[JPRT 110-3-07]
[From the U.S. Government Publishing Office]
JCS-3-07
[JOINT COMMITTEE PRINT]
ESTIMATES OF FEDERAL TAX
EXPENDITURES FOR
FISCAL YEARS 2007-2011
Prepared for the
HOUSE COMMITTEE ON WAYS AND MEANS
AND THE
SENATE COMMITTEE ON FINANCE
__________
By the Staff of the
JOINT COMMITTEE ON TAXATION
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
SEPTEMBER 24, 2007
U.S. GOVERNMENT PRINTING OFFICE
37-755 PDF WASHINGTON DC: 2007
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[[Page (ii)]]
JOINT COMMITTEE ON TAXATION
110th Congress, 1st Session
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HOUSE SENATE
CHARLES B. RANGEL, New York, MAX BAUCUS, Montana,
Chairman Vice Chairman
FORTNEY PETE STARK, California JOHN D. ROCKEFELLER IV, West
SANDER M. LEVIN, Michigan Virginia
JIM McCRERY, Louisiana KENT CONRAD, North Dakota
WALLY HERGER, California CHARLES E. GRASSLEY, Iowa
ORRIN G. HATCH, Utah
[[Page (iii)]]
C O N T E N T S
Page
Introduction..................................................... 1
I. The Concept of Tax Expenditures...................................2
II. Measurement of Tax Expenditures..................................20
III.Tax Expenditure Estimates........................................23
Table 1. Tax Expenditure Estimates by Budget Function,
Fiscal Years 2007-2011............................... 24
Table 2. Distribution of All Returns, Taxable Returns,
Itemized Returns, and Tax Liability by Income Class.. 37
Table 3. Distribution of Selected Individual Tax
Expenditures by Income Class......................... 38
[[Page (1)]]
INTRODUCTION
This report\1\ on tax expenditures for fiscal years 2007-
2011 is prepared by the staff of the Joint Committee on
Taxation (``Joint Committee staff'') for the House Committee on
Ways and Means and the Senate Committee on Finance. The report
also is submitted to the House and Senate Committees on the
Budget.
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\1\ This report may be cited as follows: Joint Committee on
Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2007-
2011 (JCS-3-07), September 24, 2007.
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As in the case of earlier reports,\2\ the estimates of tax
expenditures in this report were prepared in consultation with
the staff of the Office of Tax Analysis in the Treasury
Department (``the Treasury''). The Treasury published its
estimates of tax expenditures for fiscal years 2006-2012 in the
Administration's budgetary statement of February 2007.\3\ The
lists of tax expenditures in this Joint Committee staff report
and the Administration's budgetary statement overlap
considerably; the differences are discussed in Part I of this
report under the heading ``Comparisons with Treasury.''
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\2\ Joint Committee on Taxation, Estimates of Federal Tax
Expenditures, October 4, 1972 (JCS-28-72), June 1, 1973 (JCS-20-73),
July 8, 1975 (JCS-11-75), March 15, 1976 (JCS-5-76), March 15, 1977
(JCS-10-77), March 14, 1978 (JCS-9-78), March 15, 1979 (JCS-9-79),
March 6, 1980 (JCS-8-80), March 16, 1981 (JCS-7-81), March 8, 1982
(JCS-4-82), March 7, 1983 (JCS-4-83), November 9, 1984 (JCS-39-84),
April 12, 1985 (JCS-8-85), March 1, 1986 (JCS-7-86), February 27, 1987
(JCS-3-87), March 8, 1988 (JCS-3-88), February 28, 1989 (JCS-4-89),
March 9, 1990 (JCS-7-90), March 11, 1991 (JCS-4-91), April 24, 1992
(JCS-8-92), April 22, 1993 (JCS-6-93), November 9, 1994 (JCS-6-94),
September 1, 1995 (JCS-21-95), November 26, 1996 (JCS-11-96), December
15, 1997 (JCS-22-97), December 14, 1998 (JCS-7-98), December 22, 1999
(JCS-13-99), April 6, 2001 (JCS-1-01), January 17, 2002 (JCS-1-02),
December 19, 2002 (JCS-5-02), December 22, 2003 (JCS-8-03), January 12,
2005 (JCS-1-05), and April 25, 2006 (JCS-2-06).
\3\ Office of Management and Budget, ``Tax Expenditures,'' Budget
of the United States Government: Analytical Perspectives, Fiscal Year
2008, February 5, 2007, pp. 285-327.
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The Joint Committee staff has made its estimates (as shown
in Table 1) based on the provisions in tax law as enacted
through August 31, 2007. Expired or repealed provisions are not
listed unless they have continuing revenue effects that are
associated with ongoing taxpayer activity. Proposed extensions
or modifications of expiring provisions are not included until
they have been enacted into law. The tax expenditure estimates
in this report are based on the January 2007 Congressional
Budget Office revenue baseline and Joint Committee staff
projections of the gross income, deductions, and expenditures
of individuals and corporations for calendar years 2006-2011.
Part I of this report contains a discussion of the concept
of tax expenditures. Part II is a discussion of the measurement
of tax expenditures. Estimates of tax expenditures for fiscal
years 2007-2011 are presented in Table 1 in Part III. Table 2
shows the distribution of tax returns by income class, and
Table 3 presents distributions of selected individual tax
expenditures by income class.
[[Page (2)]]
I. THE CONCEPT OF TAX EXPENDITURES
Overview
``Tax expenditures'' are defined under the Congressional
Budget and Impoundment Control Act of 1974 (the ``Budget Act'')
as ``revenue losses attributable to provisions of the Federal
tax laws which allow a special exclusion, exemption, or
deduction from gross income or which provide a special credit,
a preferential rate of tax, or a deferral of tax liability.''
\4\ Thus, tax expenditures include any reductions in income tax
liabilities that result from special tax provisions or
regulations that provide tax benefits to particular taxpayers.
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\4\ Congressional Budget and Impoundment Control Act of 1974 (Pub.
L. No. 93-344), sec. 3(3).
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Special income tax provisions are referred to as tax
expenditures because they may be considered to be analogous to
direct outlay programs, and the two can be considered as
alternative means of accomplishing similar budget policy
objectives. Tax expenditures are similar to those direct
spending programs that are available as entitlements to those
who meet the statutory criteria established for the programs.
Estimates of tax expenditures are prepared for use in
budget analysis. They are a measure of the economic benefits
that are provided through the tax laws to various groups of
taxpayers and sectors of the economy. The estimates also may be
useful in determining the relative merits of achieving
specified public goals through tax benefits or direct outlays.
The legislative history of the Budget Act indicates that
tax expenditures are to be defined with reference to a normal
income tax structure (referred to here as ``normal income tax
law''). The determination of whether a provision is a tax
expenditure is made on the basis of a broad concept of income
that is larger in scope than ``income'' as defined under
general U.S. income tax principles. The Joint Committee staff
has used its judgment in distinguishing between those income
tax provisions (and regulations) that can be viewed as a part
of normal income tax law and those special provisions that
result in tax expenditures. A provision traditionally has been
listed as a tax expenditure by the Joint Committee staff if
there is a reasonable basis for such classification and the
provision results in more than a de minimis revenue loss, which
solely for this purpose means a total revenue loss of at least
$50 million over the five fiscal years 2007-2011. The Joint
Committee staff emphasizes, however, that in the process of
listing tax expenditures, no judgment is made, nor any
implication intended, about the desirability of any special tax
provision as a matter of public policy.
If a tax expenditure provision were eliminated, Congress
might choose to continue financial assistance through other
means rather than terminate all Federal assistance for the
activity. If a replace
[[Page 3]]
ment spending program were enacted, the higher revenues
received as a result of the elimination of a tax expenditure
might not represent a net budget gain. A replacement program
could involve direct expenditures, direct loans or loan
guarantees, regulatory activity, a mandate, a different form of
tax expenditure, or a general reduction in tax rates. Joint
Committee staff estimates of tax expenditures do not anticipate
such policy responses.
The Budget Act uses the term tax expenditure to refer to
the special tax provisions that are contained in the Federal
income taxes on individuals and corporations.\5\ Other Federal
taxes such as excise taxes, employment taxes, and estate and
gift taxes may also have exceptions, exclusions, and credits,
but those special tax provisions are not included in this
report because they are not part of the income tax. Thus, for
example, the income tax exclusion for employer-paid health
insurance is included, but the Federal Insurance Contributions
Act (``FICA'') tax exclusion for employer-paid health insurance
is not treated as a tax expenditure in this report.\6\
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\5\ The Federal income tax on individuals also applies to estates
and trusts, which are subject to a separate income tax rate schedule
(Section 1(c) of the Internal Revenue Code of 1986, the ``Code'').
Estates and trusts may benefit from some of the same tax expenditure
provisions that apply to individuals. In Table 1 of this report, the
tax expenditures that apply to estates and trusts have been included in
the estimates of tax expenditures for individual taxpayers.
\6\ Other analysts have explored applying the concept of tax
expenditures to payroll and excise taxes. See, Jonathan Barry Forman,
``Would a Social Security Tax Expenditure Budget Make Sense?'' Public
Budgeting and Financial Management, 5, 1993, pp. 311-335, and Bruce F.
Davie, ``Tax Expenditures in the Federal Excise Tax System,'' National
Tax Journal, XLVII, March 1994, pp. 39-62. Prior to 2003, the
President's budget contained a section that reviewed and tabulated
estate and gift tax provisions that the Treasury considered tax
expenditures. The Joint Committee staff considers estate and gift
provisions as being outside of the normal income tax structure and thus
omits them from its lists of tax expenditures.
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Some provisions in the Internal Revenue Code provide for
special tax treatment that is less favorable than normal income
tax law. Examples of such provisions include (1) the denial of
deductions for certain lobbying expenses, (2) the denial of
deductions for certain executive compensation, and (3) the two-
percent floor on itemized deductions for unreimbursed employee
expenses. Tax provisions that provide treatment less favorable
than normal income tax law are not shown in this report because
they are not included in the statutory definition of a tax
expenditure.
Individual Income Tax
Under the Joint Committee staff methodology, the normal
structure of the individual income tax includes the following
major components: one personal exemption for each taxpayer and
one for each dependent, the standard deduction, the existing
tax rate schedule, and deductions for investment and employee
business expenses. Most other tax benefits to individual
taxpayers are classified as exceptions to normal income tax
law.
The Joint Committee staff views the personal exemptions and
the standard deduction as defining the zero-rate bracket that
is a part of normal tax law. An itemized deduction that is not
necessary for the generation of income is classified as a tax
expenditure, but only to the extent that it, when added to a
taxpayer's other itemized deductions, exceeds the standard
deduction.
All employee compensation is subject to tax unless the tax
code contains a specific exclusion for the income. Specific
exclusions for employer-provided benefits include the
following: coverage under
[[Page 4]]
accident and health plans,\7\ accident and disability
insurance, group term life insurance, educational assistance,
tuition reduction benefits, transportation benefits (parking,
van pools, and transit passes), dependent care assistance,
adoption assistance, meals and lodging furnished for the
convenience of the employer, employee awards, and other
miscellaneous fringe benefits (e.g., employee discounts,
services provided to employees at no additional cost to
employers, and de minimis fringe benefits). Each of these
exclusions is classified as a tax expenditure in this report.
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\7\ Present law contains an exclusion for employer-provided
coverage under accident and health plans (Code sec. 106) and an
exclusion for benefits received by employees under employer-provided
accident and health plans (Code sec. 105(b)). These two exclusions are
viewed as a single tax expenditure. Under normal income tax law, the
value of employer-provided accident and health coverage would be
includable in the income of employees, but employees would not be
subject to tax on the accident and health insurance benefits
(reimbursements) that they might receive.
