[Analytical Perspectives]
[Federal Receipts and Collections]
[6. Tax Expenditures]
[From the U.S. Government Printing Office, www.gpo.gov]
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6. TAX EXPENDITURES
The Congressional Budget Act of 1974 (Public Law 93-344) requires that
a list of ``tax expenditures'' be included in the budget. Tax
expenditures are defined in the law as ``revenue losses attributable to
provisions of the Federal tax laws which allow a special exclusion,
exemption, or deduction from gross income or which provide a special
credit, a preferential rate of tax, or a deferral of liability.'' These
exceptions may be viewed as alternatives to other policy instruments,
such as spending or regulatory programs. Identification and measurement
of tax expenditures depends importantly on the baseline tax system
against which the actual tax system is compared.
The largest reported tax expenditures tend to be associated with the
individual income tax. For example, sizeable deferrals, deductions and
exclusions are provided for pension contributions and earnings, employer
contributions for medical insurance, capital gains, and payments of
State and local individual income and property taxes. Reported tax
expenditures under the corporate income tax tend to be related to timing
differences in the rate of cost recovery for various investments. As is
discussed below, the extent to which these provisions are classified as
tax expenditures varies according to the conceptual baseline used.
Each tax expenditure estimate in this chapter was calculated assuming
other parts of the tax code remained unchanged. The estimates would be
different if all tax expenditures or major groups of tax expenditures
were changed simultaneously because of potential interactions among
provisions. For that reason, this chapter does not present a grand total
for the estimated tax expenditures. Moreover, past tax changes entailing
broad elimination of tax expenditures were generally accompanied by
changes in tax rates or other basic provisions, so that the net effects
on Federal revenues were considerably (if not totally) offset.
Tax expenditures relating to the individual and corporate income taxes
are estimated for fiscal years 2002-2008 using three methods of
accounting: revenue effects, outlay equivalent, and present value. The
present value approach provides estimates of the cumulative revenue
effects for tax expenditures that involve deferrals of tax payments into
the future or have similar long-term effects.
The section of the chapter on performance measures and economic
effects presents information related to assessment of the effect of tax
expenditures on the achievement of program performance goals. This
section is a complement to the government-wide performance plan required
by the Government Performance and Results Act of 1993.
The 2003 Budget included a discussion of important ambiguities in the
tax expenditure concept and indicated that the Treasury Department had
begun a review of the tax expenditure presentation. Particular attention
of this review has focused on defining tax expenditures relative to a
comprehensive income baseline, defining tax expenditures relative to a
broad-based consumption tax baseline, and defining negative tax
expenditures, i.e., provisions of current law that over-tax certain
items or activities. The Appendix presents the results from the
preliminary stage of this review.
TAX EXPENDITURES IN THE INCOME TAX
Tax Expenditure Estimates
All tax expenditure estimates presented here are based upon current
tax law enacted as of December 31, 2002. Expired or repealed provisions
are not listed if their revenue effects result only from taxpayer
activity occurring before fiscal year 2002. Due to the time required to
estimate the large number of tax expenditures, the estimates are based
on Mid-Session economic assumptions; exceptions are the earned income
tax credit and child credit provisions, which involve outlay components
and hence are updated to reflect the economic assumptions used elsewhere
in the budget.
The total revenue effects for tax expenditures for fiscal years 2002-
2008 are displayed according to the budget's functional categories in
Table 6-1. Descriptions of the specific tax expenditure provisions
follow the tables of estimates and the discussion of general features of
the tax expenditure concept.
As in prior years, two baseline concepts--the normal tax baseline and
the reference tax law baseline--are used to identify tax expenditures.
For the most part, the two concepts coincide. However, items treated as
tax expenditures under the normal tax baseline, but not the reference
tax law baseline, are indicated by the designation ``normal tax method''
in the tables. The revenue effects for these indicated items are zero
using the reference tax rules. The alternative baseline concepts are
discussed in detail following the tables.
Table 6-2 reports the respective portions of the total revenue effects
that arise under the individual and corporate income taxes separately.
The placement of the estimates under the individual and corporate
headings does not imply that these categories of filers benefit from the
special tax provisions in proportion to the respective tax expenditure
amounts shown. Rather, these breakdowns show the specific tax accounts
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through which the various provisions are cleared. The ultimate
beneficiaries of corporate tax expenditures could be shareholders,
employees, customers, or other providers of capital, depending on
economic forces.
Table 6-3 ranks the major tax expenditures by the size of their 2004-
2008 revenue effect.
Interpreting Tax Expenditure Estimates
The estimates shown for individual tax expenditures in Tables 6-1, 6-
2, and 6-3 do not necessarily equal the increase in Federal revenues (or
the change in the budget balance) that would result from repealing these
special provisions, for the following reasons:
(1) Eliminating a tax expenditure may have incentive effects that
alter economic behavior. These incentives can affect the resulting
magnitudes of the activity or of other tax provisions or Government
programs. For example, if capital gains were taxed at ordinary rates,
capital gain realizations would be expected to decline, potentially
resulting in a decline in tax receipts. Such behavioral effects are not
reflected in the estimates.
(2) Tax expenditures are interdependent even without incentive
effects. Repeal of a tax expenditure provision can increase or decrease
the tax revenues associated with other provisions. For example, even if
behavior does not change, repeal of an itemized deduction could increase
the revenue costs from other deductions because some taxpayers would be
moved into higher tax brackets. Alternatively, repeal of an itemized
deduction could lower the revenue cost from other deductions if
taxpayers are led to claim the standard deduction instead of itemizing.
Similarly, if two provisions were repealed simultaneously, the increase
in tax liability could be greater or less than the sum of the two
separate tax expenditures, because each is estimated assuming that the
other remains in force. In addition, the estimates reported in Table 6-1
are the totals of individual and corporate income tax revenue effects
reported in Table 6-2 and do not reflect any possible interactions
between the individual and corporate income tax receipts. For this
reason, the estimates in Table 6-1 (as well as those in Table 6-5, which
are also based on summing individual and corporate estimates) should be
regarded as approximations.
The annual value of tax expenditures for tax deferrals is reported on
a cash basis in all tables except Table 6-4. Cash-based estimates
reflect the difference between taxes deferred in the current year and
incoming revenues that are received due to deferrals of taxes from prior
years. Although such estimates are useful as a measure of cash flows
into the Government, they do not accurately reflect the true economic
cost of these provisions. For example, for a provision where activity
levels have changed, so that incoming tax receipts from past deferrals
are greater than deferred receipts from new activity, the cash-basis tax
expenditure estimate can be negative, despite the fact that in present-
value terms current deferrals do have a real cost to the Government.
Alternatively, in the case of a newly enacted deferral provision, a
cash-based estimate can overstate the real effect on receipts to the
Government because the newly deferred taxes will ultimately be received.
Present-value estimates, which are a useful complement to the cash-basis
estimates for provisions involving deferrals, are discussed below.
Present-Value Estimates
Discounted present-value estimates of revenue effects are presented in
Table 6-4 for certain provisions that involve tax deferrals or other
long-term revenue effects. These estimates complement the cash-based tax
expenditure estimates presented in the other tables.
The present-value estimates represent the revenue effects, net of
future tax payments, that follow from activities undertaken during
calendar year 2002 which cause the deferrals or other long-term revenue
effects. For instance, a pension contribution in 2002 would cause a
deferral of tax payments on wages in 2002 and on pension earnings on
this contribution (e.g., interest) in later years. In some future year,
however, the 2002 pension contribution and accrued earnings will be paid
out and taxes will be due; these receipts are included in the present-
value estimate. In general, this conceptual approach is similar to the
one used for reporting the budgetary effects of credit programs, where
direct loans and guarantees in a given year affect future cash flows.
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Table 6-1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES
(In millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total from corporations and individuals
--------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007 2008 2004-2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Defense
1 Exclusion of benefits and allowances to armed forces 2,190 2,210 2,240 2,260 2,290 2,310 2,330 11,430
personnel..............................................
International Affairs
2 Exclusion of income earned abroad by U.S. citizens...... 2,740 2,620 2,680 2,750 2,810 2,940 3,100 14,280
3 Exclusion of certain allowances for Federal employees 760 800 840 880 930 980 1,030 4,660
abroad.................................................
4 Extraterritorial income exclusion....................... 4,820 5,150 5,510 5,890 6,290 6,730 7,200 31,620
5 Inventory property sales source rules exception......... 1,470 1,540 1,620 1,700 1,790 1,880 1,980 8,970
6 Deferral of income from controlled foreign corporations 7,000 7,450 7,900 8,400 8,930 9,550 10,210 44,990
(normal tax method)....................................
7 Deferred taxes for financial firms on certain income 1,950 2,050 2,130 2,190 2,260 960 0 7,540
earned overseas........................................
General Science, Space, and Technology
8 Expensing of research and experimentation expenditures 1,660 2,200 2,760 3,390 3,990 4,270 4,380 18,790
(normal tax method)....................................
9 Credit for increasing research activities............... 6,870 5,640 4,990 2,910 1,240 520 170 9,830
Energy
10 Expensing of exploration and development costs, fuels... 150 170 150 80 60 40 30 360
11 Excess of percentage over cost depletion, fuels......... 610 670 650 610 620 640 650 3,170
12 Alternative fuel production credit...................... 1,560 940 520 520 520 520 210 2,290
13 Exception from passive loss limitation for working 10 10 10 10 10 10 10 50
interests in oil and gas properties....................
14 Capital gains treatment of royalties on coal............ 100 110 110 120 120 130 140 620
15 Exclusion of interest on energy facility bonds.......... 110 120 130 140 140 150 160 720
16 Enhanced oil recovery credit............................ 330 340 350 360 360 370 390 1,830
17 New technology credit................................... 100 180 250 270 270 270 270 1,330
18 Alcohol fuel credits \1\................................ 30 30 30 30 30 30 30 150
19 Tax credit and deduction for clean-fuel burning vehicles 70 90 70 40 -10 -70 -70 -40
20 Exclusion from income of conservation subsidies provided 80 80 80 80 80 80 80 400
by public utilities....................................
Natural Resources and Environment
21 Expensing of exploration and development costs, nonfuel 30 30 30 30 30 40 40 170
minerals...............................................
22 Excess of percentage over cost depletion, nonfuel 260 260 270 280 290 290 300 1,430
minerals...............................................
23 Exclusion of interest on bonds for water, sewage, and 450 480 540 580 610 650 680 3,060
hazardous waste facilities.............................
24 Capital gains treatment of certain timber income........ 100 110 110 120 120 130 140 620
25 Expensing of multiperiod timber growing costs........... 360 370 380 380 400 410 410 1,980
26 Tax incentives for preservation of historic structures.. 200 210 230 240 250 260 280 1,260
Agriculture
27 Expensing of certain capital outlays.................... 170 180 170 170 170 170 190 870
28 Expensing of certain multiperiod production costs....... 130 130 120 120 120 120 120 600
29 Treatment of loans forgiven for solvent farmers......... 10 10 10 10 10 10 10 50
30 Capital gains treatment of certain income............... 1,010 1,060 1,120 1,180 1,250 1,310 1,380 6,240
31 Income averaging for farmers............................ 70 70 80 80 80 90 90 420
32 Deferral of gain on sale of farm refiners............... 10 10 10 10 10 10 20 60
Commerce and Housing
Financial institutions and insurance:
33 Exemption of credit union income....................... 1,020 1,090 1,160 1,240 1,320 1,410 1,510 6,640
34 Excess bad debt reserves of financial institutions..... 0 0 0 0 0 0 0 0
35 Exclusion of interest on life insurance savings........ 17,690 19,130 20,740 22,470 24,390 26,350 28,310 122,260
36 Special alternative tax on small property and casualty 10 10 10 10 10 10 10 50
insurance companies...................................
37 Tax exemption of certain insurance companies owned by 210 220 240 250 270 280 290 1,330
tax-exempt organizations..............................
38 Small life insurance company deduction................. 100 100 100 100 100 100 100 500
Housing:
39 Exclusion of interest on owner-occupied mortgage 870 960 1,050 1,140 1,210 1,270 1,360 6,030
subsidy bonds.........................................
40 Exclusion of interest on rental housing bonds.......... 180 200 220 240 250 260 280 1,250
41 Deductibility of mortgage interest on owner-occupied 63,590 65,540 68,440 71,870 74,790 78,160 82,650 375,910
homes.................................................
42 Deductibility of State and local property tax on owner- 21,760 22,320 22,160 19,750 16,240 14,580 13,580 86,310
occupied homes........................................
43 Deferral of income from post 1987 installment sales.... 1,050 1,080 1,100 1,120 1,140 1,160 1,190 5,710
44 Capital gains exclusion on home sales.................. 19,670 20,260 20,860 21,490 22,140 22,800 23,480 110,770
45 Exception from passive loss rules for $25,000 of rental 5,690 5,270 4,920 4,600 4,290 4,020 3,790 21,620
loss..................................................
46 Credit for low-income housing investments.............. 3,290 3,450 3,640 3,820 3,990 4,160 4,360 19,970
47 Accelerated depreciation on rental housing (normal tax 1,590 1,080 310 -520 -1,770 -3,310 -4,570 -9,860
method)...............................................
Commerce:
48 Cancellation of indebtedness........................... 0 10 30 50 60 60 50 250
49 Exceptions from imputed interest rules................. 50 50 50 50 50 50 50 250
50 Capital gains (except agriculture, timber, iron ore, 56,060 55,010 53,930 54,550 49,870 49,760 51,450 259,560
and coal) (normal tax method).........................
51 Capital gains exclusion of small corporation stock..... 100 130 160 210 250 300 350 1,270
52 Step-up basis of capital gains at death................ 26,890 27,390 28,500 29,630 30,490 31,370 32,390 152,380
53 Carryover basis of capital gains on gifts.............. 640 640 450 540 640 650 630 2,910
54 Ordinary income treatment of loss from small business 40 40 50 50 50 50 50 250
corporation stock sale................................
55 Accelerated depreciation of buildings other than rental -1,800 -2,530 -1,980 -6,520 -9,200 -12,360 -15,820 -45,880
housing (normal tax method)...........................
56 Accelerated depreciation of machinery and equipment 47,770 31,110 16,670 -39,310 -35,260 -33,260 -31,570 -122,730
(normal tax method)...................................
57 Expensing of certain small investments (normal tax -360 -110 370 1,570 1,830 1,510 1,380 6,660
method)...............................................
58 Amortization of start-up costs (normal tax method)..... 110 130 150 160 160 170 170 810
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59 Graduated corporation income tax rate (normal tax 4,870 5,380 5,700 5,880 6,100 6,350 6,640 30,670
method)...............................................
60 Exclusion of interest on small issue bonds............. 330 360 400 430 450 470 510 2,260
Transportation
61 Deferral of tax on shipping companies................... 20 20 20 20 20 20 20 100
62 Exclusion of reimbursed employee parking expenses....... 2,070 2,180 2,290 2,410 2,540 2,680 2,810 12,730
63 Exclusion for employer-provided transit passes.......... 250 320 380 450 530 600 670 2,630
Community and Regional Development
64 Investment credit for rehabilitation of structures 30 30 30 30 30 30 30 150
(other than historic)..................................
65 Exclusion of interest for airport, dock, and similar 690 750 830 890 950 1,000 1,060 4,730
bonds..................................................
66 Exemption of certain mutuals' and cooperatives' income.. 60 60 60 70 70 70 70 340
67 Empowerment zones, Enterprise communities, and Renewal 730 1,130 1,170 1,280 1,410 1,580 1,750 7,190
communities............................................
68 New markets tax credit.................................. 90 190 290 430 610 830 870 3,030
69 Expensing of environmental remediation costs............ 80 80 20 -10 -10 -10 -10 -20
Education, Training, Employment, and Social Services
Education:
70 Exclusion of scholarship and fellowship income (normal 1,270 1,260 1,260 1,340 1,400 1,410 1,420 6,830
tax method)...........................................
71 HOPE tax credit........................................ 4,110 3,520 2,880 2,930 2,730 2,900 2,790 14,230
72 Lifetime Learning tax credit........................... 2,180 2,250 2,980 2,840 2,610 2,820 2,860 14,110
73 Education Individual Retirement Accounts............... 50 100 160 240 330 440 560 1,730
74 Deductibility of student-loan interest................. 450 640 660 680 700 720 720 3,480
75 Deduction for higher education expenses................ 420 2,230 2,880 3,620 2,940 0 0 9,440
76 State prepaid tuition plans............................ 270 340 400 470 560 660 750 2,840
77 Exclusion of interest on student-loan bonds............ 240 260 290 310 340 350 370 1,660
78 Exclusion of interest on bonds for private nonprofit 580 640 700 760 810 850 900 4,020
educational facilities................................
79 Credit for holders of zone academy bonds............... 50 80 90 100 100 100 100 490
80 Exclusion of interest on savings bonds redeemed to 10 10 10 10 10 20 20 70
finance educational expenses..........................
81 Parental personal exemption for students age 19 or over 2,480 3,310 3,230 2,690 2,020 1,670 1,470 11,080
82 Deductibility of charitable contributions (education).. 4,020 4,140 4,350 4,640 4,820 4,970 5,230 24,010
83 Exclusion of employer-provided educational assistance.. 400 490 520 550 580 610 650 2,910
Training, employment, and social services:
84 Work opportunity tax credit............................ 380 560 430 190 80 40 20 760
85 Welfare-to-work tax credit............................. 80 70 80 60 40 20 10 210
86 Employer provided child care exclusion................. 690 720 760 810 850 890 940 4,250
87 Employer-provided child care credit.................... 40 90 130 140 150 160 170 750
88 Assistance for adopted foster children................. 220 250 290 330 380 430 480 1,910
89 Adoption credit and exclusion.......................... 140 220 450 500 540 560 570 2,620
90 Exclusion of employee meals and lodging (other than 740 780 810 850 890 930 970 4,450
military).............................................
91 Child credit \2\....................................... 22,170 21,440 21,310 22,480 24,280 23,940 23,660 115,670
92 Credit for child and dependent care expenses........... 2,750 2,910 3,230 2,860 2,380 2,190 2,050 12,710
93 Credit for disabled access expenditures................ 50 50 50 60 60 60 60 290
94 Deductibility of charitable contributions, other than 30,860 32,100 33,990 35,710 37,360 38,780 41,160 187,000
education and health..................................
95 Exclusion of certain foster care payments.............. 450 430 430 440 450 460 470 2,250
96 Exclusion of parsonage allowances...................... 350 380 400 420 450 480 510 2,260
Health
97 Exclusion of employer contributions for medical 99,060 108,500 120,160 132,240 144,710 157,180 170,230 724,520
insurance premiums and medical care...................
98 Self-employed medical insurance premiums............... 1,760 2,500 3,690 3,940 4,220 4,520 4,980 21,350
99 Workers' compensation insurance premiums............... 5,280 5,770 6,190 6,630 7,020 7,490 8,000 35,330
100 Medical Savings Accounts............................... 20 30 30 30 30 30 20 140
101 Deductibility of medical expenses...................... 5,710 6,060 6,340 6,490 6,610 6,980 7,380 33,800
102 Exclusion of interest on hospital construction bonds... 1,200 1,320 1,440 1,560 1,660 1,740 1,850 8,250
103 Deductibility of charitable contributions (health)..... 4,240 4,360 4,580 4,900 5,070 5,220 5,490 25,260
104 Tax credit for orphan drug research.................... 140 160 180 200 220 250 280 1,130
105 Special Blue Cross/Blue Shield deduction............... 300 340 310 300 270 300 250 1,430
106 Tax credit for health insurance purchased by certain 0 0 60 30 40 50 60 240
displaced and retired individuals.....................
Income Security
107 Exclusion of railroad retirement system benefits........ 390 400 400 400 400 400 400 2,000
108 Exclusion of workers' compensation benefits............. 5,750 6,100 6,460 6,850 7,270 7,710 8,190 36,480
109 Exclusion of public assistance benefits (normal tax 380 400 410 430 450 470 440 2,200
method)................................................
110 Exclusion of special benefits for disabled coal miners.. 70 60 60 50 50 50 40 250
111 Exclusion of military disability pensions............... 110 110 120 120 130 130 140 640
Net exclusion of pension contributions and earnings: 0 0 0 0 0 0 0 0
112 Employer plans......................................... 51,260 63,480 67,870 70,540 73,200 67,500 61,440 340,550
113 401(k) plans........................................... 50,830 52,920 55,290 57,830 61,490 65,060 68,030 307,700
114 Individual Retirement Accounts......................... 19,080 20,840 23,130 22,400 22,380 20,540 19,800 108,250
115 Low and moderate income savers credit.................. 850 2,050 1,860 1,670 1,510 850 0 5,890
116 Keogh plans............................................ 7,000 7,282 7,616 7,904 8,166 8,402 9,196 41,284
Exclusion of other employee benefits: 0 0 0 0 0 0 0 0
117 Premiums on group term life insurance.................. 1,780 1,800 1,830 1,860 1,890 1,920 1,950 9,450
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118 Premiums on accident and disability insurance.......... 220 230 240 250 260 270 280 1,300
119 Small business retirement plan credit................... 10 20 40 50 50 60 60 260
120 Income of trusts to finance supplementary unemployment 20 30 30 30 30 30 30 150
benefits...............................................
121 Special ESOP rules...................................... 1,630 1,710 1,790 1,890 1,990 2,090 2,200 9,960
122 Additional deduction for the blind...................... 40 40 40 40 40 40 40 200
123 Additional deduction for the elderly.................... 1,890 1,950 2,050 2,120 2,180 2,110 2,030 10,490
124 Tax credit for the elderly and disabled................. 20 20 20 20 10 10 10 70
125 Deductibility of casualty losses........................ 280 400 420 440 460 500 540 2,360
126 Earned income tax credit \3\............................ 4,450 4,930 5,090 5,280 5,410 5,580 5,790 27,150
Social Security
Exclusion of social security benefits:
127 Social Security benefits for retired workers........... 18,340 18,560 18,930 19,210 20,000 21,100 21,550 100,790
128 Social Security benefits for disabled.................. 2,910 3,210 3,570 3,950 4,360 4,870 4,390 21,140
129 Social Security benefits for dependents and survivors.. 3,730 3,910 4,140 4,360 4,590 4,920 4,820 22,830
Veterans Benefits and Services
130 Exclusion of veterans death benefits and disability 3,160 3,230 3,400 3,590 3,780 3,980 4,190 18,940
compensation...........................................
131 Exclusion of veterans pensions.......................... 70 80 80 90 90 90 100 450
132 Exclusion of GI bill benefits........................... 90 90 90 100 100 110 110 510
133 Exclusion of interest on veterans housing bonds......... 40 40 50 50 50 60 60 270
General Purpose Fiscal Assistance
134 Exclusion of interest on public purpose State and local 25,250 26,780 27,310 27,720 27,810 27,530 28,360 138,730
bonds..................................................
135 Deductibility of nonbusiness state and local taxes other 47,430 50,520 50,910 47,770 40,480 37,190 36,080 212,430
than on owner-occupied homes...........................
136 Tax credit for corporations receiving income from doing 2,240 2,240 2,240 2,200 1,300 0 0 5,740
business in U.S. possessions...........................
Interest
137 Deferral of interest on U.S. savings bonds.............. 510 590 670 750 840 920 1,050 4,230
Addendum: Aid to State and local governments:
Deductibility of:
Property taxes on owner-occupied homes................. 21,760 22,320 22,160 19,750 16,240 14,580 13,580 86,310
Nonbusiness State and local taxes other than on owner- 47,430 50,520 50,910 47,770 40,480 37,190 36,080 212,430
occupied homes........................................
Exclusion of interest on State and local bonds for:
Public purposes........................................ 25,250 26,780 27,310 27,720 27,810 27,530 28,360 138,730
Energy facilities...................................... 110 120 130 140 140 150 160 720
Water, sewage, and hazardous waste disposal facilities. 450 480 540 580 610 650 680 3,060
Small-issues........................................... 330 360 400 430 450 470 510 2,260
Owner-occupied mortgage subsidies...................... 870 960 1,050 1,140 1,210 1,270 1,360 6,030
Rental housing......................................... 180 200 220 240 250 260 280 1,250
Airports, docks, and similar facilities................ 690 750 830 890 950 1,000 1,060 4,730
Student loans.......................................... 240 260 290 310 340 350 370 1,660
Private nonprofit educational facilities............... 580 640 700 760 810 850 900 4,020
Hospital construction.................................. 1,200 1,320 1,440 1,560 1,660 1,740 1,850 8,250
Veterans' housing...................................... 40 40 50 50 50 60 60 270
Credit for holders of zone academy bonds................ 50 80 90 100 100 100 100 490
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as
follows: 2002 $1,070; 2003 $1,140; 2004 $1,230; 2005 $1,320; 2006 $1,370; 2007 $1,400; and 2008 $1,430.
\2\ The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as
follows: 2002 $5,060; 2003 $5,870; 2004 $5,860; 2005 $5,700; 2006 $7,630; 2007 $7,630; and 2008 $7,500
\3\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of
dollars) is as follows: 2002 $27,830; 2003 $30,610; 2004 $31,380; 2005 $32,090; 2006 $33,450; 2007 $34,480; and 2008 $35,380.
Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method. All estimates have been rounded to
the nearest $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.
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Table 6-2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL INCOME TAXES
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Corporations Individuals
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2004- 2004-
2002 2003 2004 2005 2006 2007 2008 2008 2002 2003 2004 2005 2006 2007 2008 2008
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
National Defense
1 Exclusion of benefits and allowances to armed ....... ....... ....... ......... ......... ......... ......... ......... 2,190 2,210 2,240 2,260 2,290 2,310 2,330 11,430
forces personnel..............................
International Affairs
2 Exclusion of income earned abroad by U.S. ....... ....... ....... ......... ......... ......... ......... ......... 2,740 2,620 2,680 2,750 2,810 2,940 3,100 14,280
citizens......................................
3 Exclusion of certain allowances for Federal ....... ....... ....... ......... ......... ......... ......... ......... 760 800 840 880 930 980 1,030 4,660
employees abroad..............................
4 Extraterritorial income exclusion.............. 4,820 5,150 5,510 5,890 6,290 6,730 7,200 31,620 ......... ......... ......... ......... ......... ......... ......... .........
5 Inventory property sales source rules exception 1,470 1,540 1,620 1,700 1,790 1,880 1,980 8,970 ......... ......... ......... ......... ......... ......... ......... .........
6 Deferral of income from controlled foreign 7,000 7,450 7,900 8,400 8,930 9,550 10,210 44,990 ......... ......... ......... ......... ......... ......... ......... .........
corporations (normal tax method)..............
7 Deferred taxes for financial firms on certain 1,950 2,050 2,130 2,190 2,260 960 0 7,540 ......... ......... ......... ......... ......... ......... ......... .........
income earned overseas........................
General Science, Space, and Technology
8 Expensing of research and experimentation 1,630 2,160 2,710 3,320 3,910 4,190 4,300 18,430 30 40 50 70 80 80 80 360
expenditures (normal tax method)..............
9 Credit for increasing research activities...... 6,810 5,590 4,950 2,890 1,240 520 170 9,770 60 50 40 20 0 0 0 60
Energy
10 Expensing of exploration and development costs, 130 150 130 70 50 40 30 320 20 20 20 10 10 0 0 40
fuels.........................................
11 Excess of percentage over cost depletion, fuels 510 550 530 500 510 530 540 2,610 100 120 120 110 110 110 110 560
12 Alternative fuel production credit............. 1,500 900 500 500 500 500 200 2,200 60 40 20 20 20 20 10 90
13 Exception from passive loss limitation for ....... ....... ....... ......... ......... ......... ......... ......... 10 10 10 10 10 10 10 50
working interests in oil and gas properties...
14 Capital gains treatment of royalties on coal... ....... ....... ....... ......... ......... ......... ......... ......... 100 110 110 120 120 130 140 620
15 Exclusion of interest on energy facility bonds. 30 30 30 30 30 30 30 150 80 90 100 110 110 120 130 570
16 Enhanced oil recovery credit................... 300 310 320 330 330 340 350 1,670 30 30 30 30 30 30 40 160
17 New technology credit.......................... 100 180 250 270 270 270 270 1,330 0 0 0 0 0 0 0 0
18 Alcohol fuel credits \1\....................... 20 20 20 20 20 20 20 100 10 10 10 10 10 10 10 50
19 Tax credit and deduction for clean-fuel burning 50 60 40 20 -10 -60 -60 -70 20 30 30 20 0 -10 -10 30
vehicles......................................
20 Exclusion from income of conservation subsidies ....... ....... ....... ......... ......... ......... ......... ......... 80 80 80 80 80 80 80 400
provided by public utilities..................
Natural Resources and Environment
21 Expensing of exploration and development costs, 30 30 30 30 30 40 40 170 0 0 0 0 0 0 0 0
nonfuel minerals..............................
22 Excess of percentage over cost depletion, 240 240 250 260 270 270 280 1,330 20 20 20 20 20 20 20 100
nonfuel minerals..............................
23 Exclusion of interest on bonds for water, 110 110 120 120 120 130 130 620 340 370 420 460 490 520 550 2,440
sewage, and hazardous waste facilities........
24 Capital gains treatment of certain timber ....... ....... ....... ......... ......... ......... ......... ......... 100 110 110 120 120 130 140 620
income........................................
25 Expensing of multiperiod timber growing costs.. 240 250 260 260 270 280 280 1,350 120 120 120 120 130 130 130 630
26 Tax incentives for preservation of historic 160 170 180 190 200 210 220 1,000 40 40 50 50 50 50 60 260
structures....................................
Agriculture
27 Expensing of certain capital outlays........... 20 20 20 20 20 20 30 110 150 160 150 150 150 150 160 760
28 Expensing of certain multiperiod production 20 20 20 20 20 20 20 100 110 110 100 100 100 100 100 500
costs.........................................
29 Treatment of loans forgiven for solvent farmers ....... ....... ....... ......... ......... ......... ......... ......... 10 10 10 10 10 10 10 50
30 Capital gains treatment of certain income...... ....... ....... ....... ......... ......... ......... ......... ......... 1,010 1,060 1,120 1,180 1,250 1,310 1,380 6,240
31 Income averaging for farmers................... ....... ....... ....... ......... ......... ......... ......... ......... 70 70 80 80 80 90 90 420
32 Deferral of gain on sale of farm refiners...... 10 10 10 10 10 10 20 60 ......... ......... ......... ......... ......... ......... ......... .........
Commerce and Housing
Financial institutions and insurance:
33 Exemption of credit union income.............. 1,020 1,090 1,160 1,240 1,320 1,410 1,510 6,640 ......... ......... ......... ......... ......... ......... ......... .........
34 Excess bad debt reserves of financial 0 0 0 0 0 0 0 0 ......... ......... ......... ......... ......... ......... ......... .........
institutions.................................
35 Exclusion of interest on life insurance 1,770 1,800 1,830 1,860 1,890 1,920 1,950 9,450 15,920 17,330 18,910 20,610 22,500 24,430 26,360 112,810
savings......................................
36 Special alternative tax on small property and 10 10 10 10 10 10 10 50 ......... ......... ......... ......... ......... ......... ......... .........
casualty insurance companies.................
37 Tax exemption of certain insurance companies 210 220 240 250 270 280 290 1,330 ......... ......... ......... ......... ......... ......... ......... .........
owned by tax-exempt organizations............
38 Small life insurance company deduction........ 100 100 100 100 100 100 100 500 ......... ......... ......... ......... ......... ......... ......... .........
Housing:
39 Exclusion of interest on owner-occupied 210 220 230 230 240 250 260 1,210 660 740 820 910 970 1,020 1,100 4,820
mortgage subsidy bonds.......................
40 Exclusion of interest on rental housing bonds. 40 50 50 50 50 50 50 250 140 150 170 190 200 210 230 1,000
41 Deductibility of mortgage interest on owner- ....... ....... ....... ......... ......... ......... ......... ......... 63,590 65,540 68,440 71,870 74,790 78,160 82,650 375,910
occupied homes...............................
42 Deductibility of State and local property tax ....... ....... ....... ......... ......... ......... ......... ......... 21,760 22,320 22,160 19,750 16,240 14,580 13,580 86,310
on owner-occupied homes......................
[[Page 107]]
43 Deferral of income from post 1987 installment 270 280 290 290 300 300 310 1,490 780 800 810 830 840 860 880 4,220
sales........................................
44 Capital gains exclusion on home sales......... ....... ....... ....... ......... ......... ......... ......... ......... 19,670 20,260 20,860 21,490 22,140 22,800 23,480 110,770
45 Exception from passive loss rules for $25,000 ....... ....... ....... ......... ......... ......... ......... ......... 5,690 5,270 4,920 4,600 4,290 4,020 3,790 21,620
of rental loss...............................
46 Credit for low-income housing investments..... 2,630 2,760 2,910 3,060 3,190 3,330 3,490 15,980 660 690 730 760 800 830 870 3,990
47 Accelerated depreciation on rental housing 70 30 -20 -80 -160 -260 -330 -850 1,520 1,050 330 -440 -1,610 -3,050 -4,240 -9,010
(normal tax method)..........................
Commerce:
48 Cancellation of indebtedness.................. ....... ....... ....... ......... ......... ......... ......... ......... 0 10 30 50 60 60 50 250
49 Exceptions from imputed interest rules........ ....... ....... ....... ......... ......... ......... ......... ......... 50 50 50 50 50 50 50 250
50 Capital gains (except agriculture, timber, ....... ....... ....... ......... ......... ......... ......... ......... 56,060 55,010 53,930 54,550 49,870 49,760 51,450 259,560
iron ore, and coal) (normal tax method)......
51 Capital gains exclusion of small corporation ....... ....... ....... ......... ......... ......... ......... ......... 100 130 160 210 250 300 350 1,270
stock........................................
52 Step-up basis of capital gains at death....... ....... ....... ....... ......... ......... ......... ......... ......... 26,890 27,390 28,500 29,630 30,490 31,370 32,390 152,380
53 Carryover basis of capital gains on gifts..... ....... ....... ....... ......... ......... ......... ......... ......... 640 640 450 540 640 650 630 2,910
54 Ordinary income treatment of loss from small ....... ....... ....... ......... ......... ......... ......... ......... 40 40 50 50 50 50 50 250
business corporation stock sale..............
55 Accelerated depreciation of buildings other -1,710 -2,250 -1,470 -5,280 -7,440 -9,980 -12,820 -36,990 -90 -280 -510 -1,240 -1,760 -2,380 -3,000 -8,890
than rental housing (normal tax method)......
56 Accelerated depreciation of machinery and 40,670 26,390 14,140 -33,390 -29,330 -26,960 -25,000 -100,540 7,100 4,720 2,530 -5,920 -5,930 -6,300 -6,570 -22,190
equipment (normal tax method)................
57 Expensing of certain small investments (normal -140 -80 130 560 720 580 520 2,510 -220 -30 240 1,010 1,110 930 860 4,150
tax method)..................................
58 Amortization of start-up costs (normal tax 90 110 120 130 130 140 140 660 20 20 30 30 30 30 30 150
method)......................................
59 Graduated corporation income tax rate (normal 4,870 5,380 5,700 5,880 6,100 6,350 6,640 30,670 ......... ......... ......... ......... ......... ......... ......... .........
tax method)..................................
60 Exclusion of interest on small issue bonds.... 80 80 90 90 90 90 100 460 250 280 310 340 360 380 410 1,800
Transportation
61 Deferral of tax on shipping companies.......... 20 20 20 20 20 20 20 100 ......... ......... ......... ......... ......... ......... ......... .........
62 Exclusion of reimbursed employee parking ....... ....... ....... ......... ......... ......... ......... ......... 2,070 2,180 2,290 2,410 2,540 2,680 2,810 12,730
expenses......................................
63 Exclusion for employer-provided transit passes. ....... ....... ....... ......... ......... ......... ......... ......... 250 320 380 450 530 600 670 2,630
Community and Regional Development
64 Investment credit for rehabilitation of 20 20 20 20 20 20 20 100 10 10 10 10 10 10 10 50
structures (other than historic)..............
65 Exclusion of interest for airport, dock, and 170 170 180 180 190 200 200 950 520 580 650 710 760 800 860 3,780
similar bonds.................................
66 Exemption of certain mutuals' and cooperatives' 60 60 60 70 70 70 70 340 ......... ......... ......... ......... ......... ......... ......... .........
income........................................
67 Empowerment zones, Enterprise communities, and 220 300 300 320 350 390 420 1,780 510 830 870 960 1,060 1,190 1,330 5,410
Renewal communities...........................
68 New markets tax credit......................... 20 50 70 110 150 210 220 760 70 140 220 320 460 620 650 2,270
69 Expensing of environmental remediation costs... 70 70 20 -10 -10 -10 -10 -20 10 10 0 0 0 0 0 0
Education, Training, Employment, and Social
Services
Education:
70 Exclusion of scholarship and fellowship income ....... ....... ....... ......... ......... ......... ......... ......... 1,270 1,260 1,260 1,340 1,400 1,410 1,420 6,830
(normal tax method)..........................
71 HOPE tax credit............................... ....... ....... ....... ......... ......... ......... ......... ......... 4,110 3,520 2,880 2,930 2,730 2,900 2,790 14,230
72 Lifetime Learning tax credit.................. ....... ....... ....... ......... ......... ......... ......... ......... 2,180 2,250 2,980 2,840 2,610 2,820 2,860 14,110
73 Education Individual Retirement Accounts...... ....... ....... ....... ......... ......... ......... ......... ......... 50 100 160 240 330 440 560 1,730
74 Deductibility of student-loan interest........ ....... ....... ....... ......... ......... ......... ......... ......... 450 640 660 680 700 720 720 3,480
75 Deduction for higher education expenses....... ....... ....... ....... ......... ......... ......... ......... ......... 420 2,230 2,880 3,620 2,940 0 0 9,440
76 State prepaid tuition plans................... ....... ....... ....... ......... ......... ......... ......... ......... 270 340 400 470 560 660 750 2,840
77 Exclusion of interest on student-loan bonds... 60 60 60 60 70 70 70 330 180 200 230 250 270 280 300 1,330
78 Exclusion of interest on bonds for private 140 150 150 160 160 170 170 810 440 490 550 600 650 680 730 3,210
nonprofit educational facilities.............
79 Credit for holders of zone academy bonds...... 50 80 90 100 100 100 100 490 ......... ......... ......... ......... ......... ......... ......... .........
80 Exclusion of interest on savings bonds ....... ....... ....... ......... ......... ......... ......... ......... 10 10 10 10 10 20 20 70
redeemed to finance educational expenses.....
81 Parental personal exemption for students age ....... ....... ....... ......... ......... ......... ......... ......... 2,480 3,310 3,230 2,690 2,020 1,670 1,470 11,080
19 or over...................................
82 Deductibility of charitable contributions 720 700 710 830 820 810 810 3,980 3,300 3,440 3,640 3,810 4,000 4,160 4,420 20,030
(education)..................................
83 Exclusion of employer-provided educational ....... ....... ....... ......... ......... ......... ......... ......... 400 490 520 550 580 610 650 2,910
assistance...................................
Training, employment, and social services:
84 Work opportunity tax credit................... 350 490 360 160 70 30 10 630 30 70 70 30 10 10 10 130
85 Welfare-to-work tax credit.................... 70 60 70 50 30 20 10 180 10 10 10 10 10 0 0 30
[[Page 108]]
86 Employer provided child care exclusion........ ....... ....... ....... ......... ......... ......... ......... ......... 690 720 760 810 850 890 940 4,250
87 Employer-provided child care credit........... ....... ....... ....... ......... ......... ......... ......... ......... 40 90 130 140 150 160 170 750
88 Assistance for adopted foster children........ ....... ....... ....... ......... ......... ......... ......... ......... 220 250 290 330 380 430 480 1,910
89 Adoption credit and exclusion................. ....... ....... ....... ......... ......... ......... ......... ......... 140 220 450 500 540 560 570 2,620
90 Exclusion of employee meals and lodging (other ....... ....... ....... ......... ......... ......... ......... ......... 740 780 810 850 890 930 970 4,450
than military)...............................
91 Child credit \2\.............................. ....... ....... ....... ......... ......... ......... ......... ......... 22,170 21,440 21,310 22,480 24,280 23,940 23,660 115,670
92 Credit for child and dependent care expenses.. ....... ....... ....... ......... ......... ......... ......... ......... 2,750 2,910 3,230 2,860 2,380 2,190 2,050 12,710
93 Credit for disabled access expenditures....... 10 10 10 20 20 20 20 90 40 40 40 40 40 40 40 200
94 Deductibility of charitable contributions, 890 870 880 1,040 1,010 1,010 1,010 4,950 29,970 31,230 33,110 34,670 36,350 37,770 40,150 182,050
other than education and health..............
95 Exclusion of certain foster care payments..... ....... ....... ....... ......... ......... ......... ......... ......... 450 430 430 440 450 460 470 2,250
96 Exclusion of parsonage allowances............. ....... ....... ....... ......... ......... ......... ......... ......... 350 380 400 420 450 480 510 2,260
Health
97 Exclusion of employer contributions for medical ....... ....... ....... ......... ......... ......... ......... ......... 99,060 108,500 120,160 132,240 144,710 157,180 170,230 724,520
insurance premiums and medical care...........
98 Self-employed medical insurance premiums....... ....... ....... ....... ......... ......... ......... ......... ......... 1,760 2,500 3,690 3,940 4,220 4,520 4,980 21,350
99 Workers' compensation insurance premiums....... ....... ....... ....... ......... ......... ......... ......... ......... 5280 5770 6190 6630 7020 7490 8000 35,330
100 Medical Savings Accounts....................... ....... ....... ....... ......... ......... ......... ......... ......... 20 30 30 30 30 30 20 140
101 Deductibility of medical expenses.............. ....... ....... ....... ......... ......... ......... ......... ......... 5,710 6,060 6,340 6,490 6,610 6,980 7,380 33,800
102 Exclusion of interest on hospital construction 290 300 310 320 330 340 350 1,650 910 1,020 1,130 1,240 1,330 1,400 1,500 6,600
bonds.........................................
103 Deductibility of charitable contributions 870 850 860 1,010 990 980 980 4,820 3,370 3,510 3,720 3,890 4,080 4,240 4,510 20,440
(health)......................................
104 Tax credit for orphan drug research............ 140 160 180 200 220 250 280 1,130 ......... ......... ......... ......... ......... ......... ......... .........
105 Special Blue Cross/Blue Shield deduction....... 300 340 310 300 270 300 250 1,430 ......... ......... ......... ......... ......... ......... ......... .........
106 Tax credit for health insurance purchased by ....... ....... ....... ......... ......... ......... ......... ......... 0 0 60 30 40 50 60 240
certain displaced and retired individuals.....
Income Security
107 Exclusion of railroad retirement system ....... ....... ....... ......... ......... ......... ......... ......... 390 400 400 400 400 400 400 2,000
benefits......................................
108 Exclusion of workers' compensation benefits.... ....... ....... ....... ......... ......... ......... ......... ......... 5,750 6,100 6,460 6,850 7,270 7,710 8,190 36,480
109 Exclusion of public assistance benefits (normal ....... ....... ....... ......... ......... ......... ......... ......... 380 400 410 430 450 470 440 2,200
tax method)...................................
110 Exclusion of special benefits for disabled coal ....... ....... ....... ......... ......... ......... ......... ......... 70 60 60 50 50 50 40 250
miners........................................
111 Exclusion of military disability pensions...... ....... ....... ....... ......... ......... ......... ......... ......... 110 110 120 120 130 130 140 640
Net exclusion of pension contributions and
earnings:
112 Employer plans................................ ....... ....... ....... ......... ......... ......... ......... ......... 51,260 63,480 67,870 70,540 73,200 67,500 61,440 340,550
113 401(k) plans.................................. ....... ....... ....... ......... ......... ......... ......... ......... 50,830 52,920 55,290 57,830 61,490 65060 68030 307,700
114 Individual Retirement Accounts................ ....... ....... ....... ......... ......... ......... ......... ......... 19,080 20,840 23,130 22,400 22,380 20,540 19,800 108,250
115 Low and moderate income savers credit......... ....... ....... ....... ......... ......... ......... ......... ......... 850 2,050 1,860 1,670 1,510 850 0 5,890
116 Keogh plans................................... ....... ....... ....... ......... ......... ......... ......... ......... 7,000 7,282 7,616 7,904 8,166 8,402 9,196 41,284
Exclusion of other employee benefits:
117 Premiums on group term life insurance......... ....... ....... ....... ......... ......... ......... ......... ......... 1,780 1,800 1,830 1,860 1,890 1,920 1,950 9,450
118 Premiums on accident and disability insurance. ....... ....... ....... ......... ......... ......... ......... ......... 220 230 240 250 260 270 280 1,300
119 Small business retirement plan credit.......... ....... ....... ....... ......... ......... ......... ......... ......... 10 20 40 50 50 60 60 260
120 Income of trusts to finance supplementary 20 30 30 30 30 30 30 150
unemployment benefits.........................
121 Special ESOP rules............................. 1330 1400 1470 1550 1640 1720 1810 8,190 300 310 320 340 350 370 390 1,770
122 Additional deduction for the blind............. ....... ....... ....... ......... ......... ......... ......... ......... 40 40 40 40 40 40 40 200
123 Additional deduction for the elderly........... ....... ....... ....... ......... ......... ......... ......... ......... 1,890 1,950 2,050 2,120 2,180 2,110 2,030 10,490
124 Tax credit for the elderly and disabled........ ....... ....... ....... ......... ......... ......... ......... ......... 20 20 20 20 10 10 10 70
125 Deductibility of casualty losses............... ....... ....... ....... ......... ......... ......... ......... ......... 280 400 420 440 460 500 540 2,360
126 Earned income tax credit \3\................... ....... ....... ....... ......... ......... ......... ......... ......... 4,450 4,930 5,090 5,280 5,410 5,580 5,790 27,150
Social Security
Exclusion of social security benefits:
127 Social Security benefits for retired workers.. ....... ....... ....... ......... ......... ......... ......... ......... 18,340 18,560 18,930 19,210 20,000 21,100 21,550 100,790
128 Social Security benefits for disabled......... ....... ....... ....... ......... ......... ......... ......... ......... 2,910 3,210 3,570 3,950 4,360 4,870 4,390 21,140
129 Social Security benefits for dependents and ....... ....... ....... ......... ......... ......... ......... ......... 3,730 3,910 4,140 4,360 4,590 4,920 4,820 22,830
survivors....................................
Veterans Benefits and Services
130 Exclusion of veterans death benefits and ....... ....... ....... ......... ......... ......... ......... ......... 3,160 3,230 3,400 3,590 3,780 3,980 4,190 18,940
disability compensation.......................
131 Exclusion of veterans pensions................. ....... ....... ....... ......... ......... ......... ......... ......... 70 80 80 90 90 90 100 450
132 Exclusion of GI bill benefits.................. ....... ....... ....... ......... ......... ......... ......... ......... 90 90 90 100 100 110 110 510
133 Exclusion of interest on veterans housing bonds 10 10 10 10 10 10 10 50 30 30 40 40 40 50 50 220
General Purpose Fiscal Assistance
134 Exclusion of interest on public purpose State 6,170 6,360 6,550 6,750 6,950 7,160 7,370 34,780 19,080 20,420 20,760 20,970 20,860 20,370 20,990 103,950
and local bonds...............................
135 Deductibility of nonbusiness state and local ....... ....... ....... ......... ......... ......... ......... ......... 47,430 50,520 50,910 47,770 40,480 37,190 36,080 212,430
taxes other than on owner-occupied homes......
[[Page 109]]
136 Tax credit for corporations receiving income 2,240 2,240 2,240 2,200 1,300 0 0 5,740 ......... ......... ......... ......... ......... ......... ......... .........
from doing business in U.S. possessions.......
Interest
137 Deferral of interest on U.S. savings bonds..... ....... ....... ....... ......... ......... ......... ......... ......... 510 590 670 750 840 920 1,050 4,230
Addendum: Aid to State and local governments:
Deductibility of:
Property taxes on owner-occupied homes........ ....... ....... ....... ......... ......... ......... ......... ......... 21,760 22,320 22,160 19,750 16,240 14,580 13,580 86,310
Nonbusiness State and local taxes other than ....... ....... ....... ......... ......... ......... ......... ......... 47,430 50,520 50,910 47,770 40,480 37,190 36,080 212,430
on owner-occupied homes......................
Exclusion of interest on State and local bonds
for:
Public purposes............................... 6,170 6,360 6,550 6,750 6,950 7,160 7,370 34,780 19,080 20,420 20,760 20,970 20,860 20,370 20,990 103,950
Energy facilities............................. 30 30 30 30 30 30 30 150 80 90 100 110 110 120 130 570
Water, sewage, and hazardous waste disposal 110 110 120 120 120 130 130 620 340 370 420 460 490 520 550 2,440
facilities...................................
Small-issues.................................. 80 80 90 90 90 90 100 460 250 280 310 340 360 380 410 1,800
Owner-occupied mortgage subsidies............. 210 220 230 230 240 250 260 1,210 660 740 820 910 970 1,020 1,100 4,820
Rental housing................................ 40 50 50 50 50 50 50 250 140 150 170 190 200 210 230 1,000
Airports, docks, and similar facilities....... 170 170 180 180 190 200 200 950 520 580 650 710 760 800 860 3,780
Student loans................................. 60 60 60 60 70 70 70 330 180 200 230 250 270 280 300 1,330
Private nonprofit educational facilities...... 140 150 150 160 160 170 170 810 440 490 550 600 650 680 730 3,210
Hospital construction......................... 290 300 310 320 330 340 350 1,650 910 1,020 1,130 1,240 1,330 1,400 1,500 6,600
Veterans' housing............................. 10 10 10 10 10 10 10 50 30 30 40 40 40 50 50 220
Credit for holders of zone academy bonds....... 50 80 90 100 100 100 100 490 ......... ......... ......... ......... ......... ......... ......... .........
