<DOC>
[DOCID: f:52597.wais]
[JOINT COMMITTEE PRINT]
ESTIMATES OF FEDERAL
TAX EXPENDITURES FOR
FISCAL YEARS 1999-2003
prepared for the
COMMITTEE ON WAYS AND MEANS
and the
COMMITTEE ON FINANCE
by the staff of the
JOINT COMMITTEE ON TAXATION
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
DECEMBER 14, 1998
JOINT COMMITTEE ON TAXATION
105th Congress, 2nd Session
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SENATE HOUSE
WILLIAM V. ROTH, Jr., Delaware, BILL ARCHER, Texas,
Chairman Vice Chairman
JOHN H. CHAFEE, Rhode Island PHILIP M. CRANE, Illinois
CHARLES GRASSLEY, Iowa WILLIAM M. THOMAS, California
DANIEL PATRICK MOYNIHAN, New York CHARLES B. RANGEL, New York
MAX BAUCUS, Montana FORTNEY PETE STARK, California
Lindy L. Paull, Chief of Staff
Mary M. Schmitt, Deputy Chief of Staff (Law)
Bernard A. Schmitt, Deputy Chief of Staff (Revenue Analysis)
C O N T E N T S
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Page
Introduction..................................................... 1
I. The Concept of Tax Expenditures...................................2
II. Measurement of Tax Expenditures..................................12
III.Tax Expenditure Estimates........................................14
Table 1. Tax Expenditure Estimates by Budget Function,
Fiscal Years 1999-2003............................... 15
Table 2. Distribution of All Returns, Taxable Returns,
Itemized Returns, and Tax Liability by Income Class.. 25
Table 3. Distribution of Selected Individual Tax
Expenditures by Income Class......................... 26
INTRODUCTION
This report \1\ on tax expenditures for fiscal years 1999-
2003 is prepared by the staff of the Joint Committee on
Taxation (``Joint Committee staff'') for the House Committee on
Ways and Means and the Senate Committee on Finance. The report
also is submitted to the House and Senate Committees on the
Budget.
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\1\ This report may be cited as follows: Joint Committee on
Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1999-
2003 (JCS-7-98), December 14, 1998.
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As in the case of earlier reports,\2\ the estimates of tax
expenditures in this report were prepared in consultation with
the staff of the Office of Tax Analysis in the Treasury
Department (``the Treasury''). The Treasury published its
estimates of tax expenditures for fiscal years 1997-2003 in the
Administration's budgetary statement of February 1998.\3\ The
lists of tax expenditures in this Joint Committee staff report
and the Administration's budgetary statement overlap
considerably; the differences are discussed in Part I of this
report under the heading ``Comparisons with Treasury.''
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\2\ Joint Committee on Taxation, Estimates of Federal Tax
Expenditures, October 4, 1972, June 1, 1973, July 8, 1975, March 15,
1976, March 16, 1977, March 14, 1978, March 15, 1979, March 6, 1980,
March 16, 1981, March 8, 1982, March 7, 1983, November 9, 1984, April
12, 1985, March 1, 1986, February 27, 1987, March 8, 1988, February 28,
1989, March 9, 1990, March 11, 1991, April 24, 1992, April 22, 1993,
November 9, 1994, September 1, 1995, November 26, 1996, and December
15, 1997.
\3\ Office of Management and Budget, ``Tax Expenditures,'' Budget
of the United States Government: Analytical Perspectives, Fiscal Year
1999, February 2, 1998, pp. 89-120.
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The Joint Committee staff has made its estimates (as shown
in Table 1) based on the provisions in tax law as enacted
through December 1, 1998. Expired or repealed provisions are
not listed unless they have continuing revenue effects that are
associated with ongoing taxpayer activity. Proposed extensions
or modifications of expiring provisions are not included until
they have been enacted into law.
Part I of this report contains a discussion of the concept
of tax expenditures. Part II is a discussion of the measurement
of tax expenditures. Estimates of tax expenditures for fiscal
years 1999-2003 are presented in Table 1 in Part III. Table 2
shows the distribution of tax returns by income class, and
Table 3 presents distributions of selected individual tax
expenditures by income class.
I. THE CONCEPT OF TAX EXPENDITURES
Overview
``Tax expenditures'' are defined under the Congressional
Budget and Impoundment Control Act of 1974 (``the Budget Act'')
as ``revenue losses attributable to provisions of the Federal
tax laws which allow a special exclusion, exemption, or
deduction from gross income or which provide a special credit,
a preferential rate of tax, or a deferral of tax liability.\4\
Thus, tax expenditures include any reductions in individual and
corporate income tax liabilities that result from special tax
provisions or regulations that provide tax benefits to
particular taxpayers.
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\4\ Congressional Budget and Impoundment Control Act of 1974 (P.L.
93-344), sec. 3(3).
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Special income tax provisions are referred to as tax
expenditures because they may be considered to be analogous to
direct outlay programs, and the two can be considered as
alternative means of accomplishing similar budget policy
objectives. Tax expenditures are most similar to those direct
spending programs that have no spending limits, and that are
available as entitlements to those who meet the statutory
criteria established for the programs.\5\
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\5\ There are a few tax expenditures that have statutorily imposed
limits. One example is the tax credit for low-income rental housing.
This credit is available only to those who have received credit
allocations from State housing authorities. There are statutory limits
on the total amounts of credit allocations that the States can make
each year.
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Estimates of tax expenditures are prepared for use in
budget analysis. They are a measure of the economic benefits
that are provided through the tax laws to various groups of
taxpayers and sectors of the economy. The estimates also may be
useful in determining the relative merits of achieving
specified public goals through tax benefits or direct outlays.
The legislative history of the Budget Act indicates that
tax expenditures are to be defined with reference to a normal
income tax structure (referred to here as ``normal income tax
law''). The Joint Committee staff has used its judgment in
distinguishing between those income tax provisions (and
regulations) that can be viewed as a part of normal income tax
law and those special provisions that result in tax
expenditures. A provision traditionally has been listed as a
tax expenditure by the Joint Committee staff if there is a
reasonable basis for such classification and the provision
results in more than a de minimis revenue loss, which solely
for this purpose means a total revenue loss of at least $50
million over the five fiscal years, 1999-2003. The Joint
Committee staff emphasizes, however, that in the process of
listing tax expenditures, no judgment is made, nor any
implication intended, about the desirability of any special tax
provision as a matter of public policy.
If a tax expenditure provision were eliminated, Congress
might choose to continue financial assistance through other
means rather than terminate all Federal assistance for the
activity. If a replacement spending program were enacted, the
higher revenues received as a result of the elimination of a
tax expenditure might not represent a net budget gain. A
replacement program could involve direct expenditures, direct
loans or loan guarantees, regulatory activity, a different form
of tax expenditure, or a general reduction in tax rates. Joint
Committee staff estimates of tax expenditures do not anticipate
such policy responses.
The Budget Act uses the term tax expenditure to refer to
the special tax provisions that are contained in the Federal
individual and corporate income taxes. Other Federal taxes such
as excise taxes, employment taxes, and estate and gift taxes
may also have exceptions, exclusions, and credits, but those
special tax provisions are not included in this report because
they are not part of the income tax. Thus, for example, the
income tax exclusion for employer-paid health insurance is
included, but the Federal Insurance Contributions Act
(``FICA'') tax exclusion for employer-paid health insurance is
not treated as a tax expenditure.\6\
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\6\ In its budget statement, the Treasury Department identifies tax
expenditures in the unified transfer tax (the estate and gift tax and
the generation-skipping transfer tax). See, Office of Management and
Budget, ``Tax Expenditures,'' February 2, 1998, pp. 119-120. Other
analysts have explored applying the concept of tax expenditures to the
payroll and excise taxes. See, Jonathan Barry Forman, ``Would a Social
Security Tax Expenditure Budget Make Sense?'' Public Budgeting and
Financial Management, 5, 1993, pp. 311-335, and Bruce F. Davie, ``Tax
Expenditures in the Federal Excise Tax System,'' National Tax Journal,
XLVII, March 1994, pp. 39-62.
