General Explanations 

of the 

President's Budget Proposals 

Affecting Receipts 

Department of the Treasury 

January 1990 

CONTENTS 

Page 

Capital Gains Tax Rate Reduction for Individuals .......... 1 

Family Savings Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 

Penalty-Free IRA Withdrawals for First-Time Home Buyers ... 15 

Permanent Research and Experimentation Tax Credit......... 17 

Research and Experimentation Expense Allocation Rules ..... 21 

Energy Tax Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 

Enterprise Zone Tax Incentives .......... .................. 31 

New Child Tax Credit and Refundable Child and 

Dependent Care Tax Credit .•....•.....•.................• 33 

Deductions for Special Needs Adoptions . . . . . . . . . . . . . • . . . . . . 37 

Low-Income Housing Tax Credit ............................. 41 

Extend Special Rules for Health Insurance Costs of 

Self-Employed Individuals ............................... 43 

Extend Social Security Retirement Coverage to 

State and Local Employees not Participating in 

Public Employee Retirement.............................. 45 

Medicare Hospital Insurance (HI) for State and Local 

Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 

Airport and Airway Trust Fund............................. 49 

Extension of the Communications (Telephone) Excise Tax 51 

Treatment of Salvage Value by Property and Casualty 

Insurance Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 

Payroll Tax Deposit Stabilization ......................... 55 

Permit Limited Use of Excess Pension Funds to Pay 

Retiree Health Benefits ................................. 59 

Initiate IRS Management Reforms ........................... 61 

Increase in IRS FY 1991 Enforcement Funding............... 63 

Miscellaneous Proposals Affecting Receipts ................ 65 

CAPITAL GAINS TAX RATE REDUCTION FOR INDIVIDUALS 

The Administration proposes that the capital gains tax rate 

for individuals be reduced on long-term investments by enacting 

a sliding scale exclusion for long-term capital gains. The proposal provides for a 10, 20, or 30 percent exclusion for longterm capital gains on assets held by individual taxpayers for 

one, two or three years, respectively. The three year holding 

period requirement will be phased in over three years. 

The reduction in capital gains taxes would benefit all 

Americans by providing incentives for saving and investment that 

will result in higher national output and more jobs. 

Current Law 

Under current law, capital gains of individuals are taxed at 

the same rates as ordinary income. Capital gains are thus 

generally subject to a 15 percent, 28 percent, or 33 percent 

marginal tax rate. When capital gains taxes interact with other 

provisions in the income tax code, such as the floors under 

itemized deductions for medical and miscellaneous expenses, the 

phase-outs of IRA deductions, and the exclusion of Social 

Security income, the marginal tax cost of an asset may be even 

higher in some cases. 

While the Tax Reform Act of 1986 eliminated the capital gains 

exclusion, it did not eliminate the legal distinction between 

capital gains and ordinary income or between short-term and 

long-term capital gains. Capital assets include any property 

except inventories or other items held for sale in the ordinary 

course of business, depreciable and real property used in a trade 

or business, copyright, literary, musical and artistic compositions, and certain other listed assets. Examples include real 

estate and antiques. Gains or losses from the sale or exchange 

of capital assets held for one year or longer are classified as 

long-term capital gains or losses. 

Individuals with capital losses exceeding capital gains may 

generally apply up to $3,000 of such losses as a deduction 

against ordinary income. A net capital loss in excess of the 

deduction limitation may be carried forward. Special rules allow 

individuals to treat losses of up to $50,000 ($100,000 on a joint 

return) with respect to stock in certain small business corporations as ordinary losses without regard to the $3,000 limit. 

Depreciation recapture rules recharacterize a portion of 

capital gains on depreciable property as ordinary income. These 

rules vary for different types of depreciable property. For 

personal property, all previously allowed depreciation not in 

excess of the realized capital gain is generally recaptured as 

ordinary income. For real property using straight-line depreciation, there is no depreciation recapture if the asset is held 

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at least one year. For real property acquired before 1987, 

generally only the excess of the depreciation claimed in excess 

of depreciation as calculated under the straight-line method is 

recaptured as ordinary income. There are also recapture rules 

applicable to the disposition of depletable property and to 

certain other assets. 

Capital gains and losses are generally taken into account 

when "realized" upon the sale, exchange, or other disposition of 

the asset. Certain dispositions of capital assets, such as 

transfers by gift, are not generally realization events for 

income tax purposes. In general, in the case of gifts, the donor 

does not realize gain or loss and the donor's basis in the 

property carries over to the donee. In certain cases, such as 

the gift of a bond with accrued market discount or of property 

that is subject to indebtedness in excess of the donor's basis, 

the donor may recognize ordinary income upon making a gift. The 

capital gain in a charitable contribution of appreciated property 

is included as a preference item in calculating the alternative 

minimum tax. Gain or loss is not realized on a transfer at 

death, and the beneficiary's basis in the inherited asset is 

generally the fair market value of the asset at (or near) the 

date of death. 

Reasons for Change 

Restoring a capital gains tax rate differential is essential 

to promote savings, entrepreneurial activity, and risky investment in new products, processes, and industries that will help 

keep America competitive and economically strong. At the same 

time, investors should be encouraged to extend their horizons and 

search for investments with longer-term growth potential. The 

future competitiveness of this country requires a sustained flow 

of capital to innovative, technologically advanced activities 

that may generate minimal short-term earnings but promise strong 

future profitability. A preferential tax rate limited to longerterm commitments of capital will encourage business investment 

patterns that favor innovations and long-term growth over shortterm profitability. The resulting increase in national output 

would benefit all Americans by providing jobs and raising living 

standards. 

In addition to the improvements in productivity and economic 

growth, a lower rate on long-term capital gains would also 

improve the fairness of the individual income tax by providing a 

rough adjustment for the taxation of inflationary gains that do 

not represent any increase in real income. In addition, it 

provides relief from the double taxation of investments in 

corporate stock. 

Incentives for Longer-Range Investment. A capital gains 

preference has long been recognized as an important incentive for 

capital investment. The first tax rate differential for capital 

gains in this country was introduced by the Revenue Act of 1921. 

For the next 65 years there was always some tax rate differential 
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for long-term capital gains. The preferential treatment for 

capital gains has taken various forms including an exclusion of a 

fixed portion of the nominal gains, an exclusion that depended on 

the length of time a taxpayer held an asset, and a special maximum tax rate for capital gains. But at no time after 1921 and 

before 1987 were long-term capital gains ever taxed at the same 

rates as ordinary income. Figure 1 shows that the average effective tax rate on realized capital gains is now higher than it has 

ever been. 

By eliminating the capital gains exclusion and lowering tax 

rates on ordinary income, the 1986 Act increased the incentives 

for short-term trading of capital assets. This occurred because 

the tax rate on long-term capital gains was increased while the 

tax rate on short-term capital gains was reduced. By providing 

for a sliding scale exclusion that provides full benefits only 

for investments held at least 3 years after a phase-in period, 

the proposal will reduce the incentive for short-term trading. 

The Cost of caeital and International Comretitiveness. The 

capital gains tax 1s an important component o the cost of 

capital, which measures the pre-tax rate of return required to 

induce businesses to undertake new investment. Evidence suggests 

that the cost of capital in the United States is higher than that 

in many other industrial nations. While not solely responsible 

for the higher cost of capital, high capital gains tax rates hurt 

the ability of U.S. firms to obtain the capital needed to remain 

competitive. By reducing the cost of capital, a reduction in the 

capital gains tax rate will stimulate productive investment and 

create new jobs and growth. 

Our major trading partners already recognize the economic 

importance of low tax rates on capital gains. Virtually all 

other major industrial nations provide lower tax rates on capital 

gains (or do not tax capital gains at all). Canada, France, 

Germany, Japan, the Netherlands, and the United Kingdom (among 

others), all treat capital gains preferentially. 

The Lock-In Effect. Under a tax system in which capital 

gains are not taxed until realized by the taxpayer, a substantial 

tax on capital gains tends to lock taxpayers into their existing 

investments. Many taxpayers who would otherwise prefer to sell 

their assets to acquire new better investments may instead continue to hold onto the assets rather than pay the current high 

capital gains tax on their accrued gains. 

This lock-in effect of capital gains taxation has at least 

three adverse effects. First, it produces a misallocation of the 

nation's capital stock and entrepreneurial talent because it 

alters the investment decisions that would be made in a genuinely 

free market. For example, the lock-in effect reduces the ability 

of entrepreneurs to withdraw from an enterprise and use the funds 

to start new ventures. Productivity in the economy suffers 

because entrepreneurs are less likely to move to where they can 
FIGURE 1. 

AVERAGE EFFECTIVE TAX RATE ON CAPITAL GAINS 

1964-1987 

Percent 

I 

24 

22 

20 

18 

16 

14 

12 

10 

65 67 69 71 73 75 77 79 81 83 85 87 

Department of the Treasury 

Office of Tax Analysis 

Years 

January 1990 

I 

A 

I 
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be most productive, and because economic resources may be used in 

a less productive fashion rather than transferred to other, more 

efficient, enterprises. These effects can be especially critical 

for smaller firms, which may not have good access to capital 

markets and where ownership and operation frequently go together. 

Second, the lock-in effect produces distortions in the investment 

portfolios of individual taxpayers. For example, some individual 

investors may be induced to assume more risk than they desire 

because they are reluctant to sell appreciated investments to 

diversify their portfolios. Third, the lock-in effect reduces 

government receipts. To the extent that taxpayers defer sales of 

existing investments, or hold onto investments until death, taxes 

that might otherwise have been paid are deferred or avoided 

altogether. Therefore, individual investors, the government, and 

other taxpayers lose from the lock-in effect. The investor is 

discouraged from pursuing more attractive investments and the 

government loses revenue. 

Substantial evidence from more than a dozen studies 

demonstrates that high capital gains tax rates in previous years 

produced significant lock-in effects. The importance of the 

lock-in effect may also be demonstrated by the fact that realized 

capital gains were 16 percent lower under the high tax rates in 

1987 than under the lower rates in 1985, even though stock prices 

had risen by approximately 50 percent over this period. The high 

tax rates on capital gains under current law imply that the lockin effect is greater than at any prior time. (See Figure 1). 

Penalty on High Risk Investments. Full taxation of capital 

gains, in combination with limited deductibility of capital 

losses, discourages risk-taking. It therefore impedes investment 

in emerging high-technology and other high-growth firms. While 

many investors are willing to take risks in anticipation of an 

adequate return, fewer are willing to contribute "venture 

capital" if a significant fraction of the increased reward will 

be used merely to satisfy higher tax liabilities. A tax system 

that imposes a high tax rate on gains from the investment reduces 

the attractiveness of risky investments, and may result in many 

worthwhile projects not being undertaken. 

In particular, it is inherently more risky to start new firms 

and invest in new products and processes than to make incremental 

investments in existing firms and products. It is therefore the 

most dynamic and innovative firms and entrepreneurs that are the 

most disadvantaged by the current high capital gain tax rates 

that penalize risk-taking. Such firms have traditionally been 

contributors to America's edge in international competition and 

have provided an important source of new jobs. 

Double Tax on Corporate Stock Investments. Under the u.s. 

income tax system, income earned on investments in corporate 

stock is generally subjected to two layers of tax. Income on 

corporate investments is taxed first at the corporate level at a 

rate of 34 percent. Corporate income is taxed a second time at 
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the individual level in the form of taxes on capital gains and 

dividends at rates ranging from 15 to 33 percent. The combination of corporate and individual income taxes thus can produce 

effective tax rates that are substantially greater than individual income tax rates alone. To the extent the return to the 

investor is obtained through appreciation in the value of the 

stock (rather than through dividend income), a reduction in 

capital gains tax rates provides a form of relief from this 

double taxation of corporate income. While a lower capital gains 

tax rate reduces the cost of capital for both corporate and noncorporate business, the greater liquidity of shares in publiclytraded companies suggests that the overall effect would be to 

reduce the bias towards noncorporate business' that results from 

our dual-level tax system. 

Description of Proposal 

General Rule. The capital gains tax rate will generally be 

lower than the tax rate on ordinary income. Individuals would be 

allowed to exclude a percentage of the capital gain realized upon 

the disposition of qualified capital assets. The amount of the 

exclusion would depend on the holding period of the assets. 

Assets held 3 years or more would qualify for an exclusion of 30 

percent. Assets held at least 2 years but less than 3 years 

would qualify for a 20 percent exclusion. Assets held at least 1 

year but less than 2 years would qualify for a 10 percent exclusion. As a result of the exclusion, the tax rate applicable to 

capital gains on qualified assets held for at least 3 years would 

be 19.6 percent for a taxpayer in the 28 percent tax bracket. 

Similarly, investments held by such taxpayer between 2 and 3 

years would be taxed at a 22.4 percent rate, and assets held 

between 1 and 2 years would be taxed at a 25.2 percent rate. 