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Under normal income tax law, employer contributions to
pension plans and income earned on pension assets generally
would be taxable to employees as the contributions are made and
as the income is earned, and employees would not receive any
deduction or exclusion for their pension contributions. Under
present law, employer contributions to qualified pension plans
and employee contributions made at the election of the employee
through salary reduction are not taxed until distributed to the
employee, and income earned on pension assets is not taxed
until distributed. The tax expenditure for ``net exclusion of
pension contributions and earnings'' is computed as the income
taxes forgone on current tax-excluded pension contributions and
earnings less the income taxes paid on current pension
distributions (including the 10-percent additional tax paid on
early withdrawals from pension plans).
Under present law, social security and tier 1 railroad
retirement benefits are partially excluded or fully excluded
from gross income.\8\ Under normal income tax law, retirees
would be entitled to an exclusion for only the portion of the
retirement benefits that represents a return of the payroll
taxes that they paid during their working years. Thus, the
exclusion of social security and railroad retirement benefits
in excess of payroll tax payments is classified as a tax
expenditure.
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\8\ For taxpayers with modified adjusted gross incomes above
certain levels, up to 85 percent of social security and tier 1 railroad
retirement benefits are includable in income.
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All Medicare benefits are excluded from taxation. The value
of Medicare Part A insurance generally is greater than the
Health Insurance (``HI'') tax contributions that enrollees made
during their working years, the value of Medicare Part B
insurance generally is greater than the Part B premium that
enrollees must pay, and the value of Medicare Part D
(prescription drug) insurance generally is greater than the
Part D premium that enrollees must pay. The exclusion of the
value of Medicare Part A insurance in excess of HI tax
contributions is classified as a tax expenditure, as is the
exclusion of the value of Medicare Part B insurance in excess
of Part B premiums, and the exclusion of the value of Part D
insurance in excess of Part D premiums.
Public assistance benefits are excluded from gross income
by statute or by Internal Revenue Service regulations. Table 1
contains tax expenditure estimates for workers' compensation
benefits, special benefits for disabled coal miners, and cash
public assistance
[[Page 5]]
benefits (which include Supplemental Security Income benefits
and Temporary Assistance for Needy Families benefits).
The individual income tax does not include in gross income
the imputed income that individuals receive from the services
provided by owner-occupied homes and durable goods.\9\ However,
the Joint Committee staff does not classify this exclusion as a
tax expenditure. The measurement of imputed income for tax
purposes presents administrative problems and its exclusion
from taxable income may be regarded as an administrative
necessity.\10\ Under normal income tax law, individuals would
be allowed to deduct only the interest on indebtedness incurred
in connection with a trade or business or an investment. Thus,
the deduction for mortgage interest on a principal or second
residence is classified as a tax expenditure.
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\9\ The National Income and Product Accounts include estimates of
this imputed income. The accounts appear in U.S. Department of
Commerce, Bureau of Economic Analysis, Survey of Current Business,
published monthly. However, a taxpayer-by-taxpayer accounting of
imputed income would be necessary for a tax expenditure estimate.
\10\ If the imputed income from owner-occupied homes were included
in adjusted gross income, it would be proper to include all mortgage
interest deductions and related property tax deductions as part of the
normal income tax structure, since interest and property tax deductions
would be allowable as a cost of producing imputed income. It also would
be appropriate to allow deductions for depreciation and maintenance
expenses for owner-occupied homes.
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The Joint Committee staff assumes that, for administrative
feasibility, normal income tax law would tax capital gains in
full in the year the gains are realized through sale, exchange,
gift, or transfer at death. Thus, the deferral of tax until
realization is not classified as a tax expenditure, but reduced
rates of tax, further deferrals of tax (beyond the year of
sale, exchange, gift, or transfer at death), and exclusions of
certain capital gains are classified as tax expenditures. It
also is assumed that normal income tax law would not provide
for any indexing of the basis of capital assets for changes in
the general price level. Thus, under normal income tax law (as
under present law), the income tax would be levied on nominal
gains as opposed to real gains in asset values.
There are many types of State and local government bonds
and private purpose bonds that qualify for tax-exempt status
for Federal income tax purposes. Table 1 contains a separate
tax expenditure listing for each type of bond.
Under the Joint Committee staff view of normal tax law,
compensatory stock options would be subject to regular income
tax at the time the options are exercised and employers would
receive a corresponding tax deduction.\11\ The employee's
income would be equal to the difference between the purchase
price of the stock and the market price on the day the option
is exercised. Present law provides for special tax treatment
for incentive stock options and options acquired under employee
stock purchase plans. When certain requirements are satisfied,
(1) the income that is received at the time the option is
exercised is excluded for purposes of the regular income tax
but, in the case of an incentive stock option, included for
purposes of the alternative minimum tax, (2) the gain from any
subsequent sale of the stock is taxed as a capital gain, and
(3) the employer does not receive a tax deduction with respect
to the option. The special tax treatment provided to the
employee
[[Page 6]]
is viewed as a tax expenditure by the Joint Committee staff,
and an estimate of this tax expenditure is contained in Table
1. However, it should be noted that the revenue loss from the
special tax treatment provided to the employee is accompanied
by a significant revenue gain from the denial of the deduction
to the employer.
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\11\ If the option has a readily ascertainable fair market value,
normal law would tax the option at the time it is granted and the
employer would be entitled to a deduction at that time.
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The individual alternative minimum tax (``AMT'') and the
passive activity loss rules are not viewed by the Joint
Committee staff as a part of normal income tax law. Instead,
they are viewed as provisions that reduce the magnitude of the
tax expenditures to which they apply. For example, the AMT
reduces the value of the deduction for State and local income
taxes (for those taxpayers subject to the AMT) by not allowing
the deductions to be claimed in the calculation of AMT
liability. Similarly, the passive loss rules defer otherwise
allowable deductions and credits from passive activities until
a time when the taxpayer has passive income or disposes of the
assets associated with the passive activity. Exceptions to the
individual AMT and the passive loss rules are not classified as
tax expenditures by the Joint Committee staff because the
effects of the exceptions already are incorporated in the
estimates of related tax expenditures.
Business Income Taxation
Regardless of the legal form of organization (sole
proprietorship, partnership, or S or C corporation), the same
general principles are used in the computation of taxable
business income. Thus, most business tax expenditures apply
equally to unincorporated and incorporated businesses.
One of the most difficult issues in defining tax
expenditures for business income relates to the tax treatment
of capital costs. Under present law, capital costs may be
recovered under a variety of alternative methods, depending
upon the nature of the costs and the status of the taxpayer.
For example, investments in equipment and structures may
qualify for tax credits, expensing, accelerated depreciation,
or straight-line depreciation. The Joint Committee staff
generally classifies as tax expenditures cost recovery
allowances that are more favorable than those provided under
the alternative depreciation system (sec. 168(g)), which
provides for straight-line recovery over tax lives that are
longer than those permitted under the accelerated system. As
indicated above, the Joint Committee staff assumes that normal
income tax law would not provide for any indexing of the basis
of capital assets. Thus, normal income tax law would not take
into account the effects of inflation on tax depreciation.
The Joint Committee staff uses several accounting standards
in evaluating the provisions in the Code that govern the
recognition of business receipts and expenses. Under the Joint
Committee staff view, normal income tax law is assumed to
require the accrual method of accounting, the standard of
``economic performance'' (used in the Code to test whether
liabilities are deductible), and the general concept of
matching income and expenses. In general, tax provisions that
do not satisfy all three standards are viewed as tax
expenditures. For example, the deduction for contributions to
taxpayer-controlled mining reclamation reserve accounts is
viewed as a tax expenditure because the contributions do not
satisfy the eco
[[Page 7]]
nomic performance standard. (Adherence to the standard would
require that the taxpayer make an irrevocable contribution
toward future reclamation, involving a trust fund or similar
mechanism, as occurs in a number of areas in the Code.) The
deductions for contributions to nuclear decommissioning trust
accounts and certain environmental settlement trust accounts
are not viewed as a tax expenditure because the contributions
are irrevocable (i.e., they satisfy the economic performance
standard). However, present law provides for a reduced rate of
tax on the incomes of these two types of trust accounts, and
these tax rate reductions are viewed as tax expenditures.
The Joint Committee staff assumes that normal income tax
law would provide for the carryback and carryforward of net
operating losses. The staff also assumes that the general
limits on the number of years that such losses may be carried
back or forward were chosen for reasons of administrative
convenience and compliance concerns and may be assumed to
represent normal income tax law. Exceptions to the general
limits on carrybacks and carryforwards are viewed as tax
expenditures.
Corporate Income Tax
The income of corporations (other than S corporations)
generally is subject to the corporate income tax. The corporate
income tax includes a graduated tax rate schedule. The lower
tax rates in the schedule are classified by the Joint Committee
staff as a tax expenditure (as opposed to normal income tax
law) because they are intended to provide tax benefits to small
business and, unlike the graduated individual income tax rates,
are unrelated to concerns about ability of individuals to pay
taxes.
Exceptions to the corporate alternative minimum tax are not
viewed as tax expenditures because the effects of the AMT
exceptions are already incorporated in the estimates of related
tax expenditures.\12\
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\12\ See discussion of individual AMT on page 6.
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Certain income of pass-through entities is exempt from the
corporate income tax. The income of sole proprietorships, S
corporations, most partnerships, and other entities (such as
regulated investment companies and real estate investment
trusts) is taxed only at the individual level. The special tax
rules for these pass-through entities are not classified as tax
expenditures because the tax benefits are available to any
entity that chooses to organize itself and operate in the
required manner.
Nonprofit corporations that satisfy the requirements of
Code section 501 also generally are exempt from corporate
income tax. The tax exemption of certain nonprofit cooperative
business organizations, such as trade associations, is not
treated as a tax expenditure for the same reason applicable to
for-profit pass-through business entities. With respect to
other nonprofit organizations, such as charities, tax-exempt
status is not classified as a tax expenditure because the
nonbusiness activities of such organizations generally must
predominate and their unrelated business activities are subject
to tax. In general, the imputed income derived from nonbusiness
activities conducted by individuals or collectively by certain
[[Page 8]]
nonprofit organizations is outside the normal income tax base.
However, the ability of donors to such nonprofit organizations
to claim a charitable contribution deduction is a tax
expenditure, as is the exclusion of income granted to holders
of tax-exempt financing issued by charities.
Recent Legislation
The Tax Increase Prevention and Reconciliation Act
(``TIPRA'') of 2005 (H.R. 4297), enacted on May 17, 2006 (Pub.
L. No. 109-222), created three new tax expenditures:
--A tax exclusion was provided for the earnings of certain
environmental settlement funds, effective for accounts and
funds established after the date of enactment. The tax
exclusion expires after December 31, 2010. In Table 1, this tax
expenditure is listed as ``Tax exclusion for earnings of
certain environmental settlement funds.''
--Reduced rates of tax were provided for gains from the
sale or exchange of self-created musical works, effective for
sales or exchanges in taxable years beginning after the date of
enactment and before January 1, 2011. This tax expenditure is
not listed in Table 1 because the estimated revenue loss is
below the de minimis amount.
--Taxpayers were given the option of electing five-year
amortization of expenses paid or incurred for the creation or
acquisition of musical compositions, effective for expenses
paid or incurred for property placed in service in taxable
years beginning after 2005 and before 2011. This tax
expenditure is not listed in Table 1 because the estimated
revenue loss is below the de minimis amount.
The Tax Increase Prevention and Reconciliation Act of 2005
also extended or modified some existing tax expenditures, as
follows:
--The $100,000 limit on the expensing of depreciable
tangible personal property by a small business, which was
scheduled to expire for taxable years beginning after 2007, was
extended for two years, and other modifications were made to
the expensing provision. In Table 1, these changes are
reflected in the tax expenditure estimate for ``Expensing under
section 179 of depreciable business property.''
