[Senate Report 105-164]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 311
105th Congress                                                   Report
                                 SENATE

 2d Session                                                     105-164
_______________________________________________________________________


 
              PARENT AND STUDENT SAVINGS ACCOUNT PLUS ACT

                                _______
                                

               February 19, 1998.--Ordered to be printed

 Filed under authority of the order of the Senate of February 12, 1998

_______________________________________________________________________


    Mr. Roth, from the Committee on Finance, submitted the following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                         [To accompany S. 1133]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Finance, to which was referred the bill 
(S. 1133) to amend the Internal Revenue Code of 1986 to allow 
tax-free expenditures from education individual retirement 
accounts for elementary and secondary school expenses and to 
increase the maximum annual amount of contributions to such 
account, having considered the same, reports favorably thereon 
with an amendment and recommends that the bill as amended do 
pass.

                                CONTENTS

                                                                   Page
  I. Legislative Background and Summary..........................     3
        A. Legislative Background................................     3
        B. Summary...............................................     3
 II. Explanation of the Bill.....................................     5
        A. Tax Incentives for Education (Title I)................     5
            1. Modifications to education IRAs (sec. 101)........     5
            2. Exclusion from gross income of education 
                distributions from qualified State tuition 
                programs (sec. 102)..............................    10
            3. Extension of exclusion for employer-provided 
                educational assistance (sec. 103)................    13
            4. Increase in arbitrage rebate exception for 
                governmental bonds used to finance education 
                facilities (sec. 104)............................    14
            5. Exclusion of certain amounts received under the 
                National Health Corps Scholarship program (sec. 
                105).............................................    15
        B. Revenue Offsets (Title II)............................    16
            1. Employer deduction for vacation pay (sec. 201)....    16
            2. Modifications to foreign tax credit carryover 
                period (sec. 202)................................    19
III. Budget Effects of the Bill..................................    20
        A. Committee Estimates...................................    20
        B. Budget Authority and Tax Expenditures.................    23
        C. Consultation with Congressional Budget Office.........    23
 IV. Votes of the Committee......................................    25
  V. Regulatory Impact and Other Matters.........................    26
        A. Regulatory Impact.....................................    26
        B. Unfunded Mandates Statement...........................    27
 VI. Changes in Existing Law Made by the Bill, as Reported.......    28
VII. Minority Views..............................................    29

                 I. LEGISLATIVE BACKGROUND AND SUMMARY

                       A. Legislative Background

    The Senate Committee on Finance marked up S. 1133 (``Parent 
and Student Savings Account PLUS Act'') on February 10, 1998. 
The Committee adopted an amendment in the nature of a 
substitute offered by Chairman Roth, and ordered the bill, as 
amended, favorably reported by a roll call vote of 11 yeas and 
8 nays.

                               B. Summary

Education tax incentives (Title I)
    The bill temporarily increases the annual contribution 
limit for education IRAs from $500 to $2,000, expands the 
definition of qualified education expenses to include qualified 
elementary and secondary education expenses, allows education 
IRA contributions for special needs beneficiaries above age 18, 
allows corporations and other entities to contribute to 
education IRAs, and makes certain technical corrections to the 
education IRA provisions. The provisions modifying education 
IRAs generally are effective for taxable years beginning after 
December 31, 1998. However, the provision that increases the 
annual contribution limit for education IRAs (i.e., to $2,000 
per year) applies during the period January 1, 1999, through 
December 31, 2002, and the provision that expands the 
definition of qualified education expenses to include qualified 
elementary and secondary education expenses applies to 
contributions (and earnings thereon) made during the period 
January 1, 1999, through December 31, 2002. The technical 
correction provisions are effective as if enacted as part of 
the Taxpayer Relief Act of 1997.
    The bill provides an exclusion from gross income for 
distributions from qualified State tuition programs to the 
extent the distribution is used to pay for college and 
vocational school tuition, fees, tutoring, books, supplies, 
equipment and special needs services and room and board 
expenses in cases where the student is at least a half-time 
student. The provision is effective for distributions made in 
taxable years beginning after December 31, 1998.
    The bill expands the section 127 exclusion from gross 
income for employer-provided educational assistance so that the 
exclusion also is available for graduate courses beginning 
after December 31, 1997. The bill also extends the exclusion 
for two years (for both graduate and undergraduate courses), so 
that it expires with respect to courses beginning after 
December 31, 2002.
    The bill increases the small issuer exception to $15 
million, provided that at least $10 million of the bonds are 
issued to finance public schools. The provision applies to 
bonds issued in calendar years beginning after December 31, 
1998.
    The bill revises the tax treatment of National Health Corps 
Scholarships so that such scholarships are excluded from gross 
income under section 117, without regard to whether the 
recipient is obligated to later provide medical services in a 
geographic area or in an underserved population group or 
designated facility identified by the Public Health service as 
having a shortage of health care professionals. The exclusion 
does not apply to amounts received for regular living expenses, 
such as room and board. The provision applies to amounts 
received in taxable years beginning after December 31, 1993.
Revenue offsets (Title II)
    The bill provides for two revenue offsets to pay for the 
above-mentioned provisions: (1) the Schmidt Baking case with 
respect to vacation pay is overruled, effective for taxable 
years ending after the date of enactment; and (2) the carryback 
period for excess foreign tax credits is reduced from two years 
to one year, and the carryforward period for excess foreign tax 
credits is extended from five years to seven years, effective 
for foreign tax credits arising in taxable years beginning 
after December 31, 1999.

