IV. JOINT COMMITTEE REVENUE ESTIMATION PROCESS

A. Overview of Revenue Estimating Responsibilities

The Joint Committee staff is nonpartisan and serves the entire Congress. The Congressional Budget

Act of 1974 ("the Budget Act"), as amended, stipulates that revenue estimates provided by the Joint

Committee staff will be the official estimates for all tax legislation considered by the Congress. The

objective of the estimating process is to produce accurate, consistent, fair, and impartial estimates

that can be relied upon by Members of Congress in making legislative decisions.

Any Member of Congress may request a revenue estimate for a tax proposal. In 1986, the Joint

Committee staff received 474 requests. By 2004, this figure had increased to 3,580. The largest

number of requests to date, 4,839, was received in 2003. While the majority of requests are for

revenue estimates, the Joint Committee staff also receives requests for distributional, legal, and data

analyses. All Requests are treated as confidential. Generally, a response to a request is released only

to the Member making the request and the response remains confidential unless the Member decides

to make the information public. Confidentiality allows the Joint Committee staff to maintain its

nonpartisan role in the legislative process.

When a revenue estimate has been included in a publicly available document (e.g., a revenue table

summarizing a markup proposal or the result of a reported bill), the estimate is posted to the Joint

Committee website. An estimate is also publicly released in circumstances where the information is

of widespread and immediate interest by the Members of Congress (e.g., a tax bill about to be voted

upon by the full House or the full Senate).

B. Background on Revenue Estimating and Budget Act Requirements

The starting point for a revenue estimate prepared by the Joint Committee staff is the Congressional

Budget Office ("CBO") 10-year projection of Federal receipts, referred to as the "revenue baseline."

The revenue baseline serves as the benchmark for measuring the effects of proposed tax law

changes. The baseline assumes that present law remains unchanged during the 10-year budget

period. Thus, the revenue baseline is an estimate of the Federal revenues that will be collected over

the next 10 years in the absence of statutory changes. The Joint Committee staff is required to use

the CBO revenue baseline in their revenue estimates.

In providing conventional estimates, the Joint Committee staff assumes that a proposal will not

change total income and therefore holds Gross National Product ("GNP") fixed. The use of fixed

economic assumptions does not prevent the Joint Committee staff from taking into account possible

shifts in economic activity across sectors or markets and/or changes in the timing of such activity in

response to the proposed tax change, so long as GNP remains unaffected.

The Joint Committee staff uses confidential tax return information to prepare revenue estimates. The

Statistics of Income Division ("SOI") of the IRS provides large micro-level data sets consisting of

carefully sampled and edited tax returns. SOI data provides the primary building block for revenue

estimates. In the process of estimating a proposal, other information sources are used frequently.

These sources include other government data, survey data, constituent data, and third-party data.

C. The Budget Window and Presentation of Estimates

The Joint Committee staff is required by the budget resolutions to present revenue estimates as point

estimates (that is, present one dollar figure rather than a range of possibilities) calculated in nominal

dollars. The current budget process also requires the Joint Committee staff to generate revenue

estimates of tax legislative proposals over a 10-year period, often referred to as the "budget

window." Revenue estimates for each year within the budget window are fiscal year estimates. The

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budget resolutions require revenue estimates to be expressed in nominal dollars over a fixed period.

D. Behavioral Effects in Revenue Estimates

Although conventional revenue estimates are sometimes referred to as "static," for more than a

quarter of a century, Joint Committee staff revenue estimates have taken into account taxpayers'

likely behavioral responses to proposed changes in tax law. Behavioral effects can be broadly

characterized as shifts in the timing of transactions and income recognition, shifts between business

sectors and entity form, shifts in portfolio holdings, shifts in consumption, and tax planning and

avoidance strategies. The report briefly presents a few specific examples that give a flavor for the

issues the Joint Committee staff considers when accounting for behavioral effects in revenue

estimates.

E. Compliance, Administration and Enforcement Costs

The Joint Committee staff attorneys, accountants, and economists working as a team examine

compliance, administration, and enforcement issues that could affect the timing or amounts of

revenues collected as part of the process of understanding how a proposal would operate. When

these issues are likely to be important to a proposal, the Joint Committee staff accounts for their

effects in the revenue estimate.

The Joint Committee staff uses a variety of sources to determine how compliance, administration,

and enforcement issues might affect revenue. IRS compliance studies provide information for issues

involving individual taxpayers. The Joint Committee staff also uses information provided by the IRS

about their examination, enforcement, appeal, and litigation activities. In some areas, such as tax

shelters, the Joint Committee staff is frequently briefed by IRS personnel. Information provided at

these meetings helps the Joint Committee staff gauge the likely compliance, administrative, and

enforcement effects of particular proposals.

