[JPRT 113-1-13]
[From the U.S. Government Publishing Office]


                                                               JCS-1-13


                                     

                        [JOINT COMMITTEE PRINT]

 
                              ESTIMATES OF
                        FEDERAL TAX EXPENDITURES
                       FOR FISCAL YEARS 2012-2017

                               __________

                            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] [TIFF OMITTED] TONGRESS.#13


                            FEBRUARY 1, 2013


                            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..................................23
III.Tax Expenditure Estimates........................................29

                              INTRODUCTION

    Tax expenditure analysis can help both policymakers and the 
public to understand the actual size of government, the uses to 
which government resources are put, and the tax and economic 
policy consequences that follow from the implicit or explicit 
choices made in fashioning legislation. This report \1\ on tax 
expenditures for fiscal years 2012-2017 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 2012-
2017 (JCS-1-13), February 1, 2013.
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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 Department of 
the Treasury (``the Treasury''). The Treasury published its 
estimates of tax expenditures for fiscal years 2011-2017 in the 
Administration's budgetary statement of February 13, 2012.\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\ The Joint Committee staff prepared its first report on 
estimates of Federal tax expenditures in 1972 (JCS-28-72), covering 
fiscal years 1967-1971. Reports cover every five-year period since 
fiscal years 1977-1981 (JCS-10-77). A complete collection of these 
reports on estimates of Federal tax expenditures, including this 
report, is available at https://www.jct.gov/
publications.html?func=select&id=5. This report satisfies the annual 
reporting requirement for fiscal years 2012 and 2013.
    \3\ Office of Management and Budget, ``Tax Expenditures,'' 
Analytical Perspectives, Budget of the United States Government, Fiscal 
Year 2013, February 13, 2012, pp. 247-284.
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    The Joint Committee staff has made its estimates (as shown 
in Table 1) based on the provisions in Federal tax law enacted 
through January 2, 2013. 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 
calculations in this report are based on the January 2012 
Congressional Budget Office (``CBO'') revenue baseline and 
Joint Committee staff projections of the gross income, 
deductions, and expenditures of individuals and corporations 
for calendar years 2011-2017.
    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; and Part III contains various estimates. 
Estimates of tax expenditures for fiscal years 2012-2017 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). The Budget Act requires CBO and the Treasury 
to publish annually detailed lists of tax expenditures. The Joint 
Committee staff issued reports prior to the statutory obligation placed 
on the CBO and continued to do so thereafter. In light of this 
precedent and a subsequent statutory requirement that the CBO rely 
exclusively on Joint Committee staff estimates when considering the 
revenue effects of proposed legislation, the CBO has always relied on 
the Joint Committee staff for the production of its annual tax 
expenditure publication. See Pub. L. No. 99-177, sec. 273, codified at 
2 U.S.C. 601(f).
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    Special income tax provisions are referred to as tax 
expenditures because they may be analogous to direct outlay 
programs and may be considered alternative means of 
accomplishing similar budget policy objectives. Tax 
expenditures are similar to direct spending programs that 
function as entitlements to those who meet the established 
statutory criteria.
    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 specific 
public goals through tax benefits or direct outlays. It is 
appropriate to evaluate tax expenditures with respect to cost, 
distributional consequences, alternative means of provision, 
and economic effects and to allow policymakers to evaluate the 
tradeoffs among these and other potentially competing policy 
goals.
    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 
uses 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 less than $50 
million over the five fiscal years 2013-2017. 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.
    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.\6\  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.
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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 
(sec. 1(e) of 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, Bruce F. 
Davie, ``Tax Expenditures in the Federal Excise Tax System,'' National 
Tax Journal, 47, March 1994, pp. 39-62, and Lindsay Oldenski, 
``Searching for Structure in the Federal Excise Tax System: An Excise 
Tax Expenditure Budget,'' National Tax Journal, 57, September 2004, pp. 
613-637. 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.
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    Some provisions in the Internal Revenue Code (``the 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 and are not 
related directly to progressivity are called negative tax 
expenditures.\7\  Special provisions of the law the principal 
purpose for which is to enforce general tax rules, or to 
prevent the violation of other laws, are not treated as 
negative tax expenditures even though they may increase the tax 
burden for certain taxpayers. Examples of these compliance and 
enforcement provisions include the (1) limitation on net 
operating loss carryforwards and certain built-in losses 
following ownership changes (sec. 382), (2) wash sale rules 
(sec. 1091), (3) denial of capital gain treatment for gains on 
certain obligations not in registered form (sec. 1287), and (4) 
disallowance of a deduction for fines and penalties (sec. 
162(f)).
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    \7\ Although the Budget Act does not require the identification of 
negative tax expenditures, the Joint Committee staff has presented a 
number of negative tax expenditures for completeness.
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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 are 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 Code 
contains a specific exclusion for the income. Specific 
exclusions for employer-provided benefits include: coverage 
under accident and health plans,\8\  accident and disability 
insurance, group term life insurance, educational assistance, 
tuition reduction benefits, 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, and de minimis fringe benefits). Each of these 
exclusions is classified as a tax expenditure in this report.
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    \8\ Present law contains an exclusion for employer-provided 
coverage under accident and health plans (sec. 106) and an exclusion 
for benefits received by employees under employer-provided accident and 
health plans (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 generally 
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.\9\  Under normal income tax law, retirees 
would be entitled to exclude 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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    \9\ 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 make 
during their working years, the value of Medicare Part B 
insurance generally is greater than the Part B premium that 
enrollees must pay, and the value of Medicare Part D 
(prescription drug) insurance generally is greater than the 
Part D 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, as are the 
exclusion of the value of Medicare Part B insurance in excess 
of Part B premiums and the exclusion of the value of Part D 
insurance in excess of Part D premiums.
    Public assistance benefits are excluded from gross income 
by statute or by Treasury regulations. Table 1 contains tax 
expenditure calculations 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.\10\ 
However, the Joint Committee staff does not classify this 
exclusion as a tax expenditure.\11\ The measurement of imputed 
income for tax purposes presents administrative problems and 
its exclusion from taxable income may be regarded as an 
administrative necessity.\12\ Under normal income tax law, 
individuals are 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.
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    \10\ The National Income and Product Accounts include estimates of 
this imputed income. The accounts appear in Survey of Current Business, 
published monthly by the U.S. Department of Commerce, Bureau of 
Economic Analysis. However, a taxpayer-by-taxpayer accounting of 
imputed income would be necessary for a tax expenditure estimate.
    \11\ The Treasury Department provides a tax expenditure calculation 
for the exclusion of net rental income of homeowners that combines the 
positive tax expenditure for the failure to impute rental income with 
the negative tax expenditure for the failure to allow a deduction for 
depreciation and other costs.
    \12\ 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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    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, exchange, 
gift, or transfer at death. Thus, the deferral of tax until 
realization is not classified as a tax expenditure. However, 
reduced rates of tax, further deferrals of tax (beyond the year 
of sale, exchange, gift, or transfer at death), and exclusions 
of certain capital gains are classified as tax expenditures. 
Because of the same concern for administrative feasibility, it 
also is assumed that normal income tax law does 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 is levied on nominal gains 
as opposed to real gains in asset values.
    There are many types of State and local government bonds 
and private purpose bonds the interest on which is exempt from 
Federal income taxation. 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 are subject to regular income tax at 
the time the options are exercised and employers receive a 
corresponding tax deduction.\13\ The employee's income is 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, then: (1) the 
income that is received at the time the option is exercised is 
excluded for purposes of the regular income tax but, in the 
case of an incentive stock option, included for purposes of the 
alternative minimum tax (``AMT''); (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. The negative tax expenditure 
created by the denial of the deduction for employers is 
incorporated in the calculation of the tax expenditure.
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    \13\ If the option has a readily ascertainable fair market value, 
normal law taxes the option at the time it is granted and the employer 
is entitled to a deduction at that time.
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    The individual 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. In two cases the 
restrictive effects of the AMT are presented separately because 
there are no underlying positive tax expenditures reflecting 
these effects: the negative tax expenditures for the AMT's 
disallowance of personal exemptions and the standard deduction; 
and the net AMT attributable to the net operating loss 
limitation.

