[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.