203

14. TAX EXPENDITURES

The Congressional Budget Act of 1974 (Public Law 93–

344) requires that a list of “tax expenditures’’ be included 

in the budget. Tax expenditures are defined in the law as 

“revenue losses attributable to provisions of the Federal 

tax laws which allow a special exclusion, exemption, or 

deduction from gross income or which provide a special 

credit, a preferential rate of tax, or a deferral of tax liability.’’ These exceptions may be viewed as alternatives to 

other policy instruments, such as spending or regulatory 

programs.

Identification and measurement of tax expenditures 

depends crucially on the baseline tax system against 

which the actual tax system is compared. The tax expenditure estimates presented in this chapter are patterned 

on a comprehensive income tax, which defines income as 

the sum of consumption and the change in net wealth in 

a given period of time.

An important assumption underlying each tax expenditure estimate reported below is that other parts of the 

Tax Code remain unchanged. The estimates would be different if tax expenditures were changed simultaneously 

because of potential interactions among provisions. For 

that reason, this chapter does not present a grand total 

for the estimated tax expenditures.

Tax expenditures relating to the individual and corporate income taxes are estimated for fiscal years 2013–

2019 using two methods of accounting: current revenue 

effects and present value effects. The present value approach provides estimates of the revenue effects for tax 

expenditures that generally involve deferrals of tax payments into the future.

A discussion of performance measures and economic 

effects related to the assessment of the effect of tax expenditures on the achievement of program performance 

goals is presented in Appendix A. This section is a complement to the Government-wide performance plan required 

by the Government Performance and Results Act of 1993.

TAX EXPENDITURES IN THE INCOME TAX

Tax Expenditure Estimates

All tax expenditure estimates presented here are based 

upon current tax law enacted as of December 31, 2013. 

In most cases, expired or repealed provisions are not 

listed if their revenue effects result only from taxpayer 

activity occurring before fiscal year 2013. The estimates 

are based on the economic assumptions from the MidSession Review of the 2014 Budget (except for health 

tax expenditures which are updated using assumptions 

in the February FY15 Budget.) The estimates reflect the 

“American Taxpayer Relief Act of 2012” (ATRA), enacted 

into law on January 2, 2013, which extended many tax 

expenditures, changed income tax rates, and provided 

Alternative Minimum Tax relief. 

The total revenue effects for tax expenditures for fiscal 

years 2013–2019 are displayed according to the Budget’s 

functional categories in Table 14–1. Descriptions of the 

specific tax expenditure provisions follow the tables of estimates and the discussion of general features of the tax 

expenditure concept.

Two baseline concepts—the normal tax baseline and 

the reference tax law baseline—are used to identify and 

estimate tax expenditures.1 For the most part, the two 

concepts coincide. However, items treated as tax expendi1 These baseline concepts are thoroughly discussed in Special Analysis G of the 1985 Budget, where the former is referred to as the pre-1983 

method and the latter the post-1982 method.

tures under the normal tax baseline, but not the reference 

tax law baseline, are indicated by the designation “normal 

tax method’’ in the tables. The revenue effects for these 

items are zero using the reference tax rules. The alternative baseline concepts are discussed in detail following 

the tables.

Table 14–2 reports separately the respective portions 

of the total revenue effects that arise under the individual 

and corporate income taxes separately. The location of the 

estimates under the individual and corporate headings 

does not imply that these categories of filers benefit from 

the special tax provisions in proportion to the respective 

tax expenditure amounts shown. Rather, these breakdowns show the form of tax liability that the various provisions affect. The ultimate beneficiaries of corporate tax 

expenditures could be shareholders, employees, customers, or other providers of capital, depending on economic 

forces.

Table 14–3 ranks the major tax expenditures by the 

size of their 2015–2019 revenue effect. The first column 

provides the number of the provision in order to cross reference this table to Tables 14–1 through 14–3, as well as 

to the descriptions below. 

Interpreting Tax Expenditure Estimates

The estimates shown for individual tax expenditures in 

Tables 14–1, 14–2, and 14–3 do not necessarily equal the 

increase in Federal revenues (or the change in the budget 
204 ANALYTICAL PERSPECTIVES

balance) that would result from repealing these special 

provisions, for the following reasons.

First, eliminating a tax expenditure may have incentive effects that alter economic behavior. These incentives 

can affect the resulting magnitudes of the activity or of 

other tax provisions or Government programs. For example, if capital gains were taxed at ordinary rates, capital 

gain realizations would be expected to decline, resulting 

in lower tax receipts. Such behavioral effects are not reflected in the estimates.

Second, tax expenditures are interdependent even 

without incentive effects. Repeal of a tax expenditure provision can increase or decrease the tax revenues associated with other provisions. For example, even if behavior 

does not change, repeal of an itemized deduction could 

increase the revenue costs from other deductions because 

some taxpayers would be moved into higher tax brackets. 

Alternatively, repeal of an itemized deduction could lower 

the revenue cost from other deductions if taxpayers are 

led to claim the standard deduction instead of itemizing. 

Similarly, if two provisions were repealed simultaneously, 

the increase in tax liability could be greater or less than 

the sum of the two separate tax expenditures, because 

each is estimated assuming that the other remains in 

force. In addition, the estimates reported in Table 14–1 

are the totals of individual and corporate income tax 

revenue effects reported in Table 14–2 and do not reflect 

any possible interactions between individual and corporate income tax receipts. For this reason, the estimates in 

Table 14–1 should be regarded as approximations.

Present-Value Estimates

The annual value of tax expenditures for tax deferrals 

is reported on a cash basis in all tables except Table 14–4. 

Cash-based estimates reflect the difference between taxes 

deferred in the current year and incoming revenues that 

are received due to deferrals of taxes from prior years. 

Although such estimates are useful as a measure of cash 

flows into the Government, they do not accurately reflect 

the true economic cost of these provisions. For example, for 

a provision where activity levels have changed, so that incoming tax receipts from past deferrals are greater than 

deferred receipts from new activity, the cash-basis tax expenditure estimate can be negative, despite the fact that 

in present-value terms current deferrals have a real cost 

to the Government. Alternatively, in the case of a newly 

enacted deferral provision, a cash-based estimate can overstate the real effect on receipts to the Government because 

the newly deferred taxes will ultimately be received. 

Discounted present-value estimates of revenue effects 

are presented in Table 14–4 for certain provisions that 

involve tax deferrals or other long-term revenue effects. 

These estimates complement the cash-based tax expenditure estimates presented in the other tables.

The present-value estimates represent the revenue effects, net of future tax payments, that follow from activities undertaken during calendar year 2013 which cause 

the deferrals or other long-term revenue effects. For instance, a pension contribution in 2013 would cause a deferral of tax payments on wages in 2013 and on pension 

fund earnings on this contribution (e.g., interest) in later 

years. In some future year, however, the 2013 pension contribution and accrued earnings will be paid out and taxes 

will be due; these receipts are included in the presentvalue estimate. In general, this conceptual approach is 

similar to the one used for reporting the budgetary effects 

of credit programs, where direct loans and guarantees in 

a given year affect future cash flows.

Tax Expenditure Baselines

A tax expenditure is an exception to baseline provisions of the tax structure that usually results in a reduction in the amount of tax owed. The 1974 Congressional 

Budget Act, which mandated the tax expenditure budget, 

did not specify the baseline provisions of the tax law. As 

noted previously, deciding whether provisions are exceptions, therefore, is a matter of judgment. As in prior years, 

most of this year’s tax expenditure estimates are presented using two baselines: the normal tax baseline and the 

reference tax law baseline. Tax expenditures may take 

the form of credits, deductions, special exceptions and allowances, and reduce tax liability below the level implied 

by the baseline tax system.

The normal tax baseline is patterned on a practical 

variant of a comprehensive income tax, which defines income as the sum of consumption and the change in net 

wealth in a given period of time. The normal tax baseline 

allows personal exemptions, a standard deduction, and 

deduction of expenses incurred in earning income. It is 

not limited to a particular structure of tax rates, or by a 

specific definition of the taxpaying unit.

The reference tax law baseline is also patterned on 

a comprehensive income tax, but it is closer to existing 

law. Reference law tax expenditures are limited to special 

exceptions from a generally provided tax rule that serve 

programmatic functions in a way that is analogous to 

spending programs. Provisions under the reference law 

baseline are generally tax expenditures under the normal 

tax baseline, but the reverse is not always true.

Both the normal and reference tax baselines allow several major departures from a pure comprehensive income 

tax. For example, under the normal and reference tax 

baselines:

•	Income is taxable only when it is realized in exchange. Thus, the deferral of tax on unrealized capital gains is not regarded as a tax expenditure. Accrued income would be taxed under a comprehensive 

income tax.

•	There is a separate corporate income tax. 

•	Noncorporate tax rates vary by level of income. 

•	Individual tax rates, including brackets, standard 

deduction, and personal exemptions, are allowed to 

vary with marital status.

•	Values of assets and debt are not generally adjusted for inflation. A comprehensive income tax would 
14. TAX EXPENDITURES 205

Table 14–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2013–2019

(In millions of dollars)

Total from corporations and individuals

2013 2014 2015 2016 2017 2018 2019 2015–19

National Defense

1 Exclusion of benefits and allowances to armed forces personnel ................................... 11,620 12,620 13,230 12,200 12,310 12,730 13,240 63,710

International affairs: 

2 Exclusion of income earned abroad by U.S. citizens ....................................................... 4,410 4,310 4,350 4,470 4,730 4,990 5,200 23,740

3 Exclusion of certain allowances for Federal employees abroad ...................................... 1,100 1,160 1,220 1,280 1,340 1,410 1,480 6,730

4 Inventory property sales source rules exception ............................................................. 3,320 3,600 3,890 4,220 4,560 4,940 5,352 22,962

5 Deferral of income from controlled foreign corporations (normal tax method) ................ 63,440 72,740 75,540 76,380 76,260 73,970 71,060 373,210

6 Deferred taxes for financial firms on certain income earned overseas ............................ 6,660 2,700 0 0 0 0 0 0

General science, space, and technology: 

7 Expensing of research and experimentation expenditures (normal tax method) ............ 5,840 5,160 4,800 5,450 6,230 6,930 7,270 30,680

8 Credit for increasing research activities ........................................................................... 8,430 5,420 3,170 2,860 2,570 2,300 2,030 12,930

Energy: 

9 Expensing of exploration and development costs, fuels .................................................. 550 510 510 590 600 550 520 2,770

10 Excess of percentage over cost depletion, fuels ............................................................. 530 670 780 920 1,070 1,230 1,390 5,390

11 Alternative fuel production credit ..................................................................................... 10 0 0 0 0 0 0 0

12 Exception from passive loss limitation for working interests in oil and gas properties .... 20 20 20 20 20 20 20 100

13 Capital gains treatment of royalties on coal ..................................................................... 90 80 90 110 120 120 130 570

14 Exclusion of interest on energy facility bonds .................................................................. 20 30 30 30 30 30 30 150

15 Energy production credit 1 .............................................................................................. 1,670 2,370 3,000 3,330 3,370 3,210 3,130 16,040

16 Energy investment credit 1 .............................................................................................. 1,950 1,840 1,470 1,380 850 220 –20 3,900

17 Alcohol fuel credits 2 ...................................................................................................... 40 10 10 0 0 0 0 10

18 Bio-Diesel and small agri-biodiesel producer tax credits 3 ............................................. 20 20 0 0 0 0 0 0

19 Tax credits for clean-fuel burning vehicles ....................................................................... 270 440 670 680 650 400 150 2,550

20 Exclusion of utility conservation subsidies ....................................................................... 340 340 340 340 320 320 320 1,640

21 Credit for holding clean renewable energy bonds 4 ........................................................ 70 70 70 70 70 70 70 350

22 Deferral of gain from dispositions of transmission property to implement FERC 

restructuring policy ..................................................................................................... 0 –60 –220 –220 –200 –170 –140 –950

23 Credit for investment in clean coal facilities ..................................................................... 180 200 140 40 20 –10 –10 180

24 Temporary 50% expensing for equipment used in the refining of liquid fuels .................. 600 –100 –700 –830 –870 –800 –660 –3,860

25 Natural gas distribution pipelines treated as 15-year property ........................................ 100 100 100 110 110 120 120 560

26 Amortize all geological and geophysical expenditures over 2 years ................................ 100 110 130 130 120 100 100 580

27 Allowance of deduction for certain energy efficient commercial building property .......... 70 40 20 0 0 –20 –20 –20

28 Credit for construction of new energy efficient homes ..................................................... 150 120 60 20 0 0 0 80

29 Credit for energy efficiency improvements to existing homes .......................................... 610 0 0 0 0 0 0 0

30 Credit for energy efficient appliances .............................................................................. 150 130 120 100 0 0 0 220

31 Credit for residential energy efficient property ................................................................. 960 1,060 1,170 1,300 540 0 0 3,010

32 Qualified energy conservation bonds 5 ........................................................................... 20 30 30 30 30 30 30 150

33 Advanced energy property credit ..................................................................................... 210 110 90 0 0 –10 –10 70

34 Advanced nuclear power production credit ...................................................................... 0 0 0 0 210 470 590 1,270

Natural resources and environment: 

35 Expensing of exploration and development costs, nonfuel minerals ............................... 50 50 50 60 60 60 60 290

36 Excess of percentage over cost depletion, nonfuel minerals ........................................... 580 590 590 600 610 620 640 3,060

37 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities .......... 450 490 560 630 690 730 790 3,400

38 Capital gains treatment of certain timber income ............................................................ 90 80 90 110 120 120 130 570

39 Expensing of multiperiod timber growing costs ............................................................... 280 300 300 320 330 340 360 1,650

40 Tax incentives for preservation of historic structures ....................................................... 570 580 600 610 620 630 640 3,100

41 Industrial CO2 capture and sequestration tax credit ....................................................... 80 80 80 130 250 120 0 580

42 Deduction for endangered species recovery expenditures .............................................. 20 20 20 30 30 30 30 140

Agriculture: 

43 Expensing of certain capital outlays ................................................................................ 90 100 100 110 110 120 120 560

44 Expensing of certain multiperiod production costs .......................................................... 140 140 140 140 150 150 160 740

45 Treatment of loans forgiven for solvent farmers ............................................................... 40 40 40 40 40 40 40 200
206 ANALYTICAL PERSPECTIVES

Table 14–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2013–2019—Continued

(In millions of dollars)

Total from corporations and individuals

2013 2014 2015 2016 2017 2018 2019 2015–19

46 Capital gains treatment of certain income ....................................................................... 920 800 920 1,060 1,160 1,230 1,280 5,650

47 Income averaging for farmers .......................................................................................... 130 130 130 140 140 140 140 690

48 Deferral of gain on sale of farm refiners .......................................................................... 20 20 20 20 20 20 20 100

49 Expensing of reforestation expenditures ......................................................................... 70 70 70 80 80 90 100 420

Commerce and housing: 

Financial institutions and insurance: 

50 Exemption of credit union income .............................................................................. 2,000 2,070 1,970 2,370 2,700 2,770 3,000 12,810

51 Exclusion of interest on life insurance savings ........................................................... 18,930 21,270 23,040 24,690 26,370 28,180 30,090 132,370

52 Special alternative tax on small property and casualty insurance companies ........... 10 10 10 10 20 20 20 80

53 Tax exemption of certain insurance companies owned by tax-exempt organizations 600 660 690 730 760 790 830 3,800

54 Small life insurance company deduction .................................................................... 30 30 40 40 40 40 40 200

55 Exclusion of interest spread of financial institutions ................................................... 210 1,260 1,840 1,940 2,030 2,130 2,230 10,170

Housing: 

56 Exclusion of interest on owner-occupied mortgage subsidy bonds ............................ 1,230 1,360 1,510 1,700 1,880 2,000 2,140 9,230

57 Exclusion of interest on rental housing bonds ............................................................ 1,000 1,090 1,230 1,390 1,520 1,640 1,750 7,530

58 Deductibility of mortgage interest on owner-occupied homes .................................... 69,020 70,370 73,910 79,830 89,150 100,600 112,840 456,330

59 Deductibility of State and local property tax on owner-occupied homes .................... 29,290 31,740 33,880 36,570 39,600 42,730 45,770 198,550

60 Deferral of income from installment sales ................................................................... 1,140 1,330 1,470 1,630 1,760 1,860 1,950 8,670

61 Capital gains exclusion on home sales ...................................................................... 34,270 52,250 56,510 61,110 66,090 71,480 77,300 332,490

62 Exclusion of net imputed rental income ...................................................................... 72,440 76,220 79,810 83,470 87,900 92,570 97,488 441,238

63 Exception from passive loss rules for $25,000 of rental loss ...................................... 8,660 9,820 10,360 10,910 11,550 12,240 12,810 57,870