                      II. EXPLANATION OF THE BILL

               A. Tax Incentives for Education (Title I)

1. Modifications to education IRAs (sec. 101 of the bill and sec. 530 
        of the Code)

                              Present Law

    In general.--Section 530 provides tax-exempt status to 
``education IRAs,'' meaning certain trusts (or custodial 
accounts) which are created or organized in the United States 
exclusively for the purpose of paying the qualified higher 
education expenses of a named beneficiary.1 
Contributions to education IRAs may be made only in cash. 
Annual contributions to education IRAs may not exceed $500 per 
designated beneficiary (except in cases involving certain tax-
free rollovers, as described below), and may not be made after 
the designated beneficiary reaches age 18.2 
Moreover, section 4973 imposes a penalty excise tax if a 
contribution is made by any person to an education IRA 
established on behalf of a beneficiary during any taxable year 
in which any contributions are made by anyone to a qualified 
State tuition program (defined under sec. 529) on behalf of the 
same beneficiary. These provisions were enacted as part of the 
Taxpayer Relief Act of 1997 (``1997 Act'').
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    \1\ Education IRAs generally are not subject to Federal income tax, 
but are subject to the unrelated business income tax (``UBIT'') imposed 
by section 511.
    \2\ An excise tax penalty may be imposed under present-law section 
4973 to the extent that excess contributions above the $500 annual 
limit are made to an education IRA. However, Title VI of H.R. 2676, the 
Tax Technical Corrections Act of 1997, as passed by the House on 
November 5, 1997, clarifies that neither the excise tax penalty under 
section 4973 nor the additional 10-percent tax under section 530(d)(4) 
(described infra) may be imposed in cases where contributions (and any 
earnings thereon) are distributed from the education IRA before the 
date that a return is required to be filed (including extensions of 
time) by the beneficiary for the year in which the contribution was 
made (or, if the beneficiary is not required to file such a return, 
April 15th of the year following the taxable year during which the 
contribution was made).
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    Phase-out of contribution limit.--The $500 annual 
contribution limit for education IRAs is phased out ratably for 
contributors with modified AGI between $95,000 and $110,000 
($150,000 and $160,000 for joint returns). Individuals with 
modified AGI above the phase-out range are not allowed to make 
contributions to an education IRA established on behalf of any 
other individual.
    Treatment of distributions.--Amounts distributed from 
education IRAs are excludable from gross income to the extent 
that the amounts distributed do not exceed qualified higher 
education expenses of the designated beneficiary incurred 
during the year the distribution is made (provided that a HOPE 
credit or Lifetime Learning credit is not claimed under sec. 
25A with respect to the beneficiary for the same taxable 
year).3 If a HOPE credit or Lifetime Learning credit 
is claimed with respect to a student for a taxable year, then a 
distribution from an education IRA may (at the option of the 
taxpayer) be made during that taxable year on behalf of that 
student, but an exclusion is not available under the Act for 
the earnings portion of such distribution.4
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    \3\ The exclusion will not be a preference item for alternative 
minimum tax (AMT) purposes.
    \4\ If a HOPE credit or Lifetime Learning credit was claimed with 
respect to a student for an earlier taxable year, the exclusion 
provided for by section 530 may be claimed with respect to the same 
student for a subsequent taxable year with respect to a distribution 
from an education IRA made in that subsequent taxable in order to cover 
qualified higher education expenses incurred during that year. 
Conversely, if an exclusion is claimed for a distribution from an 
education IRA with respect to a particular student, then a HOPE credit 
or Lifetime Learning credit will be available in a subsequent taxable 
year with respect to that same student (provided that no exclusion is 
claimed in such other taxable years for distributions from an education 
IRA on behalf of that student and provided that the requirements of the 
HOPE credit or Lifetime Learning credit are satisfied in the subsequent 
taxable year).
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    Distributions from an education IRA generally are deemed to 
consist of distributions of principal (which, under all 
circumstances, are excludable from gross income) and earnings 
(which may be excludable from gross income) by applying the 
ratio that the aggregate amount of contributions to the account 
for the beneficiary bears to the total balance of the 
account.5 If the qualified higher education expenses 
of the student for the year are at least equal to the total 
amount of the distribution (i.e., principal and earnings 
combined) from an education IRA, then the earnings in their 
entirety will be excludable from gross income. If, on the other 
hand, the qualified higher education expenses of the student 
for the year are less than the total amount of the distribution 
(i.e., principal and earnings combined) from an education IRA, 
then the qualified higher education expenses will be deemed to 
be paid from a pro-rata share of both the principal and 
earnings components of the distribution. Thus, in such a case, 
only a portion of the earnings will be excludable under section 
530 (i.e., a portion of the earnings based on the ratio that 
the qualified higher education expenses bear to the total 
amount of the distribution) and the remaining portion of the 
earnings will be includible in the distributee's gross 
income.6 To the extent that a distribution exceeds 
qualified higher education expenses of the designated 
beneficiary, an additional 10-percent tax is imposed on the 
earnings portion of such excess distribution under section 
530(d)(4), unless such distribution is made on account of the 
death or disability of, or scholarship received by, the 
designated beneficiary.7
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    \5\ Title VI of H.R. 2676, the Tax Technical Corrections Act of 
1997, as passed by the House on November 5, 1997, clarifies that, under 
rules contained in present-law section 72, distributions from education 
IRAs are treated as representing a pro-rata share of the principal 
(i.e., contributions) and accumulated earnings in the account, and also 
makes certain conforming changes to section 72. In particular, the Tax 
Technical Corrections Act of 1997 provides that, under section 
72(e)(8)(B), the determination of the ratio that the aggregate amount 
of contributions to an education IRA bears to the account balance is to 
be made at the time of the distribution or at such other time as the 
Secretary of the Treasury may prescribe.
    \6\ For example, if an education IRA has a total balance of 
$10,000, of which $4,000 represents principal (i.e., contributions) and 
$6,000 represents earnings, and if a distribution of $2,000 is made 
from such an account, then $800 of that distribution will be treated as 
a return of principal (which under no event is includible in the gross 
income of the distributee) and $1,200 of the distribution will be 
treated as accumulated earnings. In such a case, if qualified higher 
education expenses of the beneficiary during the year of the 
distribution are at least equal to the $2,000 total amount of the 
distribution (i.e., principal plus earnings), then the entire earnings 
portion of the distribution will be excludible under section 530, 
provided that a Hope credit or Lifetime Learning credit is not claimed 
for that same taxable year on behalf of the beneficiary. If, however, 
the qualified higher education expenses of the beneficiary for the 
taxable year are less than the total amount of the distribution, then 
only a portion of the earnings will be excludable from gross income 
under section 530. Thus, in the example discussed above, if the 
beneficiary incurs only $1,500 of qualified higher education expenses 
in the year that a $2,000 distribution is made, then only $900 of the 
earnings will be excludable from gross income under section 530 (i.e., 
an exclusion will be provided for the pro-rata portion of the earnings, 
based on the ratio that the $1,500 of qualified higher education 
expenses bears to the $2,000 distribution) and the remaining $300 of 
the earnings portion of the distribution will be includible in the 
distributee's gross income.
    \7\ A technical correction is needed to section 530(d)(4) to 
clarify that the 10-percent additional tax should not be imposed in 
cases where a distribution (although used to pay for qualified higher 
education expenses) is includible in gross income because the taxpayer 
elects the HOPE or Lifetime Learning credit on behalf of the student 
for the same taxable year.
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    Section 530(d) allows tax-free (and penalty-free) transfers 
or rollovers of account balances from one education IRA 
benefiting one beneficiary to another education IRA benefiting 
another beneficiary (as well as redesignations of the named 
beneficiary), provided that the new beneficiary is a member of 
the family of the old beneficiary.8
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    \8\ For this purpose, a ``member of the family'' means persons 
described in paragraphs (1) through (8) of section 152(a)--e.g., sons, 
daughters, brothers, sisters, nephews and nieces, certain in-laws, 
etc.--and any spouse of such persons. A technical correction is needed 
to section 529(e)(2) to clarify that a member of the family includes 
the spouse of the original beneficiary.
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    The legislative history to the 1997 Act indicates that any 
balance remaining in an education IRA will be deemed to be 
distributed within 30 days after the date that the named 
beneficiary reaches age 30 (or, if earlier, within 30 days of 
the date that the beneficiary dies).9
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    \9\ A technical correction providing that any balance remaining in 
an education IRA will be deemed distributed within 30 days after the 
date that the designated beneficiary reaches age 30 is included in 
Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as 
passed by the House on November 5, 1997.
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    Qualified higher education expenses.--The term ``qualified 
higher education expenses'' includes tuition, fees, books, 
supplies, and equipment required for the enrollment or 
attendance of the designated beneficiary at an eligible 
education institution, regardless of whether the beneficiary is 
enrolled at an eligible educational institution on a full-time, 
half-time, or less than half-time basis. Moreover, the term 
``qualified higher education expenses include room and board 
expenses (meaning the minimum room and board allowance 
applicable to the student as determined by the institution in 
calculating costs of attendance for Federal financial aid 
programs under sec. 472 of the Higher Education Act of 1965) 
for any period during which the beneficiary is at least a half-
time student. Qualified higher education expenses include 
expenses with respect to undergraduate or graduate-level 
courses. In addition, section 530(b)(2)(B) specifically 
provides that qualified higher education expenses include 
amounts paid or incurred to purchase tuition credits (or to 
make contributions to an account) under a qualified State 
tuition program, as defined in section 529, for the benefit of 
the beneficiary of the education IRA.
    Qualified higher education expenses generally include only 
out-of-pocket expenses. Such qualified higher education 
expenses do not include expenses covered by educational 
assistance for the benefit of the beneficiary that is 
excludable from gross income. Thus, total qualified higher 
education expenses are reduced by scholarship or fellowship 
grants excludable from gross income under present-law section 
117, as well as any other tax-free educational benefits, such 
as employer-provided educational assistance that is excludable 
from the employee's gross income under section 127. In 
addition, qualified higher education expenses do not include 
expenses paid with amounts that are excludible under section 
135. No reduction of qualified higher education expenses is 
required, however, for a gift, bequest, devise, or inheritance 
within the meaning of section 102(a).
    Eligible educational institution.--Eligible educational 
institutions are defined by reference to section 481 of the 
Higher Education Act of 1965. Such institutions generally are 
accredited post-secondary educational institutions offering 
credit toward a bachelor's degree, an associate's degree, a 
graduate-level or professional degree, or another recognized 
post-secondary credential. Certain proprietary institutions and 
post-secondary vocational institutions also are eligible 
institutions. The institution must be eligible to participate 
in Department of Education student aid programs.

                           Reasons for Change

    The Committee believes that the present-law rules governing 
education IRAs should beexpanded to provide a greater incentive 
for families (and other persons) to save for educational purposes, 
including for expenses related to elementary and secondary school 
education. The Committee also believes that more flexible rules are 
needed for education IRAs established for the benefit of special needs 
students.