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.
    Some economists assert that this may not represent the 
difference between tax depreciation and economic depreciation. 
In particular, some economists have found that economic 
depreciation follows a geometric pattern, as opposed to a 
straight-line pattern, because data suggest that a geometric 
pattern more closely matches the actual pattern of price 
declines for most asset types. The Bureau of Economic Analysis 
(``BEA'') of the Department of Commerce introduced a new 
methodology for calculating economic depreciation for purposes 
of the National Income and Product Accounts (``NIPA'') in 1997 
that relies on constant (geometric) rates of depreciation 
rather than the straight-line method used previously and 
embodied in the alternative depreciation system. This analysis 
is based on separate lives and depreciation rates for each of 
dozens of types of assets, unlike the tax depreciation 
rules.\14\ A somewhat similar result could be reproduced 
mathematically using the straight-line method and adjusting the 
recovery period. The straight-line method could be used over a 
shorter or longer recovery period to provide for a present 
value of tax depreciation greater than, equal to, or less than 
the present value of economic depreciation.\15\
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    \14\ For a detailed discussion of the BEA methodology, see Barbara 
M. Fraumeni, ``The Measurement of Depreciation in the U.S. National 
Income and Product Accounts,'' Survey of Current Business, 77, July 
1997, pp. 7-23.
    \15\ Tax expenditures are calculated on a cash flow basis such that 
two methods of depreciation with equivalent present value may produce 
both positive and negative tax expenditure estimates on a year by year 
basis relative to economic depreciation.
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    The Joint Committee staff estimates another tax expenditure 
for depreciation in those specific cases where the tax 
treatment of a certain type of asset deviates from the overall 
treatment of other similar types of assets. For example, the 
tax treatment of leasehold improvements of commercial buildings 
allows for depreciation using a recovery period of 15 years, 
while the general treatment of improvements to commercial 
buildings (e.g., owned commercial buildings) is a 39-year 
recovery period. In this case, the difference between straight-
line depreciation using 15 years and 39 years for the recovery 
period represents a tax expenditure. In Table 1, these items 
are reflected in the various tax expenditure estimates for 
depreciation. As indicated above, the Joint Committee staff 
assumes that normal income tax law does not provide for any 
indexing of the basis of capital assets (nor, for that matter, 
any indexing with respect to expenses associated with these 
assets). Thus, normal income tax law does 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 (except where its 
application is deemed infeasible), 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.) As 
another example, the deductions for contributions to nuclear 
decommissioning trust accounts and certain environmental 
settlement trust accounts are not viewed as tax expenditures 
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 incomes of these two 
types of trust accounts, and these tax rate reductions are 
viewed as tax expenditures.
    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 directly to concerns about the ability of 
individuals to pay taxes.
    Exceptions to the corporate AMT are not viewed as tax 
expenditures because the effects of the AMT exceptions are 
already incorporated in the estimates of related tax 
expenditures.\16\
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    \16\ See discussion of the individual AMT above.
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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, real estate investment trusts, 
real estate mortgage investment conduits, and cooperatives) 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 
section 501 also generally are exempt from corporate income 
tax. The tax exemption for noncharitable organizations that 
have a direct business analogue or compete with for-profit 
organizations organized for similar purposes is a tax 
expenditure.\17\ The tax exemption for certain nonprofit 
cooperative business organizations, such as trade associations, 
is not treated as a tax expenditure just as the entity-level 
exemption given to for-profit pass-through business entities is 
not treated as a tax expenditure. 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.\18\ 
However, there are numerous exceptions that allow for otherwise 
unrelated business income to escape taxation,\19\ and these 
exceptions are treated as tax expenditures. 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.
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    \17\ These organizations include small insurance companies, mutual 
or cooperative electric companies, State credit unions, and Federal 
credit unions.
    \18\ The tax exemption for charities is not treated as a tax 
expenditure even if taxable analogues may exist. For example, the tax 
exemption for hospitals and universities is not treated as a tax 
expenditure notwithstanding the existence of taxable hospitals and 
universities.
    \19\ These exceptions include certain passive income that arguably 
may relate to business activities, such as royalties or rents received 
from licensing trade names or other assets typically used in a trade or 
business, as well as other passive income such as certain dividends and 
interest. Other exceptions include income derived from certain research 
activities and income from certain trade show and fair activities.
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Recent Legislation

    The FAA Modernization and Reform Act of 2012, enacted on 
February 14, 2012 (Pub. L. No. 112-95), modifies the following 
tax expenditures:
    --The definition of qualified private activity bonds is 
modified to permit tax-exempt financing for fixed-wing 
emergency medical aircraft. In Table 1, this change is 
reflected in the tax expenditure estimate for ``Exclusion of 
interest on State and local government qualified private 
activity bonds for private nonprofit hospital facilities.''
    --Commercial airline employees who had participated in a 
commercial airline's tax-exempt defined benefit pension plan, 
that was terminated or otherwise restricted, are allowed to 
transfer to a traditional individual retirement account 
(``IRA'') any amount received from the airline resulting from a 
bankruptcy proceeding filed between September 11, 2001, and 
January 1, 2007. They may also roll over such an amount from a 
Roth IRA to a traditional IRA. Any such amount received from an 
airline that has been transferred under this Act to a 
traditional IRA is excluded from gross income. In Table 1, this 
change is reflected in the tax expenditure estimates for ``Net 
exclusion of pension contributions and earnings'' and 
``Individual retirement arrangements.''