64 Credit for low-income housing investments ................................................................ 7,410 8,310 8,280 8,330 8,730 9,080 9,420 43,840

65 Accelerated depreciation on rental housing (normal tax method) .............................. 1,780 2,090 2,500 3,020 3,560 4,130 4,710 17,920

66 Discharge of mortgage indebtedness ......................................................................... 3,360 870 0 0 0 0 0 0

Commerce: 

67 Discharge of business indebtedness .......................................................................... 0 –60 –80 –80 –60 –20 20 –220

68 Exceptions from imputed interest rules ...................................................................... 20 30 40 40 50 50 60 240

69 Treatment of qualified dividends ................................................................................. 23,650 23,840 26,650 28,580 30,040 31,290 32,390 148,950

70 Capital gains (except agriculture, timber, iron ore, and coal) ...................................... 68,860 60,030 68,850 79,300 86,950 91,550 95,620 422,270

71 Capital gains exclusion of small corporation stock ..................................................... 140 340 480 640 850 1,000 1,010 3,980

72 Step-up basis of capital gains at death ....................................................................... 23,050 30,780 32,370 34,010 35,750 37,600 39,580 179,310

73 Carryover basis of capital gains on gifts ..................................................................... 2,870 2,290 2,560 2,810 3,060 3,260 3,400 15,090

74 Ordinary income treatment of loss from small business corporation stock sale ......... 60 60 60 60 60 60 60 300

75 Accelerated depreciation of buildings other than rental housing (normal tax method) ...... –7,650 –7,570 –7,540 –7,690 –7,970 –8,350 –8,990 –40,540

76 Accelerated depreciation of machinery and equipment (normal tax method) ............ 48,460 15,300 15,470 35,640 52,860 69,300 84,420 257,690

77 Expensing of certain small investments (normal tax method) .................................... 3,950 –1,180 –2,040 –570 380 1,080 1,570 420

78 Graduated corporation income tax rate (normal tax method) ..................................... 4,300 4,200 4,130 4,100 4,220 4,200 4,370 21,020

79 Exclusion of interest on small issue bonds ................................................................. 170 190 210 230 250 280 290 1,260

80 Deduction for US production activities ........................................................................ 12,860 13,790 14,480 15,200 15,840 16,820 16,150 78,490

81 Special rules for certain film and TV production ......................................................... 290 207 120 80 40 10 0 250

Transportation: 

82 Tonnage tax ..................................................................................................................... 60 70 70 70 80 80 90 520

83 Deferral of tax on shipping companies ............................................................................ 20 20 20 20 20 20 20 100

84 Exclusion of reimbursed employee parking expenses ..................................................... 2,580 2,670 2,780 2,900 3,010 3,110 3,220 15,020

85 Exclusion for employer-provided transit passes .............................................................. 710 710 710 770 810 860 920 4,070

86 Tax credit for certain expenditures for maintaining railroad tracks ................................... 120 60 0 0 0 0 0 0

87 Exclusion of interest on bonds for Highway Projects and rail-truck transfer facilities ...... 240 230 220 210 200 190 170 990

Community and regional development: 

88 Investment credit for rehabilitation of structures (other than historic) .............................. 30 30 30 30 30 30 30 150

89 Exclusion of interest for airport, dock, and similar bonds ................................................ 740 820 920 1,030 1,130 1,210 1,300 5,590

90 Exemption of certain mutuals’ and cooperatives’ income ................................................ 110 120 120 120 130 130 130 630

91 Empowerment zones, the DC enterprise zone, and renewal communities ..................... 450 350 200 190 190 180 150 910
14. TAX EXPENDITURES 207

Table 14–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2013–2019—Continued

(In millions of dollars)

Total from corporations and individuals

2013 2014 2015 2016 2017 2018 2019 2015–19

92 New markets tax credit .................................................................................................... 950 1,010 1,040 1,050 960 750 560 4,360

93 Expensing of environmental remediation costs ............................................................... –180 –180 –170 –160 –160 –160 –160 –810

94 Credit to holders of Gulf Tax Credit Bonds. ...................................................................... 220 240 280 310 340 360 390 1,680

95 Recovery Zone Bonds 6 .................................................................................................. 120 130 150 160 180 190 210 890

96 Tribal Economic Development Bonds .............................................................................. 20 40 40 60 60 60 60 280

Education, training, employment, and social services: 

Education: 

97 Exclusion of scholarship and fellowship income (normal tax method) ....................... 2,890 2,980 3,090 3,200 3,310 3,420 3,550 16,570

98 HOPE tax credit .......................................................................................................... 0 0 0 0 0 720 7,230 7,950

99 Lifetime Learning tax credit ........................................................................................ 1,810 1,680 1,720 1,740 1,740 1,880 3,100 10,180

100 American Opportunity Tax Credit 7 ............................................................................ 12,540 15,530 15,240 15,310 15,370 13,760 0 59,680

101 Education Individual Retirement Accounts ................................................................. 70 80 100 110 120 130 150 610

102 Deductibility of student-loan interest ........................................................................... 1,720 1,720 1,780 1,780 1,790 1,790 1,840 8,980

103 Deduction for higher education expenses .................................................................. 600 560 0 0 0 0 0 0

104 Qualified tuition programs ........................................................................................... 1,680 1,770 1,900 2,050 2,200 2,350 2,520 11,020

105 Exclusion of interest on student-loan bonds ............................................................... 510 560 620 700 760 820 880 3,780

106 Exclusion of interest on bonds for private nonprofit educational facilities ................... 2,240 2,480 2,760 3,120 3,430 3,660 3,930 16,900

107 Credit for holders of zone academy bonds 8 .............................................................. 200 180 160 130 120 110 100 620

108 Exclusion of interest on savings bonds redeemed to finance educational expenses . 10 10 10 20 20 20 20 90

109 Parental personal exemption for students age 19 or over .......................................... 5,200 5,320 5,400 5,490 5,570 5,660 5,760 27,880

110 Deductibility of charitable contributions (education) ................................................... 4,550 5,040 5,370 5,810 6,290 6,780 7,290 31,540

111 Exclusion of employer-provided educational assistance ............................................ 710 750 800 850 900 950 1,000 4,500

112 Special deduction for teacher expenses ..................................................................... 190 170 0 0 0 0 0 0

113 Discharge of student loan indebtedness .................................................................... 90 90 90 90 100 100 100 480

114 Qualified school construction bonds 9 ........................................................................ 580 650 650 650 650 650 650 3,250

Training, employment, and social services: 

115 Work opportunity tax credit ......................................................................................... 900 880 460 250 200 170 130 1,210

116 Employer provided child care exclusion ...................................................................... 880 920 970 1,040 1,110 1,170 1,240 5,530

117 Employer-provided child care credit ........................................................................... 10 10 10 10 10 10 10 50

118 Assistance for adopted foster children ........................................................................ 530 530 560 590 620 660 700 3,130

119 Adoption credit and exclusion 10 ................................................................................ 450 540 580 600 640 730 660 3,210

120 Exclusion of employee meals and lodging (other than military) ................................. 2,185 3,700 3,797 3,910 4,032 4,155 4,278 20,172

121 Child credit 11 ............................................................................................................. 23,480 23,350 23,500 23,620 23,480 23,450 23,480 117,530

122 Credit for child and dependent care expenses ........................................................... 4,160 4,200 4,310 4,460 4,590 4,690 4,760 22,810

123 Credit for disabled access expenditures ..................................................................... 30 30 30 30 30 40 40 170

124 Deductibility of charitable contributions, other than education and health .................. 39,260 43,600 46,630 50,600 54,940 59,390 64,250 275,810

125 Exclusion of certain foster care payments .................................................................. 380 380 390 380 370 370 360 1,870

126 Exclusion of parsonage allowances ........................................................................... 737 720 758 798 840 885 931 4,212

127 Indian employment credit ........................................................................................... 50 40 20 20 20 10 10 80

Health: 

128 Exclusion of employer contributions for medical insurance premiums and medical care 12 ... 185,330 196,010 207,200 217,140 229,000 241,070 256,290 1,150,700

129 Self-employed medical insurance premiums ................................................................... 6,140 6,670 6,970 7,240 7,550 7,870 8,170 37,800

130 Medical Savings Accounts / Health Savings Accounts .................................................... 3,110 3,900 4,890 6,110 7,630 9,440 11,720 39,790

131 Deductibility of medical expenses ................................................................................... 8,010 8,090 8,560 8,910 8,840 9,370 10,510 46,190

132 Exclusion of interest on hospital construction bonds ....................................................... 3,430 3,790 4,210 4,740 5,220 5,570 5,970 25,710

133 Refundable Premium Assistance Tax Credit 13 ............................................................... 0 0 –3,940 –4,060 –5,740 –6,290 –6,540 –26,570

134 Credit for employee health insurance expenses of small business 14 ............................. 630 870 1,050 1,040 760 470 330 3,650

135 Deductibility of charitable contributions (health) .............................................................. 4,470 4,980 5,350 5,820 6,340 6,880 7,460 31,850

136 Tax credit for orphan drug research ................................................................................. 1,040 1,260 1,520 1,830 2,210 2,660 3,210 11,430

137 Special Blue Cross/Blue Shield deduction ...................................................................... 190 230 360 430 480 440 370 2,080

138 Tax credit for health insurance purchased by certain displaced and retired individuals 15 ..... 10 0 0 0 0 0 0 0

139 Distributions from retirement plans for premiums for health and long-term care 

insurance .................................................................................................................... 320 360 400 440 460 480 500 2,280
208 ANALYTICAL PERSPECTIVES

Table 14–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2013–2019—Continued

(In millions of dollars)

Total from corporations and individuals

2013 2014 2015 2016 2017 2018 2019 2015–19

Income security: 

140 Exclusion of railroad retirement system benefits ............................................................. 380 370 360 350 320 300 270 1,600

141 Exclusion of workers’ compensation benefits .................................................................. 10,090 10,310 10,500 10,640 10,790 10,950 11,100 53,980

142 Exclusion of public assistance benefits (normal tax method) .......................................... 770 790 820 860 900 940 980 4,500

143 Exclusion of special benefits for disabled coal miners ..................................................... 30 30 30 20 20 20 20 110

144 Exclusion of military disability pensions .......................................................................... 110 110 110 110 110 110 110 550

Net exclusion of pension contributions and earnings: 

145 Defined benefit employer plans .................................................................................. 37,860 40,090 42,340 44,750 47,270 49,160 51,440 234,960

146 Defined contribution employer plans .......................................................................... 50,670 59,380 61,050 77,020 88,740 92,770 94,820 414,400

147 Individual Retirement Accounts .................................................................................. 19,310 17,450 17,480 18,540 19,630 20,650 21,720 98,020

148 Low and moderate income savers credit .................................................................... 1,190 1,200 1,210 1,260 1,300 1,280 1,300 6,350

149 Self-Employed plans ................................................................................................... 19,400 23,300 25,530 28,100 30,890 33,860 37,150 155,530

Exclusion of other employee benefits: 

150 Premiums on group term life insurance ...................................................................... 1,910 1,940 1,980 2,030 2,080 2,130 2,180 10,400

151 Premiums on accident and disability insurance .......................................................... 310 310 310 320 320 330 330 1,610

152 Income of trusts to finance supplementary unemployment benefits ................................ 20 20 30 40 40 50 60 220

153 Special ESOP rules ......................................................................................................... 1,650 1,730 1,810 1,910 2,000 2,090 2,200 10,010

154 Additional deduction for the blind ..................................................................................... 30 30 30 30 40 40 40 180

155 Additional deduction for the elderly ................................................................................. 2,380 2,560 2,800 3,040 3,310 3,610 3,850 16,610

156 Tax credit for the elderly and disabled ............................................................................. 10 10 10 10 10 10 10 50

157 Deductibility of casualty losses ........................................................................................ 310 340 360 380 400 420 430 1,990

158 Earned income tax credit 16 ............................................................................................ 4,070 4,330 4,330 4,400 4,520 4,640 4,550 22,440

Social Security: 

Exclusion of social security benefits: 

159 Social Security benefits for retired workers ................................................................ 26,440 28,730 29,840 30,900 31,920 33,010 34,260 159,930

160 Social Security benefits for disabled workers ............................................................. 8,200 8,560 8,740 8,930 9,100 9,250 9,420 45,440

161 Social Security benefits for spouses, dependents and survivors ............................... 3,760 3,970 4,100 4,300 4,470 4,540 4,740 22,150

Veterans benefits and services: 

162 Exclusion of veterans death benefits and disability compensation .................................. 4,620 5,080 5,490 5,980 6,500 7,080 7,700 32,750

163 Exclusion of veterans pensions ....................................................................................... 410 430 450 470 480 490 510 2,400

164 Exclusion of GI bill benefits ............................................................................................. 980 1,110 1,160 1,240 1,320 1,410 1,500 6,630

165 Exclusion of interest on veterans housing bonds ............................................................ 10 10 20 20 30 30 30 130

General purpose fiscal assistance: 

166 Exclusion of interest on public purpose State and local bonds ....................................... 28,440 31,450 35,010 39,420 43,400 46,340 49,660 213,830

167 Build America Bonds 17 ................................................................................................... 0 0 0 0 0 0 0 0

168 Deductibility of nonbusiness State and local taxes other than on owner-occupied 

homes ......................................................................................................................... 44,020 46,710 49,290 53,450 58,120 62,800 67,140 290,800

Interest: 

169 Deferral of interest on U.S. savings bonds ....................................................................... 1,020 1,080 1,090 1,100 1,120 1,130 1,140 5,580

Addendum: Aid to State and local governments: 

Deductibility of: 

Property taxes on owner-occupied homes ................................................................. 29,290 31,740 33,880 36,570 39,600 42,730 45,770 198,550

Nonbusiness State and local taxes other than on owner-occupied homes ................ 44,020 46,710 49,290 53,450 58,120 62,800 67,140 290,800

Exclusion of interest on State and local bonds for: 

Public purposes .......................................................................................................... 28,440 31,450 35,010 39,420 43,400 46,340 49,660 213,830

Energy facilities .......................................................................................................... 20 30 30 30 30 30 30 150

Water, sewage, and hazardous waste disposal facilities ............................................ 450 490 560 630 690 730 790 3,400

Small-issues ............................................................................................................... 170 190 210 230 250 280 290 1,260

Owner-occupied mortgage subsidies ......................................................................... 1,230 1,360 1,510 1,700 1,880 2,000 2,140 9,230

Rental housing ............................................................................................................ 1,000 1,090 1,230 1,390 1,520 1,640 1,750 7,530

Airports, docks, and similar facilities ........................................................................... 740 820 920 1,030 1,130 1,210 1,300 5,590
14. TAX EXPENDITURES 209

Table 14–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2013–2019—Continued

(In millions of dollars)

Total from corporations and individuals

2013 2014 2015 2016 2017 2018 2019 2015–19

Student loans .............................................................................................................. 510 560 620 700 760 820 880 3,780

Private nonprofit educational facilities ........................................................................ 2,240 2,480 2,760 3,120 3,430 3,660 3,930 16,900

Hospital construction .................................................................................................. 3,430 3,790 4,210 4,740 5,220 5,570 5,970 25,710

Veterans’ housing ....................................................................................................... 10 10 20 20 30 30 30 130

1 Firms can tax an energy grant in lieu of the energy production credit or the energy investment credit for facilities placed in service in 2009 and 2010 or whose construction 

commenced in 2009 and 2010. The effect of the grant on outlays (in millions of dollars) is as follows: 2013 $8,080; 2014 $4,710; 2015 $2,520; 2016 $1,580; 2017 $330; 2018 $0; 2019 $0.

2 In addition, the alcohol fuel mixture credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2013 $10; 2014 $0; 2015 $0; 2016 $0; 2017 $0; 2018 $0; 2019 

$0. The alternative fuel mixture credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2013 $350; 2014 $200; 2015 $0; 2016 $0; 2017 $0; 2018 $0; 2019 $0.

3 In addition, the biodiesel producer tax credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2013 $1600; 2014 $610; 2015 $0; 2016 $0; 2017 $0; 2018: 

$0; 2019 $0.

4 In addition, the provision has outlay effects of (in millions of dollars): 2013 $40; 2014 $50; 2015 $50; 2016 $50; 2017 $50; 2018 $50; 2019 $50.

5 In addition, the provision has outlay effects of (in millions of dollars): 2013 $50; 2014 $60; 2015 $60; 2016 $60; 2017 $60; 2018 $60; 2019 $60.

6 In addition, recovery zone bonds have outlay effects (in millions of dollars) as follows: 2013 $160, 2014 $160, 2015 $160, 2016 $160; and 2017 $160; 2018 $160; 2019 $160. 7 The figures in the table indicate the effect of the American opportunity tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2013 $4,040; 2014 

$6,170; 2015 $6,280; 2016 $6,280; 2017 $6,090; 2018 $5,970; 2019 $2,680.