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Some provisions in the Internal Revenue Code provide for
special tax treatment that is less favorable than normal income
tax law. Examples of such provisions include (1) the denial of
deductions for certain lobbying expenses, (2) the denial of
deductions for certain executive compensation, and (3) the 2-
percent floor on itemized deductions for unreimbursed employee
expenses. Tax provisions that provide treatment less favorable
than normal income tax law are not shown in this report because
they are not included in the statutory definition of a tax
expenditure.
Individual Income Tax
Under the Joint Committee staff methodology, the normal
structure of the individual income tax includes the following
major components: one personal exemption for each taxpayer and
one for each dependent, the standard deduction, the existing
tax rate schedule, and deductions for investment and employee
business expenses. Most other tax benefits to individual
taxpayers can be classified as exceptions to ``normal income
tax law.''
Personal exemptions and the standard deduction are treated
as part of normal income tax law because one may consider these
amounts as approximating the level of income below which it
would be difficult for an individual or a family to obtain
minimal amounts of food, clothing, and shelter. Those itemized
deductions that are not necessary for the generation of income
are classified as tax expenditures, but only to the extent that
they exceed the standard deduction level.
Under present law, all employee compensation is subject to
tax unless the tax code contains a specific exclusion for the
income. There are specific exclusions for the following
employer-provided benefits: coverage under accident and health
plans,\7\ accident and disability insurance, group term life
insurance, educational assistance, transportation benefits
(parking, van pools, and transit passes), child care, meals and
lodging (furnished for the convenience of the employer),
employee awards, and other miscellaneous fringe benefits (e.g.,
employee discounts, services provided to employees at no
additional cost to employers, tuition reductions, and de
minimis fringe benefits). Each of these exclusions is
classified as a tax expenditure in this report.
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\7\ Present law contains an exclusion for employer-provided
coverage under accident and health plans (sec. 106 of the Internal
Revenue Code of 1986, the ``Code'') and an exclusion for benefits
received by employees under employer- provided accident and health
plans (Code sec. 105(b)). These two exclusions are viewed as a single
tax expenditure. Under normal income tax law, the value of employer-
provided accident and health coverage would be includable in the income
of employees, but employees would not be subject to tax on the accident
and health insurance benefits (reimbursements) that they might receive.
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Under normal income tax law, employer contributions to
pension plans and income earned on pension assets would be
taxable to employees as the contributions are made and as the
income is earned, and employees would not receive any deduction
or exclusion for their pension contributions. Under present
law, employer contributions to qualified pension plans and
employee contributions made at the election of the employee
through salary reduction are not taxed until distributed to the
employee during retirement, and income earned on pension assets
is not taxed until distributed during retirement. The tax
expenditure for ``net exclusion of pension contributions and
earnings'' is computed as the income taxes forgone on current
tax-excluded pension contributions and earnings less the income
taxes paid on current pension distributions to retirees.
Under present law, social security retirement benefits are
fully or partially excluded from gross income.\8\ Under normal
income tax law, retirees would be entitled to an exclusion for
only the portion of social security retirement benefits that
represents a return of the social security taxes that they paid
during their working years. Thus, the exclusion of social
security retirement benefits in excess of social security tax
payments is classified as a tax expenditure.
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\8\ For taxpayers with modified adjusted gross incomes above
certain levels, up to 85 percent of social security retirement benefits
are includable in income.
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All Medicare benefits are excluded from taxation. The value
of Medicare Part A insurance generally is greater than the
Health Insurance (``HI'') tax contributions that enrollees made
during their working years, and the value of Medicare Part B
insurance generally is greater than the Part B premium that
enrollees must pay. The exclusion of the value of Medicare Part
A insurance in excess of HI tax contributions is classified as
a tax expenditure, and the exclusion of the value of Medicare
Part B insurance in excess of premiums paid also is classified
as a tax expenditure.
Public assistance benefits are excluded from gross income
by law or by Internal Revenue Service regulations. Table 1
contains tax expenditure estimates for workers' compensation
benefits, special benefits for disabled coal miners, and cash
public assistance benefits (which include Supplemental Security
Income (``SSI'') benefits and Aid to Families with Dependent
Children (``AFDC'') benefits).
The individual income tax does not include in gross income
the imputed income that individuals receive from the services
provided by owner-occupied homes and durable goods.\9\ However,
the Joint Committee staff does not classify this exclusion as a
tax expenditure. The measurement of imputed income for tax
purposes presents administrative problems and its exclusion
from taxable income may be regarded as an administrative
necessity.\10\
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\9\ The National Income and Product Accounts include estimates of
this imputed income. The accounts appear in U.S. Department of
Commerce, Bureau of Economic Analysis, Survey of Current Business,
published monthly.
\10\ If the imputed income from owner-occupied homes were included
in adjusted gross income, it would be proper to include all mortgage
interest deductions and related property tax deductions as part of the
normal income tax structure, since interest and property tax deductions
would be allowable as a cost of producing imputed income. It also would
be appropriate to allow deductions for depreciation and maintenance
expenses for owner-occupied homes.
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Under normal income tax law, individuals would be allowed
to deduct only the interest on indebtedness incurred in
connection with a trade or business or an investment. Thus, the
deduction for mortgage interest on a principal or second
residence is classified as a tax expenditure.
The Joint Committee staff assumes that, for administrative
feasibility, normal income tax law would tax capital gains in
full in the year the gains are realized through sale or
exchange. Thus, the deferral of tax until realization is not
classified as a tax expenditure, but reduced rates of tax,
further deferrals of tax (beyond the year of sale or exchange),
and exclusions of certain capital gains are classified as tax
expenditures.
It also is assumed that normal income tax law would not
provide for any indexing of the basis of capital assets for
changes in the general price level. Thus, under normal income
tax law (as under present law), the income tax would be levied
on nominal gains as opposed to real gains in asset values. If,
as an alternative, normal income tax law were defined to
include full indexing of the basis of capital assets, the
capital gains tax expenditure estimates in Table 1 generally
would be much lower than those shown. For consistency, if there
were indexation of the basis of capital assets, it should be
coupled with a general indexation of the income and expenses
associated with capital assets and the indexation of interest.
If normal income tax law were defined to include the indexation
of interest paid and received, the tax expenditure estimates
for exclusion of interest on State and local government debt
would be much lower than those shown in Table 1.
There are many types of State and local government bonds
and private purpose bonds that qualify for tax-exempt status
for Federal income tax purposes. Table 1 contains a separate
tax expenditure listing for each type of bond.
Business Income Taxation
Regardless of the legal form of organization (sole
proprietorship, partnership, or S or C corporation), the same
general principles are used in the computation of taxable
business income. Thus, most business tax expenditures apply
equally to unincorporated and incorporated businesses.
One of the most difficult issues in defining tax
expenditures for business income relates to the tax treatment
of capital costs. Under present law, capital costs may be
recovered under a variety of alternative methods, depending
upon the nature of the costs and the status of the taxpayer.
For example, investments in equipment and structures may
qualify for tax credits, expensing, accelerated depreciation,
or straight-line depreciation. The Joint Committee staff
generally classifies as tax expenditures cost recovery
allowances that are more favorable than those provided under
the alternative depreciation system (sec. 168(g)), which
provides for straight-line recovery over tax lives that are
longer than those permitted under the accelerated system.
As indicated above, the Joint Committee staff assumes that
normal income tax law would not provide for any indexing of the
basis of capital assets. Thus, normal income tax law would not
take into account the effects of inflation on tax depreciation.
