aid of construction    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  .......  .......  .......  .......  .......        0.2
   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         (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.1    (\1\)    (\1\)    (\1\)    (\1\)        0.2
   costs...........................................
  Expensing of the costs of raising dairy and          (\1\)    (\1\)    (\1\)    (\1\)    (\4\)      0.1      0.1    (\1\)    (\1\)    (\4\)        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..................      0.1      0.1      0.1      0.1      0.1      0.5      0.6      0.6      0.6      0.6        3.1
  Income averaging for farmers and fishermen.......  .......  .......  .......  .......  .......    (\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 attributable to farming..................
Commerce and Housing
  Financial institutions:
    Exemption of credit union income...............      1.4      1.4      1.5      1.6      1.6  .......  .......  .......  .......  .......        7.5
  Insurance companies:
    Exclusion of investment income on life               2.4      2.5      2.6      2.6      2.7     25.0     25.7     26.4     27.2     27.9      145.0
     insurance and annuity contracts...............
    Small life insurance company taxable income          0.1      0.1      0.1      0.1      0.1  .......  .......  .......  .......  .......        0.3
     adjustment....................................
    Special treatment of life insurance company          1.8      1.9      2.0      2.0      2.1  .......  .......  .......  .......  .......        9.8
     reserves......................................
    Deduction of unpaid property loss reserves for       1.5      1.6      1.6      1.6      1.7  .......  .......  .......  .......  .......        8.0
     property and casualty insurance companies.....
    Special deduction for Blue Cross and Blue            0.9      0.9      1.0      1.0      1.0  .......  .......  .......  .......  .......        4.8
     Shield companies..............................
  Housing:
    Deduction for mortgage interest on owner-        .......  .......  .......  .......  .......     72.6     81.1     87.7     93.5     99.4      434.2
     occupied residences...........................
    Deduction for property taxes on owner-occupied   .......  .......  .......  .......  .......     19.6     15.0     13.4     13.0     13.2       74.1
     residences....................................
    Exclusion of capital gains on sales of           .......  .......  .......  .......  .......     22.9     23.7     24.6     25.4     26.3      123.0
     principal residences..........................
    Exclusion of interest on State and local             0.3      0.4      0.4      0.4      0.4      0.9      0.9      1.0      1.0      1.1        6.8
     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        1.4
     government bonds for rental housing...........
    Depreciation of rental housing in excess of          0.4      0.4      0.5      0.5      0.6      3.4      3.8      4.3      4.9      5.6       24.4
     alternative depreciation system...............
    Tax credit for low-income housing..............      3.3      3.4      3.5      3.6      3.7      1.4      1.5      1.5      1.6      1.7       25.2
    Tax credit for rehabilitation of historic            0.2      0.3      0.3      0.3      0.3      0.1      0.1      0.1      0.1      0.1        1.7
     structures....................................
  Other business and commerce:
    Reduced rates of tax on dividends and long-term  .......  .......  .......  .......  .......     57.8     64.2     69.9     78.6     86.3      356.8
     capital gains.................................
    Exclusion of capital gains at death............  .......  .......  .......  .......  .......     38.0     40.5     43.1     45.7     48.3      215.6
    Carryover basis of capital gains on gifts......  .......  .......  .......  .......  .......      4.6      4.9      5.2      5.5      5.8       26.0
    Deferral of gain on non-dealer installment           0.6      0.6      0.7      0.7      0.7      0.5      0.5      0.5      0.5      0.6        5.9
     sales.........................................
    Deferral of gain on like-kind exchanges........      1.2      1.3      1.3      1.4      1.4      0.5      0.5      0.5      0.5      0.5        9.1
    Depreciation of buildings other than rental          1.4      0.9      1.2      1.6      2.1      1.3      0.1      0.2      0.3      0.5        9.6
     housing in excess of alternative depreciation
     system........................................
    Depreciation of equipment in excess of the          18.8      5.9     10.6     15.7     20.3      2.2     -2.2     -0.1      1.7      3.5       76.4
     alternative depreciation system...............
    Expensing under section 179 of depreciable           0.5      0.7      0.6     -0.1     -0.4      2.1      3.0      2.5    (\1\)     -0.9        8.0
     business property.............................