8 In addition, the credit for holders of zone academy bonds has outlay effects of (in millions of dollars): 2013 $20; 2014 $30; 2015 $30; 2016 $30; 2017 $30; 2018 $30; and 2019 $30.

9 In addition, the provision for school construction bonds has outlay effects of (in millions of dollars): 2013 $940; 2014 $940; 2015 $940; 2016 $940; 2017 $940, 2018 $940, and 2019 

$940.

10 The figures in the table indicate the effect of the adoption tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2013 $0.

11 The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2013 $21,660; 2014 $21,680; 2015 

$21,700; 2016 $21,600; 2017 $21,680; 2018 $21,930; and 2019 $15,790.

12 The figures in the table indicate the effect on income taxes of the employer contributions for health. In addition, the effect on payroll tax receipts (in millions of dollars) is as follows: 

2013 $117,920; 2014 $122,990; 2015 $127,980; 2016 $132,400; 2017 $138,330; 2018 $145,270; 2019 $153,870.

13 In addition, the premium assistance credit provision has outlay effects (in millions of dollars) as follows: 2014 $34,020, 2015 $55,140; 2016 $70,610; 2017 $82,150; 2018 $86,460; 

2019 $90,600.

14 In addition, the small business credit provision has outlay effects (in millions of dollars) as follows: 2013 $80; 2014 $100; 2015 $110; 2016 $120; 2017 $110; 2018 $70; 2019 $50.

15 The figures in the table indicate the effect of the health coverage tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2013 $120; 2014 $30; 

2015 $0; 

16 The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2013 $56,760; 2014 

$58,430; 2015 $58,070; 2016 $58,360; 2017 $59,500; 2018 $60,900; and 2019 59,330.

17 In addition, Build America Bonds have outlay effects of (in millions of dollars): 2013 $3,190; 2014 $3,190; 2015 $3,190; 2016 $3,190; 2017 $3,190; 2018 $3,190, and 2019 $3190.

Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method.

All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.
210 ANALYTICAL PERSPECTIVES

Table 14–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL INCOME TAXES FOR FISCAL YEARS 2013-2019

(In millions of dollars)

Corporations Individuals

2013 2014 2015 2016 2017 2018 2019 2015-19 2013 2014 2015 2016 2017 2018 2019 2015-19

National Defense

1 Exclusion of benefits and allowances to 

armed forces personnel ......................... 11,620 12,620 13,230 12,200 12,310 12,730 13,240 63,710

International affairs: 

2 Exclusion of income earned abroad by U.S. 

citizens ................................................... 4,410 4,310 4,350 4,470 4,730 4,990 5,200 23,740

3 Exclusion of certain allowances for Federal 

employees abroad ................................. 1,100 1,160 1,220 1,280 1,340 1,410 1,480 6,730

4 Inventory property sales source rules 

exception ............................................... 3,320 3,600 3,890 4,220 4,560 4,940 5,352 22,962

5 Deferral of income from controlled foreign 

corporations (normal tax method) ......... 63,440 72,740 75,540 76,380 76,260 73,970 71,060 373,210

6 Deferred taxes for financial firms on certain 

income earned overseas ....................... 6,660 2,700 0 0 0 0 0 0

General science, space, and technology: 

7 Expensing of research and experimentation 

expenditures (normal tax method) ......... 5,340 4,730 4,480 5,080 5,800 6,450 6,760 28,570 500 430 320 370 430 480 510 2,110

8 Credit for increasing research activities ...... 7,910 5,150 3,040 2,740 2,460 2,200 1,940 12,380 520 270 130 120 110 100 90 550

Energy: 

9 Expensing of exploration and development 

costs, fuels ............................................. 460 430 430 490 500 460 430 2,310 90 80 80 100 100 90 90 460

10 Excess of percentage over cost depletion, 

fuels ....................................................... 450 560 650 760 880 1,010 1,140 4,440 80 110 130 160 190 220 250 950

11 Alternative fuel production credit ................ 10 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

12 Exception from passive loss limitation 

for working interests in oil and gas 

properties .............................................. 20 20 20 20 20 20 20 100

13 Capital gains treatment of royalties on coal 90 80 90 110 120 120 130 570

14 Exclusion of interest on energy facility 

bonds ..................................................... 10 10 10 10 10 10 10 50 10 20 20 20 20 20 20 100

15 Energy production credit 1 ..................................... 1,250 1,780 2,250 2,500 2,530 2,410 2,350 12,040 420 590 750 830 840 800 780 4,000

16 Energy investment credit 1 .................................... 1,560 1,470 1,180 1,100 680 180 -20 3,120 390 370 290 280 170 40 0 780

17 Alcohol fuel credits 2 ................................................ 10 0 0 0 0 0 0 0 30 10 10 0 0 0 0 10

18 Bio-Diesel and small agri-biodiesel 

producer tax credits 3 ....................................... 10 10 0 0 0 0 0 0 10 10 0 0 0 0 0 0

19 Tax credits for clean-fuel burning vehicles .... 60 100 120 130 100 50 20 420 210 340 550 550 550 350 130 2,130

20 Exclusion of utility conservation subsidies ... 20 20 20 20 10 10 10 70 320 320 320 320 310 310 310 1,570

21 Credit for holding clean renewable energy 

bonds 4 ....................................................................... 20 20 20 20 20 20 20 100 50 50 50 50 50 50 50 250

22 Deferral of gain from dispositions of 

transmission property to implement 

FERC restructuring policy ...................... -60 -220 -220 -200 -170 -140 -950 0 0 0 0 0 0 0 0

23 Credit for investment in clean coal facilities 170 190 130 40 20 -10 -10 170 10 10 10 0 0 0 0 10

24 Temporary 50% expensing for equipment 

used in the refining of liquid fuels .......... 600 -100 -700 -830 -870 -800 -660 -3,860 0 0 0 0 0 0 0 0

25 Natural gas distribution pipelines treated as 

15-year property .................................... 100 100 100 110 110 120 120 560 0 0 0 0 0 0 0 0

26 Amortize all geological and geophysical 

expenditures over 2 years ...................... 80 80 100 100 90 80 80 450 20 30 30 30 30 20 20 130

27 Allowance of deduction for certain energy 

efficient commercial building property ... 30 20 10 0 0 -10 -10 -10 40 20 10 0 0 -10 -10 -10

28 Credit for construction of new energy 

efficient homes ...................................... 50 40 20 10 0 0 0 30 100 80 40 10 0 0 0 50

29 Credit for energy efficiency improvements 

to existing homes ................................... 610 0 0 0 0 0 0 0

30 Credit for energy efficient appliances ......... 150 130 120 100 0 0 0 220 0 0 0 0 0 0 0 0

31 Credit for residential energy efficient 

property ................................................. 0 0 0 0 0 0 0 0 960 1,060 1,170 1,300 540 0 0 3,010

32 Qualified energy conservation bonds 5 .......... 10 10 10 10 10 10 10 50 10 20 20 20 20 20 20 100

33 Advanced Energy Property Credit .............. 210 110 90 0 0 -10 -10 70 0 0 0 0 0 0 0 0

34 Advanced nuclear power production credit .... 0 0 0 160 350 440 950 0 0 0 0 50 120 150 320
14. TAX EXPENDITURES 211

Table 14–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND 

INDIVIDUAL INCOME TAXES FOR FISCAL YEARS 2013-2019—Continued

(In millions of dollars)

Corporations Individuals

2013 2014 2015 2016 2017 2018 2019 2015-19 2013 2014 2015 2016 2017 2018 2019 2015-19

Natural resources and environment: 

35 Expensing of exploration and development 

costs, nonfuel minerals .......................... 50 50 50 60 60 60 60 290 0 0 0 0 0 0 0 0

36 Excess of percentage over cost depletion, 

nonfuel minerals .................................... 540 540 550 560 570 580 590 2,850 40 50 40 40 40 40 50 210

37 Exclusion of interest on bonds for water, 

sewage, and hazardous waste facilities .... 140 120 160 200 230 230 240 1,060 310 370 400 430 460 500 550 2,340

38 Capital gains treatment of certain timber 

income ................................................... 90 80 90 110 120 120 130 570

39 Expensing of multiperiod timber growing 

costs ...................................................... 170 180 180 190 200 210 230 1,010 110 120 120 130 130 130 130 640

40 Tax incentives for preservation of historic 

structures ............................................... 490 500 510 520 530 540 550 2,650 80 80 90 90 90 90 90 450

41 Industrial CO2 capture and sequestration 

tax credit ................................................ 80 80 80 130 250 120 0 580 0 0 0 0 0 0 0 0

42 Deduction for endangered species recovery 

expenditures .......................................... 10 10 10 10 10 10 10 50 10 10 10 20 20 20 20 90

Agriculture: 

43 Expensing of certain capital outlays ........... 10 10 10 10 10 10 10 50 80 90 90 100 100 110 110 510

44 Expensing of certain multiperiod production 

costs ...................................................... 10 10 10 10 10 10 10 50 130 130 130 130 140 140 150 690

45 Treatment of loans forgiven for solvent 

farmers .................................................. 40 40 40 40 40 40 40 200

46 Capital gains treatment of certain income .... 920 800 920 1,060 1,160 1,230 1,280 5,650

47 Income averaging for farmers ..................... 130 130 130 140 140 140 140 690

48 Deferral of gain on sale of farm refiners ..... 20 20 20 20 20 20 20 100 0 0 0 0 0 0 0 0

49 Expensing of reforestation expenditures .... 20 20 20 20 20 30 30 120 50 50 50 60 60 60 70 300

Commerce and housing: 

Financial institutions and insurance: 

50 Exemption of credit union income .......... 2,000 2,070 1,970 2,370 2,700 2,770 3,000 12,810

51 Exclusion of interest on life insurance 

savings .............................................. 3,210 3,710 4,100 4,270 4,520 4,820 5,010 22,720 15,720 17,560 18,940 20,420 21,850 23,360 25,080 109,650

52 Special alternative tax on small property 

and casualty insurance companies ... 10 10 10 10 20 20 20 80

53 Tax exemption of certain insurance 

companies owned by tax-exempt 

organizations ..................................... 600 660 690 730 760 790 830 3,800

54 Small life insurance company deduction .... 30 30 40 40 40 40 40 200

55 Exclusion of interest spread of financial 

institutions .......................................... 0 0 0 0 0 0 0 0 210 1,260 1,840 1,940 2,030 2,130 2,230 10,170

Housing: 

56 Exclusion of interest on owner-occupied 

mortgage subsidy bonds ................... 380 340 430 540 620 630 650 2,870 850 1,020 1,080 1,160 1,260 1,370 1,490 6,360

57 Exclusion of interest on rental housing 

bonds ................................................. 310 270 350 440 500 520 530 2,340 690 820 880 950 1,020 1,120 1,220 5,190

58 Deductibility of mortgage interest on 

owner-occupied homes ..................... 69,020 70,370 73,910 79,830 89,150 100,600 112,840 456,330

59 Deductibility of State and local property 

tax on owner-occupied homes ........... 29,290 31,740 33,880 36,570 39,600 42,730 45,770 198,550

60 Deferral of income from installment sales .... 1,140 1,330 1,470 1,630 1,760 1,860 1,950 8,670

61 Capital gains exclusion on home sales .. 34,270 52,250 56,510 61,110 66,090 71,480 77,300 332,490

62 Exclusion of net imputed rental income .. 72,440 76,220 79,810 83,470 87,900 92,570 97,488 441,238

63 Exception from passive loss rules for 

$25,000 of rental loss ........................ 8,660 9,820 10,360 10,910 11,550 12,240 12810 57,870

64 Credit for low-income housing 

investments ........................................ 7,040 7,890 7,870 7,910 8,290 8,630 8,950 41,650 370 420 410 420 440 450 470 2,190

65 Accelerated depreciation on rental 

housing (normal tax method) ............. 300 340 410 500 600 710 830 3,050 1,480 1,750 2,090 2,520 2,960 3,420 3,880 14,870

66 Discharge of mortgage indebtedness ..... 3,360 870 0 0 0 0 0 0
212 ANALYTICAL PERSPECTIVES

Table 14–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND 

INDIVIDUAL INCOME TAXES FOR FISCAL YEARS 2013-2019—Continued

(In millions of dollars)

Corporations Individuals

2013 2014 2015 2016 2017 2018 2019 2015-19 2013 2014 2015 2016 2017 2018 2019 2015-19

Commerce: 

67 Discharge of business indebtedness ...... 0 -60 -80 -80 -60 -20 20 -220

68 Exceptions from imputed interest rules .... 20 30 40 40 50 50 60 240

69 Treatment of qualified dividends ............. 23,650 23,840 26,650 28,580 30,040 31,290 32,390 148,950

70 Capital gains (except agriculture, timber, 

iron ore, and coal) .............................. 68,860 60,030 68,850 79,300 86,950 91,550 95,620 422,270

71 Capital gains exclusion of small 

corporation stock ............................... 140 340 480 640 850 1,000 1,010 3,980

72 Step-up basis of capital gains at death ... 23,050 30,780 32,370 34,010 35,750 37,600 39,580 179,310

73 Carryover basis of capital gains on gifts ... 2,870 2,290 2,560 2,810 3,060 3,260 3,400 15,090

74 Ordinary income treatment of loss from 

small business corporation stock sale .... 60 60 60 60 60 60 60 300

75 Accelerated depreciation of buildings 

other than rental housing (normal tax 

method) ............................................. -3,450 -3,340 -3,340 -3,440 -3,610 -3,840 -4,230 -18,460 -4,200 -4,230 -4,200 -4,250 -4,360 -4,510 -4,760 -22,080

76 Accelerated depreciation of machinery 

and equipment (normal tax method) .. 32,680 8,330 8,090 22,270 34,580 46,660 58,110 169,710 15,780 6,970 7,380 13,370 18,280 22,640 26,310 87,980

77 Expensing of certain small investments 

(normal tax method) .......................... 570 -260 -390 -160 -10 110 200 -250 3,380 -920 -1,650 -410 390 970 1,370 670

78 Graduated corporation income tax rate 

(normal tax method) .......................... 4,300 4,200 4,130 4,100 4,220 4,200 4,370 21,020

79 Exclusion of interest on small issue 

bonds ................................................. 50 50 60 70 80 90 90 390 120 140 150 160 170 190 200 870

80 Deduction for US production activities .... 9,730 10,430 10,950 11,500 11,980 12,720 12,220 59,370 3,130 3,360 3,530 3,700 3,860 4,100 3,930 19,120

81 Special rules for certain film and TV 

production .......................................... 230 167 100 60 30 10 0 200 60 40 20 20 10 0 0 50

Transportation: 

82 Tonnage tax ................................................ 60 70 70 70 80 80 90 520

83 Deferral of tax on shipping companies ....... 20 20 20 20 20 20 20 100

84 Exclusion of reimbursed employee parking 

expenses ............................................... 2,580 2,670 2,780 2,900 3,010 3,110 3,220 15,020

85 Exclusion for employer-provided transit 

passes ................................................... 710 710 710 770 810 860 920 4,070

86 Tax credit for certain expenditures for 

maintaining railroad tracks ..................... 100 50 0 0 0 0 0 0 20 10 0 0 0 0 0 0

87 Exclusion of interest on bonds for Highway 

Projects and rail-truck transfer facilities . 60 60 50 50 50 50 40 240 180 170 170 160 150 140 130 750

Community and regional development: 

88 Investment credit for rehabilitation of 

structures (other than historic) ............... 10 10 10 10 10 10 10 50 20 20 20 20 20 20 20 100

89 Exclusion of interest for airport, dock, and 

similar bonds ......................................... 230 200 260 330 370 380 400 1,740 510 620 660 700 760 830 900 3,850

90 Exemption of certain mutuals’ and 

cooperatives’ income ............................. 110 120 120 120 130 130 130 630

91 Empowerment zones, the DC enterprise 

zone, and renewal communities ............ 180 100 50 50 50 50 40 240 270 250 150 140 140 130 110 670

92 New markets tax credit ............................... 930 990 1,020 1,030 940 730 550 4,270 20 20 20 20 20 20 10 90

93 Expensing of environmental remediation 

costs ...................................................... -150 -150 -140 -130 -130 -130 -130 -660 -30 -30 -30 -30 -30 -30 -30 -150

94 Credit to holders of Gulf Tax Credit Bonds. ... 70 60 80 100 110 110 120 520 150 180 200 210 230 250 270 1,160

95 Recovery Zone Bonds 6 .......................................... 40 30 40 50 60 60 60 270 80 100 110 110 120 130 150 620

96 Tribal Economic Development Bonds ......... 10 10 10 20 20 20 20 90 10 30 30 40 40 40 40 190

Education, training, employment, and social 

services: 

