[Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and Means (Green Book)]
[Program Descriptions]
[Section 13. Tax Provisions Related to Retirement, Health, Poverty, Employment, Disability, and Other Social Issues]
[From the U.S. Government Printing Office, www.gpo.gov]




 
  SECTION 13. TAX PROVISIONS RELATED TO RETIREMENT, HEALTH, POVERTY, 
             EMPLOYMENT, DISABILITY AND OTHER SOCIAL ISSUES

                                CONTENTS

Introduction
  Tax Provisions
  Use of Distributional Analysis
  Tax Provision Estimates
Net Exclusion of Pension Contributions and Earnings
Individual Retirement Plans
Exclusion of Social Security and Railroad Retirement Benefits
Exclusion of Employer Contribution for Medical Insurance 
        Premiums and Medical Care
Medical Savings Accounts
Cafeteria Plans
Health Care Continuation Rules
Group Health Plan Requirements
Tax Benefits for Accelerated Death Benefits and Long-Term Care 
        Insurance
Deduction for Health Insurance Expenses of Self-Employed 
        Individuals
Exclusion of Medicare Benefits
Deductibility of Medical Expenses
Earned Income Credit
Exclusion of Public Assistance and SSI Benefits
Dependent Care Tax Credit
HOPE Credit and Lifetime Learning Credit
Qualified State Tuition Programs and Education IRAs
Student Loan Interest Deduction
Exclusion for Employer-Provided Dependent Care
Work Opportunity Tax Credit
Welfare-to-Work Tax Credit
Exclusion of Workers' Compensation and Special Benefits for 
        Disabled Coal Miners
Additional Standard Deduction for the Elderly and Blind
Tax Credit for the Elderly and Certain Disabled Individuals
Tax Provisions Related to Housing
  Owner-Occupied Housing
  Low-Income Housing Credit
Tax Credit and Exclusion for Adoption Expenses
Child Tax Credit
Effect of Tax Provisions on the Income and Taxes of the Elderly 
        and the Poor
  Hypothetical Tax Calculations for Selected Families
  Tax Treatment of the Elderly
  Distribution of Family Income and Taxes
  Federal Tax Treatment of Families in Poverty
References

                              INTRODUCTION

    The preceding sections of this publication discuss direct 
payments to individuals for retirement, health, public 
assistance, employment, and disability benefits provided 
through entitlement programs within the jurisdiction of the 
Committee on Ways and Means. The Federal Government also 
provides benefits to individuals through elements of the income 
tax set forth in the Internal Revenue Code of 1986 (the Code). 
The Code is entirely within the jurisdiction of the Committee 
on Ways and Means.

                             Tax Provisions

    Several different types of income tax provisions are 
available to provide economic incentives. Examples include: 
exclusions, exemptions, deductions, preferential rates, 
deferrals and credits. Measuring the amount of benefit afforded 
by a tax provision is difficult. However, one way to measure 
the benefit is to review the total estimated amounts excluded, 
exempted, or otherwise afforded special treatment under various 
provisions of the income tax.

                     Use of Distributional Analysis

    Analyzing the effectiveness of tax provisions at achieving 
their policy goals often involves examining the distribution of 
benefits from the provisions allocated by the income class of 
those who take advantage of the provisions. The income concept 
used to show the distribution of tax expenditures by income 
class is adjusted gross income (AGI) plus: (1) tax-exempt 
interest; (2) employer contributions for health plans and life 
insurance; (3) employer share of FICA taxes; (4) workers' 
compensation; (5) nontaxable Social Security benefits; (6) 
insurance value of Medicare benefits; (7) minimum tax 
preferences; and (8) excluded income of U.S. citizens living 
abroad.
    This definition of income includes items that clearly 
increase the ability to pay taxes, but that are not included in 
the definition of AGI. However, it omits certain items that 
clearly affect ability to consume goods and services either now 
or in the future, including accrual of pension benefits, other 
fringe benefits (such as military benefits, veterans benefits, 
and parsonage allowances), and means-tested transfer payments 
(such as Aid to Families with Dependent Children (AFDC), 
Supplemental Security Income, food stamps, housing subsidies, 
and general assistance).
    The tax return is the unit of analysis. Table 13-1 shows 
the distribution of all tax returns for 1999 by income class.
    Unless specifically indicated, all distributional tables 
exclude returns filed by dependents. All projections of income 
and deduction items and tax parameters are based on economic 
assumptions consistent with the December 1999 forecast of the 
Congressional Budget Office.

 TABLE 13-1.--DISTRIBUTION BY INCOME CLASS OF ALL RETURNS, TAXABLE RETURNS, ITEMIZED RETURNS, AND TAX LIABILITY
                              AT 1999 RATES AND 1999 LAW AND 1999 INCOME LEVELS \1\
----------------------------------------------------------------------------------------------------------------
                                                              All returns    Taxable      Itemized       Tax
                Income class (thousands) \2\                      \3\        returns      returns     liability
----------------------------------------------------------------------------------------------------------------
Below $10...................................................       22,371        1,463          460      -$8,300
$10-$20.....................................................       26,314        8,634        1,236       -8,519
$20-$30.....................................................       20,301       13,052        2,356       18,989
$30-$40.....................................................       15,902       13,532        3,710       34,291
$40-$50.....................................................       13,082       12,232        4,342       46,655
$50-$75.....................................................       19,829       19,533       10,219      116,354
$75-$100....................................................       10,042        9,993        7,268      102,779
$100-$200...................................................        8,461        8,449        7,222      173,919
$200 and over...............................................        2,527        2,524        2,309      319,360
                                                             ---------------------------------------------------
    Total...................................................      138,829       89,410       39,121     795,530
----------------------------------------------------------------------------------------------------------------
\1\ Tax law as in effect on January 1, 1999, is applied to the 1999 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 plus: (1) tax-exempt
  interest; (2) employer contributions for health plans and life insurance; (3) employer share of FICA tax, (4)
  workers' compensation; (5) nontaxable Social Security benefits; (6) insurance value of Medicare benefits; (7)
  alternative minimum tax preference items; and (8) 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.--Money amounts in millions of dollars, returns in thousands. Detail may not add to total due to rounding.

 Source: Joint Committee on Taxation.

                        Tax Provision Estimates

     Table 13-2 provides various estimates for 36 tax 
provisions related to retirement, health, poverty, employment, 
disability, and housing. These provisions are examined in 
detail in this chapter including their legislative history, an 
explanation of current law, and a brief assessment of their 
effects.

          NET EXCLUSION OF PENSION CONTRIBUTIONS AND EARNINGS

                          Legislative History

    Prior to 1921, no special tax treatment applied to employee 
retirement trusts. Retirement payments to employees and 
contributions to pension trusts were deductible by the employer 
as an ordinary and necessary business expense. Employees were 
taxed on amounts actually received as well as on employer 
contributions to a trust if there was a reasonable expectation 
of benefits accruing from the trust. The 1921 Code provided an 
exemption for a trust forming part of a qualified profit 
sharing or stock bonus plan.

    TABLE 13-2.--ESTIMATED TAX BASE EXCEPTIONS AND CREDITS UNDER THE PRESENT INCOME TAX FOR VARIOUS ITEMS,\1\
                                              CALENDAR YEARS 2001-5
                                            [In billions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                     Year
                  Item                   ------------------------------------------------------------    Total
                                             2001        2002        2003        2004        2005       2001-5
----------------------------------------------------------------------------------------------------------------
   I. Tax base exceptions related to:

Retirement:
    Net exclusion of pension                  $372.9      $361.5      $344.9      $341.3      $344.3    $1,764.8
     contributions and earnings.........
    Keogh plans.........................        20.1        20.4        20.6        21.9        23.7       106.8
    Individual retirement plans.........        55.5        62.9        67.6        73.3        76.7       336.1
    Exclusion of Social Security and           269.7       279.3       288.4       298.8       307.1     1,443.3
     railroad retirement benefits in
     excess of employee share of payroll
     tax \2\............................
Health:
    Exclusions of employer contributions       359.5       384.5       407.1       431.9       458.9     2,042.0
     for medical care, health insurance
     premiums and long-term care
     insurance premiums \3\.............
    Exclusion of Medicare benefits:
        Medicare part A.................       131.7       138.3       145.4       153.8       164.8       734.0
        Medicare part B.................        81.7        88.0        96.3       103.2       111.9       481.1
    Deductibility of medical expenses           29.5        32.3        33.9        35.5        36.5       167.7
     \4\................................
    Deductibility of health insurance            7.2         9.0        14.1        14.9        15.8        60.9
     expenses of the self-employed \5\..
    Exclusion of accelerated death               2.1         2.5         2.9         3.5         3.9        14.8
     benefits...........................
Poverty:
    Exclusion of public assistance and          54.7        57.4        60.4        63.4        69.8       305.8
     SSI cash benefits..................
Employment:
    Exclusion of employer-provided               0.7         0.7         0.7         0.8         0.8         3.6
     dependent care \6\.................
    Employee stock ownership plans......        13.5        14.0        14.6        15.2        15.8        73.1
    Exclusion for benefits provided             45.7        48.9        51.8        55.0        58.5       259.9
     under cafeteria plans \7\..........
Elderly and disabled:
    Exclusion of workers' compensation
     and special benefits for disabled
     coal miners:
        Workers' compensation...........        32.1        33.7        34.6        35.3        37.2       172.8
        Special benefits for disabled            0.3         0.3         0.3         0.3         0.3         1.6
         coal miners....................
    Additional standard deduction for           12.1        12.5        13.0        13.5        14.4        65.5
     elderly and blind..................
Housing:
    Deductibility of mortgage interest..       239.4       250.9       261.7       273.4       285.8     1,311.2
    Deductibility of property tax on            85.4        89.5        93.8        98.2       102.6       469.5
     owner-occupied housing.............
    Exclusion of interest on State and           3.3         3.3         3.3         3.4         3.4        16.8
     local government bonds for owner-
     occupied housing...................
    Depreciation of rental housing in            6.7         7.6         8.2         9.3        10.6        42.4
     excess of alternative depreciation
     system.............................
    Exclusion of interest on State and           0.7         0.7         0.7         0.8         0.8         3.6
     local government bonds for rental
     housing............................
Families:
    Qualified State tuition programs and         0.1         0.2         0.2         0.2         0.2         0.9
     education IRAs.....................
    Student loan interest deduction.....         0.4         0.4         0.4         0.5         0.5         2.2
     Employer-provided adoption expenses       (\8\)       (\8\)       (\8\)       (\8\)       (\8\)       (\8\)

       II. Tax credits related to:

Poverty:
    Earned income credit:
        Nonrefundable portion...........         4.3         4.3         4.4         4.5         4.6        22.0
        Refundable portion \9\..........        26.4        26.7        27.2        27.8        28.4       136.5
Employment:
    Dependent care credit...............         2.4         2.3         2.3         2.3         2.1        11.5
    Work opportunity tax credit.........         0.3         0.3         0.2         0.1       (\8\)         0.8
     Welfare-to-work tax credit.........         0.1         0.1       (\8\)       (\8\)       (\8\)         0.2
Elderly and disabled:
    Tax credit for elderly and disabled.       (\8\)       (\8\)       (\8\)       (\8\)       (\8\)         0.1
Housing:
    Low-income housing tax credit.......         3.7         3.9         4.0         4.1         4.2        19.7
 Families:
     Child tax credit:
         Nonrefundable portion..........        19.1        18.5        18.3        17.8        17.2        90.9
         Refundable portion.............         0.8         0.8         0.8         0.8         0.8         4.0
     HOPE credit and lifetime learning           4.6         4.2         4.3         4.3         4.3        21.6
     credit.............................
     Adoption credit....................         0.3         0.1         0.1         0.1         0.1        0.5
----------------------------------------------------------------------------------------------------------------
\1\ Estimates of exclusions and deductions represent changes in the tax base; they do not measure changes in tax
  liability. Tax effects of provisions are not comparable.
\2\ In addition to OASDI benefits for retired workers, these figures also include disability insurance benefits
  and benefits for dependents and survivors.
\3\ Estimate includes employer-provided health insurance purchased through cafeteria plans and health care
  spending through flexible spending accounts.
\4\ Amounts reported on tax returns in excess of the medical deductions floor (7.5 percent of adjusted gross
  income).
\5\ Amounts deductible from gross income (60 percent of health insurance expenses in 2001, 70 percent in 2002,
  and 100 percent in 2003-5).
\6\ Estimate includes employer-provided child care purchased through dependent care flexible spending accounts.
\7\ 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.
\8\ Less than $50 million.
\9\ Estimate provided by the Congressional Budget Office.

 Note.--Details may not add to totals due to rounding.

 Source: Joint Committee on Taxation.

    The rules relating to qualified plans were substantially 
revised by the Employee Retirement Income Security Act of 1974 
(ERISA), which added overall limitations on contributions and 
benefits and other requirements on minimum participation, 
coverage, vesting, benefit accrual, and funding. Further 
revisions of these rules have been made in every major tax bill 
enacted after 1974.
    Since ERISA, Congress has also acted to broaden the range 
of qualified plans. In the Revenue Act of 1978, Congress 
provided special rules for qualified cash or deferred 
arrangements under section 401(k). Under these arrangements, 
known popularly as 401(k) plans, employees can elect to receive 
cash or have their employers contribute a portion of their 
earnings to a qualified profit sharing, stock bonus, or pre-
ERISA money purchase pension plan.
    An employee stock ownership plan is a special type of 
qualified plan that is designed to invest primarily in 
securities of the employer maintaining the plan. Certain 
qualification rules and tax benefits apply to employee stock 
ownership plans that do not apply to other types of qualified 
plans.

                        Explanation of Provision

In general
    Under a plan of deferred compensation that meets the 
qualification standards of the Internal Revenue Code (sec. 
401(a)), an employer is allowed a deduction for contributions 
to a tax-exempt trust to provide employee benefits. Similar 
rules apply to plans funded with annuity contracts. An employer 
that makes contributions to a qualified plan in excess of the 
deduction limits is subject to a 10-percent excise tax on such 
excess (sec. 4972).
    The qualification rules limit the amount of benefits that 
can be provided through a qualified plan and require that 
benefits be provided on a basis that does not discriminate in 
favor of highly compensated employees. In addition, qualified 
plans are required to meet minimum standards relating to 
participation (the restrictions that may be imposed on 
participation in the plan), coverage (the number of employees 
participating in the plan), vesting (the time at which an 
employee's benefit becomes nonforfeitable), and benefit accrual 
(the rate at which an employee earns a benefit). Also, minimum 
funding standards apply to the rate at which employer 
contributions are required to be made to certain plans to 
ensure the solvency of pension plans.
    If a defined benefit pension plan is terminated, any assets 
remaining after satisfaction of the plan's liabilities may 
revert to the employer. Such reversions are included in the 
gross income of the employer and are subject to income tax plus 
an additional excise tax (sec. 4980). The excise tax is 20 
percent if the employer establishes a qualified replacement 
plan or provides certain benefit increases. Otherwise, the 
excise tax is 50 percent. Transfers of excess assets can be 
made from an ongoing defined benefit plan to pay certain 
retiree health benefits if certain requirements are satisfied 
(sec. 420). The assets transferred are not includable in the 
income of the employer or subject to the tax on reversions.
Minimum participation rules
    A qualified plan generally may not require as a condition 
of participation that an employee complete more than 1 year of 
service or be older than age 21 (sec. 410(a)).
Vesting rules
    A plan is not a qualified plan unless a participant's 
employer-provided benefit vests at least as rapidly as under 
one of two alternative minimum vesting schedules (sec. 411).
Benefit accrual rules
    The protection afforded employees under the minimum vesting 
rules depends not only on the minimum vesting schedules, but 
also on the accrued benefits to which these schedules are 
applied. In the case of a defined contribution plan, the 
accrued benefit is the participant's account balance. In the 
case of a defined benefit plan, a participant's accrued benefit 
is determined under the plan benefit formula, subject to 
certain restrictions. In general, the accrued benefit is 
defined in terms of the benefit payable at normal retirement 
age and does not include certain ancillary nonretirement 
benefits.
    Each defined benefit plan is required to satisfy one of 
three accrued benefit tests. The primary purpose of these tests 
is to prevent undue backloading of benefit accruals (i.e., by 
providing low rates of benefit accrual in the employee's early 
years of service when the employee is most likely to leave and 
by concentrating the accrual of benefits in the employee's 
later years of service when he is most likely to remain with 
the employer until retirement) (sec. 412).
Coverage rules
    A plan is not qualified unless the plan satisfies at least 
one of the following coverage requirements: (1) the plan 
benefits at least 70 percent of all nonhighly compensated 
employees, (2) the plan benefits a percentage of nonhighly 
compensated employees that is at least 70 percent of the 
percentage of highly compensated employees benefiting under the 
plan, or (3) the plan meets an average benefits test (sec. 
410(b)). In addition, a defined benefit plan is not a qualified 
plan unless it benefits at least the lesser of: (1) 50 
employees, or (2) the greater of 40 percent of the employees of 
the employer or 2 employees (or if there is only 1 employee, 
such employee; sec. 401(a)(26)).
General nondiscrimination rule
    In general, a plan is not a qualified plan if the 
contributions or benefits under the plan discriminate in favor 
of highly compensated employees (sec. 401(a)(4)).
Limitations on contributions and benefits
    The maximum annual benefit that may be provided by a 
defined benefit pension plan (payable at the Social Security 
retirement age) is the lesser of 100 percent of average 
compensation, or $135,000 for 2000 (sec. 415(b)). The dollar 
limit is adjusted annually for inflation. The dollar limit is 
reduced if payments of benefits begin before the Social 
Security retirement age and increased if benefits begin after 
the Social Security retirement age.
Funding rules
    Pension plans are required to meet a minimum funding 
standard for each plan year (sec. 412). In the case of a 
defined benefit pension plan, an employer must contribute an 
annual amount sufficient to fund a portion of participants' 
projected benefits determined in accordance with one of several 
prescribed funding methods, using reasonable actuarial 
assumptions. Plans with asset values of less than 100 percent 
of current liabilities are subject to additional, faster 
funding rules.
Taxation of distributions
    An employee who participates in a qualified plan is taxed 
when the employee receives a distribution from the plan to the 
extent the distribution is not attributable to employee 
contributions (sec. 402). With certain exceptions, a 10-percent 
additional income tax is imposed on early distributions from a 
qualified plan (sec. 72(t)).
Failure to satisfy qualification requirements
    If a plan fails to satisfy the qualification requirements, 
the trust that holds the plan's assets is not tax exempt. An 
employer's deduction for plan contributions is only allowed 
when the employee includes the contributions or benefits in 
income, and benefits generally are includable in an employee's 
income when they are no longer subject to a substantial risk of 
forfeiture.
SIMPLE retirement plans
    The Small Business Job Protection Act of 1996 created a 
simplified retirement plan for small business called the 
Savings Incentive Match Plan for Employees (SIMPLE) (secs. 
408(p) and 401(k)(11)). SIMPLE plans may be adopted by 
employers with 100 or fewer employees and who do not maintain 
another employer-sponsored retirement plan. A SIMPLE plan can 
be either an individual retirement account (IRA) for each 
employee or part of a qualified cash or deferred arrangement 
(401(k) plan). If established in IRA form, a SIMPLE plan is not 
subject to the nondiscrimination rules generally applicable to 
qualified plans and simplified reporting requirements apply. If 
adopted as part of a 401(k) plan, the plan does not have to 
satisfy the special nondiscrimination tests applicable to 
401(k) plans and is not subject to the top-heavy rules. The 
other qualified plan rules continue to apply. SIMPLE plans are 
subject to special rules regarding eligibility of employees to 
participate and special contribution limits.

                          Effect of Provision

    The tax treatment of pension contributions and earnings has 
encouraged employers to establish qualified retirement plans 
and to compensate employees in the form of pension 
contributions to such plans. There are two potential tax 
advantages of being compensated through pension contributions. 
One advantage is the ability to earn tax-free returns to 
savings. When saving is done through a pension plan, the 
employee earns a higher rate of return than on fully taxed 
savings.\1\ The second advantage is that an employee's tax rate 
may be lower during retirement than during the working years.
---------------------------------------------------------------------------
    \1\ This applies to pension contributions made by employers. 
Employees may also be able to contribute to qualified plans. Employee 
contributions may be made with aftertax dollars. If so, the tax 
advantage given to these contributions is smaller than the tax 
advantage given to employer contributions, and consists of the deferral 
of tax on accumulated earnings.
---------------------------------------------------------------------------
    These tax provisions directly benefit only persons who work 
for employers with qualified plans and who work for a 
sufficient period of time before their benefits vest in such 
plans. The current extent of this coverage and recent trends in 
coverage are described below.