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as follows: 2002 $1,070; 2003 $1,140; 2004 $1,230; 2005 $1,320; 2006 $1,370; 2007
$1,400; and 2008 $1,430.
\2\ The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2002 $5,060; 2003 $5,870; 2004 $5,860; 2005 $5,700; 2006 $7,630; 2007
$7,630; and 2008 $7,500
\3\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2002 $27,830; 2003 $30,610; 2004 $31,380; 2005 $32,090; 2006
$33,450; 2007 $34,480; and 2008 $35,380.
Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method. All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in each
year are not included in the table.
[[Page 110]]
Table 6-3. INCOME TAX EXPENDITURES RANKED BY TOTAL 2004-2008 PROJECTED REVENUE EFFECT
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Provision 2004 2004-2008
----------------------------------------------------------------------------------------------------------------
Exclusion of employer contributions for medical insurance premiums and medical 120,160 724,520
care.........................................................................
Deductibility of mortgage interest on owner-occupied homes.................... 68,440 375,910
Net exclusion of pension contributions and earnings: Employer plans........... 67,870 340,550
Net exclusion of pension contributions and earnings: 401(k) plans............. 55,290 307,700
Capital gains (except agriculture, timber, iron ore, and coal) (normal tax 53,930 259,560
method)......................................................................
Deductibility of nonbusiness state and local taxes other than on owner- 50,910 212,430
occupied homes...............................................................
Deductibility of charitable contributions, other than education and health.... 33,990 187,000
Step-up basis of capital gains at death....................................... 28,500 152,380
Exclusion of interest on public purpose State and local bonds................. 27,310 138,730
Exclusion of interest on life insurance savings............................... 20,740 122,260
Child credit.................................................................. 21,310 115,670
Capital gains exclusion on home sales......................................... 20,860 110,770
Net exclusion of pension contributions and earnings: Individual Retirement 23,130 108,250
Accounts.....................................................................
Social Security benefits for retired workers.................................. 18,930 100,790
Deductibility of State and local property tax on owner-occupied homes......... 22,160 86,310
Deferral of income from controlled foreign corporations (normal tax method)... 7,900 44,990
Net exclusion of pension contributions and earnings: Keough Plans............. 7,616 41,284
Exclusion of workers' compensation benefits................................... 6,460 36,480
Workers' compensation insurance premiums...................................... 6,190 35,330
Deductibility of medical expenses............................................. 6,340 33,800
Extraterritorial income exclusion............................................. 5,510 31,620
Graduated corporation income tax rate (normal tax method)..................... 5,700 30,670
Earned income tax credit...................................................... 5,090 27,150
Deductibility of charitable contributions (health)............................ 4,580 25,260
Deductibility of charitable contributions (education)......................... 4,350 24,010
Social Security benefits for dependents and survivors......................... 4,140 22,830
Exception from passive loss rules for $25,000 of rental loss.................. 4,920 21,620
Self-employed medical insurance premiums...................................... 3,690 21,350
Social Security benefits for disabled......................................... 3,570 21,140
Credit for low-income housing investments..................................... 3,640 19,970
Exclusion of veterans death benefits and disability compensation.............. 3,400 18,940
Expensing of research and experimentation expenditures (normal tax method).... 2,760 18,790
Exclusion of income earned abroad by U.S. citizens............................ 2,680 14,280
HOPE tax credit............................................................... 2,880 14,230
Lifetime Learning tax credit.................................................. 2,980 14,110
Exclusion of reimbursed employee parking expenses............................. 2,290 12,730
Credit for child and dependent care expenses.................................. 3,230 12,710
Exclusion of benefits and allowances to armed forces personnel................ 2,240 11,430
Parental personal exemption for students age 19 or over....................... 3,230 11,080
Additional deduction for the elderly.......................................... 2,050 10,490
Special ESOP rules............................................................ 1,790 9,960
Credit for increasing research activities..................................... 4,990 9,830
Premiums on group term life insurance......................................... 1,830 9,450
Deduction for higher education expenses....................................... 2,880 9,440
Inventory property sales source rules exception............................... 1,620 8,970
Exclusion of interest on hospital construction bonds.......................... 1,440 8,250
Deferred taxes for financial firms on certain income earned overseas.......... 2,130 7,540
Empowerment zones, Enterprise communities, and Renewal communities............ 1,170 7,190
Exclusion of scholarship and fellowship income (normal tax method)............ 1,260 6,830
Expensing of certain small investments (normal tax method).................... 370 6,660
Exemption of credit union income.............................................. 1,160 6,640
Capital gains treatment of certain income..................................... 1,120 6,240
Exclusion of interest on owner-occupied mortgage subsidy bonds................ 1,050 6,030
Low and moderate income savers credit......................................... 1,860 5,890
Tax credit for corporations receiving income from doing business in U.S. 2,240 5,740
possessions..................................................................
Deferral of income from post 1987 installment sales........................... 1,100 5,710
Exclusion of interest for airport, dock, and similar bonds.................... 830 4,730
Exclusion of certain allowances for Federal employees abroad.................. 840 4,660
Exclusion of employee meals and lodging (other than military)................. 810 4,450
Employer provided child care exclusion........................................ 760 4,250
Exclusion of interest on bonds for private nonprofit educational facilities... 700 4,020
Deferral of interest on U.S. savings bonds.................................... 670 4,230
Deductibility of student-loan interest........................................ 660 3,480
Excess of percentage over cost depletion, fuels............................... 650 3,170
Exclusion of interest on bonds for water, sewage, and hazardous waste 540 3,060
facilities...................................................................
New markets tax credit........................................................ 290 3,030
Exclusion of employer-provided educational assistance......................... 520 2,910
Carryover basis of capital gains on gifts..................................... 450 2,910
State prepaid tuition plans................................................... 400 2,840
[[Page 111]]
Exclusion for employer-provided transit passes................................ 380 2,630
Adoption credit and exclusion................................................. 450 2,620
Deductibility of casualty losses.............................................. 420 2,360
Alternative fuel production credit............................................ 520 2,290
Exclusion of interest on small issue bonds.................................... 400 2,260
Exclusion of parsonage allowances............................................. 400 2,260
Exclusion of certain foster care payments..................................... 430 2,250
Exclusion of public assistance benefits (normal tax method)................... 410 2,200
Exclusion of railroad retirement system benefits.............................. 400 2,000
Expensing of multiperiod timber growing costs................................. 380 1,980
Assistance for adopted foster children........................................ 290 1,910
Enhanced oil recovery credit.................................................. 350 1,830
Education Individual Retirement Accounts...................................... 160 1,730
Exclusion of interest on student-loan bonds................................... 290 1,660
Special Blue Cross/Blue Shield deduction...................................... 310 1,430
Excess of percentage over cost depletion, nonfuel minerals.................... 270 1,430
New technology credit......................................................... 250 1,330
Tax exemption of certain insurance companies owned by tax-exempt organizations 240 1,330
Premiums on accident and disability insurance................................. 240 1,300
Capital gains exclusion of small corporation stock............................ 160 1,270
Tax incentives for preservation of historic structures........................ 230 1,260
Exclusion of interest on rental housing bonds................................. 220 1,250
Tax credit for orphan drug research........................................... 180 1,130
Expensing of certain capital outlays.......................................... 170 870
Amortization of start-up costs (normal tax method)............................ 150 810
Work opportunity tax credit................................................... 430 760
Employer-provided child care credit........................................... 130 750
Exclusion of interest on energy facility bonds................................ 130 720
Exclusion of military disability pensions..................................... 120 640
Capital gains treatment of royalties on coal.................................. 110 620
Capital gains treatment of certain timber income.............................. 110 620
Expensing of certain multiperiod production costs............................. 120 600
Exclusion of GI bill benefits................................................. 90 510
Small life insurance company deduction........................................ 100 500
Credit for holders of zone academy bonds...................................... 90 490
Exclusion of veterans pensions................................................ 80 450
Income averaging for farmers.................................................. 80 420
Exclusion from income of conservation subsidies provided by public utilities.. 80 400
Expensing of exploration and development costs, fuels......................... 150 360
Exemption of certain mutuals' and cooperatives' income........................ 60 340
Credit for disabled access expenditures....................................... 50 290
Exclusion of interest on veterans housing bonds............................... 50 270
Small business retirement plan credit......................................... 40 260
Exclusion of special benefits for disabled coal miners........................ 60 250
Exceptions from imputed interest rules........................................ 50 250
Ordinary income treatment of loss from small business corporation stock sale.. 50 250
Cancellation of indebtedness.................................................. 30 250
Tax credit for health insurance purchased by certain displaced and retired 60 240
individuals..................................................................
Welfare-to-work tax credit.................................................... 80 210
Additional deduction for the blind............................................ 40 200
Expensing of exploration and development costs, nonfuel minerals.............. 30 170
Alcohol fuel credits 1/....................................................... 30 150
Income of trusts to finance supplementary unemployment benefits............... 30 150
Investment credit for rehabilitation of structures (other than historic)...... 30 150
Medical Savings Accounts...................................................... 30 140
Deferral of tax on shipping companies......................................... 20 100
Tax credit for the elderly and disabled....................................... 20 70
Exclusion of interest on savings bonds redeemed to finance educational 10 70
expenses.....................................................................
Deferral of gain on sale of farm refiners..................................... 10 60
Exception from passive loss limitation for working interests in oil and gas 10 50
properties...................................................................
Treatment of loans forgiven for solvent farmers............................... 10 50
Special alternative tax on small property and casualty insurance companies.... 10 50
Expensing of environmental remediation costs.................................. 20 -20
Tax credit and deduction for clean-fuel burning vehicles...................... 70 -40
Accelerated depreciation on rental housing (normal tax method)................ 1,080 -4,570
Accelerated depreciation of buildings other than rental housing (normal tax -2,530 -15,820
method)......................................................................
Accelerated depreciation of machinery and equipment (normal tax method)....... 31,110 -31,570
----------------------------------------------------------------------------------------------------------------
[[Page 112]]
Table 6-4. PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR ACTIVITY IN CALENDAR YEAR 2002
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Present
Provision Value of
Revenue Loss
----------------------------------------------------------------------------------------------------------------
1 Deferral of income from controlled foreign corporations (normal tax method).......... 7,180
2 Deferred taxes for financial firms on income earned overseas......................... 1,740
3 Expensing of research and experimentation expenditures (normal tax method)........... 1,800
4 Expensing of exploration and development costs--fuels................................ 140
5 Expensing of exploration and development costs--nonfuels............................. 10
6 Expensing of multiperiod timber growing costs........................................ 210
7 Expensing of certain multiperiod production costs--agriculture....................... 240
8 Expensing of certain capital outlays--agriculture.................................... 270
9 Deferral of income on life insurance and annuity contracts........................... 24,210
10 Expensing of certain small investments (normal tax method)........................... 700
11 Amortization of start-up costs (normal tax method)................................... 30
12 Deferral of tax on shipping companies................................................ 20
13 Credit for holders of zone academy bonds............................................. 120
14 Credit for low-income housing investments............................................ 3,580
15 Deferral for state prepaid tuition plans............................................. 590
16 Exclusion of pension contributions--employer plans................................... 90,570
17 Exclusion of 401(k) contributions.................................................... 81,000
18 Exclusion of IRA contributions and earnings.......................................... 10,650
19 Exclusion of contributions and earnings for Keogh plans.............................. 9,290
20 Exclusion of interest on public-purpose bonds........................................ 23,560
21 Exclusion of interest on non-public purpose bonds.................................... 6,070
22 Deferral of interest on U.S. savings bonds........................................... 470
----------------------------------------------------------------------------------------------------------------
Outlay Equivalents
The concept of ``outlay equivalents'' is another theoretical measure
of the budget effect of tax expenditures. It is the amount of budget
outlays that would be required to provide the taxpayer the same after-
tax income as would be received through the tax provision. The outlay-
equivalent measure allows the cost of a tax expenditure to be compared
with a direct Federal outlay on a more even footing. Outlay equivalents
are reported in Table 6-5.
Table 6-5. OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES
(In millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Outlay Equivalents
--------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007 2008 2004-2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Defense
1 Exclusion of benefits and allowances to armed forces 2,540 2,570 2,600 2,620 2,650 2,680 2,710 13,260
personnel..............................................
International affairs:
2 Exclusion of income earned abroad by U.S. citizens...... 3,810 3,470 3,530 3,640 3,700 3,880 4,100 18,850
3 Exclusion of certain allowances for Federal employees 1,000 1,060 1,110 1,170 1,220 1,290 1,360 6,150
abroad.................................................
4 Extraterritorial income exclusion....................... 7,410 7,920 8,480 9,060 9,680 10,350 11,080 48,650
5 Inventory property sales solurce rules exception........ 2,260 2,370 2,490 2,620 2,750 2,890 3,050 13,800
6 Deferral of income from controlled foreign corporations 7,000 7,450 7,900 8,400 8,930 9,550 10,210 44,990
(normal tax method)....................................
7 Deferred taxes for financial firms on certain income 1,950 2,050 2,130 2,190 2,260 960 0 7,540
earned overseas........................................
General Science, Space, and Technology
8 Expensing of research and experimentation expenditures 1,660 2,200 2,760 3,390 3,990 4,270 4,380 18,790
(normal tax method)....................................
9 Credit for increasing research activities............... 10,560 8,670 7,680 4,470 1,910 800 260 15,120
Energy
10 Expensing of exploration and development costs, fuels... 170 180 150 80 60 50 40 380
11 Excess of percentage over cost depletion, fuels......... 850 930 810 790 840 850 850 4,140
12 Alternative fuel production credit...................... 2,100 1,260 700 700 700 700 280 3,080
13 Exception from passive loss limitation for working 0
interests in oil and gas properties....................
14 Capital gains treatment of royalties on coal............ 130 140 150 160 170 170 180 830
15 Exclusion of interest on energy facility bonds.......... 160 170 180 200 200 210 230 1,020
16 Enhanced oil recovery credit............................ 540 560 570 590 600 620 630 3,010
17 New technology credit................................... 140 240 330 350 360 360 370 1,770
18 Alcohol fuel credits \1\................................ 30 30 30 30 30 30 30 150
19 Tax credit and deduction for clean-fuel burning vehicles 100 120 100 60 -10 -90 -100 -40
20 Exclusion from income of conservation subsidies provided 100 110 110 110 110 100 100 530
by public utilities....................................
Natural Resources and Environment
[[Page 113]]
21 Expensing of exploration and development costs, nonfuel 40 40 40 40 50 50 50 230
minerals...............................................
22 Excess of percentage over cost depletion, nonfuel 330 340 350 360 370 380 390 1,850
minerals...............................................
23 Exclusion of interest on bonds for water, sewage, and 640 690 780 840 880 930 980 4,410
hazardous waste facilities.............................
24 Capital gains treatment of certain timber income........ 130 140 150 160 170 170 180 830
25 Expensing of multiperiod timber growing costs........... 470 480 490 510 520 530 540 2,590
26 Tax incentives for preservation of historic structures.. 200 210 220 240 250 260 270 1,240
Agriculture
27 Expensing of certain capital outlays.................... 220 230 210 210 210 210 230 1,070
28 Expensing of certain multiperiod production costs....... 160 160 150 150 140 140 140 720
29 Treatment of loans forgiven for solvent farmers......... 10 10 10 10 10 10 10 50
30 Capital gains treatment of certain income............... 1,350 1,420 1,500 1,580 1,660 1,750 1,840 8,330
31 Income averaging for farmers............................ 90 90 100 100 100 100 110 510
32 Deferral of gain on sale of farm refiners............... 10 10 10 10 10 10 20 60
Commerce and Housing
Financial institutions and insurance:
33 Exemption of credit union income....................... 1,300 1,380 1,480 1,580 1,690 1,800 1,920 8,470
34 Excess bad debt reserves of financial institutions..... 0 0 0 0 0 0 0 0
35 Exclusion of interest on life insurance savings........ 19,630 21,230 23,010 24,940 27,060 29,250 31,420 135,680
36 Special alternative tax on small property and casualty 10 10 10 10 10 10 10 50
insurance companies...................................
37 Tax exemption of certain insurance companies owned by 290 310 330 350 370 390 400 1,840
tax-exempt organizations..............................
38 Small life insurance company deduction................. 120 120 120 120 120 120 120 600
Housing:
39 Exclusion of interest on owner-occupied mortgage 1,250 1,380 1,510 1,640 1,730 1,830 1,950 8,660
subsidy bonds.........................................
40 Exclusion of interest on rental housing bonds.......... 260 290 320 350 360 370 400 1,800
41 Deductibility of mortgage interest on owner-occupied 63,590 65,540 68,440 71,870 74,790 78,160 82,650 375,910
homes.................................................
42 Deductibility of State and local property tax on owner- 21,760 22,320 22,160 19,750 16,240 14,580 13,580 86,310
occupied homes........................................
43 Deferral of income from post 1987 installment sales.... 1,040 1,060 1,080 1,100 1,120 1,140 1,170 5,610
44 Capital gains exclusion on home sales.................. 24,580 25,320 26,080 26,860 27,670 28,500 29,350 138,460
45 Exception from passive loss rules for $25,000 of rental 5,690 5,270 4,920 4,600 4,290 4,020 3,790 21,620
loss..................................................
46 Credit for low-income housing investments.............. 4,450 4,670 4,920 5,170 5,390 5,620 5,900 27,000
47 Accelerated depreciation on rental housing (normal tax 1,590 1,080 310 -510 -1,770 -3,310 -4,570 -9,860
method)...............................................
Commerce:
48 Cancellation of indebtedness........................... 0 10 30 50 60 60 50 250
49 Exceptions from imputed interest rules................. 50 50 50 50 50 50 50 250
50 Capital gains (except agriculture, timber, iron ore, 74,750 73,350 71,910 72,730 66,490 66,340 68,590 346,060
and coal) (normal tax method).........................
51 Capital gains exclusion of small corporation stock..... 130 170 220 270 340 400 460 1,690
52 Step-up basis of capital gains at death................ 35,850 36,520 38,000 39,500 40,650 41,830 43,190 203,170
53 Carryover basis of capital gains on gifts.............. 640 640 450 540 640 650 630 2,910
54 Ordinary income treatment of loss from small business 50 50 60 60 60 60 60 300
corporation stock sale................................
55 Accelerated depreciation of buildings other than rental -1,800 -2,530 -1,980 -6,520 -9,200 -12,360 -15,820 -45,880
housing (normal tax method)...........................
56 Accelerated depreciation of machinery and equipment 47,770 31,110 16,670 -39,310 -35,260 -33,260 -31,570 -122,730
(normal tax method)...................................
57 Expensing of certain small investments (normal tax -360 -110 370 1,570 1,830 1,510 1,380 6,660
method)...............................................
58 Amortization of start-up costs (normal tax method)..... 110 130 150 160 160 170 170 810
59 Graduated corporation income tax rate (normal tax 7,490 8,280 8,770 9,040 9,380 9,770 10,210 47,170
method)...............................................
60 Exclusion of interest on small issue bonds............. 470 520 570 610 640 670 730 3,220
Transportation
61 Deferral of tax on shipping companies................... 20 20 20 20 20 20 20 100
62 Exclusion of reimbursed employee parking expenses....... 2,710 2,860 3,020 3,190 3,360 3,550 3,730 16,850
63 Exclusion for employer-provided transit passes.......... 310 400 480 560 660 750 840 3,290
Community and Regional Development
64 Investment credit for rehabilitation of structures 30 30 30 30 30 30 30 150
(other than historic)..................................
65 Exclusion of interest for airport, dock, and similar 30 30 30 30 30 30 30 150
bonds..................................................
66 Exemption of certain mutuals' and cooperatives' income.. 60 60 60 70 70 70 70 340
67 Empowerment zones, Enterprise communities and Renewal 730 1,120 1,170 1,280 1,410 1,580 1,750 7,190
communities............................................
68 New markets tax credit.................................. 90 190 300 420 610 830 870 3,030
69 Expensing of environmental remediation costs............ 110 110 40 -20 -10 -10 -10 -10
Education, Training, Employment, and Social Services
Education:
70 Exclusion of scholarship and fellowship income (normal 1,390 1,390 1,380 1,480 1,540 1,550 1,560 7,510
tax method)...........................................
71 HOPE tax credit........................................ 5,270 4,510 3,690 3,760 3,500 3,720 3,580 18,250
72 Lifetime Learning tax credit........................... 2,790 2,880 3,820 3,640 3,340 3,610 3,660 18,070
73 Education Individual Retirement Accounts............... 60 120 190 280 390 520 660 2,040
74 Deductibility of student-loan interest................. 540 760 790 820 840 850 860 4,160
75 Deduction for higher education expenses................ 540 2,860 3,700 4,640 3,760 0 0 12,100
76 State prepaid tuition plans............................ 270 340 400 470 560 660 750 2,840
[[Page 114]]
77 Exclusion of interest on student-loan bonds............ 340 370 410 440 490 510 530 2,380
78 Exclusion of interest on bonds for private nonprofit 830 920 1,010 1,090 1,160 1,220 1,300 5,780
educational facilities................................
79 Credit for holders of zone academy bonds............... 70 110 130 140 150 150 150 720
80 Exclusion of interest on savings bonds redeemed to 20 20 20 20 20 20 20 100
finance educational expenses..........................
81 Parental personal exemption for students age 19 or over 2,750 3,670 3,570 2,980 2,240 1,850 1,630 12,270
82 Deductibility of charitable contributions (education).. 5,670 5,830 6,130 6,560 6,800 7,000 7,380 33,870
83 Exclusion of employer-provided educational assistance.. 500 610 650 680 720 760 800 3,610
Training, employment, and social services:..............
84 Work opportunity tax credit............................ 380 560 430 190 80 40 20 760
85 Welfare-to-work tax credit............................. 80 70 80 60 40 20 10 210
86 Exclusion of employer provided child care.............. 920 960 1,010 1,080 1,130 1,190 1,250 5,660
87 Employer-provided child care........................... 60 120 170 190 200 220 230 840
88 Assistance for adopted foster children................. 250 280 330 370 420 480 540 2,140
89 Adoption credit and exclusion.......................... 180 280 570 640 690 710 730 3,340
90 Exclusion of employee meals and lodging (other than 910 950 990 1030 1080 1130 1180 5,410
military).............................................
91 Child credit \2\....................................... 29,560 28,590 28,410 29,970 32,370 31,920 31,550 154,220
92 Credit for child and dependent care expenses........... 3,670 3,880 4,310 3,810 3,170 2,920 2,730 16,940
93 Credit for disabled access expenditures................ 60 70 70 70 80 80 80 380
94 Deductibility of charitable contributions, other than 42,840 44,510 47,190 49,550 51,910 53,760 57,280 259,690
education and health..................................
95 Exclusion of certain foster care payments.............. 520 490 500 510 520 530 540 2,600
96 Exclusion of parsonage allowances...................... 430 460 490 520 550 580 620 2,760
Health
97 Exclusion of employer contributions for medical 128,510 140,330 155,930 172,140 188,900 205,820 223,620 946,410
insurance premiums and medical care....................
98 Self-employed medical insurance premiums................ 2,200 3,110 4,590 4,870 5,200 5,560 6,150 26,370
99 Workers' compensation insurance premiums................ 6,580 7,200 7,710 8,250 8,720 9,300 9,950 43,930
100 Medical Savings Accounts................................ 30 30 40 40 40 40 30 190
101 Deductibility of medical expenses....................... 6,210 6,600 6,910 7,050 7,160 7,560 7,990 36,670
102 Exclusion of interest on hospital construction bonds.... 1,720 1,900 2,070 2,240 2,390 2,500 2,660 11,860
103 Deductibility of charitable contributions (health)...... 5,990 6,160 6,470 6,940 7,180 7,380 7,770 35,740
104 Tax credit for orphan drug research..................... 210 240 270 300 330 370 420 1,690
105 Special Blue Cross/Blue Shield deduction................ 400 450 410 400 360 400 330 1,900
106 Tax credit for health insurance purchased by certain 0 0 70 40 50 60 70 290
displaced and retired individuals......................
Income Security
107 Exclusion of railroad retirement system benefits........ 390 400 400 400 400 400 400 2,000
108 Exclusion of workers' compensation benefits............. 5,750 6,100 6,460 6,850 7,270 7,710 8,190 36,480
109 Exclusion of public assistance benefits (normal tax 380 400 410 430 450 470 440 2,200
method)................................................
110 Exclusion of special benefits for disabled coal miners.. 70 60 60 50 50 50 40 250
111 Exclusion of military disability pensions............... 110 110 120 120 130 130 140 640
Net exclusion of pension contributions and earnings:....
112 Employer plans......................................... 63,280 77,890 82,770 86,020 89,270 82,320 74,930 415,310
113 401(k) plans........................................... 62,750 64,930 67,430 70,520 74,990 79,340 82,960 375,240
114 Individual Retirement Accounts......................... 25,790 28,010 30,690 29,930 29,420 27,630 26,730 144,400
115 Low and moderate income savers credit.................. 20 30 30 30 30 30 30 150
116 Keogh plans............................................ 8,943 9,272 9,661 9,976 10,259 10,521 11,516 51,933
Exclusion of other employee benefits:...................