Education: 

97 Exclusion of scholarship and fellowship 

income (normal tax method) .............. 2,890 2,980 3,090 3,200 3,310 3,420 3,550 16,570

98 HOPE tax credit ...................................... 0 0 0 0 0 720 7,230 7,950

99 Lifetime Learning tax credit .................... 1,810 1,680 1,720 1,740 1,740 1,880 3,100 10,180

100 American Opportunity Tax Credit 7 ............. 12,540 15,530 15,240 15,310 15,370 13,760 0 59,680
14. TAX EXPENDITURES 213

Table 14–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND 

INDIVIDUAL INCOME TAXES FOR FISCAL YEARS 2013-2019—Continued

(In millions of dollars)

Corporations Individuals

2013 2014 2015 2016 2017 2018 2019 2015-19 2013 2014 2015 2016 2017 2018 2019 2015-19

101 Education Individual Retirement 

Accounts ............................................ 70 80 100 110 120 130 150 610

102 Deductibility of student-loan interest ....... 1,720 1,720 1,780 1,780 1,790 1,790 1,840 8,980

103 Deduction for higher education expenses .... 600 560 0 0 0 0 0 0

104 Qualified tuition programs ....................... 1,680 1,770 1,900 2,050 2,200 2,350 2,520 11,020

105 Exclusion of interest on student-loan 

bonds ................................................. 160 140 180 220 250 260 270 1,180 350 420 440 480 510 560 610 2,600

106 Exclusion of interest on bonds for private 

nonprofit educational facilities ............ 690 610 780 990 1,130 1,160 1,200 5,260 1,550 1,870 1,980 2,130 2,300 2,500 2,730 11,640

107 Credit for holders of zone academy 

bonds 8 ................................................................. 200 180 160 130 120 110 100 620

108 Exclusion of interest on savings bonds 

redeemed to finance educational 

expenses ........................................... 10 10 10 20 20 20 20 90

109 Parental personal exemption for students 

age 19 or over .................................... 5,200 5,320 5,400 5,490 5,570 5,660 5,760 27,880

110 Deductibility of charitable contributions 

(education) ......................................... 730 780 830 870 920 960 990 4,570 3,820 4,260 4,540 4,940 5,370 5,820 6,300 26,970

111 Exclusion of employer-provided 

educational assistance ...................... 710 750 800 850 900 950 1,000 4,500

112 Special deduction for teacher expenses ... 190 170 0 0 0 0 0 0

113 Discharge of student loan indebtedness 90 90 90 90 100 100 100 480

114 Qualified school construction bonds 9 ...... 150 160 160 160 160 160 160 800 430 490 490 490 490 490 490 2,450

Training, employment, and social services: 

115 Work opportunity tax credit ..................... 670 610 300 160 130 110 80 780 230 270 160 90 70 60 50 430

116 Employer provided child care exclusion ... 880 920 970 1,040 1,110 1,170 1,240 5,530

117 Employer-provided child care credit ....... 10 10 10 10 10 10 10 50

118 Assistance for adopted foster children .... 530 530 560 590 620 660 700 3,130

119 Adoption credit and exclusion 10 .................. 450 540 580 600 640 730 660 3,210

120 Exclusion of employee meals and 

lodging (other than military) ............... 2,185 3,700 3,797 3,910 4,032 4,155 4,278 20,172

121 Child credit 11 .......................................................... 23,480 23,350 23,500 23,620 23,480 23,450 23,480 117,530

122 Credit for child and dependent care 

expenses ........................................... 4,160 4,200 4,310 4,460 4,590 4,690 4,760 22,810

123 Credit for disabled access expenditures ... 10 10 10 10 10 20 20 70 20 20 20 20 20 20 20 100

124 Deductibility of charitable contributions, 

other than education and health ........ 1,590 1,670 1,740 1,830 1,900 1,970 2050 9,490 37,670 41,930 44,890 48,770 53,040 57,420 62,200 266,320

125 Exclusion of certain foster care 

payments ........................................... 380 380 390 380 370 370 360 1,870

126 Exclusion of parsonage allowances ....... 737 720 758 798 840 885 931 4,212

127 Indian employment credit ....................... 30 20 10 10 10 0 0 30 20 20 10 10 10 10 10 50

Health: 

128 Exclusion of employer contributions for 

medical insurance premiums and 

medical care 12 ...................................................... 185,330 196,010 207,200 217,140 229,000 241,070 256,2901,150,700

129 Self-employed medical insurance premiums 

 ................................................................ 6,140 6,670 6,970 7,240 7,550 7,870 8,170 37,800

130 Medical Savings Accounts / Health Savings 

Accounts ................................................ 3,110 3,900 4,890 6,110 7,630 9,440 11,720 39,790

131 Deductibility of medical expenses .............. 8,010 8,090 8,560 8,910 8,840 9,370 10,510 46,190

132 Exclusion of interest on hospital 

construction bonds ................................ 1,060 940 1,190 1,500 1,720 1,760 1,820 7,990 2,370 2,850 3,020 3,240 3,500 3,810 4,150 17,720

133 Refundable Premium Assistance Tax 

Credit 13 ..................................................................... 0 0 -3,940 -4,060 -5,740 -6,290 -6,540 -26,570

134 Credit for employee health insurance 

expenses of small business 14 ..................... 190 280 460 470 430 250 170 1,780 440 590 590 570 330 220 160 1,870

135 Deductibility of charitable contributions 

(health) .................................................. 210 230 240 250 260 280 300 1,330 4,260 4,750 5,110 5,570 6,080 6,600 7,160 30,520

136 Tax credit for orphan drug research ............ 1,040 1,260 1,520 1,830 2,210 2,660 3,210 11,430

137 Special Blue Cross/Blue Shield deduction . 190 230 360 430 480 440 370 2,080
214 ANALYTICAL PERSPECTIVES

Table 14–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND 

INDIVIDUAL INCOME TAXES FOR FISCAL YEARS 2013-2019—Continued

(In millions of dollars)

Corporations Individuals

2013 2014 2015 2016 2017 2018 2019 2015-19 2013 2014 2015 2016 2017 2018 2019 2015-19

138 Tax credit for health insurance purchased 

by certain displaced and retired 

individuals 15 ........................................................... 10 0 0 0 0 0 0 0

139 Distributions from retirement plans for 

premiums for health and long-term care 

insurance ............................................... 320 360 400 440 460 480 500 2,280

Income security: 

140 Exclusion of railroad retirement system 

benefits .................................................. 380 370 360 350 320 300 270 1,600

141 Exclusion of workers’ compensation 

benefits .................................................. 10,090 10,310 10,500 10,640 10,790 10,950 11,100 53,980

142 Exclusion of public assistance benefits 

(normal tax method) .............................. 770 790 820 860 900 940 980 4,500

143 Exclusion of special benefits for disabled 

coal miners ............................................ 30 30 30 20 20 20 20 110

144 Exclusion of military disability pensions ..... 110 110 110 110 110 110 110 550

Net exclusion of pension contributions and 

earnings: ................................................

145 Defined benefit employer plans .............. 37,860 40,090 42,340 44,750 47,270 49,160 51,440 234,960

146 Defined contribution employer plans ...... 50,670 59,380 61,050 77,020 88,740 92,770 94,820 414,400

147 Individual Retirement Accounts .............. 19,310 17,450 17,480 18,540 19,630 20,650 21,720 98,020

148 Low and moderate income savers credit ... 1,190 1,200 1,210 1,260 1,300 1,280 1,300 6,350

149 Self-Employed plans ............................... 19,400 23,300 25,530 28,100 30,890 33,860 37,150 155,530

Exclusion of other employee benefits: 

150 Premiums on group term life insurance .... 1,910 1,940 1,980 2,030 2,080 2,130 2,180 10,400

151 Premiums on accident and disability 

insurance ........................................... 310 310 310 320 320 330 330 1,610

152 Income of trusts to finance supplementary 

unemployment benefits .......................... 20 20 30 40 40 50 60 220

153 Special ESOP rules .................................... 1,550 1,630 1,710 1,800 1,890 1,980 2,080 9,460 100 100 100 110 110 110 120 550

154 Additional deduction for the blind ................ 30 30 30 30 40 40 40 180

155 Additional deduction for the elderly ............ 2,380 2,560 2,800 3,040 3,310 3,610 3,850 16,610

156 Tax credit for the elderly and disabled ........ 10 10 10 10 10 10 10 50

157 Deductibility of casualty losses ................... 310 340 360 380 400 420 430 1,990

158 Earned income tax credit 16 .................................. 4,070 4,330 4,330 4,400 4,520 4,640 4,550 22,440

Social Security: 

Exclusion of social security benefits: 

159 Social Security benefits for retired 

workers .............................................. 26,440 28,730 29,840 30,900 31,920 33,010 34,260 159,930

160 Social Security benefits for disabled 

workers .............................................. 8,200 8,560 8,740 8,930 9,100 9,250 9,420 45,440

161 Social Security benefits for spouses, 

dependents and survivors ................. 3,760 3,970 4,100 4,300 4,470 4,540 4,740 22,150

Veterans benefits and services: 

162 Exclusion of veterans death benefits and 

disability compensation ......................... 4,620 5,080 5,490 5,980 6,500 7,080 7,700 32,750

163 Exclusion of veterans pensions .................. 410 430 450 470 480 490 510 2,400

164 Exclusion of GI bill benefits ........................ 980 1,110 1,160 1,240 1,320 1,410 1,500 6,630

165 Exclusion of interest on veterans housing 

bonds ..................................................... 0 0 10 10 10 10 10 50 10 10 10 10 20 20 20 80

General purpose fiscal assistance: 

166 Exclusion of interest on public purpose 

State and local bonds ............................ 8,780 7,780 9,930 12,490 14,330 14,640 15,140 66,530 19,660 23,670 25,080 26,930 29,070 31,700 34,520 147,300

167 Build America Bonds 17 ........................................... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

168 Deductibility of nonbusiness State and local 

taxes other than on owner-occupied 

homes .................................................... 44,020 46,710 49,290 53,450 58,120 62,800 67,140 290,800
14. TAX EXPENDITURES 215

Table 14–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND 

INDIVIDUAL INCOME TAXES FOR FISCAL YEARS 2013-2019—Continued

(In millions of dollars)

Corporations Individuals

2013 2014 2015 2016 2017 2018 2019 2015-19 2013 2014 2015 2016 2017 2018 2019 2015-19

Interest: 

169 Deferral of interest on U.S. savings bonds ... 1,020 1,080 1,090 1,100 1,120 1,130 1,140 5,580

Addendum: Aid to State and local 

governments: 

Deductibility of: 

Property taxes on owner-occupied 

homes ................................................ 29,290 31,740 33,880 36,570 39,600 42,730 45,770 198,550

Nonbusiness State and local taxes other 

than on owner-occupied homes ........ 44,020 46,710 49,290 53,450 58,120 62,800 67,140 290,800

Exclusion of interest on State and local 

bonds for: 

Public purposes ...................................... 8,780 7,780 9,930 12,490 14,330 14,640 15,140 66,530 19,660 23,670 25,080 26,930 29,070 31,700 34,520 147,300

Energy facilities ...................................... 10 10 10 10 10 10 10 50 10 20 20 20 20 20 20 100

Water, sewage, and hazardous waste 

disposal facilities ................................ 140 120 160 200 230 230 240 1,060 310 370 400 430 460 500 550 2,340

Small-issues ........................................... 50 50 60 70 80 90 90 390 120 140 150 160 170 190 200 870

Owner-occupied mortgage subsidies ..... 380 340 430 540 620 630 650 2,870 850 1,020 1,080 1,160 1,260 1,370 1,490 6,360

Rental housing ........................................ 310 270 350 440 500 520 530 2,340 690 820 880 950 1,020 1,120 1,220 5,190

Airports, docks, and similar facilities ....... 230 200 260 330 370 380 400 1,740 510 620 660 700 760 830 900 3,850

Student loans .......................................... 160 140 180 220 250 260 270 1,180 350 420 440 480 510 560 610 2,600

Private nonprofit educational facilities .... 690 610 780 990 1,130 1,160 1,200 5,260 1,550 1,870 1,980 2,130 2,300 2,500 2,730 11,640

Hospital construction .............................. 1,060 940 1,190 1,500 1,720 1,760 1,820 7,990 2,370 2,850 3,020 3,240 3,500 3,810 4,150 17,720

Veterans’ housing ................................... 0 0 10 10 10 10 10 50 10 10 10 10 20 20 20 80

1 Firms can tax an energy grant in lieu of the energy production credit or the energy investment credit for facilities placed in service in 2009 and 2010 or whose construction 

commenced in 2009 and 2010. The effect of the grant on outlays (in millions of dollars) is as follows: 2013 $8,080; 2014 $4,710; 2015 $2,520; 2016 $1,580; 2017 $330; 2018 $0; 2019 $0.

2 In addition, the alcohol fuel mixture credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2013 $10; 2014 $0; 2015 $0; 2016 $0; 2017 $0; 2018 $0; 2019 

$0. The alternative fuel mixture credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2013 $350; 2014 $200; 2015 $0; 2016 $0; 2017 $0; 2018 $0; 2019 $0.

3 In addition, the biodiesel producer tax credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2013 $1600; 2014 $610; 2015 $0; 2016 $0; 2017 $0; 2018: 

$0; 2019 $0.

4 In addition, the provision has outlay effects of (in millions of dollars): 2013 $40; 2014 $50; 2015 $50; 2016 $50; 2017 $50; 2018 $50; 2019 $50.

5 In addition, the provision has outlay effects of (in millions of dollars): 2013 $50; 2014 $60; 2015 $60; 2016 $60; 2017 $60; 2018 $60; 2019 $60.

6 In addition, recovery zone bonds have outlay effects (in millions of dollars) as follows: 2013 $150, 2014 $140, 2015 $150, 2016 $150; and 2017 $150; 2018 $150; 2019 $150.

7 The figures in the table indicate the effect of the American opportunity tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2013 $4,040; 2014 

$6,170; 2015 $6,280; 2016 $6,280; 2017 $6,090; 2018 $5,970; 2019 $2,680.

8 In addition, the credit for holders of zone academy bonds has outlay effects of (in millions of dollars): 2013 $20; 2014 $30; 2015 $30; 2016 $30; 2017 $30; 2018 $30; and 2019 $30.

9 In addition, the provision for school construction bonds has outlay effects of (in millions of dollars): 2013 $900; 2014 $840; 2015 $900; 2016 $900; 2017 $900, 2018 $900, and 2019 

$900.

10 The figures in the table indicate the effect of the adoption tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 

 2013 $0.

11 The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2013 $21,660; 2014 $21,680; 2015 

$21,700; 2016 $21,600; 2017 $21,680; 2018 $21,930; and 2019 $15,790.

12 The figures in the table indicate the effect on income taxes of the employer contributions for health. In addition, the effect on payroll tax receipts (in millions of dollars) is as follows: 

2013 $117,920; 2014 $122,990; 2015 $127,980; 2016 $132,400; 2017 $138,330; 2018 $145,270; 2019 $153,870.

13 In addition, the premium assistance credit provision has outlay effects (in millions of dollars) as follows: 2014 $34,020, 2015 $55,140; 2016 $70,610; 2017 $82,150; 2018 $86,460; 

2019 $90,600.

14 In addition, the small business credit provision has outlay effects (in millions of dollars) as follows: 2013 $80; 2014 $100; 2015 $110; 2016 $120; 2017 $110; 2018 $70; 2019 $50.

15 The figures in the table indicate the effect of the health coverage tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2013 $120; 2014 $30; 

2015 $0; 

16 The figures in the table indicate the effect of the earned income tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2013 $56,760; 2014 

$58,430; 2015 $58,070; 2016 $58,360; 2017 $59,500; 2018 $60,900; and 2019 59,330.

17 In addition, Build America Bonds have outlay effects of (in millions of dollars): 2013 $3,060; 2014 $2,840; 2015 $3,060; 2016 $3,060; 2017 $3,060; 2018 $3,060, and 2019 $3060.

Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method.