    The Middle Class Tax Relief and Job Creation Act of 2012, 
enacted on February 22, 2012 (Pub. L. No. 112-96), modifies the 
tax expenditure for defined benefit retirement plans by 
increasing the employee rate of pension contribution under the 
Federal Employees Retirement System, the Foreign Service 
Pension System, and the Central Intelligence Agency Retirement 
and Disability System for Federal employees entering service 
after December 31, 2012, who have less than five years of 
creditable civilian service. These increased employee pension 
contributions, which are taxable, result in a corresponding 
decrease in the amount of employer pension contributions, which 
are tax-excluded. In addition, members of Congress and 
congressional employees entering service after December 31, 
2012, who have less than five years of creditable civilian 
service, receive a reduction in their contribution rate and 
annuity benefit calculation to the same level as other Federal 
employees. In Table 1, these changes are reflected in the tax 
expenditure estimates for ``Net exclusion of pension 
contributions and earnings: Defined benefit plans.''

    The Moving Ahead for Progress in the 21st Century Act 
(``MAP21''), enacted on July 6, 2012 (Pub. L. No. 112-141), 
modifies the tax expenditure of defined benefit plans by 
revising the single-employer plan pension funding rules by 
adjusting a segment interest rate if the rate determined under 
the regular rules is outside a specified range. The effect is 
to decrease required contributions to defined benefit plans, 
which are deductible for employers. The Act also permits 
additional transfers of excess pension assets to retiree health 
and group term life insurance accounts. In Table 1, this change 
is reflected in the tax expenditure estimates for ``Net 
exclusion of pension contributions and earnings: Defined 
benefit plans.''