Individuals in the 15 percent tax bracket would pay proportionally lower rates of tax (13.5 percent, 12.5 percent, and 10.5 

percent, respectively). 

Qualified assets would generally be defined as any assets 

qualifying as capital assets under current law and satisfying 

the holding period requirements, except for collectibles. Collectibles are assets such as works of art, antiques, precious 

metals, gems, alcoholic beverages, and stamps and coins. Assets 

eligible for the exclusion would include, for example, corporate 

stock, manufacturing and farm equipment, a home, an apartment 

building, a stand of timber, or a family farm. 

Phase-in Rules and Effective Dates. The proposal would be 

effective generally for dispositions of qualified assets after 

the date of enactment. For the balance of 1990, the full 30 

percent exclusion would apply to assets held at least one year. 

For dispositions of assets in 1991, assets would be required to 

have been held for 2 years or more to be eligible for the 30 

percent exclusion, and at least one year but less than 2 years to 

be eligible for the 20 percent exclusion. For dispositions of 

assets in 1992 and thereafter, assets would be required to have 
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been held at least 3 years to be eligible for the 30 percent 

exclusion, at least 2 years but less than 3 years for the 20 

percent exclusion and at least 1 year but less than 2 years for 

the 10 percent exclusion. 

Additional Provisions. The excluded portion of capital gains 

would be added back in when calculating income under the alternative minimum tax. Installment sale payments received after the 

effective date will be eligible for the exclusion without regard 

to the date the sale actually took place. For purposes of the 

investment interest limitation, only the net capital gain after 

subtracting the excluded amount would be included in investment 

income. 

Depreciation deductions taken with respect to all depreciable 

property would be recaptured in full as ordinary income. This 

provision prevents taxpayers from benefiting from the exclusion 

provision for depreciation deductions that have already been 

claimed in prior years. To the extent that depreciable assets 

have increased in value above their unadjusted basis, taxpayers 

would be able to benefit from the exclusion. 

Examples of the Effects of the Proposal 

Example A. Taxpayer A is a single individual earning $16,000 

whose mutual fund investments have a reported long-term capital 

gain of $500 in 1990. 

Under current law, her tax on the $500 capital gain would be 

15 percent of the full $500 gain or $75.00. 

Under the proposal, her tax would be reduced to $52.50 which 

is 15 percent of $350 ($500 less 30 percent exclusion). 

Exam~le B. Example B is a two-earner couple with combined 

taxable 1ncome other than capital gains of $90,000. In 1992 

they sell corporate stock, realizing a $1,500 capital gain on 

stock held 15 months and a $2,300 capital gain on stock held 5 

years. 

Under current law both gains are subject to full taxation at 

an effective tax rate of 33 percent. Tax on the $1,500 gain 

would be $495 and tax on the $2,300 gain would be $759, for a 

combined tax of $1,254. 

Under the proposal, the gain from the sale of stock held 15 

months would eligible for a 10 percent exclusion and the stock 

held 5 years would be eligible for a 30 percent exclusion. The 

tax on the stock held 15 months would be $445.50 and the tax on 

the stock held 5 years would be $531.30 for a combined tax of 

$976.80, 22 percent lower than under current law. 

Example C. Taxpayer C is the founder of a five year old 

computer software company who would like to sell the company in 

order to start a new company making a new product. Taxpayer C 
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has a salary of $180,000 and $20,000 in dividend and interest 

income. Taxpayer C sells the stock in the computer software 

company for $2 million, resulting in a capital gain of $1.8 

million after deduction of the $200,000 cost basis. 

Under current law, Taxpayer C would pay a capital gains tax 

of 28 percent, or $504,000, leaving him with net proceeds of 

$1,496,000 from the sale of the company. 

Under the proposal, the capital gains tax would be $352,800 

or 28 percent of $1,260,000 ($1,800,000 less 30 percent exclusion). The net proceeds from the selling the company would now 

be $1,647,000. Taxpayer c has an additional $151,200 that can be 

invested in the new business. 

Issues Raised by Critics 

Criticism of a reduction in capital gains tax rates has 

centered on two main issues: the benefits to high income taxpayers and the effects on tax reform. 

A number of tables have been published which show that the 

benefits of a reduction in capital gains tax rates would go 

primarily to high-income taxpayers. These tables often classify 

taxpayers by their total current income, including capital gains. 

This has the effect of counting middle-income taxpayers who 

realize a one-time capital gain (such as the sale of their home) 

as "high-income", thereby overstating the concentration of 

capital gains in high-income classes. The tables imply that the 

benefits of a capital gains tax reduction are highly skewed 

toward high-income taxpayers. Because they own more capital 

assets, many high-income taxpayers will clearly benefit from 

lower capital gains taxes. They do not, however, represent the 

largest group of beneficiaries. In a typical year, 15 million 

tax returns (representing approximately 25 million taxpayers) 

report income from the sale of capital assets. Furthermore, it 

is estimated that nearly one half of all taxpayers report capital 

gains in one year or another during their life. 

It is widely agreed that taxpayers will increase their level 

of realizations of capital gains in response to a reduction in 

capital gains tax rates. Our analysis shows that this increase 

in realizations is sufficiently large that more taxes will be 

paid in response to the Administration's proposed capital gains 

tax reduction. Thus, high-income taxpayers will pay more taxes 

following the reduction in capital gains tax rates. Further, the 

best available evidence indicates that high-income taxpayers are 

more responsive to reductions in capital gains tax rates than are 

lower-income taxpayers. This means that the share of total 

income taxes paid by higher-income taxpayers will also increase 

in response to a reduction in capital gains tax rates. 
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A capital gains tax reduction is likely to be a "win-win" 

situation for taxpayers at all income levels. High-income 

taxpayers are better off because of the lower capital gains tax 

rates, even though they actually pay more in taxes. Lower and 

middle-income taxpayers are also better off because of lower 

taxes on the capital gains which they realize, but in addition 

will benefit from the deficit reduction and programs that can be 

funded by the additional capital gains tax revenues. All 

taxpayers also benefit from the enhanced economic productivity 

and growth which results from a reduction in capital gains tax 

rates. The benefit to the u.s. economy is the most important 

issue with respect to a capital gains tax reduction, and these 

benefits are shared by all. 

Another criticism of a capital gains rate cut is that a lower 

rate for capital gains would threaten tax reform and result in a 

new proliferation of tax shelters. Prior to tax reform, 60 

percent of long-term capital gains on assets held at least 6 

months were excluded. Under the new Administration proposal, the 

maximum exclusion rate is 30 percent. Because of the smaller 

exclusion rate, depreciation recapture, and the alternative 

minimum tax, there is little danger of a resurgence of tax 

shelters. In addition, other rule changes under tax reform, such 

as the limits on the deduction of passive losses, also protect 

the tax system against tax shelter abuses. 

Revenue Estimates 

Capital gains realizations are highly volatile over time in 

response to changes in stock prices and general economic conditions. All Treasury revenue estimates of capital gains since 

1978 have taken into account expected changes in taxpayer 

behavior. In particular, taxpayers are assumed to adjust their 

purchases and sales of capital assets and their other income 

sources in response to the new tax rules. 

These behavioral effects are the subject of continued 

empirical research. Treasury's Office of Tax Analysis 

incorporates all effects believed to be important and presents 

its best estimate of the expected effects. The proposal is 

expected to increase Treasury receipts as compared to current law 

receipts due to increased realizations. The revenue estimates 

noted below assume a March 15, 1990 effective date. The increase 

in revenues is expected to be greatest in fiscal year 1991 due to 

the unlocking of existing capital gains, and smaller thereafter. 

All of the expected changes in revenues are modest in comparison 

to the magnitude of the expected annual capital gains tax 

revenues (slightly in excess of $40 billion). 

These estimates do not include the effects of potential 

increases in long-run economic growth expected from a lower 

capital gains tax rate. This conforms to the standard budget and 

revenue estimating practice of assuming that the macroeconomic 

effects of revenue and spending proposals are already included in 

the economic forecast. 
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Even under these restrictive revenue estimating conventions, 

Treasury's projections indicate that the Administration proposal 

would produce increased revenues not only through the budget 

period, but for the foreseeable future. It is important to note 

that a lower capital gains tax rate should stimulate additional 

investment. Such increases in the overall economy would generate 

additional capital gains revenue in the longer term. 

Fiscal Years 

Total 

1990-

1990 1991 1992 1993 1994 1995 1995 

Capital gains tax 

rate reduction: 0.5 4.9 

(Billions of Dollars) 

2.8 1.2 1.7 1.4 12.5 
FAMILY SAVINGS ACCOUNTS 

Current Law 

of Investment Income and Savin . Investment income 

earne 1v1 ua taxpayer 1s genera y subject to tax. 

The funds saved out of each year's income, which are used to make 

additional deposits to savings or other investment accounts, 

additional purchases of stocks or bonds, or to acquire other 

investments, are generally not deductible in calculating taxable 

income. The major exception is the tax treatment of retirement 

savings, for which contributions are generally deductible and 

investment earnings are excludable from income, and thus not 

taxed, until distributed. 

Individual Retirement Accounts. The current law for 

Individual Retirement Accounts (IRAs) grants married taxpayers 

who do not participate in a qualified retirement plan or who have 

adjusted gross incomes (AGI) below $50,000 the right to make 

deductible contributions to an IRA. There is a lower income 

threshold of $35,000 if the taxpayer is unmarried (or is married 

but does not file a joint return). The deductibility of contributions for taxpayers participating in a qualified retirement 

plan is phased out as their AGI ranges from the last $10,000 

below the income threshold to the threshold. Taxpayers who do 

participate in a qualified retirement plan and who have adjusted 

gross incomes above these thresholds may make only nondeductible 

contributions to an IRA. Both deductible and nondeductible IRA 

contributions are limited to the lesser of $2,000 or the 

individual's compensation for the year. 

Married individuals who both work and otherwise qualify may 

each contribute to an IRA, so if both have compensation of $2,000 

or more, they may jointly contribute $4,000 to an IRA. If only 

one spouse works, qualifying married individuals also have the 

opportunity to contribute an additional $250 to a spousal IRA for 

the nonworking spouse. The limit on deductible contributions to 

a spousal IRA is proportionately reduced for adjusted gross 

incomes in the applicable phase-out ranges. 

Withdrawals from an IRA prior to age 59-1/2 are generally 

subject to a 10 percent additional tax. Except for distributions 

of amounts which were not deductible when contributed, IRA 

withdrawals are subject to regular income tax, and withdrawals 

must begin by age 70-1/2. 

Deductible IRAs effectively exempt investment income from 

taxation. (The income tax imposed on withdrawals merely 

recaptures the tax saved from deducting the contribution, plus 

interest on that tax savings; the investment income itself is 

exempt from tax.) This favorable tax treatment provides an 

incentive to save; IRAs are designed to provide this incentive 

specifically for retirement savings. The tax exemption of 

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investment income is also a feature of 401(k) and similar retirement plans. Nondeductible IRAs allow only a deferral of taxes on 

investment income, not an exemption. 

Reasons For Change 

There is general concern that the rate of national saving and 

investment is too low relative to that needed to sustain future 

growth and to maintain our relative economic position in comparison with the performance of other industrial nations. Addressing 

this problem requires that both public dissaving (the budget 

deficit) be reduced, and that private saving be increased. 

Incentives provided by the proposed Family Savings Accounts will 

provide an important incentive to encourage private saving. 

The availability of tax exempt savings accounts in the form 

of IRAs was sharply curtailed by the Tax Reform Act of 1986, 

which resulted in a large decline in IRA participation. Prior to 

the Act, any individual under the age of 70-1/2 could make deductible contributions, up to the current limits, to an IRA. One of 

the goals of the current proposal is to restore, and in several 

ways expand, the availability and attractiveness of tax exempt 

saving to a large segment of the population. 

An additional goal of the current proposal is to expand 

savings incentives to income that is saved for other than retirement purposes, while not eroding incentives for retirement 

saving. The proposal recognizes that individuals save for many 

reasons: for down-payments on homes, for educational expenses, 

for large medical expenses, and as a hedge against uncertain 

income in the future. 

Description of Proposal 

The Family Savings Account (FSA) differs from a deductible 

current law IRA in two respects: the contributions are not 

deductible, but if the account is maintained for at least seven 

years, neither the contributions nor the earnings are taxed when 

withdrawn. As in the case of IRAs, the income would not be taxed 

when earned. The proposal would allow individuals (other than 

dependents) to make nondeductible contributions to a FSA of the 

lesser of $2,500 or the individual's compensation for the year. 

Contributions would be allowed for single filers with adjusted 

gross income (AGI) less than $60,000, for heads of households 

with AGI less than $100,000, and for married taxpayers filing 

joint returns with AGI less than $120,000. Contributions to FSAs 

would be allowed in addition to contributions to current law 

qualified pension plans, IRAs, 401(k) plans, and other 

tax-favored forms of saving. 