                                Coverage

    The term ``covered,'' as used here, means that an employee 
is accruing benefits in an employer pension or other retirement 
plan. The most recent data regarding pension coverage is the 
March 1999 Current Population Survey. The data referred to 
below come from that survey unless otherwise noted.
    As of March 1998, 63 percent of the nonelderly full-time 
wage and salary workers employed in the private sector reported 
that they worked in firms with an employer-sponsored pension 
plan (table 13-3). Half of the full-time wage and salary 
workers employed in the private sector were covered by an 
employer-sponsored pension plan.
    Pension coverage varies substantially among full-time, 
privately employed workers. Differences depend on the age of 
the worker, job earnings, the industry of employment, and the 
size of the firm.

TABLE 13-3.--EMPLOYER SPONSORSHIP AND EMPLOYEE COVERAGE UNDER PENSION OR
         RETIREMENT PLAN, PRIVATE WAGE AND SALARY WORKERS, 1998
------------------------------------------------------------------------
                                              Percent covered
                                  --------------------------------------
                                      Total      Full time    Part time
------------------------------------------------------------------------
Employer sponsorship:
    Employer sponsors plan.......           57           63           34
    Employer does not sponsor....           43           37           66
Employee coverage:
    Employee covered under plan..           43           50           12
    Employee is not covered......           57           50           88
                                  --------------------------------------
      Number of private wage and       108,930       86,709      22,221
       salary workers (in
       thousands)................
------------------------------------------------------------------------
Source: Congressional Research Service estimates based on the U.S.
  Census Bureau's Current Population Survey of March 1999.

    Younger workers are much less likely to be covered by a 
pension than middle aged and older workers. Coverage rates rise 
steadily from 20 percent for those under age 25 to about 60 
percent for those between ages 40 and 60 before falling off 
substantially for those over age 65. This pattern holds for 
both men and women. However, the jump in coverage for middle 
aged men is slightly larger than the increase for middle aged 
women (table 13-4).
    Higher paying jobs are more likely to offer pensions. Just 
11 percent of full-time private wage and salary workers earning 
less than $10,000 per year in 1998 were covered compared to 77 
percent or more of those earning $50,000 or more (table 13-5). 
Coverage may be higher for higher paying jobs because of the 
greater value of the pension tax benefits to workers in higher 
tax brackets and because of the declining replacement rate of 
Social Security at higher earnings levels.

  TABLE 13-4.--COVERAGE UNDER EMPLOYER-SPONSORED PENSION OR RETIREMENT
  PLANS FOR FULL-TIME PRIVATE WAGE AND SALARY WORKERS BY WORKERS' AGE,
                                  1998
------------------------------------------------------------------------
                                              Percent covered
               Age                --------------------------------------
                                      Total         Men         Women
------------------------------------------------------------------------
Under 25.........................           20           21           19
25-29............................           41           39           43
30-34............................           50           52           46
35-39............................           55           57           52
40-44............................           59           62           56
45-49............................           62           66           58
50-54............................           63           67           58
55-59............................           61           64           56
60-64............................           59           61           55
65 or older......................           41           42           38
                                  --------------------------------------
      Total......................           50           52          47
------------------------------------------------------------------------
Source: Congressional Research Service estimates based on the U.S.
  Census Bureau's Current Population Survey of March 1999.


  TABLE 13-5.--COVERAGE UNDER EMPLOYER-SPONSORED PENSION OR RETIREMENT
 PLANS FOR FULL-TIME PRIVATE WAGE AND SALARY WORKERS BY WORKERS' WAGES,
                                  1998
------------------------------------------------------------------------
                                              Percent covered
         Annual earnings          --------------------------------------
                                      Total         Men         Women
------------------------------------------------------------------------
Under $10,000....................           11           10           12
$10,000-$14,999..................           22           17           26
$15,000-$19,999..................           35           30           40
$20,000-$24,999..................           45           38           52
$25,000-$29,999..................           56           53           60
$30,000-$34,999..................           63           61           66
$35,000-$39,999..................           65           63           69
$40,000-$49,999..................           71           71           72
$50,000-$74,999..................           77           77           76
$75,000 or over..................           79           80           73
                                  --------------------------------------
      Total \1\..................           50           52          47
------------------------------------------------------------------------
\1\ Total includes workers not responding on wages.

Source: Congressional Research Service estimates based on the U.S.
  Census Bureau's Current Population Survey of March 1999.

    Coverage is much lower for smaller firms (table 13-6). 
Smaller firms are less likely to offer comprehensive fringe 
benefit packages as part of total compensation. Only 17 percent 
of full-time private wage and salary workers in firms with 
fewer than 10 employees are covered. The rate rises with 
employer size but does not reach 50 percent (the average across 
all firm sizes) until firms have 100 or more employees (table 
13-6).
    Significant differences in coverage also are apparent 
between full-time private wage and salary workers and other 
wage and salary workers. Coverage is much lower among part-time 
workers and much higher among public employees. Among part-
time, private wage and salary workers, 12 percent are covered. 
Seventy-four percent of public sector wage and salary workers 
are covered including 82 percent of those who are full-time 
workers (table 13-7).

  TABLE 13-6.--COVERAGE UNDER EMPLOYER-SPONSORED PENSION OR RETIREMENT
  PLANS FOR FULL-TIME PRIVATE WAGE AND SALARY WORKERS BY SIZE OF FIRM,
                                  1998
------------------------------------------------------------------------
                                              Percent covered
  Firm size (number of workers)   --------------------------------------
                                      Total         Men         Women
------------------------------------------------------------------------
Fewer than 10....................           17           17           17
10-24............................           28           28           28
25-99............................           41           43           37
100-499..........................           54           57           51
500-999..........................           61           63           59
1,000 or more....................           66           70           61
                                  --------------------------------------
    Total........................           50           52          47
------------------------------------------------------------------------
Source: Congressional Research Service estimates based on the U.S.
  Census Bureau's Current Population Survey of March 1999.


    TABLE 13-7.--COVERAGE OF WAGE AND SALARY WORKERS UNDER EMPLOYER-
 SPONSORED PENSION OR RETIREMENT PLAN, BY PRIVATE OR PUBLIC SECTOR, 1998
------------------------------------------------------------------------
                                              Percent covered
       Sector of employment       --------------------------------------
                                      Total      Full time    Part time
------------------------------------------------------------------------
All wage and salary workers......           48           56           15
    Men..........................           51           57           10
    Women........................           44           54           17
Private sector...................           43           50           12
    Men..........................           47           52            9
    Women........................           38           47           14
Public sector....................           74           82           30
    Men..........................           76           82           19
    Women........................           72           82          34
------------------------------------------------------------------------
Source: Congressional Research Service estimates based on the U.S.
  Census Bureau's Current Population Survey of March 1999.

                           Trends in Coverage

    At the outset of World War II, private employer pensions 
were offered by about 12,000 firms. Pensions spread rapidly 
during and after the war, encouraged by high marginal tax rates 
and wartime wage controls that exempted pension benefits. By 
1972, when the first comprehensive survey was undertaken, 48 
percent of full-time private employees were covered. Subsequent 
surveys in 1979, 1983, 1988, and 1993 showed that coverage 
remained fairly constant, never falling below 46 percent or 
rising above 50 percent. However, the most recent survey in 
1998 showed a drop in coverage to 43 percent (table 13-7).
    The decline in coverage in the 1980s was concentrated among 
younger men. The coverage rate among older men has fallen less 
dramatically, and among women it has risen at some ages and 
fallen at others.
    The decline in pension coverage has occurred at the same 
time that employers have been shifting from defined benefit 
plans. Of the private wage and salary workers covered by a 
pension plan in 1975, 87 percent were covered by a defined 
benefits plan (Turner & Beller, 1989, pp. 65 & 357). This 
proportion dropped to 83 percent by 1980 and to 71 percent by 
1985. This proportion dropped even lower to 65 percent in 1993 
(Department of Labor, 1994, tables A2, B1, B2). This shifting 
composition has largely been the result of rapid growth in 
primary defined contribution plans. Employee stock ownership 
plans and 401(k) plans have been among the most rapidly growing 
defined contribution plans.

                      INDIVIDUAL RETIREMENT PLANS

                          Legislative History

    ERISA added section 219 to the Internal Revenue Code, 
providing a tax deduction for certain contributions to IRAs and 
permitting the deferral of tax on amounts held in such 
arrangements until withdrawal. Active participants in employer 
plans were not permitted to make deductible IRA contributions.
    The Economic Recovery Tax Act of 1981 expanded eligibility 
to individuals who were active participants and increased the 
amount of the permitted deduction. The Tax Reform Act of 1986 
limited the full IRA deduction to individuals with income below 
certain levels and to individuals who are not active 
participants in employer plans. Individuals who are not 
entitled to the full IRA deduction may make nondeductible 
contributions to an IRA. The Small Business Job Protection Act 
of 1996 increased contributions that can be made to the IRA of 
a nonworking spouse. The Health Insurance Portability and 
Accountability Act provided that the early withdrawal tax does 
not apply to withdrawals from IRAs: (1) for medical expenses 
that would be deductible (i.e., to the extent that total 
medical expenses exceed 7.5 percent of AGI); and (2) for health 
insurance expenses of unemployed individuals.
    The Taxpayer Relief Act of 1997, effective for years 
beginning after December 31, 1997, made the following changes 
to the IRA provisions: (1) the income limits on deductible IRA 
contributions that apply to active participants in an employer-
sponsored retirement plan were increased; (2) the nonworking 
spouse of an active participant in an employer-sponsored 
retirement plan may make a deductible contribution of up to 
$2,000 to an IRA; (3) a new tax-free nondeductible IRA, the 
Roth IRA, was added; and (4) the 10-percent early withdrawal 
tax was waived for distributions from IRAs for education and 
first-time home buyer expenses.

                        Explanation of Provision

Deductible IRAs
     An individual who is an active participant in an employer-
sponsored retirement plan may deduct annual IRA contributions 
up to the lesser of $2,000 or 100 percent of compensation if 
the individual's adjusted gross income (AGI) does not exceed 
certain limits.
     The full $2,000 IRA deduction limit is phased out for 
married individuals over the following levels of AGI: for 2000, 
$52,000-$62,000; for 2001, $53,000-$63,000; for 2002, $54,000-
$64,000; for 2003, $60,000-$70,000; for 2004, $65,000-$75,000; 
for 2005, $70,000-$80,000; for 2006, $75,000-$85,000; and for 
2007 and thereafter, $80,000-$100,000. The phase-out range for 
married individuals filing separate returns is $0-$10,000. A 
couple is not treated as married if the spouses file separate 
returns and do not live together at any time during the year. 
The phase-out range for single individuals is: for 2000, 
$32,000-$42,000; for 2001, $33,000-$43,000; for 2002, $34,000-
$44,000; for 2003, $40,000-$50,000; for 2004, $45,000-$55,000; 
for 2005 and thereafter, $50,000-$60,000.
    An individual who is not an active participant, but whose 
spouse is, may make a full $2,000 deductible IRA contribution 
if the AGI for the couple does not exceed $150,000. The 
deduction limit is phased out for AGI between $150,000 and 
$160,000. An individual who is not an active participant in an 
employer-sponsored retirement plan may deduct IRA contributions 
up to the limits described above without limitation based on 
income.
     The investment income of IRA accounts is not taxed until 
withdrawn. Withdrawn amounts attributable to deductible 
contributions and all earnings are includable in income. A 10-
percent additional income tax is levied unless the withdrawal: 
(1) is made after the IRA owner attains age 59\1/2\ or dies; 
(2) is made on account of the disability of the IRA owner; (3) 
is one of a series of substantially equal periodic payments 
made not less frequently than annually over the life or life 
expectancy of the IRA owner (or the IRA owner and his or her 
beneficiary); or (4) is made to pay medical expenses in excess 
of 7.5 percent of AGI or for insurance premiums for unemployed 
individuals; or (5) is made for first-time home buyer expenses 
(subject to a $10,000 lifetime cap) or for qualified higher 
education expenses.
Roth IRAs
    An individual may make nondeductible contributions up to 
the lesser of $2,000 or 100 percent of compensation to a Roth 
IRA if the individual's AGI does not exceed $95,000 for an 
unmarried individual, or $150,000 for a married couple filing a 
joint return. The maximum contribution is phased out between 
AGI ranges of $95,000-$110,000 for unmarried individuals and of 
$150,000-$160,000 for married individuals filing a joint 
return. No more than $2,000 of contributions can be made to all 
an individual's IRAs for a taxable year.
     Qualified distributions from a Roth IRA are not includable 
in income. Qualified distributions are distributions: (1) made 
after the 5-year taxable period beginning with the first 
taxable year for which a contribution is made, and (2) which 
are made on or after the date the individual attains age 59\1/
2\, are made to a beneficiary on or after the death of the 
individual, are attributable to the individual's being 
disabled, or are for a qualified special purpose distribution. 
A qualified special purpose distribution is a distribution for 
first-time home buyer expenses, as described above. 
Distributions that are not qualified distributions are 
includable in income, to the extent earnings are included in 
the distribution, and are subject to the 10-percent tax on 
early withdrawal, unless an exception applies, as described 
above for deductible IRAs.
     Taxpayers with AGI of less than $100,000 may convert an 
IRA to a Roth IRA at any time. If the conversion was made 
before January 1, 1999, the amounts that would have been 
includable in income had the amounts converted been withdrawn 
are includable in income ratably over 4 years. The 10-percent 
tax on early withdrawals does not apply to conversions of IRAs 
to Roth IRAs.
Nondeductible IRAs
     An individual may make nondeductible contributions to an 
IRA to the extent the individual does not or cannot make 
deductible contributions to an IRA or contributions to a Roth 
IRA. Earnings on contributions to a nondeductible IRA 
accumulate tax free, and are includable in income when 
withdrawn. The 10-percent early withdrawal tax applies to such 
earnings, subject to the exceptions for deductible and Roth 
IRAs as described above.

                          Effect of Provision

    Use of IRAs expanded significantly when eligibility was 
expanded in 1982 to all persons with earnings and contracted 
correspondingly in 1987 when deductibility was restricted for 
higher income taxpayers who were covered by an employer-
provided pension. The number of taxpayers claiming a deductible 
IRA contribution jumped from 3.4 million in 1981 to 12.0 
million in 1982 and peaked at 16.2 million in 1985. In 1987, 
only 7.3 million taxpayers reported deductible contributions. 
Since then, the number has continued to fall (table 13-8).
    Upper-income taxpayers facing higher marginal tax rates 
receive more benefit per dollar of IRA deduction than do low-
income taxpayers facing lower marginal tax rates. When IRAs 
were available to all workers, the percentage of taxpayers 
contributing to an IRA was substantially higher among taxpayers 
with higher income. For example, in 1985, 13.6 percent of 
taxpayers with AGI between $10,000 and $30,000 contributed to 
an IRA compared with 74.1 percent of taxpayers with AGI between 
$75,000 and $100,000.
    The decline in IRA use between 1985 and 1990 among those 
with AGI between $10,000 and $30,000 appears to be larger than 
the reduction required by the change in law since the 
restrictions on deductible contributions apply only to a small 
fraction of taxpayers with AGI below $30,000.

 TABLE 13-8.--USE OF DEDUCTIBLE INDIVIDUAL RETIREMENT ACCOUNTS, 1980-97
------------------------------------------------------------------------
                                         Number of tax
                                            returns         Total IRA
                 Year                    deducting IRA      deductions
                                         contributions      (billions)
                                           (millions)
------------------------------------------------------------------------
1980..................................              2.6             $3.4
1981..................................              3.4              4.8
1982..................................             12.0             28.3
1983..................................             13.6             32.1
1984..................................             15.2             35.4
1985..................................             16.2             38.2
1986..................................             15.5             37.8
1987..................................              7.3             14.1
1988..................................              6.4             11.9
1989..................................              5.8             10.8
1990..................................              5.2              9.9
1991..................................              4.7              9.0
1992..................................              4.5              8.7
1993..................................              4.4              8.5
1994..................................              4.3              8.4
1995..................................              4.1              8.3
1996..................................              4.4              8.6
1997..................................              4.1             8.7
------------------------------------------------------------------------
Source: Internal Revenue Service, Statistics of Income, various years.

    Eligibility percentages and the real value of the IRA 
contribution limits decline over time because present law does 
not index the contribution limits or the income eligibility 
limits for inflation. For example, the real value of a $2,000 
contribution has declined more than 30 percent since 1986 
because of inflation.
    Congress established IRAs to allow workers not covered by 
employer pension plans to have tax-advantaged retirement 
saving. Nonetheless, since 1981 IRA participation rates have 
been higher among those covered by an employer-provided pension 
plan than those without one, and many of those who are not 
covered by a pension plan do not contribute to an IRA. In 1987, 
10 percent of full-time private-sector earners without pension 
coverage contributed to an IRA, while 15 percent of those with 
coverage contributed (Woods, 1989, p. 9).

     EXCLUSION OF SOCIAL SECURITY AND RAILROAD RETIREMENT BENEFITS

                          Legislative History

    The exclusion from gross income for Social Security 
benefits was not initially established by statute. Prior to the 
Social Security Amendments of 1983, the exclusion was based on 
a series of administrative rulings issued by the Internal 
Revenue Service in 1938 and 1941.\2\
---------------------------------------------------------------------------
    \2\ See Internal Revenue Service, Internal Revenue Bulletin, 1938-
1, Income Tax Unit 3154, p. 114; 1938-2, Income Tax Unit 3229, p. 136; 
and 1941-1, Income Tax Unit 3447, p. 191.
---------------------------------------------------------------------------
    Under the Social Security Amendments of 1983, a portion of 
the Social Security benefits paid to higher income taxpayers is 
included in gross income. In 1993, the Omnibus Budget 
Reconciliation Act increased the amount of benefits subject to 
tax and increased the rate of tax for some benefit recipients.
    The exclusion from gross income of benefits paid under the 
Railroad Retirement System was enacted in the Railroad 
Retirement Act of 1935. A portion of the benefits payable under 
the Railroad Retirement System (generally, tier 1 benefits) is 
equivalent to Social Security benefits. The tax treatment of 
tier 1 railroad retirement benefits was modified in the Social 
Security Amendments of 1983 to conform to the tax treatment of 
Social Security benefits. Other railroad retirement benefits 
are taxable in the same manner as employer-provided retirement 
benefits. The Consolidated Omnibus Budget Reconciliation Act of 
1985 provided that tier 1 benefits are taxable in the same 
manner as Social Security benefits only to the extent that 
Social Security benefits otherwise would be payable. Other tier 
1 benefits are taxable in the same manner as all other railroad 
retirement benefits (for further details, see section 5).

                        Explanation of Provision

    For taxpayers whose modified AGI exceeds certain limits, a 
portion of Social Security and tier 1 railroad retirement 
benefits is included in taxable income. Modified AGI is AGI 
plus interest on tax-exempt bonds plus 50 percent of Social 
Security and tier 1 railroad retirement benefits. A two-tier 
structure applies. The base tier is $25,000 for unmarried 
individuals and $32,000 for married couples filing joint 
returns, and zero for married persons filing separate returns 
who do not live apart at all times during the taxable year. The 
amount of benefits includable in income is the lesser of 50 
percent of the Social Security and tier 1 railroad retirement 
benefits or 50 percent of the excess of the taxpayer's combined 
income over the base amount.
    The second tier applies to taxpayers with modified AGI of 
at least $34,000 (unmarried taxpayers) or $44,000 (married 
taxpayers filing joint returns). For these taxpayers, the 
amount of benefits includable in gross income is the lesser of 
85 percent of Social Security benefits or the sum of 85 percent 
of the amount by which modified AGI exceeds the second-tier 
thresholds, and the smaller of the amount included under prior 
law or $4,500 (unmarried taxpayers) or $6,000 (married 
taxpayers filing jointly). The portion of tier 1 railroad 
retirement benefits potentially includable in taxable income 
under the above formula is the amount of benefits the taxpayer 
would have received if covered under Social Security. Pursuant 
to section 72(r) of the Internal Revenue Code of 1986, all 
other benefits payable under the Railroad Retirement System are 
includable in income when received to the extent they exceed 
employee contributions.

                          Effect of Provision

    Approximately one-third of all Social Security recipients 
pay taxes on their benefits. This percentage is likely to 
increase over time because the thresholds are not adjusted 
annually for past inflation or other factors.

 EXCLUSION OF EMPLOYER CONTRIBUTION FOR MEDICAL INSURANCE PREMIUMS AND 
                              MEDICAL CARE

                          Legislative History

    In 1943, the Internal Revenue Service (IRS) ruled that 
employer contributions to group health insurance policies were 
not taxable to the employee. Employer contributions to 
individual health insurance policies, however, were declared to 
be taxable income in an IRS revenue ruling in 1953.
    Section 106 of the Internal Revenue Code, enacted in 1954, 
reversed the 1953 IRS ruling. As a result, employer 
contributions to all accident or health plans generally are 
excluded from gross income and therefore are not subject to 
tax. Under section 105 of the Internal Revenue Code, benefits 
received under an employer's accident or health plan generally 
are not included in the employee's income.
    In the Revenue Act of 1978, Congress added section 105(h) 
to tax the benefits payable to highly compensated employees 
under a self-insured medical reimbursement plan if the plan 
discriminated in favor of highly compensated employees.