All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.
216 ANALYTICAL PERSPECTIVES

Table 14–3. INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2015-2019 PROJECTED REVENUE EFFECT

(In millions of dollars)

Provision 2015 2015-19

128 Exclusion of employer contributions for medical insurance premiums and medical care ..................................................................................................... 207,200 1,150,700

58 Deductibility of mortgage interest on owner-occupied homes .............................................................................................................................................. 73,910 456,330

62 Exclusion of net imputed rental income ................................................................................................................................................................................. 79,810 441,238

70 Capital gains (except agriculture, timber, iron ore, and coal) ................................................................................................................................................. 68,850 422,270

146 Defined contribution employer plans ..................................................................................................................................................................................... 61,050 414,400

5 Deferral of income from controlled foreign corporations (normal tax method) ..................................................................................................................... 75,540 373,210

61 Capital gains exclusion on home sales ................................................................................................................................................................................. 56,510 332,490

168 Deductibility of nonbusiness State and local taxes other than on owner-occupied homes .................................................................................................. 49,290 290,800

124 Deductibility of charitable contributions, other than education and health ............................................................................................................................. 46,630 275,810

76 Accelerated depreciation of machinery and equipment (normal tax method) ...................................................................................................................... 15,470 257,690

145 Defined benefit employer plans ............................................................................................................................................................................................. 42,340 234,960

166 Exclusion of interest on public purpose State and local bonds ............................................................................................................................................ 35,010 213,830

59 Deductibility of State and local property tax on owner-occupied homes .............................................................................................................................. 33,880 198,550

72 Step-up basis of capital gains at death ................................................................................................................................................................................. 32,370 179,310

159 Social Security benefits for retired workers .......................................................................................................................................................................... 29,840 159,930

149 Self-Employed plans ............................................................................................................................................................................................................. 25,530 155,530

69 Treatment of qualified dividends ............................................................................................................................................................................................ 26,650 148,950

51 Exclusion of interest on life insurance savings ..................................................................................................................................................................... 23,040 132,370

121 Child credit ............................................................................................................................................................................................................................. 23,500 117,530

147 Individual Retirement Accounts ............................................................................................................................................................................................ 17,480 98,020

80 Deduction for US production activities ................................................................................................................................................................................... 14,480 78,490

1 Exclusion of benefits and allowances to armed forces personnel ........................................................................................................................................ 13,230 63,710

100 Lifetime Learning tax credit ................................................................................................................................................................................................... 15,240 59,680

63 Exception from passive loss rules for $25,000 of rental loss ................................................................................................................................................ 10,360 57,870

141 Exclusion of workers’ compensation benefits ........................................................................................................................................................................ 10,500 53,980

131 Deductibility of medical expenses ........................................................................................................................................................................................ 8,560 46,190

160 Social Security benefits for disabled workers ........................................................................................................................................................................ 8,740 45,440

64 Credit for low-income housing investments .......................................................................................................................................................................... 8,280 43,840

130 Medical Savings Accounts / Health Savings Accounts .......................................................................................................................................................... 4,890 39,790

129 Self-employed medical insurance premiums ......................................................................................................................................................................... 6,970 37,800

162 Exclusion of veterans death benefits and disability compensation ....................................................................................................................................... 5,490 32,750

135 Deductibility of charitable contributions (health) .................................................................................................................................................................... 5,350 31,850

110 Deductibility of charitable contributions (education) .............................................................................................................................................................. 5,370 31,540

7 Expensing of research and experimentation expenditures (normal tax method) ................................................................................................................. 4,800 30,680

109 Parental personal exemption for students age 19 or over .................................................................................................................................................... 5,400 27,880

132 Exclusion of interest on hospital construction bonds ............................................................................................................................................................. 4,210 25,710

2 Exclusion of income earned abroad by U.S. citizens ............................................................................................................................................................ 4,350 23,740

4 Inventory property sales source rules exception ................................................................................................................................................................... 3,890 22,962

122 Credit for child and dependent care expenses ..................................................................................................................................................................... 4,310 22,810

158 Earned income tax credit ....................................................................................................................................................................................................... 4,330 22,440

161 Social Security benefits for spouses, dependents and survivors .......................................................................................................................................... 4,100 22,150

78 Graduated corporation income tax rate (normal tax method) ............................................................................................................................................... 4,130 21,020

120 Exclusion of employee meals and lodging (other than military) ........................................................................................................................................... 3,797 20,172

65 Accelerated depreciation on rental housing (normal tax method) ........................................................................................................................................ 2,500 17,920

106 Exclusion of interest on bonds for private nonprofit educational facilities ............................................................................................................................. 2,760 16,900

155 Additional deduction for the elderly ...................................................................................................................................................................................... 2,800 16,610

97 Exclusion of scholarship and fellowship income (normal tax method) ................................................................................................................................. 3,090 16,570

15 New technology credit .......................................................................................................................................................................................................... 3,000 16,040

73 Carryover basis of capital gains on gifts ............................................................................................................................................................................... 2,560 15,090

84 Exclusion of reimbursed employee parking expenses .......................................................................................................................................................... 2,780 15,020

8 Credit for increasing research activities ................................................................................................................................................................................ 3,170 12,930

50 Exemption of credit union income ........................................................................................................................................................................................ 1,970 12,810

136 Tax credit for orphan drug research ...................................................................................................................................................................................... 1,520 11,430

104 Qualified Tuition Programs ..................................................................................................................................................................................................... 1,900 11,020

150 Premiums on group term life insurance ................................................................................................................................................................................ 1,980 10,400

99 Lifetime Learning tax credit ................................................................................................................................................................................................... 1,720 10,180

55 Exclusion of interest spread of financial institutions .............................................................................................................................................................. 1,840 10,170

153 Special ESOP rules ............................................................................................................................................................................................................... 1,810 10,010

56 Exclusion of interest on owner-occupied mortgage subsidy bonds ...................................................................................................................................... 1,510 9,230
14. TAX EXPENDITURES 217

Table 14–3. INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2015-2019 PROJECTED REVENUE EFFECT—Continued

(In millions of dollars)

Provision 2015 2015-19

102 Deductibility of student-loan interest ...................................................................................................................................................................................... 1,780 8,980

60 Deferral of income from installment sales ............................................................................................................................................................................. 1,470 8,670

98 HOPE tax credit ..................................................................................................................................................................................................................... 0 7,950

57 Exclusion of interest on rental housing bonds ....................................................................................................................................................................... 1,230 7,530

3 Exclusion of certain allowances for Federal employees abroad ............................................................................................................................................ 1,220 6,730

164 Exclusion of GI bill benefits .................................................................................................................................................................................................. 1,160 6,630

148 Low and moderate income savers credit ............................................................................................................................................................................... 1,210 6,350

46 Capital gains treatment of certain income ............................................................................................................................................................................ 920 5,650

89 Exclusion of interest for airport, dock, and similar bonds ...................................................................................................................................................... 920 5,590

169 Deferral of interest on U.S. savings bonds ............................................................................................................................................................................ 1,090 5,580

116 Employer provided child care exclusion ................................................................................................................................................................................. 970 5,530

10 Excess of percentage over cost depletion, fuels .................................................................................................................................................................. 780 5,390

142 Exclusion of public assistance benefits (normal tax method) ............................................................................................................................................... 820 4,500

111 Exclusion of employer-provided educational assistance ...................................................................................................................................................... 800 4,500

92 New markets tax credit .......................................................................................................................................................................................................... 1,040 4,360

126 Exclusion of parsonage allowances ..................................................................................................................................................................................... 758 4,212

85 Exclusion for employer-provided transit passes ................................................................................................................................................................... 710 4,070

71 Capital gains exclusion of small corporation stock ................................................................................................................................................................ 480 3,980

16 Energy investment credit ....................................................................................................................................................................................................... 1,470 3,900

53 Tax exemption of certain insurance companies owned by tax-exempt organizations ........................................................................................................... 690 3,800

105 Exclusion of interest on student-loan bonds ......................................................................................................................................................................... 620 3,780

134 Credit for employee health insurance expenses of small business. ....................................................................................................................................... 1,050 3,650

37 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities ................................................................................................................ 560 3,400

114 Qualified school construction bonds ...................................................................................................................................................................................... 650 3,250

119 Adoption credit and exclusion ................................................................................................................................................................................................ 580 3,210

118 Assistance for adopted foster children ................................................................................................................................................................................... 560 3,130

40 Tax incentives for preservation of historic structures ............................................................................................................................................................ 600 3,100

36 Excess of percentage over cost depletion, nonfuel minerals ................................................................................................................................................ 590 3,060

31 30% credit for residential purchases/installations of solar and fuel cells ............................................................................................................................... 1,170 3,010

9 Expensing of exploration and development costs, fuels ....................................................................................................................................................... 510 2,770

19 Tax credits for clean-fuel burning vehicles ............................................................................................................................................................................. 670 2,550

163 Exclusion of veterans pensions ............................................................................................................................................................................................ 450 2,400

139 Distributions from retirement plans for premiums for health and long-term care insurance .................................................................................................. 400 2,280

137 Special Blue Cross/Blue Shield deduction ........................................................................................................................................................................... 360 2,080

157 Deductibility of casualty losses ............................................................................................................................................................................................. 360 1,990

125 Exclusion of certain foster care payments ............................................................................................................................................................................ 390 1,870

94 Credit to holders of Gulf Tax Credit Bonds. ............................................................................................................................................................................ 280 1,680

39 Expensing of multiperiod timber growing costs .................................................................................................................................................................... 300 1,650

20 Exclusion of utility conservation subsidies ............................................................................................................................................................................. 340 1,640

151 Premiums on accident and disability insurance .................................................................................................................................................................... 310 1,610

140 Exclusion of railroad retirement system benefits .................................................................................................................................................................. 360 1,600

34 Advanced nuclear power production credit ............................................................................................................................................................................ 0 1,270

79 Exclusion of interest on small issue bonds ........................................................................................................................................................................... 210 1,260

115 Work opportunity tax credit .................................................................................................................................................................................................... 460 1,210

87 Exclusion of interest on bonds for Financing of Highway Projects and rail-truck transfer facilities ........................................................................................ 220 990

91 Empowerment zones, Enterprise communities, and Renewal communities ......................................................................................................................... 200 910

95 Recovery Zone Bonds ........................................................................................................................................................................................................... 150 890

44 Expensing of certain multiperiod production costs ............................................................................................................................................................... 140 740

47 Income averaging for farmers ................................................................................................................................................................................................ 130 690

90 Exemption of certain mutuals’ and cooperatives’ income ..................................................................................................................................................... 120 630

107 Credit for holders of zone academy bonds ............................................................................................................................................................................ 160 620

101 Education Individual Retirement Accounts ............................................................................................................................................................................ 100 610

41 Industrial CO2 capture and sequestration tax credit ............................................................................................................................................................. 80 580

26 Amortize all geological and geophysical expenditures over 2 years ...................................................................................................................................... 130 580

38 Capital gains treatment of certain timber income ................................................................................................................................................................. 90 570

13 Capital gains treatment of royalties on coal .......................................................................................................................................................................... 90 570

43 Expensing of certain capital outlays ..................................................................................................................................................................................... 100 560

25 Natural gas distribution pipelines treated as 15-year property .............................................................................................................................................. 100 560

144 Exclusion of military disability pensions ............................................................................................................................................................................... 110 550
218 ANALYTICAL PERSPECTIVES

Table 14–3. INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2015-2019 PROJECTED REVENUE EFFECT—Continued

(In millions of dollars)

Provision 2015 2015-19

82 Tonnage tax ........................................................................................................................................................................................................................... 70 520

113 Discharge of student loan indebtedness ............................................................................................................................................................................... 90 480

77 Expensing of certain small investments (normal tax method) .............................................................................................................................................. -2,040 420

49 Expensing of reforestation expenditures ............................................................................................................................................................................... 70 420

21 Credit for holding clean renewable energy bonds ................................................................................................................................................................. 70 350

74 Ordinary income treatment of loss from small business corporation stock sale ................................................................................................................... 60 300

35 Expensing of exploration and development costs, nonfuel minerals .................................................................................................................................... 50 290

96 Tribal Economic Development Bonds .................................................................................................................................................................................... 40 280

81 Special rules for certain film and TV production .................................................................................................................................................................... 120 250

68 Exceptions from imputed interest rules ................................................................................................................................................................................ 40 240

152 Income of trusts to finance supplementary unemployment benefits ..................................................................................................................................... 30 220

30 Credit for energy efficient appliances .................................................................................................................................................................................... 120 220

54 Small life insurance company deduction .............................................................................................................................................................................. 40 200

45 Treatment of loans forgiven for solvent farmers ..................................................................................................................................................................... 40 200

154 Additional deduction for the blind .......................................................................................................................................................................................... 30 180

23 Credit for investment in clean coal facilities ........................................................................................................................................................................... 140 180

123 Credit for disabled access expenditures ............................................................................................................................................................................... 30 170

88 Investment credit for rehabilitation of structures (other than historic) ................................................................................................................................... 30 150

32 Qualified energy conservation bonds .................................................................................................................................................................................... 30 150

14 Exclusion of interest on energy facility bonds ....................................................................................................................................................................... 30 150

42 Deduction for endangered species recovery expenditures .................................................................................................................................................... 20 140

165 Exclusion of interest on veterans housing bonds .................................................................................................................................................................. 20 130

143 Exclusion of special benefits for disabled coal miners .......................................................................................................................................................... 30 110

83 Deferral of tax on shipping companies ................................................................................................................................................................................. 20 100

48 Deferral of gain on sale of farm refiners ................................................................................................................................................................................ 20 100

12 Exception from passive loss limitation for working interests in oil and gas properties ......................................................................................................... 20 100

108 Exclusion of interest on savings bonds redeemed to finance educational expenses ............................................................................................................ 10 90

127 Indian employment credi ....................................................................................................................................................................................................... 20 80

52 Special alternative tax on small property and casualty insurance companies ..................................................................................................................... 10 80

28 Credit for construction of new energy efficient homes ........................................................................................................................................................... 60 80

33 Advanced Energy Property Credit ......................................................................................................................................................................................... 90 70

156 Tax credit for the elderly and disabled .................................................................................................................................................................................. 10 50

117 Employer-provided child care credit ...................................................................................................................................................................................... 10 50

17 Alcohol fuel credits ................................................................................................................................................................................................................ 10 10

167 Build America Bonds ............................................................................................................................................................................................................. 0 0

138 Tax credit for health insurance purchased by certain displaced and retired individuals ........................................................................................................ 0 0

112 Special deduction for teacher expenses ................................................................................................................................................................................ 0 0

103 Deduction for higher education expenses ............................................................................................................................................................................. 0 0

86 Tax credit for certain expenditures for maintaining railroad tracks ......................................................................................................................................... 0 0

66 Discharge of mortgage indebtedness .................................................................................................................................................................................... 0 0

29 Credit for energy efficiency improvements to existing homes ................................................................................................................................................ 0 0

18 Bio-Diesel and small agri-biodiesel producer tax credits ....................................................................................................................................................... 0 0

11 Alternative fuel production credit .......................................................................................................................................................................................... 0 0

6 Deferred taxes for financial firms on certain income earned overseas .................................................................................................................................. 0 0

27 Allowance of deduction for certain energy efficient commercial building property ................................................................................................................ 20 -20

67 Discharge of business indebtedness ..................................................................................................................................................................................... -80 -220

93 Expensing of environmental remediation costs ..................................................................................................................................................................... -170 -810

22 Deferral of gain from dispositions of transmission property to implement FERC restructuring policy ................................................................................... -220 -950

24 Temporary 50% expensing for equipment used in the refining of liquid fuels ........................................................................................................................ -700 -3,860

133 Refundable Premium Assistance Tax Credit ......................................................................................................................................................................... -3,940 -26,570

75 Accelerated depreciation of buildings other than rental housing (normal tax method) ......................................................................................................... -7,540 -40,540
14. TAX EXPENDITURES 219

Table 14–4. PRESENT VALUE OF SELECTED TAX EXPENDITURES 

FOR ACTIVITY IN CALENDAR YEAR 2013

(In millions of dollars)

Provision

2013

Present Value

of Revenue 

Loss

5 Deferral of income from controlled foreign corporations (normal tax method) ....................................................................... 36,010

7 Expensing of research and experimentation expenditures (normal tax method) ................................................................... 2,310

21 Credit for holding clean renewable energy bonds .................................................................................................................. 310

9 Expensing of exploration and development costs - fuels ........................................................................................................ 320

35 Expensing of exploration and development costs - nonfuels .................................................................................................. 50

39 Expensing of multiperiod timber growing costs ...................................................................................................................... 120

44 Expensing of certain multiperiod production costs - agriculture ............................................................................................. 0

43 Expensing of certain capital outlays - agriculture ................................................................................................................... 0

49 Expensing of reforestation expenditures ................................................................................................................................ 30

51 Deferral of income on life insurance and annuity contracts .................................................................................................... 16,860

65 Accelerated depreciation on rental housing ........................................................................................................................... 5,100

75 Accelerated depreciation of buildings other than rental ........................................................................................................ -15,030

76 Accelerated depreciation of machinery and equipment .......................................................................................................... 16,160

77 Expensing of certain small investments (normal tax method) ................................................................................................ 500

107 Credit for holders of zone academy bonds ............................................................................................................................. 160

64 Credit for low-income housing investments ............................................................................................................................ 6,780

104 Deferral for state prepaid tuition plans .................................................................................................................................... 3,070

145 Defined benefit employer plans .............................................................................................................................................. 21,890

146 Defined contribution employer plans ...................................................................................................................................... 66,610

147 Exclusion of IRA contributions and earnings .......................................................................................................................... 1,660

147 Exclusion of Roth earnings and distributions ......................................................................................................................... 3,400

147 Exclusion of non-deductible IRA earnings .............................................................................................................................. 150

149 Exclusion of contributions and earnings for Self-Employed plans .......................................................................................... 3,230

166 Exclusion of interest on public-purpose bonds ....................................................................................................................... 12,240

Exclusion of interest on non-public purpose bonds ................................................................................................................ 3,980

169 Deferral of interest on U.S. savings bonds .............................................................................................................................. 220

adjust the cost basis of capital assets and debt for 

changes in the general price level. Thus, under a 

comprehensive income tax baseline, the failure to 

take account of inflation in measuring depreciation, 

capital gains, and interest income would be regarded 

as a negative tax expenditure (i.e., a tax penalty), 

and failure to take account of inflation in measuring 

interest costs would be regarded as a positive tax 

expenditure (i.e., a tax subsidy).