Earnings on contributions retained in the FSA for at least 

seven years would be eligible for full tax exemption upon 

withdrawal. However, withdrawals of earnings allocable to contributions retained in the FSA for less than three years would be 
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subject to both a 10 percent excise tax penalty and to income 

tax. Withdrawals of earnings allocable to contributions retained 

in the FSA for three to seven years would be subject only to 

income tax. The effective date would be January 1, 1990. 

Effects of the Proposal 

The proposal would increase the total amount 

saving that can earn tax free investment income. 

individuals would be able to contribute to FSAs, 

plans, and similar tax-favored plans and receive 

the investment income from each source. 

of individual 

Generally, 

IRAs, 40l(k) 

tax exemption on 

The ability to contribute to an FSA would significantly raise 

the total amount of allowable contributions to tax-favored 

savings accounts. The contribution limit is $5,000 for joint 

return filers as compared to the $4,000 IRA limit for a working 

couple with sufficient compensation. These higher total contribution limits will provide additional marginal incentives for 

personal saving. The higher eligibility limits on FSAs also 

expand the incentives to more taxpayers. 

Despite the difference in structure, the value of the tax 

benefits in present value of an FSA per dollar of contribution is 

equivalent in terms of its tax treatment to the value of current 

law deductible IRAs, assuming that tax rates are constant over 

time. Both FSAs and deductible IRAs effectively exempt all 

investment income from tax. The contributions to FSAs are not 

deductible, but the income tax imposed on withdrawals from an IRA 

effectively offsets the tax savings from the deduction of the 

contribution (plus interest on the tax savings). Individuals who 

expect higher tax rates when the funds are withdrawn would 

generally prefer the tax treatment offered in an FSA to that in 

an IRA. Conversely, individuals who expect lower future tax 

rates would generally prefer an IRA as a vehicle for retirement 

savings. However, the Family Savings Account offers more 

flexibility, because full tax benefits are available seven years 

after contribution and the account need not be held until 

retirement. This gives individuals an added degree of liquidity. 

Revenue Estimate 

Fiscal Years 

1990 1991 1992 1993 1994 1995 

Family savings 

accounts: * 

(Billions of Dollars) 

-.2 -.6 -1.0 -1.3 -1.6 

* Revenue loss less than $50 million. 

Total 

1990-

1995 

-4.7 

PENALTY-FREE IRA WITHDRAWALS FOR FIRST-TIME HOME BUYERS 

Current Law 

Married taxpayers who do not participate in a qualified 

retirement plan or who have adjusted gross incomes below $50,000 

may make deductible contributions to an Individual Retirement 

Account (IRA). There is a lower threshold of $35,000 for 

unmarried taxpayers and for married taxpayers who file a separate 

return. The deductibility of contributions for taxpayers 

participating in a qualified retirement plan is phased out over 

the last $10,000 below the income threshold for each income tax 

filing status. Taxpayers who do participate in a qualified 

retirement plan and who have adjusted gross incomes above these 

thresholds may make only nondeductible contributions to an IRA. 

Both deductible and nondeductible IRA contributions are limited 

to the lesser of $2,000 or the individual's compensation for the 

year. Married individuals may contribute an additional $250 to a 

spousal IRA for a nonworking spouse. 

Withdrawals from IRAs must begin by age 70-1/2. IRA 

withdrawals, except those from nondeductible contributions, are 

subject to income tax. Withdrawals from an IRA prior to age 

59-1/2 are subject to a 10 percent additional tax. 

Reasons For Change 

The intent of this proposal is to expand savings incentives 

to income that is saved for first-time home purchases. Increased 

flexibility of IRAs would help to alleviate the difficulties that 

many individuals have in purchasing a new home. 

The attractiveness of IRAs for many taxpayers was sharply 

curtailed by the Tax Reform Act of 1986. This resulted in a 

large decline in IRA participation. Prior to the Act, any 

individual under the age of 70-1/2 could make deductible contributions, up to the current limits, to an IRA. The current 

proposal is designed to enhance the attractiveness of deductible 

IRAs by making them more flexible. This increased flexibility 

would provide an incentive for more taxpayers to save for the 

purchase of their home. 

Description of Proposal 

The proposal would allow individuals to withdraw amounts of 

up to $10,000 from their IRAs for a "first-time" home purchase. 

The 10 percent additional tax on early withdrawals would be 

waived for eligible individuals. Eligibility for penalty-free 

withdrawals would be limited to individuals who did not own a 

home in the last three years and are purchasing or constructing a 

principal residence that costs no more than 110 percent of the 

median home price in the area where the residence is located. 

The effective date of the proposal would be January 1, 1990. 

-15-
-16-

Effects of the Proposal 

This proposal will help encourage individuals to save for the 

purchase of a first home. 

Revenue Estimate 

Penalty-free IRA 

withdrawals for 

first time 

home buyers: 

Fiscal Years 

1990 1991 1992 1993 1994 1995 

(Billions of Dollars) 

-* -* -.1 -.1 -.1 -.1 

-* Revenue loss of less than $50 million. 

Total 

1990-

1995 

-.4 
PERMANENT RESEARCH AND EXPERIMENTATION TAX CREDIT 

Current Law 

Present law allows a 20 percent tax credit for a certain 

portion of a taxpayer's "qualified research expenses." The 

portion of qualified research expenses that is eligible for the 

credit is the increase in the current year's qualified research 

expenses over its base amount for that year. The base amount for 

the current year is computed by multiplying the taxpayer's 

"fixed-base percentage" by the average amount of the taxpayer's 

gross receipts for the four preceding years. A taxpayer's fixedbase percentage generally is the ratio of its total qualified 

research expenses for the 1984-88 period to its total gross 

receipts for this period. Special rules for start-up companies 

provide a fixed-base percentage of .03. In no event will a 

taxpayer's fixed-base percentage exceed .16. A taxpayer's base 

amount may not be less than 50 percent of its qualified research 

expenditures for the current year. 

In general, qualified expenditures consist of (1) "in-house" 

expenditures for wages and supplies used in research; (2) 65 

percent of amounts paid by the taxpayer for contract research 

conducted on the taxpayer's behalf; and (3) certain time-sharing 

costs for computers used in research. Restrictions further limit 

the credit to expenditures for research that is technological 

in nature and that will be useful in developing a new or improved 

business component. In addition, certain research is specifically excluded from the credit, including research performed 

outside the United States, research relating to style, taste, 

cosmetic, or seasonal design factors, research conducted after 

the beginning of commercial production, research in the social 

sciences, arts, or humanities, and research funded by persons 

other than the taxpayer. 

The credit is available only for research expenditures paid 

or incurred in carrying on a trade or business of the taxpayer. 

A taxpayer is treated as meeting the trade or business requirement with respect to in-house research expenses if, at the time 

such in-house research expenses are incurred, the principal 

purpose of the taxpayer in making such expenditures is to use the 

results of the research in the active conduct of a future trade 

or business of the taxpayer or certain related taxpayers. 

Present law also provides a separate 20 percent tax credit 

("the University Basic Research Credit") for corporate funding of 

basic research through grants to universities and other qualified 

organizations performing basic research. The University Basic 

Research Credit is measured by the increase in spending from 

certain prior years. This basic research credit applies to 

the excess of (1) 100 percent of corporate cash expenditures 

(including grants or contributions) paid for university basic 

research over (2) the sum of a fixed research floor plus an 

amount reflecting any decrease in nonresearch giving to 

-17-
-18-

universities by the corporation as compared to such giving during 

a fixed base period (adjusted for inflation). A grant is tested 

first to see if it constitutes a basic research payment; if not, 

it may be tested as a qualified research expenditure under the 

general R&E credit. 

The R&E credit is aggregated with certain other business 

credits and made subject to a limitation based on tax liability. 

The sum of these credits may reduce the first $25,000 of regular 

tax liability without limitation, but may offset only 75 percent 

of any additional tax liability. Taxpayers may carry credits not 

usable in the current year back three years and forward fifteen 

years. 

The amount of any deduction for research expenses is reduced 

by the amount of the tax credit taken for that year. 

The R&E credit in the form described above is in effect for 

taxable years beginning after December 31, 1989. However, the 

credit will not apply to amounts paid or incurred after 

December 31, 1990, and a special rule applies in the case of any 

taxable year which begins before August 2, 1990, and ends after 

September 30, 1990. Under this rule, the amount treated as a 

taxpayer's qualified research expenses for the taxable year is 

pro-rated by the ratio of the number of days in the taxable year 

before October 1, 1990, to the total number of days in the 

taxable year before January 1, 1991. By limiting the amount of 

eligible expenses, this rule is intended to provide the 

equivalent of a nine-month extension of the R&E credit. 

Reasons for Change 

The current law tax credit for research provides an incentive 

for technological innovation. Although the benefit to the 

country from such innovation is unquestioned, the market rewards 

to those who take the risk of research and experimentation may 

not be sufficient to support the level of research activity that 

is socially desirable. The credit is intended to reward those 

engaged in research and experimentation of unproven technologies. 

The credit cannot induce additional R&E expenditures unless 

its future availability is known at the time firms are planning 

R&E projects and projecting costs. R&E activity, by its nature, 

is long-term, and taxpayers should be able to plan their research 

activity knowing that the credit will be available when the 

research is actually undertaken. Thus, if the R&E credit is to 

have the intended incentive effect, it should be made permanent. 

Description of Proposal 

The R&E credit would be made permanent, and the special tax 

rule which limits the amount of eligible expenses during 1990 

would be deleted. 
-19-

Effects of Proposal 

Stable tax laws that encourage research allow taxpayers 

to undertake research with greater assurance of the future tax 

consequences. A permanent R&E credit (including the University 

Basic Research Credit) permits taxpayers to establish and expand 

research facilities without fear that the tax incentive would not 

be available when the research is carried out. 

Revenue Estimate 

Permanent R&E 

tax credit: 

1990 

-0.1 

Fiscal Years 

1991 1992 1993 1994 1995 

(Billions of Dollars) 

-0.5 -0.9 -1.1 -1.3 -1.6 

RESEARCH AND EXPERIMENTATION EXPENSE ALLOCATION RULES 

Current Law 

The tax credit allowed for payments of foreign tax is limited 

to the amount of U.S. tax otherwise payable on the taxpayer's 

income from foreign sources. The purpose of this limitation is 

to prevent the foreign tax credit from offsetting u.s. tax 

imposed on income from u.s. sources. Accordingly, a taxpayer 

claiming a foreign tax credit is required to determine whether 

income arises from u.s. or foreign sources and to allocate 

expenses between such U.S. and foreign source income. 

Under the above limitation rules, an increase in the portion 

of a taxpayer's income determined to be from foreign sources will 

increase the allowable foreign tax credit. Therefore, taxpayers 

generally receive greater foreign tax credit benefits to the 

extent that their expenses are applied against u.s. source income 

rather than foreign source income. 

Treasury regulations issued in 1977 described methods for 

allocating expenses between u.s. and foreign source income. 

Those regulations contained specific rules for the allocation of 

research and experimentation (R&E) expenditures, which generally 

required a certain portion of R&E expense to be allocated to 

foreign source income. Absent such rules, a full allocation of 

R&E expense to u.s. source income would overstate foreign source 

income, thus allowing the foreign tax credit to apply against 

U.S. tax imposed on U.S. source income and thwarting the 

limitation on the foreign tax credit. 

Since 1981 these R&E allocation regulations have been subject 

to six different suspensions and temporary modifications by 

Congress. The Technical and Miscellaneous Revenue Act of 1988 

("TAMRA") adopted allocation rules which were in effect for only 

four months. For twenty months following the period when the 

TAMRA rules were in effect, R&E allocation was controlled by the 

1977 Treasury regulations. The Budget Reconciliation Act of 1989 

(the "1989 Act") subsequently reintroduced the TAMRA rules, once 

again on a temporary basis. 

Under the R&E allocation rules enacted by TAMRA (and 

temporarily recodified by the 1989 Act), a taxpayer must allocate 

64 percent of R&E expenses for research conducted in the United 

States to U.S. source income and 64 percent of foreign-performed 

R&E to foreign source income. The remaining portion can be 

allocated on the basis of the taxpayer's gross sales or gross 

income. However, the amount allocated to foreign source income 

on the basis of gross income must be at least 30 percent of the 

amount allocated to foreign source income on the basis of gross 

sales. 

-21-
-22-

Under the 1989 Act, these R&E allocation rules are effective 

for the taxpayer's first taxable year beginning after August 1, 

1989 and before August 2, 1990; except that the rules apply only 

to the portion of R&E expenses treated (on an annualized basis) 

as having been paid or incurred during the first nine months of 

that taxable year. 

Reasons for Change 

Permanent R&E expense allocation rules are essential for U.S. 

companies to plan accurately the long-term costs of their R&E 

programs. After more than ten years of instability, both the 

u.s. government and the affected taxpayers have a strong interest 

in ending this controversy through the adoption of a fixed 

allocation system applicable to R&E. 