                        Explanation of Provision

    Gross income of an employee generally excludes employer-
provided coverage under an accident or health plan. The 
exclusion applies to coverage provided to former employees, 
their spouses, or dependents. Amounts excluded include those 
received by an employee for personal injuries or sickness if 
the amounts are paid directly or indirectly to reimburse the 
employee for expenses incurred for medical care. However, this 
exclusion does not apply in the case of amounts paid to a 
highly compensated individual under a self-insured medical 
reimbursement plan if the plan violates the nondiscrimination 
rules of section 105(h).
    Present law permits employers to prefund medical benefits 
for retirees. Postretirement medical benefits may be prefunded 
by the employer in two basic ways: (1) through a separate 
account in a tax-qualified pension plan (sec. 401(h)); or (2) 
through a welfare benefit fund (secs. 419 and 419A). Generally, 
the amounts contributed are excluded from the income of the 
plan or participants. Although amounts held in a section 401(h) 
account are accorded tax-favored treatment similar to assets 
held in a pension trust, the benefits provided under a section 
401(h) account are required to be incidental to the retirement 
benefits provided by the plan. Amounts contributed to welfare 
benefit funds are subject to certain deduction limitations 
(secs. 419 and 419A). In addition, the fund is subject to 
income tax relating to any set-aside to provide postretirement 
medical benefits.

                          Effect of Provision

    The exclusion for employer-provided health coverage 
provides an incentive for compensation to be furnished to the 
employee in the form of health coverage, rather than in cash 
subject to current taxation. For example, an employer designing 
a compensation package for an employee would be indifferent 
between paying the employee one dollar in cash and purchasing 
one dollar's worth of health insurance for the employee.\3\ On 
the other hand, because the employee is likely to pay Federal 
and State income taxes and payroll taxes on cash compensation 
and no tax on health insurance contributions made on his 
behalf, the employee would likely prefer that some compensation 
be in the form of health insurance. Employees subject to tax at 
the highest marginal tax rates have the greatest incentive to 
receive compensation in nontaxable forms.
---------------------------------------------------------------------------
    \3\ To the extent the employer bears a portion of the payroll tax, 
the employer may actually prefer to provide compensation through health 
insurance (which is not subject to payroll tax).
---------------------------------------------------------------------------
    The tax preference that the exclusion provides is 
substantial and has resulted in widespread access to health 
coverage. A majority of the population now receives health 
insurance as a consequence of their own employment or of a 
family member's employment. According to a special analysis of 
data from the Current Population Survey conducted by the 
Congressional Budget Office, nearly 75 percent of all workers 
under age 65 were covered by employment-based health insurance. 
Slightly over 4 percent of the workers under age 65 purchased 
insurance privately and nearly 3 percent received public 
insurance either through Medicare, Medicaid, or the Department 
of Veterans Affairs. The analysis reveals that slightly more 
than 18 percent of the workers under age 65 had no health 
insurance, up from 15 percent in 1996 (Committee, 1998, pp. 
853-54).
    Health coverage through employer-based plans tends to be 
more prevalent: in the finance, government, manufacturing, 
mining, professional service, transportation, and wholesale 
trade sectors of the economy; among medium and large firms; for 
more highly paid workers; and among those over age 30 (table 
13-9).

                        MEDICAL SAVINGS ACCOUNTS

    The Health Insurance Portability and Accountability Act of 
1996 included provisions for medical savings accounts (MSAs), 
effective for years beginning after December 31, 1996. Within 
limits, contributions to an MSA are deductible if made by an 
eligible individual and are excludable from income and 
employment taxes if made by the employer (other than 
contributions made through a cafeteria plan). Earnings on 
amounts in an MSA are not currently taxable. Distributions from 
an MSA for medical expenses are not includable in gross income. 
Distributions from an MSA that are not for medical expenses are 
includable in gross income and are subject to an additional tax 
of 15 percent, unless the distribution is made after death, 
disability, or age 65.

  TABLE 13-9.--PRIMARY SOURCE OF HEALTH INSURANCE FOR WORKERS UNDER AGE 65 BY DEMOGRAPHIC CATEGORY, MARCH 1999
----------------------------------------------------------------------------------------------------------------
                                                                  Percentage distribution by source of insurance
                                                       Number of -----------------------------------------------
                      Category                          workers    Own or
                                                      (millions)    other   Individual      Public         No
                                                                  employer    policy    insurance \1\  insurance
----------------------------------------------------------------------------------------------------------------
Industry:
    Agriculture.....................................       2.8       45.4       14.5           3.9         36.1
    Mining..........................................       0.6       85.0        3.3           0.1         11.6
    Construction....................................       8.8       59.9        5.9           1.5         32.7
    Manufacturing...................................      20.1       84.5        1.7           1.4         12.3
    Transportation..................................       9.1       81.7        2.4           1.4         14.5
    Wholesale trade.................................       5.0       81.0        4.2           1.3         13.5
    Retail trade....................................      18.8       62.3        4.9           5.0         27.8
    Finance.........................................       8.4       83.2        4.5           0.9         11.4
    Professional services...........................      30.4       82.9        3.7           2.2         11.1
    Other services..................................      14.5       63.3        6.1           4.1         26.5
    Government......................................       5.9       91.3        1.4           1.3          6.1
Family income (as a percentage of poverty):
    under 100.......................................       8.6       28.0        5.3          20.2         46.5
    100-199.........................................      17.7       50.4        5.1           6.4         38.1
    200-299.........................................      21.9       71.6        3.9           2.2         22.3
    300 or more.....................................      83.2       85.7        3.9           0.5          9.9
Firm size (number of employees):
    Fewer than 10...................................      25.2       53.1       12.1           3.8         31.1
    10-24...........................................      11.6       64.0        5.4           3.5         27.0
    25-99...........................................      16.6       73.8        2.5           3.3         20.5
    100-499.........................................      18.8       79.9        2.1           2.9         15.1
    500-999.........................................       7.6       84.8        1.7           2.0         11.5
    1,000 or more...................................      51.6       84.9        1.6           2.3         11.2
Age:
    Under 30........................................      31.2       61.6        3.6           5.4         29.3
    30-39...........................................      36.5       76.1        3.3           3.1         17.5
    40-49...........................................      35.6       80.6        4.2           1.7         13.6
    50-64...........................................      28.1       80.6        5.8           1.2         12.4
Region:
    Northeast.......................................      24.7       76.7        4.0           2.8         16.5
    Midwest.........................................      31.2       79.3        4.1           2.7         13.9
    South...........................................      45.5       73.4        4.0           2.6         20.0
    West............................................      30.0       70.8        4.5           3.6         21.1
                                                     -----------------------------------------------------------
All nonelderly workers                                   131.4       74.8        4.1           2.9        18.2
----------------------------------------------------------------------------------------------------------------
\1\ Public insurance includes Medicaid, Medicare, and coverage provided by the Department of Veterans Affairs.

 Source: Congressional Budget Office estimates based on the March 1999 Current Population Survey.

    MSAs are available to employees covered under an employer-
sponsored high deductible health plan of a small employer and 
to self-employed individuals covered under a high deductible 
health plan (regardless of the size of the entity for which the 
self-employed individual performs services). A small employer 
is defined as an employer with 50 or fewer employees.
    In order to be eligible for an MSA contribution, an 
otherwise eligible individual must be covered under a high 
deductible health plan and no other health plan. A high 
deductible health plan is a plan with an annual deductible of 
at least $1,500 and no more than $2,250 in the case of 
individual coverage (and at least $3,000 and no more than 
$4,500 in the case of family coverage). The dollar limits are 
indexed for inflation. High deductible plans must also meet 
certain limits on out-of-pocket expenses.
    The number of taxpayers benefiting annually from an MSA 
contribution is limited to a threshold level (generally, 
750,000 taxpayers). If it is determined in a year that the 
threshold level has been exceeded (called a cutoff year), then, 
in general, for succeeding years during the 4-year pilot period 
1997-2000, only those individuals who (1) made an MSA 
contribution or had an employer MSA contribution for the year 
or a preceding year (i.e., are active MSA participants) or (2) 
are employed by a participating employer, would be eligible for 
an MSA contribution. In determining whether the threshold for 
any year has been exceeded, MSAs of previously uninsured 
individuals are not taken into account.
    After December 31, 2000, no new contributions may be made 
to MSAs except by or on behalf of an individual who previously 
had MSA contributions and employees who are employed by a 
participating employer. Self-employed individuals who made 
contributions to an MSA during the period 1997-2000 also may 
continue to make contributions after 2000.

                            CAFETERIA PLANS

                          Legislative History

    Under present law, compensation generally is includable in 
gross income when received. An exception applies if an employee 
may choose between cash and certain employer-provided 
nontaxable benefits under a cafeteria plan.
    Prior to 1978, ERISA provided that an employer contribution 
made before January 1, 1977 to a cafeteria plan in existence on 
June 27, 1974, had to be included in an employee's gross income 
only to the extent that the employee actually elected taxable 
benefits. If a plan did not exist on June 27, 1974, the 
employer contribution was to be included in income to the 
extent the employee could have elected taxable benefits. The 
Revenue Act of 1978 set up permanent rules for plans that offer 
an election between taxable and nontaxable benefits.
    The Deficit Reduction Act of 1984 (Public Law 98-369) 
clarified the types of employer-provided benefits that could be 
provided through a cafeteria plan, added a 25-percent 
concentration test, and required annual reporting to the IRS by 
employers.
    The Tax Reform Act of 1986 also modified the rules relating 
to cafeteria plans in several respects.

                        Explanation of Provision

    A participant in a cafeteria plan (sec. 125) is not treated 
as having received taxable income solely because the 
participant had the opportunity to elect to receive cash or 
certain nontaxable benefits. In order to meet the requirements 
of section 125, the plan must be in writing, must include only 
employees (including former employees) as participants, and 
must satisfy certain nondiscrimination requirements.
    In general, a nontaxable benefit may be provided through a 
cafeteria plan if the benefit is excludable from the 
participant's gross income by reason of a specific provision of 
the Code. These include employer-provided health coverage, 
group-term life insurance coverage, and benefits under 
dependent care assistance programs. A cafeteria plan may not 
provide qualified scholarships or tuition reduction, 
educational assistance, miscellaneous employer-provided fringe 
benefits, or deferred compensation except through a qualified 
cash or deferred arrangement.
    If the plan discriminates in favor of highly compensated 
individuals regarding eligibility to participate, to make 
contributions, or to receive benefits under the plan, then the 
exclusion does not apply to such individuals. For purposes of 
these nondiscrimination requirements, a highly compensated 
individual is an officer, a shareholder owning more than 5 
percent of the employing firm, a highly compensated individual 
determined under the facts and circumstances of the case, or a 
spouse or dependent of the above individuals.

                          Effect of Provision

    The optimal compensation of employees (in a tax planning 
sense) would require that employers and employees arrive at the 
compensation package that provides the largest aftertax benefit 
to the employee at minimum aftertax cost to the employer (see 
Scholes & Wolfson, 1992, chapter 10). Both the potential 
taxation of compensation provided to employees and the 
deductibility of compensation provided by the employer would be 
considered. If only income taxes were considered, employers 
would be indifferent between the payment of $1 in salary or 
wages and the payment of $1 in fringe benefits to an employee, 
because both types of compensation are fully deductible. When 
the employer payments for FICA and Federal Unemployment Tax Act 
(FUTA) taxes are considered, however, the employer might 
actually find it less costly to compensate an employee with a 
dollar's worth of fringe benefit not subject to FICA and FUTA 
taxes rather than a dollar of wage or salary payments that are 
subject to these taxes.
    The employee, however, would prefer to be compensated in 
the form that provides the highest aftertax value. An 
additional dollar of salary or wage paid to the employee will 
be subject to tax. If a fringe benefit is excludable from the 
employee's income, the employee pays no tax on receipt of the 
benefit. Consequently, the employee receives greater 
compensation via the fringe benefit. This differential 
treatment of salary or wage payments and excludable fringe 
benefits implies that compensation packages designed to 
minimize the joint tax liability of employers and employees 
could include substantial amounts of excludable fringe 
benefits.
    Employees may have different preferences about the 
allocation of their compensation. For example, an employee with 
no dependents may place little value on employer-provided life 
insurance. Cafeteria plans permit employees some discretion as 
to the provided benefits, and will tend to be preferred to 
benefit plans in which all employees of the firm receive the 
identical benefit package.
    Cafeteria plans are a growing part of compensation plans, 
particularly for larger employers. The Bureau of Labor 
Statistics estimated that in 1997, 52 percent of employees at 
large- and medium-sized firms were eligible for some type of 
cafeteria plan. This figure has grown from an estimated 5 
percent in 1986 (U.S. Bureau of Labor Statistics, 1993). 
Smaller firms generally do not offer cafeteria plans to their 
workers. For example, in 1996, only 23 percent of the workers 
in small, private establishments (nonfarm establishments with 
fewer than 100 employees) were eligible to participate in a 
cafeteria plan (U.S. Bureau of Labor Statistics, 1996). The 
lower figure for smaller firms reflects in part the less 
generous fringe benefit packages provided by smaller firms.
    Like any income exclusion, the exclusion from gross income 
for cafeteria plan benefits can lead to disparities in the tax 
system. Employees with the same total compensation can have 
taxable incomes that are substantially different because of the 
form in which compensation is received. The exclusion for 
cafeteria plan benefits also may be used in some cases to avoid 
the 7.5 percent of AGI floor on deductible medical expenses. 
The use of cafeteria plans reduces the aftertax cost of health 
care to employees using these plans, which could cause these 
employees to purchase a larger amount of health care services. 
On the other hand, cafeteria plans could encourage employers to 
increase the share of premiums, copayments, and deductibles 
paid by employees, resulting in increased employee awareness of 
the costs of their health plans. This incentive could result in 
reduced health care costs.

                     HEALTH CARE CONTINUATION RULES

                          Legislative History

    The Consolidated Omnibus Budget Reconciliation Act of 1985 
added sections 106(b), 162(i)(2), and 162(k) to the Internal 
Revenue Code under which certain group health plans are 
required to offer health coverage to certain employees and 
former employees, as well as to their spouses and dependents. 
Parallel requirements were added to title I of ERISA and the 
Public Health Services Act. If an employer failed to satisfy 
the health care continuation rules, the employer was denied a 
deduction for contributions to its group health plans and 
highly compensated employees were required to include in 
taxable income the employer-provided value of the coverage 
received under such plans.
    The Technical and Miscellaneous Revenue Act of 1988 made 
several changes to the health care continuation rules. Sections 
106(b), 162(i)(2), and 162(k) were repealed and replaced by 
section 4980B. Section 4980B imposes an excise tax on the 
employer or other responsible party who fails to satisfy the 
rules instead of denying deductions and the exclusion. The 
Health Insurance Portability and Accountability Act of 1996 
made some changes to the health care continuation rules in 
cases of disability.

                        Explanation of Provision

    The health care continuation rules in section 4980B require 
that an employer provide qualified beneficiaries with the 
opportunity to participate for a specified period in the 
employer's health plan after that participation otherwise would 
have terminated. If the employee elects such continuation 
coverage, the employee may be required to pay for the coverage. 
The amount the employee can be required to pay is subject to 
certain limits.
    The qualifying events that may trigger rights to 
continuation coverage are: (1) the death of the employee; (2) 
the voluntary or involuntary termination of the employee's 
employment (other than by reason of gross misconduct); (3) a 
reduction of the employee's hours; (4) the divorce or legal 
separation of the employee; (5) the employee becoming entitled 
to benefits under Medicare; and (6) a dependent child of the 
employee ceasing to be a dependent under the employer's plan. 
The maximum period of continuation coverage is 36 months, 
except in the case of termination of employment or reduction of 
hours for which the maximum period is 18 months. The 18-month 
period is extended to 29 months in certain cases involving the 
disability of the qualified beneficiary. Certain events, such 
as the failure by the qualified beneficiary to pay the required 
premium, may trigger an earlier cessation of the continuation 
coverage.
    A beneficiary has a prescribed period of time during which 
to elect continuation coverage after the employee receives 
notice from the plan administrator of the right to continuation 
coverage.

                     GROUP HEALTH PLAN REQUIREMENTS

    The Health Insurance Portability and Accountability Act of 
1996 imposes certain requirements regarding health coverage 
portability through limitations on preexisting condition 
exclusions, prohibitions on excluding individuals from coverage 
based on health status, and guaranteed renewability of health 
insurance coverage. An excise tax is imposed with respect to 
failures of a group health plan to comply with the 
requirements. The tax is usually imposed on the employer 
sponsoring the plan. The amount of the tax is generally equal 
to $100 per day for each day during which the failure occurs 
until the failure is corrected. The maximum tax that can be 
imposed is the lesser of 10 percent of the employer's payments 
during the taxable year in which the failure occurred under 
group health plans or $500,000. The Secretary of the Treasury 
may waive all or part of the tax to the extent that payment of 
the tax would be excessive relative to the failure involved 
(see discussion of health care continuation rules).

    TAX BENEFITS FOR ACCELERATED DEATH BENEFITS AND LONG-TERM CARE 
                               INSURANCE

                          Legislative History

Accelerated death benefits
    If a contract meets the definition of a life insurance 
contract, gross income does not include insurance proceeds that 
are paid pursuant to the contract by reason of the death of the 
insured (sec. 101(a)). In addition, the undistributed 
investment income (inside buildup) earned on premiums credited 
under the contract is not subject to current taxation to the 
owner of the contract. The exclusion under section 101 applies 
regardless of whether the death benefits are paid as a lump sum 
or otherwise.
    If a contract fails to be treated as a life insurance 
contract under section 7702(a), inside buildup on the contract 
is generally subject to tax (sec. 7702(g)).
    To qualify as a life insurance contract for Federal income 
tax purposes, a contract must be a life insurance contract 
under the applicable State or foreign law and must satisfy 
either of two alternative tests: (1) a cash value accumulation 
test, or (2) a test consisting of a guideline premium 
requirement and a cash value corridor requirement (sec. 
7702(a)). A contract satisfies the cash value accumulation test 
if the cash surrender value of the contract may not at any time 
exceed the net single premium that would have to be paid at 
such time to fund future benefits under the contract. A 
contract satisfies the guideline premium and cash value 
corridor tests if the premiums paid under the contract do not 
at any time exceed the greater of the guideline single premium 
or the sum of the guideline level premiums, and if the death 
benefit under the contract is not less than a varying statutory 
percentage of the cash surrender value of the contract.
Long-term care insurance
    Prior to the Health Insurance Portability and 
Accountability Act of 1996, tax law generally did not provide 
explicit rules relating to the tax treatment of long-term care 
insurance contracts or long-term care services. Thus, the 
treatment of long-term care contracts and services was unclear. 
Prior and present law provide rules relating to medical 
expenses and accident or health insurance.
    Amounts received by a taxpayer under accident or health 
insurance for personal injuries or sickness generally are 
excluded from gross income to the extent that the amounts 
received are not attributable to medical expenses that were 
allowed as a deduction for a prior taxable year (sec. 104).