    The American Taxpayer Relief Act of 2012, enacted on 
January 2, 2013 (Pub. L. No. 112-240), modifies many tax 
expenditures. The permanent reduction in individual income tax 
rates also affects the value of most individual income tax 
expenditures.
    --The overall limitation on itemized deductions applies for 
taxable years beginning after December 31, 2012, for taxpayers 
with income over (1) $300,000 in the case of married taxpayers 
filing a joint return or a surviving spouse; (2) $275,000 in 
the case of a head of household; (3) $250,000 in the case of an 
individual who is not married and who is not a surviving spouse 
or head of household; and (4) $150,000 in the case of a married 
individual filing a separate return. These amounts are indexed 
for inflation for taxable years beginning after 2013. In Table 
1, this is reflected in the various tax expenditure estimates 
for the relevant itemized deductions.
    --The personal exemption phaseout, a negative tax 
expenditure, applies for taxable years beginning after December 
31, 2012, for taxpayers with income over (1) $300,000 in the 
case of married taxpayers filing a joint return or a surviving 
spouse; (2) $275,000 in the case of a head of household; (3) 
$250,000 in the case of an individual who is not married and 
who is not a surviving spouse or head of household; and (4) \1/
2\ the amount in (1) in the case of a married individual filing 
a separate return. These amounts are indexed for inflation for 
taxable years beginning after 2013.
    --The following modifications to the credit for children 
under age 17 are extended permanently for taxable years 
beginning after December 31, 2012: increase in credit from $500 
to $1,000; expanded eligibility for the refundable portion of 
the credit; AMT relief; and provision that the tax credit not 
be treated as income or resources for purposes of benefit or 
assistance programs financed in whole or in part with Federal 
funds. The reduction in the refundable child credit earned 
income threshold amount to $3,000 is extended for five years 
for taxable years beginning after 2012 and before 2018.
    --The following modifications to the adoption tax credit 
are extended permanently for taxable years beginning after 
December 31, 2012: the maximum credit increase to $10,000 
(indexed for inflation after 2002); allowance of the credit for 
both nonspecial needs and special needs adoptions; increase in 
the phaseout starting point to $150,000 (indexed for inflation 
after 2002); and allowance of the credit against the AMT.\20\ 
In Table 1, this change is reflected in the tax expenditure 
estimate for ``Adoption credit and employee adoption benefits 
exclusion.''
---------------------------------------------------------------------------
    \20\ The changes to the adoption credit for 2010 and 2011 (relating 
to the $1,000 increase in the maximum credit and the refundability of 
the credit) enacted as part of the Patient Protection and Affordable 
Care Act (Pub. L. No. 111-148) are not extended.
---------------------------------------------------------------------------
    --The following modifications to the exclusion for 
employer-provided adoption assistance are extended permanently 
for taxable years beginning after December 31, 2012: the 
maximum exclusion increase to $10,000 (indexed for inflation 
after 2002); allowance of expenses for both non-special needs 
and special needs adoptions; increase in the phaseout starting 
point to $150,000 (indexed for inflation after 2002); and 
allowance of the credit against the AMT.\21\ In Table 1, this 
change is reflected in the tax expenditure estimate for 
``Adoption credit and employee adoption benefits exclusion.''
---------------------------------------------------------------------------
    \21\ The changes to the exclusion for employer-provided adoption 
assistance for 2010 and 2011 (relating to the $1,000 increase in the 
maximum exclusion) enacted as part of the Patient Protection and 
Affordable Care Act (Pub. L. No. 111-148) are not extended.
---------------------------------------------------------------------------
    --The following modifications to the dependent care credit 
are extended permanently for taxable years beginning after 
December 31, 2012: increase of the dollar limit on creditable 
expenses from $2,400 to $3,000 ($4,800 to $6,000 for two or 
more children); increase of the applicable credit percentage 
from 30 to 35 percent; and increase of the beginning point of 
the phaseout range from $10,000 to $15,000. In Table 1, this 
change is reflected in the tax expenditure estimate for 
``Credit for child and dependent care and exclusion of 
employer-provided child care.''
    --The credit for employer-provided child care is extended 
permanently for taxable years beginning after December 31, 
2012.
    --The following modifications to the earned income tax 
credit are extended permanently for taxable years beginning 
after December 31, 2012: $3,000 increase in the beginning point 
of the phaseout range for joint returns; modification of 
treatment of amounts not includible in income; repeal of 
reduction for AMT liability; use of AGI instead of modified 
AGI; simplified relationship test; simplified tie-breaking 
rule; and expansion of math error authority. The credit 
percentage of 45 percent for three or more qualifying children 
and the $2,000 additional higher phaseout threshold for 
marriage penalty relief are extended for five years for taxable 
years beginning after 2012 and before 2018.
    --The following modifications to the exclusion of earnings 
of Coverdell education savings accounts are extended 
permanently for taxable years beginning after December 31, 
2012: increase in maximum annual contribution from $500 to 
$2,000; expansion of definition of qualified education 
expenses; increase in phaseout range for married filers to 
double that of unmarried filers; provision of special needs 
beneficiary rules; allowance of contributions by corporations 
and other entities; and allowance of contributions until April 
15th, the time prescribed by law for filing the return for the 
taxable year (not including extensions thereof).
    --The exclusion from gross income of employer-provided 
educational assistance, including the expansion to graduate 
level courses, is extended permanently for expenses relating to 
courses beginning after December 31, 2012, in taxable years 
beginning after December 31, 2012.
    --The following modifications to the deduction for interest 
on student loans are extended permanently for taxable years 
beginning after December 31, 2012: increase and indexation for 
inflation of the income phaseout ranges; repeal of the limit on 
the number of months that interest payments are deductible; and 
repeal of the rule that voluntary payments of interest are not 
deductible.
    --The exclusion from gross income of awards under the 
National Health Service Corps Scholarship Program or the Armed 
Forces Health Professions Scholarship and Financial Assistance 
program is extended permanently for taxable years beginning 
after December 31, 2012. In Table 1, this change is reflected 
in the tax expenditure estimate for ``Exclusion of scholarship 
and fellowship income.''
    --The increase in the amount of bonds qualifying for the 
small-issuer arbitrage rebate exception and expansion of tax-
exempt treatment to bonds issued to provide qualified public 
educational facilities are extended permanently for taxable 
years beginning after December 31, 2012. In Table 1, this 
change is reflected in the tax expenditure estimate for 
``Exclusion of interest on State and local government qualified 
private activity bonds for private nonprofit and qualified 
public educational facilities.''
    --The modified tax treatment of electing Alaska Native 
Settlement Trusts, including a special rate of tax, is extended 
permanently for taxable years beginning after December 31, 
2012.
    --The reduced capital gains rates for certain individuals 
and the repeal of the five-year holding period requirement are 
extended permanently for taxable years beginning after December 
31, 2012. In Table 1, this change is reflected in the tax 
expenditure estimate for ``Reduced rates of tax on dividends 
and long-term capital gains.''
    --The taxation of dividends at capital gains rates for 
individuals is extended permanently for taxable years beginning 
after December 31, 2012. In Table 1, this change is reflected 
in the tax expenditure estimate for ``Reduced rates of tax on 
dividends and long-term capital gains.''
    --The following modifications to the Hope credit, which are 
known as the American Opportunity Tax credit, are extended for 
five years for taxable years beginning after December 31, 2012 
and before 2018: increase in the maximum credit amount from 
$1,800 to $2,500; expansion of definition of qualified tuition 
and related expenses to include course materials; extension of 
application of credit to two more years of post-secondary 
education; increase in the phaseout starting point to $80,000 
($160,000 for married taxpayers filing a joint return); 
allowance of the credit against the AMT; partial refundability; 
and treatment of U.S. possessions.
    --The allowance of personal credits against regular tax 
liability and AMT is extended permanently for taxable years 
beginning after December 31, 2011. In Table 1, this is 
reflected in the tax expenditure estimates for the various 
credits allowable or treated as allowable under subpart A of 
Part IV of subchapter A.
    --The above-the-line deduction for teacher classroom 
expenses is extended for two years for taxable years beginning 
after December 31, 2011.
    --The exclusion from gross income of discharge of qualified 
principal residence indebtedness is extended for one year for 
discharges of indebtedness occurring after December 31, 2012.
    --The increase in the exclusion of employer-provided 
transit and vanpool benefits to the amount for qualified 
parking is extended for two years for months beginning after 
December 31, 2011.
    --The deduction for premiums for qualified mortgage 
insurance is extended for two years for amounts paid or accrued 
after December 31, 2011.
    --The election to deduct State and local general sales 
taxes (in lieu of State and local income taxes) is extended for 
two years for taxable years beginning after December 31, 2011.
    --The higher deduction limits for charitable contributions 
of real property interests made exclusively for conservation 
purposes is extended for two years for contributions made in 
taxable years beginning after December 31, 2011. In Table 1, 
this is reflected in the tax expenditure estimate for 
``Deduction for charitable contributions, other than for 
education and health.
    --The above-the-line deduction for qualified tuition and 
related expenses is extended for two years for taxable years 
beginning after December 31, 2011.
    --The exclusion of individual retirement plan distributions 
for charitable purposes is extended for two years for 
distributions made in taxable years beginning after December 
31, 2011.
    --The credit for research and experimentation expenses is 
extended for two years for amounts paid or incurred after 
December 31, 2011. Special rules for taxpayers under common 