In addition, as evidenced by its continued support for a 

permanent R&E credit, the Administration believes in the 

provision of tax incentives to increase the performance of 

u.s.-based research activities. The allocation rules in this 

proposal provide such an incentive. Although the proposal 

benefits only multinational corporations that are subject to the 

foreign tax credit limitation, it will provide an effective 

incentive with respect to such entities. By enhancing the return 

on R&E expenditures, the proposal promotes the growth of overall 

R&E activity as well as encouraging the location of such research 

within the United States. 

Description of Proposal 

The proposal would adopt on a permanent basis the R&E 

allocation rules which were first enacted by TAMRA and were 

re-enacted by the 1989 Act. The proposal would be effective for 

all taxable years beginning after August 1, 1990. 

Effects of Proposal 

Under the proposal, the automatic allocation of 64 percent of 

U.S.-performed R&E to U.S. source income generally permits a 

greater amount of income to be classified as foreign source than 

the rules applicable under the 1977 regulations. As discussed 

above, this will increase the benefits of the foreign tax credit 

for many taxpayers. 

The operation of these rules is best illustrated through an 

example. Assume that an unaffiliated U.S. taxpayer has $100 of 

expense from research performed in the United States, that 50 

percent of relevant gross sales produce foreign source income, 

and that 30 percent of the taxpayer's gross income is from 

foreign sources. Subject to certain limitations not applicable 

to these facts, the 1977 regulations would have required the 

taxpayer to allocate at least $30 of R&E expense to foreign 

source income ($100 x 30% gross income from foreign sources). 
-23-

under the proposal, $64 is automatically allocated to U.S. 

source income based on the place of performance ($100 x 64%). 

The remaining $36 may be allocated either on the basis of gross 

sales or on the basis of gross income (subject to the limitation 

described below). A gross sales apportionment of the remainder 

would result in $18 ($36 x 50%) being allocated to foreign source 

income, while a gross income apportionment would result in $10.80 

($36 x 30%) being allocated to foreign source income. 

The amount allocated to foreign source income using the gross 

income method must be at least 30 percent of the amount so 

allocated using the gross sales method. That limitation will not 

affect the result here since the $10.80 apportioned to foreign 

source income under the gross income method is greater than $5.40 

($18 apportioned under gross sales x 30% limitation). 

As a result of the allocation rules in the proposal, the 

taxpayer in this example must allocate at least $10.80 of 

U.S.-performed R&E expense to foreign source income, compared to 

the $30 required to be so allocated under the 1977 regulations. 

Effects of the Proposals 

This reduction of foreign allocated expenses would result in 

an increase of overall foreign source income and, for many 

taxpayers, greater foreign tax credit benefits. This may 

stimulate increased u.s. investment abroad. 

Revenue Estimate 

1990 

Permanent R&E 

expense 

allocation: 0 

Fiscal Years 

1991 1992 1993 1994 1995 

(Billions of Dollars) 

-0.4 -0.7 -0.8 -0.8 -0.9 

ENERGY TAX INCENTIVES 

Current Law 

Summary. Current law provides incentives for domestic oil 

and gas exploration and production by allowing the expensing of 

intangible drilling costs ("IDCs") and the use of percentage 

depletion. These two incentives are subject to certain limitations and their benefits are included as preferences in the 

alternative minimum tax ("AMT"). The cost of injectants used 

in tertiary enhanced recovery projects may also be deducted. 

Current law does not provide any further tax incentives for 

either exploratory drilling or tertiary enhanced recovery 

techniques. 

Drillin vs. Develo The search 

gas reserves typ1ca y eg1ns w1th certain 

preliminary tests (e.g., geological and geophysical tests) 

designed to determine the likelihood of discovering commercial 

quantities of hydrocarbons. If such tests suggest that oil and 

gas may be present, further tests may be conducted. New oil 

and gas reserves, however, are typically identified only by 

exploratory drilling. About 55 percent of exploratory well 

drilling expenditures result in dry holes. A dry hole results 

if commercially recoverable oil and gas is not found. A taxpayer 

is allowed to expense all costs of a dry hole upon abandonment of 

the dry hole. If exploratory drilling is successful in locating 

oil and gas in commercial quantities, additional drilling, 

termed development drilling, is done to recover the maximum 

amount of oil and gas. Current law does not provide any distinct 

incentives for exploratory as compared to developmental drilling. 

Tertiar Enhanced Recover Techni ues. Tertiary enhanced 

recovery tee n1ques 1ncrease ava1 a e reserves by producing oil 

and gas that cannot be recovered economically with conventional 

pumping or water flooding. Tertiary enhanced recovery projects 

use a variety of injectants, including steam, C02 , or chemical 

injectants. 

Intangible Drilling Costs (IDCs). Current law generally 

requires the capitalization of expend1tures for permanent 

improvements or betterments made to increase the value of any 

property. An exception to the capitalization requirement permits 

the expensing of IDCs paid in connection with the drilling of 

oil, gas, and geothermal wells. IDCs include amounts paid for 

labor, fuel, repairs, and site preparation. IDCs do not include 

geological and geophysical costs ("G&G costs") and surface casing 

costs (e.g., the cost of casings, valves, pipelines, and other 

facilities required to control, transport, or store the oil and 

gas). Costs that do not qualify as IDCs must be capitalized and 

recovered through depreciation or depletion. 

Percentage Depletion. Cost recovery with respect to oil and 

gas properties is allowed by means of depletion deductions. 

The depletion deduction may be calculated under the cost 

-25-
-26-

depletion method or, with significant restrictions, under the 

generally more favorable percentage depletion method. Under cost 

depletion, the amount of the depletion deduction is equal to the 

portion of the taxpayer's basis equal to the percentage of total 

oil or gas reserves produced during the year. Cost depletion 

deductions may not exceed the taxpayer's basis in the property. 

Under percentage depletion, the amount of the depletion 

deduction is equal to a statutory percentage of gross income 

from the property (15 percent in the case of oil and gas production). Percentage depletion deductions over the life of a 

property may exceed the cost of the property. Independent 

producers and royalty owners may use percentage depletion, but 

only with respect to 1,000 barrels of production per day. 

Percentage depletion with respect to oil and gas is not permitted 

for retailers or refiners of oil or gas products. Percentage 

depletion is also unavailable for oil and gas properties that 

have been transferred after they have been "proven" (i.e., shown 

to have oil or gas reserves). The percentage depletion deduction 

may not exceed either 50 percent of the taxpayer's net income 

from the property or 65 percent of the taxpayer's net taxable 

income for the year. 

Alternative Minimum Tax (AMT). An alternative minimum tax is 

imposed on certain taxpayers. This tax is calculated with 

respect to alternative minimum taxable income ("AMTI"), which is 

calculated by making certain adjustments and adding tax preference items to regular taxable income. Both IDCs and percentage 

depletion deductions are preference items for both corporate and 

noncorporate taxpayers, and thus are included in AMTI. 

The percentage depletion tax preference item is the amount by 

which the depletion deduction claimed for regular tax purposes 

exceeds the taxpayer's basis in the property at the end of the 

taxable year (disregarding the depletion deduction for the year). 

Treating such amounts as a preference item in computing AMTI may 

reduce or eliminate the benefit of permitting percentage 

depletion for certain taxpayers. 

The !DC tax preference is the amount by which a taxpayer's 

"excess IDCs" claimed with respect to successful wells exceed 

65 percent of the taxpayer's net income from oil, gas, or geothermal properties. The "excess IDCs" are the amount by which 

the !DC deductions claimed for the year exceed the deductions 

that would have been claimed had the IDCs been capitalized and 

either amortized over 120 months or recovered through cost depletion. Thus, for AMT purposes, the !DC deduction for incremental 

!DC expenditures in excess of the net income limit is reduced to 

zero. Any amount of IDCs may be capitalized and amortized over a 

60-month period by a special taxpayer election for both the 

regular tax and the AMT. This election eliminates the requirement for AMT adjustments with respect to such amounts. 
-27-

Tertiart Injectants. A taxpayer is allowed to deduct an 

amount equa to the qualified tertiary injectant expenses of the 

taxpayer for tertiary injectants injected during the taxable 

year. A qualified tertiary injectant is defined as any tertiary 

injectant (other than a recoverable hydrocarbon injectant) which 

is used as part of a tertiary recovery method. 

Reasons for Change 

The reduction in world oil prices and the increasing levels 

of oil imports over the last several years raise energy security 

concerns. While oil prices appear more recently to have firmed 

up, the nation's increased dependence on foreign oil still leaves 

the nation vulnerable to potential foreign supply disruptions. 

The Administration supports an energy policy that is designed to 

address these concerns by improving our long-term energy security 

and strengthening the domestic oil industry. 

An increase in domestic oil and gas reserves would improve 

energy security. The level of proven domestic reserves is 

closely related to the level of domestic exploratory drilling, 

which has fallen by 70 percent from recent levels, largely due to 

uncertainty concerning low world oil prices. In addition, over 

the same time period, development drilling has increased 20 

percent, resulting in a substantial decline in existing domestic 

oil and gas reserves. Special tax incentives are appropriate to 

encourage higher levels of exploratory drilling, which will 

ultimately may lead to increased domestic reserves. 

Current law limits the incentive effects of !DC expensing and 

percentage depletion, particularly for independent producers, who 

have historically drilled a majority of exploratory wells. 

Current percentage depletion rules limit its use to properties 

acquired by, or transferred to, an independent producer before 

the property is shown to have oil or gas reserves (the "transfer 

rule"). This rule discourages the transfer of producing wells 

that are uneconomic in the hands of their current owners (and 

thus likely to be abandoned) to those who may be more efficient, 

more willing to bear current losses, or better able to use the 

depletion tax benefits (and thus able to continue operation of 

the property). By keeping marginal wells in production, u.s. oil 

production would be maintained without incurring additional 

drilling costs. 

Current law also provides that percentage depletion may not 

exceed 50 percent of the net income of a property calculated 

before depletion. The 50 percent net income limitation may 

significantly reduce the benefits of percentage depletion for 

production from properties generating a small amount of net 

income. Raising the net income limitation to 100 percent would 

allow some oil producers to claim greater depletion deductions, 

thus encouraging them to continue to operate marginal properties. 
-28-

The current alternative minimum tax (AMT) also severely 

limits the incentive effects of IDC expensing, particularly for 

independent producers. Raising the net income limit and reducing 

the impact of the AMT on drilling incentives limit might also 

encourage added investment in exploratory drilling projects. 

The level of exploratory drilling (and ultimately domestic 

reserves) would be increased by providing a program of temporary 

!DC credits, less restrictive rules for the use of percentage 

depletion, and AMT relief, all targeted to exploratory drilling 

in general, and to independent producers in particular. A 

temporary tax credit for new tertiary enhanced recovery projects 

would also encourage the recovery of known energy deposits that 

are currently too costly to produce. 

Description of Proposal 

Four incentives are proposed to encourage exploration for new 

oil and gas fields and the reclamation of old fields. Two 

proposals would provide tax credits which would be phased out if 

the average daily u.s. wellhead price of oil is at or above $21 

per barrel for an entire calendar year. Because future oil 

prices are expected to exceed this price at some point, these 

credits should be viewed as inherently temporary, rather than as 

permanent features of the tax system. The other two proposals 

would enhance the incentive effects of current energy tax law. 

First, a temporary 10 percent tax credit would be allowed for 

the first $10 million of expenditures (per year, per company) on 

exploratory intangible drilling costs and a 5 percent credit 

would be allowed for the balance of exploratory drilling costs. 

This proposal would be effective for costs incurred on or after 

January 1, 1991. 

Second, a temporary 10 percent tax credit, effective 

January 1, 1991, will be allowed for all capital expenditures on 

new tertiary enhanced recovery projects (i.e., projects that 

represent the initial application of tertiary enhanced recovery 

to a property). These tax credits could be applied against both 

the regular tax and the alternative minimum tax. However, the 

credits, in conjunction with all other credits and net operating 

loss carryforwards, could not eliminate more than 80 percent of 

the tentative minimum tax in any year. Unused credits could be 

carried forward. 

Third, the proposal would eliminate the "transfer rule," 

which discourages the transfer of proven properties to 

independent producers and royalty owners, and would increase the 

percentage depletion deduction limit for independent producers to 

100 percent of the net income of each property. These changes 

would increase the availability to independent producers of the 

percentage depletion tax incentive. The effective date of each 

change would be January 1, 1991. 
-29-

Fourth, the proposal would eliminate 80 percent of current 

AMT preference items generated by exploratory IDCs incurred by 

independent producers effective January 1, 1991. Thus, 

independent producers would be allowed to deduct 80 percent 

(rather than zero, as under current law) of exploratory excess 

roes in excess of the net income limit for purposes of the AMT. 

As under current law, the net income limit would be equal to 65 

percent of oil and gas net income determined without regard to 

excess IDC deductions. 