                       Explanation of Provisions

    Annual contribution limit.--For the period 1999 through 
2002, the bill increases to $2,000 the annual contribution 
limit that currently applies to education IRAs under section 
530(b)(1)(A)(iii). Thus, under the bill, aggregate 
contributions that could be made by all contributors to one (or 
more) education IRAs established on behalf of any particular 
beneficiary would be limited to $2,000 for each year during the 
period 1999 through 2002. For 2003 and later years, the annual 
contribution limit for education IRAs will be $500.
    Qualified expenses.--With respect to contributions made 
during the period 1999 through 2002 (and earnings attributable 
to such contributions), the bill expands the definition of 
qualified education expenses that may be paid with tax-free 
distributions from an education IRA. Specifically, the 
definition of qualified education expenses is expanded to 
include ``qualified elementary and secondary education 
expenses'' meaning (1) tuition, fees, academic tutoring 
10, special needs services, books, supplies, and 
equipment (including computers and related software and 
services) incurred in connection with the enrollment or 
attendance of the designated beneficiary as an elementary or 
secondary student at a public, private, or religious school 
providing elementary or secondary education (kindergarten 
through grade 12), and (2) room and board, uniforms, 
transportation, and supplementary items and services (including 
extended-day programs) required or provided by such a school 
for such enrollment or attendance of the designated 
beneficiary. ``Qualified elementary and secondary education 
expenses'' also include certain homeschooling education 
expenses if the requirements of any applicable State or local 
law are met with respect to such homeschooling. For 
contributions made in 2003 or later years (and for earnings 
attributable to such contributions), the definition of 
qualified education expenses will be limited to post-secondary 
education expenses. 11
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    \10\  For this purpose, it is intended that ``academic tutoring'' 
means additional, personalized instruction provided in coordination 
with the student's academic courses.
    \11\  To the extent a taxpayer incurs ``qualified elementary and 
secondary expenses'' during any year that a distribution is made from 
an education IRA, the distribution will be deemed to first consist of a 
distribution of any contributions (and earnings thereon) that were made 
to the education IRA during the period 1999-2002 (reduced by the amount 
of such contributions and earnings that were deemed to be distributed 
in prior taxable years). The bill requires that trustees of education 
IRAs will be required to keep separate accounts with respect to 
contributions made during the period 1999-2002 (and earnings thereon).
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    Under the bill, no deduction or credit (such as the 
dependent care credit under section 21) will be allowed under 
the Internal Revenue Code for any qualified education expenses 
taken into account in determining the amount of the exclusion 
under section 530 for a distribution from an education IRA.
    With respect to post-secondary education, qualified 
education expenses include (1) tuition, fees, academic 
tutoring, special needs services, books, supplies, and 
equipment (including computers and related software and 
services) incurred in connection with the enrollment or 
attendance of the designated beneficiary at an eligible post-
secondary educational institution, and (2) room and board 
expenses (meaning the minimum room and board allowance 
applicable to the student as determined by the institution 
calculating costs of attendance for Federal financial aid 
programs) for any period during which the student is at least a 
half-time student.
    Special needs beneficiaries.--The bill also provides that, 
although contributions to an education IRA generally may not be 
made after the designated beneficiary reaches age 18, 
contributions may continue to be made to an education IRA in 
the case of a special needs beneficiary (as defined by Treasury 
Department regulations). In addition, under the bill, in the 
case of a special needs beneficiary, a deemed distribution of 
any balance in an education IRA will not be required when the 
beneficiary reaches age 30. 12
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    \12\  The determination of whether a beneficiary has ``special 
needs'' will be required to be made for each year that contributions 
are made to an education IRA after the beneficiary reaches age 18. 
However, if an individual meets the definition of a ``special needs'' 
beneficiary when such individual reaches age 30, then such individual 
thereafter will be presumed to be a ``special needs'' beneficiary.
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    Contributions by persons other than individuals.--The bill 
clarifies that corporations and other entities (e.g., tax-
exempt entities) are permitted to make contributions to 
education IRAs, regardless of the income of the corporation or 
entity during the year of the contribution. As under present 
law, the eligibility of high-income individuals to make 
contributions to education IRAs is phased out ratably for 
individuals with modified AGI between $95,000 and $110,000 
($150,000 and $160,000 for joint returns).
    Technical corrections.--The bill provides for several 
technical corrections to section 530 (as enacted as part of the 
Taxpayer Relief Act of 1997), including: (1) adding a provision 
that any balance remaining in an education IRA will be deemed 
to be distributed within 30 days after the date that the named 
beneficiary reaches age 30; (2) clarifying that, under rules 
contained in present-law section 72, distributions from 
education IRAs are treated as representing a pro-rata share of 
the principal and accumulated earnings in the account; and (3) 
clarifying that, under section 530(d)(4), the 10-percent 
additional tax will not be imposed in cases where a 
distribution (although used to pay for qualified higher 
education expenses) is includible in gross income solely 
because the taxpayer elects the HOPE or Lifetime Learning 
credit on behalf of the student for the same taxable year.

                             Effective Date

    The provisions modifying education IRAs under section 530 
generally are effective for taxable years beginning after 
December 31, 1998. However, the provision that increases the 
annual contribution limit for education IRAs (i.e., to $2,000 
per year) applies during the period January 1, 1999, through 
December 31, 2002, and the provision that expands the 
definition of qualified education expenses to include qualified 
elementary and secondary education expenses applies to 
contributions (and earnings thereon) made during the period 
January 1, 1999, through December 31, 2002. The technical 
correction provisions are effective as if enacted as part of 
the Taxpayer Relief Act of 1997 (i.e., such provisions are 
effective for taxable years beginning after December 31, 1997).

2. Exclusion from gross income of education distributions from 
        qualified State tuition programs (sec. 102 of the bill and sec. 
        529 of the Code)

                              Present Law

    Section 529 provides tax-exempt status to ``qualified State 
tuition programs,'' meaning certain programs established and 
maintained by a State (or agency or instrumentality thereof) 
under which persons may (1) purchase tuition credits or 
certificates on behalf of a designated beneficiary that entitle 
the beneficiary to a waiver or payment of qualified higher 
education expenses of the beneficiary, or (2) make 
contributions to an account that is established for the purpose 
of meeting qualified higher education expenses of the 
designated beneficiary of the account. The term ``qualified 
higher education expenses'' has the same meaning as does the 
term for purposes of education IRAs (as described above) and, 
thus, includes expenses for tuition, fees, books, supplies, and 
equipment required for the enrollment or attendance at an 
eligible educational institution 13, as well as room 
and board expenses (meaning the minimum room and board 
allowance applicable to the student as determined by the 
institution in calculating costs of attendance for Federal 
financial aid programs under sec. 472 of the Higher Education 
Act of 1965) for any period during which the student is at 
least a half-time student.
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    \13\  ``Eligible educational institutions'' are defined the same 
for purposes of education IRAs (described in II.A.1., above) and 
qualified State tuition programs.
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    Section 529 also provides that no amount shall be included 
in the gross income of a contributor to, or beneficiary of, a 
qualified State tuition program with respect to any 
distribution from, or earnings under, such program, except that 
(1) amounts distributed or educational benefits provided to a 
beneficiary (e.g., when the beneficiary attends college) will 
be included in the beneficiary's gross income (unless 
excludable under another Code section) to the extent such 
amounts or the value of the educational benefits exceed 
contributions made on behalf of the beneficiary, and (2) 
amounts distributed to a contributor or another distributee 
(e.g., when a parent receives a refund) will be included in the 
contributor's/distributee's gross income to the extent such 
amounts exceed contributions made on behalf of the 
beneficiary.14
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    \14\  Title VI of H.R. 2676, the Tax Technical Corrections Act of 
1997, as passed by the House on November 5, 1997, clarifies that, under 
rules contained in present-law section 72, distributions from qualified 
State tuition programs are treated as representing a pro-rata share of 
the principal (i.e., contributions) and accumulated earnings in the 
account, and also makes certain conforming changes to section 72. In 
particular, the Tax Technical Corrections Act of 1997 provides that, 
under section 72(e)(8)(B), the determination of the ratio that the 
aggregate amount of contributions to a qualified State tuition program 
on behalf of a beneficiary bears to the total balance (or value) of the 
account for the beneficiary is to be made at the time of the 
distribution or at such other time as the Secretary of the Treasury may 
prescribe.
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    A qualified State tuition program is required to provide 
that purchases or contributions only be made in 
cash.15 Contributors and beneficiaries are not 
allowed to directly or indirectly direct the investment of 
contributions to the program (or earnings thereon). The program 
is required to maintain a separate accounting for each 
designated beneficiary. A specified individual must be 
designated as the beneficiary at the commencement of 
participation in a qualified State tuition program (i.e., when 
contributions are first made to purchase an interest in such a 
program), unless interests in such a program are purchased by a 
State or local government or a tax-exempt charity described in 
section 501(c)(3) as part of a scholarship program operated by 
such government or charity under which beneficiaries to be 
named in the future will receive such interests as 
scholarships. A transfer of credits (or other amounts) from one 
account benefiting one designated beneficiary to another 
account benefiting a different beneficiary will be considered a 
distribution (as will a change in the designated beneficiary of 
an interest in a qualified State tuition program), unless the 
beneficiaries are members of the same family.\16\ Earnings on 
an account may be refunded to a contributor or beneficiary, but 
the State or instrumentality must impose a more than de minimis 
monetary penalty unless the refund is (1) used for qualified 
higher education expenses of the beneficiary, (2) made on 
account of the death or disability of the beneficiary, or (3) 
made on account of a scholarship received by the designated 
beneficiary to the extent the amount refunded does not exceed 
the amount of the scholarship used for higher education 
expenses.
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    \15\ Sections 529(c)(2), (c)(4), and (c)(5), and section 530(d)(3) 
provide special estate and gift tax rules for contributions made to, 
and distributions made from, qualified State tuition programs and 
education IRAs.
    \16\ For this purpose, the term ``member of the family'' means 
persons described in paragraphs (1) through (8) of section 152(a)--
e.g., sons, daughters, brothers, sisters, nephews and nieces, certain 
in-laws, etc.--and any spouse of such persons. A technical correction 
is needed to section 529(e)(2) to clarify that a member of the family 
includes the spouse of the original beneficiary.
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    No amount is includible in the gross income of a 
contributor to, or beneficiary of, a qualified State tuition 
program with respect to any contribution to or earnings on such 
a programuntil a distribution is made from the program, at 
which time the earnings portion of the distribution (whether made in 
cash or in-kind) will be includible in the gross income of the 
distributee. However, to the extent that a distribution from a 
qualified State tuition program is used to pay for qualified tuition 
and related expenses (as defined in sec. 25A(f))(1)), the distributee 
(or another taxpayer claiming the distributee as a dependent) will be 
able to claim the HOPE credit or Lifetime Learning credit under section 
25A with respect to such tuition and related expenses (assuming that 
the other requirements for claiming the HOPE credit or Lifetime 
Learning credit are satisfied and the modified AGI phaseout for those 
credits does not apply).