117 Premiums on group term life insurance.................. 2360 2400 2440 2480 2520 2560 2610 12,610
118 Premiums on accident and disability insurance.......... 290 310 320 330 350 360 370 1,730
119 Small business retirement plan credit.................. 10 20 40 50 50 60 60 260
120 Income of trusts to finance supplementary unemployment 20 30 30 30 30 30 30 150
benefits..............................................
121 Special ESOP rules..................................... 2,220 2,340 2,450 2,580 2,720 2,860 2,990 13,600
122 Additional deduction for the blind..................... 40 50 50 50 50 50 50 250
123 Additional deduction for the elderly................... 2,290 2,360 2,480 2,570 2,630 2,550 2,460 12,690
124 Tax credit for the elderly and disabled................ 30 20 20 20 20 20 10 90
125 Deductibility of casualty losses....................... 310 440 460 480 510 500 540 2,490
126 Earned income tax credit \3\........................... 4,930 5,470 5,660 5,860 6,010 6,200 6,430 30,160
Social Security
Exclusion of social security benefits:..................
127 Social Security benefits for retired workers........... 18,340 18,560 18,930 19,210 20,000 21,100 21,550 100,790
128 Social Security benefits for disabled.................. 2,910 3,210 3,570 3,950 4,360 4,870 4,390 21,140
129 Social Security benefits for dependents and survivors.. 3,730 3,910 4,140 4,360 4,590 4,920 4,820 22,830
Veterans Benefits and Services..........................
130 Exclusion of veterans death benefits and disability 3,160 3,230 3,400 3,590 3,780 3,980 4,190 18,940
compensation..........................................
131 Exclusion of veterans pensions......................... 70 80 80 90 90 90 100 450
132 Exclusion of GI bill benefits.......................... 90 90 90 100 100 110 110 510
133 Exclusion of interest on veterans housing bonds........ 50 50 70 70 70 80 80 370
[[Page 115]]
General Purpose Fiscal Assistance
134 Exclusion of interest on public purpose State and local 36,190 38,400 39,160 39,740 39,850 39,430 40,630 198,810
bonds..................................................
135 Deductibility of nonbusiness state and local taxes other 47,430 50,520 50,910 47,770 40,480 37,190 36,080 212,430
than on owner-occupied homes...........................
136 Tax credit for corporations receiving income from doing 3,190 3,190 3,190 3,140 1,860 0 0 8,190
business in U.S. possessions...........................
Interest
137 Deferral of interest on U.S. savings bonds.............. 510 590 670 750 840 920 1,050 4,230
Addendum: Aid to State and local governments:
Deductibility of:
Property taxes on owner-occupied homes................. 21,760 22,320 22,160 19,750 16,240 14,580 13,580 86,310
Nonbusiness State and local taxes other than on owner- 47,430 50,520 50,910 47,770 40,480 37,190 36,080 212,430
occupied homes........................................
Exclusion of interest on State and local bonds for:
Public purposes........................................ 36,190 38,400 39,160 39,740 39,850 39,430 40,630 198,810
Energy facilities...................................... 160 170 180 200 200 210 230 1,020
Water, sewage, and hazardous waste disposal facilities. 640 690 780 840 880 930 980 4,410
Small-issues........................................... 470 520 570 610 640 670 730 3,220
Owner-occupied mortgage subsidies...................... 1,250 1,380 1,510 1,640 1,730 1,830 1,950 8,660
Rental housing......................................... 260 290 320 350 360 370 400 1,800
Airports, docks, and similar facilities................ 30 30 30 30 30 30 30 150
Student loans.......................................... 340 370 410 440 490 510 530 2,380
Private nonprofit educational facilities............... 830 920 1,010 1,090 1,160 1,220 1,300 5,780
Hospital construction.................................. 1,720 1,900 2,070 2,240 2,390 2,500 2,660 11,860
Veterans' housing...................................... 50 50 70 70 70 80 80 370
Credit for holders of zone academy bonds............... 70 110 130 140 150 150 150 720
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as
follows: 2002 $1,070; 2003 $1,140; 2004 $1,230; 2005 $1,320; 2006 $1,370; 2007 $1,400; and 2008 $1,430.
\2\ The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as
follows: 2001 $980; 2002 $5,060 2003 $5,870; 2004 $5,860; 2005 $5,700; 2006 $7,630; 2007 $7,630; and 2008 $7,500
\3\ The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of
dollars) is as follows: 2002 $27,830; 2003 $30,610; 2004 $31,380; 2005 $32,090; 2006 $33,450; 2007 $34,480; and 2008 $35,380.
Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method.
All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.
Tax Expenditure Baselines
A tax expenditure is an exception to baseline provisions of the tax
structure. The 1974 Congressional Budget Act, which mandated the tax
expenditure budget, did not specify the baseline provisions of the tax
law. As noted previously, deciding whether provisions are exceptions,
therefore, is a matter of judgment. As in prior years, this year's tax
expenditure estimates are presented using two baselines: the normal tax
baseline and the reference tax law baseline.
The normal tax baseline is patterned on a comprehensive income tax,
which defines income as the sum of consumption and the change in net
wealth in a given period of time. The normal tax baseline allows
personal exemptions, a standard deduction, and deductions of the
expenses incurred in earning income. It is not limited to a particular
structure of tax rates, or by a specific definition of the taxpaying
unit.
The reference tax law baseline is also patterned on a comprehensive
income tax, but it is closer to existing law. Tax expenditures under the
reference law baseline are always tax expenditures under the normal tax
baseline, but the reverse is not always true.
Both the normal and reference tax baselines allow several major
departures from a pure comprehensive income tax. For example:
Income is taxable only when it is realized in exchange.
Thus, neither the deferral of tax on unrealized capital gains
nor the tax exclusion of imputed income (such as the rental
value of owner-occupied housing or farmers' consumption of
their own produce) is regarded as a tax expenditure. Imputed
income would be taxed under a comprehensive income tax, and
all income would be taxed as it accrued.
There is a separate corporation income tax. Under a
comprehensive income tax, corporate income would be taxed only
once--at the shareholder level, whether or not distributed in
the form of dividends. (This budget proposes to eliminate the
double taxation of corporate income.)
Values of assets and debt are not generally adjusted for
inflation. A comprehensive income tax would adjust the cost
basis of capital assets and debt for changes in the price
level during the time the assets or debt are held. Thus, under
a comprehensive income tax baseline, the failure to take
account of inflation in measuring depreciation, capital gains,
and interest income would be regarded as a negative tax
expenditure (i.e., a tax penalty), and failure to take account
of inflation in measuring interest costs would be regarded as
a positive tax expenditure (i.e., a tax subsidy).
[[Page 116]]
Although the reference law and normal tax baselines are generally
similar, areas of difference include:
(1) Tax rates. The separate schedules applying to the various
taxpaying units are included in the reference law baseline. Thus,
corporate tax rates below the maximum statutory rate do not give rise to
a tax expenditure. The normal tax baseline is similar, except that it
specifies the current maximum rate as the baseline for the corporate
income tax. The lower tax rates applied to the first $10 million of
corporate income are thus regarded as a tax expenditure. Similarly,
under the reference law baseline, preferential tax rates for capital
gains generally do not yield a tax expenditure; only capital gains
treatment of otherwise ``ordinary income,'' such as that from coal and
iron ore royalties and the sale of timber and certain agricultural
products, is considered a tax expenditure. The alternative minimum tax
is treated as part of the baseline rate structure under both the
reference and normal tax methods.
(2) Income subject to the tax. Income subject to tax is defined as
gross income less the costs of earning that income. The Federal income
tax defines gross income to include: (1) consideration received in the
exchange of goods and services, including labor services or property;
and (2) the taxpayer's share of gross or net income earned and/or
reported by another entity (such as a partnership). Under the reference
tax rules, therefore, gross income does not include gifts defined as
receipts of money or property that are not consideration in an
exchange--or most transfer payments, which can be thought of as gifts
from the Government.\1\ The normal tax baseline also excludes gifts
between individuals from gross income. Under the normal tax baseline,
however, all cash transfer payments from the Government to private
individuals are counted in gross income, and exemptions of such
transfers from tax are identified as tax expenditures. The costs of
earning income are generally deductible in determining taxable income
under both the reference and normal tax baselines.\2\
---------------------------------------------------------------------------
\1\ Gross income does, however, include transfer payments associated
with past employment, such as Social Security benefits.
\2\ In the case of individuals who hold ``passive'' equity interests
in businesses, however, the pro-rata shares of sales and expense
deductions reportable in a year are limited. A passive business activity
is defined to be one in which the holder of the interest, usually a
partnership interest, does not actively perform managerial or other
participatory functions. The taxpayer may generally report no larger
deductions for a year than will reduce taxable income from such
activities to zero. Deductions in excess of the limitation may be taken
in subsequent years, or when the interest is liquidated. In addition,
costs of earning income may be limited under the alternative minimum
tax.
---------------------------------------------------------------------------
(3) Capital recovery. Under the reference tax law baseline no tax
expenditures arise from accelerated depreciation. Under the normal tax
baseline, the depreciation allowance for property is computed using
estimates of economic depreciation. The latter represents a change in
the calculation of the tax expenditure under normal law in the 2004
Budget. The Appendix provides further details on the new methodology and
how it differs from the prior methodology.
(4) Treatment of foreign income. Both the normal and reference tax
baselines allow a tax credit for foreign income taxes paid (up to the
amount of U.S. income taxes that would otherwise be due), which prevents
double taxation of income earned abroad. Under the normal tax method,
however, controlled foreign corporations (CFCs) are not regarded as
entities separate from their controlling U.S. shareholders. Thus, the
deferral of tax on income received by CFCs is regarded as a tax
expenditure under this method. In contrast, except for tax haven
activities, the reference law baseline follows current law in treating
CFCs as separate taxable entities whose income is not subject to U.S.
tax until distributed to U.S. taxpayers. Under this baseline, deferral
of tax on CFC income is not a tax expenditure because U.S. taxpayers
generally are not taxed on accrued, but unrealized, income.
In addition to these areas of difference, the Joint Committee on
Taxation considers a somewhat broader set of tax expenditures under its
normal tax baseline than is considered here.
Performance Measures and the Economic Effects of Tax Expenditures
The Government Performance and Results Act of 1993 (GPRA) directs
Federal agencies to develop annual and strategic plans for their
programs and activities. These plans set out performance objectives to
be achieved over a specific time period. Most of these objectives will
be achieved through direct expenditure programs. Tax expenditures,
however, may also contribute to achieving these goals. The report of the
Senate Governmental Affairs Committee on GPRA \3\ calls on the Executive
branch to undertake a series of analyses to assess the effect of
specific tax expenditures on the achievement of agencies' performance
objectives.
---------------------------------------------------------------------------
\3\ Committee on Government Affairs, United States Senate,
``Government Performance and Results Act of 1993'' (Report 103-58,
1993).
---------------------------------------------------------------------------
The Executive Branch is continuing to focus on the availability of
data needed to assess the effects of the tax expenditures designed to
increase savings. Treasury's Office of Tax Analysis and Statistics of
Income Division (IRS) have developed a new sample of individual income
tax filers as one part of this effort. This new ``panel'' sample will
follow the same taxpayers over a period of at least ten years. The first
year of this panel sample was drawn from tax returns filed in 2000 for
tax year 1999. The sample will capture the changing demographic and
economic circumstances of individuals and the effects of changes in tax
law over an extended period of time. Data from the sample will therefore
permit more extensive, and better, analyses of many tax provisions than
can be performed using only annual (``cross-section'') data. In
particular, data from this panel sample will enhance our ability to
analyze the effect of tax expenditures designed to increase savings.
Other efforts by OMB, Treasury, and other agencies to improve data
available for the analysis of tax expenditures will continue over the
next several years.
Comparison of tax expenditure, spending, and regulatory policies. Tax
expenditures by definition work through the tax system and,
particularly, the in
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come tax. Thus, they may be relatively advantageous policy approaches
when the benefit or incentive is related to income and is intended to be
widely available. \4\ Because there is an existing public administrative
and private compliance structure for the tax system, the incremental
administrative and compliance costs for a tax expenditure may be low in
many cases. In addition, some tax expenditures actually simplify the tax
system, (for example, the exclusion for up to $500,000 of capital gains
on home sales).
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\4\ Although this section focuses upon tax expenditures under the
income tax, tax expenditures also arise under the unified transfer,
payroll, and excise tax systems. Such provisions can be useful when they
relate to the base of those taxes, such as an excise tax exemption for
certain types of consumption deemed meritorious.
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Tax expenditures also have important limitations. In many cases they
add to the complexity of the tax system, which raises both
administrative and compliance costs. For example, targeting personal
exemptions and credits can complicate filing and decisionmaking. The
income tax system may have little or no contact with persons who have no
or very low incomes, and does not require information on certain
characteristics of individuals used in some spending programs, such as
wealth. Verifying eligibility criteria can be costly. The tax system
also operates on the basis of annual income and it may be poorly
targeted when taxpayer characteristics change within the course of a
year. These features may reduce the effectiveness of tax expenditures
for addressing certain income-transfer objectives. Tax expenditures also
generally do not enable the same degree of agency discretion as an
outlay program. For example, grant or direct Federal service delivery
programs can prioritize activities to be addressed with specific
resources in a way that is difficult to emulate with tax expenditures.
Tax expenditures may not receive the same level of scrutiny afforded to
other programs.
Outlay programs have advantages where direct government service
provision is particularly warranted--such as equipping and providing the
armed forces or administering the system of justice. Outlay programs may
also be specifically designed to meet the needs of low-income families
who would not otherwise be subject to income taxes or need to file a tax
return. Outlay programs may also receive more year-to-year oversight and
fine tuning, through the legislative and executive budget process. In
addition, many different types of spending programs--including direct
government provision; credit programs; and payments to State and local
governments, the private sector, or individuals in the form of grants or
contracts--provide flexibility for policy design. On the other hand,
certain outlay programs--such as direct government service provision--
may rely less directly on economic incentives and private-market
provision than tax incentives, which may reduce the relative efficiency
of spending programs for some goals. Spending programs require resources
to be raised via taxes, user charges, or government borrowing, which can
impose further costs by diverting resources from their most efficient
uses, but tax expenditures can have similar effects by requiring
government to make up for lost revenue. Finally, spending programs,
particularly on the discretionary side, may respond less readily to
changing activity levels and economic conditions than tax expenditures.
Regulations have more direct and immediate effects than outlay and
tax-expenditure programs because regulations apply directly and
immediately to the regulated party (i.e., the intended actor)--generally
in the private sector. Regulations can also be fine-tuned more quickly
than tax expenditures, because they can generally be changed by the
executive branch without legislation. Like tax expenditures, regulations
often rely largely upon voluntary compliance, rather than detailed
inspections and policing. As such, the public administrative costs tend
to be modest, relative to the private resource costs associated with
modifying activities. Historically, regulations have tended to rely on
proscriptive measures, as opposed to economic incentives. This reliance
can diminish their economic efficiency, although this feature can also
promote full compliance where (as in certain safety-related cases)
policymakers believe that trade-offs with economic considerations are
not of paramount importance. Also, regulations generally do not directly
affect Federal outlays or receipts. Thus, like tax expenditures, they
may escape the type of scrutiny that outlay programs receive. However,
most regulations are subjected to a formal benefit-cost analysis that
goes well beyond the analysis required for outlays and tax-expenditures.
To some extent, the GPRA requirement for performance evaluation will
address this lack of formal analysis.
Some policy objectives are achieved using multiple approaches. For
example, minimum wage legislation, the earned income tax credit, and the
food stamp program are regulatory, tax expenditure, and direct outlay
programs, respectively, all having the objective of improving the
economic welfare of low-wage workers.
Tax expenditures, like spending and regulatory programs, have a
variety of objectives and effects. These include: encouraging certain
types of activities (e.g., saving for retirement or investing in certain
sectors); increasing certain types of after-tax income (e.g., favorable
tax treatment of Social Security income); reducing private compliance
costs and government administrative costs (e.g., the exclusion for up to
$500,000 of capital gains on home sales); and promoting tax neutrality
(e.g., accelerated depreciation in the presence of inflation). Some of
these objectives are well suited to quantitative measurement, while
others are less well suited. Also, many tax expenditures, including
those cited above, may have more than one objective. For example,
accelerated depreciation may encourage investment. In addition, the
economic effects of particular provisions can extend beyond their
intended objectives (e.g., a provision intended to promote an activity
or raise certain incomes may have positive or negative effects on tax
neutrality).
Performance measurement is generally concerned with inputs, outputs,
and outcomes. In the case of tax expenditures, the principal input is
usually the revenue effect. Outputs are quantitative or qualitative
measures
[[Page 118]]
of goods and services, or changes in income and investment, directly
produced by these inputs. Outcomes, in turn, represent the changes in
the economy, society, or environment that are the ultimate goals of
programs.
Thus, for a provision that reduces taxes on certain investment
activity, an increase in the amount of investment would likely be a key
output. The resulting production from that investment, and, in turn, the
associated improvements in national income, welfare, or security, could
be the outcomes of interest. For other provisions, such as those
designed to address a potential inequity or unintended consequence in
the tax code, an important performance measure might be how they change
effective tax rates (the discounted present-value of taxes owed on new
investments or incremental earnings) or excess burden (an economic
measure of the distortions caused by taxes). Effects on the incomes of
members of particular groups may be an important measure for certain
provisions.
An overview of evaluation issues by budget function. The discussion
below considers the types of measures that might be useful for some
major programmatic groups of tax expenditures. The discussion is
intended to be illustrative and not all encompassing. However, it is
premised on the assumption that the data needed to perform the analysis
are available or can be developed. In practice, data availability is
likely to be a major challenge, and data constraints may limit the
assessment of the effectiveness of many provisions. In addition, such
assessments can raise significant challenges in economic modeling.
National defense.--Some tax expenditures are intended to assist
governmental activities. For example, tax preferences for military
benefits reflect, among other things, the view that benefits such as
housing, subsistence, and moving expenses are intrinsic aspects of
military service, and are provided, in part, for the benefit of the
employer, the U.S. Government. Tax benefits for combat service are
intended to reduce tax burdens on military personnel undertaking
hazardous service for the Nation. A portion of the tax expenditure
associated with foreign earnings is targeted to benefit U.S. Government
civilian personnel working abroad by offsetting the living costs that
can be higher than those in the United States. These tax expenditures
should be considered together with direct agency budget costs in making
programmatic decisions.
International affairs.--Tax expenditures are also aimed at goals such
as tax neutrality. These include the exclusion for income earned abroad
by nongovernmental employees and exclusions for income of U.S.-
controlled foreign corporations. Measuring the effectiveness of these
provisions raises challenging issues.
General science, space and technology; energy; natural resources and
the environment; agriculture; and commerce and housing.--A series of tax
expenditures reduces the cost of investment, both in specific
activities--such as research and experimentation, extractive industries,
and certain financial activities--and more generally, through
accelerated depreciation for plant and equipment. These provisions can
be evaluated along a number of dimensions. For example, it could be
useful to consider the strength of the incentives by measuring their
effects on the cost of capital (the interest rate which investments must
yield to cover their costs) and effective tax rates. The impact of these
provisions on the amounts of corresponding forms of investment (e.g.,
research spending, exploration activity, equipment) might also be
estimated. In some cases, such as research, there is evidence that the
investment can provide significant positive externalities--that is,
economic benefits that are not reflected in the market transactions
between private parties. It could be useful to quantify these
externalities and compare them with the size of tax expenditures.
Measures could also indicate the effects on production from these
investments--such as numbers or values of patents, energy production and
reserves, and industrial production. Issues to be considered include the
extent to which the preferences increase production (as opposed to
benefitting existing output) and their cost-effectiveness relative to
other policies. Analysis could also consider objectives that are more
difficult to measure but still are ultimate goals, such as promoting the
Nation's technological base, energy security, environmental quality, or
economic growth. Such an assessment is likely to involve tax analysis as
well as consideration of non-tax matters such as market structure,
scientific, and other information (such as the effects of increased
domestic fuel production on imports from various regions, or the effects
of various energy sources on the environment).
Housing investment also benefits from tax expenditures. The mortgage
interest deduction on personal residences is reported as a tax
expenditure because the value of owner-occupied housing services is not
included in a taxpayer's taxable income. Taxpayers also may exclude up
to $500,000 of the capital gains from the sale of personal residences.
Measures of the effectiveness of these provisions could include their
effects on increasing the extent of home ownership and the quality of
housing.. Similarly, analysis of the extent of accumulated inflationary
gains is likely to be relevant to evaluation of the capital gains for
home sales. Deductibility of State and local property taxes assists with
making housing more affordable as well as easing the cost of providing
community services through these taxes. Provisions intended to promote
investment in rental housing could be evaluated for their effects on
making such housing more available and affordable. These provisions
should then be compared with alternative programs that address housing
supply and demand.
Transportation.--Employer-provided parking is a fringe benefit that,
for the most part, is excluded from taxation. The tax expenditure
estimates reflect the cost of parking that is leased by employers for
employees; an estimate is not currently available for the value
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of parking owned by employers and provided to their employees. The
exclusion for employer-provided transit passes is intended to promote
use of this mode of transportation, which has environmental and
congestion benefits. The tax treatments of these different benefits
could be compared with alternative transportation policies.
Community and regional development.--A series of tax expenditures is
intended to promote community and regional development by reducing the
costs of financing specialized infrastructure, such as airports, docks,
and stadiums. Empowerment zone and enterprise community provisions are
designed to promote activity in disadvantaged areas. These provisions
can be compared with grants and other policies designed to spur economic
development.
Education, training, employment, and social services.--Major
provisions in this function are intended to promote post-secondary
education, to offset costs of raising children, and to promote a variety
of charitable activities. The education incentives can be compared with
loans, grants, and other programs designed to promote higher education
and training. The child credits are intended to adjust the tax system
for the costs of raising children; as such, they could be compared to
other Federal tax and spending policies, including related features of
the tax system, such as personal exemptions (which are not defined as a
tax expenditure). Evaluation of charitable activities requires
consideration of the beneficiaries of these activities, who are
generally not the parties receiving the tax reduction.
Health.--Individuals also benefit from favorable treatment of
employer-provided health insurance. Measures of these benefits could
include increased coverage and pooling of risks. The effects of
insurance coverage on final outcome measures of actual health (e.g.,
infant mortality, days of work lost due to illness, or life expectancy)
or intermediate outcomes (e.g., use of preventive health care or health
care costs) could also be investigated. A potentially negative outcome
of this tax expenditure is that the subsidy may lead to excessive health
care spending for these who are covered.
Income security, Social Security, and veterans benefits and
services.--Major tax expenditures in the income security function
benefit retirement savings, through employer-provided pensions,
individual retirement accounts, and Keogh plans. These provisions might
be evaluated in terms of their effects on boosting retirement incomes,
private savings, and national savings (which would include the effect on
private savings as well as public savings or deficits). Interactions
with other programs, including Social Security, also may merit analysis.
As in the case of employer-provided health insurance, analysis of
employer-provided pension programs requires imputing the value of
benefits funded at the firm level to individuals.
Other provisions principally affect the incomes of members of certain
groups, rather than affecting incentives. For example, tax-favored
treatment of Social Security benefits, certain veterans benefits, and
deductions for the blind and elderly provide increased incomes to
eligible parties. The earned-income tax credit, in contrast, should be
evaluated for its effects on labor force participation as well as the
income it provides lower-income workers.
General purpose fiscal assistance and interest.--The tax-exemption for
public purpose State and local bonds reduces the costs of borrowing for
a variety of purposes (borrowing for non-public purposes is reflected
under other budget functions). The deductibility of certain State and
local taxes reflected under this function primarily relates to personal
income taxes (property tax deductibility is reflected under the commerce
and housing function). Tax preferences for Puerto Rico and other U.S.
possessions are also included here. These provisions can be compared
with other tax and spending policies as means of benefitting fiscal and
economic conditions in the States, localities, and possessions. Finally,
the tax deferral for interest on U.S. savings bonds benefits savers who
invest in these instruments. The extent of these benefits and any
effects on Federal borrowing costs could be evaluated.
The above illustrative discussion, although broad, is nevertheless
incomplete, omitting important details both for the provisions mentioned
and the many that are not explicitly cited. Developing a framework that
is sufficiently comprehensive, accurate, and flexible to reflect the
objectives and effects of the wide range of tax expenditures will be a
significant challenge. OMB, Treasury, and other agencies will work
together, as appropriate, to address this challenge. As indicated above,
over the next few years the Executive Branch's focus will be on the
availability of the data needed to assess the effects of the tax
expenditures designed to increase savings.
Descriptions of Income Tax Provisions
Descriptions of the individual and corporate income tax expenditures
reported upon in this chapter follow. These descriptions relate to
current law as of December 31, 2002, and do not reflect proposals made
elsewhere in the Budget.
National Defense
1. Benefits and allowances to armed forces personnel.--The housing and
meals provided military personnel, either in cash or in kind, as well as
certain amounts of pay related to combat service, are excluded from
income subject to tax.