Effects of Proposal 

The proposed new incentive program for the oil and gas 

industry would encourage exploration for new oil and gas fields 

and the reclamation of old fields. The incentives would 

strengthen the financial health of the smaller independent 

producers. They would help maintain a level of exploratory 

drilling activity which would provide continuing opportunities 

for skilled geologists and drilling contractors, many of whom 

have already left the industry. Although modest in scale, the 

program would help preserve the resource base and the human 

capital that may be needed in the future if the nation is to 

maintain a reasonable degree of energy independence. 

Revenue Estimate 

Fiscal Years 

1990 1991 1992 1993 1994 1995 

Ten percent credit for 

exploratory drilling: 

Ten percent credit for 

tertiary enhanced 

recovery: 

Eliminate the transfer 

rule and increase the 

net income limit to 100 

percent for percentage 

depletion: 

Eliminate 80 percent of 

exploratory IDC tax 

preferences from minimum 

tax for independent 

producers: 

(Billions of Dollars) 

0 -0.2 -0.3 -0.3 -0.4 -0.4 

0 -* -* -* -* -* 

0 -* -* -* -* -* 

0 -0.1 -0.1 -0.1 -0.1 -0.1 

-* Represents revenue loss of $50 million or less. 

ENTERPRISE ZONE TAX INCENTIVES 

Current Law 

Existing Federal tax incentives generally are not targeted to 

benefit specific geographic areas. Although the Federal tax law 

contains incentives that may encourage economic development in 

targeted economically distressed areas, the provisions generally 

are not limited to use with respect to such areas. 

Among the existing general Federal tax incentives that aid 

economically distressed areas is the targeted jobs tax credit. 

This credit provides an incentive for employers to hire 

economically disadvantaged workers and often is available to 

firms located in economically distressed areas. An investment 

credit also is allowed for certain investment in low-income 

housing or the rehabilitation of certain structures that may be 

located in economically distressed areas. Another Federal tax 

incentive permits the deferral of capital gains taxation upon 

certain transfers of low-income housing and certain exchanges of 

business or investment property for property of the same kind. 

In addition, tax-exempt state and local government bonds may be 

used to finance certain activities conducted in economically 

distressed areas. 

Reason for Change 

Despite sustained national prosperity and growth, certain 

areas have not kept pace. To help these economically distressed 

areas share in the benefits of continued economic growth, this 

Administration proposes to designate Federal enterprise zones in 

which targeted tax incentives and regulatory relief will 

stimulate government and private sector revitalization of the 

areas. 

Description of Proposal 

The proposed enterprise zone initiative would include 

selected Federal income tax employment and investment incentives. 

These incentives will be offered in conjunction with Federal, 

state, and local regulatory relief. Up to 50 zones will be 

selected over a four-year period. 

The incentives are: (i) a 5 percent refundable tax credit for 

qualified employees with respect to their first $10,500 of wages 

earned in an enterprise zone (up to $525 per worker, with the 

credit phasing out between $20,000 and $25,000 of total annual 

wages of the employee); (ii) elimination of capital gains taxes 

for tangible property used in an enterprise zone business and 

located within an enterprise zone for at least two years; and 

(iii) expensing by individuals of contributions to the capital of 

corporations engaged in the conduct of enterprise zone businesses 

(provided the corporation has less than $5 million of total 

assets and uses the contributions to acquire tangible assets 

-31-
-32-

located within an enterprise zone, and limiting the expensing to 

$50,000 annually per investor with a $250,000 lifetime limit per 

investor). 

The willingness of states and localities to "match" Federal 

incentives will be considered in selecting the special enterprise 

zones to receive these additional Federal incentives. 

Effects of the Proposals 

Enterprise zones would encourage private industry investment 

and job creation in the economically distressed areas by removing 

regulatory and other barriers inhibiting growth. They would also 

promote growth through selected tax incentives to reduce the 

risks and costs of operating or expanding in severely depressed 

areas. A new era of public/private partnerships is needed to 

help distressed cities and rural areas help themselves. 

Revenue Estimate 

Fiscal Year 

1990 1991 1992 1993 1994 1995 

(Billions of Dollars) 

Enterprise zone 

incentives: 0 -0.1 -0.2 -0.3 -0.5 -0.8 
Current Law 

NEW CHILD TAX CREDIT AND 

REFUNDABLE CHILD AND DEPENDENT CARE CREDIT 

The Internal Revenue Code provides assistance to low-income 

working parents through both the earned income tax credit (EITC) 

and the child and dependent care credit. 

Earned Income Tax Credit. Low-income workers with minor 

dependents may be eligible for a refundable income tax credit· of 

up to 14 percent of the first $6,810 in earned income. The 

maximum amount of the EITC is $953. The credit is reduced by an 

amount equal to 10 percent of the excess of adjusted gross income 

(AGI) or earned income (whichever is greater) over $10,730. The 

credit is not available to taxpayers with AGI over $20,264. Both 

the maximum amount of earnings on which the credit may be taken 

and the income level at which the phase-out region begins are 

adjusted for inflation (1990 levels are shown). 

Earned income eligible for the credit includes wages, 

salaries, tips and other employee compensation plus the amount of 

the taxpayer's net earnings from self-employment. Eligible 

individuals may receive the benefit of the credit in their 

paychecks throughout the year by electing advance payments. 

Child and Dependent Care Credit. Working families may also 

be eligible for a nonrefundable income tax credit if they incur 

expenses for the care of a qualifying individual in order to 

work. A qualifying individual is (1) a dependent who is under 

the age of 13 for whom the taxpayer can claim a dependency 

exemption; (2) the spouse of the taxpayer if the spouse is 

physically or mentally incapabl~ of caring for himself or herself; or (3) a dependent of the taxpayer who is physically or 

mentally incapable of caring for himself or herself. 

To claim the child and dependent care credit, taxpayers must 

be married and filing a joint return or be a head of household. 

Two-parent households, with only one earner, do not qualify for 

the credit unless the nonworking spouse is disabled or a fulltime student. 

The amount of employment-related expenses that is eligible 

for the credit is subject to both a dollar limit and an earned 

income limit. Employment-related expenses are limited to $2,400 

for one qualifying individual and $4,800 for two or more qualifying individuals. Further, employment-related expenses cannot 

exceed the earned income of the taxpayer, if single, or for 

married couples, the earned income of the spouse with the lower 

earnings. 

-33-
-34-

Taxpayers with AGI of $10,000 or less are allowed a credit 

equal to 30 percent of eligible employment-related expenses. For 

taxpayers with AGI of $10,000 to $28,000, the credit is reduced 

by one percentage point for each $2,000, or fraction thereof, 

above $10,000. The credit is limited to 20 percent of 

employment-related dependent care expenses for taxpayers with AGI 

above $28,000. 

Reasons for Change 

Current law does not adequately provide for the child care 

needs of low-income families. For low-income families which rely 

on paid child care arrangements, child care expenditures consume 

a large share of their income. On average, child care expenditures constitute 6 percent of income for all families which paid 

for the care of their preschool children. But, for low-income 

families with working mothers, child care expenditures constitute 

about 20 percent of income. Further, because the child and 

dependent care credit is not refundable, many low-income families 

can not claim the credit since they do not incur a federal income 

tax liability. 

In addition, child care by relatives - much of which is not 

paid for in cash - is especially prevalent among low-income 

families. Over half of low-income families with preschool 

children do not make cash expenditures and could not benefit from 

the child and dependent care credit, even if it was refundable. 

The EITC, while refundable, does not adjust for differences 

among working families in the costs of providing care according 

to the age of the dependent child or the number of dependent 

children. Preschool children generally require more extensive 

child care services than older children who may be in a school 

setting for much of the day. 

Description of Proposal 

A new or modified child care credit may be claimed (in 

addition to the current law earned income credit) by low-income 

working families. 

New Child Tax Credit. Low-income families, containing at 

least one worker, would be entitled to take a new tax credit of 

up to $1,000 for each dependent child under age four. For each 

child under the age of four, families could receive a credit 

equal to 14 percent of earned income, with a maximum credit equal 

to $1,000 per child. Initially, the credit would be reduced by 

an amount equal to 20 percent of the excess of AGI or earned 

income (whichever is greater) over $8,000. As a consequence, the 

credit would not be available to families with AGI or earned 

income greater than $13,000. In subsequent years, both the 

starting and end-points of the phase-out range would be increased 

by $1,000 increments. In 1995, the credit would phase-out 

between $15,000 and $20,000. Beginning in 1996, the income 

thresholds would be indexed for inflation. 
-35-

The credit would be refundable and would be effective for tax 

years beginning after December 31, 1990. Families would have the 

option of receiving the refund in advance through a payment added 

to their paycheck. 

Refundable Child and Dependent Care Credit. The existing 

child and dependent care credit would be made refundable (but 

otherwise unchanged). Families could not claim both the new 

child credit and the child and dependent care credit with respect 

to the same child but could choose the larger of the two credits. 

The refundable child care credit would be effective for tax years 

beginning January 1, 1991. 

Effects of the Proposal 

The proposal would increase the resources available to lowincome families, better enabling them to choose the child care 

arrangements which best suit their needs and correspond to their 

personal values. The child care proposal, combined with newly 

legislated increases in the minimum wage, will lift a single 

mother of two preschool children, who works full-time at the 

minimum wage, above the poverty level. 

About 2.2 million working families with children under the 

age of four will initially be eligible for the new child tax 

credit. When the proposal is fully implemented, eligibility will 

be expanded to approximately 1 million additional families. 

These families will also have the option of claiming the refundable child and dependent care credit, although they will not be 

able to claim both credits with respect to the same child. In 

addition, low-income parents of children between the ages of four 

and twelve would benefit from the refundabilty of the child and 

dependent care credit if they incur child-care expenses in order 

to work. 

Consider, for example, a single mother of two children, ages 

three and six. The mother earns $10,000 a year and has no other 

sources of taxable income. She pays a neighbor $20 a week to 

care for her younger child. Her older child is enrolled in a 

after-school program during the winter months and a neighborhood 

park program during the summer at a total cost of $500 per year. 

In total, she spends $1,540 a year for child care in order to 

work. Under current law, she is not entitled to claim the child 

and dependent care credit. At a 30 percent credit rate on dependent care expenses, the credit would be $462. However, she has 

no tax liability as a consequence of the standard deduction and 

personal exemptions and therefore cannot claim the credit. 

Under the proposal, the mother will be able to claim the new 

child credit. In 1991, she will be entitled to a credit equal to 

$600. (A mother in similar circumstances in 1993 would be entitled to the full $1,000 credit.) In addition, the mother will be 

able to claim a refundable child and dependent care credit of 

$150 on the basis of the expenses associated with the day-care of 
-36-

her older child. In total, she will be entitled to an additional 

refund of $750. Under both current law and the proposed changes, 

she will also receive an EITC of about $990, bring her total 1991 

refund under the proposal to $1,740. 

Revenue Estimate 1 

Fiscal Years 

1990 1991 1992 1993 1994 1995 

(Billions of Dollars) 

New child 

care credit 

and refundable 

child and 

dependent 

care credit: -0 -* -* -* -0.1 -0.1 

* Revenue loss of less than $50 million. 

1 Increased outlays attributable to refunds payable to eligible 

individuals with no tax liability are estimated to be $0.2 

billion in 1991, $1.8 billion in 1992, $2.0 billion in 1993, 

$2.1 billion in 1994, and $2.2 billion in 1995. 
DEDUCTION FOR SPECIAL NEEDS ADOPTIONS 

Current Law 

Expenses associated with the adoption of children are not 

deductible under current law. However, expenses associated with 

the adoption of special needs children are reimbursable under the 

Federal-State Adoption Assistance Program (Title IV-E of the 

Social Security Act). Special needs children are those who by 

virtue of special conditions such as age, physical or mental 

handicap, or combination of circumstances, are difficult to place 

for adoption. The Adoption Assistance Program includes several 

components. One of these components requires states to reimburse 

families for costs associated with the process of adopting 

special needs children. The Federal Government shares 50 percent 

of these costs up to a maximum Federal share of $1,000 per child. 

Reimbursable expenses include those associated directly with the 

adoption process such as legal costs, social service review, and 

transportation costs. Some children are also eligible for 

continuing Federal-State assistance under Title IV-E of the 

Social Security Act. This assistance includes Medicaid. Other 

children may be eligible for continuing assistance under Stateonly programs. 

Reasons for Change 

The Tax Reform Act of 1986 (the "1986 Act") repealed the 

deduction for adoption expenses associated with special needs 

children. Under prior law, a deduction of up to $1,500 of 

expenses associated with the adoption of special needs children 

was allowed. The 1986 Act provided for a new outlay program 

under the existing Adoption Assistance Program to reimburse 

expenses associated with the adoption process of these children. 

The group of children covered under the outlay program is 

somewhat broader than the group covered by the prior deduction. 