--Reduced rates of tax on dividends and long-term capital
gains of individuals, which were scheduled to expire for
taxable years beginning after 2008, were extended for two
years.
--The temporary exceptions from subpart F foreign personal
holding income, which were scheduled to expire for taxable
years after 2006, were extended for two years. In Table 1, this
change is reflected in the tax expenditure estimates for
``Deferral of active income of controlled foreign
corporations'' and ``Deferral of certain active financing
income.''
--The present-law provision providing for the deferral of
active income of controlled foreign corporations was expanded
by providing look-through treatment of payments between
controlled foreign corporations, effective for taxable years of
foreign corporations beginning after December 31, 2005, and
before January 1, 2009.
--Certain changes were made to the rules governing
qualified veterans' mortgage bonds, including changes to the
definition of an eligible veteran, and new State volume limits
were provided for
[[Page 9]]
qualified veterans' mortgage bonds issued by the States of
Alaska, Oregon, and Wisconsin in calendar years 2006 through
2010, with the program expiring after 2010. In Table 1, these
changes are reflected in the tax expenditure estimate for
``Exclusion of interest on State and local government qualified
private activity bonds for owner-occupied housing.''
--An exception to the tax-exempt bond arbitrage
restrictions for certain bonds secured by income from
investments in the Texas Permanent University Fund was codified
and extended. In Table 1, this change is reflected in the tax
expenditure estimate for ``Exclusion of interest on State and
local government qualified private activity bonds for private
non-profit and qualified public educational facilities.''
--The timing of the $20 million capital expenditure
limitation on qualified small issue bonds was accelerated from
bonds issued after September 30, 2009, to bonds issued after
December 31, 2006. In Table 1, this change is reflected in the
tax expenditure estimate for ``Exclusion of interest on State
and local government small issue qualified private activity
bonds.''
--The exception to the interest imputation rule for below-
market loans to qualified continuing care facilities was
broadened by eliminating the dollar cap and making other
modifications, effective for calendar years 2005 through 2010,
with respect to loans made before, on, or after such date. In
Table 1, this change is reflected in the tax expenditure
estimate for ``Exemptions from imputed interest rules.''
--The exemption amounts for the alternative minimum tax
were increased to: (1) $62,550 in the case of married
individuals filing a joint return and surviving spouses; (2)
$42,500 in the case of unmarried individuals other than
surviving spouses; and (3) $31,275 in the case of married
individuals filing a separate return, effective for taxable
years beginning in 2006. In addition, the provision allowing
nonrefundable personal credits to the full extent of the
individual's regular and alternative minimum tax, which was
scheduled to expire for taxable years beginning after December
31, 2005, was extended for one year. In Table 1, these changes
to the alternative minimum tax are reflected in the estimates
of the various tax expenditures whose benefits are limited by
the alternative minimum tax.
--The two-year amortization period for geological and
geophysical expenditures associated with oil and gas
exploration was extended to five years for certain major
integrated oil companies, effective for amounts paid or
incurred after the date of enactment.
--New requirements were imposed on pooled financing bonds
as a condition of tax exemption, effective for bonds issued
after the date of enactment. In Table 1, these new requirements
are reflected in the estimates of all of the tax expenditure
provisions that relate to the exclusion of interest on State
and local government bonds.
--The income limits on conversions of traditional IRAs to
Roth IRAs were eliminated, effective for taxable years
beginning after 2009. In Table 1, this change is reflected in
the tax expenditure estimate for ``Net exclusion of pension
contributions and earnings: Individual retirement plans.''
[[Page 10]]
--The foreign sales corporation and extraterritorial income
binding contract relief provisions were repealed, effective for
taxable years beginning after the date of enactment. Thus, the
tax expenditure for ``Exclusion of extraterritorial income'' is
no longer listed in Table 1.
--The wage limitation applicable to the deduction for
domestic production activities was modified, effective for
taxable years beginning after the date of enactment.
--An inflation adjustment was provided for the foreign
earned income exclusion and adjustments were made to the
exclusion for housing costs, effective for taxable years
beginning after 2005. In Table 1, these changes are reflected
in the tax expenditure estimate for ``Exclusion of income
earned abroad by U.S. citizens.''
The Heroes Earned Retirement Opportunities Act (H.R. 1499),
enacted on May 29, 2006 (Pub. L. No. 109-227), provided that
for purposes of applying the limit on IRA contributions, an
individual's gross income is determined without regard to the
exclusion for combat pay, effective for taxable years beginning
after 2003.
The Pension Protection Act of 2006 (H.R. 4), enacted on
August 17, 2006 (Pub. L. No. 109-280), made changes to the
rules governing the tax treatment of pensions and IRAs and
permanently extended the pension and IRA provisions contained
in the Economic Growth and Tax Relief Reconciliation Act of
2001. In Table 1, these changes are reflected in the various
tax expenditure estimates for pensions and IRAs.
The Pension Protection Act of 2006 also modified two other
tax expenditures, as follows:
--An exception was provided for the service area limitation
rules as they apply to the local furnishing of electric energy
or gas for bonds issued prior to May 31, 2006, to finance the
Lake Dorothy hydroelectric project in Alaska, effective on the
date of enactment. In Table 1, this change is reflected in the
tax expenditure estimate for ``Exclusion of interest on State
and local government qualified private activity bonds for
energy production facilities.''
--Various rules governing the tax treatment of qualified
tuition programs, which were scheduled to expire after 2010,
were permanently extended. In Table 1, these changes are
reflected in the tax expenditure estimate for ``Exclusion of
tax on earnings of qualified tuition programs.''
The Tax Relief and Health Care Act of 2006 (H.R. 6111),
enacted on December 20, 2006 (Pub. L. No. 109-432), created
several new tax expenditures:
--A new tax credit was provided for corporate income earned
in American Samoa, effective for the first two taxable years of
a corporation beginning after December 31, 2005. This tax
expenditure is not listed in Table 1 because the estimated
revenue loss is below the de minimis amount.
--A special depreciation allowance was provided for
cellulosic biomass ethanol plant property, effective for
property placed in service after the date of enactment and
before January 1, 2013. This provision is not listed in Table 1
because the estimated revenue loss is below the de minimis
amount.
--Partial expensing was provided for investments in
advanced mine safety equipment, effective for costs paid or
incurred after the
[[Page 11]]
date of enactment with respect to property placed in service on
or before December 31, 2008. This provision is not listed in
Table 1 because the estimated revenue loss is below the de
minimis amount.
--A credit was provided for costs incurred in training
qualified mine rescue team employees, effective for taxable
years beginning after December 31, 2005, and before January 1,
2009. This provision is not listed in Table 1 because the
estimated revenue loss is below the de minimis amount.
--A deduction was provided for premiums paid or accrued for
qualified mortgage insurance, effective for mortgage insurance
contracts issued on or after January 1, 2007, and amounts paid
or accrued on such contracts during 2007. This tax expenditure
is listed in Table 1.
--A 25-percent exclusion from gross income was provided for
capital gains from the conservation sale of a qualifying
mineral or geothermal interest located on eligible Federal
land, effective for sales occurring on or after the date of
enactment. This provision is not listed in Table 1 because the
estimated revenue loss is below the de minimis amount.
The Tax Relief and Health Care Act of 2006 also extended or
modified some existing tax expenditures, as follows:
--The above-the-line deduction for qualified higher
education expenses, which was scheduled to expire for taxable
years beginning after December 31, 2005, was extended for two
years.
--The new markets tax credit, which was scheduled to expire
after calendar year 2007, was extended through 2008 and up to
$3.5 billion in qualified equity investments will be permitted
in 2008.
--The option to deduct State and local sales taxes (in lieu
of State and local income taxes), which was scheduled to expire
for sales taxes paid after December 31, 2005, was extended for
two years.
--The tax credit for increasing research activities, which
expired on December 31, 2005, was extended for two years (for
amounts paid or incurred after December 31, 2005, and before
January 1, 2008). The Act also made certain modifications to
the research credit.
--The work opportunity tax credit and the welfare-to-work
tax credit expired for individuals who began work for an
employer after December 31, 2005. The Act extended the two
credits unchanged through 2006 and combined the two credits
(with changes) for 2007. The combined credit expires for
individuals who begin work for an employer after December 31,
2007. The combined credit is listed in Table 1 as the ``Work
opportunity tax credit.''
--The election to treat combat pay as earned income for
purposes of the earned income credit, which was scheduled to
expire for taxable years ending after December 31, 2006, was
extended for one year.
--The tax credit for holders of qualified zone academy
bonds, which was scheduled to expire for bonds issued after
December 31, 2005, was extended to include bonds issued through
December 31, 2007, and arbitrage requirements and spending
requirements were imposed on all such bonds issued after the
date of enactment with
[[Page 12]]
respect to allocations of the annual aggregate bond cap for
calendar years after 2005.
--The above-the-line deduction for teacher classroom
expenses, which was scheduled to expire for taxable years
beginning after December 31, 2005, was extended for two years.
--The expensing of environmental remediation costs, which
was scheduled to expire for expenses paid or incurred after
December 31, 2005, was extended for two years and the
definition of hazardous substance was expanded to include
petroleum products.
--The various tax incentives for investments in the
District of Columbia, which were scheduled to expire after
December 31, 2005, were extended for two years.
--The tax credit for Indian reservation employment, which
was scheduled to expire for taxable years ending after December
31, 2005, was extended for two years.
--Accelerated depreciation for business property on Indian
reservations, which was scheduled to expire for property placed
in service after December 31, 2005, was extended for two years.
--Fifteen-year straight-line cost recovery for qualified
leasehold improvements and qualified restaurant property, which
was scheduled to expire for property placed in service after
December 31, 2005, was extended for two years. In Table 1, this
is reflected in the tax expenditure estimate for ``Depreciation
of buildings other than rental housing in excess of alternative
depreciation system.''
--The enhanced deduction for charitable contributions of
scientific property used for research and computer technology
and equipment, which was scheduled to expire for taxable years
beginning after December 31, 2005, was extended for two years
and expanded to include property assembled by the taxpayer. In
Table 1, these changes are reflected in the tax expenditure
estimate for the ``Deduction for charitable contributions to
educational institutions.''
--The provision allowing certain individuals to establish
new Archer Medical Savings Accounts (``MSAs''), which was
scheduled to expire after December 31, 2005, was extended for
two years. The tax expenditure for Archer MSAs is not listed in
Table 1 because the estimated revenue loss is below the de
minimis amount.
--The suspension of the 100-percent-of-net-income
limitation on percentage depletion for oil and natural gas from
marginal properties, which was scheduled to expire for taxable
years after December 31, 2005, was extended for two years.
--The placed-in-service date for additional first-year
depreciation for Gulf Opportunity Zone (``GO zone'') property,
which was scheduled to expire for property placed in service
after December 31, 2008, was extended for progress expenditures
made prior to 2010 for certain structures.
--The tax credits for electricity production from certain
renewable resources, which were generally scheduled to expire
for property placed in service after December 31, 2007, were
extended for one year.
--The authority to issue clean renewable energy bonds,
which was scheduled to expire for bonds issued after December
31, 2007, was extended to include bonds issued through December
31, 2008, and the national limitation on the issuance of such
bonds was increased by $400 million. In Table 1, this change is
reflected in the
[[Page 13]]
tax expenditure estimate for ``Tax credit for holders of clean
renewable energy bonds.''
--The advanced coal credit was modified by changing the
performance requirement relating to the removal of sulfur
dioxide from subbituminous coal, effective for advanced coal
project certification applications submitted after October 2,
2006. In Table 1, this modification is reflected in the tax
expenditure estimate for the ``Energy credit.''