The expensing and depreciation tax expenditure estimates in
Table 1 are larger than would be the case if normal income tax
law provided for inflation adjustments in the basis of assets
for tax depreciation purposes.
The alternative minimum tax (``AMT'') and the passive
activity loss rules are not viewed by the Joint Committee staff
as a part of normal income tax law. Instead, they are viewed as
provisions that reduce the magnitude of the tax expenditures to
which they apply. For example, the AMT reduces the value of
business tax credits (for those taxpayers subject to the AMT)
by not allowing the tax credits to be claimed in the
calculation of AMT liability. Similarly, the passive loss rules
defer otherwise allowable deductions and credits from passive
activities until a time when the taxpayer has passive income or
disposes of the assets associated with the passive activity.
Exceptions to the AMT and the passive loss rules are not
classified as tax expenditures by the Joint Committee staff
because the effects of the exceptions already are incorporated
in the estimates of related tax expenditures.
Corporate Income Tax
The income of corporations (other than S corporations)
generally is subject to the corporate income tax. The corporate
income tax includes a graduated tax rate schedule. The lower
tax rates in the schedule are classified by the Joint Committee
staff as a tax expenditure (as opposed to normal income tax
law) because they are intended to provide tax benefits to small
business and, unlike the graduated individual income tax rates,
are unrelated to concerns about ability of individuals to pay
taxes.
Certain income of pass-through entities is exempt from the
corporate income tax. The income of sole proprietorships, S
corporations, and most partnerships is taxed only at the
individual level. The special tax rules for these pass-through
entities are not classified as tax expenditures because the tax
benefits are available to any entity that chooses to organize
itself and operate in the required manner in order to avoid the
corporate income tax.
Nonprofit corporations that satisfy the requirements of
Code section 501 also generally are exempt from corporate
income tax. The tax exemption of certain nonprofit cooperative
business organizations, such as trade associations, is not
treated as a tax expenditure for the same reason applicable to
for-profit pass-through business entities. With respect to
other nonprofit organizations, such as charities, tax-exempt
status is not classified as a tax expenditure because the
nonbusiness activities of such organizations generally must
predominate and their unrelated business activities are subject
to tax. In general, the imputed income derived from nonbusiness
activities conducted by individuals or collectively by certain
nonprofit organizations is outside the normal income tax base.
However, the ability of donors to such nonprofit organizations
to claim a charitable contribution deduction is a tax
expenditure (because such contributions do not generate income
to the donor), as is the exclusion from income granted to
holders of tax-exempt financing issued by charities.
Recent Legislation
Surface Transportation Revenue Act of 1998
The Surface Transportation Revenue Act of 1998, enacted on
June 9, 1998, as part of the Transportation Equity Act for the
21st Century (Title IX of H.R. 2400) (P.L. 105-178), modified
two existing tax expenditures:
--The excise tax exemptions and income tax credits for
alcohol fuels were extended through September 30, 2007 (excise
tax exemptions), and December 31, 2007 (income tax credits),
and the tax incentives will be reduced from 54 cents per gallon
to 51 cents per gallon over a five-year period beginning on
January 1, 2001. (The income tax credits are classified as a
tax expenditure, but not the excise tax exemptions.)
--The exclusion for employer-provided parking and transit
benefits was modified as follows: (1) no parking or
transportation benefit is includible in gross income or wages
of an employee merely because the employee is offered the
choice of cash in lieu of one or more qualified transportation
benefits, effective for taxable years beginning after December
31, 1997; (2) there is no indexing of the dollar limits on the
exclusions for qualified transportation benefits in 1999; and
(3) the exclusion for employer-provided transit passes and
vanpooling is increased to $100 per month effective for taxable
years beginning after December 31, 2001.
Internal Revenue Service Restructuring and Reform Act of
1998
The Internal Revenue Service Restructuring and Reform Act
of 1998 (``IRS Reform Act'') (H.R. 2676), enacted on July 22,
1998 (P.L. 105-206), modified two existing tax expenditures:
--Property held more than one year (rather than more than
18 months) is eligible for reduced capital gains tax rates,
effective January 1, 1998.
--All of the meals provided to employees on the business
premises of an employer are generally treated as being provided
for the convenience of the employer (and are thus excludable
under section 119) if more than one-half of the employees who
are provided meals are being provided meals for the convenience
of the employer, effective for taxable years beginning before,
on, or after July 22, 1998.
Tax and Trade Relief Extension Act of 1998
The Tax and Trade Relief Extension Act of 1998 (``the Tax
Extension Act''), enacted on October 21, 1998, as part of the
Omnibus Consolidated and Emergency Supplemental Appropriations
Act, 1999 (Division J of H.R. 4328) (P.L. 105-277), extended
and modified some existing tax expenditures and added a new tax
expenditure to the Internal Revenue Code.
Extensions of expiring tax provisions.--The Tax Extension
Act extended a number of tax expenditure provisions that had
recently expired or were scheduled to expire. The tax credit
for qualified research expenditures (Code sec. 41), which
expired after June 30, 1998, was extended for the period July
1, 1998, through June 30, 1999. The work opportunity tax
credit, which expired after June 30, 1998, was extended through
June 30, 1999. The welfare-to-work tax credit, which was
scheduled to expire after April 30, 1999, was extended through
June 30, 1999. The deduction equal to the fair market value of
``qualified appreciated stock'' contributed to a private
foundation, which expired after June 30, 1998, was permanently
extended. (The effects of this provision are reflected in the
tax expenditure estimates for ``deduction for charitable
contributions'' in Table 1.) Income averaging for farmers,
which was scheduled to expire for taxable years beginning after
December 31, 2000, was permanently extended.
Modifications to existing tax expenditures.--The Tax
Extension Act also modified two existing tax expenditures:
--The rates of deduction for health insurance expenses of
self-employed individuals are increased as follows: the
deduction is 45 percent in 1998, 60 percent in 1999 through
2001, 70 percent in 2002, and 100 percent in 2003 and
thereafter.
--The limit on State private activity tax-exempt bonds is
increased to $75 per resident of each State or $225 million (if
greater) beginning in calendar year 2007. The increase is
phased in, beginning with $55 per resident or $165 million (if
greater) in calendar year 2003.
New tax expenditure.--The Tax Extension Act provided a
special five-year carryback period for net operating losses
attributable to farming businesses. The provision is effective
for net operating losses arising in taxable years beginning
after December 31, 1997.
Alternative minimum tax effects on personal credits.--The
Tax Extension Act contained a provision that allows
nonrefundable personal credits to offset the regular tax in
full for taxable years beginning in 1998, thereby reducing or
eliminating the alternative minimum tax liabilities of some
taxpayers. This provision will allow taxpayers to receive
greater benefits from the nonrefundable personal credits. Thus,
in Table 1, the tax expenditure estimates for these credits are
larger than would otherwise be the case.
Cancelled Tax Provisions
The Taxpayer Relief Act of 1997 contained two tax
expenditure provisions that were cancelled by the President
pursuant to the Line Item Veto Act of 1996. In June 1998, the
Supreme Court held that the provisions of the Line Item Veto
Act were unconstitutional. Thus, the two cancelled tax
provisions are now present law. The first provision provides a
temporary exception from foreign personal holding company
income (for subpart F purposes) for certain income that is
derived in the active conduct of an insurance, banking,
financing, or similar business, for taxable years beginning in
1998. The Tax Extension Act modified and extended this
provision through taxable years beginning in 1999. The
provision is listed in Table 1. The second cancelled tax
provision provides for a deferral of tax on gains from the sale
of stock in a qualified refiner or processor to an eligible
farmer's cooperative, effective for sales after December 31,
1997. This provision is not listed in Table 1 because the
associated revenue loss is less than the de minimis amount
required for inclusion in the table.