The prior law deduction was available only for special needs 

children assisted under Federal welfare programs. Aid to 

Families with Dependent Children (AFDC), Title IV-E Foster Care, 

or Supplemental Security Income (SSI). The current adoption 

assistance outlay program provides assistance for adoption 

expenses for these special needs children, as well as special 

needs children in private and State-only programs. 

Repeal of the special needs adoption deduction may have 

appeared to some as a lessening of the Federal concern for the 

adoption of special needs children. 

An important purpose of the Adoption Assistance Program is 

to enable families in modest circumstances to adopt special needs 

children. In a number of cases the children are in foster care 

with the prospective adoptive parents. The prospective parents 

would like to formally adopt the child but find that to do so 

would impose a financial hardship on the entire family. 

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-38-

While the majority of eligible expenses are expected to 

be reimbursed under the continuing expenditure program, the 

Administration is concerned that in some cases the limits may be 

set below actual cost in high-cost areas or in special circumstances. Moreover, inclusion in the tax code of a deduction for 

special needs children may alert families who are hoping to adopt 

a child to the many forms of assistance provided to families 

adopting a child with special needs. 

Description of Proposal 

The proposal would permit the deduction from income of 

expenses incurred associated with the adoption of special needs 

children up to a maximum of $3,000 per child. Eligible expenses 

would be limited to those directly associated with the adoption 

process that are eligible for reimbursement under the Adoption 

Assistance Program. These include court costs, legal expenses, 

social service review, and transportation costs. Only expenses 

for adopting children defined as eligible under the rules of the 

Adoption Assistance Program would be allowed. Expenses which 

were deducted and reimbursed would be included in income in the 

year in which the reimbursement occurred. 

Effects of Proposal 

The proposal when combined with the current outlay program 

would assure that reasonable expenses associated with the process 

of adopting a special needs child do not cause financial hardship 

for the adoptive parents. The proposed deduction would supplement the current Federal outlay program. In addition, the 

proposal highlights the Administration's concern that adoption 

of these children be specially encouraged and may call to the 

attention of families interested in adoption the various programs 

that help families adopting children with special needs. 

There is currently uncertainty regarding whether Federal and 

State reimbursements are income to the adopting families. The 

proposal would clarify the treatment of reimbursements by making 

them includable in income but also deductible, up to $3,000 of 

eligible expenses per child. Additionally, qualified expenses up 

to this limit would be deductible even though not reimbursed. 

While the costs of adoption of a special needs child are 

only a small part of the total costs associated with adoption of 

these children, the Administration believes that it is important 

to remove this small one-time cost barrier that might leave any 

of these children without a permanent family. 
Revenue Estimate 

1990 

Deduction for 

special needs 

adoption: 0 

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Fiscal Years 

1991 1992 1993 1994 

(Billions of Dollars) 

-* -* -* -* 

-* Revenue loss of less than $50 million. 

1995 

-* 

LOW-INCOME HOUSING TAX CREDIT 

Current Law 

A tax credit is allowed for certain expenditures with respect 

to low-income residential rental housing. The low-income housing credit generally may be claimed by owners of qualified low-income 

buildings in equal annual installments over a 10-year credit 

period as long as the buildings continue to provide low-income 

housing over a 15-year compliance period. 

In general, the discounted present value of the installments 

may be as much as 70 percent of eligible expenditures. Eligible expenditures include the depreciable costs of new construction 

and substantial rehabilitations, as well as the cost of acquiring 

certain existing buildings not placed in service within the 

previous ten years and not subject to the 15-year compliance period. The basis of property is not reduced by the amount of 

the credit for purposes of depreciation and capital gain. 

The annual credit available for a building cannot exceed the 

amount allocated to the building by the designated State or local 

housing agency. As originally enacted, the total allocations by the housing agency in a given year could not exceed the product 

of $1.25 and the State's population. A State credit allocation 

is not required, however, for certain projects financed with taxexempt bonds subject to the State's private activity bond volume 

limitation. While the credits originally could not be allocated 

after 1989, the Omnibus Budget Reconciliation Act (OBRA) of 1989 

extended each State's credit allocation authority through 1990 at 

a level equal to the product of $0.9375 and the State's 

population. 

Reason for Change 

The low-income housing credit encourages the private sector 

to construct and rehabilitate the nation's rental housing stock 

and to make it available to the working poor and other low-income 

families. In addition to tenant-based housing vouchers and 

certificates, the credit would appear to be an important 

mechanism for providing Federal assistance to rental households. 

Because the effectiveness of this newly designed incentive was 

unclear when introduced in the Tax Reform Act of 1986, it was 

felt appropriate to limit its availability. While extended by 

OBRA through 1990 (at a reduced limit), it is useful to allow a 

more extensive examination of this method of providing low income 

housing assistance. 

Description of Proposal 

The proposal would extend the credit through 1991, and would 

establish each State's credit allocation authority for 1990 and 

1991 at a level equal to the product of $1.25 and the State's 

population. 

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-42-

Effects of the Proposal 

The proposal would allow continued utilization of the 

low-income housing credit through 1991. This would not only 

provide additional needed low-income housing, but allow a greater 

period of application over which the efficiency of the program 

may be tested. 

Revenue Estimate 

Fiscal Years 

1990 1991 1992 1993 1994 1995 

(Billions of Dollars) 

Extend and 

expand 

low-income 

housing tax 

credit: -* -0.1 -0.3 -0.4 -0.4 -0.4 

-* Revenue loss of less than $50 million. 
EXTEND SPECIAL RULES FOR 

HEALTH INSURANCE COSTS OF SELF-EMPLOYED INDIVIDUALS 

Current Law 

Current law allows a self-employed individual to deduct as a 

business expense up to 25 percent of the amount paid during a 

taxable year for health insurance coverage for himself, his 

spouse, and his dependents. Originally, this deduction was only 

available if the insurance was provided under a plan that 

satisfied the non-discrimination requirements of section 89 of 

the Code. Section 89 has since been repealed retroactively, 

however, and no non-discrimination requirements currently apply 

to such insurance. The value of any coverage provided for such 

individuals and their families by the business is not deductible 

for self-employment tax purposes. The deduction is scheduled to 

expire after September 30, 1990. For taxable years beginning 

in 1990, the deduction is allowed only for premiums paid for 

coverage through October 1, 1990. 

Reasons for Change 

The 25 percent deduction for health insurance costs of selfemployed individuals was added by the Tax Reform Act of 1986 

because of a disparity between the tax treatment of owners of 

incorporated and unincorporated businesses (~., partnerships 

and sole proprietorships). Under prior law, 1ncorporated 

businesses could generally deduct, as an employee compensation 

expense, the full cost of any health insurance coverage provided for their employees (including owners serving as employees) and 

their employees' spouses and dependents. By contrast, selfemployed individuals operating through an unincorporated business 

could only deduct the cost of health insurance coverage for 

themselves and their spouses and dependents to the extent that 

it, together with other allowable medical expenses, exceeded 5 

percent of their adjusted gross income. (Coverage provided to 

employees of the self-employed, however, was and remains a 

deductible business expense for the self-employed.) The special 

25 percent deduction was designed to mitigate this disparity in 

treatment. 

Description of Proposal 

The proposal would make the 25 percent deduction permanent. 

Effects of Proposal 

The proposal will continue to reduce the disparity in tax 

treatment between self-employed individuals and owners of 

incorporated businesses, compared to prior law. 

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-44-

Revenue Estimate 

Fiscal Year 

1990 1991 1992 1993 1994 1995 

(Billions of Dollars) 

Extend special rules for 

health insurance costs of 

self-employed individuals: -* -0.2 -0.4 

-* Revenue loss of less than $50 million. 

-0.5 -0.5 -0.6 
EXTEND SOCIAL SECURITY RETIREMENT COVERAGE TO 

STATE AND LOCAL EMPLOYEES 

NOT PARTICIPATING IN PUBLIC EMPLOYEE RETIREMENT PROGRAMS 

Current Law 

State and local government employees are not required to 

participate in the retirement (Old Age, Survivors, and Disability 

Insurance) portion of Social Security. If these employers and 

employees do not voluntarily join the system, wages are not 

subject to the social security retirement tax (6.2 percent on 

both employers and employees). 

Reasons for Change 

Currently about 4 million state and local employees, many of 

whom are part-time workers and students, are not covered by OASDI 

or public retirement plans. Extending coverage would provide 

retirement income protection to those who do not currently have 

access to Social Security benefits. 

Description of Proposal 

Effective October 1, 1990, mandatory social security coverage 

would be extended to those employees of state and local governments who do not participate in a retirement system in 

conjunction with their current employment. 

Effects of Proposal 

An additional 4 million state and local government employees, 

and their employing governments, would contribute to Social 

Security. All state and local government employees would be 

eligible for OASDI or other retirement benefits. 

Revenue Estimate 1 

Extend social security 

retirement coverage to 

State and local 

employees: 

1990 

0 

1 Net of income tax offset. 

Fiscal Years 

1991 1992 1993 1994 1995 

(Billions of Dollars) 

2.1 2.2 2.3 2.5 2.7 

-45-

MEDICARE HOSPITAL INSURANCE (HI) FOR STATE AND LOCAL EMPLOYEES 

Current Law 

State and local government employees hired on or after 

April 1, 1986, are covered by Medicare Hospital Insurance and 

their wages are subject to the Medicare tax (1.45 percent on both 

employers and employees). Employees hired prior to April 1, 

1986, are not covered by Medicare Hospital Insurance nor are they 

subject to the tax. 

Reasons for Change 

State and local government employees are the only major group 

of employees not assured Medicare coverage. A quarter of state 

and local government employees are not covered by voluntary 

agreements or by law. Extending coverage would provide access to 

Medicare to those who would otherwise not be eligible to receive 

Medicare benefits, and would eliminate the inequity and the drain 

on the Medicare trust fund caused by those who receive Medicare 

without fully contributing. 

Description of Proposal 

As of October 1, 1990, all state and local government 

employees would be covered by Medicare Hospital Insurance. 

Effects of Proposal 

An additional 2 million state and local government employees 

would be contributing to Medicare. Of these, roughly 300,000 

employees would become newly eligible to receive Medicare 

benefits subject to satisfying the minimum 40 quarters of covered 

employment. 

Revenue Estimate 1 

Extend Medicare hospital 

insurance coverage to 

State and local employees: 

1 Net of income tax offset 

Fiscal Years 

1990 1991 1992 1993 1994 1995 

(Billions of Dollars) 

0 1.7 1.7 1.7 1.7 1.6 

-47-

AIRPORT AND AIRWAY TRUST FUND 

Current Law 

The Airport and Airway Trust Fund supports the capital and 

operating programs of the Federal Aviation Administration (FAA). 

The Trust Fund receives revenue from taxes imposed on users of 

the nation's air transportation system. These taxes include the 

8 percent air passenger tax, the 5 percent air freight tax, the 

12 cents per gallon noncommercial aviation gasoline tax, and the 

14 cents per gallon noncommercial aviation jet fuel tax. In 

addition, the Trust Fund receives revenue from the international 

air departure tax, which was increased from $3 to $6 by the 

Omnibus Budget Reconciliation Act of 1989. The Airport and 

Airway Trust Fund taxes are scheduled to expire after 1990. 

The Omnibus Budget Reconciliation Act of 1989 suspended for 

one year a trigger that would reduce several of the Airport and 

Airway Trust Fund taxes. The trigger would also take effect 

after 1990 if the appropriations in fiscal years 1989 and 1990 

for capital programs funded by these taxes are less than 85 

percent of authorizations. The trigger would reduce by 50 

percent both the air passenger tax and the air freight tax, and 

it would substantially reduce the aviation gasoline tax. 

Under Gramm-Rudman-Hollings, the current services budget 

includes the extension of excise tax trust fund receipts and 

outlays at the levels in effect during the budget year. As a 

consequence, the 1991 budget baseline includes the extension of 

the Airport and Airway Trust Fund tax rates at their current 

levels irrespective of the trigger. The actual realization of 

Airport and Airway Trust Fund tax receipts at current services 

levels would require an extension of the taxes at their current 

rates (which implies a repeal of the trigger). 

Reason for Change 

The Airport and Airway Development and Revenue Act of 1970 

established the Airport and Airway Trust Fund as a mechanism for 

financing the capital and operating programs of the FAA through 

taxes imposed on the users of the nation's air transportation 

system. The Airport and Airway Trust Fund taxes have never 

covered total FAA outlays and, in fact, are projected to cover 

only 60 percent of total FAA outlays in 1990. 

Description of Proposal 

The proposal would raise the air passenger tax to 10 percent, 

the air freight tax to 6.25 percent the noncommercial aviation 

gasoline tax to 15 cents per gallon, and jet the noncommercial 

fuel tax to 17.5 cents per gallon. However, the proposal would 

not affect the international air departure tax. 

-49-
-50-

Effects of Proposal 

The proposal would increase by 25 percent the baseline levels 

of several of the Airport and Airway Trust Fund taxes after 1990. 