--The deduction for expenditures on energy efficient
commercial building property, which was scheduled to expire for
property placed in service after December 31, 2007, was
extended for one year.
--The tax credit for the construction of energy efficient
new homes, which was scheduled to expire for homes purchased
after December 31, 2007, was extended for one year.
--The tax credit for the residential purchase of qualified
photovoltaic and solar water heating property, which was
scheduled to expire for property placed in service after
December 31, 2007, was extended for one year.
--The business solar and fuel cell energy credit, which was
scheduled to expire for property purchased after December 31,
2007, was extended for one year. In Table 1, this change is
reflected in the tax expenditure estimate for ``Energy
credit.''
--The tax credit for producing fuel from a non-conventional
source was modified by repealing the phaseout of the coke
credit, which was based on the reference price of oil. This
repeal of the phaseout is estimated to have no effect on the
tax expenditure estimate for the ``Tax credit for producing
fuel from a non-conventional source.''
--Certain modifications were made to the rules governing
health savings accounts (``HSAs''), with varying effective
dates. In Table 1, all of these modifications are reflected in
the tax expenditure estimate for ``Health savings accounts.''
--The deduction for income attributable to domestic
production activities (sec. 199) was expanded to include income
attributable to production activities in Puerto Rico, effective
for the first two taxable years beginning after December 31,
2005, and before January 1, 2008.
--The tax exclusion for the earnings of certain
environmental settlement funds established in consent decrees
for the sole purpose of resolving claims under the
Comprehensive Environmental Response, Compensation, and
Liability Act, which was scheduled to expire for funds
established after December 31, 2010, was made permanent.
--The TIPRA changes to the rules governing qualified
veterans' mortgage bonds, including changes to the definition
of an eligible veteran, and new State volume limits for
qualified veterans' mortgage bonds issued by the States of
Alaska, Oregon, and Wisconsin, which were scheduled to expire
after 2010, were made permanent. In Table 1, these changes are
reflected in the tax expenditure estimate for ``Exclusion of
interest on State and local government qualified private
activity bonds for owner-occupied housing.''
--The reduced rate of tax on gains from the sale of certain
self-created musical works, which was scheduled to expire for
works
[[Page 14]]
sold or exchanged after December 31, 2010, was made permanent.
This tax expenditure is not listed in Table 1 because the
estimated revenue loss is below the de minimis amount.
--The exception to the tax-exempt bond arbitrage
restrictions for certain bonds secured by income from
investments in the Texas Permanent University Fund, which was
codified and extended by TIPRA, was made permanent. In Table 1,
this change is reflected in the tax expenditure for ``Exclusion
of interest on State and local government qualified private
activity bonds for private non-profit and qualified public
educational facilities.''
--The rules applicable to loans financed with qualified
veterans' mortgage bonds were modified to permit the financing
of mortgages to veterans without regard to the first-time home
buyer requirement. In Table 1, this change is reflected in the
tax expenditure estimate for ``Exclusion of interest on State
and local government private activity bonds for owner-occupied
housing.''
--Certain eligibility requirements for the exclusion of
capital gains on sales of principal residences were modified
for specified employees of the intelligence community,
effective for sales or exchanges after the date of enactment
and before January 1, 2011.
--The deferral of recognition of gain on sales of property
to comply with certain conflict of interest requirements was
extended to judicial officers who receive a certificate of
divestiture from the Judicial Conference of the United States.
The provision applies to sales after the date of enactment.
This tax expenditure is not listed in Table 1 because the
estimated revenue loss is below the de minimis amount.
--The definition of qualified railroad track expenditures
was modified for purposes of the tax credit for certain
expenditures on railroad track maintenance, effective for
expenditures paid or incurred during taxable years beginning
after December 31, 2004, and before January 1, 2008.
--The broadening of the exception to the interest
imputation rule for below-market loans to qualified continuing
care facilities, which was scheduled to expire after 2010, was
made permanent. In Table 1, this change is reflected in the tax
expenditure estimate for ``Exemptions from imputed interest
rules.''
The Small Business and Work Opportunity Tax Act of 2007
(H.R. 2206), enacted on May 25, 2007 (Pub. L. No. 110-28), made
a number of changes to existing tax expenditures:
--The work opportunity tax credit, which was scheduled to
expire for individuals who begin work for an employer after
December 31, 2007, was extended for 44 months (to include
individuals who begin work for an employer before September 1,
2011), and other changes were made to expand the targeted
groups of employees, effective for individuals who begin work
for an employer after the date of enactment.
--The $100,000 limit on the expensing of depreciable
tangible personal property by a small business was increased to
$125,000 for taxable years beginning in 2007 through 2010, and
the $125,000 limit was indexed for inflation in taxable years
beginning after 2007 and before 2011. In Table 1, these changes
are reflected in the tax expenditure estimate for ``Expensing
under section 179 of depreciable business property.''
[[Page 15]]
--The minimum wage for purposes of the employer tax credit
for Social Security taxes paid with respect to employee cash
tips was increased from $2.13 per hour to $5.15 per hour,
effective for tips received for services performed after
December 31, 2006.
--The alternative minimum tax was modified by providing
that alternative minimum tax liability may be offset by the
work opportunity tax credit and the employer tax credit for
Social Security taxes paid with respect to employee cash tips,
effective for taxable years beginning after December 31, 2006.
In Table 1, this change is reflected in the tax expenditure
estimates for the ``Work opportunity tax credit'' and the ``Tax
credit for employer-paid FICA taxes on tips.''
--The increased expensing limit for Gulf Opportunity Zone
property, which was scheduled to expire for property placed in
service after December 31, 2007, was extended to include
property placed in service in 2008. This tax expenditure is not
listed in Table 1 because the estimated revenue loss is below
the de minimis amount.
--The placed-in-service dates for the enhanced low-income
housing credit for property located in the GO Zone, the Rita GO
Zone, and the Wilma GO Zone, which were scheduled to end after
2008, were extended for an additional two years. In Table 1,
this extension is reflected in the tax expenditure estimate for
``Tax credit for low-income housing.''
--The qualified mortgage bond rules were modified to
provide that a qualified GO Zone repair or reconstruction loan
is treated as a qualified rehabilitation loan. In Table 1, this
change is reflected in the tax expenditure estimate for
``Exclusion of interest on State and local government private
activity bonds for owner-occupied housing.''
Expiring Tax Expenditure Provisions
A number of tax expenditure provisions expired in 2006 or
are scheduled to expire in 2007:
--The tax credit for qualified electric vehicles expired
for property placed in service after December 31, 2006. This
tax expenditure is no longer listed in Table 1.
--The election to treat combat pay as earned income for
purposes of the earned income credit is scheduled to expire for
taxable years ending after December 31, 2007.
--The tax credit for increasing research activities is
scheduled to expire for amounts paid or incurred after December
31, 2007.
--The tax credit for Indian reservation employment is
scheduled to expire for taxable years ending after December 31,
2007.
--The tax credit for certain expenditures on railroad track
maintenance is scheduled to expire for taxable years beginning
after December 31, 2007.
--The above-the-line deduction for teacher classroom
expenses is scheduled to expire for taxable years beginning
after December 31, 2007.
--The deduction for premiums on qualified mortgage
insurance is scheduled to expire for amounts paid or accrued on
qualified contracts after December 31, 2007.
[[Page 16]]
--The option to deduct State and local sales taxes (in lieu
of State and local income taxes) is scheduled to expire for
sales taxes paid after December 31, 2007.
--Fifteen-year straight-line cost recovery for qualified
leasehold improvements and qualified restaurant property is
scheduled to expire for property placed in service after
December 31, 2007. In Table 1, this is reflected in the tax
expenditure estimate for ``Depreciation of buildings other than
rental housing in excess of alternative depreciation system.''
--Seven-year cost recovery for certain motorsports
racetrack property is scheduled to expire for property placed
in service after December 31, 2007. In Table 1, this is
reflected in the tax expenditure estimate for ``Depreciation of
buildings other than rental housing in excess of alternative
depreciation system.''
--Accelerated depreciation for business property on Indian
reservations is scheduled to expire for property placed in
service after December 31, 2007.
--The enhanced charitable deduction for contributions of
food inventory is scheduled to expire for contributions made
after December 31, 2007. In Table 1, this is reflected in the
tax expenditure estimate for ``Deduction for charitable
contributions, other than for education and health.''
--The enhanced charitable deduction for contributions of
book inventories to public schools is scheduled to expire for
contributions made after December 31, 2007. In Table 1, this is
reflected in the tax expenditure estimate for ``Deduction for
charitable contributions to educational institutions.''
--The enhanced deduction for qualified computer
contributions to schools is scheduled to expire for
contributions made in taxable years beginning after December
31, 2007. In Table 1, this is reflected in the tax expenditure
estimate for ``Deduction for charitable contributions to
educational institutions.''
--The expensing of environmental remediation costs is
scheduled to expire for expenses paid or incurred after
December 31, 2007.
--The deduction for income attributable to domestic
production activities in Puerto Rico is scheduled to expire for
taxable years beginning after December 31, 2007.
--After December 31, 2007, no new contributions may be made
to Archer MSAs except by individuals who previously made Archer
MSA contributions and by employees of small employers with
prior Archer MSA participation. The tax expenditure for Archer
medical savings accounts is not listed in Table 1 because the
estimated revenue loss is below the de minimis amount.
--The above-the-line deduction for qualified higher
education expenses is scheduled to expire for taxable years
beginning after December 31, 2007.
--The tax credit for the purchase of qualified energy
efficiency improvements to existing homes is scheduled to
expire for property placed in service after December 31, 2007.
--The tax credit for the production of energy-efficient
appliances is scheduled to expire for appliances produced after
December 31, 2007.
--The tax credit for producing fuels from a non-
conventional source expires for fuel sold after December 31,
2007.
[[Page 17]]
--The higher deduction limit for charitable donations of
property interests made for conservation purposes is scheduled
to expire for contributions made in taxable years after
December 31, 2007.
--The deferral of gain from the disposition of electric
transmission property to implement Federal Energy Regulation
Commission restructuring policy is scheduled to expire for
taxable years beginning after December 31, 2007.
--The suspension of the 100-percent-of-net-income
limitation on percentage depletion for oil and gas from
marginal properties is scheduled to expire for taxable years
beginning after December 31, 2007.
--The tax credit for holders of qualified zone academy
bonds is scheduled to expire for bonds issued after December
31, 2007.
--The various tax incentives for investments in the
District of Columbia are scheduled to expire after December 31,
2007.
--The tax credit for corporate income earned in American
Samoa is scheduled to expire for taxable years beginning after
December 31, 2007. This tax expenditure is not listed in Table
1 because the estimated revenue loss is below the de minimis
amount.
Comparisons with Treasury Department
The Joint Committee staff and Treasury lists of tax
expenditures differ in three respects. First, the Treasury uses
a different classification of those provisions that can be
considered a part of normal income tax law under both the
individual and business income taxes. In general, the Joint
Committee staff methodology involves a broader definition of
the normal income tax base. Thus, the Joint Committee list of
tax expenditures includes some provisions that are not
contained in the Treasury list. The cash method of accounting
by certain businesses provides an example. The Treasury
considers the cash accounting option for certain businesses to
be a part of normal income tax law, but the Joint Committee
staff methodology treats it as a departure from normal income
tax law that constitutes a tax expenditure.
Second, the Joint Committee staff and Treasury estimates of
tax expenditures span slightly different sets of years. The
Treasury's estimates cover a 7-year period--the last fiscal
year, the current fiscal year when the President's budget is
submitted, and the next five fiscal years, i.e., fiscal years
2006-2012. The Joint Committee staff estimates cover the
current fiscal year and the succeeding four fiscal years, i.e.,
fiscal years 2007-2011.