                        Explanation of Provision

Accelerated death benefits
    The Health Insurance Portability and Accountability Act of 
1996 provides an exclusion from gross income as an amount paid 
by reason of the death of an insured for amounts received under 
a life insurance contract and for amounts received for the sale 
or assignment of a life insurance contract to a qualified 
viatical settlement provider, provided that the insured under 
the life insurance contract is either terminally ill or 
chronically ill.
    The exclusion does not apply in the case of an amount paid 
to any taxpayer other than the insured, if such taxpayer has an 
insurable interest by reason of the insured being a director, 
officer, or employee of the taxpayer, or by reason of the 
insured being financially interested in any trade or business 
carried on by the taxpayer.
    A terminally ill individual is defined as one who has been 
certified by a physician as having an illness or physical 
condition that reasonably can be expected to result in death 
within 24 months of the date of certification.
    A chronically ill individual has the same meaning as 
provided under the long-term care rules (see below). In the 
case of a chronically ill individual, the exclusion with 
respect to amounts paid under a life insurance contract and 
amounts paid in a sale or assignment to a viatical settlement 
provider applies if the payment received is for costs incurred 
by the payee (not compensated by insurance or otherwise) for 
qualified long-term care services for the insured person for 
the period, and two other requirements (similar to requirements 
applicable to long-term care insurance contracts) are met.
     The first requirement is that under the terms of the 
contract giving rise to the payment, the payment is not a 
payment or reimbursement of expenses reimbursable under 
Medicare (except where Medicare is a secondary payor under the 
arrangement, or the arrangement provides for per diem or other 
periodic payments without regard to expenses for qualified 
long-term care services). No provision of law shall be 
construed or applied so as to prohibit the offering of such a 
contract giving rise to such a payment on the basis that the 
contract coordinates its payments with those provided under 
Medicare. The second requirement is that the arrangement 
complies with the consumer protection provisions applicable to 
long-term care insurance contracts and issuers that are 
specified in Treasury regulations.
Long-term care insurance
    Exclusion of long-term care insurance proceeds.--The Health 
Insurance Portability and Accountability Act of 1996 provides 
that a long-term care insurance contract generally is treated 
as an accident and health insurance contract. Amounts (other 
than policyholder dividends or premium refunds) received under 
a long-term care insurance contract generally are excludable as 
amounts received for personal injuries and sickness, subject to 
a dollar cap on aggregate payments under per diem contracts. A 
reporting requirement applies to payors of excludable amounts.
    The amount of the dollar cap on aggregate payments under 
per diem contracts with respect to any one chronically ill 
individual (who is not also terminally ill) is $190 per day for 
calendar year 2000 ($69,540 annually) as indexed,\4\ reduced by 
the amount of reimbursements and payments received by anyone 
for the cost of qualified long-term care services for the 
chronically ill individual. If more than one payee receives 
payments with respect to any one chronically ill individual, 
then everyone receiving periodic payments with respect to the 
same insured is treated as one person for purposes of the 
dollar cap. The amount of the dollar cap is used first by the 
chronically ill person, and any remaining amount is to be 
allocated in accordance with Treasury regulations. If payments 
under such contracts exceed the dollar cap, then the excess is 
excludable only to the extent of actual costs (in excess of the 
dollar cap) incurred for long-term care services. Amounts in 
excess of the dollar cap, with respect to which no actual costs 
were incurred for long-term care services, are fully includable 
in income without regard to rules relating to return of basis 
under section 72. A grandfather rule applies to any per diem-
type contract issued to a policyholder on or before July 31, 
1996.
---------------------------------------------------------------------------
    \4\ Internal Revenue Service (1999).
---------------------------------------------------------------------------
    Exclusion for employer-provided long-term care coverage.--A 
plan of an employer providing coverage under a long-term care 
insurance contract generally is treated as an accident and 
health plan. Thus, employer-provided long-term care coverage is 
generally excludable from income and wages and deductible by 
the employer. Employer-provided coverage under a long-term care 
insurance contract is not, however, excludable by an employee 
if provided through a cafeteria plan; similarly, expenses for 
long-term care services cannot be reimbursed under a flexible 
spending arrangement.
    Definition of long-term care insurance contract.--A long-
term care insurance contract is defined as any insurance 
contract that provides only coverage of qualified long-term 
care services and that meets other requirements. The other 
requirements are that: (1) the contract is guaranteed 
renewable; (2) the contract does not provide for a cash 
surrender value or other money that can be paid, assigned, 
pledged or borrowed; (3) refunds (other than refunds on the 
death of the insured or complete surrender or cancellation of 
the contract) and dividends under the contract may be used only 
to reduce future premiums or increase future benefits; and (4) 
the contract generally does not pay or reimburse expenses 
reimbursable under Medicare (except where Medicare is a 
secondary payor, or the contract makes per diem or other 
periodic payments without regard to expenses).
    A contract does not fail to be treated as a long-term care 
insurance contract solely because it provides for payments on a 
per diem or other periodic basis without regard to expenses 
incurred during the period.
    Medicare duplication rules.--No provision of law may be 
applied to prohibit the offering of a long-term care insurance 
contract on the basis that the contract coordinates its 
benefits with those provided under Medicare.
    Definition of qualified long-term care services.--Qualified 
long-term care services means necessary diagnostic, preventive, 
therapeutic, curing, treating, mitigating and rehabilitative 
services, and maintenance or personal care services that are 
required by a chronically ill individual and that are provided 
pursuant to a plan of care prescribed by a licensed health care 
practitioner.
    Chronically ill individual.--A chronically ill individual 
is one who has been certified within the previous 12 months by 
a licensed health care practitioner as: (1) being unable to 
perform (without substantial assistance) at least two 
activities of daily living for at least 90 days due to a loss 
of functional capacity; (2) having a similar level of 
disability as determined by the Secretary of the Treasury in 
consultation with the Secretary of Health and Human Services; 
or (3) requiring substantial supervision to protect such 
individual from threats to health and safety due to severe 
cognitive impairment. Activities of daily living are eating, 
toileting, transferring, bathing, dressing and continence. For 
purposes of determining whether an individual is chronically 
ill, the number of activities of daily living that are taken 
into account under the long-term care insurance contract may 
not be less than five.
    Expenses for long-term care services treated as medical 
expenses.--Unreimbursed expenses for qualified long-term care 
services provided to the taxpayer or the taxpayer's spouse or 
dependents are treated as medical expenses for purposes of the 
itemized deduction for medical expenses (subject to the 
present-law floor of 7.5 percent of AGI). For this purpose, 
amounts received under a long-term care insurance contract 
(regardless of whether the contract reimburses expenses or pays 
benefits on a per diem or other periodic basis) are treated as 
reimbursement for expenses actually incurred for medical care.
    For purposes of the deduction for medical expenses, 
qualified long-term care services do not include services 
provided to an individual by a relative or spouse (directly, or 
through a partnership, corporation, or other entity), unless 
the relative is a licensed professional with respect to such 
services, or by a related corporation (within the meaning of 
Code section 267(b) or 707(b)).
    Long-term care insurance premiums treated as medical 
expenses.--Long-term care insurance premiums that do not exceed 
specified dollar limits are treated as medical expenses for 
purposes of the itemized deduction for medical expenses.
    Consumer protection provisions.--Certain consumer 
protection provisions apply with respect to the terms of a 
long-term care insurance contract, for purposes of determining 
whether the contract is a qualified long-term care insurance 
contract. In addition, certain consumer protection provisions 
apply to issuers of long-term care insurance contracts.

  DEDUCTION FOR HEALTH INSURANCE EXPENSES OF SELF-EMPLOYED INDIVIDUALS

    Self-employed individuals may currently deduct 60 percent 
of their health insurance expenses for themselves and their 
spouses and dependents. The deduction also applies to certain 
long-term care premiums treated as medical expenses. Under the 
Tax and Trade Relief Extension Act of 1998, the deduction for 
health insurance of self-employed individuals will increase as 
follows: the deduction will be 60 percent in 2000 and 2001; 70 
percent in 2002; and 100 percent in 2003 and thereafter.

                     EXCLUSION OF MEDICARE BENEFITS

                          Legislative History

    The exclusion from income of Medicare benefits has never 
been expressly established by statute. A 1970 IRS ruling, Rev. 
Rul. 70-341, 1970-2 C.B. 31, provided that the benefits under 
part A of Medicare are not includable in gross income because 
they are disbursements made to further the social welfare 
objectives of the Federal Government. The Internal Revenue 
Service relied on a similar ruling, Rev. Rul. 70-217, 1970-1 
C.B. 13, with respect to the excludability of Social Security 
disability insurance benefits in reaching this conclusion. (For 
background on the exclusion of Social Security benefits, see 
above section on pension contributions.) Rev. Rul. 70-341 also 
held that benefits under part B of Medicare are excludable as 
amounts received through accident and health insurance (though 
the subsidized portion of part B also may be excluded under the 
same theory applicable to the exclusion of part A benefits).

                        Explanation of Provision

    Benefits under part A and part B of Medicare are excludable 
from the gross income of the recipient. In general, part A pays 
for certain inpatient hospital care, skilled nursing facility 
care, home health care, and hospice care for eligible 
individuals (generally the elderly and the disabled). Part B 
covers certain services of a physician and other medical 
services for elderly or disabled individuals who elect to pay 
the required premium.

                   DEDUCTIBILITY OF MEDICAL EXPENSES

                          Legislative History

    An itemized deduction for unreimbursed medical expenses 
above a specified floor has been allowed since 1942. From 1954 
through 1982, the floor under the medical expense deduction was 
3 percent of the taxpayer's adjusted gross income (AGI); a 
separate floor of 1 percent of AGI applied to expenditures for 
medicine and drugs.
    In the Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA), the floor was increased to 5 percent of AGI (effective 
for 1983 and thereafter) and was applied to the total of all 
eligible medical expenses, including prescription drugs and 
insulin. TEFRA made nonprescription drugs ineligible for the 
deduction and eliminated the separate floor for drug costs.
    The Tax Reform Act of 1986 increased the floor under the 
medical expense deduction to 7.5 percent of AGI, beginning in 
1987.

                        Explanation of Provision

    Individuals who itemize deductions may deduct amounts they 
pay during the taxable year, if not reimbursed by insurance or 
otherwise, for medical care of the taxpayer and of the 
taxpayer's spouse and dependents, to the extent that the total 
of such expenses exceeds 7.5 percent of AGI (sec. 213).
    Medical care expenses eligible include: (1) health 
insurance (including aftertax employee contributions to 
employer health plans); (2) diagnosis, treatment, or prevention 
of disease, or for the purpose of affecting any structure or 
function of the body; (3) transportation primarily for and 
essential to medical care; (4) lodging away from home primarily 
for and essential to medical care, up to $50 per night; and (5) 
prescription drugs and insulin.
    Expenses paid for the general improvement of health, such 
as fees for exercise programs, are not eligible for the 
deduction unless prescribed by a physician to treat a specific 
illness. A deduction is not allowed for cosmetic surgery or 
similar procedures that do not meaningfully promote the proper 
function of the body or treat disease. However, such expenses 
are deductible if the cosmetic procedure is necessary to 
correct a deformity arising from a congenital abnormality, an 
injury resulting from an accident, or disfiguring disease.
    Medical expenses are not subject to the general limitation 
on itemized deductions applicable to taxpayers with AGIs above 
a certain limit ($128,950 for 2000 and adjusted annually for 
inflation; Joint Committee on Taxation staff projections).

                          Effect of Provision

    The Tax Code allows taxpayers to claim an itemized 
deduction if unreimbursed medical expenses absorb a substantial 
portion of income and thus adversely affect the taxpayer's 
ability to pay taxes. In order to limit the deduction to 
extraordinary expenses, medical expenses are deductible only to 
the extent that they exceed 7.5 percent of the taxpayer's AGI.
    Table 13-10 shows the effect on medical expense deductions 
of the increases in the floor on medical deductions. In the 
absence of those increases, one would have expected the number 
of taxpayers claiming the deduction to have increased because 
of inflation of medical costs. However, increasing the floor 
should reduce the number of taxpayers claiming the deduction 
because many taxpayers with relatively modest expenses no 
longer qualify. The average deduction in excess of the 7.5 
percent of AGI floor has increased substantially, from $769 in 
1980 to $5,571 in 1997. Both increases in the floor (to 5 
percent in 1983 and to 7.5 percent in 1987) substantially 
reduced the number of taxpayers claiming deductions.
    Taxpayers in higher tax rate brackets receive more of a 
benefit from each dollar of deductible medical expense than do 
taxpayers in lower tax rate brackets. However, because the 
floor automatically rises with a taxpayer's income, higher 
income taxpayers are able to deduct a smaller amount (if any) 
of medical expenses above their floor than are low-income 
taxpayers incurring the same aggregate amount of medical 
expenses.
    In 2000 it is estimated that approximately 5.4 million 
taxpayers will claim itemized medical expenses in excess of the 
medical deductions floor (7.5 percent of AGI; Joint Committee 
on Taxation staff projections). It is also estimated by the 
staff of the Joint Committee that 81 percent will have incomes 
of less than $50,000 (table 13-11). However, taxpayers with 
incomes over $50,000 will receive far more than half of the 
total tax savings attributable to medical expense deductions.

               TABLE 13-10.--TAX RETURNS CLAIMING DEDUCTIBLE MEDICAL AND DENTAL EXPENSES, 1980-97
----------------------------------------------------------------------------------------------------------------
                                                                            Returns claiming medical and dental
                                                                            expenses in excess of the AGI floor
                                                                 Total    --------------------------------------
                                                               number of                Expenses in
                            Year                                returns     Number of    excess of     Average
                                                               filed (in     returns      the AGI    amount over
                                                               millions)       (in       floor  (in   the floor
                                                                            millions)    billions)
----------------------------------------------------------------------------------------------------------------
1980........................................................         93.9         19.5        $15.0         $769
1981........................................................         95.4         21.4         17.9          836
1982........................................................         95.3         22.0         21.7          986
1983........................................................         96.3          9.7         18.1        1,859
1984........................................................         99.4         10.7         21.5        2,009
1985........................................................        101.7         10.8         22.9        2,127
1986........................................................        103.0         10.5         25.1        2,382
1987........................................................        107.0          5.4         17.2        3,202
1988........................................................        110.1          4.8         18.0        3,741
1989........................................................        112.1          5.1         20.9        4,079
1990........................................................        113.7          5.1         21.5        4,215
1991........................................................        114.7          5.3         23.7        4,444
1992........................................................        113.6          5.5         25.7        4,675
1993........................................................        114.6          5.5         26.5        4,829
1994........................................................        115.9          5.2         26.4        5,044
1995........................................................        118.2          5.4         27.0        5,039
1996........................................................        120.4          5.4         27.0        5,003
1997........................................................        122.4          5.3         29.3       5,571
----------------------------------------------------------------------------------------------------------------
Source: Internal Revenue Service.


 TABLE 13-11.--DISTRIBUTION OF ITEMIZED DEDUCTIONS FOR MEDICAL EXPENSES,
                                  2000
------------------------------------------------------------------------
                                  Average      Returns     Total amount
 Income class (thousands) \1\    deduction   (thousands)  (billions) \2\
------------------------------------------------------------------------
0-$10.........................       $4,135          185           $0.8
$10-$20.......................        4,352          318            1.4
$20-$30.......................        4,882          603            2.9
$30-$40.......................        5,522          880            4.9
$40-$50.......................        4,386          907            4.0
$50-$75.......................        4,871        1,493            7.3
$75-$100......................        4,805          627            3.0
$100-$200.....................       10,360          372            3.9
$200 and over.................       31,109           46            1.4
                               -----------------------------------------
     Total....................        5,431        5,432          29.5
------------------------------------------------------------------------
\1\ The income concept is defined in the introduction to this chapter.
\2\ Amounts in excess of the floor on itemized medical deductions (7.5
  percent of adjusted gross income).

 Source: Joint Committee on Taxation.

                          EARNED INCOME CREDIT

                          Legislative History

    The earned income credit (EIC Code sec. 32), enacted in 
1975, generally equals a specified percentage of wages up to a 
maximum dollar amount. The maximum amount applies over a 
certain income range and then diminishes to zero over a 
specified phaseout range. The income ranges and percentages 
have been revised several times since original enactment, 
expanding the credit (table 13-12).
    In 1987, the credit was indexed for inflation. In 1990 and 
again in 1993, Congress enacted substantial expansions of the 
credit. Auxiliary credits were added for very young children 
and for health insurance premiums paid on behalf of a 
qualifying child in 1990. These were repealed in 1993. Also in 
1993, eligibility for the credit was expanded to include 
childless workers. The Personal Responsibility and Work 
Opportunity Reconciliation Act of 1996 incorporated new rules 
relating to taxpayer identification numbers and the modified 
AGI phaseout of the credit in addition to amending the credit's 
unearned income test (described below). The Taxpayer Relief Act 
of 1997 also included provisions to improve compliance. The 
provisions: (1) deny the EIC for 10 years to taxpayers who 
fraudulently claimed the EIC, 2 years for EIC claims which are 
a result of reckless or intentional disregard of rules or 
regulations); (2) require EIC recertification for a taxpayer 
who is denied the EIC; (3) imposes due diligence requirements 
on paid preparers of returns involving the EIC; (4) requires 
information sharing between the Treasury Department and State 
and local governments regarding child support orders; and (5) 
allows expanded use of Social Security Administration records 
to enforce the tax laws, including the EIC. The Balanced Budget 
Act of 1997 also increased the IRS authorization to improve 
enforcement of the EIC.

                        Explanation of Provision

     The EIC is available to low-income working taxpayers. 
Three separate schedules apply.
     Taxpayers with one qualifying child may claim a credit in 
1999 of 34 percent of their earnings up to $6,800, resulting in 
a maximum credit of $2,312. The maximum credit is available for 
those with earnings between $6,800 and $12,460. At $12,460 of 
earnings the credit begins to phase down at a rate of 15.98 
percent of earnings above $12,460. The credit is phased down to 
0 at $26,928 of earnings.
     Taxpayers with more than one qualifying child may claim a 
credit in 1999 of 40 percent of earnings up to $9,540, 
resulting in a maximum credit of $3,816. The maximum credit is 
available for those with earnings between $9,540 and $12,460. 
At $12,460 of earnings the credit begins to phase down at a 
rate of 21.06 percent of earnings above $12,460. The credit is 
phased down to $0 at $30,580 of earnings.

                             TABLE 13-12.--EARNED INCOME CREDIT PARAMETERS, 1975-99
                                    [Dollar amounts unadjusted for inflation]
----------------------------------------------------------------------------------------------------------------
                                                                 Mininum                        Phaseout range
                                                        Credit    income            Phaseout -------------------
                    Calendar year                        rate      for    Maximum     rate
                                                      (percent)  maximum   credit  (percent)  Beginning   Ending
                                                                  credit                        income    income
----------------------------------------------------------------------------------------------------------------
1975-78.............................................     10.00    $4,000     $400     10.00     $4,000    $8,000
1979-84.............................................     10.00     5,000      500     12.50      6,000    10,000
1985-86.............................................     14.00     5,000      550     12.22      6,500    11,000
1987................................................     14.00     6,080      851     10.00      6,920    15,432
1988................................................     14.00     6,240      874     10.00      9,840    18,576
1989................................................     14.00     6,500      910     10.00     10,240    19,340
1990................................................     14.00     6,810      953     10.00     10,730    20,264
1991:
  One child.........................................     16.70     7,140    1,192     11.93     11,250    21,250
  Two children......................................     17.30     7,140    1,235     12.36     11,250    21,250
1992:
  One child.........................................     17.60     7,520    1,324     12.57     11,840    22,370
  Two children......................................     18.40     7,520    1,384     13.14     11,840    22,370
1993:
  One child.........................................     18.50     7,750    1,434     13.21     12,200    23,050
  Two children......................................     19.50     7,750    1,511     13.93     12,200    23,050
1994:
  No children.......................................      7.65     4,000      306      7.65      5,000     9,000
  One child.........................................     26.30     7,750    2,038     15.98     11,000    23,755
  Two children......................................     30.00     8,425    2,528     17.68     11,000    25,296
1995:
  No children.......................................      7.65     4,100      314      7.65      5,130     9,230
  One child.........................................     34.00     6,160    2,094     15.98     11,290    24,396
  Two children......................................     36.00     8,640    3,110     20.22     11,290    26,673
1996:
  No children.......................................      7.65     4,220      323      7.65      5,280     9,500
  One child.........................................     34.00     6,330    2,152     15.98     11,610    25,078
  Two children......................................     40.00     8,890    3,556     21.06     11,610    28,495
1997:
  No children.......................................      7.65     4,340      332      7.65      5,430     9,770
  One child.........................................     34.00     6,500    2,210     15.98     11,930    25,750
  Two children......................................     40.00     9,140    3,656     21.06     11,930    29,290
1998:
  No children.......................................      7.65     4,460      341      7.65      5,570    10,030
  One child.........................................     34.00     6,680    2,271     15.98     12,260    26,473
  Two children......................................     40.00     9,390    3,756     21.06     12,260    30,095
1999:
  No children.......................................      7.65     4,530      347      7.65      5,670    10,200
  One child.........................................     34.00     6,800    2,312     15.98     12,460    26,928
  Two children......................................     40.00     9,540    3,816     21.06     12,460   30,580
----------------------------------------------------------------------------------------------------------------
Source: Joint Committee on Taxation.