control and for computing the credit when a major portion of a 
trade or business (or unit thereof) changes hands are modified.
    --The temporary minimum 9-percent credit rate for 
nonfederally subsidized new buildings for the low-income 
housing credit is extended for credit dollar allocations made 
before January 1, 2014.
    --The treatment of military basic housing allowances for 
purposes of determining income of occupants of residential 
rental projects under the low-income housing credit and exempt 
facility bond requirements is extended for two years for income 
determinations made after December 31, 2011. In Table 1, this 
is reflected in the tax expenditure estimates for ``Credit for 
low-income housing'' and ``Exclusion of interest on State and 
local government qualified private activity bonds for rental 
housing.''
    --The Indian employment tax credit is extended for two 
years for taxable years beginning after December 31, 2011.
    --The new markets tax credit is extended for two years for 
calendar years beginning after December 31, 2011, permitting up 
to $3.5 billion in qualified equity investments for each of the 
2012 and 2013 calendar years. The carryover period for unused 
credits is extended for two years, through calendar year 2018.
    --The credit for certain expenditures on railroad track 
maintenance is extended for two years for expenditures paid or 
incurred after December 31, 2011.
    --The credit for training costs of mine rescue team 
employees is extended for two years for taxable years beginning 
after December 31, 2011. This tax expenditure is not listed in 
Table 1 because the estimated revenue loss is below the de 
minimis amount.
    --The credit for wages of employees who are active duty 
members of the uniformed services is extended for two years for 
payments made after December 31, 2011. This tax expenditure is 
not listed in Table 1 because the estimated revenue loss is 
below the de minimis amount.
    --The work opportunity tax credit other than for hiring 
qualified veterans is extended for two years for wages paid or 
incurred for individuals who begin work for an employer after 
December 31, 2011. The work opportunity tax credit for 
qualified veterans is extended for one year for wages paid or 
incurred for individuals who begin work for an employer after 
December 31, 2012.
    --The credit to holders of qualified zone academy bonds is 
extended for two years for obligations issued after December 
31, 2011, and the issuance of up to $400 million of qualified 
zone academy bonds is authorized for 2012 and 2013.
    --Fifteen-year straight-line cost recovery for qualified 
leasehold improvements, qualified restaurant property, and 
qualified retail improvements is extended for two years for 
property placed in service after December 31, 2011. In Table 1, 
this is reflected in the tax expenditure estimate for 
``Depreciation of buildings other than rental housing in excess 
of alternative depreciation system.''
    --Seven-year cost recovery for certain motorsports 
racetrack property is extended for two years for property 
placed in service after December 31, 2011. In Table 1, this is 
reflected in the tax expenditure estimate for ``Depreciation of 
buildings other than rental housing in excess of alternative 
depreciation system.''
    --Accelerated depreciation for business property on Indian 
reservations is extended for two years for property placed in 
service after December 31, 2011. In Table 1, this is reflected 
in the various tax expenditure estimates for depreciation.
    --The enhanced charitable deduction for contributions of 
food inventory is extended for two years for contributions made 
after December 31, 2011. In Table 1, this is reflected in the 
tax expenditure estimate for ``Deduction for charitable 
contributions, other than for education and health.''
    --The amount a taxpayer may expense under section 179 
increases to $500,000, and the phase-out threshold amount 
increases to $2 million, for taxable years beginning in 2012 
and 2013. The treatment of off-the-shelf computer software as 
qualifying property is extended for one year for taxable years 
beginning before January 1, 2014. The treatment of qualified 
real property as eligible section 179 is extended for two years 
for taxable years beginning in 2012 and 2013. In Table 1, these 
changes are reflected in the tax expenditure estimate for 
``Expensing under section 179 of depreciable business 
property.''
    --The election to expense advanced mine safety equipment is 
extended for two years for property placed in service after 
December 31, 2011. This tax expenditure is not listed in Table 
1 because the estimated revenue loss is below the de minimis 
amount.
    --The election to expense qualified film and television 
productions is extended for two years for productions 
commencing after December 31, 2011.
    --The deduction for income attributable to domestic 
production activities in Puerto Rico is extended for two years 
for taxable years beginning after December 31, 2011. In Table 
1, this is reflected in the tax expenditure estimate for 
``Deduction for income attributable to domestic production 
activities.''
    --The special rules for certain amounts received from 
controlled tax-exempt entities pursuant to a binding written 
contract in effect on August 17, 2006 is extended for two years 
for payments received or accrued after December 31, 2011. This 
modification to the unrelated business taxable income 
(``UBTI'') rules related to passive income gains is not listed 
in Table 1 because the projected revenue change is unavailable 
for the passive income gains exception to the UBTI rules.
    --The exemptions under subpart F for active financing 
income are extended for two years for taxable years of foreign 
corporations beginning after December 31, 2011, and for taxable 
years of U.S. shareholders with or within which such taxable 
years of such foreign corporations end.
    --The look-through treatment of payments between related 
controlled foreign corporations under the foreign personal 
holding company rules is extended for two years for taxable 
years of foreign corporations beginning after December 31, 
2011, and for taxable years of U.S. shareholders with or within 
which such taxable years of such foreign corporations end. In 
Table 1, this is reflected in the tax expenditure estimate for 
``Deferral of active income of controlled foreign 
corporations.''
    --The 100 percent exclusion for gain from certain small 
business stock and the exception from minimum tax preference 
treatment are extended for two years for stock acquired after 
December 31, 2011.
    --The designations and tax incentives for empowerment zones 
are extended for two years for periods after December 31, 2011.
    --The authority to issue New York Liberty bonds is extended 
for two years for bonds issued after December 31, 2011. This 
tax expenditure is not listed in Table 1 because the estimated 
revenue loss is below the de minimis amount.
    --The credit for corporate income earned in American Samoa 
is extended for two years for taxable years beginning after 
December 31, 2011. This tax expenditure is not listed in Table 
1 because the estimated revenue loss is below the de minimis 
amount.
    --The additional first-year depreciation deduction for 50 
percent of the basis of certain qualified property (``bonus 
depreciation'') is extended for one year for property (other 
than longer-lived and transportation property) placed in 
service after December 31, 2012 and for longer-lived and 
transportation property placed in service after December 31, 
2013. The election to accelerate AMT credits in lieu of bonus 
depreciation is extended for one year for property placed in 
service after December 31, 2012.
    --The credit for certain nonbusiness energy property is 
extended for two years for property placed in service after 
December 31, 2011.
    --The credit for alternative fuel vehicle refueling 
property is extended for two years for property other than 
property relating to hydrogen for property placed in service 
after December 31, 2011.
    --The credit for certain plug-in electric drive motor 
vehicles is combined with the credit electric motorcycles and 
three-wheeled vehicles (but not low-speed vehicles) and is 
extended for two years for vehicles acquired after December 31, 
2011.
    --The credit for production of cellulosic biofuel is 
expanded to include algae-based fuel for fuels sold or used 
after the date of enactment. The credit is renamed the second 
generation biofuel producer credit. The credit is extended for 
one year for qualified second generation biofuel production 
after December 31, 2012.
    --The credit for biodiesel and renewable diesel fuel is 
extended for two years for fuel sold or used after December 31, 
2011.
    --The credit for Indian coal produced at Indian coal 
production facilities placed in service before 2009 is extended 
for one year for Indian coal produced after December 31, 2012.
    --The credit for electricity production from renewable 
resources is extended to include facilities the construction of 
which begins before January 1, 2014. The definition of 
municipal solid waste for purposes of the credit is modified to 
exclude segregated paper that is commonly recycled.
    --The election to claim the energy investment credit in 
lieu of the electricity production credit is extended to 
include property used in facilities the construction of which 
begins before January 1, 2014. In Table 1, this change is 
reflected in the tax expenditure estimate for the related 
energy credits under section 45 and section 48.
    --The credit for construction of new energy-efficient homes 
is extended for two years, and the energy efficiency standard 
is updated for homes acquired after December 31, 2011.
    --The credit for energy-efficient appliances is extended 
for two years for certain dishwashers, clothes washers, and 
refrigerators manufactured after December 31, 2011.
    --The special allowance for 50 percent of basis of second 
gerneration biofuel plant property (formerly cellulosic biofuel 
plant property) is extended for one year for property placed in 
service after December 31, 2012. The definition of qualified 
cellulosic biofuel plant property is modified to treat algae as 
a qualified feedstock for property placed in service after the 
date of enactment (January 2, 2013). This tax expenditure is 
not listed in Table 1 because the estimated revenue loss is 
below the de minimis amount.
    -- The deferral of gain from the disposition of electric 
transmission property to implement Federal Energy Regulation 
Commission restructuring policy is extended for two years for 
dispositions after December 31, 2011. In Table 1, this change 
is reflected in the tax expenditure estimate for ``Special rule 
to implement electric transmission restructuring.''
    --The ability to transfer amounts in applicable retirement 
plans to designated Roth accounts is expanded to include 
amounts not otherwise distributable under the plan. In Table 1, 
this change is reflected in the tax expenditure estimate for 
``Net exclusion of pension contributions and earnings: Defined 
contribution plans.''