Third, the Joint Committee staff list excludes those
provisions that are estimated to result in revenue losses below
the de minimis amount, i.e. less than $50 million over the five
fiscal years 2007 through 2011. The Treasury rounds all yearly
estimates to the nearest $10 million and excludes those
provisions with estimates that round to zero in each year,
i.e., provisions that result in less than $5 million in revenue
loss in each of the years 2006 through 2012.
In some cases, two or more of the tax expenditure items in
the Treasury list have been combined into a single item in the
Joint Committee staff list, and vice versa. The Table 1
descriptions of some tax expenditures also may vary from the
descriptions used by the Treasury.
[[Page 18]]
The following tax provisions are viewed as tax expenditures
by the Joint Committee staff but are not listed in Table 1
because the estimated revenue losses for fiscal years 2007
through 2011 are below the de minimis amount ($50 million):
Energy
--Deferral of gain from the disposition of electric
transmission property to implement Federal Energy
Regulatory Commission restructuring policy
--Expensing of tertiary injectants
--Tax credit for production of electricity from qualifying
advanced nuclear power facilities
--Tax credit for the residential purchase of qualified
photovoltaic and solar water heating property
--Tax credit for the construction of energy-efficient new homes
--Five-year carryback period for certain net operating losses
of electric utility companies
--Special depreciation allowance for cellulosic biomass ethanol
plant property
--Partial expensing of investments in advanced mine safety
equipment
--Tax credit for costs incurred in training qualified mine
rescue team employees
Natural Resources and Environment
--Amortization of certified pollution control facilities
--Partial exclusion from gross income for capital gains from
the conservation sale of a qualifying mineral or
geothermal interest located on eligible Federal land
Agriculture
--Cash accounting for agriculture
--Deferral of tax on gains from the sale of stock in a
qualified refiner or processor to an eligible farmer's
cooperative
Financial institutions
--Bad debt reserves of financial institutions
--Exclusion of investment income from structured settlement
arrangements
Insurance companies
--Special alternative tax on small property and casualty
insurance companies
Other business and commerce
--Deferral of gain on sales of property to comply with
conflict-of-interest requirements
--Exclusion of income from discharge of indebtedness incurred
in connection with qualified real property
--Partial expensing of Gulf Opportunity Zone clean-up costs
--Five-year carryback period for losses attributable to various
expenses related to Hurricane Katrina
--Reduced rates of tax on gains from the sale of self-created
musical works
[[Page 19]]
--Amortization of expenses for the creation or acquisition of
musical compositions
--Tax credit for corporate income earned in American Samoa
Community and Regional Development
--Tax credit for holders of Gulf Tax Credit Bonds
Education and Training
--Exclusion of interest on educational savings bonds
Social services
--Exclusion of restitution payments received by victims of the
Nazi regime and the victims' heirs and estates
Health
--Archer medical savings accounts
Income security
--Tax credit for new retirement plan expenses of small
businesses
--Exclusion of cancellation of indebtedness income of Hurricane
Katrina victims
--Tax credit for the elderly and disabled
[[Page (20)]]
II. MEASUREMENT OF TAX EXPENDITURES
Tax Expenditure Estimates Generally
A tax expenditure is measured by the difference between tax
liability under present law and the tax liability that would
result from a recomputation of tax without benefit of the tax
expenditure provision. Taxpayer behavior is assumed to remain
unchanged for tax expenditure estimate purposes.\13\
---------------------------------------------------------------------------
\13\ An alternative way to measure tax expenditures is to express
their values in terms of ``outlay equivalents.'' An outlay equivalent
is the dollar size of a direct spending program that would provide
taxpayers with net benefits that would equal what they now receive from
a tax expenditure.
---------------------------------------------------------------------------
The tax expenditure estimates in this report are based on
the January 2007 Congressional Budget Office revenue baseline
and Joint Committee staff projections of the gross income,
deductions, and expenditures of individuals and corporations
for calendar years 2006-2011. These projections are used to
compute tax liabilities for the present-law revenue baseline
and tax liabilities for the alternative baseline that assumes
that the tax expenditure provision does not exist.
Internal Revenue Service (``IRS'') statistics from recent
tax returns are used to develop projections of the tax credits,
deductions, and exclusions that will be claimed under the
present-law baseline. These IRS statistics show the actual
usage of the various tax expenditure provisions. In the case of
some tax expenditures, such as the earned income credit, there
is evidence that some taxpayers are not claiming all of the
benefits to which they are entitled, while others are filing
claims that exceed their entitlements. The tax expenditure
estimates in this report are based on projections of actual
claims under the various tax provisions, not the tax benefits
to which taxpayers are entitled.
Some tax expenditure estimates are based partly on
statistics for income, deductions, and expenses for prior
years. Accelerated depreciation is an example. Estimates for
this tax expenditure are based on the difference between tax
depreciation deductions under present law and the deductions
that would have been claimed in the current year if investments
in the current year and all prior years had been depreciated
using the alternative (normal income tax law) depreciation
system.
Each tax expenditure is estimated separately, under the
assumption that all other tax expenditures remain in the tax
code. If two or more tax expenditures were estimated
simultaneously, the total change in tax liability could be
smaller or larger than the sum of the amounts shown for each
item separately, as a result of interactions among the tax
expenditure provisions.
Year-to-year differences in the estimates for each tax
expenditure reflect changes in tax law, including phaseouts of
tax expenditure provisions and changes that alter the
definition of the normal in
[[Page 21]]
come tax structure, such as the tax rate schedule, the personal
exemption amount, and the standard deduction. Some of the
estimates for this tax expenditure report may differ from
estimates made in previous years because of changes in law and
economic conditions, the availability of better data, and
improved estimating techniques.
Tax Expenditures versus Revenue Estimates
A tax expenditure estimate is not the same as a revenue
estimate for the repeal of the tax expenditure provision for
three reasons. First, unlike revenue estimates, tax expenditure
estimates do not incorporate the effects of the behavioral
changes that are anticipated to occur in response to the repeal
of a tax expenditure provision. Second, tax expenditure
estimates are concerned with changes in the tax liabilities of
taxpayers. Because the tax expenditure focus is on tax
liabilities as opposed to Federal government tax receipts,
there is no concern for the timing of tax payments. Revenue
estimates are concerned with changes in Federal tax receipts
that are affected by the timing of tax payments. Third, some of
the tax provisions that provide an exclusion from income also
apply to the FICA tax base, and the repeal of the income tax
provision would automatically increase FICA tax revenues as
well as income tax revenues. There may also be interactions
between income tax provisions and other Federal taxes such as
excise taxes and the estate and gift tax.
If a tax expenditure provision were repealed, it is likely
that the repeal would be made effective for taxable years
beginning after a certain date. Because most individual
taxpayers have taxable years that coincide with the calendar
year, the repeal of a provision affecting the individual income
tax most likely would be effective for taxable years beginning
after December 31 of a certain year. However, the Federal
government's fiscal year begins October 1. Thus, the revenue
estimate for repeal of a provision would show a smaller revenue
gain in the first fiscal year than in subsequent fiscal years.
This is due to the fact that the repeal would be effective
after the start of the Federal government's fiscal year. The
revenue estimate might also reflect some delay in the timing of
the revenue gains as a result of the taxpayer tendency to
postpone or forgo changes in tax withholding and estimated tax
payments.
Comparisons with Treasury Department
The Joint Committee staff and the Treasury use differing
methodologies for the estimation of tax expenditures. Thus, the
estimates in Table 1 are not necessarily comparable with the
estimates prepared by the Treasury.
Under the Joint Committee staff methodology, each tax
expenditure is measured by the difference between tax liability
under present law and the tax liability that would result if
the tax expenditure provision were repealed and taxpayers were
allowed to take advantage of any of the remaining tax
expenditure provisions that apply to the income or the expenses
associated with the repealed tax expenditure. For example, the
tax expenditure provision for the exclusion of employer-paid
health insurance is measured by the difference between tax
liability under present law and the tax
[[Page 22]]
liability that would result if the exclusion were repealed and
taxpayers were allowed to claim the next best tax treatment for
the previously excluded employer-paid health insurance. This
next best tax treatment could be the inclusion of the employer-
paid health insurance as an itemized medical deduction on
Schedule A.\14\
---------------------------------------------------------------------------
\14\ If the exclusion were repealed, the value of the employer-paid
health insurance would be included in income and taxpayers would be
treated as having purchased the insurance themselves. Thus, the
insurance expense would be deductible as an itemized medical expense on
Schedule A, subject to the itemized medical deduction floor (7.5
percent of the taxpayer's adjusted gross income).
---------------------------------------------------------------------------
Under the Treasury methodology, each tax expenditure is
measured by the difference between tax liability under present
law and the tax liability that would result if the tax
expenditure provision were repealed and taxpayers were
prohibited from taking advantage of any of the remaining tax
expenditure provisions that apply to the income or the expenses
associated with the repealed tax expenditure. For example, the
tax expenditure provision for the exclusion for employer-paid
health insurance is measured by the difference between tax
liability under present law and the tax liability that would
result if the exclusion were repealed and taxpayers were
required to include all of the employer-paid health insurance
in income, with no offsetting deductions (i.e., no
deductibility on Schedule A).
The Joint Committee staff and the Treasury estimates of tax
expenditures may also differ as a result of differing data
sources and differences in baseline projections of incomes and
expenses. The Treasury's tax expenditure estimates are based on
the Administrations economic forecast. The Joint Committee
staff estimates are based on the economic forecast prepared by
the Congressional Budget Office.
[[Page (23)]]
III. TAX EXPENDITURE ESTIMATES
Tax expenditures are grouped in Table 1 in the same
functional categories as outlays in the Federal budget.
Estimates are shown separately for individuals and
corporations. Those tax expenditures that do not fit clearly
into any single budget category have been placed in the most
appropriate category.
Several of the tax expenditure items involve small amounts
of revenue, and those estimates are indicated in Table 1 by
footnote 1. For each of these items, the footnote means that
the tax expenditure is less than $50 million in the fiscal
year.
Table 2 presents projections of tax return information for
each of nine income classes on the number of all returns
(including filing and nonfiling units), the number of taxable
returns, the number of returns with itemized deductions, and
the amount of tax liability.
Table 3 provides distributional estimates by income class
for some of the tax expenditures that affect individual
taxpayers. Not all tax expenditures that affect individuals are
shown in this table because of the difficulty in making
reliable estimates of the income distribution of items that do
not appear on tax returns under present law.
[[Page 24]]
Table 1.--Tax Expenditure Estimates By Budget Function, Fiscal Years 2007-2011
[Billion of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Corporations Individuals
Function -------------------------------------------------------------------------------------------- Total
2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007-11
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Defense
Exclusion of benefits and allowances to Armed ....... ....... ....... ....... ....... 3.0 3.2 3.3 3.4 3.9 16.8
Forces personnel..............................
Exclusion of military disability benefits...... ....... ....... ....... ....... ....... 0.1 0.1 0.1 0.1 0.1 0.5
Deduction for overnight-travel expenses of ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) 0.1 0.2
National Guard and Reserve Members............
International Affairs
Exclusion of income earned abroad by U.S. ....... ....... ....... ....... ....... 3.8 4.0 4.2 4.4 4.6 21.0
citizens......................................
Exclusion of certain allowances for Federal ....... ....... ....... ....... ....... 0.6 0.7 0.7 0.8 0.8 3.6
employees abroad..............................
Deferral of active income of controlled foreign 5.8 6.4 7.0 7.5 7.9 ....... ....... ....... ....... ......... 34.6
corporations..................................