                           Reasons for Change

    The Committee believes that distributions from qualified 
State tuition programs should not be subject to Federal income 
tax to the extent that such distributions are used to pay for 
qualified higher education expenses of an undergraduate or 
graduate student who is attending a college, university, or 
certain vocational schools.

                        Explanation of Provision

    Under the bill, an exclusion from gross income is provided 
for distributions from qualified State tuition programs (as 
defined in sec. 529) to the extent that the distribution is 
used to pay for (1) tuition, fees, academic tutoring, special 
needs services, books, supplies, and equipment (including 
computers and related software and services) incurred in 
connection with the enrollment or attendance of a designated 
beneficiary at an eligible post-secondary educational 
institution (i.e., colleges, universities, and certain 
vocational schools), and (2) room and board expenses (meaning 
the minimum room and board allowance applicable to the student 
as determined by the institution calculating costs of 
attendance for Federal financial aid programs) for any period 
during which the student is at least a half-time student. As 
under present law, there is no specific dollar limitation 
imposed under the Internal Revenue Code on contributions made 
to qualified State tuition programs, although section 529(b)(7) 
will continue to require that the programs themselves provide 
adequate safeguards to prevent contributions on behalf of a 
beneficiary in excess of those necessary to provide for 
qualified higher education expenses of the beneficiary.
    As with the present-law exclusion from gross income for 
distributions from education IRAs, the tax-free treatment for a 
distribution from a qualified State tuition program will be 
allowed only if, for the taxable year during which the 
distribution is made, a HOPE or Lifetime Learning credit (under 
sec. 25A) is not claimed on behalf of the student. As under 
present law, if a student is claimed as a dependent by his or 
her parent, then the parent (if eligible) must decide whether 
to elect to claim a HOPE or Lifetime Learning credit with 
respect to that student for that taxable year; and, if the 
parent elects to claim a HOPE or Lifetime Learning credit, then 
the earnings portion of a distribution made to a student from a 
qualified State tuition program will be includible in the gross 
income of the student.
    Under the bill, no deduction (under section 162 or any 
other section) or credit will be allowed under the Internal 
Revenue Code for any qualified higher education expenses taken 
into account in determining the amount of the exclusion under 
section 529 for a distribution made to, or on behalf of, a 
student by a qualified State tuition program.

                             Effective Date

    The provision that allows an exclusion from gross income 
for certain distributions from qualified State tuition programs 
under section 529 (and the modification to the definition of 
qualified higher education expenses under that section) is 
effective for distributions made in taxable years beginning 
after December 31, 1998.

3. Extension of exclusion for employer-provided education assistance 
        (sec. 103 of the bill and sec. 127 of the Code)

                              Present Law

    Under present-law section 127, an employee's gross income 
and wages do not include amounts paid or incurred by the 
employer for educational assistance provided to the employee if 
such amounts are paid or incurred to an educational assistance 
program that meets certain requirements. This exclusion is 
limited to $5,250 of educational assistance with respect to an 
individual during a calendar year. The exclusion does not apply 
with respect to graduate-level courses. The exclusion is 
scheduled to expire with respect to courses beginning after May 
31, 2000.
    In the absence of the exclusion provided by section 127, 
educational assistance is excludable from income only if the 
education is related to the employee's current job, meaning 
that the education (1) maintains or improves a skill required 
in a trade or business currently engaged in by the taxpayer, or 
(2) meets the express requirements of the taxpayer's employer, 
or requirements of applicable law or regulations, imposed as a 
condition of continued employment (but not if the education 
relates to certain minimum educational requirements or enables 
a taxpayer to begin working in a new trade or business).

                           Reasons for Change

    The Committee believes that the exclusion for employer-
provided educational assistance has enabled millions of workers 
to advance their education and improve their job skills without 
incurring additional taxes and a reduction in take-home pay. In 
addition, the exclusion lessens the complexity of the tax laws. 
Without the special exclusion, a worker receiving educational 
assistance from his or her employer is subject to tax on the 
assistance, unless the education is related to the workers' 
current job. Because the determination of whether particular 
educational assistance is job-related is based on the facts and 
circumstances, it may be difficult to determine with certainty 
whether the educational assistance is excludable from income. 
This uncertainty may lead to disputes between taxpayers and the 
Internal Revenue Service.
    The Committee believes that reinstating the exclusion for 
graduate-level employer-provided educational assistance will 
enable more individuals to seek higher education, and that 
further extension of the exclusion is important. The past 
experience of allowing the exclusion to expire and subsequently 
retroactively extending it has created burdens for employers 
and employees. Employees may have difficulty planning for their 
educational goals if they do not know whether their tax bills 
will increase. For employers, the fits and starts of the 
legislative history of the provision have caused severe 
administrative problems. Uncertainty about the exclusion's 
future may discourage some employers from providing educational 
benefits.

                        Explanation of Provision

    The bill reinstates the exclusion for graduate-level 
courses, effective with respect to courses beginning after 
December 31, 1997. In addition, the bill provides that the 
exclusion (as applied to both graduate and undergraduate 
courses) expires with respect to courses beginning after 
December 31, 2002.

                             Effective Date

    The extension of the exclusion for employer-provided 
educational assistance to graduate-level courses is effective 
for expenses with respect to courses beginning after December 
31, 1997. The exclusion (with respect to both graduate and 
undergraduate courses) expires with respect to courses 
beginning after December 31, 2002.

4. Increase in arbitrage rebate exception for governmental bonds used 
        to finance education facilities (sec. 104 of the bill and sec. 
        148 of the Code)

                              Present Law

    Interest on State and local government bonds generally is 
excluded from income if the bonds are issued to finance 
activities carried out and paid for with revenues of these 
governments. Interest on bonds issued by these governments to 
finance activities of other persons (e.g. private activity 
bonds) is taxable unless a specific exception is included in 
the Code. In the case of bonds, the interest on which is 
excluded from income, generally, all arbitrage profits earned 
on investments unrelated to the purpose of the borrowing 
(``nonpurpose investments'') must be rebated to the Federal 
Government. An exception (the ``small issuer exception'') 
allows governmental units having general taxing powers to issue 
up to $5 million of governmental bonds during a calendar year 
without being subject to the arbitrage rebate requirement. This 
limit is increased to $10 million for governmental units that 
issue at least $5 million of public school bonds during the 
calendar year.