International Affairs
2. Income earned abroad.--U.S. citizens who lived abroad, worked in
the private sector, and satisfied a foreign residency requirement in
2002 may exclude up to $80,000 in foreign earned income from U.S. taxes.
[[Page 120]]
In addition, if these taxpayers receive a specific allowance for foreign
housing from their employers, they may also exclude the value of that
allowance. If they do not receive a specific allowance for housing
expenses, they may deduct against their U.S. taxes that portion of such
expenses that exceeds one-sixth the salary of a civil servant at grade
GS-14, step 1 ($67,765 in 2002).
3. Exclusion of certain allowances for Federal employees abroad.--U.S.
Federal civilian employees and Peace Corps members who work outside the
continental United States are allowed to exclude from U.S. taxable
income certain special allowances they receive to compensate them for
the relatively high costs associated with living overseas. The
allowances supplement wage income and cover expenses like rent,
education, and the cost of travel to and from the United States.
4. Extraterritorial income exclusion \5\.--For purposes of calculating
U.S. tax liability, a taxpayer may exclude from gross income the
qualifying foreign trade income attributable to foreign trading gross
receipts. The exclusion generally applies to income from the sale or
lease of qualifying foreign trade property and certain types of services
income. The FSC Repeal and Extraterritorial Income Exclusion Act of 2000
created the extraterritorial income exclusion to replace the foreign
sales corporation provisions, which the Act repealed. The exclusion is
generally available for transactions entered into after September 30,
2000.
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\5\ The determination of whether a provision is a tax expenditure is
made on the basis of a broad concept of ``income'' that is larger in
scope than is ``income'' as defined under general U.S. income tax
principles. For that reason, the tax expenditure estimates include, for
example, estimates related to the exclusion of extraterritorial income,
as well as other exclusions, notwithstanding that such exclusions define
income under the general rule of U.S. income taxation.
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5. Sales source rule exceptions.--The worldwide income of U.S. persons
is taxable by the United States and a credit for foreign taxes paid is
allowed. The amount of foreign taxes that can be credited is limited to
the pre-credit U.S. tax on the foreign source income. The sales source
rules for inventory property allow U.S. exporters to use more foreign
tax credits by allowing the exporters to attribute a larger portion of
their earnings abroad than would be the case if the allocation of
earnings was based on actual economic activity.
6. Income of U.S.-controlled foreign corporations.--The income of
foreign corporations controlled by U.S. shareholders is not subject to
U.S. taxation. The income becomes taxable only when the controlling U.S.
shareholders receive dividends or other distributions from their foreign
stockholding. Under the normal tax method, the currently attributable
foreign source pre-tax income from such a controlling interest is
considered to be subject to U.S. taxation, whether or not distributed.
Thus, the normal tax method considers the amount of controlled foreign
corporation income not distributed to a U.S. shareholder as tax-deferred
income.
7. Exceptions under subpart F for active financing income.--Financial
firms can defer taxes on income earned overseas in an active business.
Taxes on income earned through December 31, 2006 can be deferred.
General Science, Space, and Technology
8. Expensing R&E expenditures.--Research and experimentation (R&E)
projects can be viewed as investments because, if successful, their
benefits accrue for several years. It is often difficult, however, to
identify whether a specific R&E project is successful and, if
successful, what its expected life will be. Under the normal tax method,
the expensing of R&E expenditures is viewed as a tax expenditure. The
baseline assumed for the normal tax method is that all R&E expenditures
are successful and have an expected life of five years.
9. R&E credit.--The research and experimentation (R&E) credit is 20
percent of qualified research expenditures in excess of a base amount.
The base amount is generally determined by multiplying a ``fixed-base
percentage'' by the average amount of the company's gross receipts for
the prior four years. The taxpayer's fixed base percentage generally is
the ratio of its research expenses to gross receipts for 1984 through
1988. Taxpayers may also elect an alternative credit regime. Under the
alternative credit regime the taxpayer is assigned a three-tiered fixed-
base percentage that is lower than the fixed-base percentage that would
otherwise apply, and the credit rate is reduced (the rates range from
2.65 percent to 3.75 percent). A 20-percent credit with a separate
threshold is provided for a taxpayer's payments to universities for
basic research. The credit applies to research conducted before July 1,
2004 and extends to research conducted in Puerto Rico and the U.S.
possessions.
Energy
10. Exploration and development costs.--For successful investments in
domestic oil and gas wells, intangible drilling costs (e.g., wages, the
costs of using machinery for grading and drilling, the cost of
unsalvageable materials used in constructing wells) may be expensed
rather than amortized over the productive life of the property.
Integrated oil companies may deduct only 70 percent of such costs and
must amortize the remaining 30 percent over five years. The same rule
applies to the exploration and development costs of surface stripping
and the construction of shafts and tunnels for other fuel minerals.
11. Percentage depletion.--Independent fuel mineral producers and
royalty owners are generally allowed to take percentage depletion
deductions rather than cost depletion on limited quantities of output.
Under cost depletion, outlays are deducted over the productive life of
the property based on the fraction of the resource extracted. Under
percentage depletion, taxpayers deduct a percentage of gross income from
mineral production at rates of 22 percent for uranium; 15 percent for
oil, gas and oil shale; and 10 percent for coal. The deduction is
limited to 50 percent of net income from the property, except for oil
and gas where the deduction can be 100 percent of net property income.
Production from geothermal deposits is eligible for percentage depletion
at 65 percent of net income, but with no limit on output and no
limitation with respect to qualified
[[Page 121]]
producers. Unlike depreciation or cost depletion, percentage depletion
deductions can exceed the cost of the investment.
12. Alternative fuel production credit.--A nontaxable credit of $3 per
oil-equivalent barrel of production (in 1979 dollars) is provided for
several forms of alternative fuels. The credit is generally available if
the price of oil stays below $29.50 (in 1979 dollars). The credit
generally expires on December 31, 2002.
13. Oil and gas exception to passive loss limitation.--Owners of
working interests in oil and gas properties are exempt from the
``passive income'' limitations. As a result, the working interest-
holder, who manages on behalf of himself and all other owners the
development of wells and incurs all the costs of their operation, may
aggregate negative taxable income from such interests with his income
from all other sources.
14. Capital gains treatment of royalties on coal.--Sales of certain
coal under royalty contracts can be treated as capital gains rather than
ordinary income.
15. Energy facility bonds.--Interest earned on State and local bonds
used to finance construction of certain energy facilities is tax-exempt.
These bonds are generally subject to the State private-activity bond
annual volume cap.
16. Enhanced oil recovery credit.--A credit is provided equal to 15
percent of the taxpayer's costs for tertiary oil recovery on U.S.
projects. Qualifying costs include tertiary injectant expenses,
intangible drilling and development costs on a qualified enhanced oil
recovery project, and amounts incurred for tangible depreciable
property.
17. New technology credits.--A credit of 10 percent is available for
investment in solar and geothermal energy facilities. In addition, a
credit of 1.5 cents is provided per kilowatt hour of electricity
produced from renewable resources such as wind, biomass, and poultry
waste facilities. The renewable resources credit applies only to
electricity produced by a facility placed in service on or before
December 31, 2004.
18. Alcohol fuel credits.--An income tax credit is provided for
ethanol that is derived from renewable sources and used as fuel. The
credit equals 53 cents per gallon in 2001 and 2002; 52 cents per gallon
in 2003 and 2004; and 51 cents per gallon in 2005, 2006, and 2007. To
the extent that ethanol is mixed with taxable motor fuel to create
gasohol, taxpayers may claim an exemption of the Federal excise tax
rather than the income tax credit. In addition, small ethanol producers
are eligible for a separate 10 cents per gallon credit.
19. Credit and deduction for clean-fuel vehicles and property.--A tax
credit of 10 percent (not to exceed $4,000) is provided for purchasers
of electric vehicles. Purchasers of other clean-fuel burning vehicles
and owners of clean-fuel refueling property may deduct part of their
expenditures. The credit and deduction are phased out from 2004 through
2007,.
20. Exclusion of utility conservation subsidies.--Non-business
customers can exclude from gross income subsidies received from public
utilities for expenditures on energy conservation measures.
Natural Resources and Environment
21. Exploration and development costs.--Certain capital outlays
associated with exploration and development of nonfuel minerals may be
expensed rather than depreciated over the life of the asset.
22. Percentage depletion.--Most nonfuel mineral extractors may use
percentage depletion rather than cost depletion, with percentage
depletion rates ranging from 22 percent for sulfur to 5 percent for sand
and gravel.
23. Sewage, water, solid and hazardous waste facility bonds.--Interest
earned on State and local bonds used to finance the construction of
sewage, water, or hazardous waste facilities is tax-exempt. These bonds
are generally subject to the State private-activity bond annual volume
cap.
24. Capital gains treatment of certain timber.--Certain timber sold
under a royalty contract can be treated as a capital gain rather than
ordinary income.
25. Expensing multiperiod timber growing costs.--Most of the
production costs of growing timber may be expensed rather than
capitalized and deducted when the timber is sold. In most other
industries, these costs are capitalized under the uniform capitalization
rules.
26. Historic preservation.--Expenditures to preserve and restore
historic structures qualify for a 20-percent investment credit, but the
depreciable basis must be reduced by the full amount of the credit
taken.
Agriculture
27. Expensing certain capital outlays.--Farmers, except for certain
agricultural corporations and partnerships, are allowed to expense
certain expenditures for feed and fertilizer, as well as for soil and
water conservation measures. Expensing is allowed, even though these
expenditures are for inventories held beyond the end of the year, or for
capital improvements that would otherwise be capitalized.
28. Expensing multiperiod livestock and crop production costs.--The
production of livestock and crops with a production period of less than
two years is exempt from the uniform cost capitalization rules. Farmers
establishing orchards, constructing farm facilities for their own use,
or producing any goods for sale with a production period of two years or
more may elect not to capitalize costs. If they do, they must apply
straight-line depreciation to all depreciable property they use in
farming.
29. Loans forgiven solvent farmers.--Farmers are forgiven the tax
liability on certain forgiven debt. Normally, a debtor must include the
amount of loan forgiveness as income or reduce his recoverable basis in
the property to which the loan relates. If the debtor elects to reduce
basis and the amount of forgiveness exceeds his basis in the property,
the excess forgiveness is taxable. For insolvent (bankrupt) debtors,
however,
[[Page 122]]
the amount of loan forgiveness reduces carryover losses, then unused
credits, and then basis; any remainder of the forgiven debt is excluded
from tax. Farmers with forgiven debt are considered insolvent for tax
purposes, and thus qualify for income tax forgiveness.
30. Capital gains treatment of certain income.--Certain agricultural
income, such as unharvested crops, can be treated as capital gains
rather than ordinary income.
31. Income averaging for farmers.--Taxpayers can lower their tax
liability by averaging, over the prior three-year period, their taxable
income from farming.
32. Deferral of gain on sales of farm refiners.--A taxpayer who sells
stock in a farm refiner to a farmers' cooperative can defer recognition
of gain if the taxpayer reinvests the proceeds in qualified replacement
property.
Commerce and Housing
This category includes a number of tax expenditure provisions that
also affect economic activity in other functional categories. For
example, provisions related to investment, such as accelerated
depreciation, could be classified under the energy, natural resources
and environment, agriculture, or transportation categories.
33. Credit union income.--The earnings of credit unions not
distributed to members as interest or dividends are exempt from income
tax.
34. Bad debt reserves.--Small (less than $500 million in assets)
commercial banks, mutual savings banks, and savings and loan
associations may deduct additions to bad debt reserves in excess of
actually experienced losses.
35. Deferral of income on life insurance and annuity contracts.--
Favorable tax treatment is provided for investment income within
qualified life insurance and annuity contracts. Investment income earned
on qualified life insurance contracts held until death is permanently
exempt from income tax. Investment income distributed prior to the death
of the insured is tax-deferred, if not tax-exempt. Investment income
earned on annuities is treated less favorably than income earned on life
insurance contracts, but it benefits from tax deferral without annual
contribution or income limits generally applicable to other tax-favored
retirement income plans.
36. Small property and casualty insurance companies.--Insurance
companies that have annual net premium incomes of less than $350,000 are
exempt from tax; those with $350,000 to $2.1 million of net premium
incomes may elect to pay tax only on the income earned by their
investment portfolio.
37. Insurance companies owned by exempt organizations.--Generally, the
income generated by life and property and casualty insurance companies
is subject to tax, albeit by special rules. Insurance operations
conducted by such exempt organizations as fraternal societies and
voluntary employee benefit associations, however, are exempt from tax.
38. Small life insurance company deduction.--Small life insurance
companies (gross assets of less than $500 million) can deduct 60 percent
of the first $3 million of otherwise taxable income. The deduction
phases out for otherwise taxable income between $3 million and $15
million.
39. Mortgage housing bonds.--Interest earned on State and local bonds
used to finance homes purchased by first-time, low-to-moderate-income
buyers is tax-exempt. The amount of State and local tax-exempt bonds
that can be issued to finance these and other private activity is
limited. The combined volume cap for private activity bonds, including
mortgage housing bonds, rental housing bonds, student loan bonds, and
industrial development bonds is $62.50 per capita ($187.5 million
minimum) per State in 2001, and $75 per capita ($225 million minimum) in
2002. The Community Renewal Tax Relief Act of 2000 accelerated the
scheduled increase in the state volume cap and indexed the cap for
inflation, beginning in 2003. States may issue mortgage credit
certificates (MCCs) in lieu of mortgage revenue bonds. MCCs entitle home
buyers to income tax credits for a specified percentage of interest on
qualified mortgages. The total amount of MCCs issued by a State cannot
exceed 25 percent of its annual ceiling for mortgage-revenue bonds.
40. Rental housing bonds.--Interest earned on State and local
government bonds used to finance multifamily rental housing projects is
tax-exempt. At least 20 percent (15 percent in targeted areas) of the
units must be reserved for families whose income does not exceed 50
percent of the area's median income; or 40 percent for families with
incomes of no more than 60 percent of the area median income. Other tax-
exempt bonds for multifamily rental projects are generally issued with
the requirement that all tenants must be low or moderate income
families. Rental housing bonds are subject to the volume cap discussed
in the mortgage housing bond section above.
41. Interest on owner-occupied homes.--Owner-occupants of homes may
deduct mortgage interest on their primary and secondary residences as
itemized nonbusiness deductions. The mortgage interest deduction is
limited to interest on debt no greater than the owner's basis in the
residence and, for debt incurred after October 13, 1987, it is limited
to no more than $1 million. Interest on up to $100,000 of other debt
secured by a lien on a principal or second residence is also deductible,
irrespective of the purpose of borrowing, provided the debt does not
exceed the fair market value of the residence. Mortgage interest
deductions on personal residences are tax expenditures because the value
of owner-occupied housing services is not included in a taxpayer's
taxable income. The Appendix provides an alternative calculation of the
tax expenditure based on the implicit rental income on owner-occupied
housing, which is generally viewed as a more accurate measure of the tax
expenditure relative to a comprehensive income tax base.
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42. Taxes on owner-occupied homes.--Owner-occupants of homes may
deduct property taxes on their primary and secondary residences even
though they are not required to report the value of owner-occupied
housing services as gross income.
43. Installment sales.--Dealers in real and personal property (i.e.,
sellers who regularly hold property for sale or resale) cannot defer
taxable income from installment sales until the receipt of the loan
repayment. Nondealers (i.e., sellers of real property used in their
business) are required to pay interest on deferred taxes attributable to
their total installment obligations in excess of $5 million. Only
properties with sales prices exceeding $150,000 are includable in the
total. The payment of a market rate of interest eliminates the benefit
of the tax deferral. The tax exemption for nondealers with total
installment obligations of less than $5 million is, therefore, a tax
expenditure.
44. Capital gains exclusion on home sales.--A homeowner can exclude
from tax up to $500,000 ($250,000 for singles) of the capital gains from
the sale of a principal residence. The exclusion may not be used more
than once every two years.
45. Passive loss real estate exemption.--In general, passive losses
may not offset income from other sources. Losses up to $25,000
attributable to certain rental real estate activity, however, are exempt
from this rule.
46. Low-income housing credit.--Taxpayers who invest in certain low-
income housing are eligible for a tax credit. The credit rate is set so
that the present value of the credit is equal to 70 percent for new
construction and 30 percent for (1) housing receiving other Federal
benefits (such as tax-exempt bond financing), or (2) substantially
rehabilitated existing housing. The credit is allowed in equal amounts
over 10 years. State agencies determine who receives the credit; States
are limited in the amount of credit they may authorize annually. The
Community Renewal Tax Relief Act of 2000 increased the per-resident
limit to $1.50 in 2001 and to $1.75 in 2002 and indexed the limit for
inflation, beginning in 2003. The Act also created a $2 million minimum
annual cap for small States beginning in 2002; the cap is indexed for
inflation, beginning in 2003.
47. Accelerated depreciation of rental property.--The tax depreciation
allowance provisions are part of the reference law rules, and thus do
not give rise to tax expenditures under the reference method. Under the
normal tax method, however, economic depreciation is assumed. This
calculation is described in more detail in the Appendix.
48. Cancellation of indebtedness.--Individuals are not required to
report the cancellation of certain indebtedness as current income. If
the canceled debt is not reported as current income, however, the basis
of the underlying property must be reduced by the amount canceled.
49. Imputed interest rules.--Holders (issuers) of debt instruments are
generally required to report interest earned (paid) in the period it
accrues, not when paid. In addition, the amount of interest accrued is
determined by the actual price paid, not by the stated principal and
interest stipulated in the instrument. In general, any debt associated
with the sale of property worth less than $250,000 is excepted from the
general interest accounting rules. This general $250,000 exception is
not a tax expenditure under reference law but is under normal law.
Exceptions above $250,000 are a tax expenditure under reference law;
these exceptions include the following: (1) sales of personal residences
worth more than $250,000, and (2) sales of farms and small businesses
worth between $250,000 and $1 million.
50. Capital gains (other than agriculture, timber, iron ore, and
coal).--Capital gains on assets held for more than 1 year are taxed at a
lower rate than ordinary income. The lower rate on capital gains is
considered a tax expenditure under the normal tax method but not under
the reference law method.
For most assets held for more than 1 year, the top capital gains tax
rate is 20 percent. For assets acquired after December 31, 2000, the top
capital gains tax rate for assets held for more than 5 years is 18
percent. On January 1, 2001, taxpayers were permitted to mark-to-market
existing assets to start the 5-year holding period. Losses from the
mark-to-market are not recognized. For assets held for more than 1 year
by taxpayers in the 15-percent ordinary tax bracket, the top capital
gains tax rate is 10 percent. After December 31, 2000, the top capital
gains tax rate for assets held by these taxpayers for more than 5 years
is 8 percent.
51. Capital gains exclusion for small business stock.--An exclusion of
50 percent is provided for capital gains from qualified small business
stock held by individuals for more than 5 years. A qualified small
business is a corporation whose gross assets do not exceed $50 million
as of the date of issuance of the stock.
52. Step-up in basis of capital gains at death.--Capital gains on
assets held at the owner's death are not subject to capital gains taxes.
The cost basis of the appreciated assets is adjusted upward to the
market value at the owner's date of death. After repeal of the estate
tax under EGTRRA for 2010, the basis for property acquired from a
decedent will be the lesser of fair market value or the decedent's
basis. Certain types of additions to basis will be allowed so that
assets in most estates that are not currently subject to estate tax will
not be subject to capital gains tax in the hands of the heirs.
53. Carryover basis of capital gains on gifts.--When a gift is made,
the donor's basis in the transferred property (the cost that was
incurred when the transferred property was first acquired) carries-over
to the donee. The carryover of the donor's basis allows a continued
deferral of unrealized capital gains. Even though the estate tax is
repealed for 2010 under EGTRRA, the gift tax is retained with a lifetime
exemption of $1 million.
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54. Ordinary income treatment of losses from sale of small business
corporate stock shares.--Up to $100,000 in losses from the sale of small
business corporate stock (capitalization less than $1 million) may be
treated as ordinary losses. Such losses would, thus, not be subject to
the $3,000 annual capital loss write-off limit.
55. Accelerated depreciation of non-rental-housing buildings.--The tax
depreciation allowance provisions are part of the reference law rules,
and thus do not give rise to tax expenditures under reference law. Under
normal law, however, economic depreciation is assumed. This calculation
is described in more detail in the Appendix.
56. Accelerated depreciation of machinery and equipment.--The tax
depreciation allowance provisions are part of the reference law rules,
and thus do not give rise to tax expenditures under reference law. Under
the normal tax baseline, this tax depreciation allowance is measured
relative to economic depreciation. This calculation is described in more
detail in the Appendix.
57. Expensing of certain small investments.--In 2002, qualifying
investments in tangible property up to $24,000 can be expensed rather
than depreciated over time. The expensing limit increases to $25,000 in
2003. To the extent that qualifying investment during the year exceeds
$200,000, the amount eligible for expensing is decreased. In 2002, the
amount expensed is completely phased out when qualifying investments
exceed $224,000.
58. Business start-up costs.--When taxpayers enter into a new
business, certain start-up expenses, such as the cost of legal services,
are normally incurred. Taxpayers may elect to amortize these outlays
over 60 months even though they are similar to other payments made for
nondepreciable intangible assets that are not recoverable until the
business is sold. The normal tax method treats this amortization as a
tax expenditure; the reference tax method does not.
59. Graduated corporation income tax rate schedule.--The corporate
income tax schedule is graduated, with rates of 15 percent on the first
$50,000 of taxable income, 25 percent on the next $25,000, and 34
percent on the next $9.925 million. Compared with a flat 34-percent
rate, the lower rates provide an $11,750 reduction in tax liability for
corporations with taxable income of $75,000. This benefit is recaptured
for corporations with taxable incomes exceeding $100,000 by a 5-percent
additional tax on corporate incomes in excess of $100,000 but less than
$335,000.
The corporate tax rate is 35 percent on income over $10 million.
Compared with a flat 35-percent tax rate, the 34-percent rate provides a
$100,000 reduction in tax liability for corporations with taxable
incomes of $10 million. This benefit is recaptured for corporations with
taxable incomes exceeding $15 million by a 3-percent additional tax on
income over $15 million but less than $18.33 million. Because the
corporate rate schedule is part of reference tax law, it is not
considered a tax expenditure under the reference method. A flat
corporation income tax rate is taken as the baseline under the normal
tax method; therefore the lower rates is considered a tax expenditure
under this concept.
60. Small issue industrial development bonds.--Interest earned on
small issue industrial development bonds (IDBs) issued by State and
local governments to finance manufacturing facilities is tax-exempt.
Depreciable property financed with small issue IDBs must be depreciated,
however, using the straight-line method. The annual volume of small
issue IDBs is subject to the unified volume cap discussed in the
mortgage housing bond section above.
Transportation
61. Deferral of tax on U.S. shipping companies.--Certain companies
that operate U.S. flag vessels can defer income taxes on that portion of
their income used for shipping purposes, primarily construction,
modernization and major repairs to ships, and repayment of loans to
finance these investments. Once indefinite, the deferral has been
limited to 25 years since January 1, 1987.
62. Exclusion of employee parking expenses.--Employee parking expenses
that are paid for by the employer or that are received in lieu of wages
are excludable from the income of the employee. In 2002, the maximum
amount of the parking exclusion is $185 (indexed) per month. The tax
expenditure estimate does not include parking at facilities owned by the
employer.
63. Exclusion of employee transit pass expenses.--Transit passes,
tokens, fare cards, and vanpool expenses paid for by an employer or
provided in lieu of wages to defray an employee's commuting costs are
excludable from the employee's income. In 2002, the maximum amount of
the exclusion is $100 (indexed) per month.
Community and Regional Development
64. Rehabilitation of structures.--A 10-percent investment tax credit
is available for the rehabilitation of buildings that are used for
business or productive activities and that were erected before 1936 for
other than residential purposes. The taxpayer's recoverable basis must
be reduced by the amount of the credit.
65. Airport, dock, and similar facility bonds.--Interest earned on
State and local bonds issued to finance high-speed rail facilities and
government-owned airports, docks, wharves, and sport and convention
facilities is tax-exempt. These bonds are not subject to a volume cap.
66. Exemption of income of mutuals and cooperatives.--The incomes of
mutual and cooperative telephone and electric companies are exempt from
tax if at least 85 percent of their revenues are derived from patron
service charges.
67. Empowerment zones, enterprise communities, and renewal
communities.--Qualifying businesses in designated economically depressed
areas can receive tax
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benefits such as an employer wage credit, increased expensing of
investment in equipment, special tax-exempt financing, accelerated
depreciation, and certain capital gains incentives. The Job Creation and
Worker Assistance Act of 2002 expanded the existing provisions by adding
the ``New York City Liberty Zone.'' In addition, certain first-time
buyers of a principal residence in the District of Columbia can receive
a tax credit on homes purchased on or before December 31, 2003, and
investors in certain D.C. property can receive a capital gains break.