Comparisons with Treasury Department
The Joint Committee staff and Treasury lists of tax
expenditures differ in two respects. First, the Treasury uses a
different classification of those provisions that can be
considered a part of normal income tax law under both the
individual and business income taxes. In general, the Joint
Committee staff methodology involves a narrower concept of
normal income tax law. Thus, the Joint Committee list of tax
expenditures includes some provisions that are not contained in
the Treasury list. The cash method of accounting provides an
example. The Treasury considers the cash accounting option for
certain businesses as a part of normal income tax law, but the
Joint Committee staff methodology treats it as a departure from
normal income tax law that constitutes a tax expenditure.
Second, the Joint Committee staff list excludes those
provisions that are estimated to result in revenue losses below
the de minimis amount, i.e., less than $50 million over the
five fiscal years, 1999-2003. The Treasury does not have a de
minimis exception. Thus, the Treasury list of tax expenditures
includes some provisions that are not contained in the Joint
Committee staff list.
The Joint Committee staff and Treasury estimates of tax
expenditures span slightly different sets of years. The
Treasury's estimates cover a seven-year period--the last fiscal
year, the current fiscal year when the President's budget is
submitted, and the next five fiscal years, i.e., fiscal years
1997-2003. The Joint Committee staff estimates cover the
current fiscal year and the succeeding four fiscal years, i.e.,
fiscal years 1999-2003.
For the past seven years, the President's budget has
contained a section that reviews and tabulates the estate and
gift tax provisions that the Treasury considers as tax
expenditures. The Joint Committee staff considers estate and
gift tax provisions as being outside of the normal income tax
structure and thus omits them from its list of tax
expenditures.
In some cases, two or more of the tax expenditure items in
the Treasury list have been combined into a single item in the
Joint Committee staff list, and vice versa. The Table 1
descriptions of some tax expenditures also may vary from the
descriptions used by the Treasury.
The following is a list of tax expenditure provisions in
the Joint Committee staff list that are not classified as tax
expenditures by the Treasury: \11\
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\11\ There are two additional tax expenditure provisions in the
Joint Committee staff list that are not classified a tax expenditures
by the Treasury: the expensing of tertiary injectants and the exclusion
of investment income from structured settlement amounts. These
provisions are not listed in Table 1 because the estimated revenue
losses are below the de minimis amount ($50 million over the five
fiscal years, 1999-2003).
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Natural resources and environment
--Exclusion of contributions in aid of construction for water
and sewer utilities
Agriculture
--Exclusion of cost-sharing payments
--Cash accounting for agriculture
--Five-year carryback period for net operating losses
attributable to farming
Insurance companies
--Special treatment of life insurance company reserves
--Deduction of unpaid property loss reserves of property and
casualty companies
Business and commerce
--Expensing of magazine circulation expenditures
--Special rules for magazine, paperback book, and record
returns
--Completed contract rules
--Cash accounting, other than agriculture
--Deferral of gain on like-kind exchanges
--Exception from net operating loss limitations for
corporations in bankruptcy
--Tax credit for employer-paid FICA taxes on tips
--Deferral of gain on involuntary conversions resulting from
Presidentially-declared disasters
Employment
--Exclusion of miscellaneous fringe benefits
--Exclusion of employee awards
--Exclusion of income earned by voluntary employee beneficiary
associations
Medicare
--Exclusion of untaxed Medicare benefits for Hospital Insurance
--Exclusion of untaxed Medicare benefits for Supplementary
Medical Insurance
The following is a list of the tax expenditure provisions
that are included in the Treasury list but are excluded from
the Joint Committee staff list because the estimated revenue
losses are below the de minimis amount (less than $50 million
over the five fiscal years, 1999-2003):
Energy
--Tax credit for electric vehicles
--Deductions for clean-fuel vehicles and refueling property
Natural resources and environment
--Tax credit and seven-year amortization for reforestation
expenditures
Agriculture
--Deferral of tax on gains from the sale of stock in a
qualified refiner or processor to an eligible
farmer's cooperative \12\
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\12\ This provision was not included in the Treasury list of tax
expenditures that was published as part of the budget statement on
February 2, 1998. However, it is expected that the provision will be
included in the Treasury list that will accompany the budget statement
forthcoming in February 1999.
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Financial institutions
--Bad debt reserves of financial institutions
Insurance companies
--Special alternative tax on small property and casualty
insurance companies
--Tax exemption for insurance companies owned by tax-exempt
organizations
Business and commerce
--Ordinary income treatment of losses from sales of small
business corporation stock
--Exclusion of income from discharge of indebtedness incurred
in connection with qualified real property
Social services
--Expensing of costs for removing architectural barriers
There are three additional tax expenditure provisions in
the Treasury list that are not included in the Joint Committee
staff list. Two of the provisions involve exceptions to the
passive loss rules: (1) the exception for working interests in
oil and gas properties; and (2) the exception for up to $25,000
of rental losses. The Joint Committee staff does not classify
these two provisions as tax expenditures; the revenue effects
of the passive loss rules (and exceptions to the rules) are
included in the estimates of the tax expenditure provisions
that are affected by the rules.\13\ The third tax expenditure
in the Treasury list that is not included in the Joint
Committee staff list is the exemption of certain income of
telephone and electric cooperatives. The Joint Committee staff
does not classify this provision as a tax expenditure because
the special tax rules for pass-through entities are assumed to
be a part of normal tax law.\14\
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\13\ See discussion of the alternative minimum tax and passive loss
rules on p. 6, above.
\14\ See discussion of pass-through entities on p. 6, above.
II. MEASUREMENT OF TAX EXPENDITURES
Tax Expenditure Estimates Generally
A tax expenditure is measured by the difference between tax
liability under present law and the tax liability that would
result from a recomputation of tax without benefit of the tax
expenditure provision. Taxpayer behavior is assumed to remain
unchanged for tax expenditure estimate purposes.\15\
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\15\ An alternative way to measure tax expenditures is to express
their values in terms of ``outlay equivalents.'' An outlay equivalent
is the dollar size of a direct spending program that would provide
taxpayers with net benefits that would equal what they now receive from
a tax expenditure. The Treasury Department presents estimates of outlay
equivalents in the President's budget in addition to presenting
estimates in the same manner as the Joint Committee staff.
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The tax expenditure estimates in this report are based on
Congressional Budget Office and Joint Committee staff
projections of the gross income, deductions, and expenditures
of individuals and corporations for calendar years 1998-2003.
These projections are used to compute tax liabilities for the
present-law revenue baseline and tax liabilities for the
alternative baseline that assumes that the tax expenditure
provision does not exist.
Internal Revenue Service (``IRS'') statistics from recent
tax returns are used to develop projections of the tax credits,
deductions, and exclusions that will be claimed under the
present-law baseline. These IRS statistics show the actual
usage of the various tax expenditure provisions. In the case of
some tax expenditures, such as the earned income tax credit,
there is evidence that some taxpayers are not claiming all of
the benefits to which they are entitled, while others are
filing claims that exceed their entitlements. The tax
expenditure estimates in this report are based on projections
of actual claims under the various tax provisions, not the tax
benefits to which taxpayers are entitled.
Some tax expenditure estimates are based partly on
statistics for income, deductions, and expenses for prior
years. Accelerated depreciation is an example. Estimates for
this tax expenditure are based on the difference between tax
depreciation deductions under present law and the deductions
that would have been claimed in the current year if investments
in the current year and all prior years had been depreciated
using the alternative (normal income tax law) depreciation
system.