     Taxpayers with no qualifying children may claim a credit 
if they are over age 24 and below age 65. The credit is 7.65 
percent of earnings up to $4,530, resulting in a maximum credit 
of $347. The maximum is available for those with incomes 
between $4,530 and $5,670. At $5,670 of earnings, the credit 
begins to phase down at a rate of 7.65 percent of earnings 
above that amount, resulting in a $0 credit at $10,200.
     All income thresholds are indexed for inflation annually. 
In order to be a qualifying child, an individual must satisfy a 
relationship test, a residency test, and an age test. The 
relationship test requires that the individual be a child, 
stepchild, a descendant of a child, or a foster or adopted 
child of the taxpayer. The residency test requires that the 
individual have the same place of abode as the taxpayer for 
more than half the taxable year. The household must be located 
in the United States. The age test requires that the individual 
be under 19 (24 for a full-time student) or be permanently and 
totally disabled.
     An individual is not eligible for the EIC if the aggregate 
amount of disqualified income of the taxpayer for the taxable 
year exceeds $2,350. This threshold is indexed. Disqualified 
income is the sum of:
 1. Interest (taxable and tax exempt),
 2. Dividends,
 3. Net rent and royalty income (if greater than zero),
 4. Capital gains net income, and
 5. Net passive income (if greater than zero) that is not self-
        employment income.
     For taxpayers with earned income (or modified AGI, if 
greater) in excess of the beginning of the phaseout range, the 
maximum EIC amount is reduced by the phaseout rate multiplied 
by the amount of earned income (or modified AGI, if greater) in 
excess of the beginning of the phaseout range. For taxpayers 
with earned income (or modified AGI, if greater) in excess of 
the end of the phaseout range, no credit is allowed.
     The definition of modified AGI used for phasing out the 
EIC disregards certain losses. The losses disregarded are:
 1. Net capital losses (if greater than zero),
 2. Net losses from trusts and estates,
 3. Net losses from nonbusiness rents and royalties, and
 4. Seventy-five percent of the net losses from businesses, 
        computed separately with respect to sole 
        proprietorships (other than in farming), sole 
        proprietorships in farming, and other businesses.
     The definition of modified AGI also includes tax-exempt 
interest and nontaxable distributions from pensions, annuities, 
and individual retirement accounts (IRAs; but only if not 
called over into similar vehicles during the applicable 
rollover period).
     Individuals are ineligible for the credit if they do not 
include their taxpayer identification number and their 
qualifying child's number (and, if married, their spouse's 
taxpayer identification number) on their tax return. Solely for 
these purposes and for purposes of the present-law 
identification test for a qualifying child, a taxpayer 
identification number is defined as a Social Security number 
issued to an individual by the Social Security Administration 
other than a number issued under section 205(c)(2)(B)(i)(II) 
(or that portion of sec. 205(c)(2)(B)(i)(III) relating to it) 
of the Social Security Act regarding the issuance of a number 
to an individual applying for or receiving federally funded 
benefits.
     If an individual fails to provide a correct taxpayer 
identification number, such omission will be treated as a 
mathematical or clerical error by the Internal Revenue Service. 
Similarly, if an individual who claims the credit with respect 
to net earnings from self-employment fails to pay the proper 
amount of self-employment tax on such net earnings, the failure 
will be treated as a mathematical or clerical error for 
purposes of the amount of credit allowed.
     The EIC is relatively unique because it is a refundable 
tax credit; i.e., if the amount of the credit exceeds the 
taxpayer's Federal income tax liability, the excess is payable 
to the taxpayer as a direct transfer payment. In this sense, 
the EIC is like other Federal programs that provide poor and 
low-income families with public benefits. However, the EIC 
differs from other Federal programs in that its benefits 
require earnings.
     Under an advance payment system, available since 1979, 
eligible taxpayers may elect to receive the credit in their 
paychecks, rather than waiting to claim a refund on their tax 
return filed by April 15 of the following year. In 1993, 
Congress required that the IRS begin to notify eligible 
taxpayers of the advance payment option.

                 Interaction with Means-Tested Programs

    The treatment of the EIC for purposes of Aid to Families 
with Dependent Children (AFDC) and food stamp benefit 
computations has varied since inception of the credit. When 
enacted in 1975, the credit was not considered income in 
determining AFDC and food stamp benefits, and the credit could 
not be received on an advance basis. From January 1979 through 
September 1981, the credit was treated as earned income when 
actually received.
    From October 1981 to September 1984, the amount of the 
credit was treated as earned income and was imputed to the 
family even though it may not have been received as an advance 
payment. Pursuant to the Deficit Reduction Act of 1984, the 
credit was treated as earned income only when received, either 
as an advance payment or as a refund after the conclusion of 
the year.
    Under the Family Support Act of 1988, States generally were 
required to disregard any advance payment or refund of the EIC 
when calculating AFDC eligibility or benefits. However, the 
credit was counted against the gross income eligibility 
standard (185 percent of the State need standard) for both 
applicants and recipients.
    OBRA 1990 specified that, effective January 1, 1991, the 
EIC was not to be taken into account as income (for the month 
in which the payment is received or any following month) or as 
a resource (for the month in which the payment is received or 
the following month) for determining the eligibility or amount 
of benefit for AFDC, Medicaid, SSI, food stamps, or low-income 
housing programs.

                          Effect of Provision

    More than 18.4 million taxpayers are expected to take 
advantage of the EIC in 2000 (table 13-13). Their claims are 
expected to total $30 billion, 87 percent of which will be 
refunded as direct payments to these families. As table 13-13 
also shows, approximately 72 percent of the tax relief or 
direct spending from the EIC accrues to taxpayers who file as 
singles or heads of households.

                    TABLE 13-13.--DISTRIBUTION OF TAX PROVISIONS: EARNED INCOME CREDIT, 2000
----------------------------------------------------------------------------------------------------------------
                                                              Joint returns        Head of         All returns
                                                            -----------------   household and  -----------------
                        Income class                                           single returns
                                                             Number   Amount ------------------  Number   Amount
                                                                               Number   Amount
----------------------------------------------------------------------------------------------------------------
$0-$10,000.................................................     592   $1,041    4,490   $4,575    5,082   $5,616
$10,000-$20,000............................................   1,187    2,993    4,724   10,056    5,910   13,049
$20,000-$30,000............................................   1,747    3,196    3,312    5,989    5,059    9,185
$30,000-$40,000............................................   1,026      996    1,143      970    2,169    1,966
$40,000-$50,000............................................     172      130       17       12      189      141
$50,000-$75,000............................................      29       43        0        0       29       43
$75,000 and over...........................................       0        0        0        0        0        0
                                                            ----------------------------------------------------
      Total................................................   4,754    8,398   13,685   21,602   18,459   30,000
                                                            ====================================================
Percent distribution by type of return.....................    25.8     28.0     74.2     72.0    100.0   100.0
----------------------------------------------------------------------------------------------------------------
Note.--Number of returns in thousands; amount of credit in millions.

Source: Joint Committee on Taxation.

    Table 13-14 shows the total amount of EIC received for each 
of the calendar years since the inception of the program, the 
number of recipient families, the amount of the credit received 
as refunded payments, and the average amount of credit received 
per family.

            EXCLUSION OF PUBLIC ASSISTANCE AND SSI BENEFITS

                          Legislative History

    While there is no specific statutory authorization, a 
number of revenue rulings under Code section 61 have held that 
specific types of public assistance payments are excludable 
from gross income. Revenue rulings generally exclude government 
transfer payments from income because they are considered to be 
general welfare payments. In addition, taxing benefits provided 
in kind, rather than in cash, would require valuation of these 
benefits, which could create administrative difficulties.

                        Explanation of Provision

    The Federal Government provides tax-free public assistance 
benefits to individuals either by cash payments or by provision 
of certain goods and services at reduced cost or free of 
charge. Cash payments come mainly from the AFDC and 
Supplemental Security Income (SSI) Programs. Inkind payments 
include food stamps, Medicaid, and housing assistance. None of 
these payments is subject to income tax.

            TABLE 13-14.--EARNED INCOME CREDIT: NUMBER OF RECIPIENTS AND AMOUNT OF CREDIT, 1975-2000
----------------------------------------------------------------------------------------------------------------
                                                               Number of      Total       Refunded
                                                               recipient    amount of   portions of    Average
                            Year                                families      credit       credit     credit per
                                                              (thousands)   (millions)   (millions)     family
----------------------------------------------------------------------------------------------------------------
1975........................................................        6,215       $1,250         $900         $201
1976........................................................        6,473        1,295          890          200
1977........................................................        5,627        1,127          880          200
1978........................................................        5,192        1,048          801          202
1979........................................................        7,135        2,052        1,395          288
1980........................................................        6,954        1,986        1,370          286
1981........................................................        6,717        1,912        1,278          285
1982........................................................        6,395        1,775        1,222          278
1983........................................................        7,368        1,795        1,289          224
1984........................................................        6,376        1,638        1,162          257
1985........................................................        7,432        2,088        1,499          281
1986........................................................        7,156        2,009        1,479          281
1987........................................................        8,738        3,391        2,930          450
1988........................................................       11,148        5,896        4,257          529
1989........................................................       11,696        6,595        4,636          564
1990........................................................       12,542        7,542        5,266          601
1991........................................................       13,665       11,105        8,183          813
1992........................................................       14,097       13,028        9,959          924
1993........................................................       15,117       15,537       12,028        1,028
1994........................................................       19,017       21,105       16,598        1,110
1995........................................................       19,334       25,956       20,829        1,342
1996........................................................       19,464       28,825       23,157        1,481
1997........................................................       19,391       30,389       24,396        1,567
1998 \1\....................................................       20,273       32,340       27,175        1,595
1999 \2\....................................................       19,440       29,965       25,800        1,541
2000 \2\....................................................       18,439       30,002       26,148        1,625
2001 \2\....................................................       18,502       30,662       26,763        1,657
2002 \2\....................................................       18,233       31,010       26,916       1,701
----------------------------------------------------------------------------------------------------------------
\1\ Preliminary.
\2\ Projected.

 Source: For 1975-98, Internal Revenue Service; for 1999-2002, Joint Committee on Taxation.

                       DEPENDENT CARE TAX CREDIT

                          Legislative History

    Under section 21 of the Internal Revenue Code, taxpayers 
are allowed an income tax credit for certain employment-related 
expenses for dependent care. The Internal Revenue Code of 1954 
provided a deduction to gainfully employed women, widowers, and 
legally separated or divorced men for certain employment-
related dependent care expenses. The deduction was limited to 
$600 per year and phased out for families with incomes between 
$4,500 and $5,100.
    The Revenue Act of 1964 made husbands with incapacitated 
wives eligible for the dependent care deduction and raised the 
threshold for the income phaseout from $4,500 to $6,000.
    The Revenue Act of 1971: (1) made any individual who 
maintained a household and was gainfully employed eligible for 
the deduction; (2) modified the definition of a dependent; (3) 
raised the deduction limit to $4,800 per year; (4) increased 
from $6,000 to $18,000 the income level at which the deduction 
began to phase out; (5) allowed the deduction for household 
services in addition to direct dependent care; and (6) limited 
the deduction with respect to services outside the taxpayer's 
household.
    The Tax Reduction Act of 1975 increased from $18,000 to 
$35,000 the income level at which the deduction began to be 
phased out.
    The Tax Reform Act of 1976 replaced the deduction with a 
nonrefundable credit. This change broadened eligibility to 
those who do not itemize deductions and provided relatively 
greater benefit to low-income taxpayers. In addition, the act 
eased the rules related to family status and simplified the 
computation.
    In the Economic Recovery Tax Act of 1981, Congress provided 
a higher ceiling on creditable expenses, a larger credit for 
low-income individuals, and modified rules relating to care 
provided outside the home.
    The Family Support Act of 1988 reduced to 13 the age of a 
child for whom the dependent care credit may be claimed, 
reduced the amount of eligible expenses by the amount of 
expenses excludable from that taxpayer's income under the 
dependent care exclusion, lowered from 5 to 2 the age at which 
a taxpayer identification number had to be submitted for 
children for whom the credit was claimed, and disallowed the 
credit unless the taxpayer reports on her tax return the 
correct name, address, and taxpayer identification number 
(generally, an employer identification number or a Social 
Security number) of the dependent care provider.
    The Small Business Protection Act of 1996 required a TIN 
for all children for whom a dependent care credit may be 
claimed.

                        Explanation of Provision

    A taxpayer may claim a nonrefundable credit against income 
tax liability for up to 30 percent of a limited amount of 
employment-related dependent care expenses. Eligible 
employment-related expenses are limited to $2,400 if there is 
one qualifying dependent or $4,800 if there are two or more 
qualifying dependents. Generally, a qualifying individual is a 
dependent under the age of 13 or a physically or mentally 
incapacitated dependent or spouse.
    Employment-related dependent care expenses are expenses for 
the care of a qualifying individual incurred to enable the 
taxpayer to be gainfully employed, other than expenses incurred 
for an overnight camp. For example, amounts paid for the 
services of a housekeeper generally qualify if such services 
are performed at least partly for the benefit of a qualifying 
individual; amounts paid for a chauffeur or gardener do not 
qualify.
    Expenses that may be taken into account in computing the 
credit generally may not exceed an individual's earned income 
or, in the case of married taxpayers, the earned income of the 
spouse with the lesser earnings. Thus, if one spouse is not 
working, no credit generally is allowed. Also, the amount of 
expenses eligible for the dependent care credit is reduced, 
dollar for dollar, by the amount of expenses excludable from 
that taxpayer's income under the dependent care exclusion 
(discussed below).
    The 30-percent credit rate is reduced, but not below 20 
percent, by 1 percentage point for each $2,000 (or fraction 
thereof) of AGI above $10,000. Because married couples are 
required to file a joint return to claim the credit, a married 
couple's combined AGI is used for purposes of this computation.

                          Effect of Provision

    From 1976 to 1997, the number of families that claimed the 
dependent care credit increased from 2.7 to 5.8 million, the 
aggregate amount of credits claimed increased from $0.5 to $2.5 
billion, and the average amount of credit claimed per family 
increased from $206 to $425 (table 13-15). In 1998, 6.1 million 
families are expected to claim an average credit of $433, for a 
total of $2.6 billion.
    Changes made in the Family Support Act of 1988 reduced the 
use of the credit in 1989. The number of families who claimed 
the credit dropped by about one-third and the amount of credit 
claimed declined by $1.373 billion.
    Data for 1997 from the Internal Revenue Service show that 
about 10 percent of the benefit from the credit accrues to 
families with AGI of less than $20,000; about 42 percent to 
families with AGI between $20,000 and $50,000; and about 48 
percent to families with AGI above $50,000.

                HOPE CREDIT AND LIFETIME LEARNING CREDIT

    The Taxpayer Relief Act of 1997 established the HOPE credit 
and the lifetime learning credit as nonrefundable credits 
against Federal income tax liability for qualified tuition and 
fees required for the attendance of an eligible student at an 
eligible educational institution.
    The HOPE credit rate is 100 percent of the first $1,000 of 
qualified tuition and fees per eligible student per year, and 
50 percent of the next $1,000 of qualified tuition and fees per 
eligible student per year. The HOPE credit is available only 
for the first 2 years of postsecondary education. The qualified 
tuition and fees must be incurred on behalf of the taxpayer, 
the taxpayer's spouse, or a dependent. Charges and fees 
associated with meals, lodging, books, student activities, 
athletics, insurance, transportation, and similar personal, 
living, or family expenses are not eligible for the credit. An 
eligible student for purposes of the HOPE credit is a student 
enrolled in a degree, certificate, or other program on at least 
a half-time basis. Eligible educational institutions are 
defined by reference to section 481 of the Higher Education Act 
of 1965. Such institutions generally are accredited 
postsecondary educational institutions offering credit toward a 
bachelor's degree, an associate's de-


 TABLE 13-15.--DEPENDENT CARE TAX CREDIT: NUMBER OF FAMILIES AND AMOUNT
                           OF CREDIT, 1976-98
------------------------------------------------------------------------
                                    Number of
                                     returns     Aggregate     Average
                                     claiming    amount of      credit
               Year                 dependent      credit    claimed per
                                      credit      claimed       return
                                   (thousands)   (millions)
------------------------------------------------------------------------
1976.............................        2,660         $548         $206
1977.............................        2,910          521          179
1978.............................        3,431          654          191
1979.............................        3,833          793          207
1980.............................        4,231          956          226
1981.............................        4,578        1,148          251
1982.............................        5,004        1,501          300
1983.............................        6,367        2,051          322
1984.............................        7,456        2,649          351
1985.............................        8,417        3,127          372
1986.............................        8,950        3,398          380
1987.............................        8,520        3,438          404
1988.............................        9,023        3,813          423
1989.............................        6,028        2,440          405
1990.............................        6,144        2,549          415
1991.............................        5,896        2,521          427
1992.............................        5,980        2,527          433
1993.............................        6,090        2,559          419
1994.............................        6,012        2,526          420
1995.............................        5,964        2,518          445
1996.............................        6,003        2,663          444
1997.............................        5,796        2,464          425
1998 \1\.........................        6,120        2,649         433
------------------------------------------------------------------------
\1\ Preliminary.

 Source: Joint Committee on Taxation.

gree, or another recognized postsecondary credential. Certain 
proprietary institutions and postsecondary vocational 
institutions are also eligible educational institutions. The 
HOPE credit is effective for expenses paid after December 31, 
1997, for education furnished in academic periods beginning 
after such date. For taxable years beginning after 2001, the 
$1,500 maximum HOPE credit amount will be indexed for 
inflation.
    The lifetime learning credit rate is 20 percent of up to 
$5,000 in qualified tuition and fees for a maximum credit of 
$1,000. For expenses paid after December 31, 2002, up to 
$10,000 in qualified tuition and fees will be eligible for the 
20-percent credit, for a maximum credit of $2,000. In contrast 
to the HOPE credit, the lifetime learning credit is available 
for an unlimited number of years of education. Also in contrast 
to the HOPE credit, which requires a half-time or greater 
enrollment status, the lifetime learning credit is available 
with respect to any course of instruction at an eligible 
educational institution to acquire or improve job skills, 
regardless of enrollment status. Qualified tuition and fees are 
defined in the same manner as under the HOPE credit provisions. 
As with the HOPE credit, eligible students are the taxpayer, 
the taxpayer's spouse, or a dependent. In contrast to the HOPE 
credit, the maximum amount of the lifetime learning credit that 
may be claimed on a taxpayer's return will not vary with the 
number of students in the taxpayer's family. The lifetime 
learning credit is effective for expenses paid after June 30, 
1998, for education furnished in academic periods beginning 
after such date. The maximum lifetime learning credit amount is 
not indexed for inflation.
    Eligibility for the HOPE credit and the lifetime learning 
credit is phased out ratably for taxpayers with modified 
adjusted gross income (AGI) between $40,000 and $50,000 
($80,000 and $100,000 for joint returns). These phaseout ranges 
are indexed for inflation for taxable years beginning after 
2001. For a taxable year, a taxpayer may elect with respect to 
an eligible student either the HOPE credit, the lifetime 
learning credit, or the exclusion from gross income for certain 
distributions from an education IRA. For purposes of both the 
HOPE credit and the lifetime learning credit, if a parent 
claims a child as a dependent, then only the parent may claim 
the credit.

           QUALIFIED STATE TUITION PROGRAMS AND EDUCATION IRAs

     The Taxpayer Relief Act of 1997 modified section 529 of 
the Tax Code, which governs the tax treatment of qualified 
State tuition programs. Section 529 was enacted as part of the 
Small Business Job Protection Act of 1996, and provides tax-
exempt status and deferral of tax on earnings of qualified 
State tuition programs. The Taxpayer Relief Act of 1997 also 
provides that taxpayers may establish education IRAs.
     Qualified State tuition programs are programs established 
and maintained by a State under which persons may: (1) purchase 
tuition credits on behalf of a designated beneficiary that 
entitle the beneficiary to a waiver or payment of qualified 
higher education expenses of the beneficiary; or (2) make 
contributions to an account that is established for the purpose 
of meeting qualified higher education expense of a designated 
beneficiary. Qualified higher education expenses are defined as 
tuition, fees, books, supplies, and equipment required for the 
enrollment of or attendance at a college or university (or 
certain vocational schools). The Taxpayer Relief Act of 1997 
expanded the definition of qualified expenses to include room 
and board expenses. Contributions to State tuition programs are 
not deductible. Earnings on qualified State tuition programs 
are includable in income only when ultimately distributed. 
Distributions from a qualified State tuition program also 
entitle the distributee to claim either the HOPE or the 
lifetime learning credit with respect to education expenses 
paid with such distributions, assuming the other requirements 
for claiming the HOPE credit or the lifetime learning credit 
are satisfied. There are no income limits for participation in 
qualified State tuition programs, though contributions must be 
limited by the program to amounts no greater than an amount 
necessary to provide for the education of the beneficiary. The 
program must also impose a more than de minimis penalty on 
earnings not used for qualified expenses.
     An education IRA is a trust or custodial account created 
exclusively for the purpose of paying qualified higher 
education expenses of a named beneficiary. Contributions to an 
education IRA are not deductible; earnings on contributions are 
not currently includable in income. Contributions to education 
IRAs are limited to $500 per year per beneficiary. However, no 
contribution may be made by any person to an education IRA 
established on behalf of a beneficiary during any taxable year 
in which any contributions are made by anyone to a qualified 
State tuition program on behalf of the same beneficiary. The 
contribution limit is phased out ratably for contributors with 
modified AGI between $95,000 and $110,000 ($150,000 and 
$160,000 for joint returns). Qualified expenses are the same as 
those for the qualified State tuition programs, with the 
exception that room and board expenses are qualified expenses 
only if the student is enrolled on at least a half-time basis. 
Withdrawals of earnings from education IRAs are excludable from 
income provided that such withdrawals are used to pay for 
qualified higher education expenses. If the earnings are not 
used for qualified expenses, they are includable in income and 
are also subject to an additional 10-percent penalty tax. A 
taxpayer may not simultaneously claim an exclusion from income 
for distributions from an education IRA and claim either the 
HOPE credit or the lifetime learning credit.