The Community Renewal Tax Relief Act of 2000 created the renewal
communities tax benefits, which begin on January 1, 2002 and expire on
December 31, 2009. The Act also created additional empowerment zones,
increased the tax benefits for empowerment zones, and extended the
expiration date of (1) empowerment zones from December 31, 2004 to
December 31, 2009, and (2) the D.C. home-buyer credit from December 31,
2001 to December 31, 2003.
68. New markets tax credit.--Taxpayers who invest in a community
development entity (CDE) after December 31, 2000 are eligible for a tax
credit. The total equity investment available for the credit across all
CDEs is $1.0 billion in 2001, $1.5 billion in 2002 and 2003, $2.0
billion in 2004 and 2005, and $3.5 billion in 2006 and 2007. The amount
of the credit equals (1) 5 percent in the year of purchase and the
following 2 years, and (2) 6 percent in the following 4 years. A CDE is
any domestic firm whose primary mission is to serve or provide
investment capital for low-income communities/individuals; a CDE must be
accountable to residents of low-income communities. The Community
Renewal Tax Relief Act of 2000 created the new markets tax credit.
69. Expensing of environmental remediation costs.--Taxpayers who clean
up certain hazardous substances at a qualified site may expense the
clean-up costs, rather than capitalize the costs, even though the
expenses will generally increase the value of the property significantly
or appreciably prolong the life of the property. The expensing only
applies to clean-up costs incurred on or before December 31, 2003. The
Community Renewal Tax Relief Act of 2000 extended the expiration date
from December 31, 2001 to December 31, 2003. The Act also expanded the
number of qualified sites.
Education, Training, Employment, and Social Services
70. Scholarship and fellowship income.--Scholarships and fellowships
are excluded from taxable income to the extent they pay for tuition and
course-related expenses of the grantee. Similarly, tuition reductions
for employees of educational institutions and their families are not
included in taxable income. From an economic point of view, scholarships
and fellowships are either gifts not conditioned on the performance of
services, or they are rebates of educational costs. Thus, under the
reference law method, this exclusion is not a tax expenditure because
this method does not include either gifts or price reductions in a
taxpayer's gross income. The exclusion, however, is considered a tax
expenditure under the normal tax method, which includes gift-like
transfers of government funds in gross income (many scholarships are
derived directly or indirectly from government funding).
71. HOPE tax credit.--The non-refundable HOPE tax credit allows a
credit for 100 percent of an eligible student's first $1,000 of tuition
and fees and 50 percent of the next $1,000 of tuition and fees. The
credit only covers tuition and fees paid during the first two years of a
student's post-secondary education. In 2002, the credit is phased out
ratably for taxpayers with modified AGI between $82,000 and $102,000
($41,000 and $51,000 for singles) (indexed beginning in 2002).
72. Lifetime Learning tax credit.--The non-refundable Lifetime
Learning tax credit allows a credit for 20 percent of an eligible
student's tuition and fees. For tuition and fees paid before January 1,
2003, the maximum credit per return is $1,000. For tuition and fees paid
after December 31, 2002, the maximum credit per return is $2,000. The
credit is phased out ratably for taxpayers with modified AGI between
$82,000 and $102,000 ($41,000 and $51,000 for singles) (indexed
beginning in 2002). The credit applies to both undergraduate and
graduate students.
73. Deduction for Higher Education Expenses.--The tax code provides a
new above-the-line deduction for qualified higher education expenses.
The maximum annual deduction is $3,000 beginning in 2002 for taxpayers
with adjusted gross income up to $130,000 on a joint return ($65,000 for
singles). The maximum deduction increases to $4,000 in 2004. Taxpayers
with adjusted gross income up to $160,000 on a joint return ($80,000 for
singles) may deduct up to $2,000 beginning in 2004. No deduction is
allowed for expenses paid after December 31, 2005.
74. Education Individual Retirement Accounts.--Contributions to an
education IRA are not tax-deductible. Investment income earned by
education IRAs is not taxed when earned, and investment income from an
education IRA is tax-exempt when withdrawn to pay for a student's
tuition and fees. The maximum contribution is $2,000 and the phase-out
range for joint filers is $190,000 through $220,000 of modified AGI,
double the range of singles. Elementary and secondary school expenses
may also be paid tax-free from such accounts.
75. Student-loan interest.--Taxpayers may claim an above-the-line
deduction of up to $2,500 on interest paid on an education loan.
Interest may only be deducted for the first five years in which interest
payments are required.
76. State prepaid tuition plans.--Some States have adopted prepaid
tuition plans and prepaid room and board plans, which allow persons to
pay in advance for college expenses for designated beneficiaries.
Beginning in 2002, investment income is not taxed when earned, and is
tax-exempt when withdrawn to pay for qualified expenses.
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77. Student-loan bonds.--Interest earned on State and local bonds
issued to finance student loans is tax-exempt. The volume of all such
private activity bonds that each State may issue annually is limited.
78. Bonds for private nonprofit educational institutions.--Interest
earned on State and local government bonds issued to finance the
construction of facilities used by private nonprofit educational
institutions is not taxed.
79. Credit for holders of zone academy bonds.--Financial institutions
that own zone academy bonds receive a non-refundable tax credit (at a
rate set by the Treasury Department) rather than interest. The credit is
included in gross income. Proceeds from zone academy bonds may only be
used to renovate, but not construct, qualifying schools and for certain
other school purposes. The total amount of zone academy bonds that may
be issued is limited to $1.6 billion--$400 million in each year from
1998 to 2003.
80. U.S. savings bonds for education.--Interest earned on U.S. savings
bonds issued after December 31, 1989 is tax-exempt if the bonds are
transferred to an educational institution to pay for educational
expenses. The tax exemption is phased out for taxpayers with AGI between
$86,400 and $116,400 ($57,600 and $72,600 for singles) in 2002.
81. Dependent students age 19 or older.--Taxpayers may claim personal
exemptions for dependent children age 19 or over who (1) receive
parental support payments of $1,000 or more per year, (2) are full-time
students, and (3) do not claim a personal exemption on their own tax
returns.
82. Charitable contributions to educational institutions.--Taxpayers
may deduct contributions to nonprofit educational institutions.
Taxpayers who donate capital assets to educational institutions can
deduct the assets' current value without being taxed on any appreciation
in value. An individual's total charitable contribution generally may
not exceed 50 percent of adjusted gross income; a corporation's total
charitable contributions generally may not exceed 10 percent of pre-tax
income.
83. Employer-provided educational assistance.--Employer-provided
educational assistance is excluded from an employee's gross income even
though the employer's costs for this assistance are a deductible
business expense.
84. Work opportunity tax credit.--Employers can claim a tax credit for
qualified wages paid to individuals who begin work on or before December
31, 2004 and who are certified as members of various targeted groups.
The amount of the credit that can be claimed is 25 percent for
employment of less than 400 hours and 40 percent for employment of 400
hours or more. The maximum credit per employee is $2,400 and can only be
claimed on the first year of wages an individual earns from an employer.
Employers must reduce their deduction for wages paid by the amount of
the credit claimed.
85. Welfare-to-work tax credit.--An employer is eligible for a tax
credit on the first $20,000 of eligible wages paid to qualified long-
term family assistance recipients during the first two years of
employment. The credit is 35 percent of the first $10,000 of wages in
the first year of employment and 50 percent of the first $10,000 of
wages in the second year of employment. The maximum credit is $8,500 per
employee. The credit applies to wages paid to employees who are hired on
or before December 31, 2004.
86. Employer-provided child care exclusion.--Employer-provided child
care is excluded from an employee's gross income even though the
employer's costs for the child care are a deductible business expense.
87. Employer-provided child care credit.--Employers can deduct
expenses for supporting child care or child care resource and referral
services. A tax credit to employers for qualified expenses began in
2002. The credit is equal to 25 percent of qualified expenses for
employee child care and 10 percent of qualified expenses for child care
resource and referral services. Employer deductions for such expenses
are reduced by the amount of the credit. The maximum total credit is
limited to $150,000 per taxable year.
88. Assistance for adopted foster children.--Taxpayers who adopt
eligible children from the public foster care system can receive monthly
payments for the children's significant and varied needs and a
reimbursement of up to $2,000 for nonrecurring adoption expenses. These
payments are excluded from gross income.
89. Adoption credit and exclusion.--Taxpayers can receive a
nonrefundable tax credit for qualified adoption expenses. The maximum
credit is $5,000 per child ($6,000 for special needs adoptions) for
2001. The credit is phased-out ratably for taxpayers with modified AGI
between $150,000 and $190,000 in 2002. EGTRRA increased the maximum
credit for non-special needs children to $10,000, set a flat credit
amount of $10,000 for special needs children, and increased the start
point of the phase-out to $150,000 beginning in 2002. The credit amounts
and the phase-out thresholds are indexed for inflation beginning in
2003. Unused credits may be carried forward and used during the five
subsequent years. Taxpayers may also exclude qualified adoption expenses
from income, subject to the same maximum amounts and phase-out as the
credit. The same expenses cannot qualify for tax benefits under both
programs; however, a taxpayer may use the benefits of the exclusion and
the tax credit for different expenses. Stepchild adoptions are not
eligible for either benefit. Both the credit and the exclusion were made
permanent by EGTRRA.
90. Employer-provided meals and lodging.--Employer-provided meals and
lodging are excluded from an employee's gross income even though the
employer's costs for these items are a deductible business expense.
91. Child credit.--Taxpayers with children under age 17 can qualify
for a $600 refundable per child credit. The maximum credit is increased
to $700 in 2005,
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$800 in 2009, and $1,000 in 2010. The credit is phased out for taxpayers
at the rate of $50 per $1,000 of modified AGI above $110,000 ($75,000
for singles).
92. Child and dependent care expenses.--Married couples with child and
dependent care expenses may claim a tax credit when one spouse works
full time and the other works at least part time or goes to school. The
credit may also be claimed by single parents and by divorced or
separated parents who have custody of children. Expenditures up to a
maximum $2,400 for one dependent and $4,800 for two or more dependents
are eligible for the credit. EGTRRA increased the maximum expenditure
limit to $3,000 for one dependent and $6,000 for two or more dependents
beginning in 2003. The credit is equal to 30 percent of qualified
expenditures (35 percent beginning in 2003) for taxpayers with incomes
of $10,000 or less ($15,000 or less beginning in 2003). The credit is
reduced to a minimum of 20 percent by one percentage point for each
$2,000 of income in excess of $10,000 ($15,000 beginning in 2003).
93. Disabled access expenditure credit.--Small businesses (less than
$1 million in gross receipts or fewer than 31 full-time employees) can
claim a 50-percent credit for expenditures in excess of $250 to remove
access barriers for disabled persons. The credit is limited to $5,000.
94. Charitable contributions, other than education and health.--
Taxpayers may deduct contributions to charitable, religious, and certain
other nonprofit organizations. Taxpayers who donate capital assets to
charitable organizations can deduct the assets' current value without
being taxed on any appreciation in value. An individual's total
charitable contribution generally may not exceed 50 percent of adjusted
gross income; a corporation's total charitable contributions generally
may not exceed 10 percent of pre-tax income.
95. Foster care payments.--Foster parents provide a home and care for
children who are wards of the State, under contract with the State.
Compensation received for this service is excluded from the gross
incomes of foster parents; the expenses they incur are nondeductible.
96. Parsonage allowances.--The value of a minister's housing allowance
and the rental value of parsonages are not included in a minister's
taxable income.
Health
97. Employer-paid medical insurance and expenses.--Employer-paid
health insurance premiums and other medical expenses (including long-
term care) are deducted as a business expense by employers, but they are
not included in employee gross income. The self-employed also may deduct
part of their family health insurance premiums.
98. Self-employed medical insurance premiums.--Self-employed taxpayers
may deduct a percentage of their family health insurance premiums.
Taxpayers without self-employment income are not eligible for the
special percentage deduction. The deductible percentage is 60 percent in
2001, 70 percent in 2002, and 100 percent in 2003 and thereafter.
99. Workers compensation insurance premiums.--Workers compensation
insurance premiums are paid by employers and deducted as a business
expense, but the premiums are not included in employee gross income.
100. Medical savings accounts.--Some employees may deduct annual
contributions to a medical savings account (MSA); employer contributions
to MSAs (except those made through cafeteria plans) for qualified
employees are also excluded from income. An employee may contribute to
an MSA in a given year only if the employer does not contribute to the
MSA in that year. MSAs are only available to self-employed individuals
or employees covered under an employer-sponsored high deductible health
plan of a small employer. The maximum annual MSA contribution is 75
percent of the deductible under the high deductible plan for family
coverage (65 percent for individual coverage). Earnings from MSAs are
excluded from taxable income. Distributions from an MSA for medical
expenses are not taxable. The number of taxpayers who may benefit
annually from MSAs is generally limited to 750,000. No new MSAs may be
established after December 31, 2003.
101. Medical care expenses.--Personal expenditures for medical care
(including the costs of prescription drugs) exceeding 7.5 percent of the
taxpayer's adjusted gross income are deductible.
102. Hospital construction bonds.--Interest earned on State and local
government debt issued to finance hospital construction is excluded from
income subject to tax.
103. Charitable contributions to health institutions.--Individuals and
corporations may deduct contributions to nonprofit health institutions.
Tax expenditures resulting from the deductibility of contributions to
other charitable institutions are listed under the education, training,
employment, and social services function.
104. Orphan drugs.--Drug firms can claim a tax credit of 50 percent of
the costs for clinical testing required by the Food and Drug
Administration for drugs that treat rare physical conditions or rare
diseases.
105. Blue Cross and Blue Shield.--Blue Cross and Blue Shield health
insurance providers in existence on August 16, 1986 and certain other
nonprofit health insurers are provided exceptions from otherwise
applicable insurance company income tax accounting rules that
substantially reduce (or even eliminate) their tax liabilities.
106. Tax credit for health insurance purchased by ceratin displaced
and retired individuals.--The Trade Act of 2002 provided a refundable
tax credit of 65 percent for the purchase of health insurance covergae
by individuals eligible for Trade Adjustment Assitance and certain PBGC
pension recipients.
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Income Security
107. Railroad retirement benefits.--Railroad retirement benefits are
not generally subject to the income tax unless the recipient's gross
income reaches a certain threshold. The threshold is discussed more
fully under the Social Security function.
108. Workers' compensation benefits.--Workers compensation provides
payments to disabled workers. These benefits, although income to the
recipients, are not subject to the income tax.
109. Public assistance benefits.--Public assistance benefits are
excluded from tax. The normal tax method considers cash transfers from
the government as taxable and, thus, treats the exclusion for public
assistance benefits as a tax expenditure.
110. Special benefits for disabled coal miners.--Disability payments
to former coal miners out of the Black Lung Trust Fund, although income
to the recipient, are not subject to the income tax.
111. Military disability pensions.--Most of the military pension
income received by current disabled retired veterans is excluded from
their income subject to tax.
112. Employer-provided pension contributions and earnings.--Certain
employer contributions to pension plans are excluded from an employee's
gross income even though the employer can deduct the contributions. In
addition, the tax on the investment income earned by the pension plans
is deferred until the money is withdrawn.
113. 401(k) plans.--Individual taxpayers can make tax-preferred
contributions to certain types of employer-provided 401(k) plans (and
401(k)-type plans like 403(b) plans and the Federal government's Thrift
Savings Plan). In 2001, an employee could exclude up to $10,500
(indexed) of wages from AGI under a qualified arrangement with an
employer's 401(k) plan. EGTRRA increases the exclusion amount to $11,000
in 2002, $12,000 in 2003, $13,000 in 2004, $14,000 in 2005 and $15,000
in 2006 (indexed thereafter). The tax on the investment income earned by
401(k)-type plans is deferred until withdrawn.
EGTRRA also allows employees to make after-tax contributions to 401(k)
and 401(k)-type plans beginning in 2002. These contributions are not
excluded from AGI, but the investment income of such after-tax
contributions is not taxed when earned or withdrawn.
114. Individual Retirement Accounts.--Individual taxpayers can take
advantage of several different Individual Retirement Accounts (IRAs):
deductible IRAs, non-deductible IRAs, and Roth IRAs. Employees can make
annual contributions to an IRA up to $3,000 (or 100 percent of
compensation, if less). The annual contributions limit applies to the
total of a taxpayer's deductible, non-deductible, and Roth IRAs
contributions. The IRA contribution limit increases to $4,000 in 2005,
and $5,000 in 2008 (indexed thereafter) and allows taxpayers over age 50
to make additional ``catch-up'' contributions of $1,000 (by 2006).
Taxpayers whose AGI is below $54,000 ($34,000 for non-joint filers) in
2002 can claim a deduction for IRA contributions. In 2002, the IRA
deduction is phased out for taxpayers with AGI between $54,000 and
$64,000 ($34,000 and $44,000 for non-joint). The phase-out range
increases annually until it reaches $80,000 to $100,000 in 2007 ($50,000
to $60,000 in 2005 for non-joint filers). Taxpayers whose AGI is above
the phase-out range can also claim a deduction for their IRA
contributions depending on whether they (or their spouse) are an active
participant in an employer-provided retirement plan. The tax on the
investment income earned by 401(k) plans, non-deductible IRAs, and
deductible IRAs is deferred until the money is withdrawn.
Taxpayers with incomes below $150,000 ($95,000 for nonjoint filers)
can make contributions to Roth IRAs. The maximum contribution to a Roth
IRA is phased out for taxpayers with AGI between $150,000 and $160,000
($95,000 and $110,000 for singles). Investment income of a Roth IRA is
not taxed when earned nor when withdrawn. Withdrawals from a Roth IRA
are penalty free if: (1) the Roth IRA was opened at least 5 years before
the withdrawal, and (2) the taxpayer either (a) is at least 59-1/2, (b)
dies, (c) is disabled, or (d) purchases a first-time house.
Taxpayers can contribute to a non-deductible IRA regardless of their
income and whether they are an active participant in an employer-
provided retirement plan. The tax on investment income earned by non-
deductible IRAs is deferred until the money is withdrawn.
115. Low and moderate income savers' credit.--EGTRRA provides an
additional incentive for lower-income taxpayers to save through a
nonrefundable credit of up to 50 percent on IRA contributions. This
credit is in addition to any deduction or exclusion. The credit is
completely phased out by $50,000 for joint filers and $25,000 for single
filers. This temporary credit is in effect from 2002 through 2006.
116. Keogh plans.--Self-employed individuals can make deductible
contributions to their own retirement (Keogh) plans equal to 25 percent
of their income, up to a maximum of $40,000 in 2002. The tax on the
investment income earned by Keogh plans is deferred until withdrawn.
117. Employer-provided life insurance benefits.--Employer-provided
life insurance benefits are excluded from an employee's gross income
even though the employer's costs for the insurance are a deductible
business expense.
118. Small business retirement plan credit.--Businesses with 100 or
fewer employees may receive a credit for 50 percent of the qualified
startup costs associated with a new qualified retirement plan. The
credit is limited to $500 annually and may only be claimed for expenses
incurred during the first three years from the start of the qualified
plan. Qualified startup expenses include expenses related to the
establishment and administration of the plan, and the retirement-related
education of employees.
[[Page 129]]
119. Employer-provided accident and disability benefits.--Employer-
provided accident and disability benefits are excluded from an
employee's gross income even though the employer's costs for the
benefits are a deductible business expense.
120. Employer-provided supplementary unemployment benefits.--Employers
may establish trusts to pay supplemental unemployment benefits to
employees separated from employment. Interest payments to such trusts
are exempt from taxation.
121. Employer Stock Ownership Plan (ESOP) provisions.--ESOPs are a
special type of tax-exempt employee benefit plan. Employer-paid
contributions (the value of stock issued to the ESOP) are deductible by
the employer as part of employee compensation costs. They are not
included in the employees' gross income for tax purposes, however, until
they are paid out as benefits. The following special income tax
provisions for ESOPs are intended to increase ownership of corporations
by their employees: (1) annual employer contributions are subject to
less restrictive limitations; (2) ESOPs may borrow to purchase employer
stock, guaranteed by their agreement with the employer that the debt
will be serviced by his payment (deductible by him) of a portion of
wages (excludable by the employees) to service the loan; (3) employees
who sell appreciated company stock to the ESOP may defer any taxes due
until they withdraw benefits; and (4) dividends paid to ESOP-held stock
are deductible by the employer.
122. Additional deduction for the blind.--Taxpayers who are blind may
take an additional $1,150 standard deduction if single, or $900 if
married in 2002.
123. Additional deduction for the elderly.--Taxpayers who are 65 years
or older may take an additional $1,150 standard deduction if single, or
$900 if married in 2002.
124. Tax credit for the elderly and disabled.--Individuals who are 65
years of age or older, or who are permanently disabled, can take a tax
credit equal to 15 percent of the sum of their earned and retirement
income. Income is limited to no more than $5,000 for single individuals
or married couples filing a joint return where only one spouse is 65
years of age or older, and up to $7,500 for joint returns where both
spouses are 65 years of age or older. These limits are reduced by one-
half of the taxpayer's adjusted gross income over $7,500 for single
individuals and $10,000 for married couples filing a joint return.
125. Casualty losses.--Neither the purchase of property nor insurance
premiums to protect its value are deductible as costs of earning income;
therefore, reimbursement for insured loss of such property is not
reportable as a part of gross income. Taxpayers, however, may deduct
uninsured casualty and theft losses of more than $100 each, but only to
the extent that total losses during the year exceed 10 percent of AGI.
126. Earned income tax credit (EITC).--The EITC may be claimed by low
income workers. For a family with one qualifying child, the credit is 34
percent of the first $7,370 of earned income in 2002. The credit is 40
percent of the first $10,350 of income for a family with two or more
qualifying children. The credit is phased out beginning when the
taxpayer's income exceeds $13,520 at the rate of 15.98 percent (21.06
percent if two or more qualifying children are present). It is
completely phased out when the taxpayer's modified adjusted gross income
reaches $29,201 ($33,178 if two or more qualifying children are
present).
The credit may also be claimed by workers who do not have children
living with them. Qualifying workers must be at least age 25 and may not
be claimed as a dependent on another taxpayer's return. The credit is
not available to workers age 65 or older. In 2002, the credit is 7.65
percent of the first $4,910 of earned income. When the taxpayer's income
exceeds $6,150, the credit is phased out at the rate of 7.65 percent. It
is completely phased out at $11,060 of modified adjusted gross income.
For workers with or without children, the income levels at which the
credit begins to phase-out and the maximum amounts of income on which
the credit can be taken are adjusted for inflation. For married
taxpayers filing a joint return, EGTRRA increases the base amount for
the phase-out by $1,000 in 2002 through 2004, $2,000 in 2005 through
2007, and $3,000 in 2008 (indexed thereafter).
Earned income tax credits in excess of tax liabilities owed through
the individual income tax system are refundable to individuals. This
portion of the credit is shown as an outlay, while the amount that
offsets tax liabilities is shown as a tax expenditure.
Social Security
127. Social Security benefits for retired workers.--Social Security
benefits that exceed the beneficiary's contributions out of taxed income
are deferred employee compensation and the deferral of tax on that
compensation is a tax expenditure. These additional retirement benefits
are paid for partly by employers' contributions that were not included
in employees' taxable compensation. Portions (reaching as much as 85
percent) of recipients' Social Security and Tier 1 Railroad Retirement
benefits are included in the income tax base, however, if the
recipient's provisional income exceeds certain base amounts. Provisional
income is equal to adjusted gross income plus foreign or U.S. possession
income and tax-exempt interest, and one half of Social Security and tier
1 railroad retirement benefits. The tax expenditure is limited to the
portion of the benefits received by taxpayers who are below the base
amounts at which 85 percent of the benefits are taxable.
128. Social Security benefits for the disabled.--Benefit payments from
the Social Security Trust Fund, for disability and for dependents and
survivors, are partially excluded from a beneficiary's gross incomes.
129. Social Security benefits for dependents and survivors.--Benefit
payments from the Social Security
[[Page 130]]
Trust Fund for dependents and survivors are partially excluded from a
beneficiary's gross income.
Veterans Benefits and Services
130. Veterans death benefits and disability compensation.--All
compensation due to death or disability paid by the Veterans
Administration is excluded from taxable income.
131. Veterans pension payments.--Pension payments made by the Veterans
Administration are excluded from gross income.
132. G.I. Bill benefits.--G.I. Bill benefits paid by the Veterans
Administration are excluded from gross income.
133. Tax-exempt mortgage bonds for veterans.--Interest earned on
general obligation bonds issued by State and local governments to
finance housing for veterans is excluded from taxable income. The
issuance of such bonds is limited, however, to five pre-existing State
programs and to amounts based upon previous volume levels for the period
January 1, 1979 to June 22, 1984. Furthermore, future issues are limited
to veterans who served on active duty before 1977.
General Government
134. Public purpose State and local bonds.--Interest earned on State
and local government bonds issued to finance public-purpose construction
(e.g., schools, roads, sewers), equipment acquisition, and other public
purposes is tax-exempt. Interest on bonds issued by Indian tribal
governments for essential governmental purposes is also tax-exempt.
135. Deductibility of certain nonbusiness State and local taxes.--
Taxpayers may deduct State and local income taxes and property taxes
even though these taxes primarily pay for services that, if purchased
directly by taxpayers, would not be deductible.