Inventory property sales source rule exception. 6.4 6.6 6.8 7.0 7.2 ....... ....... ....... ....... ......... 34.0
Deferral of certain active financing income.... 2.3 2.6 0.8 ....... ....... ....... ....... ....... ....... ......... 5.7
General Science, Space, and Technology
Tax credit for increasing research activities.. 5.0 3.2 1.9 1.5 1.0 0.1 0.1 (\1\) (\1\) (\1\) 12.8
Expensing of research and experimental 1.3 2.2 4.6 5.8 6.2 (\1\) (\1\) 0.1 0.1 0.1 20.9
expenditures..................................
Energy
Expensing of exploration and development costs:
Oil and gas.................................. 1.1 0.8 0.6 0.5 0.5 (\1\) (\1\) (\1\) (\1\) (\1\) 3.5
Other fuels.................................. (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
Excess of percentage over cost depletion:
Oil and gas.................................. 1.1 1.2 1.2 1.2 1.2 (\1\) (\1\) (\1\) (\1\) (\1\) 5.9
Other fuels.................................. 0.1 0.1 0.1 0.1 0.1 (\1\) (\1\) (\1\) (\1\) (\1\) 0.7
[[Page 25]]
Tax credit and deduction for small refiners (\1\) (\1\) (\1\) (\1\) (\1\) ....... ....... ....... ....... ......... 0.1
with capital costs associated with EPA sulfur
regulation compliance.........................
Tax credit for enhanced oil recovery costs..... 0.1 (\1\) (\1\) (\1\) (\1\) 0.1 (\1\) (\1\) (\1\) (\1\) 0.3
Tax credit for producing fuels from a non- 3.7 1.4 (\1\) (\1\) (\1\) 0.8 0.3 (\1\) (\1\) (\1\) 6.2
conventional source...........................
Tax credits for alcohol fuels (\2\)............ (\1\) (\1\) (\1\) (\1\) (\1\) ....... ....... ....... ....... ......... 0.2
Tax credits for biodiesel fuels (\3\).......... 0.1 0.1 (1) ....... ....... ....... ....... ....... ....... ......... 0.2
Exclusion of interest on State and local (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.1 0.1 0.1 0.1 0.5
government qualified private activity bonds
for energy production facilities..............
Exclusion of energy conservation subsidies ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
provided by public utilities..................
Energy credit (Section 48)..................... 0.1 0.1 (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.3
Tax credits for electricity production from 1.0 1.5 1.8 1.6 1.4 0.1 0.1 0.1 0.1 0.1 7.8
renewable resources...........................
Tax credit for holders of clean renewable (\1\) (\1\) 0.1 0.1 0.1 (\1\) (\1\) (\1\) (\1\) (\1\) 0.3
energy bonds..................................
Tax credits for investments in clean coal power 0.1 0.1 0.2 0.2 0.3 ....... ....... ....... ....... ......... 0.8
generation facilities.........................
Expensing of the cost of property used in the (\4\) 0.2 0.5 0.7 0.6 ....... ....... ....... ....... ......... 2.1
refining of liquid fuels......................
Amortization of geological and geophysical 0.1 0.2 0.2 0.2 0.1 (\1\) 0.1 0.1 0.1 (\1\) 1.1
expenditures associated with oil and gas
exploration...................................
Deduction for expenditures on energy-efficient (\1\) 0.1 (\1\) (\4\) (\4\) (\1\) 0.1 (\1\) (\4\) (\4\) 0.2
commercial building property..................
Tax credit for the purchase of qualified energy ....... ....... ....... ....... ....... 0.3 0.2 ....... ....... ......... 0.6
efficiency improvements to existing homes.....
Tax credit for the production of energy- 0.1 (\1\) ....... ....... ....... ....... ....... ....... ....... ......... 0.2
efficient appliances..........................
Tax credits for alternative technology vehicles 0.1 (\1\) (\1\) (\1\) (\1\) 0.2 0.2 0.2 0.1 (\1\) 0.9
[[Page 26]]
Tax credit for clean-fuel vehicle refueling (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
property......................................
Natural Resources and Environment
Expensing of exploration and development costs, 0.1 0.1 0.1 0.1 0.1 (\1\) (\1\) (\1\) (\1\) (\1\) 0.5
nonfuel minerals..............................
Excess of percentage over cost depletion, 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 1.1
nonfuel minerals..............................
Expensing of timber-growing costs.............. 0.2 0.2 0.2 0.2 0.2 (\1\) (\1\) (\1\) (\1\) (\1\) 1.1
Exclusion of interest on State and local 0.2 0.2 0.2 0.2 0.2 0.4 0.5 0.5 0.5 0.6 3.5
government qualified private activity bonds
for sewage, water, and hazardous waste
facilities....................................
Special rules for mining reclamation reserves.. (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
Special tax rate for nuclear decommissioning 0.6 0.7 0.8 0.8 0.9 ....... ....... ....... ....... ......... 3.8
reserve funds.................................
Exclusion of contributions in aid of (\1\) (\1\) (\1\) (\1\) (\1\) ....... ....... ....... ....... ......... 0.2
construction for water and sewer utilities....
Tax exclusion for earnings of certain (\1\) (\1\) (\1\) (\1\) (\1\) ....... ....... ....... ....... ......... 0.1
environmental settlement funds................
Amortization and expensing of reforestation (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.1 0.1 0.1 0.1 0.6
expenditures..................................
Agriculture
Expensing of soil and water conservation (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.2
expenditures..................................
Expensing of fertilizer and soil conditioner (\1\) (\1\) (\1\) (\1\) (\1\) 0.2 0.1 0.1 0.1 0.1 0.6
costs.........................................
[[Page 27]]
Expensing of the costs of raising dairy and (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.1 0.1 0.1 0.1 0.5
breeding cattle...............................
Exclusion of cost-sharing payments............. (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Exclusion of cancellation of indebtedness ....... ....... ....... ....... ....... 0.1 0.1 0.1 0.1 0.1 0.5
income of farmers.............................
Income averaging for farmers and fisherman..... ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Five-year carryback period for net operating (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
losses attributable to farming................
Commerce and Housing
Financial institutions:
Exemption of credit union income............. 1.6 1.7 1.8 1.9 1.9 ....... ....... ....... ....... ......... 8.9
Insurance companies:
Exclusion of investment income on life 2.5 2.6 2.7 2.7 2.8 26.1 26.8 27.5 28.2 28.9 150.9
insurance and annuity contracts.............
Small life insurance company taxable income 0.1 0.1 0.1 0.1 0.1 ....... ....... ....... ....... ......... 0.3
adjustment..................................
Special treatment of life insurance company 2.0 2.0 2.1 2.2 2.3 ....... ....... ....... ....... ......... 10.7
reserves....................................
Deduction of unpaid property loss reserves 3.4 3.5 3.6 3.6 3.7 ....... ....... ....... ....... ......... 17.8
for property and casualty insurance
companies...................................
Special deduction for Blue Cross and Blue 1.0 1.0 1.0 1.1 1.1 ....... ....... ....... ....... ......... 5.2
Shield companies............................
Tax exemption for certain small insurance 0.1 0.1 0.1 0.1 0.1 ....... ....... ....... ....... ......... 0.3
companies.....................................
Housing:
Deduction for mortgate interest on owner- ....... ....... ....... ....... ....... 73.7 79.9 85.2 90.5 101.0 430.2
occupied residences.........................
Deduction for property taxes on owner- ....... ....... ....... ....... ....... 16.8 14.3 14.2 13.9 27.9 87.1
occupied residences.........................
Exclusion of capital gains on sales of ....... ....... ....... ....... ....... 28.5 29.0 30.1 31.1 34.9 153.5
principal residences........................
Exclusion of interest on State and local 0.4 0.4 0.4 0.4 0.4 0.9 1.0 1.1 1.1 1.2 7.4
government qualified private activity bonds
for owner-occupied housing..................
[[Page 28]]
Exclusion of interest on State and local 0.2 0.2 0.2 0.2 0.2 0.5 0.5 0.6 0.6 0.6 4.0
government qualified private activity bonds
for rental housing..........................
Depreciation of rental housing in excess of 0.4 0.5 0.5 0.6 0.7 3.9 4.4 4.9 5.4 6.0 27.4
alternative depreciation system.............
Tax credit for low-incoming housing.......... 4.4 4.6 4.9 5.3 5.7 0.7 0.7 0.7 0.8 0.8 28.7
Tax credit for rehabilitation of historic 0.3 0.3 0.3 0.4 0.4 0.1 0.1 0.2 0.2 0.2 2.2
structures..................................
Tax credit for rehabilitation of structures, (1) (1) (1) 1.0 1.0 0.1 0.1 0.1 0.2 0.2 0.8
other than historic structures..............
Tax credit for Gulf Opportunity Zone 0.1 ....... ....... ....... ....... 0.1 ....... ....... ....... ......... 0.2
employers providing in-kind lodging for
employees and income exclusion for the
employees...................................
Deduction for premiums for qualified mortgage ....... ....... ....... ....... ....... (1) 0.1 (1) (1) (1) 0.1
insurance...................................
Other business and commerce:
Reduced rates of tax on dividends and long- ....... ....... ....... ....... ....... 127.1 127.9 131.0 146.6 99.3 631.9
term capital gains..........................
Exclusion of capital gains at death.......... ....... ....... ....... ....... ....... 51.9 53.7 57.5 60.1 56.7 279.9
Carryover basis of capital gains on gifts.... ....... ....... ....... ....... ....... 5.5 5.7 5.9 6.1 6.0 29.2
Deferral of gain on non-dealer installment 3.3 1.7 0.9 0.8 1.0 2.3 1.2 0.6 0.5 0.9 13.2
sales.......................................
Deferral of gain on like-kind exchanges...... 3.3 3.3 3.3 3.3 3.4 1.0 1.0 1.0 1.1 1.0 21.7
Depreciation of buildings other than rental 0.6 0.7 0.7 0.7 0.7 0.6 0.7 0.7 0.7 0.7 6.7
housing in excess of alternative
depreciation system.........................
[[Page 29]]
Depreciation of equipment in excess of the 1.8 6.2 11.1 16.5 21.4 -0.3 0.8 2.3 4.1 5.6 69.6
alternative depreciation system.............
Expensing under section 179 of depreciable 0.4 0.3 0.2 0.2 0.0 2.9 2.2 1.6 1.7 -0.1 9.5
business property...........................
Amortization of business startup costs....... (1) (1) (1) (1) (1) 0.7 0.8 0.8 0.9 0.9 4.1
Reduced rates on first $10,000,000 of 3.5 3.5 3.5 3.4 3.4 ....... ....... ....... ....... ......... 17.3
corporate taxable income....................
Exemptions from imputed interest rules....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.4 0.4 0.4 0.5 0.5 2.2
Expensing of magazine circulation (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
expenditures................................
Special rules for magazines, paperback book, (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
and record returns..........................
Completed contract rules..................... 0.4 0.4 0.5 0.6 0.6 (\1\) (\1\) (\1\) (\1\) (\1\) 2.5
Cash accounting, other than agriculture...... (\1\) (\1\) (\1\) (\1\) (\1\) 0.8 0.8 0.9 0.9 1.0 4.4
Exclusion of interest on State and local 0.1 0.1 0.1 0.1 0.2 0.3 0.3 0.4 0.4 0.4 2.5
government small-issue qualified private
activity bonds..............................
Exception from net operating loss limitations 0.5 0.5 0.5 0.5 0.5 ....... ....... ....... ....... ......... 2.5
for corporations in bankruptcy proceedings..
Tax credit for employer-paid FICA taxes on 0.2 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2 2.5
tips........................................