Expiring Tax Expenditure Provisions

    A number of tax expenditure provisions expired in 2012 or 
are scheduled to expire in 2013. Some provisions expired prior 
to 2012, but have continuing revenue effects that are 
associated with ongoing taxpayer activity. These determinations 
reflect present law as of January 2, 2013.
    --The authority to issue qualified green buildings and 
sustainable design project bonds expires for bonds issued after 
September 30, 2012.
    --The agricultural chemicals security credit expires for 
any amount paid or incurred after December 31, 2012. This tax 
expenditure is not listed in Table 1 because the estimated 
revenue loss is below the de minimis amount.
    --Tax-exempt bond financing rules for areas damaged by the 
2008 Midwestern severe storms, tornados, and flooding and by 
Hurricane Ike expire for bonds issued after December 31, 2012.
    --The 100-percent additional first year depreciation 
deduction expires December 31, 2012, for certain longer-lived 
and transportation property.
    --The credit for certain nonbusiness energy property 
expires for expenditures made after December 31, 2013.
    --The credit for alternative fuel vehicle refueling 
property other than property relating to hydrogen expires for 
property placed in service after December 31, 2013.
    --The credit for two- or three-wheeled plug-in electric 
vehicles expires for vehicles acquired after December 31, 2013.
    --The credit for health insurance costs of eligible 
individuals expires for months beginning after December 31, 
2013.
    --The second generation biofuel producer credit (formerly 
the cellulosic biofuel producer credit) expires for qualified 
second generation biofuel production after December 31, 2013.
    --The credit for biodiesel and renewable diesel fuel 
expires for fuel sold or used after December 31, 2013.
    --The credit for research and experimentation expenses 
expires for amounts paid or incurred after December 31, 2013.
    --The determination of low-income housing credit rate 
allocations with respect to nonfederally subsidized buildings 
expires with respect to housing credit dollar amount 
allocations made after December 31, 2013.
    --The credit for electricity produced from certain 
renewable resources expires for facilities the construction of 
which begins after December 31, 2013.
    --The election to claim an energy credit in lieu of the 
credit for electricity produced from certain renewable 
resources expires for facilities the construction of which 
begins after December 31, 2013.
    --The credit for electricity produced from certain 
renewable resources expires for Indian coal produced and sold 
after December 31, 2013.
    --The Indian employment tax credit expires for taxable 
years beginning after December 31, 2013.
    --The new markets tax credit expires December 31, 2013.
    --The credit for certain expenditures on railroad track 
maintenance expires for expenditures paid or incurred after 
December 31, 2013.
    --The credit for construction of new energy-efficient homes 
expires for homes purchased after December 31, 2013.
    --The credit for energy efficient appliances expires for 
certain dishwashers, clothes washers, and refrigerators 
produced after December 31, 2013.
    --The credit for training costs of mine rescue team 
employees expires for taxable years beginning after December 
31, 2013. This tax expenditure is not listed in Table 1 because 
the estimated revenue loss is below the de minimis amount.
    --The credit for wages of employees who are active duty 
members of the uniformed services expires for payments made 
after December 31, 2013. This tax expenditure is not listed in 
Table 1 because the estimated revenue loss is below the de 
minimis amount.
    --The work opportunity tax credit expires for wages paid or 
incurred for individuals who begin work for an employer after 
December 31, 2013.
    --The allocation of new bond authority for the credit to 
holders of qualified zone academy bonds expires for bonds 
issued after December 31, 2013.
    --The above-the-line deduction for teacher classroom 
expenses expires for taxable years beginning after December 31, 
2013.
    --The exclusion from gross income of discharge of qualified 
principal residence indebtedness expires for discharges of 
indebtedness occurring after December 31, 2013.
    --The increase in the exclusion of employer-provided 
transit and vanpool benefits to the same dollar amount in 
effect for qualified parking expires for taxable years 
beginning after December 31, 2013.
    --The treatment of military basic housing allowances for 
purposes of determining income of occupants of residential 
rental projects under the low-income housing credit and exempt 
facility bond requirements expires for income determinations 
made after December 31, 2013. In Table 1, this is reflected in 
the tax expenditure estimates for ``Credit for low-income 
housing'' and ``Exclusion of interest on State and local 
government qualified private activity bonds for rental 
housing.''
    --The deduction for premiums for qualified mortgage 
insurance as interest that is qualified residence interest 
expires for amounts paid, accrued, or properly allocable to any 
period after December 31, 2013.
    --The election to deduct State and local general sales 
taxes (in lieu of State and local income taxes) expires for 
taxable years beginning after December 31, 2013.
    --Three-year cost recovery for race horses two years old or 
younger expires for race horses placed in service after 
December 31, 2013. In Table 1, this is reflected in the tax 
expenditure estimate for ``Depreciation of equipment in excess 
of the alternative depreciation system.''
    --Fifteen-year straight-line cost recovery for qualified 
leasehold improvements, qualified restaurant property, and 
qualified retail improvements expires for property placed in 
service after December 31, 2013. In Table 1, this is reflected 
in the tax expenditure estimate for ``Depreciation of buildings 
other than rental housing in excess of alternative depreciation 
system.''
    --Seven-year cost recovery for certain motorsports 
racetrack property expires for property placed in service after 
December 31, 2013. In Table 1, this is reflected in the tax 
expenditure estimate for ``Depreciation of buildings other than 
rental housing in excess of alternative depreciation system.''
    --Accelerated depreciation for business property on Indian 
reservations expires for property placed in service after 
December 31, 2013. In Table 1, this is reflected in the various 
tax expenditure estimates for depreciation.
    --Additional first-year depreciation for 50 percent of 
basis of qualified property expires for property acquired after 
December 31, 2013.\22\
---------------------------------------------------------------------------
    \22\ The 50-percent additional first year depreciation deduction 
expires December 31, 2014, for certain longer-lived and transportation 
property.
---------------------------------------------------------------------------
    --The special allowance for 50 percent of basis of second 
generation biofuel plant property (formerly cellulosic biofuel 
plant property) expires for property placed in service after 
December 31, 2013. This tax expenditure is not listed in Table 
1 because the estimated revenue loss is below the de minimis 
amount.
    --The higher deduction limits for charitable contributions 
of real property interests made exclusively for conservation 
purposes expires for contributions made in taxable years 
beginning after December 31, 2013. In Table 1, this is 
reflected in the tax expenditure estimate for ``Deduction for 
charitable contributions, other than for education and 
health.''
    --The enhanced charitable deduction for contributions of 
food inventory expires for contributions made after December 
31, 2013. In Table 1, this is reflected in the tax expenditure 
estimate for ``Deduction for charitable contributions, other 
than for education and health.''
    --The increased dollar limitations, $500,000 and $2 
million, for expensing certain depreciable business assets 
under section 179 expire for taxable years beginning after 
December 31, 2013. In Table 1, these changes are reflected in 
the tax expenditure estimate for ``Expensing under section 179 
of depreciable business property.''
    --The election to expense 50 percent of the cost of any 
qualified refinery property expires for property placed in 
service after December 31, 2013.
    --The deduction for expenditures on energy-efficient 
commercial building property expires for property placed in 
service after December 31, 2013.
    --The election to expense advanced mine safety equipment 
expires for property placed in service after December 31, 2013. 
This tax expenditure is not listed in Table 1 because the 
estimated revenue loss is below the de minimis amount.
    --The election to expense qualified film and television 
productions expires for productions commencing after December 
31, 2013.
    --The deduction for income attributable to domestic 
production activities in Puerto Rico expires for taxable years 
beginning after December 31, 2013. In Table 1, this is 
reflected in the tax expenditure estimate for ``Deduction for 
income attributable to domestic production activities.''
    --The above-the-line deduction for qualified tuition and 
related expenses expires for taxable years beginning after 
December 31, 2013.
    --The exclusion of individual retirement plan distributions 
for charitable purposes expires for taxable years beginning 
after December 31, 2013. In Table 1, this is reflected in the 
tax expenditure estimate for ``Traditional IRAs.''
    --The deferral of gain from the disposition of electric 
transmission property to implement Federal Energy Regulation 
Commission restructuring policy expires for dispositions after 
December 31, 2013.
    --The exemptions under subpart F for active financing 
income expire for taxable years beginning after December 31, 
2013.
    --The look-through treatment of payments between related 
controlled foreign corporations under the foreign personal 
holding company rules expires for taxable years beginning after 
December 31, 2013.
    --The 100-percent exclusion for gain from certain small 
business stock expires for stock acquired after December 31, 
2013.
    --The designations and tax incentives for empowerment zones 
expire after December 31, 2013.
    --The credit for corporate income earned in American Samoa 
expires for taxable years beginning after December 31, 2013. 
This tax expenditure is not listed in Table 1 because the 
estimated revenue loss is below the de minimis amount.