136. Business income earned in U.S. possessions.--U.S. corporations
operating in a U.S. possession (e.g., Puerto Rico) can claim a credit
against some or all of their U.S. tax liability on possession business
income. The credit expires December 31, 2005.
Interest
137. U.S. savings bonds.--Taxpayers may defer paying tax on interest
earned on U.S. savings bonds until the bonds are redeemed.
Appendix:
TREASURY REVIEW OF THE TAX EXPENDITURE PRESENTATION
This appendix provides an initial presentation of the Treasury
Department review of the tax expenditure budget first described in the
2003 Budget. As previously described, the review focuses in particular
on three issues: (1) using comprehensive income as a baseline tax
system, (2) using a consumption tax as a baseline tax system, and (3)
defining negative tax expenditures (provisions that cause taxpayers to
pay too much tax).
The first section of this appendix compares major tax expenditures in
the current budget to those implied by a comprehensive income baseline.
This comparison includes a discussion of negative tax expenditures. The
second section compares the major tax expenditures in the current budget
to those implied by a consumption tax baseline, and also discusses
negative tax expenditures. The final section addresses concerns that
have been raised over the measurement of some current tax expenditures
by describing a new estimate of the tax expenditure caused by
accelerated depreciation and an alternative estimate of the tax
expenditure resulting from the tax exemption of the return earned on
owner-occupied housing. The final section also provides an estimate of
the negative tax expenditure caused by the double tax on corporate
profits.
DIFFERENCES BETWEEN OFFICIAL TAX EXPENDITURES AND THOSE BASED ON
COMPREHENSIVE INCOME
As discussed in the main body of this chapter, traditional tax
expenditures are measured relative to normal law or reference law
baselines that deviate from a comprehensive concept of income.
Consequently, tax expenditures identified in the budget can differ from
those that would be identified if comprehensive income were chosen as
the baseline tax system. This appendix addresses this issue by comparing
major tax expenditures listed in the current tax expenditure budget with
those implied by a comprehensive income baseline. Most large tax
expenditures would continue to be tax expenditures were the baseline
taken to be comprehensive income, although some would not. A
comprehensive income baseline would also result in a number of
additional tax provisions being counted as tax expenditures.
Current budgetary practice excludes from the list of official tax
expenditures those provisions that over-tax certain items of income.
This exclusion conforms to the view that tax expenditures are
substitutes for direct government spending programs. However, it gives a
one-sided picture of the ways in which current law deviates from the
baseline tax system. Relative to a comprehensive income baseline, a
number of current tax provisions would be negative tax expenditures.
Some of these might also be negative tax expenditures under the
reference law or normal law baselines, expanded to admit negative tax
expenditures.
[[Page 131]]
Treatment of Major Tax Expenditures From the Current Budget Under a
Comprehensive Income Baseline
Comprehensive income, also called Haig-Simons income, is the real,
inflation adjusted, accretion to one's economic power arising between
two points in time, e.g., the beginning and ending of the year. It
includes all accretions to wealth, whether or not realized, whether or
not related to a market transaction, and whether a return to capital or
labor. Inflation adjusted capital gains would be included in
comprehensive income as they accrue. Business, investment, and casualty
losses, including losses caused by depreciation, would be deducted.
Implicit returns, such as those accruing to homeowners, also would be
included in comprehensive income. While comprehensive income can be
defined on the sources side of the consumer's balance sheet, it
sometimes is instructive to use the identity between the sources of
wealth and the uses of wealth to redefine it as the sum of consumption
during the period plus the change in net worth between the beginning and
the end of the period.
Comprehensive income is widely held to be the idealized base for an
income tax even though it is not a perfectly defined concept. \6\ It
suffers from conceptual ambiguities, some of which are discussed below,
as well as practical problems in measurement and tax administration,
e.g., how to implement a practicable deduction for economic depreciation
or include in income the return earned on housing or consumer durable
goods, including automobiles and major appliances.
---------------------------------------------------------------------------
\6\ See, e.g., David F. Bradford, Untangling the Income Tax
(Cambridge, MA: Harvard University Press, 1986), pp. 15-31, and Richard
Goode, ``The Economic Definition of Income'' in Joseph Pechman, ed.,
Comprehensive Income Taxation (Washington, D.C.: The Brookings
Institution, 1977), pp. 1-29.
---------------------------------------------------------------------------
Furthermore, comprehensive income represents an ideal tax base only in
the tautological sense that the base of an income tax is, or should be,
income. Comprehensive income does not necessarily represent the
economically most desirable tax base; efficiency or equity might be
improved by deviating from comprehensive income as a tax base, e.g., by
reducing the taxation of capital income in order to spur economic growth
or by subsidizing certain types of activities in order to correct for
market failures or to improve the after-tax distribution of income. In
addition, some elements of comprehensive income would be difficult or
impossible to include in a tax system that is administrable.
Table 1 shows the thirty largest tax expenditures from the 2004 Budget
classified according to whether they would be considered a tax
expenditure under a comprehensive income tax. Thirteen of the thirty
items would be tax expenditures under a comprehensive tax base (those in
panel A). \7\ Most of these give preferential tax treatment to the
return on certain types of savings or investment. They are a result of
the explicitly hybrid nature of the existing tax system, and arise out
of policy decisions that reflect discomfort with the high tax rate on
capital income that would otherwise arise under the current structure of
the income tax, especially in consideration of the potential for capital
income to be subject to two layers of tax given the absence of
integration between the corporate and individual income tax systems.
---------------------------------------------------------------------------
\7\ Not all of the items are properly specified and measured if the
intent is to compare current law with a comprehensive income tax.
Nonetheless, they all deal with items whose treatment differs
fundamentally from that required by a comprehensive income tax.
---------------------------------------------------------------------------
Panel B deals with items that potentially are tax expenditures, but
that raise more difficult conceptual issues or raise inconsistencies.
The first of these is the deduction of nonbusiness State and local taxes
other than on owner-occupied homes. These taxes include both income
taxes and property taxes. The stated justification for this tax
expenditure is that ``Taxpayers may deduct State and local income taxes
and property taxes even though these taxes primarily pay for services
that, if purchased directly by taxpayers, would not be deductible.'' \8\
The idea is that these taxes represent consumption expenditures, and so
are elements of income.
---------------------------------------------------------------------------
\8\ Fiscal Year 2003 Budget of the United States Government,
Analytical Perspectives (Washington, D.C.: U.S. Government Printing
Office, 2002) p. 127
---------------------------------------------------------------------------
In contrast to the view in the budget, the deduction for State and
local taxes might not be a tax expenditure if the baseline were
comprehensive income. Properly measured comprehensive income would
include the imputed value of State and local government benefits
received, but would allow a deduction for State and local taxes paid.
\9\ Thus, in this sense the deductibility of State and local taxes is
consistent with comprehensive income principles; it should not be a tax
expenditure. However, imputing the value of State and local services may
be difficult and, as a rough correction, the tax system might disallow
the deduction for State and local taxes. \10\ So, if the value of
services from State and local governments is excluded from the tax base,
as it generally is under current law, a deduction for taxes might be
viewed as a tax expenditure relative to a comprehensive income baseline.
\11\
---------------------------------------------------------------------------
\9\ U.S. Treasury, Blueprints for Basic Tax Reform (Washington, D.C.:
U.S. Government Printing Office, 1977) p. 92.
\10\ Home mortgage interest and property taxes on owner-occupied
housing raise the same ambiguity. Classifying them as probably not tax
expenditures arguably is inconsistent. It reflects the judgment that no
comprehensive tax is likely to tax the value of State and local
services, while it appears somewhat easier to impute and tax the rental
income from owner-occupied housing.
\11\ Under the normal tax method employed by the Joint Committee on
Taxation, the value of some public assistance benefits provided by state
governments is included as a tax expenditure, thereby raising a
potential double counting issue.
---------------------------------------------------------------------------
Step-up of basis at death lowers the income tax on capital gains for
those who inherit assets below what it would be otherwise. From that
perspective it would be a tax expenditure under a comprehensive income
baseline. Nonetheless, there are ambiguities. Under a comprehensive
income baseline, all gains would be taxed as accrued, so there would be
no deferred unrealized gains on assets held at death.
The lack of full taxation of Social Security retirement benefits also
is listed in panel B. To the extent that Social Security is viewed as a
pension, a comprehensive income tax would include in income all
contributions to Social Security retirement funds (payroll taxes) and
tax accretions to value as they arise (inside build-up). \12\ Benefits
paid out of prior contributions and the inside
[[Page 132]]
build-up, however, would not be included in the tax base because the
fall in the value of the individual's Social Security account would be
offset by an increase in cash. In contrast, to the extent that Social
Security is viewed as a transfer program, all contributions should be
deductible from the income tax base and all benefits received should be
included in the income tax base.
---------------------------------------------------------------------------
\12\ As a practical matter, this may be impossible to do. Valuing
claims subject to future contingencies is very difficult, as discussed
in Bradford, Untangling the Income Tax, pp. 23-24.
---------------------------------------------------------------------------
In contrast to either of these treatments, current law excludes one-
half of contributions (employer-paid payroll taxes) from the base of the
income tax, makes no attempt to tax accretions, and subjects some, but
not all, benefits to taxation. The difference between the current law
treatment of Social Security retirement benefits and their treatment
under a comprehensive income tax would qualify as a tax expenditure, but
such a tax expenditure differs in concept from that included in the
current budget.
The tax expenditures in the current budget \13\ reflect exemptions for
lower income beneficiaries from the tax on 85 percent of Social Security
benefits. \14\ Historically, payroll taxes paid by the employee
represented no more than 15 percent of the expected value of the
benefits received by a lower-earnings Social Security beneficiary. The
85 percent inclusion rate is therefore intended to tax the remaining
amount of the benefit payment arising from the payroll tax contributions
made by employers and the implicit return on the employee and employer
contributions. Thus, the tax expenditure conceived and measured in the
current budget is not intended to capture the deviation from a
comprehensive income baseline, which would additionally account for the
deferral of tax on these components (less an inflation adjustment
attributable to the employee's payroll tax contributions). Rather, it is
intended to approximate the taxation of private pensions with employee
contributions made from after-tax income, \15\ on the assumption that
Social Security is comparable to such pensions. Hence, the official tax
expenditure understates the tax advantage accorded Social Security
benefits relative to a comprehensive income baseline.
---------------------------------------------------------------------------
\13\ This includes both the tax expenditure for benefits paid to
workers and that for benefits paid to survivors and dependents.
\14\ The current budget does not include as a tax expenditure the
absence of income taxation on the employer's contributions (payroll
taxes) to Social Security retirement at the time these contributions are
made.
\15\ Private pensions allow the employee to defer tax on all inside
build-up. They also allow the employee to defer tax on contributions
made by the employer, but not on contributions made directly by the
employee. Applying these tax rules to Social Security would require the
employee to include in his taxable income benefits paid out of inside
build-up and out of the employer's contributions, but would allow the
employee to exclude from his taxable income benefits paid out of his own
contributions.
---------------------------------------------------------------------------
To the extent that the personal and dependent care exemptions and the
standard deduction properly remove from taxable income all expenditures
that do not yield consumption value, then the child care credit and the
earned income tax credit would be tax expenditures. In contrast, a
competing perspective views these credits as appropriate modifications
that account for differing taxpaying capacity. Since comprehensive
income is equal to the sum of consumption and one's change in wealth,
expenditures on items that are viewed as not yielding consumption value
reduce income, and, hence taxpaying capacity under this interpretation.
The tax expenditures related to workers' compensation benefits raise
double counting issues. The official tax expenditure list counts as a
tax expenditure both the failure to tax premiums and the failure to tax
benefits. This is inappropriate treatment if the baseline is
comprehensive income. Under comprehensive income tax principles, if the
taxpayer were to buy the insurance himself, he would be able to deduct
the premium (since it represents a reduction in net-worth) but should
include the benefit when paid (since it represents an increase in net-
worth). \16\ If the employer paid the premium, the proper treatment
would allow the employer a deduction and allow the employee to disregard
the premium, but he would take the proceeds, if any, into income.
Equivalently, the employee could be required to take the premium into
income and ignore the proceeds, on the argument that the premium has the
same expected value as the proceeds of the policy, as explained in
Blueprints. \17\ But in no circumstances should the employee be taxed on
both the premium and the proceeds. One of the two current tax
expenditures would be eliminated if the baseline were comprehensive
income. \18\
---------------------------------------------------------------------------
\16\ Suppose he buys the unemployment insurance policy at the
beginning of the year. He exchanges one asset, cash, for another, the
policy, so there is no change in net worth. But, at the end of the year,
the policy expires and so is worthless, hence he has a reduction in net
worth equal to the amount he paid for the policy, which of course is the
premium. If the policy pays off (i.e., a work related injury prevents
his employment), then he would include the proceeds in his income
because they represent an increase in net worth.
\17\ U.S. Treasury, Blueprints for Basic Tax Reform, pp. 59-61.
\18\ This might also be double counting under the normal and reference
law baselines.
---------------------------------------------------------------------------
The next category (panel C) includes items whose treatment under a
comprehensive income tax is widely acknowledged to be ambiguous. \19\
Consider, for example, the items relating to charitable contributions.
Under existing law, charitable contributions are deductible, and this
deduction is considered on its face a tax expenditure in the current
budget. \20\
---------------------------------------------------------------------------
\19\ See, for example, Goode, The Economic Definition of Income, pp.
16-17, and Bradford, Untangling the Income Tax, pp. 19-21, and pp.30-31.
\20\ The item also includes gifts of appreciated property, at least
part of which represents a tax expenditure relative to an ideal income
tax, even if one assumes that charitable donations are not consumption.
---------------------------------------------------------------------------
The treatment of charitable donations, however, is ambiguous under a
comprehensive income tax. If charitable contributions are a consumption
item for the giver, then they are properly included in his taxable
income; a deduction for contributions would then be a tax expenditure
relative to a comprehensive income tax baseline. In contrast, charitable
contributions could represent a transfer of purchasing power from the
giver to the receiver. As such, they would represent a reduction in the
giver's net worth, not an item of consumption, and so properly would be
deductible, implying that current law's treatment is not a tax
expenditure. At the same time, the value of the charitable benefits
received is income to the recipient. Under current law, such income
generally is not taxed, and so represents a tax expenditure whose size
might be approximated by the size of the donor's contribution. \21\
---------------------------------------------------------------------------
\21\ If recipients tend to be in lower tax brackets, then the tax
expenditure is smaller than when measured at the donor's tax rates.
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[[Page 133]]
Medical expenditures may or may not be an element of income (or
consumption), depending on one's point of view. Some argue that medical
expenditures don't represent discretionary spending, and so are not
consumption. Instead, they are a reduction of net worth and should be
excluded from the tax base. Others argue that there is no way to
logically distinguish medical care from other consumption items.
Moreover, clearly there is choice in health care decisions, e.g.,
whether to go to the best doctor, whether to have voluntary surgical
procedures, and whether to exercise and eat nutritiously so as to
improve and maintain one's health and minimize medical expenditures.
The final category (panel D) includes items that probably are not tax
expenditures under a comprehensive income tax base. But even these raise
some issues. Mortgage interest would be deductible from the base of a
comprehensive income tax, because comprehensive income would include
implicit rental income on owner-occupied housing. Similarly, property
taxes on owner-occupied housing would be deductible, since they
represent a reduction in net worth. \22\ One could argue, however, that
because current law fails to impute rental income, the home mortgage
interest deduction and the deduction for property taxes constitute tax
expenditures. Alternatively, they might be viewed as proxies for the
correct tax expenditure. They are, however, extremely crude proxies for
the implicit rental income earned on owner-occupied housing. The
interest deduction proxy, for example, ignores implicit rental income
earned on a house that is unencumbered by any mortgage.
---------------------------------------------------------------------------
\22\ Of course, the value of government services would be included in
net income.
---------------------------------------------------------------------------
A comprehensive income tax would assign all income tax liability to
individuals. There would be no separate corporation income tax. Hence,
the issue of graduated corporate tax rates would not come up. \23\ Under
some views, graduated individual income tax rates might result in a tax
expenditure or in a negative tax expenditure, depending on the decision
regarding the general tax rate.
---------------------------------------------------------------------------
\23\ As discussed below, the double tax on corporate profits would be
a major negative tax expenditure.
---------------------------------------------------------------------------
A tax based on comprehensive income would allow all losses to be
deducted. Hence, the exception from the passive loss rules would not be
a tax expenditure. \24\
---------------------------------------------------------------------------
\24\ In contrast, the passive loss rules themselves, which restrict
the deduction of losses, would be a negative tax expenditure when
compared to a comprehensive tax base.
---------------------------------------------------------------------------
Major Tax Expenditures Under a Comprehensive Income Tax That Are
Excluded from the Current Budget
While most of the major tax expenditures in the current budget also
would be tax expenditures under a comprehensive income base, there also
are tax expenditures relative to a comprehensive income base that are
not found on the existing tax expenditure list. These additional tax
expenditures include the imputed return from consumer durables and
owner-occupied housing, the difference between capital gains as they
accrue and capital gains as they are realized, private gifts and
inheritances received, in-kind benefits from such government programs as
food-stamps, Medicaid, and public housing, the value of payouts from
insurance policies, \25\ and benefits received from private charities.
Under some ideas of comprehensive income, the value of leisure and of
household production of goods and services also would be included as tax
expenditures. The personal exemption and standard deduction also might
be considered tax expenditures, although they can be viewed differently,
e.g., as elements of the basic tax rate schedule or as necessary
expenditures that are not items of voluntary consumption. The foreign
tax credit also might be a tax expenditure, since it could be argued
that a deduction for foreign taxes, rather than a credit, would seem to
measure the income of U.S. residents properly.
---------------------------------------------------------------------------
\25\ To the extent that premiums are deductible.
---------------------------------------------------------------------------
Negative Tax Expenditures
Under current budgetary practice, negative tax expenditures, tax
provisions that raise rather than lower taxes, are excluded from the
official tax expenditure list. This exclusion conforms with the view
that tax expenditures are defined to be similar to government spending
programs.
If attention is expanded to include any deviation from the baseline
tax system, negative tax expenditures would be of interest. Relative to
a comprehensive income baseline, there are a number of important
negative tax expenditures, some of which also might be viewed as
negative tax expenditures under an expanded interpretation of the normal
or reference law baseline. Among the more important negative tax
expenditures is the corporation income tax, which would be eliminated
under a comprehensive income tax applied to individuals as discussed
later in the Appendix. The passive loss rules, restrictions on the
deductibility of capital losses, and NOL carry-forward requirements each
would generate a negative tax expenditure, since a comprehensive income
tax would allow full deductibility of losses. If human capital were
considered an asset, then its cost (e.g., certain education and training
expenses, including perhaps the cost of college and professional school)
should be amortizable, but it is not under current law. \26\ Some
restricted deductions under the individual AMT might be negative tax
expenditures as might the phase-out of personal exemptions and of
itemized deductions. The inability to deduct consumer interest also
might be a negative tax expenditure, as an interest deduction may be
required to properly measure income, as seen by the equivalence between
borrowing and reduced lending. \27\
---------------------------------------------------------------------------
\26\ Current law offers favorable treatment to some education costs,
thereby creating (positive) tax expenditures. Current law allows
expensing of that part of the cost of education and career training that
is related to foregone earnings and this would be a tax expenditure
under a comprehensive income baseline. In addition, some education has
consumption value, and under a comprehensive income definition would be
taxable to that extent, but is not taxable under current law.
\27\ See Bradford, Untangling the Income Tax, p. 41.
---------------------------------------------------------------------------
Current tax law fails to index for inflation interest receipts,
capital gains, depreciation, and inventories. These provisions are
negative tax expenditures because
[[Page 134]]
comprehensive income would be indexed for inflation. Current law,
however, also fails to index for inflation the deduction for interest
payments; this represents a (positive) tax expenditure.
The issue of indexing highlights that even if one wished to focus only
on tax policies that are similar to spending programs, accounting for
some negative tax expenditures may be required. For example, the net
subsidy created by accelerated depreciation is properly measured by the
difference between depreciation allowances specified under existing tax
law and economic depreciation, which is indexed for inflation. \28\
---------------------------------------------------------------------------
\28\ Accelerated depreciation can be described as the equivalent of an
interest free loan from the government to the taxpayer. Under federal
budget accounting principles, such a loan would be treated as an outlay
equal to the present value of the foregone interest.
---------------------------------------------------------------------------
Tax Expenditures and the Tax Rate Structure
Under some views, the graduated personal income tax rate structure
might result in a tax expenditure or in a negative tax expenditure. To
the extent that one views a single tax rate as most compatible with a
comprehensive income base, tax rates above the appropriate single rate
would yield a negative tax expenditure. To the extent that one views a
graduated tax rate structure as most desirable, then differences between
the appropriate graduated tax rate structure and the actual tax rate
structure would lead to tax expenditures or negative tax expenditures.
DIFFERENCES BETWEEN OFFICIAL TAX EXPENDITURES AND TAX EXPENDITURES
RELATIVE TO A CONSUMPTION BASE
This section compares tax expenditures listed in the official tax
expenditure budget with those implied by a comprehensive consumption
baseline. It first discusses some of the difficulties encountered in
trying to compare current tax provisions to those that would be observed
under a comprehensive consumption tax. Next, it discusses which of the
thirty largest official tax expenditures would be tax expenditures under
the consumption baseline, concluding that about one-half of the top
thirty official tax expenditures would remain tax expenditures under a
consumption baseline. Most of those that fall off the list are tax
incentives for saving and investment.
The section next discusses some major differences between current law
and a comprehensive consumption baseline that are excluded from the
current list of tax expenditures. These differences include the
consumption value of owner-occupied housing and other consumer durables,
benefits from in-kind government transfers, and gifts. It concludes with
a discussion of negative tax expenditures relative to a consumption
baseline
Ambiguities in Determining Tax Expenditures Relative to a Consumption
Baseline
A broad-based consumption tax is a combination of an income tax plus a
deduction for net saving. This follows from the definition of
comprehensive income as consumption plus the change in net worth. It
therefore seems straightforward to say that current law's deviations
from a consumption base are the sum of (a) tax expenditures on an income
base associated with exemptions and deductions for certain types of
income, plus (b) overpayments of tax, or negative tax expenditures, to
the extent net saving is not deductible from the tax base. In reality,
however, the situation is more complicated. A number of issues arise,
some of which also are problems in defining a comprehensive income tax,
but seem more severe, or at least more obvious, for the consumption tax
baseline.
It is not always clear how to treat certain items under a consumption
tax. One problem is determining whether a particular expenditure is an
item of consumption. Spending on medical care and charitable donations
are two examples. Another problem is related to foreign source income.
It is sometimes argued that a credit for foreign income taxes is
inappropriate against the base of a consumption tax. Does that mean that
the current foreign tax credit is a tax expenditure for a consumption
tax base? The classification below includes medical spending and
charitable contributions in the definition of consumption, but also
considers an alternative view. It makes no judgment about the treatment
of foreign taxes, but provides a brief discussion of the issue.
There may be more than one way to treat various items under a
consumption tax. For example, a consumption tax might ignore borrowing
and lending by excluding from the borrower's tax base the proceeds from
loans, denying the borrower a deduction for payments of interest and
principal, and excluding interest and principal payments received from
the lender's tax base. On the other hand, a consumption tax might
include borrowing and lending in the tax base by requiring the borrower
to add the proceeds from loans in his tax base, allowing the lender to
deduct loans from his tax base, allowing the borrower to deduct payments
of principal and interest, and requiring the lender to include receipt
of principal and interest payments. In present value terms, the two
approaches are equivalent for both the borrower and the lender; in
particular both allow the tax base to measure consumption and both
impose a zero effective tax rate on interest income. But which approach
is taken obviously has different implications (at least on an annual
flow basis) for the treatment of many important items of income and
expense, such as the home mortgage interest deduction. The
classification below suggests that the deduction for home mortgage
interest probably should be a tax expenditure, but takes note of
alternative views.
[[Page 135]]
Some exclusions of income are equivalent in many respects to
consumption tax treatment that immediately deducts the cost of an
investment while taxing the future cash-flow. For example, exempting
investment income is equivalent to consumption tax treatment as far as
the normal rate of return on new investment is concerned. This is
because expensing generates a tax reduction that offsets in present
value terms the tax paid on the investment's future normal returns.
Expensing gives the income from a marginal investment a zero effective
tax rate. However, a yield exemption approach differs from a consumption
tax as far as the distribution of income and government revenue is
concerned. Pure profits in excess of the normal rate of return would be
taxed under a consumption tax, because they are an element of cash-flow,
but would not be taxed under a yield exemption tax system. Should
exemption of certain kinds of investment income, and certain investment
tax credits, be regarded as the equivalent of consumption tax treatment?
The classification that follows generally takes a broad view of this
equivalence and considers tax provisions that reduce or eliminate the
tax on capital income to be consistent with a broad-based consumption
tax.