Deduction of certain film and television 0.1 0.1 (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.4
production costs............................
Deduction for income attributable to domestic 3.9 5.5 5.9 7.4 8.8 1.3 1.8 2.0 2.6 3.4 42.6
production activities.......................
Tax credit for the cost of carrying tax-paid (\1\) (\1\) (\1\) (\1\) (\1\) ....... ....... ....... ....... ......... 0.1
distilled spirits in wholesale inventories..
Additional first-year depreciation for Gulf 0.9 0.4 0.1 0.0 -0.1 0.4 0.2 0.0 0.0 0.0 1.8
Opportunity Zone property...................
Tax credit for employers for retention of (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) ......... 0.1
employees affected by Hurricanes Katrina,
Rita, and Wilma.............................
[[Page 30]]
Transportation
Exclusion of interest on State and local (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
government qualified private activity bonds
for highway projects and rail-truck transfer
facilities..................................
Tax credit for certain expenditures on 0.1 0.1 0.1 (\1\) (\1\) ....... ....... ....... ....... ......... 0.3
railroad track maintenance..................
Deferral of tax on capital construction funds 0.1 0.1 0.1 0.1 0.1 ....... ....... ....... ....... ......... 0.5
of shipping companies.......................
Exclusion of employer-paid transportation ....... ....... ....... ....... ....... 4.7 4.8 4.9 5.1 5.2 24.7
benefits....................................
Community and Regional Development
New York City Liberty Zone tax incentives...... 0.1 0.1 (\1\) (\1\) (\1\) 0.1 0.1 0.1 0.1 0.1 0.7
Empowerment zone tax incentives................ 0.2 0.2 0.2 0.2 0.1 0.4 0.4 0.5 0.3 0.1 2.6
Renewal community tax incentives............... 0.3 0.4 0.4 0.2 (\1\) 0.4 0.4 0.4 0.2 (\1\) 4.3
New markets tax credit......................... 0.3 0.4 0.4 0.4 0.3 0.4 0.5 0.5 0.5 0.4 4.2
District of Columbia tax incentives............ (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.1 0.1 0.1 0.2 0.6
Expensing of environmental remediation costs 0.1 (\1\) (\1\) (\1\) (\1\) 0.2 (\1\) (\4\) (\4\) (\4\) 0.1
(``Brownfields'').............................
Accelerated depreciation for business property 0.2 0.2 (\1\) -0.1 -0.1 0.1 0.1 (\1\) (\4\) 0.1 0.6
on Indian reservations........................
Tax credit for Indian reservation employment... (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Exclusion of interest on state and local (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
qualified private activity bonds for green
buildings and sustainable design projects.....
[[Page 31]]
Exclusion of interest on State and local 0.3 0.3 0.4 0.4 0.4 0.8 0.9 0.9 0.9 1.0 6.2
government qualified private activity bonds
for private airports, docks, and mass-
communting facilities.........................
Education, Training, Employment, and Social
Services
Education and training:
Tax credits for tuition for post-secondary ....... ....... ....... ....... ....... 3.1 4.4 4.9 4.7 5.5 22.6
education...................................
Deduction for interest of student loans...... ....... ....... ....... ....... ....... 0.9 0.9 0.9 1.0 0.5 4.3
Deduction for higher education expenses...... ....... ....... ....... ....... ....... 2.2 0.6 ....... ....... ......... 2.9
Exclusion of earnings of Coverdell education ....... ....... ....... ....... ....... 0.1 0.1 0.1 0.1 0.1 0.5
savings accounts............................
Exclusion of tax on earnings of qualified ....... ....... ....... ....... ....... 0.6 0.7 0.9 1.0 1.2 4.4
tuition programs............................
Exclusion of scholarship and fellowship ....... ....... ....... ....... ....... 1.6 1.7 1.8 1.9 2.0 9.0
income......................................
Exclusion of income attributable to the ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
discharge of certain student loan debt and
NHSC Educational Loan repayments............
Exclusion of employer-provided education ....... ....... ....... ....... ....... 0.8 0.8 0.9 0.9 0.2 3.7
assistance benefits.........................
Exclusion of employer-provided tuition ....... ....... ....... ....... ....... 0.2 0.2 0.2 0.2 0.2 1.1
reduction benefits..........................
Parental personal exemption for students age ....... ....... ....... ....... ....... 0.4 0.1 0.1 (\1\) 0.4 1.0
19 to 23....................................
Exclusion of interest on State and local 0.1 0.1 0.1 0.1 0.1 0.3 0.3 0.4 0.4 0.4 2.5
government qualified private activity bonds
for student loans...........................
Exclusion of interest on State and local 0.4 0.5 0.5 0.5 0.6 1.1 1.2 1.3 1.4 1.4 8.9
government qualified private activity bonds
for private nonprofit and qualified public
educational facilities......................
[[Page 32]]
Tax credit for holders of qualified zone 0.1 0.1 0.1 0.1 0.1 ....... ....... ....... ....... ......... 0.6
academy bonds...............................
Deduction for charitable contributions to 0.7 0.8 0.8 0.8 0.8 5.9 6.2 6.5 6.9 7.3 36.8
educational institutions....................
Above-the-line deduction for teacher ....... ....... ....... ....... ....... 0.2 0.1 ....... ....... ......... 0.3
classroom expenses..........................
Employment:
Exclusion of employee meals and lodging ....... ....... ....... ....... ....... 0.9 0.9 1.0 1.0 1.0 5.0
(other than military).......................
Exclusion of benefits provided under ....... ....... ....... ....... ....... 30.0 33.6 36.8 40.3 44.8 185.5
cafeteria plans \5\.........................
Exclusion of housing allowances for ministers ....... ....... ....... ....... ....... 0.6 0.6 0.6 0.7 0.7 3.2
Exclusion of miscellaneous fringe benefits... ....... ....... ....... ....... ....... 6.6 7.0 7.2 7.5 8.4 36.7
Exclusion of employee awards................. ....... ....... ....... ....... ....... 0.2 0.2 0.2 0.2 0.2 0.9
Exclusion of income earned by voluntary ....... ....... ....... ....... ....... 2.0 2.0 2.1 2.1 2.2 10.4
employees' beneficiary associations.........
Special tax provisions for employee stock 0.8 0.9 1.0 1.1 1.2 0.3 0.3 0.3 0.3 0.3 6.5
ownership plans (ESOPs).....................
Work opportunity tax credit.................. 0.4 0.5 0.5 0.6 0.5 0.1 0.1 0.1 0.1 0.1 3.1
Deferral of taxation on spread on acquisition ....... ....... ....... ....... ....... 0.4 0.4 0.3 0.2 0.3 1.5
of stock under incentive stock option plans
and employee stock purchase plans \6\.......
Social services:
Tax credit for children under age 17 \7\..... ....... ....... ....... ....... ....... 45.0 44.8 44.8 44.8 21.9 201.3
[[Page 33]]
Tax credit for child and dependent care and ....... ....... ....... ....... ....... 3.0 2.6 2.6 2.5 2.5 13.2
exclusion of employer-provided child care
\8\.........................................
Tax credit for employer-provided dependent (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
care........................................
Exclusion of certain foster care payments.... ....... ....... ....... ....... ....... 0.6 0.7 0.7 0.8 0.8 3.7
Adoption credit and employee adoption ....... ....... ....... ....... ....... 0.7 0.7 0.7 0.8 0.2 3.1
benefits exclusion..........................
Deduction for charitable contributions, other 1.8 1.9 1.9 1.9 1.9 32.0 33.6 35.3 37.1 39.6 187.0
than for education and health...............
Tax credit for disabled access expenditures.. (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.3
Health
Exclusion of employer contributions for health ....... ....... ....... ....... ....... 105.7 116.5 126.0 135.6 144.7 628.5
care, health insurance premiums, and long-term
care insurance premiums \9\...................
Exclusion of medical care and TRICARE medical ....... ....... ....... ....... ....... 1.6 2.1 2.2 2.3 2.5 10.7
insurance for military dependents, retirees,
and retiree dependents not enrolled in
Medicare......................................
Exclusion of health insurance benefits for ....... ....... ....... ....... ....... 0.8 1.2 1.3 1.4 1.7 6.4
military retirees and retiree dependents
enrolled in Medicare..........................
Deduction for health insurance premiums and ....... ....... ....... ....... ....... 3.8 4.4 4.9 5.3 5.9 24.3
long-term care insurance premiums by the self-
employed......................................
Deduction for medical expenses and long-term ....... ....... ....... ....... ....... 8.4 9.5 10.8 12.4 16.7 57.9
care expenses.................................
Exclusion of workers' compensation benefits ....... ....... ....... ....... ....... 7.5 8.1 8.8 9.5 10.3 44.2
(medical benefits)............................
Health savings accounts........................ ....... ....... ....... ....... ....... 0.3 0.6 0.9 1.2 1.6 4.6
Exclusion of interest on State and local 0.7 0.7 0.8 0.8 0.9 1.8 1.9 2.0 2.1 2.2 14.0
government qualified private activity bonds
for private nonprofit hospital facilities.....
[[Page 34]]
Deduction for charitable contributions to 0.9 0.9 0.9 0.9 0.9 4.0 4.3 4.5 4.7 5.0 27.0
health organizations..........................
Tax credit for orphan drug research............ 0.3 0.3 0.3 0.3 0.4 (\1\) (\1\) (\1\) (\1\) (\1\) 1.6
Tax credit for purchase of health insurance by ....... ....... ....... ....... ....... 0.2 0.2 0.2 0.2 0.2 1.0
certain displaced persons.....................
Medicare
Exclusion of Medicare benefits:
Hospital insurance (Part A).................. ....... ....... ....... ....... ....... 20.1 21.7 23.5 25.6 30.2 121.1
Supplementary medical insurance (Part B)..... ....... ....... ....... ....... ....... 14.5 15.6 16.3 17.6 20.9 84.9
Prescription drug insurance (Part D)......... ....... ....... ....... ....... ....... 5.3 5.5 6.0 6.8 8.4 32.0
Exclusion of certain subsidies to employers 1.0 1.1 1.1 1.1 1.1 ....... ....... ....... ....... ......... 5.3
who maintain prescription drug plans for
Medicare enrollees..........................
Income Security
Exclusion of workers' compensation benefits ....... ....... ....... ....... ....... 2.6 2.7 2.7 2.7 3.0 13.7
(disability and survivors payments)...........
Exclusion of damages on account of personal ....... ....... ....... ....... ....... 1.5 1.5 1.5 1.5 1.6 7.5
physical injuries or physical sickness........
Exclusion of special benefits for disabled coal ....... ....... ....... ....... ....... 0.1 (\1\) (\1\) (\1\) (\1\) 0.2
miners........................................
Exclusion of cash public assistance benefits... ....... ....... ....... ....... ....... 2.9 3.0 3.0 3.1 3.4 15.4
Net exclusion of pension contributions and
earnings:
Employer plans............................... ....... ....... ....... ....... ....... 108.6 114.1 120.4 126.7 137.5 607.3
Individual retirement plans.................... ....... ....... ....... ....... ....... 15.5 17.0 18.5 20.0 23.2 94.1
Plans covering partners and sole proprietors ....... ....... ....... ....... ....... 8.8 9.5 10.6 11.5 14.1 54.5
(sometimes referred to as ``Keogh plans'')....
[[Page 35]]
Tax credit for certain individuals for elective ....... ....... ....... ....... ....... 0.9 0.9 0.9 0.9 0.9 4.4
deferrals and IRA contributions...............