Comparisons with Treasury

    The Joint Committee staff and Treasury lists of tax 
expenditures differ in at least six respects. First, the Joint 
Committee staff and the Treasury use differing methodologies 
for the estimation of tax expenditures. Thus, the estimates in 
Table 1 are not necessarily comparable with the estimates 
prepared by the Treasury. Under the Joint Committee staff 
methodology, each tax expenditure is measured by the difference 
between tax liability under present law and the tax liability 
that would result if the tax expenditure provision were 
repealed and taxpayers were allowed to take advantage of any of 
the remaining tax expenditure provisions that apply to the 
income or the expenses associated with the repealed tax 
expenditure.
    For example, the tax expenditure provision for the 
exclusion of employer-paid health insurance is measured by the 
difference between tax liability under present law and the tax 
liability that would result if the exclusion were repealed and 
taxpayers were allowed to claim the next best tax treatment for 
the previously excluded employer-paid health insurance. This 
next best tax treatment could be the inclusion of the employer-
paid health insurance as an itemized medical deduction on 
Schedule A.\23\
---------------------------------------------------------------------------
    \23\ If the exclusion were repealed, the value of the employer-paid 
health insurance would be included in income and taxpayers would be 
treated as having purchased the insurance themselves. Thus, the 
insurance expense would be deductible as an itemized medical expense on 
Schedule A, subject to the itemized medical deduction floor (7.5 
percent (10 percent for taxable years beginning after December 31, 
2012) of the taxpayer's adjusted gross income).
---------------------------------------------------------------------------
    Under the Treasury methodology, each tax expenditure is 
measured by the difference between tax liability under present 
law and the tax liability that would result if the tax 
expenditure provision were repealed and taxpayers were 
prohibited from taking advantage of any of the remaining tax 
expenditure provisions that apply to the income or the expenses 
associated with the repealed tax expenditure. For example, the 
tax expenditure provision for the exclusion for employer-paid 
health insurance is measured by the difference between tax 
liability under present law and the tax liability that would 
result if the exclusion were repealed and taxpayers were 
required to include all of the employer-paid health insurance 
in income, with no offsetting deductions (i.e., no 
deductibility on Schedule A).
    Second, 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.
    Third, the Joint Committee staff and the Treasury estimates 
of tax expenditures may also differ as a result of differing 
data sources and differences in baseline projections of incomes 
and expenses. The Treasury's tax expenditure calculations are 
based on the Administration's economic forecast. The Joint 
Committee staff calculations are based on the economic forecast 
prepared by the CBO.
    Fourth, the Joint Committee staff and the 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 2011-2017. The Joint Committee staff estimates 
cover the last fiscal year, the current fiscal year, and the 
succeeding four fiscal years, i.e., fiscal years 2012-2017.
    Fifth, 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 2013 through 2017. 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 2011 through 2017.
    Finally, the Joint Committee staff list formally integrates 
negative tax expenditures into its standard presentation.
    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.
    There are some tax expenditure provisions that are 
contained in the Treasury list but are not contained in the 
Joint Committee staff list. Two of these 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.\24\ The capital gains treatment 
of royalties on coal and domestic iron ore is included with the 
estimate of special tax rate for qualified timber gain.
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    \24\ See discussion of the passive loss rules above.

                  II. MEASUREMENT OF TAX EXPENDITURES

Tax Expenditure Calculations 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.\25\ Taxpayer behavior is assumed to 
remain unchanged for tax expenditure estimate purposes.\26\ 
This assumption is made to simplify the calculation and conform 
to the presentation of government outlays. This approach to tax 
expenditure measurement is in contrast to the approach taken in 
revenue estimating; all Joint Committee staff revenue estimates 
reflect anticipated taxpayer behavior.
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    \25\ 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. For positive tax expenditures, the major difference 
between outlay equivalents and the tax expenditure calculations 
presented here is accounting for whether a tax expenditure converted 
into an outlay payment would itself be taxable, so that a gross-up 
might be needed to deliver the equivalent after-tax benefits.
    \26\ An exception to this absence of behavior in tax expenditure 
calculations is that a taxpayer is assumed to make simple additions or 
deletions in filing tax forms, what the Joint Committee staff refers to 
as ``tax form behavior.'' For example, as noted above, if the exclusion 
for employer-paid health insurance were repealed, taxpayers would be 
allowed to claim the next best tax treatment for the previously 
excluded insurance. This next best tax treatment could be the inclusion 
of the employer-paid health insurance as an itemized medical deduction 
on Schedule A. Similarly, a taxpayer that is eligible for one of two 
alternative credits is assumed to file for the second credit if the 
first credit is eliminated.
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    The tax expenditure calculations in this report are based 
on the January 2012 CBO revenue baseline and Joint Committee 
staff projections of the gross income, deductions, and 
expenditures of individuals and corporations for calendar years 
2011-2016. 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 (or that will 
be denied in the case of negative tax expenditures) 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 
calculations in this report are based on projections of actual 
claims under the various tax provisions, not the potential tax 
benefits to which taxpayers are entitled.
    Some tax expenditure calculations 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 calculated separately, under the 
assumption that all other tax expenditures remain in the 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.\27\
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    \27\ See Leonard E. Burman, Christopher Geissler, and Eric J. 
Toder, ``How Big Are Total Individual Income Tax Expenditures, and Who 
Benefits from Them?'' American Economic Review, 98, May 2008, pp. 79-
83.
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    Year-to-year differences in the calculations 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. For example, the dollar level of tax expenditures 
tends to increase and decrease as tax rates increase and 
decrease, respectively, without any other changes in law. Some 
of the calculations 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 measurement techniques.
    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.