Each tax expenditure is estimated separately, under the
assumption that all other tax expenditures remain in the tax
code. If two or more tax expenditures were estimated
simultaneously, the total change in tax liability could be
smaller or larger than the sum of the amounts shown for each
item separately, as a result of interactions among the tax
expenditure provisions.
Year-to-year differences in the estimates for each tax
expenditure reflect changes in tax law, including phaseouts of
tax expenditure provisions and changes that alter the
definition of the normal income tax structure, such as the tax
rate schedule, the personal exemption amount, and the standard
deduction. Some of the estimates for this tax expenditure
report may differ from estimates made in previous years because
of changes in law and economic conditions, the availability of
better data, and improved estimating techniques.
Tax Expenditures versus Revenue Estimates
A tax expenditure estimate is not the same as a revenue
estimate for the repeal of the tax expenditure provision for
two reasons. First, tax expenditure estimates do not
incorporate any changes in taxpayer behavior, whereas revenue
estimates incorporate the effects of the behavioral changes
that are anticipated to occur in response to the repeal of a
tax provision. Second, tax expenditure estimates are concerned
with changes in the tax liabilities of taxpayers. Because the
tax expenditure focus is on tax liabilities as opposed to
Federal Government tax receipts, there is no concern for the
timing of tax payments. Revenue estimates are concerned with
changes in Federal tax receipts, which are affected by the
timing of tax payments.
If a tax expenditure provision were repealed, it is likely
that the repeal would be made effective at the beginning of a
calendar year. In this case, the revenue estimate for repeal
would show a smaller revenue gain in the first fiscal year than
in subsequent years, because the repeal would be occurring
after the start of the government's fiscal year. The revenue
estimate might also reflect some delay in the timing of the
revenue gains as a result of the taxpayer tendency to postpone
or forgo changes in tax withholding and estimated tax payments.
III. TAX EXPENDITURE ESTIMATES
Tax expenditures are grouped in Table 1 in the same
functional categories as outlays in the Federal budget.
Estimates are shown separately for individuals and
corporations. Those tax expenditures that do not fit clearly
into any single budget category have been placed in the most
appropriate category.
Several of the tax expenditure items involve small amounts
of revenue, and those estimates are indicated in Table 1 by
footnote 1. For each of these items, the footnote means that
the tax expenditure is less than $50 million in the fiscal
year.
Table 2 presents tax return information for each of nine
income classes on the number of all returns filed, the number
of all returns and taxable returns with itemized deductions,
and the amount of tax liability.
Table 3 provides distributional estimates by income class
for some of the tax expenditures that affect individual
taxpayers. Not all tax expenditures that affect individuals are
shown in this table because of the difficulty in making
reliable estimates of the income distribution of items that do
not appear on tax returns under present law.
Table 1.--Tax Expenditure Estimates By Budget Function, Fiscal Years 1999-2003
[Billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Corporations Individuals
Function ------------------------------------------------------------------------------------------ Total
1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 1999-2003
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Defense
Exclusion of benefits and allowances to Armed
Forces personnel................................ ....... ....... ....... ....... ....... 2.0 2.0 2.0 2.1 2.1 10.2
Exclusion of military disability benefits........ ....... ....... ....... ....... ....... 0.1 0.1 0.1 0.1 0.1 0.5
International Affairs
Exclusion of income earned abroad by U.S.
citizens........................................ ....... ....... ....... ....... ....... 1.9 2.0 2.2 2.3 2.5 10.9
Exclusion of certain allowances for Federal
employees abroad................................ ....... ....... ....... ....... ....... 0.2 0.2 0.2 0.2 0.2 1.0
Exclusion of income of foreign sales corporations
(FSCs).......................................... 1.8 1.9 2.0 2.1 2.2 ....... ....... ....... ....... ....... 10.0
Deferral of active income of controlled foreign
corporations.................................... 1.3 1.4 1.4 1.5 1.6 ....... ....... ....... ....... ....... 7.2
Inventory property sales source rule exception... 3.9 4.0 4.1 4.2 4.3 ....... ....... ....... ....... ....... 20.5
Footnotes at end of table.
Deferral of certain active financing income...... 0.2 0.3 ....... ....... ....... ....... ....... ....... ....... ....... 0.5
General Science, Space, and Technology
Tax credit for qualified research expenditures... 1.6 0.9 0.5 0.3 0.1 ....... ....... ....... ....... ....... 3.4
Expensing of research and experimental
expenditures.................................... 1.9 2.4 2.7 2.8 3.0 ....... ....... ....... ....... ....... 12.7
Energy
Expensing of exploration and development costs:
Oil and gas.................................... 0.4 0.4 0.4 0.5 0.5 (\1\) (\1\) (\1\) (\1\) (\1\) 2.2
Other fuels.................................... (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Excess of percentage over cost depletion:
Oil and gas.................................... 0.4 0.4 0.4 0.4 0.4 0.1 0.1 0.1 0.1 0.1 2.4
Other fuels.................................... 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 1.5
Tax credit for enhanced oil recovery costs....... (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.3
Tax credit for production of non-conventional
fuels........................................... 1.0 1.0 1.0 1.0 0.8 0.3 0.3 0.3 0.3 0.2 6.2
Tax credits for alcohol fuels (\2\).............. (\1\) (\1\) (\1\) (\1\) (\1\) ....... ....... ....... ....... ....... (\1\)
Exclusion of interest on State and local
government industrial development bonds for
energy production facilities.................... 0.1 (\1\) (\1\) (\1\) (\1\) 0.1 0.1 0.1 0.1 0.1 0.8
Exclusion of energy conservation subsidies
provided by public utilities.................... ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Tax credit for investments in solar and
geothermal energy facilities.................... (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.3
Tax credit for electricity production from wind
and biomass..................................... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.1 0.1 0.1 0.1 0.4
Natural Resources and Environment
Expensing of exploration and development costs,
nonfuel minerals................................ (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
Excess of percentage over cost depletion, nonfuel
minerals........................................ 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 1.5
Expensing of multiperiod timber-growing costs.... 0.1 0.1 0.2 0.2 0.2 (\1\) (\1\) (\1\) (\1\) (\1\) 0.9
Exclusion of interest on State and local
government sewage, water, and hazardous waste
facilities bonds................................ 0.2 0.2 0.2 0.2 0.2 0.4 0.5 0.5 0.5 0.5 3.4
Special rules for mining reclamation reserves.... (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
Exclusion of contributions in aid of construction
for water and sewer utilities................... (\1\) (\1\) (\1\) (\1\) (\1\) ....... ....... ....... ....... ....... 0.1
Agriculture
Expensing of soil and water conservation
expenditures.................................... (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
Expensing of fertilizer and soil conditioner
costs........................................... (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.1 0.1 0.3
Expensing of the costs of raising dairy and
breeding cattle................................. (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.2 0.2 0.2 0.2 0.9
Exclusion of cost-sharing payments............... (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Exclusion of cancellation of indebtedness income
of farmers...................................... ....... ....... ....... ....... ....... 0.1 0.1 0.1 (\1\) (\1\) 0.3
Cash accounting for agriculture.................. (\1\) (\1\) (\1\) (\1\) (\1\) 0.4 0.5 0.6 0.6 0.6 3.0
Income averaging for farmers..................... ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Five-year carryback period for net operating
losses attributable to farming.................. (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.1 0.1 (\1\) (\1\) 0.3
Commerce and Housing
Financial institutions:
Exemption of credit union income............... 0.9 0.9 1.0 1.0 1.1 ....... ....... ....... ....... ....... 4.8
Insurance companies:
Exclusion of investment income on life
insurance and annuity contracts............... 22.6 23.3 24.0 24.8 25.6 1.3 1.3 1.4 1.4 1.5 127.1
Small life insurance company taxable income
adjustment.................................... 0.1 0.1 0.1 0.1 0.1 ....... ....... ....... ....... ....... 0.7
Special treatment of life insurance company
reserves...................................... 1.3 1.4 1.4 1.5 1.5 ....... ....... ....... ....... ....... 7.1
Deduction of unpaid property loss reserves for
property and casualty insurance companies..... 3.3 3.4 3.4 3.5 3.5 ....... ....... ....... ....... ....... 17.1
Special deduction for Blue Cross and Blue
Shield companies.............................. 0.4 0.4 0.4 0.4 0.3 ....... ....... ....... ....... ....... 1.9
Footnotes at end of table.