Exclusion of other employee benefits:
Premiums on group term life insurance........ ....... ....... ....... ....... ....... 2.6 2.6 2.7 2.7 2.7 13.3
Premiums on accident and disability insurance ....... ....... ....... ....... ....... 2.8 2.9 3.0 3.1 3.4 15.3
Additional standard deduction for the blind and ....... ....... ....... ....... ....... 1.7 1.6 1.7 1.8 2.2 8.9
the elderly...................................
Deduction for casualty and theft losses........ ....... ....... ....... ....... ....... 0.8 0.3 0.3 0.3 0.3 2.0
Earned income credit (EIC)..................... ....... ....... ....... ....... ....... 44.7 46.5 47.9 48.9 46.9 234.9
Exclusion of survivor annuities paid to (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
families of public safety officers killed in
the line of duty..............................
Exclusion of disaster mitigation payments...... (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
Social Security and Railroad Retirement
Exclusion of untaxed social security and ....... ....... ....... ....... ....... 22.4 23.1 24.0 25.0 30.6 125.1
railroad retirement benefits..................
Veterans' Benefits and Services
Exclusion of veterans' disability compensation. ....... ....... ....... ....... ....... 3.1 3.3 3.5 3.6 3.8 17.2
Exclusion of veterans' pensions................ ....... ....... ....... ....... ....... 0.1 0.1 0.1 0.1 0.1 0.5
Exclusion of veterans' readjustment benefits... ....... ....... ....... ....... ....... 0.3 0.3 0.4 0.4 0.4 1.8
Exclusion of interest on State and local (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.1 0.1 0.1 0.1 0.4
government qualified private activity bonds
for veterans' housing.........................
General Purpose Fiscal Assistance
Exclusion of interest on public purpose State 7.8 8.4 8.8 9.2 9.6 20.0 21.5 22.5 23.6 24.7 156.0
and local government bonds....................
Deduction of nonbusiness State and local ....... ....... ....... ....... ....... 33.9 29.6 29.6 30.0 52.0 175.1
government income taxes, sales taxes, and
personal property taxes \10\..................
Interest
Deferral of interest on savings bonds.......... ....... ....... ....... ....... ....... 1.1 1.2 1.2 1.2 1.3 6.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Positive tax expenditure of less than $50 million.
[[Page 36]]
\2\ In addition, the credit from excise tax for alcohol fuels results in a reduction in excise tax receipts, net of income tax effect, of $10.9 billion
over the fiscal years 2007 through 2011.
\3\ In addition, the credit from excise tax for biodiesel fuels results in a reduction in excise tax receipts, net of income tax effect, of less than
$50 million in each of the fiscal years 2007 through 2011.
\4\ Negative tax expenditure of less than $50 million.
\5\ Estimate includes amounts of employer-provided health insurance purchased through cafeteria plans and employer-provided child care purchased through
dependent care flexible spending accounts. These amounts are also included in other line items in this table.
\6\ Tax expenditure estimate does not include offsetting denial of corporate deduction for qualified stock option compensation.
\7\ Tax expenditure estimate includes refundable amounts, amounts used to offset income taxes, and amounts used to offset other taxes. The amount of
refundable child tax credit and earned income tax credit used to offset taxes other than income tax or paid out as refunds is: $58.1 billion in 2007,
$59.6 billion in 2008, $61.0 billion in 2009, $62.0 billion in 2010, and $48.9 in 2011.
\8\ Estimate includes employer-provided child care purchased through dependent care flexible spending accounts.
\9\ Estimate includes employer-provided health insurance purchased through cafeteria plans.
\10\ Deduction for state and local sales taxes expires after December 31, 2007.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.
[[Page 37]]
Table 2.--Distribution by Income Class of All Returns, Taxable Returns, Itemized Returns, and Tax Liability at
2006 Rates and 2006 Law and 2006 Income Levels \1\
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
Itemized
Income Class \2\ All Returns \3\ Taxable Returns Returns Tax Liability
----------------------------------------------------------------------------------------------------------------
Below $10,000............................... 26,394 293 590 -$6,755
$10,000 to $20,000.......................... 23,074 5,181 1,179 -15,354
$20,000 to $30,000.......................... 15,893 7,349 2,015 -6,247
$30,000 to $40,000.......................... 14,482 8,939 3,020 6,505
$40,000 to $50,000.......................... 12,323 9,181 3,762 19,683
$50,000 to $75,000.......................... 22,777 19,639 9,847 78,143
$75,000 to $100,000......................... 14,575 14,165 8,772 89,575
$100,000 to $200,000........................ 18,520 18,430 15,101 249,920
$200,000 and over........................... 5,138 5,130 4,754 576,758
-------------------------------------------------------------------
Total................................. 153,177 88,306 49,038 $992,229
----------------------------------------------------------------------------------------------------------------
\1\ Tax law as in effect on December 31, 2006, is applied to the 2006 level and sources of income and their
distribution among taxpayers.
\2\ The income concept used to place tax returns into classes is adjusted gross income (``AGI'') plus: (a) tax-
exempt interest, (b) employer contributions for health plans and life insurance, (c) employer share of FICA
tax, (d) workers' compensation, (e) nontaxable Social Security benefits, (f) insurance value of Medicare
benefits, (g) alternative minimum tax preference items, and (h) excluded income of U.S. citizens living
abroad.
\3\ Includes filing and nonfiling units. Filing units include all taxable and nontaxable returns. Nonfiling
units include individuals with income that is exempt from Federal income taxation (e.g., transfer payments,
interest from tax-exempt bonds, etc.). Excludes individuals who are dependents of other taxpayers and
taxpayers with negative income.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.
[[Page 38]]
Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items, at 2006 Rates and 2006
Income Levels \1\
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
Medical Deduction Real Estate Tax Deduction
Income Class \2\ -------------------------------------------------------------------
Returns Amount Returns Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000............................... 9 (\3\) 373 0
$10,000 to $20,000.......................... 210 $38 797 $29
$20,000 to $30,000.......................... 642 186 1,339 128
$30,000 to $40,000.......................... 1,007 364 2,137 324
$40,000 to $50,000.......................... 1,223 586 2,777 625
$50,000 to $75,000.......................... 2,542 1,822 8,004 2,859
$75,000 to $100,000......................... 1,747 1,608 7,637 3,592
$100,000 to $200,000........................ 1,434 2,595 13,858 11,529
$200,000 and over........................... 110 711 4,459 5,449
-------------------------------------------------------------------
Total................................. 8,924 7,911 41,381 $24,536
----------------------------------------------------------------------------------------------------------------
Footnotes appear at the end of table.
[[Page 39]]
Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items, at 2006 Rates and 2006
Income Levele \1\--Continued
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
State and local income, sales Charitable contributions
and personal property tax deduction
Income Class \2\ deduction ---------------------------------
----------------------------------
Returns Amount Returns Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000............................... 18 0 2 (\3\)
$10,000 to $20,000.......................... 394 $22 252 $23
$20,000 to $30,000.......................... 1,284 114 938 141
$30,000 to $40,000.......................... 2,415 300 1,871 371
$40,000 to $50,000.......................... 3,448 642 2,711 664
$50,000 to $75,000.......................... 9,707 3,163 8,122 2,956
$75,000 to $100,000......................... 9,054 4,022 7,837 3,676
$100,000 to $200,000........................ 15,195 15,250 14,120 11,826
$200,000 over............................... 3,772 20,573 4,567 19,365
-------------------------------------------------------------------
Total................................. 45,286 $44,086 40,420 $39,022
----------------------------------------------------------------------------------------------------------------
Footnoes appear at the end of table.
[[Page 40]]
Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items, at 2006 Rates and 2006
Income Levels \1\--Continued
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
Child Care Credit Earned Income Credit \4\
Income Class \2\ -------------------------------------------------------------------
Returns Amount Returns Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000............................... 1 0 5,747 $6,650
$10,000 to $20,000.......................... 112 $26 6,407 16,349
$20,000 to $30,000.......................... 455 228 4,808 11,353
$30,000 to $40,000.......................... 553 302 4,067 6,446
$40,000 to $50,000.......................... 603 370 1,815 1,987
$50,000 to $75,000.......................... 1,193 636 534 475
$75,000 to $100,000......................... 1,011 534 9 5
$100,000 to $200,000........................ 1,866 984 3 5
$200,000 over over.......................... 362 188 0 0
----------------------------------------------------------------------------------------------------------------
Total................................. 6,157 3,268 23,391 43,270
----------------------------------------------------------------------------------------------------------------
Footnotes appear at the end of table.
[[Page 41]]
Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items, at 2006 Rates and 2006
Income Levels \1\--Continued
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
Untaxed Social Security and Child Tax Credit \4\
Railroad Retirement benefits ---------------------------------
Income Class \2\ ----------------------------------
Returns Amount Returns Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000............................... 151 $4 304 $421
$10,000 to $20,000.......................... 8,295 2,939 3,018 1,669
$20,000 to $30,000.......................... 2,698 2,555 4,148 4,925
$30,000 to $40,000.......................... 2,263 2,774 4,225 6,274
$40,000 to $50,000.......................... 2,255 2,919 3,298 5,403
$50,000 to $75,000.......................... 5,392 6,554 6,066 10,237
$75,000 to $100,000......................... 3,356 2,652 4,541 7,713
$100,000 to $200,000........................ 3,122 842 5,688 8,743
$200,000 and over........................... 948 348 15 10
-------------------------------------------------------------------
Total................................. 28,479 $21,587 31,302 $45,393
----------------------------------------------------------------------------------------------------------------
Footnotes appear at the end of table.
[[Page 42]]
Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items, at 2006 Rates and 2006
Income Levels \1\--Continued
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
Education credits Student loan interest deduction
Income Class \2\ -------------------------------------------------------------------
Returns Amount Returns Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000............................... 2 (\3\) 35 $2
$10,000 to $20,000.......................... 556 $119 259 16
$20,000 to $30,000.......................... 941 404 464 37
$30,000 to $40,000.......................... 967 531 707 69
$40,000 to $50,000.......................... 932 531 767 95
$50,000 to $75,000.......................... 1,492 972 1,602 191
$75,000 to $100,000......................... 1,343 1,002 1,036 120
$100,000 to $200,000........................ 866 589 1,516 249
$200,000 and over........................... (\5\) (\3\) ............... ...............
----------------------------------------------------------------------------------------------------------------
Total................................. 7,100 $4,148 6,387 $779
----------------------------------------------------------------------------------------------------------------
Footnotes appear at the end of table.
[[Page 43]]
Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items, at 2006 Rates and 2006
Income levels \1\--Continued
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
Mortgage interest deduction
Income Class \2\ ---------------------------------
Returns Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000................................................................. 12 $1
$10,000 to $20,000............................................................ 237 65
$20,000 to $30,000............................................................ 733 330
$30,000 to $40,000............................................................ 1,515 814
$40,000 to $50,000............................................................ 2,261 1,523
$50,000 to $75,000............................................................ 6,929 6,827
$75,000 to $100,000........................................................... 6,957 8,360
$100,000 to $200,000.......................................................... 12,888 27,936
$200,000 and over............................................................. 3,759 19,663
---------------------------------
Total................................................................... 35,292 $65,518
----------------------------------------------------------------------------------------------------------------
Footnotes for Table 3:
\1\ Excludes individuals who are dependents of other taxpayers and taxpayers with negative income.
\2\ The income concept used to place tax returns into classes is adjusted gross income (``AGI'') plus: (a) tax-
exempt interest, (b) employer contributions for health plans and life insurance, (c) employer share of FICA
tax, (d) workers' compensation, (e) nontaxable Social Security benefits, (f) insurance value of Medicare
benefits, (g) alternative minimum tax preference items, and (h) excluded income of U.S. citizens living
abroad.
\3\ Less than $500,000.
\4\ Includes the refundable portion.
\5\ Less than 500 returns.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.