                     STUDENT LOAN INTEREST DEDUCTION

     The Taxpayer Relief Act of 1997 provided for the above-
the-line deductibility of interest on qualified education 
loans. The deduction is allowed only with respect to interest 
paid during the first 60 months in which interest payments are 
required. A qualified education loan is generally defined as 
any indebtedness incurred to pay for the qualified higher 
education expenses of the taxpayer, the taxpayer's spouse, or 
any dependent of the taxpayer as of the time the indebtedness 
was incurred in attending either postsecondary educational 
institutions and certain vocational schools defined by 
reference to section 481 of the Higher Education Act of 1965, 
or institutions conducting internship or residency programs 
leading to a degree or certificate from an institution of 
higher education, a hospital, or a health care facility 
conducting postgraduate training. Qualified higher education 
expenses are defined as the student's cost of attendance as 
defined in section 472 of the Higher Education Act of 1965 
(generally, tuition, fees, room and board, and related 
expenses), reduced by: (1) any amount excluded under section 
135 (i.e., U.S. saving bonds used to pay higher education 
tuition and fees); (2) any amount distributed from an education 
IRA and excluded from gross income; and (3) the amount of any 
scholarship or fellowship grants excludable from gross income 
under section 117, as well as any other tax-free education 
benefits, such as employer-provided educational assistance that 
is excludable from the employee's gross income under section 
127.
     The maximum deduction is phased in gradually, with a 
$2,000 maximum in 2000, and $2,500 in 2001. The maximum 
deduction is not indexed for inflation, and the deduction is 
phased out ratably for individual taxpayers with modified AGI 
of $40,000-$55,000 ($60,000-$75,000 for joint returns). These 
income ranges will be indexed for inflation occurring after the 
year 2002, and rounded down to the closest multiple of $5,000. 
This provision is effective for interest payments due and paid 
after December 31, 1997, on any qualified education loan.

             EXCLUSION FOR EMPLOYER-PROVIDED DEPENDENT CARE

                          Legislative History

    The value of certain employer-provided dependent care is 
excluded from the employee's gross income. The Economic 
Recovery Tax Act of 1981 added this exclusion (sec. 129) and 
amended Code sections 3121(a)(18) and 3306(b)(13) to exclude 
such employer-provided dependent care from wages for purposes 
of the Federal Insurance Contributions Act (FICA) and the 
Federal Unemployment Tax Act (FUTA). The Tax Reform Act of 1986 
modified the nondiscrimination rules and limited the exclusion 
to $5,000 a year ($2,500 in the case of a separate return by a 
married individual). The Family Support Act of 1988 required 
the amount of employer-provided dependent care excluded from 
the taxpayer's income to reduce, dollar for dollar, the amount 
of expenses eligible for the dependent care tax credit.

                        Explanation of Provision

    Amounts paid or incurred by an employer for dependent care 
assistance provided to an employee generally are excluded from 
the employee's gross income if the assistance is furnished 
under a program meeting certain requirements. These 
requirements include that the program be described in writing, 
satisfy certain nondiscrimination rules, and provide for 
notification to all eligible employees. The type of dependent 
care eligible for the exclusion is the same as the type 
eligible for the dependent care credit.
    The dependent care exclusion is limited to $5,000 per year 
except that a married taxpayer filing a separate return may 
exclude only $2,500. Amounts excluded from gross income 
generally are excludable from wages for employment tax 
purposes. Dependent care expenses excluded from income are not 
eligible for the dependent care tax credit.

                          Effect of Provision

    The exclusion provides an incentive to taxpayers with 
expenses for dependent care to seek compensation in the form of 
dependent care assistance rather than in cash subject to 
taxation. This incentive is of greater value to employees in 
higher tax brackets.
    Many employees covered by the exclusion for employer-
provided dependent care also are eligible to use the dependent 
care tax credit. While the limitations on the exclusion and the 
credit differ, the credit generally is less valuable than the 
exclusion for taxpayers who are above the 15-percent tax 
bracket.
    According to a survey of private firms with 100 or more 
workers conducted by the U.S. Bureau of Labor Statistics 
(1993), nearly one-tenth of full-time workers at these firms 
were eligible for child care benefits provided by the employer 
in the form of on-site or near-site child care facilities or 
through direct reimbursement of employee expenses. A more 
prevalent form of providing dependent care benefits is through 
reimbursement accounts, which may cover other nontaxable fringe 
benefits, such as out-of-pocket health care expenses, in 
addition to dependent care. Slightly over one-third of full-
time employees at large- and medium-sized firms were eligible 
for such accounts in 1991.

                      WORK OPPORTUNITY TAX CREDIT

    The work opportunity tax credit is available on an elective 
basis for employers hiring individuals from one or more of 
eight targeted groups. The targeted groups are: (1) families 
eligible to receive benefits under the Title IV-A Temporary 
Assistance for Needy Families Program (TANF; the successor to 
AFDC); (2) qualified ex-felons; (3) vocational rehabilitation 
referrals; (4) qualified summer youth employees; (5) qualified 
veterans; (6) youths who reside in an empowerment zone or 
enterprise community; (7) families receiving food stamps; and 
(8) persons receiving certain Supplemental Security Income 
(SSI) benefits.
    The credit generally is equal to 40 percent (25 percent for 
employment of 400 hours or less) of qualified wages. Qualified 
wages consist of wages attributable to service rendered by a 
member of a targeted group during the 1-year period beginning 
with the day the individual begins work for the employer. For a 
vocational rehabilitation referral, however, the period will 
begin on the day the individual begins work for the employer on 
or after the beginning of the individual's vocational 
rehabilitation plan as under prior law.
    Generally, no more than $6,000 of wages during the first 
year of employment is permitted to be taken into account with 
respect to any individual. Thus, the maximum credit per 
individual is $2,400. With respect to qualified summer youth 
employees, the maximum credit is 40 percent of up to $3,000 of 
qualified first-year wages, for a maximum credit of $1,200.
    In general, an individual is not to be treated as a member 
of a targeted group unless: (1) on or before the day the 
individual begins work for the employer, the employer received 
in writing a certification from the designated local agency 
that the individual is a member of a specific targeted group; 
or (2) on or before the day the individual is offered work with 
the employer, a prescreening notice is completed with respect 
to that individual by the employer and within 21 days after the 
individual begins work for the employer, the employer submits 
such notice, signed by the employer and the individual under 
penalties of perjury, to the designated local agency as part of 
a written request for certification. The prescreening notice 
will contain the information provided to the employer by the 
individual that forms the basis of the employer's belief that 
the individual is a member of a targeted group.
    No credit is allowed for wages paid unless the eligible 
individual is employed by the employer for at least 120 hours. 
The credit percentage is 25 percent for employment of 400 hours 
or less, assuming that the minimum employment period is 
satisfied with respect to that employee. For employment of more 
than 400 hours, the credit percentage is 40 percent.
    The credit is effective for wages paid or incurred to a 
qualified individual who begins work for an employer after 
September 30, 1996, and before January 1, 2002.

                       WELFARE-TO-WORK TAX CREDIT

     The Code provides to employers a tax credit on the first 
$20,000 of eligible wages paid to qualified long-term family 
assistance (TANF) recipients during the first 2 years of 
employment. The credit is 35 percent of the first $10,000 of 
eligible wages in the first year of employment and 50 percent 
of the first $10,000 of eligible wages in the second year of 
employment. The maximum credit is $8,500 per qualified 
employee.
     Qualified long-term family assistance recipients are: (1) 
members of a family that has received TANF benefits for at 
least 18 consecutive months ending on the hiring date; (2) 
members of a family that has received TANF benefits for a total 
of at least 18 months (whether or not consecutive) after the 
date of enactment of this credit if they are hired within 2 
years after the date that the 18-month total is reached; and 
(3) members of a family who are no longer eligible for TANF 
because of either Federal or State time limits, if they are 
hired within 2 years after the Federal or State time limits 
made the family ineligible for family assistance.
     Eligible wages include cash wages paid to an employee plus 
amounts paid by the employer for the following: (1) educational 
assistance excludable under a section 127 program (or that 
would be excludable but for the expiration of sec. 127); (2) 
health plan coverage for the employee, but not more than the 
applicable premium defined under section 4980B(f)(4); and (3) 
dependent care assistance excludable under section 129.
     The welfare to work credit is effective for wages paid or 
incurred to a qualified individual who begins work for an 
employer on or after January 1, 1998 and before January 1, 
2002.

 EXCLUSION OF WORKERS' COMPENSATION AND SPECIAL BENEFITS FOR DISABLED 
                              COAL MINERS

                          Legislative History

    Workers' compensation benefits generally are not taxable 
under section 104(a)(1) of the Internal Revenue Code of 1986. 
Workers' compensation benefits are treated as Social Security 
benefits to the extent that they reduce Social Security 
benefits received (see above). This exclusion from gross income 
was first codified in the Revenue Act of 1918. The Ways and 
Means Committee report for that act suggests that such payments 
were not subject to tax even prior to the 1918 act.
    Payments made to coal miners or their survivors for death 
or disability resulting from pneumoconiosis (black lung 
disease) under the Federal Coal Mine Health and Safety Act of 
1969 (as amended) are excluded from gross income. Payments made 
as a result of claims filed before December 31, 1972 originally 
were excluded from Federal income tax by the Federal Coal Mine 
Health and Safety Act of 1969. Later payments are excluded from 
gross income because they are considered to be in the nature of 
workers' compensation (Rev. Rul. 72-400, 1972-2 C.B. 75).

                        Explanation of Provision

    Gross income does not include amounts received as workers' 
compensation for personal injuries or sickness. This exclusion 
also applies to benefits paid under a workers' compensation act 
to a survivor of a deceased employee.
    Benefits for disabled coal miners (black lung benefits) are 
not includable in gross income.
    There are two types of black lung programs. The first 
involves Federal payments to coal miners and their survivors 
due to death or disability, payable for claims filed before 
July 1, 1973 (December 31, 1973, in the case of survivors). 
This program provided total annual payments of around $672 
million to approximately 143,000 beneficiaries in December 1995 
(Social Security Administration, 1996).
    The second program requires coal mine operators to ensure 
payment of black lung benefits for claims filed on or after 
July 1, 1973 (December 31, 1973, in the case of survivors) in a 
federally mandated workers' compensation program. Benefits 
include medical treatment as well as cash payments. These 
benefits are paid from a trust fund financed by an excise tax 
on coal production if there is no responsible operator (an 
operator for whom the miner worked for at least 1 year) or if 
the responsible operator is in default. This program provided 
total annual payments of around $610 million to approximately 
156,550 claimants in 1986 (U.S. Department of Labor, 1989, 
tables 3 & 6).

        ADDITIONAL STANDARD DEDUCTION FOR THE ELDERLY AND BLIND

                          Legislative History

    From 1954 through 1986, an additional personal exemption 
was allowed for a taxpayer or a spouse who was 65 years or 
older at the close of the year. An additional personal 
exemption also was allowed for a taxpayer or a spouse who was 
blind.
    The Tax Reform Act of 1986 repealed the additional personal 
exemption for the elderly and blind and replaced it with an 
additional standard deduction amount. These additional standard 
deduction amounts are adjusted for inflation.

                        Explanation of Provision

    The additional standard deduction amount for the elderly or 
the blind is $850 in 2000 for an elderly or a blind individual 
who is married (whether filing jointly or separately) or is a 
surviving spouse, and $1,700 for such an individual who is both 
elderly and blind. The additional amount is $1,100 for a head 
of household who is elderly or blind ($2,200, if both), and for 
a single individual (i.e., an unmarried individual other than a 
surviving spouse or head of household) who is elderly or blind.
    The definitions of elderly and blind status have not been 
changed since 1954. An elderly person is an individual who is 
at least 65 years of age. Blindness is defined in terms of the 
ability to correct a deficiency in distance vision or the 
breadth of the area of vision. An individual is blind only if 
central vision acuity is not better than 20/200 in the better 
eye with correcting lenses, or if visual acuity is better than 
20/200 but is accompanied by a limitation in the fields of 
vision such that the widest diameter of the visual field 
subtends an angle no greater than 20 degrees.

                          Effect of Provision

    The additional standard deduction increases the tax 
threshold for elderly and blind taxpayers. For example, the 
additional amount is $1,700 for two elderly individuals filing 
a joint return, raising the tax threshold in 2000 from $12,950 
to $14,650.
    In 1997, about 11.1 million taxpayers claimed the extra 
standard deduction. About 81 percent of the 11.1 million 
beneficiaries had incomes of less than $40,000.

      TAX CREDIT FOR THE ELDERLY AND CERTAIN DISABLED INDIVIDUALS

                          Legislative History

    The present tax credit for individuals who are age 65 or 
older, or who have retired on permanent and total disability, 
was enacted in the Social Security Amendments of 1983 (Code 
sec. 22). This credit replaced the previous credit for the 
elderly, which had been enacted in the Tax Reform Act of 1976. 
Prior to that provision, the tax law provided a retirement 
income credit, which initially was enacted in the Internal 
Revenue Code of 1954.

                        Explanation of Provision

    Individuals who are age 65 or older may claim a 
nonrefundable income tax credit equal to 15 percent of a base 
amount. The credit also is available to an individual, 
regardless of age, who is retired on disability and who was 
permanently and totally disabled at retirement. For this 
purpose, an individual is considered permanently and totally 
disabled if he is unable to engage in any substantial gainful 
activity by reason of any medically determinable physical or 
mental impairment that can be expected to result in death, or 
that has lasted or can be expected to last for a continuous 
period of not less than 12 months. The individual must furnish 
proof of disability to the IRS.
    The maximum base amount for the credit is $5,000 for 
unmarried elderly or disabled individuals and for married 
couples filing a joint return if only one spouse is eligible; 
$7,500 for married couples filing a joint return with both 
spouses eligible; or $3,750 for married couples filing separate 
returns. For a nonelderly, disabled individual the initial base 
amount is the lesser of the applicable specified amount or the 
individual's disability income for the year. Consequently, the 
maximum credit available is $750 (15 percent of $5,000), $1,125 
(15 percent of $7,500), or $562.50 (15 percent of $3,750).
    The maximum base amount is reduced by the amount of certain 
nontaxable income of the taxpayer, such as nontaxable pension 
and annuity income or nontaxable Social Security, railroad 
retirement, or veterans' nonservice-related disability 
benefits. In addition, the base amount is reduced by one-half 
of the taxpayer's AGI in excess of certain limits: $7,500 for a 
single individual, $10,000 for married taxpayers filing a joint 
return, or $5,000 for married taxpayers filing separate 
returns. These computational rules reflect that the credit is 
designed to provide tax benefits to individuals who receive 
only taxable retirement or disability income, or who receive a 
combination of taxable retirement or disability income plus 
Social Security benefits that generally are comparable to the 
tax benefits provided to individuals who receive only Social 
Security benefits (including Social Security disability 
benefits).

                          Effect of Provision

    In 1997, $41 million in elderly and disabled credit was 
claimed. Though the number of families claiming the credit has 
fallen significantly, the average credit granted has been 
relatively stable since the credit was modified by the Social 
Security Amendments of 1983, as shown in table 13-16.

       TABLE 13-16.--CREDIT FOR THE ELDERLY AND DISABLED, 1976-97
------------------------------------------------------------------------
                                    Number of
                                     families      Total
                                       that      amount of     Average
               Year                  received      credit     credit per
                                      credit     (millions)     return
                                   (thousands)
------------------------------------------------------------------------
1976.............................        1,011         $206         $204
1977.............................          569           93          163
1978.............................          689          145          210
1979.............................          607          132          217
1980.............................          562          135          240
1981.............................          474          124          262
1982.............................          483          131          271
1983.............................          423          116          275
1984.............................          475          107          225
1985.............................          460          106          230
1986.............................          430           86          200
1987.............................          354           67          189
1988.............................          357           69          193
1989.............................          320           65          202
1990.............................          342           63          183
1991.............................          285           57          200
1992.............................          240           51          213
1993.............................          223           49          220
1994.............................          222           47          210
1995.............................          252           48          191
1996.............................          168           32          189
1997.............................          190           41         217
------------------------------------------------------------------------
Source: Joint Committee on Taxation.

                   TAX PROVISIONS RELATED TO HOUSING

                         Owner-Occupied Housing

Legislative history
    Deductibility of mortgage interest.--Prior to the Tax 
Reform Act of 1986, all interest payments on indebtedness 
incurred for personal use (e.g., to purchase consumption goods) 
were deductible in computing taxable income. The 1986 act 
amended section 163(h) of the Internal Revenue Code to disallow 
deductions for all personal interest except for interest on 
indebtedness secured by a first or second home.
    In the Omnibus Budget Reconciliation Act of 1987, Congress 
further restricted the deductibility of mortgage interest. Only 
two classes of interest were distinguished as deductible: 
interest on acquisition indebtedness and interest on home 
equity indebtedness. Acquisition indebtedness, defined as 
indebtedness secured by a residence and used to acquire or 
improve the residence by which it is secured, was limited to 
$1,000,000 ($500,000 in the case of a married individual filing 
a separate return). Home equity indebtedness, defined as any 
nonacquisition indebtedness secured by a residence (for 
example, a home equity loan), was limited to the lesser of 
$100,000 ($50,000 for married taxpayers filing separately) or 
the excess of the fair market value of the residence over the 
acquisition indebtedness.
    Exclusion of capital gains for certain taxpayers.--In the 
Revenue Act of 1964, Congress introduced section 121 of the 
Internal Revenue Code of 1954, which permitted a one-time 
exclusion of all or part of the gain on the sale of a principal 
residence by older individuals. This exclusion was limited to 
homeowners who had lived in the property as a principal 
residence for 5 out of the last 8 years before the property's 
sale or exchange. Furthermore, full exclusion was permitted 
only for houses that sold for $20,000 or less.
    The parameters of this exclusion have been modified and 
expanded a number of times. Most recently, the Taxpayer Relief 
Act of 1997 significantly expanded the exclusion (e.g., the age 
55 requirement was repealed).
Explanation of provision
    Homeowners may deduct a number of expenses related to 
housing as itemized deductions in computing taxable income. 
These include payments of interest on qualified residence debt, 
certain interest on home equity loans, certain payments of 
points (i.e., up front interest payments) on the purchase of a 
house, and payments of real property taxes. Interest on 
acquisition debt of $1,000,000 or less is fully deductible, as 
is any interest on debt secured by a residence that was 
incurred on or before October 13, 1987. Interest on home equity 
indebtedness of $100,000 is fully deductible for regular tax 
purposes, as long as the total amount of debt (acquisition plus 
home equity indebtedness) does not exceed the fair market value 
of the house. Interest on home equity indebtedness exceeding 
$100,000 (and incurred after October 13, 1987) or exceeding the 
difference between the fair market value of the home and the 
acquisition indebtedness is not deductible. Interest paid on 
home equity loans is generally not deductible in computing the 
alternative minimum tax.
     Under present law, a taxpayer generally is able to exclude 
up to $250,000 ($500,000 if married filing a joint return) of 
gain realized on the sale or exchange of a principal residence. 
The exclusion is allowed each time a taxpayer selling or 
exchanging a principal residence meets the eligibility 
requirements, but generally no more frequently than once every 
2 years.
     To be eligible for the exclusion, a taxpayer must have 
owned the residence and occupied it as a principal residence 
for at least 2 of the 5 years prior to the sale or exchange. A 
taxpayer who fails to meet these requirements by reason of a 
change of place of employment, health, or other unforeseen 
circumstances is able to exclude the fraction of the $250,000 
($500,000 if married filing a joint return) equal to the 
fraction of 2 years that these requirements are met.
Effects of provision
    Preliminary tax return information for 1997 indicates that 
30 million taxpayers claimed the deduction for mortgage 
interest. Reliable data are not yet available on how many 
claimed the one-time exclusion.
    The favorable treatment of owner-occupied housing may 
affect both the home ownership rate and the share of total 
investment in housing in the United States.
    The home ownership tax provisions may benefit neighborhoods 
because they encourage home ownership and home improvement. The 
United States has maintained a high rate of home ownership--66 
percent of all American households own the homes they live in 
(U.S. Census Bureau, 1999, p. 729, table 1212).
    The tax advantages for owner-occupied housing encourage 
people to invest in homes instead of taxable business 
investments. This shift may reduce investment in business 
assets in the United States. One study suggested that housing 
capital is 25 percent higher and other capital is 12 percent 
lower than it would be if tax policy provided equal treatment 
for all forms of capital (Mills, 1987). Currently, about one-
third of net private investment goes into owner-occupied 
housing, so even a modest shift of investment to other assets 
could have sizable effects.