Housing:
Deduction for mortgage interest on owner-
occupied residences........................... ....... ....... ....... ....... ....... 48.5 50.4 52.4 54.5 56.8 262.6
Deduction for property taxes on owner-occupied
residences.................................... ....... ....... ....... ....... ....... 17.8 18.4 19.1 19.7 20.3 95.3
Exclusion of capital gains on sales of
principal residences.......................... ....... ....... ....... ....... ....... 5.8 6.0 6.2 6.4 6.6 31.0
Exclusion of interest on State and local
government bonds for owner-occupied housing... 0.6 0.6 0.6 0.7 0.7 1.4 1.5 1.5 1.6 1.7 10.9
Exclusion of interest on State and local
government bonds for rental housing........... 0.3 0.3 0.3 0.3 0.3 0.7 0.8 0.8 0.8 0.8 5.4
Depreciation of rental housing in excess of
alternative depreciation system............... 0.2 0.2 0.2 0.2 0.2 1.6 1.5 1.5 1.6 1.7 8.6
Tax credit for low-income housing.............. 1.2 1.4 1.5 1.7 1.9 2.3 2.6 2.8 3.1 3.4 22.0
Tax credit for first-time homebuyers in the
District of Columbia.......................... ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) ....... ....... 0.1
Tax credit for rehabilitation of historic
structures.................................... 0.3 0.4 0.4 0.4 0.4 0.1 0.1 0.1 0.1 0.1 2.3
Other business and commerce:
Reduced rates of tax on long-term capital gains ....... ....... ....... ....... ....... 35.1 32.0 33.8 34.9 36.1 171.9
Exclusion of capital gains at death............ ....... ....... ....... ....... ....... 19.2 20.7 22.2 23.9 25.2 111.2
Carryover basis of capital gains on gifts...... ....... ....... ....... ....... ....... 1.9 2.1 2.3 2.5 2.7 11.5
Deferral of gain on non-dealer installment
sales......................................... 0.5 0.5 0.5 0.5 0.6 0.4 0.4 0.4 0.4 0.4 4.7
Deferral of gain on like-kind exchanges........ 0.4 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.3 0.3 3.5
Deferral of gain on involuntary conversions
resulting from Presidentially-declared
disasters..................................... ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Depreciation of buildings other than rental
housing in excess of alternative depreciation
system........................................ 1.9 1.5 1.2 1.2 1.1 0.9 0.7 0.5 0.5 0.4 9.9
Depreciation of equipment in excess of
alternative depreciation system............... 23.7 24.8 25.3 25.7 26.1 6.3 6.7 6.9 6.8 6.7 158.9
Expensing of depreciable business property..... 0.5 0.5 0.7 0.7 0.5 0.3 0.2 0.3 0.4 0.2 4.4
Amortization of business startup costs......... (\1\) (\1\) (\1\) (\1\) (\1\) 0.3 0.3 0.3 0.3 0.3 1.6
Reduced rates on first $10,000,000 of corporate
taxable income................................ 4.4 4.4 4.4 4.4 4.5 ....... ....... ....... ....... ....... 22.1
Permanent exemption from imputed interest rules (\1\) (\1\) (\1\) (\1\) (\1\) 0.2 0.2 0.2 0.2 0.2 1.1
Expensing of magazine circulation expenditures. (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
Special rules for magazine, paperback book, and
record returns................................ (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Completed contract rules....................... 0.2 0.2 0.2 0.2 0.2 (\1\) (\1\) (\1\) (\1\) (\1\) 1.1
Cash accounting, other than agriculture........ (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.1 0.1 0.1 0.1 0.6
Exclusion of interest on State and local
government small-issue industrial development
bonds......................................... 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2 1.3
Exception from net operating loss limitations
for corporations in bankruptcy proceedings.... 0.5 0.5 0.5 0.4 0.4 ....... ....... ....... ....... ....... 2.3
Tax credit for employer-paid FICA taxes on tips 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.3 0.3 2.1
Footnotes at end of table.
Transportation
Deferral of tax on capital construction funds of
shipping companies.............................. 0.1 0.1 0.1 0.1 0.1 ....... ....... ....... ....... ....... 0.5
Exclusion of employer-paid transportation
benefits........................................ ....... ....... ....... ....... ....... 3.5 3.6 3.6 3.7 3.7 18.1
Exclusion of interest on State and local
government bonds for high-speed rail............ (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.5
Community and Regional Development
Empowerment zone tax incentives.................. 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.2 0.1 0.1 1.8
District of Columbia tax incentives.............. 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.7
Indian reservation tax incentives................ 0.1 0.1 0.1 0.1 (\1\) 0.1 0.1 0.1 (\1\) (\1\) 0.8
Expensing of redevelopment costs in certain
environmentally contaminated areas
(``Brownfields'')............................... 0.1 0.1 0.1 (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.3
Tax credit for rehabilitation of structures,
other than historic structures.................. (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Exclusion of interest on State and local
government bonds for private airports, docks,
and mass-commuting facilities................... 0.3 0.3 0.3 0.4 0.4 0.7 0.8 0.9 0.9 1.0 6.1
Education, Training, Employment, and Social
Services
Education and training:
Tax credits for tuition for post-secondary
education..................................... ....... ....... ....... ....... ....... 5.6 6.4 6.2 6.2 6.2 30.6
Deduction for interest on student loans........ ....... ....... ....... ....... ....... 0.1 0.2 0.2 0.3 0.3 1.1
Exclusion of earnings of trust accounts for
higher education (``education IRAs'')......... ....... ....... ....... ....... ....... 0.3 0.5 0.5 0.6 0.7 2.6
Exclusion of interest on educational savings
bonds......................................... ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Deferral of tax on earnings of qualified State
tuition programs.............................. ....... ....... ....... ....... ....... 0.2 0.2 0.2 0.3 0.4 1.2
Exclusion of scholarship and fellowship income. ....... ....... ....... ....... ....... 0.9 1.0 1.0 1.1 1.2 5.3
Exclusion of employer-provided education
assistance benefits........................... ....... ....... ....... ....... ....... 0.2 0.2 0.2 0.2 0.2 1.1
Parental personal exemption for students age 19
to 23......................................... ....... ....... ....... ....... ....... 0.8 0.8 0.8 0.9 0.9 4.2
Exclusion of interest on State and local
government student loan bonds................. 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2 1.3
Exclusion of interest on State and local
government bonds for private nonprofit
educational facilities........................ 0.3 0.3 0.3 0.4 0.4 0.7 0.8 0.8 0.9 0.9 5.9
Tax credit for holders of qualified education
bonds......................................... (\1\) 0.1 0.1 0.1 0.1 ....... ....... ....... ....... ....... 0.3
Deduction for charitable contributions to
educational institutions...................... 1.0 1.1 1.2 1.4 1.5 2.8 2.9 3.1 3.3 3.5 21.8
Employment:
Exclusion of employee meals and lodging (other
than military)................................ ....... ....... ....... ....... ....... 0.7 0.8 0.8 0.8 0.9 4.0
Exclusion of benefits provided under cafeteria
plans (\3\)................................... ....... ....... ....... ....... ....... 4.3 4.5 4.9 5.3 5.7 24.6
Exclusion of housing allowances for ministers.. ....... ....... ....... ....... ....... 0.4 0.4 0.4 0.4 0.4 2.0
Exclusion of miscellaneous fringe benefits..... ....... ....... ....... ....... ....... 6.2 6.5 6.9 7.3 7.8 34.7
Exclusion of employee awards................... ....... ....... ....... ....... ....... 0.1 0.1 0.1 0.1 0.1 0.7
Exclusion of income earned by voluntary
employees' beneficiary associations........... ....... ....... ....... ....... ....... 0.5 0.5 0.6 0.6 0.6 2.8
Special tax provisions for employee stock
ownership plans (ESOPs)....................... 0.8 0.8 0.9 0.9 0.9 (\1\) (\1\) (\1\) (\1\) (\1\) 4.6
Work opportunity tax credit.................... 0.3 0.2 0.1 (\1\) (\1\) 0.1 (\1\) (\1\) (\1\) ....... 0.7
Welfare-to-work tax credit..................... (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) ....... ....... 0.1
Footnotes at end of table.