Revenue Estimate 1 

Fiscal Years 

1990 1991 1992 1993 1994 

(Billions of Dollars) 

Airport and airway 

trust fund: 0 0.5 

1 Net of income tax offsets. 

0.8 0.9 0.9 

1995 

1.0 
EXTENSION OF THE COMMUNICATIONS (TELEPHONE) EXCISE TAX 

Current Law 

The Omnibus Budget Reconciliation Act of 1987 extended the 

communications excise tax until December 31, 1990. The tax is 

imposed at a rate of three percent on local and toll telephone 

service and on teletypewriter exchange service. 

Reasons for Change 

The communications excise tax was originally enacted in 1914 

and has been imposed continuously since 1932, even though it has 

been scheduled to expire continuously since 1959. Allowing the 

tax to expire will reduce Federal tax receipts by approximately 

$2.5 billion annually at 1992 levels. 

Description of Proposal 

The proposal would permanently extend the three percent 

communications excise tax. The tax rate is substantially less 

than the ten percent rate that was in effect between 1954 and 

1972, and as low or lower than the rate in effect for any year 

since 1932 (except for 1980-82). The base of the tax would not 

be broadened. 

Effects of Proposal 

Extension of the communications excise tax would maintain a 

revenue source that has been in existence since 1932, and would 

avoid the disruption that would occur if the tax were allowed to 

expire and then were re-enacted. 

Revenue Estimate 1 

Fiscal Years 

1990 1991 1992 1993 1994 1995 

(Billions of Dollars) 

Extend telephone 

excise tax: 0 1.5 2.5 2.7 2.9 3.1 

1 Net of income tax offset. 

-51-

Present Law 

TREATMENT OF SALVAGE VALUE BY 

PROPERTY AND CASUALTY INSURANCE COMPANIES 

In calculating underwriting income under current law, 

property and casualty insurance companies may deduct underwriting 

losses (and expenses) in the year in which they are incurred 

(section 832). The deduction for losses incurred consists of a 

deduction for losses paid during the taxable year, and a deduction for the increase in (discounted) reserves for losses 

incurred during the taxable year but still unpaid as of the end 

of the taxable year. 

The deduction for losses paid during the taxable year must be 

reduced to take account of salvage and reinsurance. Insurance 

companies, however, are not required to reduce paid losses by 

salvage attributable to such losses if any state, territory, or 

the District of Columbia prohibits the company from treating the 

salvage as an asset for statutory purposes. The deduction for 

unpaid losses must be discounted as provided in section 846. The 

deduction for losses and expenses incurred, both paid and unpaid, 

is required to be "reasonable." 

Reasons for Change 

Several states have rules prohibiting the reporting of any 

salvage (including subrogation claims) not reduced to cash or 

cash equivalents. These rules reflect the generally conservative 

nature of state reporting measures, which are designed primarily 

to ensure the solvency of insurance companies. The exclusion of 

such a significant portion of salvage, while consistent with 

state regulatory ends, does not result in an accurate measurement 

of income for federal tax purposes. The state regulatory rules 

allow companies to determine losses incurred on a gross basis 

rather than on a net basis (i.e. gross losses incurred minus 

salvage value). As a result, the deduction for paid losses is 

overstated by the amount of salvage expected to be received in 

the future. (The salvage value is later taken as income when 

received.) This overstatement of deductions results in a mismatching of underwriting income and underwriting expenses. A 

more accurate measure of income for federal tax purposes can be 

achieved by requiring the matching of expected salvage recovery 

value against paid losses. 

A more accurate measurement of income accrued can also be 

achieved through adjusting reserves for unpaid losses by 

estimated recoveries of salvage, and reinsurance value. In 

addition, making this adjustment is consistent with the current 

regulations that require the deduction for losses incurred to be 

a fair and reasonable estimate of the liability. 

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Description of Proposal 

Section 832 would be amended to require that the deduction 

for losses incurred, both paid and unpaid, be reduced by 

estimated recoveries of salvage (including subrogation claims) 

attributable to such losses, whether or not the salvage is 

treated as an asset for statutory purposes. Treasury would be 

given regulatory authority to provide for the discounting of any 

salvage to be taken into account. 

The provision would apply to taxable years beginning after 

December 31, 1989. Application of this provision is a change in 

the taxpayer's method of accounting for purposes of section 481. 

Taxpayers must spread the section 481 adjustment over a period 

not exceeding four years, in accordance with the rules applicable 

to a change in method of accounting initiated by the taxpayer and 

approved by the Internal Revenue Service. In all cases, the 

amount of the adjustment required by section 481 will be the 

difference between the amount of unreduced loss reserves at the 

end of the taxable year immediately preceding the first taxable 

year beginning after December 31, 1989, and the amount of the 

reduced loss reserve determined under this proposal as of the 

beginning of the first taxable year beginning after December 31, 

1989. 

Effects of Proposal 

The proposal will ensure that the salvage and subrogation 

value received by insurance companies cannot be used to defer 

income from taxation by overstating the deductions taken for 

underwriting losses (and expenses). The total deductions taken 

for any given policy loss will remain unchanged; however, the 

timing of those deductions will more accurately reflect income 

accrued. The tax benefit received by insurance companies through 

the mismeasurement of their taxable incomes under current law 

will be recovered by the proposal. 

Revenue Effect 

The proposal is estimated to increase budget receipts as 

follows: 

Treatment of salvage 

value by insurance 

companies: 

1990 

0.2 

Fiscal Year 

1991 1992 1993 1994 1995 

(Billions of dollars) 

0.2 0.2 0.2 0.1 0.1 
PAYROLL TAX DEPOSIT STABILIZATION 

Current Law 

Under current law, employers deposit income taxes and FICA 

(social security) taxes withheld from employees' wages together 

with the employers' matching shares of FICA taxes. The frequency 

of payment is related to the amount of unpaid liability. 

Smaller employers pay accumulated payroll tax liabilities of 

$500 or more after the end of the month; payroll tax liabilities 

under $500 are paid after the end of each calendar quarter. 

Until August, 1990, larger employers are required to deposit 

payroll taxes as frequently as eight times a month. Employers 

who have $3,000 or more of accumulated but undeposited payroll 

taxes at the end of eighth-monthly periods (periods which end on 

the 3rd, 7th, 11th, 15th, 19th, 22nd, 25th, and last days of each 

month) are required to deposit at least 95 percent of such taxes 

within three banking days. The remainder is due with the first 

deposit otherwise required after the 15th of the following month. 

Beginning in August, 1990, under provisions of the Omnibus 

Reconciliation Act of 1989 (OBRA), payment of accumulated 

liabilities of $100,000 or more will be accelerated and deposits 

may be required more frequently than eight times a month. An 

employer who is on the eighth-monthly deposit system will be 

required to deposit at least 95 percent of accumulated payroll 

taxes by the close of the next banking day after any day on which 

the employer has undeposited payroll taxes accumulated within 

that eighth-monthly period of $100,000 or more, regardless of 

whether that day is the last day of an eighth-monthly period. 

From August, 1990 through December, 1990, accumulated, unpaid 

payroll taxes of $100,000 or more trigger a next banking day 

deposit requirement. During 1991, such amounts must be deposited 

by the second banking day. During 1992 aae 199~, such amounts 

must be deposited by the third banking day. During~l,t,_s" 

1995, such amounts must again be deposited by the next banking •J 

day. After 1995, OBRA empowers the Treasury Department to issue 

regulations to set the deposit dates in a similar manner in order 

to minimize the unevenness of the receipts effects of the 

provision. It is anticipated that deposits would continue to be 

required on the next banking day. 

Reasons for Change 

Most payroll taxes are withheld from the wages and salaries 

of employees and are held by employers as agents for the u.s. 

Government. The delay between the payroll date and the date on 

which the withheld taxes are paid to the Treasury was originally 

intended to permit employers to verify the amount of payroll tax 

liability and to minimize the administrative burdens and processing costs of immediate payment for employers and the government. 

-55-
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In recent years, the advances in automated payroll and 

accounting equipment have virtually eliminated the need for any 

delay between the payroll date and the date on which the taxes 

are deposited by the employer. In recognition of this, Congress 

in the Omnibus Budget Reconciliation Act of 1989 required many 

employers to make deposits on the next banking day after they 

have accumulated undeposited payroll taxes of $100,000 or more. 

This change is effective for amounts required to be deposited 

after July 31, 1989. 

However, this change was not made permanent. Instead the 

one-day delay applies only in 1990, and then automatically shifts 

to two days in 1991, to three days in 1992, and then back to one 

day in 1993 and 1994. After 1994, the Secretary of the Treasury 

is directed to issue regulations which "minimize the unevenness" 

in the revenue effect of the provision. 

The automatic shift from one to two days in 1991, and from 

two to three days in 1992, is inconsistent with the rationale 

which Congress gave for the change which it made in 1989 -- that 

is, that advances in payroll systems make such delays 

unnecessary. Moreover, current law would place substantial 

burdens on employers who would be forced to reprogram their 

payroll system for four years in a row to take account of the 

shifting deposit dates. 

Description of Proposal 

Under the proposal, an employer who is on the eighth-monthly 

deposit system would be required to deposit at least 95 percent 

of accumulated payroll taxes by the close of the next banking day 

after any day on which the employer had undeposited payroll taxes 

accumulated within that eighth-monthly period of $100,000 or 

more, regardless of whether that day is the last day of an 

eighth-monthly period. The proposal would become effective for 

payroll tax deposits beginning in August, 1990. 

Effects of Proposal 

The proposal would change the OBRA-mandated second banking 

day deposit requirement for 1991 and the third banking day 

deposit requirement for 1992 and 1993 to a next day deposit 

requirement. Under the proposal, the change to next banking day 

deposits imposed by OBRA and scheduled to become effective in 

August, 1990 would be permanent and would be the only change 

required by employers. 

The proposal to continue next banking day payroll tax 

deposits after 1990 would not impose any new burdens on affected 

employers. In fact, since much of the burden of payroll tax 

deposit requirements is from adjusting to changes, the current 

proposal will ease administrative burdens by eliminating the 

currently scheduled changes in deposit rules in 1991, 1992, and 

1994. 
Revenue Estimate 

Stabilize payroll tax 

deposits: 

1990 

0 

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Fiscal Years 

1991 1992 1993 1994 1995 

(Billions of Dollars) 

0.9 2.2 -3.1 0 0 

PERMIT LIMITED USE OF EXCESS PENSION FUNDS 

TO PAY RETIREE HEALTH BENEFITS 

Current Law 

Pension plan assets may not revert to an employer prior to 

termination of the plan and the satisfaction of all plan 

liabilities. Any assets that revert to the employer upon such 

termination are included in the gross income of the employer and 

are subject to a 15 percent excise tax. 

A pension plan may provide medical benefits to retirees 

through a section 401(h) account that is part of such plan. The 

assets of a pension plan may not be transferred to a section 

401(h) account without disqualifying the pension plan and 

subjecting the amounts transferred to income and excise taxes. 

Reasons for Change 

Many employers currently have substantially over-funded 

pension plans. At the same time, many of these employers are 

facing significant retiree health liabilities for which current 

law permits limited tax-favored pre-funding. The proposal would 

permit employers to use some portion of excess pension plan 

assets to satisfy current retiree health liabilities under 

the same plan. 

Description of Proposal 

The transfer of excess pension plan assets to a 401(h) 

account to pay current retiree health benefits would be allowed 

without termination or disqualification of the plan. The amount 

of the transfer could not exceed the amount of assets in excess 

of 140 percent of the plan's current liability or, if less, the 

plan's current retiree health liabilities for the current year. 

Amounts transferred would not be includable in gross income or 

subject to the excise tax on reversions. 

Transfers would be permitted on an interim basis only, 

thereby enabling policy makers to evaluate the effectiveness and 

the long-term revenue effects of this approach to satisfy retiree 

health liabilities. In the event of a transfer, the pension plan 

would be subject to additional requirements with respect to 

pension benefits, such as full vesting, to preserve benefit 

security. More specifically, only one transfer would be 

permitted. The transfer would have to occur before January 1, 

1993 and in a plan year beginning after December 31, 1990. 

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Effects of Proposal 

Employers could be expected to transfer funds from the 

pension portion of an over-funded plan rather than making 

additional contributions to a 40l(h) account under the same plan. 

Since additional contributions are deductible from income, 

taxable income would be increased in the short run. In the 

longer run, however, the reduction in assets available to pay 

pension benefits could result in a corresponding increase in 

contributions for that purpose. 