                           Reasons for Change

    The Committee believes that additional Federal assistance 
for the construction of public schools is appropriate in light 
of currently identified national needs. The Committee 
determined a modest increase in the small issuer exception for 
bonds to finance public school construction will assist local 
governments in meeting these needs by simplifying their use of 
tax-exempt financing without creating incentives to issue such 
debt earlier or in larger amounts than necessary.

                        Explanation of Provision

    The bill increases the small issuer exception to $15 
million, provided that at least $10 million of the bonds are 
issued to finance public schools.

                             Effective Date

    The provision applies to bonds issued in calendar years 
beginning after December 31, 1998.

5. Exclusion of certain amounts received under the National Health 
        Corps Scholarship program (sec. 105 of the bill and sec. 117 of 
        the Code)

                              Present Law

    Section 117 excludes from gross income amounts received as 
a qualified scholarship by an individual who is a candidate for 
a degree and used for tuition and fees required for the 
enrollment or attendance (or for fees, books, supplies, and 
equipment required for courses of instruction) at a primary, 
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to 
scholarship amounts covering regular living expenses, such as 
room and board. In addition to the exclusion for qualified 
scholarship, section 117 provides an exclusion from gross 
income for qualified tuition reductions for certain education 
provided to employees (and their spouses and dependents) of 
certain educational organizations.
    Section 117(c) specifically provides that the exclusion for 
qualified scholarships and qualified tuition reductions does 
not apply to any amount received by a student that represents 
payment for teaching, research, or other services by the 
student required as a condition for receiving the scholarship 
or tuition reduction.

                           Reasons for Change

    The Committee believes that it is appropriate to provide 
tax-free treatment under section 117 for scholarships received 
by medical, dental, nursing, and physician assistant students 
under the National Health Corps Scholarship Program.

                        Explanation of Provision

    Under the bill, amounts received by an individual under the 
National Health Corps Scholarship Program--administered under 
section 338A(g)(1)(A) of the Public Health Service Act--are 
eligible for tax-free treatment as a qualified scholarship 
under section 117, without regard to the fact that the 
recipient of the scholarship is obligated to later provide 
medical services in a geographic area (or to an underserved 
population group or designated facility) identified by the 
Public Health Service as having a shortage of health care 
professionals. As with other qualified scholarships under 
section 117, the tax-free treatment does not apply to amounts 
received by students to cover regular living expenses, such as 
room and board.

                             Effective Date

    The provision applies to amounts received in taxable years 
beginning after December 31, 1993.

                     B. Revenue Offsets (Title II)

1. Employer deduction for vacation pay (sec. 201 of the bill and sec. 
        404 of the Code)

                              Present Law

    For deduction purposes, any method or arrangement that has 
the effect of a plan deferring the receipt of compensation or 
other benefits for employees is treated as a deferred 
compensation plan (sec. 404(b)). In general, contributions 
under a deferred compensation plan (other than certain pension, 
profit-sharing and similar plans) are deductible in the taxable 
year in which an amount attributable to the contribution is 
includable in income of the employee. However, vacation pay 
which is treated as deferred compensation is deductible for the 
taxable year of the employer in which the vacation pay is paid 
to the employee (sec. 404(a)(5)).
    Temporary Treasury regulations provide that a plan, method, 
or arrangement defers the receipt of compensation or benefits 
to the extent it is one under which an employee receives 
compensation or benefits more than a brief period of time after 
the end of the employer's taxable year in which the services 
creating the right to such compensation or benefits are 
performed. A plan, method or arrangement is presumed to defer 
the receipt of compensation for more than a brief period of 
time after the end of an employer's taxable year to the extent 
that compensation is received after the 15th day of the 3rd 
calendar month after the end of the employer's taxable year in 
which the related services are rendered (the ``2\1/2\ month'' 
period). A plan, method or arrangement is not considered to 
defer the receipt of compensation or benefits for more than a 
brief period of time after the end of the employer's taxable 
year to the extent that compensation or benefits are received 
by the employee on or before the end of the applicable 2\1/2\ 
month period. (Temp. Treas. Reg. sec. 1.404(b)-1T A-2).
    The Tax Court recently addressed the issue of when vacation 
pay and severance pay are considered deferred compensation in 
Schmidt Baking Co., Inc., 107 T.C. 271 (1996). In Schmidt 
Baking, the taxpayer was an accrual basis taxpayer with a 
fiscal year that ended December 28, 1991. The taxpayer funded 
its accrued vacation and severance pay liabilities for 1991 by 
purchasing an irrevocable letter of credit on March 13, 1992. 
The parties stipulated that the letter of credit represented a 
transfer of substantially vested interest in property to 
employees for purposes of section 83, and that the fair market 
value of such interest was includable in the employees' gross 
incomes for 1992 as a result of the transfer.\17\ The Tax Court 
held that the purchase of the letter of credit, and the 
resulting income inclusion, constituted payment of the vacation 
and severance pay within the 2\1/2\ month period. Thus, the 
vacation and severance pay were treated as received by the 
employees within the 2\1/2\ month period and were not treated 
as deferred compensation. The vacation pay and severance pay 
were deductible by the taxpayer for its 1991 fiscal year 
pursuant to its normal accrual method of accounting.
---------------------------------------------------------------------------
    \17\ While the rules of section 83 may govern the income inclusion, 
section 404 governs the deduction if the amount involved is deferred 
compensation.
---------------------------------------------------------------------------

                           Reasons for Change

    Prior to the Tax Reform Act of 1986, an employer could make 
an election to deduct an amount representing a reasonable 
addition to a reserve account for vacation pay earned by 
employees before the close of the current year and expected to 
be paid by the close of that year or within 12 months 
thereafter. As a result of concerns that this rule provided 
more favorable tax treatment for vacation pay than other types 
of compensation or deductible items, the Tax Reform Act of 1986 
limited this special rule to vacation pay that is paid during 
the current taxable year or within 8\1/2\ months after the 
close of the taxable year of the employer with respect to which 
the vacation pay was earned by employees.
    The tax treatment of vacation pay was again changed in the 
Omnibus Budget Reconciliation Act of 1987 (``OBRA 1987''). At 
that time, the Congress was concerned that then-present law 
provided more favorable tax treatment for vacation pay that was 
deferred by employees beyond the end of the year than was 
provided for other deferred benefits. The House and Senate 
bills would have repealed the reserve for accrued vacation pay 
and would have provided that deductions for vacation pay 
generally would be allowed in any taxable year for amounts paid 
during the year, plus vested vacation amounts paid or funded 
within 2\1/2\ months after the end of the year. The conference 
agreement followed a different approach, and provided that 
``vacation pay earned during any taxable year, but not paid to 
employees on or before the date that is 2\1/2\ months after the 
end of the taxable year, is deductible for the taxable year of 
the employer in which it is paid to employees.'' \18\ The key 
difference between the House and Senate provisions and the 
conference agreement to OBRA 1987 is that the conference 
agreement does not allow a deduction for amounts merely because 
they are vested and funded (i.e., are includable in income) 
within 2\1/2\ months after the end of the employer's taxable 
year.
---------------------------------------------------------------------------
    \18\ H. Rept. 100-495, at 921 (December 21, 1987).
---------------------------------------------------------------------------
    The Committee believes that the decision in Schmidt Baking 
reaches an inappropriate result and represents an incorrect 
interpretation of the intent of the Congress in adopting the 
vacation pay provision in OBRA 1987. The Committee believes 
that the intent of that provision was clearly to provide that a 
deduction for vacation pay is not available for the current 
taxable year unless the vacation pay is actually paid to 
employees within 2\1/2\ months after the end of the year. 
Moreover, OBRA 1987 reflect Congressional intent and 
understanding that compensation actually paid beyond the 2\1/2\ 
month period is deferred compensation.
    Further, the Committee is concerned that taxpayers may 
inappropriately extend the rationale of Schmidt Baking to other 
situations in which a deduction or other tax consequences are 
contingent upon an item being paid. The Committee does not 
believe that, as a general rule, letters of credit and similar 
mechanisms should be considered payment for any purposes of the 
Code.