Social services:
Tax credit for children under age 17 (\4\)..... ....... ....... ....... ....... ....... 19.1 20.0 20.0 19.8 19.5 98.4
Tax credit for child and dependent care
expenses...................................... ....... ....... ....... ....... ....... 2.5 2.5 2.5 2.5 2.5 12.6
Exclusion of employer-provided child care (\5\) ....... ....... ....... ....... ....... 0.4 0.4 0.5 0.5 0.6 2.4
Exclusion of certain foster care payments...... ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.2
Adoption credit and employee adoption benefits
exclusion..................................... ....... ....... ....... ....... ....... 0.4 0.4 0.4 0.2 0.1 1.5
Deduction for charitable contributions, other
than for education and health................. 1.0 1.1 1.2 1.3 1.4 19.8 20.9 22.1 23.3 24.6 116.6
Tax credit for disabled access expenditures.... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.1 0.1 0.1 0.1 0.3
Health
Exclusion of employer contributions for health
care, health insurance premiums, and long-term
care insurance premiums (\6\)................... ....... ....... ....... ....... ....... 57.9 61.3 65.1 69.2 73.8 327.3
Exclusion of medical care and CHAMPUS/TRICARE
medical insurance for military dependents,
retirees, and retiree dependents................ ....... ....... ....... ....... ....... 1.5 1.6 1.6 1.6 1.6 7.9
Deduction for health insurance premiums and long-
term care insurance premiums by the self-
employed........................................ ....... ....... ....... ....... ....... 1.0 1.2 1.2 1.5 2.4 7.3
Deducation for medical expenses and long-term
care expenses................................... ....... ....... ....... ....... ....... 4.2 4.3 4.5 4.7 4.9 22.6
Exclusion of workers' compensation benefits
(medical benefits).............................. ....... ....... ....... ....... ....... 4.3 4.5 4.7 4.9 5.1 23.4
Medical savings accounts......................... ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Exclusion of interest on State and local
government bonds for private nonprofit hospital
facilities...................................... 0.5 0.6 0.6 0.7 0.7 1.3 1.5 1.5 1.6 1.7 10.8
Deduction for charitable contributions to health
organizations................................... 0.7 0.8 0.9 1.0 1.1 2.0 2.1 2.3 2.4 2.5 15.8
Tax credit for orphan drug research.............. (\1\) (\1\) (\1\) (\1\) (\1\) ....... ....... ....... ....... ....... 0.2
Medicare
Exclusion of untaxed medicare benefits:
Hospital insurance............................. ....... ....... ....... ....... ....... 14.7 15.2 15.9 16.8 17.8 80.4
Supplementary medical insurance................ ....... ....... ....... ....... ....... 7.2 8.0 9.1 10.4 11.8 46.5
Income Security
Exclusion of workers' compensation benefits
(disability and survivors payments)............. ....... ....... ....... ....... ....... 3.7 3.8 3.9 4.0 4.2 19.7
Exclusion of special benefits for disabled coal
miners.......................................... ....... ....... ....... ....... ....... 0.1 0.1 0.1 0.1 0.1 0.4
Exclusion of cash public assistance benefits..... ....... ....... ....... ....... ....... 0.5 0.5 0.5 0.5 0.5 2.5
Net exclusion of pension contributions and
earnings:
Employer plans................................. ....... ....... ....... ....... ....... 76.1 78.3 78.2 78.1 78.4 388.9
Individual retirement plans.................... ....... ....... ....... ....... ....... 11.4 12.4 13.1 14.2 15.5 66.6
Keogh plans.................................... ....... ....... ....... ....... ....... 4.8 5.1 5.2 5.4 5.7 26.1
Exclusion of other employee benefits:
Premiums on group term life insurance.......... ....... ....... ....... ....... ....... 2.0 2.0 2.1 2.2 2.3 10.5
Premiums on accident and disability insurance.. ....... ....... ....... ....... ....... 0.2 0.2 0.2 0.2 0.2 1.0
Additional standard deduction for the blind and
the elderly..................................... ....... ....... ....... ....... ....... 2.0 2.0 2.0 2.1 2.2 10.3
Tax credit for the elderly and disabled.......... ....... ....... ....... ....... ....... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1
Deduction for casualty and theft losses.......... ....... ....... ....... ....... ....... 0.3 0.3 0.3 0.3 0.4 1.6
Earned income credit (EIC) (\7\)................. ....... ....... ....... ....... ....... 4.2 4.3 4.5 4.6 4.7 22.3
Footnotes at end of table.
Social Security and Railroad Retirement
Exclusion of untaxed social security and railroad
retirement benefits............................. ....... ....... ....... ....... ....... 25.4 26.1 27.0 28.0 28.9 135.4
Veterans' Benefits and Services
Exclusion of veterans' disability compensation... ....... ....... ....... ....... ....... 2.0 2.1 2.2 2.2 2.3 10.8
Exclusion of veterans' pensions.................. ....... ....... ....... ....... ....... 0.1 0.1 0.1 0.1 0.1 0.6
Exclusion of GI bill benefits.................... ....... ....... ....... ....... ....... 0.1 0.1 0.1 0.1 0.1 0.5
Exclusion of interest on State and local
government bonds for veterans' housing.......... (\1\) (\1\) (\1\) (\1\) (\1\) 0.1 0.1 0.1 0.1 0.1 0.4
General Purpose Fiscal Assistance
Exclusion of interest on public purpose State and
local government debt........................... 4.2 4.8 4.9 5.2 5.6 10.4 11.7 11.9 12.8 13.8 85.3
Deduction of nonbusiness State and local
government income and personal property taxes... ....... ....... ....... ....... ....... 31.2 32.1 33.0 33.9 34.8 165.0
Tax credit for Puerto Rico and possession income. 3.6 3.8 4.0 3.6 3.2 ....... ....... ....... ....... ....... 18.2
Interest
Deferral of interest on savings bonds............ ....... ....... ....... ....... ....... 1.2 1.2 1.2 1.2 1.2 6.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Footnotes for Table 1:
\1\ Positive tax expenditure of less than $50 million.
\2\ In addition, the exemption from excise tax for alcohol fuels results in a reduction in excise tax receipts, net of income tax effect, of $0.5
billion in fiscal year 1999 and $0.6 billion per year in fiscal years 2000 through 2003.
\3\ Estimate includes amounts of employer-provided health insurance purchased through cafeteria plans and employer-provided child care purchased
dependent care flexible spending accounts. These amounts are also included in other line items in this table.
\4\ The figures in the table show the effect of the child credit on receipts. The increase in outlays is: $0.9 billion in 1999, $1.2 billion in 2000,
$1.2 billion in 2001, $1.2 billion in 2002, and $1.2 billion in 2003.