F. Indirect Tax Effects

In estimating the revenue effects of proposed changes to tax law, the Joint Committee staff

incorporates the behavioral responses of taxpayers (within the fixed-GNP convention) and any

indirect tax effects associated with that behavior. These secondary effects are not the direct result of

tax changes. Instead, they arise from changes in taxable income induced by behavioral responses to

tax changes.

Indirect tax effects are not limited to changes in tax law, however. Non-tax legislation, either by

design or not, may cause changes in taxable income and thereby impact Federal tax receipts. The

CBO has responsibility for scoring the budget effects of non-tax legislation, and over time CBO has

developed general guidelines for when indirect tax effects are scored and by whom (often in

consultation with the Joint Committee staff). Regardless of whether CBO or the Joint Committee

staff scores the indirect tax effects, to the extent that these effects are accounted for they are included

with the estimate of the bill.

G. Offsets in Revenue Estimates

In estimating the revenue effects of changes in excise taxes, the Joint Committee staff (along with

staff at CBO and Treasury's Office of Tax Analysis) generally assumes that the net effect on total

Federal tax receipts from an increase in Federal excise taxes is less than the increase in gross excise

tax receipts. The difference between the change in excise tax receipts and the change in total Federal

tax receipts is referred to as the "income and payroll tax offset." The difference arises from the fact

that an increase (decrease) in excise taxes results in a decrease (increase) in income subject to

Federal income and payroll taxation. The existence of the income and payroll tax offset for excise

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taxes has become an established, generally accepted component of revenue estimates for excise

taxes. In addition to the offset for excise taxes, the report discusses the income and payroll tax offset

used in estimating the effects of changes in payroll taxes.

H. Distributional Analysis

Distributional analysis is not a legally required task of the Joint Committee staff. However, upon

request of Members or committee staff, distributions of certain tax changes are provided as

background information. The Joint Committee staff has produced distributional analyses since the

early 1970s. The current distribution methodology dates to 1994. Under this method, the Joint

Committee staff provides a distribution by current income group, when sufficient information is

available, for legislation affecting the individual income tax, Social Security and Medicare payroll

taxes, and excise taxes. The current methodology does not distribute corporate income taxes and

estate and gift taxes.

The measure used in the distributional analysis is the change in liability (taxes paid) for the taxable

year. Liability is measured, whenever possible, after any behavioral response related to the tax

change. Compliance issues are also taken into account in the measurement of liability.

The basic unit of analysis is the tax filing unit or return. Changes in tax liability are distributed to

taxpayers according to their expanded income. This income classifier begins with Federal adjusted

gross income and adds tax-exempt interest, employer contributions for life and health insurance,

employer share of Social Security and Medicare payroll tax, workers' compensation, untaxed Social

Security benefits, insurance value of Medicare benefits, alternative minimum tax preference items,

and excluded income of U.S. citizens living abroad. Yearly distributions in nominal dollars are

provided for the first five years of the 10-year budget window.

I. Tax Models

The Joint Committee staff uses several highly developed microsimulation tax models to estimate the

revenue impact of changes in tax laws. These are the Individual Model, the Corporate Model, and the

Estate and Gift Model. In addition, the staff is beginning to use individual panel-based models. The

primary source of tax data for the models comes from the SOI division within the IRS. Some of the

models use large micro-data files, while others are smaller and spreadsheet based. Some models

reside on a desktop computer, while others reside on "servers" and are simultaneously available to

several staff members. The complexity and scope of a model are determined by several factors

including the amount and type of data available, the level of interest in the model, and the level of

complexity associated with the questions being asked of the model.

J. Technical Corrections

From time to time enacted tax legislation may not exactly reflect the intent of the legislators. When

this occurs, legislators may seek a technical correction to fix the statutory language. The Joint

Committee staff does not provide estimates of the revenue effect of technical corrections. This

convention stems from the view that the original revenue estimate reflects the intent of the

legislation. Therefore, an estimate of the correcting provision would be a double counting of the

effect of the original policy.

K. Pamphlets on Revenue Estimating Methodologies

An overview of the current procedures used in the revenue estimating process is provided in Joint

Committee on Taxation, Overview of Revenue Estimating Procedures and Methodologies Used by

the Staff of the Joint Committee on Taxation, (JCX-1-05), February 2, 2005. The report provides a

summary of the revenue estimating responsibilities of the Joint Committee staff; discusses

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requirements, constraints, and conventions of the revenue estimating process; and presents the

estimating procedures and models used by the Joint Committee staff in preparing revenue estimates.

The emphasis is solely on methodology and issues associated with the preparation of conventional

revenue estimates of proposed changes to the Internal Revenue Code.

See Joint Committee on Taxation, Overview of Work of the Staff of the Joint Committee on

Taxation to Model the Macroeconomic Effects of Proposed Tax Legislation to Comply with House

Rule X111.3.(h)(2), (JCX-105-03), December 22, 2003, for a discussion of how the Joint Committee

staff provides supplemental macroeconomic analysis of certain tax proposals.

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