                       Low-Income Housing Credit

Legislative history
    The low-income rental housing tax credit was first enacted 
in the Tax Reform Act of 1986. The Omnibus Budget 
Reconciliation Act of 1989 substantially modified the credit. 
The Omnibus Budget Reconciliation Act of 1993 modified the 
credit again and made it permanent.
Explanation of provision
    A tax credit may be claimed by owners of residential rental 
property used for low-income rental housing. The credit is 
claimed annually, generally for a period of 10 years. New 
construction and rehabilitation expenditures for low-income 
housing projects are eligible for a maximum 70-percent present 
value credit, claimed annually for 10 years. The acquisition 
cost of existing projects that meet the substantial 
rehabilitation requirements and the cost of newly constructed 
projects receiving other Federal subsidies are eligible for a 
maximum 30-percent present value credit, also claimed annually 
for 10 years. These credit percentages are adjusted monthly 
based on an Applicable Federal Rate.
    The credit amount is based on the qualified basis of the 
housing units serving the low-income tenants. A residential 
rental project will qualify for the credit only if: (1) 20 
percent or more of the aggregate residential rental units in 
the project are occupied by individuals with 50 percent or less 
of area median income; or (2) 40 percent or more of the 
aggregate residential rental units in the project are occupied 
by individuals with 60 percent or less of area median income. 
These income figures are adjusted for family size. Maximum 
rents that may be charged families in units on which a credit 
is claimed depend on the number of bedrooms in the unit. The 
rent limitation is 30 percent of the qualifying income of a 
family deemed to have a size of 1.5 persons per bedroom (e.g., 
a two-bedroom unit has a rent limitation based on the 
qualifying income for a family of three).
    Credit eligibility also depends on the existence of a 30-
year extended low-income use agreement for the property. If 
property on which a low-income housing credit is claimed ceases 
to qualify as low-income rental housing or is disposed of 
before the end of a 15-year credit compliance period, a portion 
of the credit may be recaptured. The 30-year extended use 
agreement creates a State law right to enforce low-income use 
for an additional 15 years after the initial 15-year recapture 
period.
    In order for a building to be a qualified low-income 
building, the building owner generally must receive a credit 
allocation from the appropriate credit authority. An exception 
is provided for property that is substantially financed with 
the proceeds of tax-exempt bonds subject to the State's 
private-activity bond volume limitation. The low-income housing 
credit is allocated by State or local government authorities 
subject to an annual limitation for each State based on State 
population. The annual credit allocation per State is $1.25 per 
resident.
Effect of provision
    Comprehensive data from tax returns concerning the low-
income housing tax credit are unavailable. Table 13-17 presents 
data from a survey of State credit allocating agencies. These 
data indicate that annual allocation of available credit 
authority generally has been 67 percent or greater. Year-to-
year variations in credit allocation probably reflect changes 
in Federal law affecting the credit and changing economic 
conditions affecting the construction and housing markets. For 
example, 1990 was the first year following substantial 
modification to the credit and included a temporary period 
during which State credit allocating agencies were limited to 
allocating authority of $0.9375 per capita rather than the 
$1.25 per capita of present and prior law.

   TABLE 13-17.--ALLOCATION OF THE LOW-INCOME HOUSING CREDIT, 1987-98
------------------------------------------------------------------------
                                    Authority    Allocated    Allocated
              Years                 (millions)   (millions)   (percent)
------------------------------------------------------------------------
1987.............................       $313.1        $62.9         20.1
1988.............................        311.5        209.8         67.4
1989.............................        314.2        307.2         97.8
1990.............................        317.7        213.1         67.0
1991 \1\.........................        497.3        400.6         80.6
1992 \1\.........................        476.8        332.7         70.0
1993 \1\.........................        546.4        424.7         77.7
1994 \1\.........................        523.7        495.5         94.7
1995 \1\.........................        432.6        410.9         95.0
1996 \1\.........................        391.6        379.9         97.0
1997.............................        387.3        382.9         98.9
1998.............................        376.8        373.8        99.0
------------------------------------------------------------------------
\1\ Increased authority includes credits unallocated from prior years
  carried over to the current year.

 Source: Survey of State allocating agencies conducted by the National
  Council of State Housing Agencies (1996).

    An allocation percentage of less than 100 percent does not 
imply that some credits available for allocation to low-income 
housing projects go unused. Since 1990, States are permitted to 
carry forward unused credit subsequently made available for 
allocation by other States. Thus, the amount allocated in any 1 
year could be less than the States' authority, but such 
authority may ultimately be allocated.

             TAX CREDIT AND EXCLUSION FOR ADOPTION EXPENSES

    The Small Business Job Protection Act of 1996 (Public Law 
104-188), signed into law on August 20, 1996, includes two tax 
provisions designed to reduce economic barriers to adoption. 
First, a tax credit of up to $5,000 (or $6,000 in the case of 
families adopting special-needs children from the United 
States) is created to help defray one-time adoption expenses. 
The credit is phased out for families with incomes above 
$75,000, and is unavailable to families with incomes above 
$115,000. Second, employees may receive an income tax exclusion 
of up to $5,000 per child (or $6,000 in the case of special-
needs children) for employer-provided adoption assistance. The 
effective date for both provisions is January 1, 1997. The 
credit for foreign special-needs adoptions and the exclusion 
are not available after December 31, 2001.

                            CHILD TAX CREDIT

     The Taxpayer Relief Act of 1997 provided for a $500 ($400 
for taxable year 1998) tax credit for each qualifying child 
under the age of 17. A qualifying child is defined as an 
individual for whom the taxpayer can claim a dependency 
exemption and who is a son or daughter of the taxpayer (or a 
descendant of either), a stepson or stepdaughter of the 
taxpayer, or an eligible foster child of the taxpayer. For 
taxpayers with modified AGI in excess of certain thresholds, 
the allowable child credit is phased out.
     Generally, the maximum amount of the child credit for each 
taxable year cannot exceed the excess of the taxpayer's regular 
tax liability over the taxpayer's tentative minimum tax 
liability (determined without regard to the alternative minimum 
foreign tax credit). In the case of a taxpayer with three or 
more qualifying children, the maximum amount of the child 
credit for each taxable year cannot exceed the greater of: (1) 
the general rule (described above), or (2) an amount equal to 
the excess of the sum of the taxpayer's regular income tax 
liability (net of applicable credits other than the earned 
income credit (EIC)) and the employee share of FICA (and one-
half of the taxpayer's SECA tax liability, if applicable) 
reduced by the EIC. In the case of a taxpayer with three or 
more qualifying children, the excess of the amount allowed in 
(2) over the amount computed in (1) is a refundable credit.
     For taxpayers with modified AGI in excess of certain 
thresholds, the child credit is phased out. The phaseout rate 
is $50 for each $1,000 of modified AGI (or fraction thereof) in 
excess of the threshold. For these purposes modified AGI is 
computed by increasing the taxpayer's AGI by the amount 
otherwise excluded under Code sections 911, 931, and 933 
(relating to the exclusion of income of U.S. citizens or 
residents living abroad; residents of Guam, American Samoa, and 
the Northern Mariana Islands; and residents of Puerto Rico, 
respectively). For married taxpayers filing joint returns, the 
threshold is $110,000. For taxpayers filing single or head of 
household returns, the threshold is $75,000. For married 
taxpayers filing separate returns, the threshold is $55,000. 
These thresholds are not indexed for inflation.

EFFECT OF TAX PROVISIONS ON THE INCOME AND TAXES OF THE ELDERLY AND THE 
                                  POOR

    Table 13-18 presents values of the personal exemptions, 
standard deductions, additional standard deductions for the 
elderly and the blind, and taxable income brackets for 1993-
2009. The figures for 2001-9 are based on Congressional Budget 
Office projections. The value to taxpayers of personal 
exemptions, standard deductions, and additional standard 
deductions for the elderly and the blind grows steadily over 
the 10-year period.

          Hypothetical Tax Calculations for Selected Families

    Table 13-19 presents examples of tax liabilities for 
hypothetical taxpayers. The table presents 1999 Federal income 
and payroll tax burdens. The worker is assumed to bear both the 
employer and employee shares of FICA tax (7.65 percent for 
each). Taxpayers claim the EIC, if eligible, and they claim the 
standard deduction, except where noted in the footnotes. Income 
sources are listed in the table's footnotes for each example.

                      Tax Treatment of the Elderly

    Present law contains several provisions that reduce, or in 
some cases eliminate, the burden of Federal income tax on 
senior citizens. These provisions are: the exemption from 
income taxation of some or all of an individual's Social 
Security benefits; a tax credit for certain taxpayers who do 
not receive substantial Social Security


                          TABLE 13-18a.--ACTUAL PERSONAL EXEMPTIONS, STANDARD DEDUCTIONS, AND TAXABLE INCOME LEVELS, 1993-2000
--------------------------------------------------------------------------------------------------------------------------------------------------------
              Exemption, deduction, or income level                  1993       1994       1995       1996       1997       1998       1999       2000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Personal exemptions                                                  $2,350     $2,450     $2,500     $2,550     $2,650     $2,700     $2,750     $2,800
Standard deductions:
    Joint.......................................................      6,200      6,350      6,550      6,700      6,900      7,100      7,200      7,350
    Single......................................................      3,700      3,800      3,900      4,000      4,150      4,250      4,300      4,400
    Head of household...........................................      5,450      5,600      5,750      5,900      6,050      6,250      6,350      6,450
Additional standard deductions for elderly/blind:
    Joint (each individual).....................................        700        750        750        800        800        850        850        850
    Single/head of household....................................        900        950        950      1,000      1,000      1,050      1,050      1,100
Taxable income levels:
    Joint returns:
        15 percent rate ends at.................................     36,900     38,000     39,000     40,100     41,200     42,350     43,050     43,850
        28 percent rate ends at.................................     89,150     91,850     94,250     96,900     99,600    102,300    104,050    105,950
        31 percent rate ends at.................................    140,000    140,000    143,600    147,700    151,750    155,950    158,550    161,450
    Single returns:
        15 percent rate ends at.................................     22,100     22,750     23,350     24,000     24,650     25,350     25,750     26,250
        28 percent rate ends at.................................     53,500     55,100     56,550     58,150     59,750     61,400     62,450     63,550
        31 percent rate ends at.................................    115,000    115,000    117,950    121,300    124,650    128,100    130,250    132,600
    Heads of household:
        15 percent rate ends at.................................     29,600     30,500     31,250     32,150     33,050     33,950     34,550     35,150
        28 percent rate ends at.................................     76,400     78,700     80,750     83,050     85,350     87,700     89,150     90,800
        31 percent rate ends at.................................    127,500    127,500    130,800    134,500    138,200    142,000    144,400    147,050
        39.6 percent rate begins at.............................    250,000    250,000    256,500    263,750    271,050    278,450    283,150   288,350
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.


                          TABLE 13-18b.--PROJECTED PERSONAL EXEMPTIONS, STANDARD DEDUCTIONS, AND TAXABLE INCOME LEVELS, 2001-9
--------------------------------------------------------------------------------------------------------------------------------------------------------
        Exemption, deduction, or income level             2001       2002       2003       2004       2005       2006       2007       2008       2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
Personal exemptions                                       $2,900     $2,950     $3,000     $3,100     $3,200     $3,250     $3,350     $3,400     $3,500
Standard deductions:
    Joint............................................      7,550      7,700      7,900      8,100      8,300      8,500      8,750      8,950      9,150
    Single...........................................      4,500      4,600      4,750      4,850      5,000      5,100      5,250      5,350      5,500
    Head of household................................      6,650      6,800      6,950      7,150      7,300      7,500      7,700      7,850      8,050
Additional standard deductions for elderly/blind:
    Joint (each individual)..........................        900        900        950        950      1,000      1,000      1,050      1,050      1,100
    Single/head of household.........................      1,100      1,150      1,150      1,200      1,250      1,250      1,300      1,300      1,350
Taxable income levels:
    Joint returns:
        15 percent rate ends at......................     44,950     46,050     47,200     48,350     49,550     50,800     52,050     53,350     54,700
        28 percent rate ends at......................    108,650    111,250    114,050    116,850    119,800    122,750    125,800    128,950    132,150
        31 percent rate ends at......................    165,600    169,550    173,750    178,100    182,550    187,100    191,750    196,500    201,400
    Single returns:
        15 percent rate ends at......................     26,900     27,550     28,250     28,950     29,650     30,400     31,150     31,950     32,750
        28 percent rate ends at......................     65,200     66,750     68,400     70,150     71,850     73,650     75,500     77,400     79,300
        31 percent rate ends at......................    136,050    139,250    142,750    146,300    149,950    153,650    157,500    161,400    165,450
    Heads of household:
        15 percent rate ends at......................     36,050     36,950     37,850     38,800     39,750     40,750     41,750     42,800     43,850
        28 percent rate ends at......................     93,100     95,350     97,700    100,150    102,650    105,200    107,800    110,500    113,250
        31 percent rate ends at......................    150,800    154,400    158,250    162,200    166,250    170,350    174,600    178,950    183,450
        39.6 percent rate begins at..................    295,750    302,800    310,350    318,050    325,950    334,100    342,400    350,950   359,700
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.


      TABLE 13-19.--EXAMPLES OF FEDERAL INCOME AND PAYROLL TAX LIABILITIES OF HYPOTHETICAL TAXPAYERS, 1999
----------------------------------------------------------------------------------------------------------------
                                                                                       Overall        Overall
                                                     Income    FICA tax  Total tax  effective tax   marginal tax
          Type of filing unit and income              tax     liability  liability       rate           rate
                                                   liability                        (percent) \1\  (percent) \1\
----------------------------------------------------------------------------------------------------------------
Joint filer--3 exemptions: \2\
     $10,000.....................................    -$2,312     $1,530      -$782         -7.3           14.2
     $30,000.....................................      1,683      4,590      6,273         19.4           28.1
    $50,000 \3\..................................      4,263      7,650     11,913         22.1           28.1
    $100,000 \4\.................................     13,994     11,902     25,896         24.4           30.5
Head of household--2 exemptions: \2\
    $10,000......................................     -2,312      1,530       -782         -7.3           14.2
    $30,000......................................      2,223      4,590      6,813         21.1           28.1
    $50,000 \3\..................................      4,675      7,650     12,325         22.9           28.1
    $100,000 \4\.................................     16,369     11,902     28,271         26.7           30.5
Elderly couple filing joint return:
    $10,000 \5\..................................          0          0          0          0.0        \6\ 0.0
    $30,000 \7\..................................        540          0        540          1.8       \8\ 15.0
    $50,000 \9\..................................      4,440      1,530      5,970         11.8           40.0
Elderly single filer:
    $10,000 \10\.................................          0          0          0          0.0        \6\ 0.0
    $30,000 \11\.................................      2,254          0      2,254          7.5      \12\ 22.5
    $50,000 \13\.................................      8,070      3,060     11,130         21.6          40.2
----------------------------------------------------------------------------------------------------------------
\1\ The average tax rate is total tax liability divided by income plus the employer share of FICA. The marginal
  rate computations also count the employer share of FICA tax as income to the employee (for both payroll and
  income tax purposes). Unless otherwise noted, all calculations assume the taxpayer takes the standard
  deduction rather than itemized deductions.
\2\ Assumes one child who is eligible for the child credit, one earner, and all income is wage income.
\3\ Assumes taxpayer claims itemized deductions of $10,000.
\4\ Assumes taxpayer claims itemized deductions of $20,000.
\5\ All income is Social Security.
\6\ If the marginal dollar of income is assumed to consist of wage income, the marginal tax rate would be 14.2
  percent. This represents the FICA tax liability on this income.
\7\ Of the total, $12,000 is Social Security, $12,000 is a taxable pension, and $6,000 is taxable interest.
\8\ If the marginal dollar of income is assumed to consist of wage income, the marginal tax rate would be 28.1
  percent, representing both the income tax liability and the FICA tax liability on this income.
\9\ Same as above plus additional $10,000 of taxable interest and $10,000 of wages.
\10\ Of the total, $7,500 is Social Security and $7,500 is taxable pension.
\11\ Of the total, $7,500 is Social Security, $7,500 is taxable pension, and $15,000 is taxable interest.
\12\ If the marginal dollar of income is assumed to consist of wage income, the marginal tax rate would be 35.1
  percent, representing both the income tax liability (22.5-percent marginal rate reflects the inclusion of 50
  cents of Social Security benefits as taxable for each additional dollar of adjusted gross income) and the FICA
  tax liability on this income.
\13\ Same as above plus $20,000 of wages.

 Source: Joint Committee on Taxation.

income; and an additional standard deduction for taxpayers age 
65 and older. These are described in detail in preceding 
portions of this section.
    As a result of these favorable tax provisions, the tax 
threshold (the level of income, excluding Social Security, at 
which tax liability is incurred) for elderly taxpayers is very 
close to or above the poverty level. For example, in 2000, a 
single elderly individual with $5,000 in Social Security 
benefits can have up to $8,300 in other income without 
incurring tax liability (or total income of $13,300). An 
elderly married couple filing jointly with $5,000 in excluded 
Social Security benefits has a tax threshold of $14,467 (or 
total income of $19,467). By comparison, the poverty levels in 
2000 for a single elderly person and an elderly couple were 
$8,350 and $11,250, respectively (Federal Register, 2000). 
Table 13-20 displays similar information for other years and 
for varying amounts of Social Security benefits.

TABLE 13-20.--INCOME TAX THRESHOLDS FOR ELDERLY INDIVIDUALS WITH VARIOUS
              AMOUNTS OF SOCIAL SECURITY INCOME, 1992-2009
------------------------------------------------------------------------
                                Amount of income before Social Security
   Year and filing status    -------------------------------------------
                                 None      $2,500     $5,000     $7,500
------------------------------------------------------------------------
1992:
    Single..................    $10,367     $8,700     $6,800     $6,800
    Joint...................     16,333     14,667     13,000     12,000
1993:
    Single..................     10,467      8,800      6,950      6,950
    Joint...................     16,533     14,867     13,200     12,300
1994:
    Single..................     10,633      8,967      7,200      7,200
    Joint...................     16,833     15,167     13,500     12,750
1995:
    Single..................     10,733      9,067      7,350      7,350
    Joint...................     17,033     15,367     13,700     13,050
1996:
    Single..................     10,867      9,200      7,550      7,550
    Joint...................     17,267     15,600     13,933     13,400
1997:
    Single..................     11,033      9,367      7,800      7,800
    Joint...................     17,533     15,867     14,200     13,800
1998:
    Single..................     11,167      9,500      8,000      8,000
    Joint...................     17,800     16,133     14,467     14,200
1999:
    Single..................     11,233      9,567      8,100      8,100
    Joint...................     17,933     16,267     14,600     14,400
2000:
    Single..................     11,367      9,700      8,300      8,300
    Joint...................     18,100     16,433     14,767     14,650
2001:
    Single..................     11,500      9,833      8,500      8,500
    Joint...................     18,433     16,767     15,100     15,150
2002:
    Single..................     11,633      9,967      8,700      8,700
    Joint...................     18,600     16,933     15,267     15,400
2003:
    Single..................     11,767     10,100      8,900      8,900
    Joint...................     18,867     17,200     15,533     15,800
2004:
    Single..................     11,933     10,267      9,150      9,150
    Joint...................     19,133     17,467     15,800     16,200
2005:
    Single..................     12,133     10,467      9,450      9,450
    Joint...................     19,467     17,800     16,133     16,700
2006:
    Single..................     12,233     10,567      9,600      9,600
    Joint...................     19,667     18,000     16,333     17,000
2007:
    Single..................     12,433     10,767      9,900      9,900
    Joint...................     20,033     18,367     16,700     17,550
2008:
    Single..................     12,533     10,867     10,050     10,050
    Joint...................     20,233     18,567     16,900     17,850
2009:
    Single..................     12,733     11,067     10,350     10,350
    Joint...................     20,567     18,900     17,233    18,350
------------------------------------------------------------------------
Source: Congressional Budget Office.

    The combination of these tax provisions means that an 
estimated 50 percent of elderly individuals will have no tax 
liability for 2000 (table 13-21).

                Distribution of Family Income and Taxes

    Table 13-21 presents estimates of the distribution of tax 
filing units by the Federal individual income tax rate brackets 
for calendar year 2000. As shown in the bottom panel, almost 47 
million filing units pay no Federal income taxes. There are 
67.5 million filing units who are in the 15-percent bracket. 
There are approximately 6.5 million families that face marginal 
income tax rates of 31 percent or above.
    Table 13-22 is a more complicated version of table 13-21. 
It illustrates for various types of wage earners the additional 
(marginal) Federal tax these wage earners will pay if they earn 
one more dollar of wages. For purposes of this table, marginal 
tax rates include both Federal income and payroll taxes. The 
majority of single wage earners have income below $30,000 per 
year and face marginal tax rates of 20.0-24.9 percent. In 
addition, the phaseout of certain deductions or exclusions 
under the Tax Code (e.g., the personal exemption phaseout) and 
the overall limitation on itemized deductions also have the 
effect of imposing additional dollars of tax liability on a 
taxpayer as the taxpayer's income increases. Hence, effective 
marginal tax rates can exceed the sum of the statutory 
individual income tax rate and payroll tax rate.