    Amortization of business startup costs.........    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.6      0.6      0.6      0.6      0.7        3.1
    Reduced rates on first $10,000,000 of corporate      3.6      4.6      5.1      5.2      5.2  .......  .......  .......  .......  .......       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        1.6
    Expensing of magazine circulation expenditures.    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)        0.1
    Special rules for magazine, paperback book, and    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)        0.2
     record returns................................
    Completed contract rules.......................      0.3      0.3      0.3      0.4      0.4    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)        1.8
    Cash accounting, other than agriculture........    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.7      0.8      0.8      0.8      0.8        3.9
    Exclusion of interest on State and local             0.1      0.1      0.1      0.1      0.2      0.3      0.3      0.4      0.4      0.4        2.5
     government small-issue bonds..................
    Exception from net operating loss limitations        0.6      0.6      0.6      0.6      0.6  .......  .......  .......  .......  .......        3.0
     for corporations in bankruptcy proceedings....
    Tax credit for employer-paid FICA taxes on tips      0.2      0.2      0.2      0.2      0.2      0.3      0.3      0.4      0.4      0.4        2.8
    Deduction of certain film and television             0.1      0.1      0.1      0.1    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)        0.3
     production costs..............................
    Production activity deduction..................      1.8      2.7      3.9      5.5      5.9      0.6      0.9      1.3      1.8      2.0       26.4
Transportation
  Provide a 50-percent tax credit for certain            0.1      0.1      0.1      0.1      0.1  .......  .......  .......  .......  .......        0.4
   expenditures for maintaining railroad tracks....
  Deferral of tax on capital construction funds of       0.1      0.1      0.1      0.1      0.1  .......  .......  .......  .......  .......        0.4
   shipping companies..............................
  Exclusion of employer-paid transportation          .......  .......  .......  .......  .......      4.0      4.2      4.3      4.4      4.5       21.4
   benefits........................................
Community and Regional Development
  New York City Liberty Zone tax incentives........      0.3      0.4      0.1  .......  .......      0.3      0.4      0.3      0.2      0.2        2.0
  Empowerment zone tax incentives..................      0.3      0.4      0.4      0.4      0.5      0.4      0.4      0.5      0.5      0.5        4.2
  Renewal community tax incentives.................      0.2      0.2      0.2      0.3      0.3      0.3      0.4      0.4      0.5      0.5        3.3
  New markets tax credit...........................      0.2      0.2      0.3      0.4      0.3      0.2      0.3      0.4      0.5      0.4        3.3
  District of Columbia tax incentives..............    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.1      0.1    (\1\)      0.1      0.1        0.4
  Wage credit for Indian reservation employment....      0.1    (\1\)    (\1\)    (\1\)  .......    (\1\)    (\1\)    (\1\)    (\1\)  .......        0.1
  Expensing of environmental remediation costs           0.1    (\1\)    (\4\)    (\4\)    (\4\)      0.1    (\1\)    (\4\)    (\4\)    (\4\)        0.1
   (``brownfields'')...............................
  Exclusion of interest on State and local             (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)        0.2
   government bonds for qualified green building
   and sustainable design projects.................
  Tax credit for rehabilitation of structures,         (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)        0.2
   other than historic structures..................
  Exclusion of interest on State and local               0.3      0.3      0.3      0.3      0.3      0.6      0.7      0.7      0.7      0.8        4.9
   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       .......  .......  .......  .......  .......      5.2      5.3      5.3      5.4      5.4       26.6
     education.....................................
    Deduction for interest on student loans........  .......  .......  .......  .......  .......      0.8      0.9      0.9      0.9      1.0        4.5
    Deduction for higher education expenses........  .......  .......  .......  .......  .......      2.8      0.7  .......  .......  .......        3.5
    Exclusion of earnings of Coverdell education     .......  .......  .......  .......  .......      0.1      0.1      0.1      0.2      0.2        0.7
     savings accounts..............................
    Exclusion of interest on educational savings     .......  .......  .......  .......  .......    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)        0.1
     bonds.........................................