Looking at provisions one at a time can be misleading. The hybrid
character of the existing tax system leads to many provisions that might
make good sense in the context of a consumption tax, but that generate
inefficiencies because of the problem of the ``uneven playing field''
when evaluated within the context of the existing tax rules. It is not
clear how these should be classified. For example, many saving
incentives are targeted to specific tax-favored sources of capital
income, and so potentially distort economic choices in ways that would
not occur under a broad-based consumption tax. As another example, under
a consumption value added tax (VAT) based on the destination principle,
there would be a rebate of the VAT on exports and a tax on imports. Does
this mean that the extraterritorial income exclusion (the successor of
the Foreign Sales Corporation provision) is not a tax expenditure?
Resolution comes down to judgments about how broad is broad enough to be
considered general, or whether it even matters at all that a provision
is targeted in some way. The classification that follows generally views
savings incentives, even if targeted, as consistent with a broad based
consumption tax.
Capital gains would not be a part of a comprehensive consumption tax
base. Proceeds from asset sales and sometimes borrowing would be part of
the cash-flow tax base, but, for transactions between domestic investors
at a flat tax rate, would cancel out in the economy as a whole. How
should existing tax expenditures related to capital gains be classified?
The classification below generally views available capital gains tax
breaks as consistent with a broad-based consumption tax because they
lower the tax rate on capital income toward the zero rate that is
consistent with a consumption-based tax. By implication, this also means
that capital gains taxes paid under a broad-based consumption tax are
negative tax expenditures.
Such considerations suggest that trying to compute the current tax's
deviations from ``the'' base of a consumption tax is impossible because
deviations cannot be uniquely determined, making it very difficult to do
a consistent accounting of the differences between the current tax base
and a consumption tax base. Nonetheless, Table 2 attempts a
classification based on the criteria outlined above.
Treatment of Major Tax Expenditures Under a Comprehensive Consumption
Baseline
As noted above, the major difference between a comprehensive
consumption tax and a comprehensive income tax is in the treatment of
saving, or in the taxation of capital income. Consequently, many current
tax expenditures related to preferential taxation of capital income
would not be tax expenditures under a consumption tax. However,
preferential treatment of items of income unrelated to fairly broad-
based saving incentives would remain tax expenditures under a
consumption baseline.
Table 2 shows the thirty largest tax expenditures from the 2004 Budget
classified according to whether they would be considered a tax
expenditure under a consumption tax. Four of the thirty items clearly
would be tax expenditures (those in panel A).
The official tax expenditures for Social Security benefits reflects
exceptions for low income taxpayers from the general rule that 85
percent of Social Security benefits are included in the recipient's tax
base. The 85 percent inclusion is intended as a simplified mechanism for
taxing Social Security benefits as if the Social Security program were a
private pension with employee contributions made from after-tax income.
Under these tax rules, income earned on contributions made by both
employers and employees benefits from tax deferral, but employer
contributions also benefit because the employee may exclude them from
his taxable income, while the employee's own contributions are included
in his taxable income. These tax rules give the equivalent of
consumption tax treatment, a zero effective tax rate on the return, to
the extent that the original pension contributions are made by the
employer, but give less generous treatment to the extent that the
original contributions are made by the employee. Income earned on
employee contributions is taxed at a low, but positive, effective tax
rate. Based on historical calculations, the 85 percent inclusion
reflects roughly the outcome of applying these tax rules to a lower-
income earner when one-half of the contributions are from the employer
and one-half from the employee.
The current tax expenditure measures a tax benefit relative to a
baseline that is somewhere between a comprehensive income tax and a
consumption tax. The properly measured tax expenditure relative to a
consumption tax baseline would include only those Social Security
benefits that are accorded treatment more favorable than that implied by
a consumption tax, which
[[Page 136]]
would correspond to including 50 percent of Social Security benefits in
the recipient's tax base.
Exclusion of workers' compensation benefits allows an exclusion from
income that is unrelated to investment, and so should be included in the
base of a comprehensive consumption tax.
The credit for increasing research activities gives a negative
effective tax rate because the cost of investment in research can be
deducted immediately. As discussed above, expensing reduces to zero the
effective tax rate on the income from an investment. Giving a tax credit
on top of expensing leads to a negative effective tax rate; it gives
better than consumption tax treatment to the income earned by the
qualifying investment. A tax subsidy for research might be justified to
the extent that the full social return from an investment is not
captured by the investor, because, e.g., others can freely learn from
the results of the research. Nonetheless, such a subsidy is inconsistent
with a broad-based consumption tax.
An additional twelve items (panel B) probably would be tax
expenditures under a consumption base. Each of these twelve, however,
comes with some ambiguity. Several of these items relate to the costs of
medical care or to charitable contributions. As discussed in the
previous section of the appendix, there is disagreement within the tax
policy community over the extent to which medical care and charitable
giving represent consumption items. While widely held to be consumption,
a competing view is that they represent reductions in net worth that
should be excluded from the tax base because they do not yield direct
satisfaction to taxpayer who makes the expenditure.
There also is the issue of how to tax employer-provided medical
insurance. Under current law, employees do not have to include insurance
premiums paid for by employers in their income. The self-employed also
may exclude (via a deduction) medical insurance premiums from their
taxable income. Assume first that medical spending is consumption. From
some perspectives, these premiums should be in the tax base because they
appear to represent consumption. Yet an alternative perspective would
support excluding the premium from tax as long as the consumption tax
base included the value of any medical services paid for by the
insurance policy, because the premium equals the expected value of
insurance benefits received. But even from this alternative perspective,
the official tax expenditure might continue to be a tax expenditure
under a consumption tax baseline because current law excludes the value
of medical services paid with insurance benefits from the employee's
taxable income.
If medical spending is not consumption, one approach to measuring the
consumption base would ignore insurance, but allow the consumer to
deduct the value of all medical services obtained. An alternative
approach would allow a deduction for the premium but include the value
of any insurance benefits received, while continuing to allow a
deduction for the value of all medical services obtained. In either
case, the official tax expenditure for the exclusion of employer
provided medical insurance and expenses would not be a tax expenditure
relative to a consumption tax baseline.
Ambiguity also surrounds the deductibility of home mortgage interest.
A consumption tax seeks to tax the consumption value of housing services
consumed no matter how the house is financed. From this perspective,
home mortgage interest should not be deductible. However, what governs
the proper treatment of interest under a consumption tax is whether
financial flows are in or out of the consumption tax base. A result
equivalent to disallowing the interest deduction would require that the
loan be taken into income and would permit the associated interest and
principal payments to be deducted. If the loans are taken into income
(as they would be under some types of consumption taxes), then the
associated interest and principal payments should be deductible,
otherwise not. Without specifying how financial flows are treated, it is
unclear how to treat the home mortgage interest deduction. Nonetheless,
given that loans are not taken into income under current law, and this
treatment's equivalency to disallowing the interest deduction,
classifying the deduction of home mortgage interest as a tax expenditure
might be reasonable.
Ambiguities arise about the proper treatment of State and local taxes,
as they do under an income tax. These taxes are not of themselves
consumption items, but might serve as proxies for the value of
government services consumed.
The child credit and the earned income tax credit can be viewed as
social welfare programs unrelated to measuring and taxing consumption.
As such, they would be tax expenditures relative to a consumption
baseline. Yet, from another perspective, these credits look similar to a
personal or dependent deduction that many would see as appropriate under
a broad-based consumption tax.
The extraterritorial income exclusion replaces the previous Foreign
Sales Corporation program. It provides an exclusion from income for
certain exports. To the extent that the program is viewed as a component
of a destination-based VAT it might not be a tax expenditure. In
addition, to the extent that the exclusion is an investment subsidy, it
might be consistent with consumption tax principles (i.e., a low tax
rate on capital income).
The remaining items in the table (panels C and D) are not likely to be
tax expenditures under a consumption base. Exemption of workers'
compensation insurance premiums would not be a tax expenditure because
it represents double counting, given that the exemption of benefits
already is a tax expenditure, as discussed in the previous section of
the appendix.
Most of the other items that would not be tax expenditures relate to
tax provisions that eliminate or reduce the tax on various types of
capital income because a zero tax on capital income is consistent with
consumption tax principles
[[Page 137]]
The graduated corporate income tax rates would not be a tax
expenditure under a comprehensive consumption baseline. A consumption
tax would have no tax on corporate income or profits, hence the issue of
whether the rate structure on corporate income provides a special
benefit to corporations with low income would not arise.
The exception from the passive loss rules probably would not be a tax
expenditure because proper measurement of income, and hence of
consumption, requires full deduction of losses.
Major Tax Expenditures under a Consumption Tax That Are Excluded from
the Current Budget
Several differences between current law and a consumption tax are left
off the official tax expenditure list. Additional tax expenditures
include the imputed consumption value from consumer durables and owner-
occupied housing, private gifts and inheritances received, possibly
benefits paid by insurance policies, in-kind benefits from such
government programs as food-stamps, Medicaid, and public housing, and
benefits received from charities. Under some ideas of a comprehensive
consumption tax, the value of leisure and of household production of
goods and services would be included as a tax expenditure if they were
not imputed to the tax base.
A consumption tax implemented as a tax on cash flows would tax all
proceeds from sales of capital assets when consumed, rather than just
capital gains; because of expensing, taxpayers effectively would have a
zero basis. The proceeds from borrowing would be in the base of a
consumption tax that also allowed a deduction for repayment of principal
and interest, but are excluded from the current tax base. The deduction
of business interest expense might be a tax expenditure, since under
some forms of consumption taxation interest is neither deducted from the
borrower's tax base nor included in the lender's tax base. The personal
exemption and standard deduction also might be considered tax
expenditures, although they can be viewed differently, e.g., as elements
of the basic tax rate schedule.
The foreign tax credit also might be a tax expenditure relative to a
consumption baseline, but the argument for this is not air-tight. From a
formalistic perspective, the foreign tax credit would be a tax
expenditure because it applies against income tax and there would be no
income tax under a consumption baseline. In addition, it is sometimes
argued that a deduction for foreign taxes, rather than a credit, is
appropriate under a comprehensive consumption tax because the taxpayer's
increase in net worth properly is measured after payment of foreign
taxes. Nonetheless, simply eliminating the credit for foreign taxes
would subject the return earned by U.S. residents on overseas investment
to double taxation, and would disfavor foreign investment relative to
domestic investment.
Negative Tax Expenditures
Importantly, current law also deviates from a consumption tax norm in
ways that increase, rather than decrease, tax liability. These could be
called negative tax expenditures. The official budget excludes negative
tax expenditures on the theory that tax expenditures are intended to
substitute for government spending programs. Yet excluding negative tax
expenditures would give a very one-sided look at the differences between
the existing tax system and a consumption tax.
A large item on this list would be the inclusion of capital income in
the current individual income tax base. The revenue from the corporation
income tax also would be a negative tax expenditure. Depreciation
allowances, even if accelerated, would be a negative tax expenditure
since consumption tax treatment generally would require expensing.
Depending on the treatment of loans, the borrower's inability to deduct
payments of principal and the lender's inability to deduct loans might
be a negative tax expenditure. The passive loss rules, restrictions on
the deductibility of capital losses, and NOL carryforward provisions
also would generate negative tax expenditures, because the change in net
worth requires a deduction for losses. If human capital were considered
an asset, then its cost (e.g., certain education and training expenses,
including perhaps costs of college and professional school) should be
expensed, but it is not under current law. Certain restrictions under
the individual AMT as well as the phase-out of personal exemptions and
of itemized deductions also might be considered negative tax
expenditures.
Tax Expenditures and the Tax Rate Structure
Under some views, the graduated personal income tax rate structure
might result in a tax expenditure or in a negative tax expenditure when
compared with a consumption tax base. To the extent that one views a
single tax rate as most compatible with a consumption tax base, tax
rates above the appropriate single rate would yield a negative tax
expenditure. To the extent that one views a graduated tax rate structure
as most desirable, then differences between the appropriate graduated
tax rate structure and the actual tax rate structure would lead to tax
expenditures or negative tax expenditures.
REVISED ESTIMATES OF SELECTED TAX EXPENDITURES
Accelerated Depreciation
Under the reference tax law baseline no tax expenditures arise from
accelerated depreciation. In the past, official tax expenditure
estimates of accelerated depreciation under the normal tax law baseline
compared tax allowances based on the historic cost of an asset with
allowances calculated using the straight-line method over relatively
long recovery periods. Normal law
[[Page 138]]
allowances also were determined by the historical cost of the asset and
so did not adjust for inflation, although such an adjustment is required
when measuring economic depreciation, the age related fall in the real
value of the asset.
In this year's budget, the tax expenditures for accelerated
depreciation under the normal law concept have been recalculated using
as a baseline depreciation rates and replacement cost indexes from the
National Income and Product Accounts. \29\ The revised estimates are
intended to approximate the degree of acceleration provided by current
law over a baseline determined by real, inflation adjusted, economic
depreciation. Current law depreciation allowances for machinery and
equipment include the benefits of the temporary 30 percent expensing
provision. \30\ The estimates are shown in tables in the body of the
main text, e.g., Table 6-1.
---------------------------------------------------------------------------
\29\ See Barbara Fraumeni, ``The Measurement of Depreciation in the
U.S. National Income and Product Accounts,'' in Survey of Current
Business 77 No. 7 (Washington, D.C.: Department of Commerce, Bureau of
Economic Analysis, July, 1997), pp. 7-42, and the National Income and
Product Accounts of the United States, Table 7.6, ``Chain-type Quantity
and Price Indexes for Private Fixed Investment by Type,'' U.S.
Department of Commerce, Bureau of Economic Analysis.
\30\ The temporary provision allows 30 percent of the cost of a
qualifying investment to be deducted immediately rather than capitalized
and depreciated over time. It is generally effective for qualifying
investments made after September 10, 2001 and before September 11, 2004.
Qualifying investments generally are limited to tangible property with
depreciation recovery periods of 20 years or less, certain software, and
leasehold improvements, but this set of assets corresponds closely to
machinery and equipment.
---------------------------------------------------------------------------
The revised tax expenditure estimates differ substantially from
estimates calculated under the old methodology. In general, the new tax
expenditure estimates are smaller than the old estimates. \31\ In part
this is because the new baseline uses depreciation allowances that are
faster than those in the old baseline. In addition, the new baseline
calculates depreciation on a replacement cost basis rather on the
historic cost basis previously used; this translates into larger
depreciation allowances to the extent that asset prices rise over time.
In many years the new tax expenditures are negative, indicating that
current law's tax depreciation allowances are smaller than those implied
by economic depreciation. Because these estimates are on a cash flow,
rather than a present value, basis, the negative value does not
necessarily indicate that tax depreciation is decelerated relative to
economic depreciation over the life of an investment. Even when tax
depreciation is accelerated over the life of an investment, negative
annual cash flow estimates could obtain in the later years of an
investment's economic life. This type of vintage effect contributes
importantly to the negative tax expenditures calculated for equipment in
2005-2008 because the temporary expensing provision expires in 2004.
Calculations that compare the present value of tax depreciation (without
30 percent expensing) with the present value of inflation indexed
economic depreciation over each investment's economic life show that for
many types of assets tax depreciation is accelerated, but only slightly,
assuming a moderate rate of inflation. \32\
---------------------------------------------------------------------------
\31\ Estimates under the old methodology are no longer shown in the
tables.
\32\ U.S. Department of the Treasury, Report to the Congress on
Depreciation Recovery Periods and Methods (Washington, D.C.: U.S.
Government Printing Office, July, 2000), p. 32.
---------------------------------------------------------------------------
Owner-Occupied Housing
A homeowner receives a flow of housing services equal in gross value
to the rent that could have been earned had the owner chosen to rent the
house to others. Comprehensive income would include in its base the
implicit net rental income earned on investment in owner-occupied
housing. Current law, however, excludes from its tax base such net
rental income. This exclusion is a tax expenditure relative to a
comprehensive income base.
In contrast to a comprehensive income baseline, the official list of
tax expenditures does not include the exclusion of implicit rental
income on owner-occupied housing. Instead, it includes as tax
expenditures deductions for home mortgage interest and for property
taxes. These are poor proxies for the exclusion of implicit net rental
income. To the extent that a homeowner owns his house outright,
unencumbered by a mortgage, he would have no home mortgage interest
deduction, yet he still would enjoy the benefits of receiving tax free
the implicit rental income earned on his house. When measuring the net
income from an investment in owner-occupied housing, mortgage interest
and property taxes generally would be deductible. The official tax
expenditures do not allow for depreciation and other costs incurred by
the homeowner that must be deducted in determining his net rental
income.
Table 3 shows an estimate of the tax expenditure caused by the
exclusion of implicit net rental income from investment in owner-
occupied housing. This estimate starts with the NIPA calculated value of
gross rent on owner-occupied housing, and subtracts interest, taxes,
economic depreciation, and other costs in arriving at an estimate of
net-rental income from owner-occupied housing. \33\
---------------------------------------------------------------------------
\33\ National Income and Production Accounts, Table 2.4.
---------------------------------------------------------------------------
The tax expenditure estimate is substantial, growing from $20 billion
in 1994 to $31 billion in 2008. Nonetheless, it is only about one-third
as large as the official tax expenditure for the deduction of home
mortgage interest. In part this discrepancy reflects depreciation and
other expenses that must be subtracted from gross rents in arriving at
net rental income. In part, it also might reflect homeowners' ability to
borrow against their homes to fund other spending, leading to a
relatively high debt/equity ratio for housing.
Double Tax on Corporate Profits
A comprehensive income tax would tax all sources of income once at a
tax rate appropriate for the particular taxpayer. Taxes would not vary
by type or source of income.
In contrast to this benchmark, current law may tax income that
shareholders earn on investment in corporate stocks at least twice, and
at combined rates that generally are higher than those imposed on other
sources of income. Corporate profits are taxed once at the company level
under the corporation income tax. They are taxed again at the
shareholder level when
[[Page 139]]
received as a dividend or recognized as a capital gain. Corporate
profits can be taxed more then twice when they pass through multiple
corporations before beings distributed to noncorporate shareholders.
Corporate level taxes cascade because corporations and are taxed on
capital gains they realize on the sale of stock shares and on some
dividend income received. Compared to a comprehensive income tax current
law's double (or more) tax on corporate profits is an example of a
negative tax expenditure because it subjects income to a larger tax
burden than implied by a comprehensive income baseline. The President
has proposed in this Budget to remove the double taxation of corporate
profits.
Table 3 provides an estimate of the negative tax expenditure caused by
the multiple levels of tax on corporate profits. This negative tax
expenditure includes the shareholder level tax on dividends paid and
capital gains realized out of earnings that have been taxed at the
corporate level. It also includes the corporate tax paid on inter-
corporate dividends and on corporate capital gains attributable to the
sale of stock shares.
The negative tax expenditure is large in magnitude; it grows from $25
billion in 2004 to $33 billion in 2008. It is comparable in size (but
opposite in sign) to all but the largest official tax expenditures.
Appendix Table 1. COMPARISON OF CURRENT TAX EXPENDITURES WITH THOSE IMPLIED BY A COMPREHENSIVE INCOME TAX \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue Effect
Description (2004)
--------------------------------------------------------------------------------------------------------------------------------------------------------
A. Tax Expenditure Under a Comprehensive Income Tax
Net exclusion of pension contributions and earnings: Employer plans.................................................................... 67,870
Net exclusion of pension contributions and earnings: 401(k) plans...................................................................... 55,290
Capital gains (except agriculture, timber, iron ore, and coal) (normal tax method)..................................................... 53,930
Exclusion of interest on public purpose State and local bonds.......................................................................... 27,310
Net exclusion of pension contributions and earnings: Individual Retirement Accounts.................................................... 23,130
Capital gains exclusion on home sales.................................................................................................. 20,860
Exclusion of interest on life insurance savings........................................................................................ 20,740
Accelerated depreciation of machinery and equipment (normal tax method)................................................................ 16,670
Deferral of income from controlled foreign corporations (normal tax method)............................................................ 7,900
Net exclusion of pension contributions and earnings: Keogh plans....................................................................... 7,616
Extraterritorial income exclusion...................................................................................................... 5,510
Credit for increasing research activities.............................................................................................. 4,990
Exclusion of Social security benefits of dependents and survivors...................................................................... 4,140
B. Possibly a Tax Expenditure Under a Comprehensive Income Tax, But With Some Qualifications
Deductibility of nonbusiness State and local taxes other than on owner-occupied homes................................................. 50,910
Step-up basis of capital gains at death............................................................................................... 28,500
Child credit.......................................................................................................................... 21,310
Exclusion of Social Security benefits for retired workers............................................................................. 18,930
Exclusion of workers' compensation benefits........................................................................................... 6,460
Workers' compensation insurance premiums.............................................................................................. 6,190
Earned income tax credit.............................................................................................................. 5,090
C. Uncertain
Exclusion of employer contributions for medical insurance premiums and medical care.................................................... 120,160
Deductibility of charitable contributions, other than education and health............................................................. 33,990
Deductibility of medical expenses...................................................................................................... 6,340
Deductibility of charitable contributions (health)..................................................................................... 4,580
Deductibility of charitable contributions (education).................................................................................. 4,350
Deductibility of self-employed medical insurance premiums.............................................................................. 3,690
D. Probably Not a Tax Expenditure Under a Comprehensive Income Tax
Deductibility of mortgage interest on owner-occupied homes............................................................................ 68,440
Deductibility of State and local property tax on owner-occupied homes................................................................. 22,160
Graduated corporation income tax rate (normal tax method)............................................................................. 5,700
Exception from passive loss rules for $25,000 of rental loss.......................................................................... 4,920
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\1\ The measurement of certain tax expenditures under a comprehensive income tax baseline may differ from the official budget estimate even when the
provision would be a tax expenditure under both baselines.
Source: Table 6-2, Tax Expenditure Budget.
[[Page 140]]
Appendix Table 2. COMPARISON OF CURRENT TAX EXPENDITURES WITH THOSE IMPLIED BY A COMPREHENSIVE CONSUMPTION TAX \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue Effect
Description (2004)
--------------------------------------------------------------------------------------------------------------------------------------------------------
A. Tax Expenditure Under a Consumption Base
Exclusion of Social Security benefits for retired workers.............................................................................. 18,930
Exclusion of workers' compensation benefits............................................................................................ 6,460
Credit for increasing research activities.............................................................................................. 4,990
Exclusion of Social Security benefits of dependents and survivors...................................................................... 4,140
B. Probably a Tax Expenditure Under a Consumption Base
Exclusion of employer contributions for medical insurance premiums and medical care.................................................... 120,160
Deductibility of mortgage interest on owner-occupied homes............................................................................. 68,440
Deductibility of nonbusiness state and local taxes other than on owner-occupied homes.................................................. 50,910
Deductibility of charitable contributions, other than education and health............................................................. 33,990
Deductibility of State and local property tax on owner-occupied homes.................................................................. 22,160
Child credit........................................................................................................................... 21,310
Deductibility of medical expenses...................................................................................................... 6,340
Extraterritorial income exclusion...................................................................................................... 5,510
Earned income tax credit............................................................................................................... 5,090
Deductibility of charitable contributions (health)..................................................................................... 4,580
Deductibility of charitable contributions (education).................................................................................. 4,350
Deductibility of self-employed medical insurance premiums.............................................................................. 3,690
C. Probably Not a Tax Expenditure Under a Consumption Base
Workers' compensation insurance premiums............................................................................................... 6,190
D. Not a Tax Expenditure Under a Consumption Base
Net exclusion of pension contributions and earnings: Employer plans.................................................................... 67,870
Net exclusion of pension contributions and earnings: 401(k) plans...................................................................... 55,290
Capital gains (except agriculture, timber, iron ore, and coal) (normal tax method)..................................................... 53,930
Step-up basis of capital gains at death................................................................................................ 28,500
Exclusion of interest on public purpose State and local bonds.......................................................................... 27,310
Net exclusion of pension contributions and earnings: Individual Retirement Accounts.................................................... 23,130
Capital gains exclusion on home sales.................................................................................................. 20,860
Exclusion of interest on life insurance savings........................................................................................ 20,740
Accelerated depreciation of machinery and equipment (normal tax method)................................................................ 16,663
Deferral of income from controlled foreign corporations (normal tax method)............................................................ 7,900
Net exclusion of pension contributions and earnings: Keogh plans....................................................................... 7,616
Graduated corporation income tax rate (normal tax method).............................................................................. 5,700
Exception from passive loss rules for $25,000 of rental loss........................................................................... 4,920
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\1\ The measurement of certain tax expenditures under a consumption tax baseline may differ from the official budget estimate even when the provision
would be a tax expenditure under both baselines.
Source: Table 6-2, Tax Expenditure Budget.
Appendix Table 3. POSSIBLE FUTURE ADDITIONS TO TAX EXPENDITURE ESTIMATES \1\
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2004 2005 2006 2007 2008
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Imputed Rent On Owner-Occupied Housing........................ 20,517 24,064 25,092 28,052 31,002
Double Tax on Corporate Profits \2\........................... -25,373 -32,723 -31,590 -32,022 -33,096
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\1\ Calculations described in the appendix text.
\2\ This is a negative tax expenditure, a tax provision that overtaxes income relative to the treatment
specified by the baseline tax system.