                        Explanation of Provision

    The bill provides that, for purposes of determining whether 
an item of compensation (other than severance pay),\19\ is 
deferred compensation (under Code sec. 404), the compensation 
is not considered to be paid or received until actually 
received by the employee. In addition, an item of deferred 
compensation is not considered paid to an employee until 
actually received by the employee. The bill is intended to 
overrule the result in Schmidt Baking. For example, with 
respect to the determination of whether vacation pay is 
deferred compensation, the fact that the value of the vacation 
pay is includible in the income of employees within the 
applicable 2\1/2\ month period is not relevant. Rather, the 
vacation pay must have been actually received by employees 
within the 2\1/2\ month period in order for the compensation 
not to be treated as deferred compensation.
---------------------------------------------------------------------------
    \19\ A provision that overrules Schmidt Baking with respect to 
severance pay was included in H.R. 2644, the ``United States-Caribbean 
Trade Partnership Act,'' as ordered reported by the Committee on Ways 
and Means on October 9, 1997.
---------------------------------------------------------------------------
    It is intended that similar arrangements, in addition to 
the letter of credit approach used in Schmidt Baking, do not 
constitute actual receipt by the employee, even if there is an 
income inclusion. Thus, for example, actual receipt does not 
include the furnishing of a note or letter or other evidence of 
indebtedness of the taxpayer, whether or not the evidence is 
guaranteed by any other instrument or by any third party. As a 
further example, actual receipt does not include a promise of 
the taxpayer to provide service or property in the future 
(whether or not the promise is evidenced by a contract or other 
written agreement). In addition, actual receipt does not 
include an amount transferred as a loan, refundable deposit, or 
contingent payment. Amounts set aside in a trust for employees 
generally are not considered to be actually received by the 
employee.
    The bill does not change the rule under which deferred 
compensation (other than vacation pay and deferred compensation 
under qualified plans) is deductible in the year includible in 
the gross income of employees participating in the plan if 
separate accounts are maintained for each employee.
    While Schmidt Baking involved only vacation pay and 
severance pay, there is concern that this type of arrangement 
may be tried to circumvent other provisions of the Code where 
payment is required in order for a deduction to occur. Thus, it 
is intended that the Secretary will prevent the use of similar 
arrangements. No inference is intended that the result in 
Schmidt Baking is present law beyond its immediate facts or 
that the use of similar arrangements is permitted under present 
law.
    The bill does not affect the determination of whether an 
item is includable in income. Thus, for example, using the 
mechanism in Schmidt Baking for vacation pay would still result 
in income inclusion to the employees, but the employer would 
not be entitled to a deduction for the vacation pay until 
actually paid to and received by the employees.

                             Effective Date

    The provision is effective for taxable years ending after 
the date of enactment. Any change in method of accounting 
required by the bill is treated as initiated by the taxpayer 
with the consent of the Secretary of the Treasury. Any 
adjustment required by section 481 as a result of the change 
will be taken into account in the year of the change.

2. Modifications to foreign tax credit carryover period (sec. 202 of 
        the bill and sec. 904 of the Code)

                              Present Law

    U.S. persons may credit foreign taxes against U.S. tax on 
foreign source income. The amount of foreign tax credits that 
can be claimed in a year is subject to a limitation that 
prevents taxpayers from using foreign tax credits to offset 
U.S. tax on U.S. source income. Separate foreign tax credit 
limitations are applied to specific categories of income.
    The amount of creditable taxes paid or accrued (or deemed 
paid) in any taxable year which exceeds the foreign tax credit 
limitation is permitted to be carried back two years and 
forward five years. The amount carried over may be used as a 
credit in a carryover year to the extent the taxpayer otherwise 
has excess foreign tax credit limitation for such year. The 
separate foreign tax credit limitations apply for purposes of 
the carryover rules.

                           Reasons for Change

    The Committee believes that reducing the carryback period 
for foreign tax credits to one year and increasing the 
carryforward period to seven years will reduce some of the 
complexity associated with carrybacks while continuing to 
address the timing difference between U.S. and foreign tax 
rules.

                        Explanation of Provision

    The bill reduces the carryback period for excess foreign 
tax credits from two years to one year. The bill also extends 
the excess foreign tax credit carryforward period from five 
years to seven years.

                             Effective Date

    The provision applies to foreign tax credits arising in 
taxable years beginning after December 31, 1999.

                    III. BUDGET EFFECTS OF THE BILL

                         A. Committee Estimates

    In compliance with paragraph 11(a) of Rule XXVI of the 
Standing Rules of the Senate, the following statement is made 
concerning the estimated budget effects of the revenue 
provisions of S. 1133 as reported.

                            Estimated Budget Effects of S. 1133 (The ``Parent and Student Savings Account Plus Act''), as Approved by the Senate Committee on Finance                           
                                                                                     Fiscal Years 1998-2008                                                                                     
                                                                                      [Millions of Dollars]                                                                                     
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                    Provision                          Effective       1998     1999     2000     2001      2002      2003     2004     2005     2006     2007     2008    1998-2003   1998-2008
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
A. Tax Incentives for Education (Title I)                                                                                                                                                       
1. Education IRAs--increase the annual                                                                                                                                                          
 contribution limit to $2,000; expand the                                                                                                                                                       
 definition of qualified education expenses to                                                                                                                                                  
 include qualified elementary and secondary                                                                                                                                                     
 education expenses (including after-school                                                                                                                                                     
 programs); allow education IRA contributions for                                                                                                                                               
 special needs beneficiaries above the age of 18;                                                                                                                                               
 allow corporations and other entities to                                                                                                                                                       
 contribute to education IRAs; and various                                                                                                                                                      
 technical corrections (sunsets 12/31/92)........    tyba 12/31/98   .......      -33     -110     -164       -216     -238     -215     -204     -186     -158     -119        -762      -1,644
2. Qualified State tuition programs..............  dmi tyba 12/31/                                                                                                                              
                                                                98   .......      -12      -47      -68        -92     -120     -154     -193     -239     -291     -352        -339      -1,568
3. Expand the section 127 exclusion for employer-                                                                                                                                               
 provided educational assistance to include                                                                                                                                                     
 graduate 0 level courses; extend the exclusion                                                                                                                                                 
 for undergraduate-level courses (both provisions                                                                                                                                               
 sunset 12/31/02)................................           (\11\)      -107     -291     -378     -603       -760     -488  .......  .......  .......  .......  .......      -2,627      -2,627
4. Raise the small issuer arbitrage rebate                                                                                                                                                      
 exception to $15 million (for school                                                                                                                                                           
 construction only)..............................           1/1/99   .......    (\2\)       -3       -7        -11      -14      -27      -29      -32      -34      -37         -35        -194
5. National health Corps Scholarship exclusion...    tyba 12/31/93   .......  .......  .......  .......                                                                                         
(3) Negligible Revenue Effect                      ................  .......  .......  .......  .......                                                                                         
                                                                    ----------------------------------------------------------------------------------------------------------------------------
      Subtotal, Title I..........................                       -107     -336     -538     -842     -1,079     -860     -396     -426     -457     -483     -508      -3,763      -6,033
                                                                    ============================================================================================================================
B. Revenue Offsets (Title II)                                                                                                                                                                   
1. Repeal Schmidt Baking with respect to vacation                                                                                                                                               
 pay.............................................         tyea DOE       513      970      986      120        126      132      139      146      153      161      169       2,847       3,615
2. Allow taxpayers to use foreign tax credits to                                                                                                                                                
 reduce income for 1 year back and carry forward                                                                                                                                                
 7 years.........................................           ftpoai                                                                                                                              
                                                     tyba 12/31/99   .......  .......       87      562        502      468      437      406      279      263      259       1,618       3,262
                                                                    ----------------------------------------------------------------------------------------------------------------------------
      Subtotal, Title II.........................                        513      970    1,073      682        628      600      576      552      432      424      428       4,465       6,877
                                                                    ============================================================================================================================
      Net Total..................................                        406      634      535     -160       -451     -260      180      126      -25      -59      -80         702         844
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Effective for expenses paid with respect to courses beginning during the period 1/1/98 through 12/31/02 for graduate-level education and extends the exclusion for undergraduate education  
  with respect to courses beginning during the period 6/1/00 through 12/31/02.                                                                                                                  
\2\ Loss of less than $500,000.                                                                                                                                                                 
                                                                                                                                                                                                
Legend for ``Effective'' column: dmi = distributions made in; ftpoai = foreign taxes paid or accrued in; tyba = taxable years beginning after; tyea = taxable years ending after.               
                                                                                                                                                                                                
Note.--Details may not add to totals due to rounding.                                                                                                                                           
                                                                                                                                                                                                
Source: Joint Committee on Taxation.                                                                                                                                                            

                B. Budget Authority and Tax Expenditures

Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that the revenue provisions of the bill as 
reported involve no new or increased budget authority.

Tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the revenue-reducing provisions of the 
bill involve increased tax expenditures (see revenue table in 
Part III. A., above), and that the revenue offset provisions of 
the bill involve reduced tax expenditures (see Part III.A., 
above).

            C. Consultation with Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office 
submitted the following statement on this bill:

                                     U.S. Congress,
                               Congressional Budget Office,
                                 Washington, DC, February 18, 1998.
Hon. William V. Roth, Jr.,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office and the 
Joint Committee on Taxation (JCT) have reviewed S. 1133, the 
``Parent and Student Savings Account PLUS Act.'' The JCT 
estimates that this bill would increase governmental receipts 
by $406 million in fiscal year 1998, and by $702 million over 
fiscal years 1998 through 2003. CBO concurs with the estimate.
    For a detailed estimate of the S. 1133, please refer to the 
enclosed JCT table [see Part III.A.].
    In accordance with the requirements of Public Law 104-4, 
the Unfunded Mandates Reform Act of 1995, JCT has determined 
that S. 1133 contains no federal intergovernmental mandates.
    In addition, JCT has determined that the amendment contains 
two federal private sector mandates. The provisions to repeal 
Schmidt Baking with respect to the employer deduction for 
vacation pay, and to modify the foreign tax credit carryback 
and carryforward periods, are estimated to increase tax revenue 
by $3,615 million and $3,262 million, respectively, over fiscal 
years 1998 through 2008, which is the estimated amount that the 
private sector will be required to spend in order to comply 
with this federal private-sector mandate. The revenue raised 
from these provisions will offset the revenue cost of the 
education savings tax incentives in the bill.

                                         Federal Private Sector Mandates                                        
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                                                                          1998- 
                                                     1998     1999     2000     2001     2002     2003     2003 
----------------------------------------------------------------------------------------------------------------
Total Mandate Cost...............................      513      970    1,073      682      628      600    4,466
----------------------------------------------------------------------------------------------------------------

    Section 252 of the Balanced Budget and Emergency Deficit 
Control Act of 1985 establishes pay-as-you-go procedures for 
legislation affecting receipts or direct spending through 2008. 
For purposes of enforcing pay-as-you-go procedures, only the 
effects in the budget year and the succeeding four years are 
counted. Because the bill would affect receipts, pay-as-you-go 
procedures would apply. These effects are summarized in the 
table below.

                                          Pay-as-You-Go Considerations                                          
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                                                                          1998- 
                                                     1998     1999     2000     2001     2002     2003     2003 
----------------------------------------------------------------------------------------------------------------
Changes in Receipts..............................      406      634      535     -160     -451     -260      703
Changes in Outlays...............................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)
----------------------------------------------------------------------------------------------------------------
\1\ Not applicable.                                                                                             

    If you wish further details, please feel free to contact me 
or your staff may wish to contact Alyssa Trzeskowski.
            Sincerely,
                                         June E. O'Neill, Director.

                       IV. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of Rule XXVI of the 
standing rules of the Senate, the following statements are made 
concerning the roll call votes in the Committee's consideration 
of S. 1133.
Motion to report the bill
    The bill (S. 1133) was ordered favorably reported, as 
amended by the Chairman's amendment in the nature of a 
substitute, by a roll call vote of 11 yeas and 8 nays on 
February 10, 1998. The vote, with a quorum present, was as 
follows:
    Yeas.--Senators Roth, Grassley, Hatch, D'Amato, Murkowski 
(proxy), Nickles, Gramm, Lott, Mack (proxy), Breaux, and 
Graham.
    Nays.--Senators Chafee, Moynihan, Baucus, Rockefeller, 
Conrad (proxy), Moseley-Braun, Bryan, and Kerry.
Votes on other amendments
    (1) An amendment by Senator D'Amato to guarantee coverage 
of inpatient hospital care for breast cancer treatment was 
defeated on a roll call vote of 6 yeas and 6 nays. The chairman 
ruled this amendment non-germane. The vote was as follows (a 
vote of two-thirds of Members in attendance is required to 
overrule the Chairman's germaneness ruling):
    Yeas.--Senators Hatch, D'Amato, Murkowski, Moynihan, 
Moseley-Braun, and Bryan.
    Nays.--Senators Roth, Chafee, Gramm, Lott, Jeffords, and 
Baucus.
    (2) A amendment by Senator Rockefeller to reduce the income 
phaseout limits on contributions to education IRAs for married 
couples from the current $110,000-$150,000 to $75,000-$95,000 
was defeated by a roll call vote of 7 yeas and 12 nays. The 
vote was as follows:
    Yeas.--Senators Moynihan, Baucus, Rockefeller, Conrad 
(proxy), Graham (proxy), Moseley-Braun, and Kerrey.
    Nays.--Senators Roth, Chafee, Grassley, Hatch, D'Amato, 
Murkowski (proxy), Nickles (proxy), Gramm, Lott, Mack (proxy), 
Breaux, and Bryan.

                 V. REGULATORY IMPACT AND OTHER MATTERS

                          A. Regulatory Impact

    Pursuant to paragraph 11(b) of Rule XXVI of the Standing 
Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact that might be 
incurred in carrying out the provisions of the bill as amended.
Impact on individuals and businesses
    The bill increases the annual contribution limit for 
education IRAs from $500 to $2,000 (for taxable years beginning 
after 1998 and before 2003), expands the definition of 
qualified education expenses to include qualified elementary 
and secondary education expenses (including after-school 
programs), allows education IRA contributions for special needs 
beneficiaries above age 18, allows corporations and other 
entities to contribute to education IRAs, and makes certain 
technical corrections to the education IRA provisions.
    The bill provides an exclusion from gross income for 
distributions from qualified State tuition programs to the 
extent the distribution is used to pay for college and 
vocational school tuition, fees, tutoring, books, supplies, 
equipment and special needs services and room and board 
expenses in cases where the student is at least a half-time 
student.
    The bill expands the section 127 exclusion from gross 
income for employer-provided educational benefits so that the 
exclusion also is available for graduate courses, and extends 
the section 127 exclusion for two years (through 2002).
    The bill increases the small issuer exception to the 
arbitrage rebate rules for certain tax-exempt school bonds from 
$10 million to $15 million.
    The bill revises the tax treatment of National Health Corps 
Scholarships so that such scholarships are excluded from gross 
income under section 117, without regard to whether the 
recipient later is obligated to provide medical services in a 
geographic area or in an underserved population group or 
designated facility identified by the Public Health Service as 
having a shortage of health care professionals. The exclusion 
does not apply to amounts received for regular living expenses, 
such as room and board.
    The bill provides for two revenue offsets to pay for the 
above-mentioned provisions: (1) the Schmidt Baking case with 
respect to vacation pay is overruled, effective for taxable 
years ending after the date of enactment; and (2) the carryback 
period for excess foreign tax credits is reduced from two years 
to one year, and the carryforward period for excess foreign tax 
credits is extended from five years to seven years, effective 
for foreign tax credits arising in taxable years beginning 
after December 31, 1999.
    The two revenue offset provisions will increase the tax 
burden on the affected taxpayers. The other provisions will 
reduce the tax burden on individuals utilizing educational 
IRAs, qualified State tuition programs, employer-provided 
educational assistance programs, and National Health Corps 
Scholarships. The increase in the arbitrage exception for 
public school bonds issued by certain State and local 
governments will reduce the burden for paying certain arbitrage 
rebates to the Federal Government.
Impact on personal privacy and paperwork
    The bill should not have any adverse impact on personal 
privacy. By expanding the eligibility of qualified education 
expenses, the bill will result in certain additional taxpayers 
having to keep track of qualified elementary and secondary 
education expenses and special needs expenses in connection 
with maintaining education IRA records. The bill also clarifies 
that corporations and tax-exempt entities are permitted to make 
contributions to education IRAs. The bill makes certain 
technical corrections to the education IRA provisions to 
clarify the application of the provisions.
    The expansion of the section 127 exclusion for employer-
provided educational benefits to graduate courses will involve 
some additional recordkeeping concerning students taking 
graduate level courses.