    Exclusion of earnings of qualified tuition       .......  .......  .......  .......  .......      0.5      0.6      0.7      0.8      0.9        3.4
     programs......................................
    Exclusion of scholarship and fellowship income.  .......  .......  .......  .......  .......      1.4      1.5      1.5      1.6      1.6        7.6
    Exclusion of income attributable to the          .......  .......  .......  .......  .......    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)        0.1
     discharge of certain student loan debt and
     NHSC Educational Loan repayments..............
    Exclusion of employer-provided education         .......  .......  .......  .......  .......      0.8      0.8      0.9      0.9      0.9        4.3
     assistance benefits...........................
    Parental personal exemption for students age 19  .......  .......  .......  .......  .......      1.1      0.5      0.3      0.2      0.2        2.3
     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      0.4        2.2
     government student loan bonds.................
    Exclusion of interest on State and local             0.3      0.3      0.3      0.4      0.4      0.8      0.9      0.9      0.9      1.0        6.2
     government bonds for private nonprofit and
     qualified public educational facilities.......
    Tax credit for holders of qualified zone             0.1      0.1      0.1      0.1      0.1  .......  .......  .......  .......  .......        0.4
     academy bonds.................................
    Deduction for charitable contributions to            0.8      0.9      0.9      0.9      1.0      4.9      5.4      5.9      6.3      6.9       34.0
     educational institutions......................
    Above-the-line deduction for teacher classroom   .......  .......  .......  .......  .......      0.2      0.1  .......  .......  .......        0.2
     expenses......................................
  Employment:
    Exclusion of employee meals and lodging (other   .......  .......  .......  .......  .......      0.9      0.9      0.9      0.9      1.0        4.8
     than military)................................
    Exclusion of benefits provided under cafeteria   .......  .......  .......  .......  .......     23.6     24.9     26.6     28.6     30.7      134.4
     plans \5\.....................................
    Exclusion of housing allowances for ministers..  .......  .......  .......  .......  .......      0.5      0.5      0.5      0.5      0.6        2.5
    Exclusion of miscellaneous fringe benefits.....  .......  .......  .......  .......  .......      6.4      6.6      6.8      7.0      7.3       34.2
    Exclusion of employee awards...................  .......  .......  .......  .......  .......      0.2      0.2      0.2      0.2      0.2        0.8
    Exclusion of income earned by voluntary          .......  .......  .......  .......  .......      3.1      3.3      3.4      3.5      3.7       17.0
     employees' beneficiary associations...........
    Special tax provisions for employee stock            0.8      0.9      0.9      0.9      0.9      0.3      0.3      0.3      0.3      0.3        5.9
     ownership plans (ESOPs).......................
    Work opportunity tax credit....................      0.2      0.2      0.1    (\1\)    (\1\)      0.1    (\1\)    (\1\)    (\1\)    (\1\)        0.6
    Welfare-to-work tax credit.....................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)        0.2
    Deferral of taxation on spread on acquisition    .......  .......  .......  .......  .......      0.4      0.4      0.4      0.4      0.4        2.0
     of stock under incentive stock option plans
     and employee stock purchase plans \6\.........
  Social services:
    Tax credit for children under age 17\7\........  .......  .......  .......  .......  .......     46.6     46.5     46.4     46.4     45.8      231.7
    Tax credit for child and dependent care          .......  .......  .......  .......  .......      3.0      2.2      1.9      1.8      1.7       10.6
     expenses......................................
    Exclusion of employer-provided child care\8\...  .......  .......  .......  .......  .......      1.0      1.1      1.1      1.2      1.3        5.6
    Tax credit for employer-provided dependent care      0.1      0.1      0.2      0.2      0.2    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)        0.8
    Exclusion of certain foster care payments......  .......  .......  .......  .......  .......      0.6      0.6      0.6      0.7      0.7        3.2
    Adoption credit and employee adoption benefits   .......  .......  .......  .......  .......      0.2      0.2      0.2      0.2      0.2        1.0
     exclusion.....................................