TABLE 13-21.--TAX FILING UNITS CLASSIFIED BY MARGINAL FEDERAL INCOME TAX
                      RATE, \1\ PROJECTED FOR 2000
------------------------------------------------------------------------
                                                 Tax units
  Family type and marginal tax rate (percent)   (thousands)    Percent
------------------------------------------------------------------------
With children:
    0.........................................       12,600         27.6
    15........................................       21,300         46.6
    28........................................        9,600         21.0
    31........................................        1,100          2.4
    36........................................          500          1.1
    39.6......................................          600          1.3
                                               -------------------------
      Total...................................       45,700        100.0
                                               =========================
Elderly:
    0.........................................       11,700         50.0
    15........................................        8,500         36.3
    28........................................        2,400         10.3
    31........................................          400          1.7
    36........................................          200          3.9
    39.6......................................          200          0.9
                                               -------------------------
      Total...................................       23,400        100.0
                                               =========================
Other:
    0.........................................       22,600         28.3
    15........................................       37,700         47.2
    28........................................       16,100         20.2
    31........................................        2,400          3.0
    36........................................          600          0.8
    39.6......................................          500          0.6
                                               -------------------------
      Total...................................       79,900        100.0
                                               =========================
All tax units:
    0.........................................       46,900         31.5
    15........................................       67,500         45.3
    28........................................       28,100         18.9
    31........................................        3,900          2.6
    36........................................        1,300          0.9
    39.6......................................        1,300          0.9
                                               -------------------------
      Total...................................      149,000       100.0
------------------------------------------------------------------------
\1\ The rate used is the ordinary rate bracket for taxable income
  without capital gains. Some taxpayers classified with a marginal rate
  greater than 0 may owe no income tax because of their ability to claim
  tax credits.

Source: Congressional Budget Office tax simulation model.


                           TABLE 13-22.--DISTRIBUTION OF EARNERS BY INCOME AND MARGINAL TAX RATES ON WAGES, PROJECTED FOR 2000
                                                                     [In thousands]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Income in thousands of 2000 dollars
                                                    -------------------------------------------------------------------------------------------    All
    Family type and marginal tax rate (percent)        Less                                                                           $200 and   incomes
                                                     than $10   $10-$20   $20-$30   $30-$40   $40-$50   $50-$75  $75-$100  $100-$200    over
--------------------------------------------------------------------------------------------------------------------------------------------------------
All earners ages 21-64 without Social Security
 earnings:
    Less than 0....................................     2,987       468        57         5         1         0         0          0         0     3,519
    0-4.9..........................................     1,215        59         3         1         0         0         0          0         0     1,278
    5.0-9.9........................................     4,290     1,557       529       102         6         3         5          0         0     6,492
    10.0-14.9......................................       687       310        47        14         0         0         0          0         0     1,057
    15.0-19.9......................................       549       176       107        13         0        29        39          0         0       913
    20.0-24.9......................................     1,828    10,961    11,168    11,254     9,388    13,009       179          4         5    57,796
    25.0-29.9......................................       441     1,889     1,174       293        58       429     1,430      1,007         8     6,729
    30.0-34.9......................................     1,367       175       144       527       281       849       725      3,070       254     7,392
    35.0-39.9......................................         0       808     1,785     2,620     3,095    11,372    10,924      6,923       972    38,500
    40.0-44.9......................................         0        88     1,485       105         9         4        48      1,083     1,694     4,516
    45.0-49.9......................................         0         0        22        11         0         0        33        361       654     1,081
                                                    ----------------------------------------------------------------------------------------------------
      Total........................................    13,363    16,491    16,522    14,946    12,838    25,695    13,384     12,448     3,587   129,273
                                                    ====================================================================================================
      Mean marginal tax rate.......................       4.9      21.2      26.1      25.4      26.0      28.8      34.7       35.9      41.9      26.0
      Mean marginal income tax rate................      -2.7      13.6      18.4      17.8      18.3      21.2      27.9       30.4      38.3      18.8
      Mean marginal Social Security tax rate.......       7.6       7.6       7.6       7.6       7.6       7.6       6.7        5.4       3.5       7.2
                                                    ====================================================================================================
Single earners:
    Less than 0....................................     2,396       245        23         2         0         0         0          0         0     2,666
    0-4.9..........................................     1,129        33         1         0         0         0         0          0         0     1,163
    5.0-9.9........................................     3,707       784        53         4         0         0         5          0         0     4,552
    10.0-14.9......................................       636       183         2         0         0         0         0          0         0       821
    15.0-19.9......................................       433       105        22         1         0         0         0          0         0       561
    20.0-24.9......................................     1,805     9,739     8,565     3,933       695       139         4          0         0    24,881
    25.0-29.9......................................       370       858       179       172        27        43       227         67         0     1,944
    30.0-34.9......................................     1,367       131        32       419        62        96       586        550        10     3,253
    35.0-39.9......................................         0       714     1,060     2,503     3,068     4,022       315        230       123    12,035
    40.0-44.9......................................         0        65       658         7         2         4        44         25       219     1,024
    45.0-49.9......................................         0         0         0         0         0         0         0         32        10        43
                                                    ----------------------------------------------------------------------------------------------------
      Total........................................    11,844    12,857    10,595     7,041     3,855     4,304     1,182        904       361    52,943
                                                    ====================================================================================================
      Mean marginal tax rate.......................       6.1      22.1      25.5      28.0      33.2      35.2      33.3       34.4      40.7      22.4
      Mean marginal income tax rate................      -1.6      14.4      17.8      20.4      25.6      27.6      29.7       32.0      38.6      15.0
      Mean marginal Social Security tax rate.......       7.6       7.6       7.6       7.6       7.6       7.6       3.5        2.4       2.0       7.4
                                                    ====================================================================================================
 Married earners:
    Less than 0....................................       591       223        35         3         1         0         0          0         0       852
    0-4.9..........................................        86        26         3         1         0         0         0          0         0       115
    5.0-9.9........................................       583       774       476        98         6         3         0          0         0     1,940
    10.0-14.9......................................        50       127        44        14         0         0         0          0         0       236
    15.0-19.9......................................       116        71        85        13         0        29        39          0         0       352
    20.0-24.9......................................        23     1,222     2,603     7,321     8,693    12,871       175          4         5    32,915
    25.0-29.9......................................        71     1,031       995       121        30       386     1,203        940         8     4,785
    30.0-34.9......................................         0        43       112       108       219       753       139      2,520       244     4,139
    35.0-39.9......................................         0        94       725       117        27     7,350    10,609      6,693       849    26,466
    40.0-44.9......................................         0        23       827        98         7         0         4      1,058     1,476     3,492
    45.0-49.9......................................         0         0        22        11         0         0        33        329       643     1,038
                                                    ----------------------------------------------------------------------------------------------------
      Total........................................     1,519     3,634     5,927     7,905     8,983    21,391    12,202     11,544     3,225    76,330
                                                    ====================================================================================================
      Mean marginal tax rate.......................      -4.1      18.2      27.1      23.1      22.9      27.6      34.8       36.0      42.0      28.5
      Mean marginal income tax rate................     -11.8      10.6      19.5      15.5      15.3      19.9      27.8       30.3      38.3      21.4
      Mean marginal Social Security tax rate.......       7.6       7.6       7.6       7.6       7.6       7.6       7.0        5.7       3.7       7.1
                                                    ====================================================================================================
Earners with children:
    Less than 0....................................     2,702       438        52         3         0         0         0          0         0     3,195
    0-4.9..........................................        53        12         3         0         0         0         0          0         0        68
    5.0-9.9........................................       725       975       467        86         2         3         5          0         0     2,262
    10.0-14.9......................................         8       215        42        14         0         0         0          0         0       279
    15.0-19.9......................................         5        33        67        10         0        25        37          0         0       177
    20.0-24.9......................................        22       678       913     5,265     5,586     8,859       158          0         0    21,480
    25.0-29.9......................................        81     1,738     1,140        85        22       151       876        478         3     4,574
    30.0-34.9......................................         0        89       118        39        49       323       168      1,595       136     2,517
    35.0-39.9......................................         0       607     1,339       152        39     3,134     5,597      2,887       366    14,122
    40.0-44.9......................................         0        63     1,384       104         7         4        35        910       753     3,260
    45.0-49.9......................................         0         0        22        11         0         0        23        181       378       615
                                                    ----------------------------------------------------------------------------------------------------
      Total........................................     3,595     4,848     5,546     5,770     5,705    12,498     6,900      6,051     1,637    52,548
                                                    ====================================================================================================
      Mean marginal tax rate.......................     -18.7      19.3      31.3      23.3      22.9      26.2      34.5       36.1      42.4      25.1
      Mean marginal income tax rate................     -26.4      11.6      23.7      15.7      15.2      18.6      27.7       30.7      38.9      17.9
      Mean marginal Social Security tax rate.......       7.6       7.6       7.6       7.6       7.6       7.6       6.8        5.3       3.5      7.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office tax simulation model.

              Federal Tax Treatment of Families in Poverty

    During the 1970s and early 1980s, inflation gradually 
increased the tax burdens of the poor and lowered the real 
income level at which a poor family became liable for income 
taxation. Legislation passed by Congress reversed or slowed 
this trend, but in the absence of indexing, inflation during 
this period gradually offset these legislative efforts. One 
measure of this trend is the degree to which the income at 
which a poor family begins to pay income taxes (termed the tax 
threshold, or the tax entry point) exceeds or falls below the 
poverty threshold. A second measure is the actual amount of tax 
liability incurred by a family with income at the poverty line.
    Table 13-23 shows the income tax threshold, the poverty 
level, and the tax threshold as a percent of the poverty level 
for a married couple with two children in selected years. These 
figures demonstrate that before 1975 a family of four was 
generally liable for Federal income tax if the family's income 
was significantly below the poverty line. In 1975, following 
the enactment of the earned


   TABLE 13-23.--RELATIONSHIP BETWEEN INCOME TAX THRESHOLD AND POVERTY
          LEVEL FOR A FAMILY OF FOUR, SELECTED YEARS 1959-2007
------------------------------------------------------------------------
                                                                 Tax
                                                              threshold
                                    Income tax    Poverty        as a
               Year                 threshold      level      percent of
                                                               poverty
                                                                level
------------------------------------------------------------------------
1959.............................       $2,667       $2,978         89.7
1960.............................        2,667        3,022         88.3
1965.............................        3,000        3,223         93.1
1970.............................        3,600        3,968         90.7
1975.............................        6,692        5,500        121.7
1980.............................        8,626        8,414        102.5
1984.............................        8,783       10,610         82.8
1990.............................       16,296       13,359        122.0
1991.............................       17,437       13,924        125.2
1992.............................       18,548       14,335        129.4
1993.............................       19,187       14,763        130.0
1994.............................       21,098       14,625        144.3
1995.............................       22,362       15,570        143.6
1996.............................       23,672       16,020        147.8
1997.............................       24,386       16,479        148.0
1998.............................       25,039       16,969        147.6
1999.............................       25,798       17,470        147.7
2000.............................       26,006       17,980        148.0
2001.............................       27,333       18,521        147.6
2002.............................       28,170       19,072        147.7
2003.............................       29,035       19,654        147.7
2004.............................       29,923       20,257        147.7
2005.............................       30,833       20,880        147.7
2006.............................       31,760       21,523        147.6
2007.............................       32,742       22,187       147.6
------------------------------------------------------------------------
Source: Congressional Budget Office.

income credit (EIC), a family of four incurred no tax liability 
until its income exceeded the poverty threshold by 22 percent. 
Over the next decade this margin eroded; by 1984, a poor family 
of four incurred income tax liability when its income was 17 
percent below the poverty line. By 1993, changes in the tax law 
resulted in no tax liability for a typical family of four until 
its income exceeded the poverty threshold by nearly 30 percent.
    Table 13-24 shows the income tax burden and payroll tax 
burden of households with incomes at the poverty line for 
families of different sizes. As a result of the refundable EIC, 
the table reflects that many individuals receive a substantial 
credit that more than offsets total income, and in many cases 
Social Security, taxes paid.

 TABLE 13-24.--POVERTY LEVELS, TAX THRESHOLDS, AND FEDERAL TAX AMOUNTS FOR DIFFERENT FAMILY SIZES WITH EARNINGS
                                      EQUAL TO THE POVERTY LEVEL, 1993-2009
----------------------------------------------------------------------------------------------------------------
                                                                             Family size
          Poverty or tax measure and year          -------------------------------------------------------------
                                                       1        2         3          4          5          6
----------------------------------------------------------------------------------------------------------------
Poverty level:
    1993..........................................   $7,363   $9,414   $11,522    $14,763    $17,449    $19,718
    1994..........................................    7,547    9,661    11,821     15,141     17,900     20,235
    1995..........................................    7,759    9,924    12,150     15,570     18,022     20,786
    1996..........................................    7,982   10,211    12,501     16,020     18,542     21,386
    1997..........................................    8,211   10,504    12,859     16,479     19,074     21,999
    1998..........................................    8,480   10,915    13,120     16,530     19,453     21,780
    1999..........................................    8,667   11,156    13,410     16,895     19,882     22,261
    2000..........................................    8,887   11,439    13,750     17,323     20,386     22,825
    2001..........................................    9,103   11,717    14,084     17,744     20,882     23,380
    2002..........................................    9,329   12,009    14,435     18,186     21,401     23,962
    2003..........................................    9,561   12,307    14,794     18,639     21,934     24,558
    2004..........................................    9,799   12,614    15,162     19,103     22,480     25,170
    2005..........................................   10,043   12,928    15,540     19,578     23,040     25,796
    2006..........................................   10,294   13,250    15,927     20,066     23,614     26,439
    2007..........................................   10,550   13,580    16,324     20,566     24,202     27,098
    2008..........................................   10,813   13,919    16,731     21,079     24,805     27,774
    2009..........................................   11,083   14,266    17,148     21,604     25,424     28,466
Income tax threshold:
    1993..........................................    6,050   10,900    17,841     19,187     20,405     21,624
    1994..........................................    7,179   11,250    18,887     21,098     22,222     23,347
    1995..........................................    7,356   11,550    19,387     22,362     23,426     24,491
    1996..........................................    7,546   11,800    19,884     23,672     24,733     25,793
    1997..........................................    7,803   12,200    22,090     27,160     30,157     36,135
    1998..........................................    7,990   12,500    22,630     27,795     30,605     36,635
    1999..........................................    8,114   12,700    22,980     28,200     30,959     37,040
    2000..........................................    8,274   12,950    23,380     28,683     31,355     37,485
    2001..........................................    8,498   13,350    23,990     29,403     32,050     38,290
    2002..........................................    8,681   13,600    24,482     29,995     32,610     38,735
    2003..........................................    8,905   13,900    25,020     30,630     33,267     39,234
    2004..........................................    9,135   14,300    25,635     31,368     34,045     40,035
    2005..........................................    9,392   14,700    26,265     32,122     34,840     40,835
    2006..........................................    9,593   15,000    26,835     32,793     35,530     41,335
    2007..........................................    9,860   15,450    27,510     33,590     36,370     42,187
    2008..........................................   10,060   15,750    28,097     34,300     37,100     42,685
    2009..........................................   10,334   16,150    28,765     35,091     37,935     43,485
Income tax at poverty level:
    1993..........................................      197        0    -1,434     -1,154       -780       -464
    1994..........................................       83        0    -1,907     -1,795     -1,308       -895
    1995..........................................       93        0    -1,956     -2,243     -1,747     -1,187
    1996..........................................       99        0    -2,010     -2,627     -2,096     -1,497
    1997..........................................       93        0    -2,065     -2,698     -2,152     -1,535
    1998..........................................      111     -238    -2,087     -2,857     -2,241     -1,751
    1999..........................................      125     -232    -2,106     -2,882     -2,253     -1,752
    2000..........................................      139     -227    -2,130     -2,912     -2,267     -1,754
    2001..........................................      137     -245    -2,188     -2,993     -2,332     -1,806
    2002..........................................      147     -239    -2,238     -3,061     -2,384     -1,845
    2003..........................................      149     -239    -2,293     -3,136     -2,442     -1,889
    2004..........................................      150     -253    -2,348     -3,213     -2,502     -1,936
    2005..........................................      148     -266    -2,407     -3,295     -2,566     -1,985
    2006..........................................      159     -263    -2,467     -3,374     -2,627     -2,032
    2007..........................................      156     -281    -2,529     -3,459     -2,693     -2,083
    2008..........................................      171     -275    -2,592     -3,547     -2,762     -2,137
    2009..........................................      170     -283    -2,934     -3,632     -2,828     -2,187
Payroll tax at poverty level:
    1993..........................................      563      720       881      1,129      1,335      1,508
    1994..........................................      577      739       904      1,158      1,369      1,548
    1995..........................................      594      759       929      1,191      1,379      1,590
    1996..........................................      611      781       956      1,226      1,418      1,636
    1997..........................................      628      804       984      1,261      1,459      1,683
    1998..........................................      649      835     1,004      1,265      1,488      1,666
    1999..........................................      663      853     1,026      1,292      1,521      1,703
    2000..........................................      680      875     1,052      1,325      1,560      1,746
    2001..........................................      696      896     1,077      1,357      1,597      1,789
    2002..........................................      714      919     1,104      1,391      1,637      1,833
    2003..........................................      731      942     1,132      1,426      1,678      1,879
    2004..........................................      750      965     1,160      1,461      1,720      1,925
    2005..........................................      768      989     1,189      1,498      1,763      1,973
    2006..........................................      787    1,014     1,218      1,535      1,806      2,023
    2007..........................................      807    1,039     1,249      1,573      1,851      2,073
    2008..........................................      827    1,065     1,280      1,613      1,898      2,125
    2009..........................................      848    1,091     1,312      1,653      1,945      2,178
Combined tax at poverty level:
    1993..........................................      760      720      -552        -25        555      1,044
    1994..........................................      661      739    -1,003       -637         62        653
    1995..........................................      686      759    -1,026     -1,052       -368        403
    1996..........................................      710      781    -1,053     -1,402       -677        139
    1997..........................................      721      804    -1,081     -1,437       -693        148
    1998..........................................      760      597    -1,084     -1,592       -753        -85
    1999..........................................      788      622    -1,080     -1,590       -732        -49
    2000..........................................      819      648    -1,078     -1,587       -708         -7
    2001..........................................      833      651    -1,110     -1,636       -735        -18
    2002..........................................      861      680    -1,134     -1,670       -747        -12
    2003..........................................      880      703    -1,161     -1,710       -764        -10
    2004..........................................      900      712    -1,188     -1,752       -782        -10
    2005..........................................      916      723    -1,218     -1,797       -803        -12
    2006..........................................      946      751    -1,249     -1,839       -820         -9
    2007..........................................      964      758    -1,281     -1,885       -841        -10
    2008..........................................      998      790    -1,312     -1,934       -864        -12
    2009..........................................    1,017      809    -1,622     -1,979       -883         -9
Combined tax at poverty level as a percent of
 poverty level:
    1993..........................................     10.3      7.7      -4.8       -0.2        3.2        5.3
    1994..........................................      8.8      7.7      -8.5       -4.2        0.3        3.2
    1995..........................................      8.8      7.7      -8.4       -6.8       -2.0        1.9
    1996..........................................      8.9      7.7      -8.4       -8.7       -3.7        0.7
    1997..........................................      8.8      7.7      -8.4       -8.7       -3.6        0.7
    1998..........................................      9.0      5.5      -8.3       -9.6       -3.9       -0.4
    1999..........................................      9.1      5.6      -8.1       -9.4       -3.7       -0.2
    2000..........................................      9.2      5.7      -7.8       -9.2       -3.5        0.0
    2001..........................................      9.2      5.6      -7.9       -9.2       -3.5       -0.1
    2002..........................................      9.2      5.7      -7.9       -9.2       -3.5        0.0
    2003..........................................      9.2      5.7      -7.8       -9.2       -3.5        0.0
    2004..........................................      9.2      5.6      -7.8       -9.2       -3.5        0.0
    2005..........................................      9.1      5.6      -7.8       -9.2       -3.5        0.0
    2006..........................................      9.2      5.7      -7.8       -9.2       -3.5        0.0
    2007..........................................      9.1      5.6      -7.8       -9.2       -3.5        0.0
    2008..........................................      9.2      5.7      -7.8       -9.2       -3.5        0.0
    2009..........................................      9.2      5.7      -9.5       -9.2       -3.5       0.0
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.

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