Although the reference law and normal tax baselines 

are generally similar, areas of difference include:

Tax rates. The separate schedules applying to the various 

taxpaying units are included in the reference law baseline. 

Thus, corporate tax rates below the maximum statutory 

rate do not give rise to a tax expenditure. The normal tax 

baseline is similar, except that, by convention, it specifies 

the current maximum rate as the baseline for the corporate 

income tax. The lower tax rates applied to the first $10 million of corporate income are thus regarded as a tax expenditure under the normal tax. By convention, the Alternative 

Minimum Tax is treated as part of the baseline rate structure under both the reference and normal tax methods.

Income subject to the tax. Income subject to tax is defined as gross income less the costs of earning that income. Under the reference tax rules, gross income does 

not include gifts defined as receipts of money or property that `are not consideration in an exchange nor does 

gross income include most transfer payments from the 

Government.2 The normal tax baseline also excludes gifts 

between individuals from gross income. Under the normal 

tax baseline, however, all cash transfer payments from 

the Government to private individuals are counted in 

gross income, and exemptions of such transfers from tax 

are identified as tax expenditures. The costs of earning income are generally deductible in determining taxable income under both the reference and normal tax baselines.3

Capital recovery. Under the reference tax law baseline 

no tax expenditures arise from accelerated depreciation. 

Under the normal tax baseline, the depreciation allow2 Gross income does, however, include transfer payments associated 

with past employment, such as Social Security benefits.

3 In the case of individuals who hold “passive’’ equity interests in 

businesses, the pro-rata shares of sales and expense deductions reportable in a year are limited. A passive business activity is defined generally to be one in which the holder of the interest, usually a partnership 

interest, does not actively perform managerial or other participatory 

functions. The taxpayer may generally report no larger deductions for a 

year than will reduce taxable income from such activities to zero. Deductions in excess of the limitation may be taken in subsequent years, or 

when the interest is liquidated. In addition, costs of earning income may 

be limited under the Alternative Minimum Tax.
220 ANALYTICAL PERSPECTIVES

ance for property is computed using estimates of economic depreciation. 

Treatment of foreign income. Both the normal and reference tax baselines allow a tax credit for foreign income 

taxes paid (up to the amount of U.S. income taxes that 

would otherwise be due), which prevents double taxation 

of income earned abroad. Under the normal tax method, 

however, controlled foreign corporations (CFCs) are not 

regarded as entities separate from their controlling U.S. 

shareholders. Thus, the deferral of tax on income received by CFCs is regarded as a tax expenditure under 

this method. In contrast, except for tax haven activities, 

the reference law baseline follows current law in treating CFCs as separate taxable entities whose income is 

not subject to U.S. tax until distributed to U.S. taxpayers. 

Under this baseline, deferral of tax on CFC income is not 

a tax expenditure because U.S. taxpayers generally are 

not taxed on accrued, but unrealized, income.

Descriptions of Income Tax Provisions

Descriptions of the individual and corporate income tax 

expenditures reported on in this chapter follow. These descriptions relate to current law as of December 31, 2013. 

National Defense

1. Benefits and allowances to Armed Forces personnel.—Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, 

should be included in taxable income because they represent accretions to wealth that do not materially differ 

from cash wages. As an example, a rental voucher of $100 

is (approximately) equal in value to $100 of cash income. 

In contrast to this treatment, certain housing and meals, 

in addition to other benefits provided military personnel, 

either in cash or in kind, as well as certain amounts of 

pay related to combat service, are excluded from income 

subject to tax. 

2. Income earned abroad.—Under the baseline 

tax system, all compensation received by U.S. citizens is 

properly included in their taxable income. It makes no 

difference whether the compensation is a result of working abroad or whether it is labeled as a housing allowance. In contrast to this treatment, U.S. tax law allows 

U.S. citizens who live abroad, work in the private sector, 

and satisfy a foreign residency requirement to exclude 

up to $80,000, plus adjustments for inflation since 2004 

($97,600 in 2013), in foreign earned income from U.S. 

taxes. In addition, if these taxpayers receive a specific 

allowance for foreign housing from their employers, then 

they may also exclude such expenses to the extent that 

they do not exceed 30 percent of the earned income inclusion, with geographical adjustments, over 16 percent 

of the earned income limit. If taxpayers do not receive 

a specific allowance for housing expenses, they may deduct housing expenses up to the amount by which foreign earned income exceeds their foreign earned income 

exclusion.

3. Exclusion of certain allowances for Federal 

employees abroad.—In general, all compensation received by U.S. citizens is properly included in their taxable 

income. It makes no difference whether the compensation 

is a result of working abroad or whether it is labeled as an 

allowance for the high cost of living abroad. In contrast to 

this treatment, U.S. Federal civilian employees and Peace 

Corps members who work outside the continental United 

States are allowed to exclude from U.S. taxable income 

certain special allowances they receive to compensate 

them for the relatively high costs associated with living 

overseas. The allowances supplement wage income and 

cover expenses such as rent, education, and the cost of 

travel to and from the United States.

4. Sales source rule exceptions.—The United 

States generally taxes the worldwide income of U.S. persons and business entities. Under the baseline tax system, taxpayers receive a credit for foreign taxes paid 

which is limited to the pre-credit U.S. tax on the foreign 

source income. In contrast, the sales source rules for inventory property under current law allow U.S. exporters 

to use more foreign tax credits by allowing the exporters 

to attribute a larger portion of their earnings abroad than 

would be the case if the allocation of earnings was based 

on actual economic activity.

5. Income of U.S.-controlled foreign corporations.—Under the baseline tax system, the United States

generally taxes the worldwide income of U.S. persons and 

business entities. In contrast, certain active income of foreign corporations controlled by U.S. shareholders is not 

subject to U.S. taxation when it is earned. The income becomes taxable only when the controlling U.S. shareholders 

receive dividends or other distributions from their foreign 

stockholding. The reference law tax baseline reflects this 

tax treatment where only realized income is taxed. Under 

the normal tax method, however, the currently attributable foreign source pre-tax income from such a controlling interest is considered to be subject to U.S. taxation, 

whether or not distributed. Thus, the normal tax method 

considers the amount of controlled foreign corporation 

income not yet distributed to a U.S. shareholder as taxdeferred income.

6. Exceptions under subpart F for active financing income.—The United States generally taxes the 

worldwide income of U.S. persons and business entities. 

The baseline tax system would not allow the deferral of 

tax or other relief targeted at particular industries or 

activities. In contrast, under current law, financial firms 

may defer taxes on income earned overseas in an active 

business. Under current law, this provision expires at the 

end of 2013.

General Science, Space, and Technology

7. Expensing R&E expenditures.—The baseline 

tax system allows a deduction for the cost of producing 

income. It requires taxpayers to capitalize the costs associated with investments over time to better match the 

streams of income and associated costs, Research and 

experimentation (R&E) projects can be viewed as invest-
14. TAX EXPENDITURES 221

ments because, if successful, their benefits accrue for several years. It is often difficult, however, to identify whether a specific R&E project is successful and, if successful, 

what its expected life will be. Because of this ambiguity, 

the reference law baseline tax system would allow of expensing of R&E expenditures. In contrast, under the normal tax method, the expensing of R&E expenditures is 

viewed as a tax expenditure. The baseline assumed for 

the normal tax method is that all R&E expenditures are 

successful and have an expected life of five years.

8. R&E credit.—The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. In 

contrast, the Tax Code allows an R&E credit of 20 percent of qualified research expenditures in excess of a base 

amount. 

The base amount of the credit is generally determined 

by multiplying a “fixed-base percentage” by the average 

amount of the company’s gross receipts for the prior four 

years. The taxpayer’s fixed base percentage generally is 

the ratio of its research expenses to gross receipts for 

1984 through 1988. Taxpayers can elect the alternative 

simplified credit regime, which is equal to 14 percent of 

qualified research expenses that exceed 50 percent of the 

average qualified research expenses for the three preceding taxable years. The credit does not apply to expenses 

paid or incurred after December 31, 2013. 

Energy

9. Exploration and development costs.—Under 

the baseline tax system, the costs of exploring and developing oil and gas wells would be capitalized and then amortized (or depreciated) over an estimate of the economic 

life of the well. This insures that the net income from the 

well is measured appropriately each year. 

In contrast to this treatment, current law allows intangible drilling costs for successful investments in domestic 

oil and gas wells (such as wages, the cost of using machinery for grading and drilling, and the cost of unsalvageable materials used in constructing wells) to be deducted 

immediately, i.e., expensed. Because it allows recovery of 

costs sooner, expensing is more generous for the taxpayer 

than would be amortization. Integrated oil companies 

may deduct only 70 percent of such costs and must amortize the remaining 30 percent over five years. The same 

rule applies to the exploration and development costs of 

surface stripping and the construction of shafts and tunnels for other fuel minerals.

10. Percentage depletion.—The baseline tax system would allow recovery of the costs of developing certain oil and mineral properties using cost depletion. Cost 

depletion is similar in concept to depreciation, in that the 

costs of developing or acquiring the asset are capitalized 

and then gradually reduced over an estimate of the asset’s productive life, as is appropriate for measuring net 

income.

In contrast, the Tax Code generally allows independent 

fuel and mineral producers and royalty owners to take 

percentage depletion deductions rather than cost depletion on limited quantities of output. Under percentage 

depletion, taxpayers deduct a percentage of gross income 

from mineral production. In certain cases the deduction is 

limited to a fraction of the asset’s net income. Over the life 

of an investment, percentage depletion deductions can exceed the cost of the investment. Consequently, percentage 

depletion offers more generous tax treatment than would 

cost depletion, which would limit deductions to an investment’s cost.

11. Alternative fuel production credit.—The 

baseline tax system would not allow credits for particular 

activities, investments, or industries. Instead, it generally 

would seek to tax uniformly all returns from investmentlike activities. In contrast, the Tax Code provides a credit 

of $3 per oil-equivalent barrel of production (in 2004 dollars) for coke or coke gas during a four-year period for 

qualified facilities. Qualifying facilities producing coke 

and coke gas must be placed in service by December 31, 

2009. 

12. Oil and gas exception to passive loss limitation.—The baseline tax system accepts current law’s 

general rule limiting taxpayers’ ability to deduct losses 

from passive activities against nonpassive income (e.g., 

wages, interest, and dividends). Passive activities generally are defined as those in which the taxpayer does not 

materially participate, and there are numerous additional considerations brought to bear on the determination of 

which activities are passive for a given taxpayer. Losses 

are limited in an attempt to limit tax sheltering activities. 

Passive losses that are unused may be carried forward 

and applied against future passive income. 

An exception from the passive loss limitation is provided for a working interest in an oil or gas property that the 

taxpayer holds directly or through an entity that does not 

limit the liability of the taxpayer with respect to the interest. Thus, taxpayers can deduct losses from such working 

interests against nonpassive income without regard to 

whether they materially participate in the activity. 

13. Capital gains treatment of royalties on 

coal.—The baseline tax system generally would tax all 

income under the regular tax rate schedule. It would not 

allow preferentially low tax rates to apply to certain types 

or sources of income. For individuals in 2013, tax rates 

on regular income vary from 10 percent to 39.6 percent, 

depending on the taxpayer’s income. In contrast, current 

law allows capital gains realized by individuals to be 

taxed at a preferentially low rate that is no higher than 

20 percent. Certain sales of coal under royalty contracts 

qualify for taxation as capital gains rather than ordinary 

income, and so benefit from the preferentially low 20 percent maximum tax rate on capital gains. 

14. Energy facility bonds.—The baseline tax system generally would tax all income under the regular tax 

rate schedule. It would not allow preferentially low (or 

zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allows interest earned on 

State and local bonds used to finance construction of certain energy facilities to be exempt from tax. These bonds 

are generally subject to the State private-activity-bond 

annual volume cap.
222 ANALYTICAL PERSPECTIVES

15. Energy production credit.—The baseline tax 

system would not allow credits for particular activities, 

investments, or industries. Instead, it generally would 

seek to tax uniformly all returns from investment-like 

activities. In contrast, the Tax Code provides a credit for 

certain electricity produced from wind energy, biomass, 

geothermal energy, solar energy, small irrigation power, 

municipal solid waste, or qualified hydropower and sold to 

an unrelated party. In addition to the electricity production credit, an income tax credit is allowed for the production of refined coal and Indian coal at qualified facilities.

16. Energy investment credit.—The baseline tax 

system would not allow credits for particular activities, 

investments, or industries. Instead, it generally would 

seek to tax uniformly all returns from investment-like 

activities. However, the Tax Code provides credits for investments in solar and geothermal energy property, qualified fuel cell power plants, stationary microturbine power 

plants, geothermal heat pumps, small wind property and 

combined heat and power property. Owners of renewable 

power facilities that qualify for the energy production 

credit may instead elect to take an energy investment 

credit.

17. Alcohol fuel credits.—The baseline tax system 

would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to 

tax uniformly all returns from investment-like activities. 

In contrast, the Tax Code provides an income tax credit 

for qualified cellulosic biofuel production. This provision 

expired on December 31, 2013 

18. Bio-Diesel tax credit.—The baseline tax system

would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to 

tax uniformly all returns from investment-like activities. 

However, the Tax Code allows an income tax credit for biodiesel used or sold and for bio-diesel derived from virgin 

sources. In lieu of the bio-diesel credit, the taxpayer may 

claim a refundable excise tax credit. In addition, small 

agri-biodiesel producers are eligible for a separate income 

tax credit for ethanol production and a separate credit 

is available for qualified renewable diesel fuel mixtures. 

This provision expired on December 31, 2013. 

19. Tax credits for clean-fuel burning vehicles

and refueling property.—The baseline tax system 

would not allow credits or deductions for particular activities, investments, or industries. Instead, it generally 

would seek to tax uniformly all returns from investmentlike activities. In contrast, the Tax Code allows a number 

of credits for certain types of vehicles and property. These 

are available for alternative fuel vehicle refueling property, fuel cell vehicles, plug-in electric-drive motor vehicles, 

and two- and three-wheeled plug-in electric vehicles.

20. Exclusion of utility conservation subsidies.—The baseline tax system generally takes a comprehensive view of taxable income that includes a wide 

variety of (measurable) accretions to wealth. In certain 

circumstances, public utilities offer rate subsidies to nonbusiness customers who invest in energy conservation 

measures. These rate subsidies are equivalent to payments from the utility to its customer, and so represent 

accretions to wealth, income, that would be taxable to the 

customer under the baseline tax system. In contrast, the 

Tax Code exempts these subsidies from the non-business 

customer’s gross income.

21. Credit to holders of clean renewable energy 

bonds.—The baseline tax system would uniformly tax all 

returns to investments and not allow credits for particular activities, investments, or industries. In contrast, the 

Tax Code provides for the issuance of Clean Renewable 

Energy Bonds which entitles the bond holder to a Federal 

income tax credit in lieu of interest. The limit on the volume authorized in 2009–2010 is $2.4 billion. As of March 

2010, issuers of the unused authorization of such bonds 

could opt to receive direct payment with the yield becoming fully taxable.

22. Deferral of gain from dispositions of transmission property to implement FERC restructuring 

policy.—The baseline tax system generally would tax 

gains from sale of property when realized. It would not 

allow an exception for particular activities or individuals. 

However, the Tax Code allows utilities to defer gains from 

the sale of their transmission assets to a FERC-approved 

independent transmission company. The sale of property 

must be made prior to January 1, 2013. 

23. Credit for investment in clean coal facilities.—The baseline tax system would uniformly tax all 

returns to investments and not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code provides 

investment tax credits for clean coal facilities producing 

electricity and for industrial gasification combined cycle 

projects. 