    Deduction for charitable contributions, other        1.8      1.9      2.0      2.1      2.1     26.0     29.4     31.9     34.2     37.7      169.3
     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     .......  .......  .......  .......  .......     78.6     91.2    100.2    107.8    116.0      493.7
   care, health insurance premiums, and long-term
   care insurance premiums\9\......................
  Exclusion of medical care and CHAMPUS/TRICARE      .......  .......  .......  .......  .......      1.6      1.6      1.7      1.7      1.7        8.4
   medical insurance for military dependents,
   retirees, and retiree dependents................
  Deduction for health insurance premiums and long-  .......  .......  .......  .......  .......      3.2      3.8      4.2      4.5      5.0       20.7
   term care insurance premiums by the self-
   employed........................................
  Deduction for medical expenses and long-term care  .......  .......  .......  .......  .......      7.7      8.2      8.9      9.5      9.9       44.1
   expenses........................................
  Exclusion of workers' compensation benefits        .......  .......  .......  .......  .......      5.2      5.5      5.7      6.0      6.3       28.8
   (medical benefits)..............................
  Health savings accounts..........................  .......  .......  .......  .......  .......      0.4      0.5      0.5      0.6      0.7        2.7
  Exclusion of interest on State and local               0.5      0.5      0.5      0.6      0.6      1.3      1.3      1.4      1.4      1.5        9.7
   government bonds for private nonprofit hospital
   facilities......................................
  Deduction for charitable contributions to health       0.9      1.0      1.0      1.0      1.1      3.3      3.7      4.1      4.3      4.8       25.2
   organizations...................................
  Tax credit for orphan drug research..............      0.2      0.2      0.2      0.3      0.3  .......  .......  .......  .......  .......        1.2
  Tax credit for purchase of health insurance by     .......  .......  .......  .......  .......      0.1      0.1      0.1      0.1      0.1        0.6
   certain displaced persons.......................
Medicare
  Exclusion of Medicare benefits:
    Hospital insurance (Part A)....................  .......  .......  .......  .......  .......     16.4     18.1     19.7     21.4     23.9       99.5
    Supplementary medical insurance (Part B).......  .......  .......  .......  .......  .......     10.9     11.8     12.8     13.9     15.7       65.1
  Prescription drug insurance (Part D).............  .......  .......  .......  .......  .......  .......      4.3      7.2      8.4      9.8       29.7
  Exclusion of certain subsidies to employers who    .......      1.2      1.7      1.9      2.1  .......  .......  .......  .......  .......        6.8
   maintain prescription drug plans for Medicare...
Income Security
  Exclusion of workers' compensation benefits        .......  .......  .......  .......  .......      3.9      4.1      4.3      4.5      4.7       21.5
   (disability and survivors payments).............
  Exclusion of damages on account of personal        .......  .......  .......  .......  .......      1.4      1.4      1.5      1.5      1.5        7.3
   physical injuries or physical sickness..........
  Exclusion of special benefits for disabled coal    .......  .......  .......  .......  .......      0.1      0.1      0.1    (\1\)    (\1\)        0.3
   miners..........................................
  Exclusion of cash public assistance benefits.....  .......  .......  .......  .......  .......      2.5      2.6      2.7      2.7      2.8       13.3
  Net exclusion of pension contributions and
   earnings:
    Employer plans.................................  .......  .......  .......  .......  .......    102.8    107.9    113.3    118.9    124.8      567.8
    Individual retirement plans....................  .......  .......  .......  .......  .......     11.6     14.8     16.3     18.0     19.5       80.2
    Keogh plans....................................  .......  .......  .......  .......  .......      8.3      9.1     10.8     11.5     11.4       51.1
  Tax credit for certain individuals for elective    .......  .......  .......  .......  .......      1.7      1.6      0.5  .......  .......        3.8
   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..........  .......  .......  .......  .......  .......      2.5      2.5      2.6      2.6      2.7       12.9
    Premiums on accident and disability insurance..  .......  .......  .......  .......  .......      2.5      2.6      2.7      2.8      2.9       13.4
  Additional standard deduction for the blind and    .......  .......  .......  .......  .......      1.8      1.8      1.7      1.8      1.9        9.1
   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\...................  .......  .......  .......  .......  .......     39.0     39.0     38.8     39.0     39.3      195.1
Social Security and Railroad Retirement
  Exclusion of certain social security and railroad  .......  .......  .......  .......  .......     22.3     22.3     22.8     23.5     24.4      115.3
   retirement benefits.............................