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
    The Committee on Finance has reviewed the provisions of the 
bill (S. 1133) as approved by the Committee on February 10, 
1998. In accordance with the requirements of Public Law 104-4, 
the Committee has determined that the following provisions of 
the bill contain Federal private sector mandates.
          Restriction on employer deduction for certain 
        vacation pay (overruling of Schmidt Baking) (bill sec. 
        201); and
          Modification of foreign tax credit carryback and 
        carryforward rules (bill sec. 202).
    As indicated in the revenue table in (III.A., above), the 
vacation pay provision is estimated to increase tax revenue by 
$3,615 million over fiscal years 1998-2008, and the foreign tax 
credit provision is estimated to increase tax revenue by $3,262 
million over fiscal years 1998-2008. These are the estimated 
amounts ($6,877 million total for the period, 1998-2008) that 
the private sector will be required to pay in order to comply 
with the Federal private sector mandates under the bill. These 
two provisions will not impose a Federal intergovernmental 
mandate on State, local, or tribal governments.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In the opinion of the Committee, it is necessary in order 
to expedite the business of the Senate, to dispense with the 
requirements of paragraph 12 of Rule XXVI of the Standing Rules 
of the Senate (relating to the showing of changes in existing 
law made by the bill as reported by the Committee).

  VII. MINORITY VIEWS OF DANIEL PATRICK MOYNIHAN, MAX BAUCUS, JOHN D. 
ROCKEFELLER, KENT CONRAD, CAROL MOSELEY-BRAUN, RICHARD H. BRYAN, AND J. 
                             ROBERT KERREY

    The undersigned Members of the Committee on Finance opposed 
the Parent and Student Savings Account Plus Act, as reported by 
the Finance Committee on February 10, 1998. We opposed the bill 
because, as explained below, we believe its central feature--
the proposal to expand education savings accounts--is seriously 
flawed. We were also troubled by the Committee's failure to 
address in this bill the pressing need for improved school 
infrastructure in the states.
    We believe that improving public education and increasing 
opportunities for education must continue to be one of our 
highest national priorities. Congress should therefore 
undertake a comprehensive review of Federal education policy 
rather than limiting such efforts to tinkering with the 
Internal Revenue Code.
Employer provided educational assistance
    The bill includes an extension of Internal Revenue Code 
Section 127, employer provided educational assistance, which we 
strongly support. Section 127 is one of the most successful 
Federal education policies in place today. Approximately one 
million persons per year participate in employer educational 
assistance programs; about a quarter of those are enrolled in 
graduate-level courses. Employers benefit substantially from 
the ability to send employees to school to acquire additional 
skills. In a world of continuing education, where science and 
technology change constantly, Section 127 permits employers to 
provide education benefits to employees, who then bring new 
skills back into the workplace and earn more income. The 
Federal Treasury in turn receives more tax revenue. This is a 
program that works, and it administers itself.
    Last year, approving the provision contained in the bill 
reported by the Finance Committee, the Senate version of the 
Taxpayer Relief Act of 1997 made Section 127 permanent for both 
undergraduate and graduate study. However, the Senate language 
was dropped in conference, leaving only undergraduate study 
eligible under the Code. We believe that the Committee has 
acted appropriately in once again seeking to extend the benefit 
of this provision to graduate students, and in extending the 
entire provision until December 31, 2002. We hope this position 
is sustained in the Senate bill, and in conference with the 
House.
Qualified State prepaid tuition plans
    We are also pleased that the bill reported by the Committee 
includes a provision to expand the tax benefits accorded to 
qualified State prepaid tuition plans. These programs have been 
adopted by, or are being considered in, each of the States, to 
provide a vehicle whereby parents and students can save for the 
costs of college. The Congress recognized the importance of 
these programs in the Small Business Job Protection Act of 1996 
by enacting rules designed to clarify that the programs are 
tax-exempt and that the beneficiaries of the plans should not 
be taxed until funds are withdrawn from the plans. The prepaid 
tuition rules were further liberalized in the Taxpayer Relief 
Act of 1997.
    The proposal in the Committee bill to exclude certain 
distributions from qualified State prepaid tuition plans from 
gross income would contribute to tax simplification. Parents 
and students would be able to participate in the programs and 
withdraw funds for college expenses without having to determine 
which portion of the withdrawal represents earnings versus a 
return of contributions, and whether a Hope Scholarship or 
Lifetime Learning credit is available with respect to the 
educational expenses paid by the program. The Committee bill 
would also eliminate the consequence of the differences in the 
law between the definition of ``qualified higher education 
expenses'' for purposes of prepaid tuition plans and the Hope 
Scholarship and Lifetime Learning tax credits.
Education savings accounts
    We appreciate the good intentions of the proponents of 
expanding the availability of education savings accounts. 
However, the proposed changes to current law included in the 
Committee bill are fraught with serious policy and technical 
defects. The Secretary of the Treasury and the Secretary of 
Education expressed strong opposition to the education IRA 
provisions in this bill, and indicated that they will recommend 
that the President veto a bill that contains such provisions. 
In a letter to Members of the Finance Committee dated February 
9, 1998, Secretaries Rubin and Riley argued that the provisions 
would disproportionately benefit the most affluent families and 
provide little or no benefit to lower and middle-income 
families. In addition, they indicated that the provisions 
``would create significant compliance problems.''
    Treasury Department analyses conclude that seventy percent 
of the tax benefits from this provision would go to the top 
twenty percent of all taxpayers. The staff of the Joint 
Committee on Taxation assumes that the dollar benefit to 
taxpayers with children in public schools will be 
``significantly lower'' than that attributable to taxpayers 
with children in private schools.
    We therefore believe that the bill will not result in 
greater opportunity for middle andlower income families to send 
children to private schools, as supporters contend. Instead, it will 
merely provide new tax breaks to families already able to afford 
private schools for their children. Nor do we believe that expansion of 
the contribution limit and tax-free withdrawal opportunities for 
education IRAs will lead to increased savings. In our view, these 
changes will provide further incentives for taxpayers to shift money to 
tax-favored accounts, and to spend funds that would otherwise be used 
for retirement.
    Further, we are concerned about the additional complexity 
these changes would add to the Internal Revenue Code. Taxpayers 
are just beginning to become aware of the hundreds of changes 
made in the 1997 tax bill, including the establishment of the 
education IRA (effective for 1998) for higher education 
expenses. At a time when calls for simplifying, and even 
abolishing, the income tax grow ever louder, enactment of the 
proposed unjustified changes to the education IRA provisions 
would add a maze of new rules and unanswered questions with 
which taxpayers and the IRS would be forced to contend.
    Taxpayers and the IRS will have difficulty interpreting the 
definition of a ``qualified education expense.'' For example, 
such expenses are defined in the bill to include computers and 
related software and services in connection with the enrollment 
or attendance of the beneficiary of an education IRA at a 
school providing elementary or secondary education. Yet the 
bill provides no guidance for the IRS to determine whether a 
computer (or use of the Internet) is used by a child for 
educational purposes or for entertainment, or by the child's 
parents for unrelated purposes.
    The proposal would also add significant complexity by 
requiring taxpayers to make sophisticated financial 
calculations each time a withdrawal from the education savings 
account is made. For instance, after 2002, withdrawals for 
elementary and secondary education expenses can be made--but 
only from contributions made during the period from 1999 to 
2002 (and from the earnings on such contributions). The law 
already includes complicated rules for taxpayers to determine 
the portion of a withdrawal that represents earnings, and the 
portion that represents a return of contributions. This bill 
would create different tax consequences depending on whether a 
withdrawal relates to contributions from three time periods 
(1998, 1999-2002, and post-2002), and from earnings on such 
contributions.

School infrastructure

    Prior to the Committee's consideration of this legislation 
on February 10, Chairman Roth and his staff devoted 
considerable time to working with Members of the Committee on 
both sides of the aisle to design measures to address the issue 
of school infrastructure. We appreciate the Chairman's good 
faith efforts in this regard.
    However, during markup the Committee was unable to agree on 
how best to proceed. As reported, the one provision in the bill 
related to school infrastructure--the increase in the small 
issuer arbitrage rebate exception--is nominal compared to the 
estimated cost of $112 billion to repair existing schools. Last 
year, Senators Moseley-Braun and Graham brought the issue of 
crumbling schools to our attention, and they continue to lead 
efforts to address this serious problem. During the first 
session of the 105th Congress, Senate Democrats argued that the 
most efficient way to address this issue was through direct 
spending. Unfortunately, our previous proposals, such as block 
grants to the States, were rejected by the majority, and since 
then we have sought to provide assistance via the Internal 
Revenue Code for improvements to school infrastructure. We 
remain committed to identifying and pursuing solutions to this 
critical problem, and we were pleased that during the 
Committee's markup, Chairman Roth pledged to hold hearings on 
this issue and to continue to work with us toward that 
objective.

                                   Daniel Patrick Moynihan.

                                
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