24. Temporary 50 percent expensing for equipment used in the refining of liquid fuels.—The baseline tax system allows the taxpayer to deduct the decline 

in the economic value of an investment over its economic 

life. However, the Tax Code provides for an accelerated 

recovery of the cost of certain investments in refineries by 

allowing partial expensing of the cost, thereby giving such 

investments a tax advantage.

25. Natural gas distribution pipelines treated 

as 15-year property.—The baseline tax system allows

taxpayers to deduct the decline in the economic value of 

an investment over its economic life. However, the Tax 

Code allows depreciation of natural gas distribution pipelines (placed in service between 2005 and 2011) over a 15 

year period. These deductions are accelerated relative to 

deductions based on economic depreciation.

26. Amortize all geological and geophysical expenditures over two years.—The baseline tax system 

allows taxpayers to deduct the decline in the economic 

value of an investment over time. However, the Tax Code 

allows geological and geophysical expenditures incurred 

in connection with oil and gas exploration in the United 

States to be amortized over two years for non-integrated 

oil companies.

27. Allowance of deduction for certain energy efficient commercial building property.—The baseline 

tax system would not allow deductions in addition to nor-
14. TAX EXPENDITURES 223

mal depreciation allowances for particular investments in 

particular industries. Instead, it generally would seek to 

tax uniformly all returns from investment-like activities. 

In contrast, the Tax Code allows a deduction, per square 

foot, for certain energy efficient commercial buildings.

28. Credit for construction of new energy efficient homes.—The baseline tax system would not allow 

credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all 

returns from investment-like activities. However, the Tax 

Code allows contractors a tax credit of $2,000 for the construction of a qualified new energy-efficient home that has 

an annual level of heating and cooling energy consumption at least 50 percent below the annual consumption 

of a comparable dwelling unit. The credit equals $1,000 

in the case of a new manufactured home that meets a 30 

percent standard. This provision expired on December 31, 

2013.

29. Credit for energy efficiency improvements 

to existing homes.—The baseline tax system would not 

allow credits for particular activities, investments, or industries. However, the Tax Code provides an investment 

tax credit for expenditures made on insulation, exterior 

windows, and doors that improve the energy efficiency 

of homes and meet certain standards. The Tax Code also 

provides a credit for purchases of advanced main air circulating fans, natural gas, propane, or oil furnaces or hot 

water boilers, and other qualified energy efficient property. This provision expired on December 31, 2013. 

30. Credit for energy efficient appliances.—The 

baseline tax system would not allow credits for particular 

activities, investments, or industries. Instead, it generally 

would seek to tax uniformly all returns from investmentlike activities. In contrast, the Tax Code provides tax credits for the manufacture of efficient dishwashers, clothes 

washers, and refrigerators. The size of the credit depends 

on the efficiency of the appliance. This provision expired 

on December 31, 2013. 

31. Credit for residential energy efficient property.—The baseline tax system would uniformly tax all 

returns to investments and not allow credits for particular activities, investments, or industries. However, the 

Tax Code provides a credit for the purchase of a qualified 

photovoltaic property and solar water heating property, as 

well as for fuel cell power plants, geothermal heat pumps 

and small wind property.

32. Credit for qualified energy conservation 

bonds.—The baseline tax system would uniformly tax 

all returns to investments and not allow credits for particular activities, investments, or industries. However, the 

Tax Code provides for the issuance of energy conservation 

bonds which entitle the bond holder to a Federal income 

tax credit in lieu of interest. The limit on the volume issued in 2009–2010 is $3.2 billion. As of March 2010, issuers of the unused authorization of such bonds could opt 

to receive direct payment with the yield becoming fully 

taxable.

33. Advanced energy property credit.—The baseline tax system would not allow credits for particular 

activities, investments, or industries. However, the Tax 

Code provides a 30 percent investment credit for property used in a qualified advanced energy manufacturing 

project. The Treasury Department may award up to $2.3 

billion in tax credits for qualified investments. 

34. Advanced nuclear power facilities production credit.—The baseline tax system would not allow 

credits or deductions for particular activities, investments, or industries. Instead, it generally would seek to 

tax uniformly all returns from investment-like activities. 

In contrast, the Tax Code allows a tax credit equal to 1.8 

cents times the number of kilowatt hours of electricity 

produced at a qualifying advanced nuclear power facility. A taxpayer may claim no more than $125 million per 

1,000 MW of capacity. The Treasury Department may allocate up to 6,000 megawatts of credit-eligible capacity.

Natural Resources and Environment

35. Exploration and development costs.—The 

baseline tax system allows the taxpayer to deduct the depreciation of an asset according to the decline in its economic value over time. However, certain capital outlays 

associated with exploration and development of nonfuel 

minerals may be expensed rather than depreciated over 

the life of the asset.

36. Percentage depletion.—The baseline tax system allows the taxpayer to deduct the decline in the economic value of an investment over time. Under current 

law, however, most nonfuel mineral extractors may use 

percentage depletion (whereby the deduction is fixed as a 

percentage of revenue and can exceed total costs) rather 

than cost depletion, with percentage depletion rates ranging from 22 percent for sulfur to 5 percent for sand and 

gravel. Over the life of an investment, percentage depletion deductions can exceed the cost of the investment. 

Consequently, percentage depletion offers more generous 

tax treatment than would cost depletion, which would 

limit deductions to an investment’s cost.

37. Sewage, water, solid and hazardous waste 

facility bonds.—The baseline tax system generally 

would tax all income under the regular tax rate schedule. 

It would not allow preferentially low (or zero) tax rates to 

apply to certain types or sources of income. In contrast, 

the Tax Code allows interest earned on State and local 

bonds used to finance construction of sewage, water, or 

hazardous waste facilities to be exempt from tax. These 

bonds are generally subject to the State private-activitybond annual volume cap.

38. Capital gains treatment of certain timber.—

The baseline tax system generally would tax all income 

under the regular tax rate schedule. It would not allow 

preferentially low tax rates to apply to certain types or 

sources of income. However, under current law certain 

timber sales can be treated as a capital gain rather than 

ordinary income and therefore subject to the lower capital-gains tax rate. For individuals in 2013, tax rates on 

regular income vary from 10 percent to 39.6 percent, depending on the taxpayer’s income. In contrast, current 

law allows capital gains to be taxed at a preferentially 

low rate that is no higher than 20 percent. 
224 ANALYTICAL PERSPECTIVES

39. Expensing multi-period timber growing

costs.—The baseline tax system requires the taxpayer 

to capitalize costs associated with investment property. 

However, most of the production costs of growing timber 

may be expensed under current law rather than capitalized and deducted when the timber is sold, thereby accelerating cost recovery.

40. Historic preservation.—The baseline tax system would not allow credits for particular activities, investments, or industries. However, expenditures to preserve and restore certified historic structures qualify for 

an investment tax credit of 20 percent under current law 

for certified rehabilitation activities. The taxpayer’s recoverable basis must be reduced by the amount of the credit. 

41. Industrial CO2 capture and sequestration 

tax credit.—The baseline tax system would uniformly 

tax all returns to investments and not allow credits for 

particular activities, investments, or industries. In contrast, the Tax Code allows a credit of $20 per metric ton 

for qualified carbon dioxide captured at a qualified facility 

and disposed of in secure geological storage. In addition, 

the provision allows a credit of $10 per metric ton of qualified carbon dioxide that is captured at a qualified facility 

and as a tertiary injectant in a qualified enhanced oil or 

natural gas recovery project.

42. Deduction for endangered species recovery expenditures.—The baseline tax system generally 

would tax all income under the regular tax rate schedule. 

It would not allow preferentially low tax rates to apply 

to certain types or sources of income. In contrast, under 

current law farmers can deduct up to 25 percent of their 

gross income for expenses incurred as a result of site and 

habitat improvement activities that will benefit endangered species on their farm land, in accordance with site 

specific management actions included in species recovery 

plans approved pursuant to the Endangered Species Act 

of 1973.

Agriculture

43. Expensing certain capital outlays.—The 

baseline tax system requires the taxpayer to capitalize 

costs associated with investment property. However, farmers may expense certain expenditures for feed and fertilizer as well as for soil and water conservation measures 

as well as other capital improvements under current law.

44. Expensing multi-period livestock and crop

production costs.—The baseline tax system requires 

the taxpayer to capitalize costs associated with an investment over time. However, the production of livestock and 

crops with a production period greater than two years 

(e.g., establishing orchards or constructing barns) is exempt from the uniform cost capitalization rules, thereby 

accelerating cost recovery.

45. Loans forgiven solvent farmers.—The baseline tax system requires debtors to include the amount of 

loan forgiveness as income or else reduce their recoverable 

basis in the property related to the loan. If the amount 

of forgiveness exceeds the basis, the excess forgiveness 

is taxable. However, for bankrupt debtors, the amount of 

loan forgiveness reduces carryover losses, unused credits, 

and then basis, with the remainder of the forgiven debt 

excluded from taxation.

46. Capital gains treatment of certain income.—

For individuals in 2013, tax rates on regular income vary 

from 10 percent to 39.6 percent, depending on the taxpayer’s income. The baseline tax system generally would tax 

all income under the regular tax rate schedule. It would 

not allow preferentially low tax rates to apply to certain 

types or sources of income. In contrast, current law allows capital gains to be taxed at a preferentially low rate 

that is no higher than 20 percent. Certain agricultural 

income, such as unharvested crops, qualify for taxation as 

capital gains rather than ordinary income, and so benefit 

from the preferentially low 20 percent maximum tax rate 

on capital gains. 

47. Income averaging for farmers.—The baseline 

tax system generally taxes all earned income each year at 

the rate determined by the income tax. However, taxpayers may average their taxable income from farming and 

fishing over the previous three years.

48. Deferral of gain on sales of farm refiners.—

The baseline tax system generally subjects capital gains 

to taxes the year that they are realized. However, the Tax 

Code allows a taxpayer who sells stock in a farm refiner 

to a farmers’ cooperative to defer recognition of the gain 

if the proceeds are re-invested in a qualified replacement 

property.

49. Expensing of reforestation expenditures.—

The baseline tax system requires the taxpayer to capitalize costs associated with an investment over time. In 

contrast, the Tax Code provides for the expensing of the 

first $10,000 in reforestation expenditures with 7-year 

amortization of the remaining expenses.

Commerce and Housing

This category includes a number of tax expenditure 

provisions that also affect economic activity in other 

functional categories. For example, provisions related to 

investment, such as accelerated depreciation, could be 

classified under the energy, natural resources and environment, agriculture, or transportation categories.

50. Credit union income exemption.—Under the 

baseline tax system, corporations pay taxes on their profits under the regular tax rate schedule. It would not allow 

preferentially low (or zero) tax rates to apply to certain 

types or sources of income. However, in the Tax Code the 

earnings of credit unions not distributed to members as 

interest or dividends are exempt from the income tax.

51. Deferral of income on life insurance and 

annuity contracts.—Under the baseline tax system, 

individuals and corporations pay taxes on their income 

when it is (actually or constructively) received or accrued, 

depending on their method of accounting. Nevertheless, 

the Tax Code provides favorable tax treatment for investment income earned within qualified life insurance and 

annuity contracts. In general, investment income earned 

on qualified life insurance contracts held until death is 
14. TAX EXPENDITURES 225

permanently exempt from income tax. Investment income distributed prior to the death of the insured is taxexempt to the extent that investment in the contract is 

overstated (because premiums paid for the cost of life insurance protection are credited to investment in the contract), while the remaining distributed amounts are taxdeferred because income is not taxed on a current basis, 

but is recognized only when distributed from the contract. 

Investment income earned on annuities benefits from tax 

deferral.

52. Small property and casualty insurance companies.—Under the baseline tax system, corporations pay 

taxes on their profits under the regular tax rate schedule. 

It would not allow preferentially low (or zero) tax rates to 

apply to certain types or sources of income. Under current 

law, however, stock non-life insurance companies are generally exempt from tax if their gross receipts for the taxable year do not exceed $600,000 and more than 50 percent of such gross receipts consist of premiums. Mutual 

non-life insurance companies are generally tax-exempt if 

their annual gross receipts do not exceed $150,000 and 

more than 35 percent of gross receipts consist of premiums. Also, non-life insurance companies with no more 

than $1.2 million of annual net premiums may elect to 

pay tax only on their taxable investment income.

53. Insurance companies owned by exempt organizations.—Under the baseline tax system, corporations pay taxes on their profits under the regular tax rate 

schedule. It would not allow preferentially low (or zero) 

tax rates to apply to certain types or sources of income. 

Generally the income generated by life and property and 

casualty insurance companies is subject to tax, albeit by 

special rules. Insurance operations conducted by such exempt organizations as fraternal societies, voluntary employee benefit associations, and others, however, are exempt from tax.

54. Small life insurance company deduction.—

Under the baseline tax system, corporations pay taxes on 

their profits under the regular tax rate schedule. It would 

not allow preferentially low (or zero) tax rates to apply to 

certain types or sources of income. However, under current law small life insurance companies (with gross assets of less than $500 million) can deduct 60 percent of 

the first $3 million of otherwise taxable income. The deduction phases out for otherwise taxable income between 

$3 million and $15 million.

55. Exclusion of interest spread of financial institutions.—The baseline tax system generally would tax 

all income under the regular tax rate schedule. It would 

not allow preferentially low (or zero) tax rates to apply to 

certain types or sources of income. Consumers and nonprofit organizations pay for some deposit-linked services, 

such as check cashing, by accepting a below-market interest rate on their demand deposits. If they received a 

market rate of interest on those deposits and paid explicit 

fees for the associated services, they would pay taxes on 

the full market rate and (unlike businesses) could not deduct the fees. The Government thus foregoes tax on the 

difference between the risk-free market interest rate and 

below-market interest rates on demand deposits, which 

under competitive conditions should equal the value added of deposit services.

56. Mortgage housing bonds.—The baseline tax 

system generally would tax all income under the regular 

tax rate schedule. It would not allow preferentially low (or 

zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allows interest earned on 

State and local bonds used to finance homes purchased by 

first-time, low-to-moderate-income buyers to be exempt. 

These bonds are generally subject to the State privateactivity-bond annual volume cap.

57. Rental housing bonds.—The baseline tax system generally would tax all income under the regular tax 

rate schedule. It would not allow preferentially low (or 

zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allows interest earned on 

State and local government bonds used to finance multifamily rental housing projects to be tax-exempt.

58. Interest on owner-occupied homes.—Under

the baseline tax system, expenses incurred in earning income would be deductible. However, such expenses would 

not be deductible when the income or the return on an 

investment is not taxed. In contrast, the Tax Code allows 

an exclusion from a taxpayer’s taxable income for the 

value of owner-occupied housing services and also allows 

the owner-occupant to deduct mortgage interest paid on 

his or her primary residence and one secondary residence 

as an itemized non-business deduction. In general, the 

mortgage interest deduction is limited to interest on debt 

no greater than the owner’s basis in the residence, and is 

also limited to interest on debt of no more than $1 million. Interest on up to $100,000 of other debt secured by 

a lien on a principal or second residence is also deductible, irrespective of the purpose of borrowing, provided 

the total debt does not exceed the fair market value of 

the residence. As an alternative to the deduction, holders 

of qualified Mortgage Credit Certificates issued by State 

or local governmental units or agencies may claim a tax 

credit equal to a proportion of their interest expense.

59. Taxes on owner-occupied homes.—Under the

baseline tax system, expenses incurred in earning income 

would be deductible. However, such expenses would not 

be deductible when the income or the return on an investment is not taxed. In contrast, the Tax Code allows an 

exclusion from a taxpayer’s taxable income for the value 

of owner-occupied housing services and also allows the 

owner-occupant to deduct property taxes paid on his or 

her primary and secondary residences.

60. Installment sales.—The baseline tax system 

generally would tax all income under the regular tax rate 

schedule. It would not allow preferentially low (or zero) 

tax rates, or deferral of tax, to apply to certain types or 

sources of income. Dealers in real and personal property 

(i.e., sellers who regularly hold property for sale or resale) 

cannot defer taxable income from installment sales until 

the receipt of the loan repayment. Nondealers (i.e., sellers 

of real property used in their business) are required to 

pay interest on deferred taxes attributable to their total 

installment obligations in excess of $5 million. Only properties with sales prices exceeding $150,000 are includ-
226 ANALYTICAL PERSPECTIVES

able in the total. The payment of a market rate of interest 

eliminates the benefit of the tax deferral. The tax exemption for nondealers with total installment obligations of 

less than $5 million is, therefore, a tax expenditure.

61. Capital gains exclusion on home sales.—The 

baseline tax system would not allow deductions and exemptions for certain types of income. In contrast, the Tax 

Code allows homeowners to exclude from gross income up 

to $250,000 ($500,000 in the case of a married couple filing a joint return) of the capital gains from the sale of 

a principal residence. To qualify, the taxpayer must have 

owned and used the property as the taxpayer’s principal 

residence for a total of at least two of the five years preceding the date of sale. In addition, the exclusion may not 

be used more than once every two years.