Revenue Estimate 

Permit limited use of 

excess pension funds to 

pay retiree health 

benefits: 

Fiscal Year 

1990 1991 1992 1993 1994 

(Billions of Dollars) 

0 0.2 0.4 0.2 0.0 

1995 

0.0 
INITIATE IRS MANAGEMENT REFORMS 

Current Management Procedure: 

The IRS currently allocates substantial resources to direct 

enforcement of the tax laws. Direct enforcement encompasses activit~es designed to encourage accurate reporting of taxable 

income and to assess or collect taxes, penalties, and interest 

which are owed but not reported or paid. In allocating resources 

to these activities, the IRS does not simply seek to collect the 

maximum amount of taxes; rather, the objective is to encourage 

and enhance voluntary compliance (i.e., indirect revenue effects 

are also considered). Consequently, a portion of its resources 

are routinely allocated to direct enforcement activities which 

have historically resulted in relatively low yields (i.e., 

revenues to costs). 

Reasons for Changes: 

The IRS has identified a number of current opportunites in 

the enforcement area in which a temporary reallocation of 

resources already at hand would be particularly useful. 

Description of Proposal: 

These management reforms would change the allocation of 

specific resources, and results from a special effort to identify 

specific areas of opportunity. A description of these actions 

follows, along with the estimated FY 1991 impact on revenue: 

o Examination FY 1991 Tax Shelter Initiative--Resources 

would be reallocated to accelerate the examination process 

for tax shelter cases with attendant expedited closure of 

such cases. Significant key cases will be prioritized and 

targeted for expeditious handling. The overall impact 

involves a two-year window of opportunity, and the FY 1991 

estimated revenue will be $349.0 million. 

o CEP Settlement Authority--Examinations in the Coordinated 

Examination Program enter the administrative appeals 

process on unagreed issues at the close of the examination. This initiative would delegate appeals settlement 

authority to the CEP examiners on the basis of historical 

appeals settlement precedents. The result would be an 

acceleration of the receipt of taxes, penalties, and 

interest, and the FY 1991 effect is estimated to be $546.7 

million. 

o Excise Tax Initiative--An additional 150 staff years of 

existing revenue agent staffing is to be redirected from 

lower yielding areas to examination of excise tax returns. 

The FY 1991 revenue effect is estimated to be $2.3 

million. 

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o Employee Plans/Exempt Organizations--This initiative 

focuses on the actuarial examinations of small retirement 

plans. Resources will be shifted from other examination 

and determination activities to this program, increasing 

the number of examinations in this area from the 

previously planned 700 to 18,000. The revenue effect 

starts in FY 1990, with additional collections of $64.0 

million, and $602 million in FY 1991. 

o Counsel/Appeals--This initiative will shift 145 staff 

years from Examination staff to Appeals staff to help 

close targeted large cases in the appeals process. There 

are 47 targeted cases which are expected to be closed in 

FY 1991, yielding collections of $1.0 billion in that 

year. 

Effects of Proposal: 

All affected activities are in the area of direct 

enforcement. Consequently, the proposal should enhance the 

amount of revenue directly resulting from specific cases, while 

also expediting the collection of past due taxes. 

Revenue Estimates 

Initiate IRS management 

initiatives: 

Fiscal Years 

1990 1991 1992 1993 1994 1995 

(Billions of Dollars) 

0.1 2.5 1.1 0.5 -* -0.4 

-* Revenue loss of less than $50 million. 
INCREASE IN IRS FY 1991 ENFORCEMENT FUNDING 

Current Law 

The IRS currently allocates substantial resources to direct 

enforcement of the tax laws. Direct enforcement encompasses 

activities designed to encourage accurate reporting of taxable 

income and to assess or collect taxes, penalties, and interest 

which are owed but not paid. In allocating resources to these 

activities, the IRS does not simply seek to collect the maximum 

amount of taxes; rather, the objective is to encourage and 

enhance voluntary compliance (i.e., indirect revenue effects are 

considered. 

Reasons for Changes 

The IRS has identified a number of enforcement areas in which 

specific problems exist that could be resolved by the application 

of additional resources. In addition, the gap between taxes owed 

and taxes voluntarily paid contributes to the Federal deficit and 

undermines the system of voluntary compliance. 

Description of Proposal 

Increases IRS funding for tax law enforcement, and for the 

collection of delinquent taxes, penalties, and interest. The 

specific programs, new budget authority and estimated FY 1991 

receipts are as follows: 

I 

o Examination District Office Initiative--An additional 

1,049 staff years (and 127 support staff years) are to be 

applied to excise tax and estate and gift tax audits. 

Total budget authority for FY 1991 is $77.1 million, and 

the effect on collections in that year is a reduction of 

$18.2 million, due to initial opportunity costs. 

o Examination Service Center--This initiative will expand 

Service Center Examination programs by applying an 

additional 640 staff years, with an FY 1991 budget 

authority of $27.3 million, to a variety of correspondence 

audits: Schedule A deductions, dependents, duplicated 

expenses, and deductions in excess of statutory limits. 

Collections in FY 1991 are estimated to increase by $143.6 

million. 

o Examination Contract Training--Current training programs 

utilize experienced revenue agents as instructors. This 

initiative will reduce the opportunity costs of training 

by substituting contract instructors for a substantial 

portion of recruit classroom training. The FY 1991 budget 

authority is $7.5 million, and the estimated revenue 

impact for that year is $13.8 million. 

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o Examination Claims Auditing--This initiative would apply 

100 revenue agent staff years (and 46 support staff 

years), with a budget authority of $7.9 million in FY 

1991, to increase examinations of claims for refunds of 

taxes. There is no estimated revenue impact for FY 1991. 

o Collection of Accounts Receivable--This initiative will 

apply an additional 987 revenue officer staff years (and 

an additional 66 staff years for support), with total FY 

1991 budget authority of $55.5 million, to the accounts 

receivable inventory. In FY 1991, increased collections 

of past due taxes, penalties and interest will amount to 

$150.2 million. 

o Returns Processing, Document Matching--This initiative 

would expand matching of noncustodial agreements by 

applying the equivalent of 366 staff years, with budget 

authority of $12.3 million, to this activity. The 

estimated increase in collections for FY 1991 is $172.6 

million. 

o Returns Processing, Dependent SSN Matching--This 

initiative will expand matching of dependent social 

security numbers by application of the equivalent of 84 

staff years, with a budget authority of $2.9 million. The 

estimated increase in collections for FY 1991 is $57.5 

million. 

o Returns Processing, Mortgage Interest Credit--This 

initiative will expand matching of the mortgage interest 

credit by application of the equivalent of 14 additional 

staff years, with an FY 1991 budget authority of $0.5 

million. Increase collections in FY 1991 are estimated to 

be $17.5 million. 

Effects of Proposal: 

All affected activities are in the area of direct 

enforcement. Consequently, the proposal should enhance the level 

of revenue collection, encourage taxpayers to correctly report 

their income for tax purposes, and expedite the collection of 

past due taxes. 

Revenue Estimates 

Increase IRS enforcement 

funding: 

Fiscal Years 

1990 1991 1992 1993 1994 1995 

(Billions of Dollars) 

0 0.5 0.8 1.3 1.5 1.6 
MISCELLANEOUS PROPOSALS AFFECTING RECEIPTS 

Description of Proposals 

contr1 ut1on tote c1v1 serv1ce ret1rement system CSRS). 

Effective January 1, 1991, the D.C. government would be required 

to phase-in payments for current CSRS employee cost of living 

(COLAs) liabilities, as well as to pay the cost of COLAs for 

post-1986 CSRS annuitants. 

Increase ad valorem fee on shi ers. The current ad valorem 

fee on s 1ppers wou e 1ncrease rom .04 percent of cargo 

value to approximately 0.125 percent of cargo value. This 

increase would fully offset the cost of Corps of Engineers harbor 

maintenance dredging; currently 40% of the cost of the program is 

recovered by the fee. It would also offset the cost of certain 

National Oceanic and Atmospheric Administration marine programs, 

including coastal mapping, marine weather, and circulation and 

tide data. 

Increase and exland Securities Exchange Commission (SEC) 

fees. Effective Ju y 1, 1990, the fee on securities market 

transactions would be increased from 1/300 to 1/220 of 1 percent 

of dollar volume traded, and would be extended to apply to most 

over-the-counter securities transactions. In addition, the fee 

charged for merger or proxy filing would be increased from 1/50 

to 1/40 of 1 percent of the value of the transaction. Similarly, 

the registration fee on securities offerings would be increased 

from 1/50 to 1/40 of 1 percent of the value of the offering. 

Modify collection period of telephone excise tax. Under 

present law the telephone tax billed to a customer in a given 

semimonthly period is considered to be collected during the 

second following semimonthly period. The tax is deposited within 

three banking days after the semimonthly period in which it is 

considered to be collected. Under this proposal the tax would be 

collected during the first week of the second following semimonthly period and would be deposited within three banking 

days after the end of that week. This change would be effective 

for taxes considered collected for semimonthly periods beginning 

after December 31, 1990. 

Extend abandoned mine reclamation fees. The abandoned mine 

reclamation fees, which are scheduled to expire in August 1992, 

would be extended. Collections from the existing fees of 

35 cents per ton for surface mined coal and 15 cents per ton for 

under ground mined coal are allocated to States for reclamation 

grants. Extensive abandoned land problems are expected to exist 

after all the money from the collection of existing fees is 

expended. 

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Futures Tradin commission (CFTC) fees. 

Effect1ve Octo er , , a utures mar et transact1ons ee of 

11 cents per transaction would be established to cover the cost 

of CFTC expenses. 

Chan e collection oint of s ecial taxes in connection with 

liquor occupat1ons. To 1ncrease comp 1ance rates an revenues, 

the special occupation taxes currently levied on retailers would 

be eliminated and the existing taxes on wholesalers and 

manufacturers would be increased effective October 1, 1990. 

Extend social securit and Medicare 

(OASDHI coverage to D.C. emp oyees. T 1s proposa wou extend 

OASDHI coverage to all newly hired D.C. employees effective 

January 1, 1991. Most D.C. employees are currently covered. 

Extend IRS user fees. The existing fee on each request for a 

letter ruling, determination letter, opinion, or other similar 

ruling or determination filed after January 31, 1988 and before 

October 1, 1990 would be permanently extended. 

Establish Federal Emergenc* Mana0ement Agency (FEMA) user 

fees. Beginning October 1, 19 0, 10 percent of FEMAs costs 

1ncurred as the Nuclear Regulatory Commission's agent in 

regulating the evacuation plans of nuclear power plants would be 

recovered through user fees. 

Extend and expand railroad unem~loyment insurance (UI) 

reimbursable status. To prevent pu lie subsidies from being 

diverted to pay for the high unemployment cost of the private 

sector railroads, public commuter railroads were exempt from the 

full railroad unemployment tax rate in 1989 and will continue to 

be exempt in 1990. Instead, they are required to reimburse the 

unemployment insurance fund for the actual costs of their 

employees. Under this proposal the exemption provided to public 

commuter railroads would be extended beyond its current law 

expiration date and would be expanded to Amtrak beginning in 

1991. 

Modify Federal Reserve reimbursement. A permanent, 

indefinite appropriation to reimburse Federal Reserve banks for 

their services as fiscal agents for the Bureau of Public Debt 

will be established. This would result in a corresponding 

increase in the deposit of earnings by the Federal Reserve 

System, which are classified as receipts. 

Delay for 3 months the Federal emaloyee pay raise. The 

Federal employee pay raise is propose to be delayed 3 months 

from October 31, 1990 to January 1, 1991. 

Establish Corps of Engineers atplication fees for ~ermits. 

Revised regulations are being deve oped that would ena le the 

Corps of Engineers to begin collecting fees on requests for 

permits necessary for development or other activities in 

navigable waterways and wetlands. These fees would be effective 

October 1, 1990. 
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Other. Additional proposals include an increase in the HUD 

interstate land sales fee and modification of the EPA pesticide 

fee. 

Revenue Estimate 

Fiscal Year 

1990 1991 1992 1993 1994 1995 

(Billions of Dollars) 

Increase D.C. contributions 

to CSRS 0 * * * 0.1 0.1 

Increase a-d valorem fees on 

shippers 0 0.3 0.3 0.3 0.4 0.4 

Increase and expand SEC fees * 0.1 0.1 0.1 0.1 0.1 

Modify collection period of 

telephone excise tax 0 0.1 * * * * 

Extend abandoned mine 

reclamation fees 0 0 0.1 0.3 0.3 0.3 

Establish CFTC fee 0 * * * 0.1 0.1 

Change collection point for 

liquor occupation taxes 0 * * * * * 

Extend OASDHI coverage to 

DC employees 0 * * * * * 

Extend IRS user fee 0 0.1 0.1 0.1 0.1 0.1 

Establish FEMA fees * * * * * * 

Extend and expand railroad 

UI reimbursable status 0 -* -* 0 -* -* 

Modify Federal Reserve 

reimbursement 0 0.1 0.1 0.1 0.1 0.1 

Delay Federal pay raise 0 -* -0.1 -0.1 -0.1 -0.1 

Establish Corps of Engineers 

fees 0 * * * * * 

Other 0 -0.1 -0.2 -* -* -* 

* Revenue gain of less than $50 million. 

-* Revenue loss of less than $50 million.