Tax Expenditures versus Revenue Estimates
    A tax expenditure calculation 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 
calculations 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 
calculations are concerned with changes in the reported tax 
liabilities of taxpayers.\28\ Because tax expenditure analysis 
focuses on tax liabilities as opposed to Federal government tax 
receipts, there is no concern for the short-term timing of tax 
payments. Revenue estimates are concerned with changes in 
Federal tax receipts that are affected by the timing of all 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. This FICA 
effect would be reflected in revenue estimates, but is not 
considered in tax expenditure calculations. There may also be 
interactions between income tax provisions and other Federal 
taxes such as excise taxes and the estate and gift tax.
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    \28\ Reported tax liabilities may reflect compliance issues, and 
thus calculations of tax expenditures reflect existing compliance 
issues.
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    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, and very often repeal or modification of a tax 
provision includes transition relief that would not be captured 
in a tax expenditure calculation.

Quantitatively de minimis Tax Expenditures
    The following tax provisions are viewed as tax expenditures 
by the Joint Committee staff but are not listed in Table 1 
because the estimated revenue losses for fiscal years 2013 
through 2017 are below the de minimis amount ($50 million):
International affairs
    --Miscellaneous nonresident individual income tax 
exclusions (certain gambling winnings (sec. 871(j)), ship or 
aircraft operation income, certain exchange or training 
programs compensation, bond income of residents of the Ryukyu 
Islands, certain wagering income (sec. 872(b)))
    --Miscellaneous foreign corporate income tax exclusions 
(ship or aircraft operation income, foreign railroad rolling 
stock earnings, certain communication satellite earnings (sec. 
883))

Energy
    --Credit for enhanced oil recovery costs (sec. 43)
    --Credit for producing oil and gas from marginal wells 
(sec. 45I)
    --Credit for production of electricity from qualifying 
advanced nuclear power facilities (sec. 45J)
    --Credit for producing fuels from a nonconventional source 
(sec. 45K)
    --Seven-year MACRS Alaska natural gas pipeline (sec. 
168(e)(3)(C))
    --50-percent expensing of cellulosic biofuel plant property 
(sec. 168(l))
    --Partial expensing of investments in advanced mine safety 
equipment (sec. 179E)
    --Expensing of tertiary injectants (sec. 193)
Agriculture
    --Agricultural chemicals security credit (sec. 45O)
    --Cash accounting for agriculture (sec. 448(b)(1))

Commerce and housing

    --Exclusion of investment income from structured settlement 
arrangements (secs. 72(u)(3)(C) and 130)
    --Exclusion of income from discharge of indebtedness 
incurred in connection with qualified real property (sec. 
108(a)(1)(D))
    --Bad debt reserves of financial institutions (sec. 585)
    --Alaska Native Corporation trusts (sec. 646)
    --Deferral of gain on sales of property to comply with 
conflict-of-interest requirements (sec. 1043)
    --Reduced rates of tax on gains from the sale of self-
created musical works (sec. 1221(b)(3))

Community and regional development

    --Five-year carryback period for certain net operating 
losses of electric utility companies
    --Issuance of tribal economic development bonds
    --New York Liberty Zone
    --Katrina Emergency Act provisions
    --Kansas disaster relief

Education, training, employment, and social services

    --Exclusion of interest on educational savings bonds
    --Exclusion of restitution payments received by victims of 
the Nazi regime and the victims' heirs and estates

Health

    --Archer medical savings accounts

Income security

    --Credit for the elderly and disabled
    --Credit for new retirement plan expenses of small 
businesses

Veterans' benefits and services

    --Burial expenses for veterans

General purpose fiscal assistance

    --American Samoa economic development credit

Tax Expenditures for Which Quantification Is Not Available

    The following tax provisions are viewed as tax expenditures 
by the Joint Committee staff but are not listed in Table 1 
because the projected revenue changes are unavailable (a 
provision that is a negative tax expenditure is indicated by an 
``*''):

International affairs

    --Branch profits tax*
    --Deduction for U.S. employment tax paid under section 
3121(l) agreements for employees of foreign affiliates
    --Doubling of tax rates on citizens and corporations of 
certain foreign countries*

Energy

    --Carbon dioxide sequestration credit (sec. 45Q)
    --Accelerated deductions for nuclear decommissioning costs
    --Fossil fuel capital gains treatment (sec. 631(c))

Natural resources and environment

    --Exception to partial interest rule for qualified 
conservation

Agriculture

    --Exceptions from dealer disposition definition
    --Exception from interest calculation on installment sales 
for small dispositions
    --Single purpose agricultural or horticultural structures

Commerce and housing

    --Credit for interest on certain home mortgages (sec. 25)
    --Amortization of organizational expenditures
    --Deferral of prepaid subscription income
    --Deferral of prepaid dues income of certain membership 
organizations
    --Amortization of partnership organization and syndication 
fees
    --Unrecaptured section 1250 gain rate (section 1(h)), which 
applies to depreciation taken on real property
    --Nonrecognition of in-kind distributions by regulated 
investment companies in redemption of their stock
    --Special discount rate rule for certain debt instruments 
where stated principal amount is $2.8 million or less
    --Deduction for investment expenses*
    --Tax treatment of convertible bonds
    --Treatment of loans under life insurance and annuity 
contracts and 401(k) plans
    --Exemption for cemetery companies
    --Certain exceptions to the UBTI rules:
       Passive income gains
       Income from certain research
       Trade shows and fairs
       Bingo games
       Pole rentals
       Sponsorship payments
       Real estate exception to the debt-financed 
income rules
    --Specific identification of sold equities
    --Nondeductibility of excise taxes imposed on employers 
whose employees receive premium assistance credits*
    --Nondeductibility of annual fees imposed on certain drug 
manufacturers or importers*
    --Nondeductibility of annual fees imposed on health 
insurers*

Community and regional development

    --Three-year carryback of small businesses' and farmers' 
casualty losses attributable to Presidentially declared 
disaster

Education, training, employment, and social services

    --Allowance of 80-percent deduction for right to purchase 
tickets or stadium seating

General purpose fiscal assistance

    --Exclusion of Guam, American Samoa, and Northern Mariana 
Islands income
    --Exclusion of U.S. Virgin Islands income
    --Exclusion of Puerto Rico income


                     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. Totals for each tax expenditure are 
presented for two five-year periods covering fiscal years 2012-
2016 and fiscal years 2013-2017, respectively.
    Several of the tax expenditure items involve small amounts 
of revenue, and those estimates are indicated in Table 1 by 
footnote 5. 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.
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