Veterans' Benefits and Services
  Exclusion of veterans' disability compensation...  .......  .......  .......  .......  .......      3.4      3.5      3.5      3.6      3.6       17.5
  Exclusion of veterans' pensions..................  .......  .......  .......  .......  .......      0.1      0.1      0.1      0.1      0.1        0.6
  Exclusion of veterans' readjustment benefits.....  .......  .......  .......  .......  .......      0.2      0.2      0.2      0.2      0.3        1.2
  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      7.4      7.5      7.6      7.8      8.0     19.1     19.3     19.7     20.1     20.5      136.9
   local government debt...........................
  Deduction of nonbusiness State and local           .......  .......  .......  .......  .......     46.2     36.8     33.9     33.7     35.2      185.8
   government income, sales, and personal property
   taxes...........................................
  Tax credit for Puerto Rico and possession income,      1.2      0.3  .......  .......  .......  .......  .......  .......  .......  .......        1.5
   and Puerto Rico economic activity...............
Interest
  Deferral of interest on savings bonds............  .......  .......  .......  .......  .......      1.1      1.1      1.1      1.1      1.1        5.6

--------------------------------------------------------------------------------------------------------------------------------------------------------
\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 $1.4
  billion in each of the fiscal years 2005 through 2007 and $1.5 billion per year in fiscal years 2008 and 2009.
\3\ In addition, the exemption from excise tax for biodiesel results in a reduction in excise tax receipts, net of income tax effect, of a total of $0.1
  billion over the fiscal years 2004 through 2007.
\4\ Negative tax expenditure of less than $50 million.
\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\ Tax expenditure estimate includes refundable amounts, amounts used to offset income taxes, and amounts used to offset other taxes. 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: $51.5 billion in 2005,
  $51.9 billion in 2006, $51.0 billion in 2007, and $50.6 billion in 2008, and $50.7 in 2009.
\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 at 2004 Rates and 2004 Law and 2004 Income Levels\1\
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                                                    Itemized
               Income Class\2\                 All returns\3\  Taxable returns      returns       Tax liability
----------------------------------------------------------------------------------------------------------------
Below $10,000...............................           25,426              589              301          -$6,824
$10,000 to $20,000..........................           22,336            6,742              896          -13,424
$20,000 to $30,000..........................           19,811            8,688            1,899           -2,473
$30,000 to $40,000..........................           16,580           10,390            3,287           12,214
$40,000 to $50,000..........................           13,101           10,025            4,228           24,218
$50,000 to $75,000..........................           22,875           20,129           10,721           76,832
$75,000 to $100,000.........................           13,584           13,261            9,556           83,229
$100,000 to $200,000........................           14,383           14,260           12,506          195,823
$200,000 and over...........................            3,454            3,430            3,281          353,082
                                             -------------------------------------------------------------------
      Total.................................          151,449           87,512           46,675         $722,676
----------------------------------------------------------------------------------------------------------------
\1\ Tax law as in effect on November 1, 2004, is applied to the 2004 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 2004 Rates and 2004 Income Levels \1\
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                      Medical deduction             Real estate tax deduction
              Income Class \2\               -------------------------------------------------------------------
                                                  Returns           Amount          Returns           Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000...............................                3            (\3\)               29               $2
$10,000 to $20,000..........................              189              $50              813              112
$20,000 to $30,000..........................              503              188            2,141              403
$30,000 to $40,000..........................            1,002              471            3,482              724
$40,000 to $50,000..........................            1,096              711            4,162            1,157
$50,000 to $75,000..........................            2,341            2,275           10,133            3,599
$75,000 to $100,000.........................            1,290            1,512            7,575            3,908
$100,000 to $200,000........................              777            1,808            7,422            6,412
$200,000 and over...........................               67              621            1,428            2,995
                                             -------------------------------------------------------------------
      Total.................................            7,268           $7,633           37,185          $19,312
----------------------------------------------------------------------------------------------------------------
Footnotes appear at the end of the table.


              Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items,
                               at 2004 Rates and 2004 Income Levels \1\--Continued
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                               State and local income, sales,        Charitable contribution
                                                  and personal property tax                 deduction
             Income Class [\2\]                           deduction            ---------------------------------
                                             ----------------------------------
                                                  Returns           Amount          Returns           Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000...............................               61               $6                2               $1
$10,000 to $20,000..........................            1,014               85              251               30
$20,000 to $30,000..........................            2,685              386              884              135
$30,000 to $40,000..........................            4,281              910            2,158              405
$40,000 to $50,000..........................            4,888            1,641            3,303              794
$50,000 to $75,000..........................           11,564            5,530            9,170            2,917
$75,000 to $100,000.........................            8,265            6,576            8,781            3,668
$100,000 to $200,000........................            8,237           12,423           11,883            9,473
$200,000 and over...........................            2,227           17,703            3,152           16,997
                                             -------------------------------------------------------------------
      Total.................................           43,221          $45,258           39,584         $34,419
----------------------------------------------------------------------------------------------------------------
Footnotes appear at the end of the table.


              Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items,
                               at 2004 Rates and 2004 Income Levels \1\--Continued
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                      Child care credit             Earned income credit \4\
              Income Class \2\               -------------------------------------------------------------------
                                                  Returns           Amount          Returns           Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000...............................            (\5\)            (\3\)            5,383           $6,641
$10,000 to $20,000..........................               82              $25            6,152           15,522
$20,000 to $30,000..........................              373              172            4,783           10,620
$30,000 to $40,000..........................              633              361            3,471            4,605
$40,000 to $50,000..........................              567              328              951              587
$50,000 to $75,000..........................            1,265              640               98               73
$75,000 to $100,000.........................            1,142              560  ...............  ...............
$100,000 to $200,000........................            1,367              710  ...............  ...............
$200,000 and over...........................              223              120  ...............  ...............
                                             -------------------------------------------------------------------
      Total.................................            5,641           $2,915           20,838          $38,048
----------------------------------------------------------------------------------------------------------------
Footnotes appear at the end of the table.


              Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items,
                               at 2004 Rates and 2004 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 \2\               ----------------------------------
                                                  Returns           Amount          Returns           Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000...............................              137               $8              129             $161
$10,000 to $20,000..........................            3,587              760            3,331            1,893
$20,000 to $30,000..........................            4,848            3,335            4,422            5,158
$30,000 to $40,000..........................            3,558            4,048            4,219            6,500
$40,000 to $50,000..........................            2,947            3,591            3,406            5,563
$50,000 to $75,000..........................            5,743            7,895            6,851           11,646
$75,000 to $100,000.........................            2,706            1,768            4,982            8,634
$100,000 to $200,000........................            2,225              710            4,654            7,236
$200,000 and over...........................              550              180                8                9
                                             -------------------------------------------------------------------
      Total.................................           26,301          $22,295           32,002          $46,799
----------------------------------------------------------------------------------------------------------------
Footnotes appear at the end of the table.


              Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items,
                               at 2004 Rates and 2004 Income Levels \1\--Continued
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                                                   Mortgage interest deduction
                               Income Class \2\                                ---------------------------------
                                                                                    Returns           Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000.................................................................               65              $22
$10,000 to $20,000............................................................              787              250
$20,000 to $30,000............................................................            2,271            1,136
$30,000 to $40,000............................................................            3,501            2,195
$40,000 to $50,000............................................................            4,140            3,738
$50,000 to $75,000............................................................            9,834           11,325
$75,000 to $100,000...........................................................            7,198           12,793
$100,000 to $200,000..........................................................            7,353           23,248
$200,000 and over.............................................................            2,141           15,457
                                                                               ---------------------------------
      Total...................................................................           37,291          $70,164
----------------------------------------------------------------------------------------------------------------
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\ Less than $500,000.
\4\ Includes the refundable portion.
\5\ Less than 500,000 returns.

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

Source: Joint Committee on Taxation.

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