\5\ Estimate includes employer-provided child care purchased through dependent care flexible spending accounts.
\6\ Estimate includes employer-provided health insurance purchased through cafeteria plans.
\7\ The figures in the table show the effect of the earned income credit on receipts. The increase in outlays is: $25.6 billion in 1999, $26.2 billion
in 2000, $26.8 billion in 2001, $27.3 billion in 2002, and $27.9 billion in 2003.
Note: Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.
Table 2.--Distribution by Income Class of All Returns, Taxable Returns, Itemized Returns,
and Tax Liability at 1998 Rates and 1998 Law and 1998 Income Levels \1\
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
All returns Taxable Itemized
Income class [thousands] \2\ \3\ returns returns Tax liability
----------------------------------------------------------------------------------------------------------------
Below $10....................................... 19,763 1,388 110 -$5,401
$10 to $20...................................... 25,158 8,527 858 -6,186
$20 to $30...................................... 20,397 12,446 2,015 14,101
$30 to $40...................................... 16,189 12,860 3,258 29,025
$40 to $50...................................... 12,434 11,269 3,918 38,022
$50 to $75...................................... 19,469 19,167 9,711 99,413
$75 to $100..................................... 10,015 9,976 7,322 94,567
$100 to $200.................................... 8,383 8,367 7,240 164,726
$200 and over................................... 2,129 2,125 1,936 272,265
---------------------------------------------------------------
Total..................................... 133,938 86,125 36,367 $700,532
----------------------------------------------------------------------------------------------------------------
\1\ Tax law as in effect on January 1, 1998, is applied to the 1998 level and sources of income and their
distribution among taxpayers.
\2\ The income concept used to place tax returns into classes is adjusted gross income (AGI) plus: (a) tax-
exempt interest, (b) employer contributions for health plans and life insurance, (c) employer share of FICA
tax, (d) workers' compensation, (e) nontaxable Social Security benefits, (f) insurance value of Medicare
benefits, (g) alternative minimum tax preference items, and (h) excluded income of U.S. citizens living
abroad.
\3\ Includes filing and nonfiling units. Filing units include all taxable and nontaxable returns. Nonfiling
units include individuals with income that is exempt from Federal income taxation (e.g., transfer payments,
interest from tax-exempt bonds, etc.). Excludes individuals who are dependents of other taxpayers and
taxpayers with negative income.
Note: Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.
Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items,
at 1998 Rates and 1998 Income Levels \1\
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
Medical deduction \3\ Real estate tax deduction
Income class [thousands] \2\ ---------------------------------------------------------------
Returns Amount Returns Amount
----------------------------------------------------------------------------------------------------------------
Below $10....................................... 7 $2 9 $1
$10 to $20...................................... 170 49 373 59
$20 to $30...................................... 556 172 1,257 206
$30 to $40...................................... 827 352 2,405 498
$40 to $50...................................... 794 406 3,199 825
$50 to $75...................................... 1,424 934 8,452 2,803
$75 to $100..................................... 578 683 6,616 3,611
$100 to $200.................................... 306 830 6,668 5,682
$200 and over................................... 38 319 1,614 3,672
---------------------------------------------------------------
Total....................................... 4,701 $3,746 30,594 $17,358
----------------------------------------------------------------------------------------------------------------
Footnotes at end of table.
Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items,
at 1998 Rates and 1998 Income Levels \1\--Continued
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
State and local income and Charitable contributions
personal property tax deduction
Income class [thousands] \2\ deduction -------------------------------
--------------------------------
Returns Amount Returns Amount
----------------------------------------------------------------------------------------------------------------
Below $10....................................... 20 (\6\) 54 $4
$10 to $20...................................... 487 $20 930 113
$20 to $30...................................... 1,460 84 2,196 302
$30 to $40...................................... 2,833 299 3,187 598
$40 to $50...................................... 3,554 775 3,830 955
$50 to $75...................................... 9,201 2,925 9,221 3,511
$75 to $100..................................... 6,719 4,526 5,593 3,482
$100 to $200.................................... 6,594 8,721 5,151 5,223
$200 and over................................... 1,697 13,121 1,617 9,395
---------------------------------------------------------------
Total..................................... 32,565 $30,469 31,777 $23,583
----------------------------------------------------------------------------------------------------------------
Footnotes at end of table.
Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items,
at 1998 Rates and 1998 Income Levels \1\--Continued
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
Child care credit Earned income credit \4\
Income class [thousands] \2\ ---------------------------------------------------------------
Returns Amount Returns Amount
----------------------------------------------------------------------------------------------------------------
Below $10....................................... 3 (\6\) 4,976 $5,732
$10 to $20...................................... 346 $102 6,683 13,805
$20 to $30...................................... 935 389 5,279 7,543
$30 to $40...................................... 831 349 2,061 1,722
$40 to $50...................................... 718 296 160 145
$50 to $75...................................... 1,473 662 41 53
$75 to $100..................................... 804 391 (\5\) (\6\)
$100 to $200.................................... 531 267 -- --
$200 and over................................... 95 49 -- --
---------------------------------------------------------------
Total..................................... 5,738 $2,504 19,201 $29,000
----------------------------------------------------------------------------------------------------------------
Footnotes at end of table.
Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items,
at 1998 Rates and 1998 Income Levels \1\--Continued
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
Untaxed Social Security and Child tax credit \4\
Railroad Retirement benefits -------------------------------
Income class [thousands] \2\ --------------------------------
Returns Amount Returns Amount
----------------------------------------------------------------------------------------------------------------
Below $10....................................... 172 $30 19 $6
$10 to $20...................................... 3,977 1,664 1,676 545
$20 to $30...................................... 4,902 4,705 3,697 1,802
$30 to $40...................................... 4,467 5,783 4,125 2,775
$40 to $50...................................... 3,561 5,561 3,396 2,447
$50 to $75...................................... 4,228 5,768 7,322 5,339
$75 to $100..................................... 1,432 583 4,397 3,223
$100 to $200.................................... 1,312 320 2,131 1,369
$200 and over................................... 362 122 3 2
---------------------------------------------------------------
Total..................................... 24,411 $24,536 26,766 $17,508
----------------------------------------------------------------------------------------------------------------
Footnotes at end of table.
Table 3.--Distribution by Income Class of Selected Individual Tax Expenditure Items,
at 1998 Rates and 1998 Income Levels \1\--Continued
[Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
Mortgage interest deduction
Income class [thousands] \2\ -------------------------------
Returns Amount
----------------------------------------------------------------------------------------------------- -------------
Below $10............................................................ 14 $3
$10 to $20........................................................... 345 128
$20 to $30........................................................... 1,134 466
$30 to $40........................................................... 2,375 1,238
$40 to $50........................................................... 3,080 2,270
$50 to $75........................................................... 8,201 7,667
$75 to $100.......................................................... 6,538 10,029
$100 to $200......................................................... 6,306 15,739
$200 and over........................................................ 1,554 9,438
------------------------------------------
Total.......................................................... 29,548 $46,977
----------------------------------------------------------------------------------------------------------------
Footnotes for Table 3:
\1\ Excludes individuals who are dependents of other taxpayers and taxpayers with negative income.
\2\ The income concept used to place tax returns into classes is adjusted gross income (AGI) plus: (a) tax-
exempt interest, (b) employer contributions for health plans and life insurance, (c) employer share of FICA
tax, (d) workers' compensation, (e) nontaxable Social Security benefits, (f) insurance value of Medicare
benefits, (g) alternative minimum tax preference items, and (h) excluded income of U.S. citizens living
abroad.
\3\ Tax expenditure estimate does not include revenue losses attributable to deductions for long-term care and
long-term care insurance premiums.
\4\ Includes the refundable portion.
\5\ Less than 500 returns.
\6\ Less than $500,000.
Note: Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.
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