62. Imputed net rental income on owner-occupied housing.—Under the baseline tax system, the taxable income of a taxpayer who is an owner-occupant would

include the implicit value of gross rental income on housing services earned on the investment in owner-occupied 

housing and would allow a deduction for expenses, such as 

interest, depreciation, property taxes, and other costs, associated with earning such rental income. In contrast, the 

Tax Code allows an exclusion from taxable income for the 

implicit gross rental income on housing services, while in 

certain circumstances allows a deduction for some costs 

associated with such income, such as for mortgage interest and property taxes.

63. Passive loss real estate exemption.—The baseline tax system accepts current law’s general rule limiting 

taxpayers’ ability to deduct losses from passive activities 

against nonpassive income (e.g., wages, interest, and dividends). Passive activities generally are defined as those 

in which the taxpayer does not materially participate and 

there are numerous additional considerations brought to 

bear on the determination of which activities are passive 

for a given taxpayer. Losses are limited in an attempt to 

limit tax sheltering activities. Passive losses that are unused may be carried forward and applied against future 

passive income. 

In contrast to the general restrictions on passive losses, 

the Tax Code exempts owners of rental real estate activities from “passive income’’ limitations. The exemption is 

limited to $25,000 in losses and phases out for taxpayers 

with income between $100,000 and $150,000. 

64. Low-income housing credit.—The baseline

tax system would uniformly tax all returns to investments and not allow credits for particular activities, 

investments, or industries. However, under current law 

taxpayers who invest in certain low-income housing are 

eligible for a tax credit. The credit rate is set so that 

the present value of the credit is equal to 70 percent 

for new construction and 30 percent for (1) housing receiving other Federal benefits (such as tax-exempt bond 

financing), or (2) substantially rehabilitated existing 

housing. The credit can exceed these levels in certain 

statutorily defined and State designated areas where 

project development costs are higher. The credit is allowed in equal amounts over 10 years and is generally 

subject to a volume cap. 

65. Accelerated depreciation of residential rental property.—Under an economic income tax, the costs of 

acquiring a building are capitalized and depreciated over 

time in accordance with the decline in the property’s economic value due to wear and tear or obsolescence. This insures that the net income from the rental property is measured appropriately each year. However, the depreciation 

provisions of the Tax Code are part of the reference law 

rules, and thus do not give rise to tax expenditures under 

reference law. Under normal law, however, depreciation 

allowances reflect estimates of economic depreciation.

66. Discharge of mortgage indebtedness.—Under 

the baseline tax system, all income would generally be 

taxed under the regular tax rate schedule. The baseline 

tax system would not allow preferentially low (or zero) 

tax rates to apply to certain types or sources of income. 

In contrast, the Tax Code allows an exclusion from a taxpayer’s taxable income for any discharge of indebtedness 

of up to $2 million ($1 million in the case of a married 

individual filing a separate return) from a qualified principal residence. The provision applies to debt discharged 

after January 1, 2007, and before January 1, 2014.

67. Discharge of business indebtedness.—The 

baseline tax system generally would tax all income under 

the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types 

or sources of income. In contrast, the Tax Code allows an 

exclusion from a taxpayer’s taxable income for any discharge qualified real property business indebtedness by 

taxpayers other than a C corporation. If the canceled debt 

is not reported as current income, however, the basis of 

the underlying property must be reduced by the amount 

canceled.

68. Imputed interest rules.—Under the baseline 

tax system, holders (issuers) of debt instruments are generally required to report interest earned (paid) in the period it accrues, not when paid. In addition, the amount of 

interest accrued is determined by the actual price paid, 

not by the stated principal and interest stipulated in the 

instrument. But under current law, and in general, any 

debt associated with the sale of property worth less than 

$250,000 is excepted from the general interest accounting rules. This general $250,000 exception is not a tax expenditure under reference law but is under normal law. 

Exceptions above $250,000 are a tax expenditure under 

reference law; these exceptions include the following: (1) 

sales of personal residences worth more than $250,000, 

and (2) sales of farms and small businesses worth between $250,000 and $1 million.

69. Treatment of qualified dividends.—The baseline tax system generally would tax all income under the 

regular tax rate schedule. It would not allow preferentially low tax rates to apply to certain types or sources 

of income. For individuals in 2013, tax rates on regular 

income vary from 10 percent to 39.6 percent, depending 

on the taxpayer’s income. In contrast, under current law, 

qualified dividends are taxed at a preferentially low rate 

that is no higher than 20 percent. 

70. Capital gains (other than agriculture, timber, and coal).—The baseline tax system generally 
14. TAX EXPENDITURES 227

would tax all income under the regular tax rate schedule. 

It would not allow preferentially low tax rates to apply 

to certain types or sources of income. For individuals in 

2013, tax rates on regular income vary from 10 percent 

to 39.6 percent, depending on the taxpayer’s income. In 

contrast, under current law, capital gains on assets held 

for more than one year are taxed at a preferentially low 

rate that is no higher than 20 percent. 

71. Capital gains exclusion for small business 

stock.—The baseline tax system would not allow deductions and exemptions, or provide preferential treatment 

of certain sources of income or types of activities. In contrast, the Tax Code provides an exclusion of 50 percent 

(from a 28 percent tax rate) for capital gains from qualified 

small business stock held by individuals for more than 5 

years; 75 percent for stock issued after February 17, 2009 

and before September 28, 2010; and 100 percent for stock 

issued after September 27, 2010 and before January 1, 

2014. A qualified small business is a corporation whose 

gross assets do not exceed $50 million as of the date of 

issuance of the stock. 

72. Step-up in basis of capital gains at death.

Under the baseline tax system, unrealized capital gains 

would be taxed when assets are transferred at death or by 

gift. It would not allow for exempting gains upon transfer 

of the underlying assets to the heirs. In contrast, capital 

gains on assets held at the owner’s death are not subject 

to capital gains tax under current law. The cost basis of 

the appreciated assets is adjusted to the market value at 

the owner’s date of death which becomes the basis for the 

heirs.

73. Carryover basis of capital gains on gifts.—

Under the baseline tax system, unrealized capital gains 

would be taxed when assets are transferred at death or by 

gift. In contrast, when a gift of appreciated asset is made 

under current law, the donor’s basis in the transferred 

property (the cost that was incurred when the transferred 

property was first acquired) carries over to the donee. The 

carryover of the donor’s basis allows a continued deferral 

of unrealized capital gains.

74. Ordinary income treatment of losses from 

sale of small business corporate stock shares.—The 

baseline tax system limits to $3,000 the write-off of losses 

from capital assets, with carryover of the excess to future 

years. In contrast, the Tax Code allows up to $100,000 

in losses from the sale of small business corporate stock 

(capitalization less than $1 million) to be treated as ordinary losses and fully deducted.

75. Depreciation of non-rental-housing buildings.—Under an economic income tax, the costs of acquiring a building are capitalized and depreciated ove

time in accordance with the decline in the property’s 

economic value due to wear and tear or obsolescence. 

This insures that the net income from the property is 

measured appropriately each year. However, the depreciation provisions of the Tax Code are part of the reference law rules, and thus do not give rise to tax expenditures under reference law. Under normal law, however, 

depreciation allowances reflect estimates of economic 

depreciation.

76. Accelerated depreciation of machinery and 

equipment.—Under an economic income tax, the costs 

of acquiring machinery and equipment are capitalized 

and depreciated over time in accordance with the decline in the property’s economic value due to wear and 

tear or obsolescence. This insures that the net income 

from the property is measured appropriately each year. 

However, the depreciation provisions of the Tax Code are 

part of the reference law rules, and thus do not give rise 

to tax expenditures under reference law. Under normal 

law, however, depreciation allowances reflect estimates 

of economic depreciation.

77. Expensing of certain small investments.—

Under the reference law baseline, the costs of acquiring 

tangible property and computer software would be depreciated using the Tax Code’s depreciation provisions. 

Under the normal tax baseline, depreciation allowances 

are estimates of economic depreciation. However, the 

Tax Code allows qualifying investments by small businesses in tangible property and certain computer software to be expensed rather than depreciated over time.

78. Graduated corporation income tax rate 

schedule.—Because the corporate rate schedule is part 

of reference tax law, it is not considered a tax expenditure under the reference method. A flat corporation income tax rate is taken as the baseline under the normal 

tax method; therefore the lower rate is considered a tax 

expenditure under this concept.

79. Small issue industrial development 

bonds.—The baseline tax system generally would tax 

all income under the regular tax rate schedule. It would 

not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, 

the Tax Code allows interest earned on small issue 

industrial development bonds (IDBs) issued by State 

and local governments to finance manufacturing facilities to be tax exempt. Depreciable property financed 

with small issue IDBs must be depreciated, however, 

using the straight-line method. The annual volume of 

small issue IDBs is subject to the unified volume cap 

discussed in the mortgage housing bond section above.

80. Deduction for U.S. production activities.—

The baseline tax system generally would tax all income 

under the regular tax rate schedule. It would not allow 

preferentially low (or zero) tax rates to apply to certain 

types or sources of income. In contrast, the Tax Code 

allows for a deduction equal to a portion of taxable income attributable to domestic production.

81. Special rules for certain film and TV production.—The baseline tax system generally would 

tax all income under the regular tax rate schedule. It 

would not allow deductions and exemptions or preferentially low (or zero) tax rates to apply to certain types 

or sources of income. In contrast, under current law 

taxpayers may deduct up to $15 million per production 

($20 million in certain distressed areas) in non-capital 

expenditures incurred during the year. This provision 

expires at the end of 2013.
228 ANALYTICAL PERSPECTIVES

Transportation

82. Tonnage tax. — The baseline tax system generally would tax all profits and income under the regular 

tax rate schedule. U.S. shipping companies may choose to 

be subject to a tonnage tax based on gross shipping weight 

in lieu of an income tax, in which case profits would not be 

subject to tax under the regular tax rate schedule.

83. Deferral of tax on U.S. shipping companies.—The baseline tax system generally would tax all 

profits and income under the regular tax rate schedule. 

It would not allow preferentially low (or zero) tax rates 

to apply to certain types or sources of income. In contrast, 

the Tax Code allows certain companies that operate U.S. 

flag vessels to defer income taxes on that portion of their 

income used for shipping purposes, primarily construction, modernization and major repairs to ships, and repayment of loans to finance these investments. 

84. Exclusion of employee parking expenses.—

Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, would be 

included in taxable income. Dedicated payments and inkind benefits represent accretions to wealth that do not 

differ materially from cash wages. In contrast, the Tax 

Code allows an exclusion from taxable income for employee parking expenses that are paid for by the employer 

or that are received by the employee in lieu of wages. In 

2013, the maximum amount of the parking exclusion is 

$245 per month. The tax expenditure estimate does not 

include any subsidy provided through employer-owned 

parking facilities.

85. Exclusion of employee transit pass expenses.—Under the baseline tax system, all compensation, 

including dedicated payments and in-kind benefits, would 

be included in taxable income. Dedicated payments and 

in-kind benefits represent accretions to wealth that do 

not differ materially from cash wages. In contrast, the 

Tax Code allows an exclusion from a taxpayer’s taxable 

income for passes, tokens, fare cards, and vanpool expenses that are paid for by an employer or that are received 

by the employee in lieu of wages to defray an employee’s 

commuting costs. The maximum amount of the transit exclusion is $130 (indexed) per month in 2014. (There had 

been a parity provision that had temporary resulted in 

a higher maximum equal to those for parking passes for 

several years, which expired on December 31, 2013.). 

86. Tax credit for certain expenditures for maintaining railroad tracks.—The baseline tax system 

would not allow credits for particular activities, investments, or industries. However, under current law eligible 

taxpayers may claim a credit equal to the lesser of 50 

percent of maintenance expenditures and the product of 

$3,500 and the number of miles of track owned or leased. 

This provision expires at the end of 2013. 

87. Exclusion of interest on bonds for financing 

of highway projects and rail-truck transfer facilities.—The baseline tax system generally would tax all

income under the regular tax rate schedule. It would not 

allow preferentially low (or zero) tax rates to apply to 

certain types or sources of income. In contrast, the Tax 

Code provides for $15 billion of tax-exempt bond authority to finance qualified highway or surface freight transfer 

facilities. The authority to issue these bonds expires on 

December 31, 2015.

Community and Regional Development

88. Rehabilitation of structures.—The baseline 

tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. However, the Tax Code allows a 

10-percent investment tax credit for the rehabilitation of 

buildings that are used for business or productive activities and that were erected before 1936 for other than residential purposes. The taxpayer’s recoverable basis must 

be reduced by the amount of the credit. 

89. Airport, dock, and similar facility bonds.—

The baseline tax system generally would tax all income 

under the regular tax rate schedule. It would not allow 

preferentially low (or zero) tax rates to apply to certain 

types or sources of income. In contrast, the Tax Code allows interest earned on State and local bonds issued to 

finance high-speed rail facilities and Government-owned 

airports, docks, wharves, and sport and convention facilities to be tax-exempt. These bonds are not subject to a 

volume cap.

90. Exemption of income of mutuals and cooperatives.—Under the baseline tax system, corporations pay 

taxes on their profits under the regular tax rate schedule. 

In contrast, the Tax Code provides for the incomes of mutual and cooperative telephone and electric companies to 

be exempt from tax if at least 85 percent of their revenues 

are derived from patron service charges.

91. Empowerment zones, the DC Enterprise 

Zone, and renewal communities.—The baseline tax 

system generally would tax all income under the regular 

tax rate schedule. It would not allow preferentially low 

(or zero) tax rates to apply to certain types or sources of 

income, tax credits, and write-offs faster than economic 

depreciation. In contrast, under current law qualifying 

businesses in designated economically depressed areas 

can receive tax benefits such as an employer wage credit, 

increased expensing of investment in equipment, special 

tax-exempt financing, accelerated depreciation, and certain capital gains incentives. A taxpayer’s ability to accrue new tax benefits for empowerment zones expired 

December 31, 2013. 

92. New markets tax credit.—The baseline tax 

system would not allow credits for particular activities, 

investments, or industries. However, under current law 

taxpayers who make qualified equity investments in a 

community development entity (CDE), which then makes 

qualified investments in low-income communities, are eligible for a tax credit received over 7 years. A CDE must 

first receive an allocation of tax credit from Treasury before it can sell the tax credit to the investor in exchange 

for the equity investment. The total equity investment 

available for the credit across all CDEs is $3.5 billion for 

2013, the last year for which allocations can be made. 
14. TAX EXPENDITURES 229

93. Expensing of environmental remediation 

costs.—Under the baseline tax system, the costs would 

be amortized (or depreciated) over an estimate of the economic life of the building. This insures that the net income from the buildings is measured appropriately each 

year. However, the Tax Code allows taxpayers who clean 

up certain hazardous substances at a qualified site to expense the clean-up costs, even though the expenses will 

generally increase the value of the property significantly 

or appreciably prolong the life of the property.

94. Credit to holders of Gulf and Midwest Tax 

Credit Bonds.—The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, under current law taxpayers that own Gulf 

and Midwest Tax Credit bonds receive a non-refundable 

tax credit rather than interest. The credit is included in 

gross income.

95. Recovery Zone Bonds.—The baseline tax system would not allow credits for particular activities, investments, or industries. In addition, it would tax all income under the regular tax rate schedule. It would not 

allow preferentially low (or zero) tax rates to apply to 

certain types or sources of income. In contrast, the Tax 

Code allowed local governments to issue up $10 billion 

in taxable Recovery Zone Economic Development Bonds 

in 2009 and 2010 and receive a direct payment from 

Treasury equal to 45 percent of interest expenses. In addition, local governments could issue up to $15 billion in 

tax exempt Recovery Zone Facility Bonds. These bonds financed certain kinds of business development in areas of 

economic distress.

96. Tribal Economic Development Bonds.—The 

baseline tax system generally would tax all income under 

the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or 

sources of income. In contrast, the Tax Code was modified 

in 2009 to allow Indian tribal governments to issue tax 

exempt “tribal economic development bonds.” There is a 

national bond limitation of $2 billion.

Education, Training, Employment, 

and Social Services

97. Scholarship and fellowship income.—

Scholarships and fellowships are excluded from taxable 

income to the extent they pay for tuition and course-related expenses of the grantee. Similarly, tuition reductions 

for employees of educational institutions and their families are not included in taxable income. From an economic 

point of view, scholarships and fellowships are either gifts 

not conditioned on the performance of services, or they 

are rebates of educational costs. Thus, under the baseline 

tax system of the reference law method, this exclusion is 

not a tax expenditure because this method does not include either gifts or price reductions in a taxpayer’s gross 

income. The exclusion, however, is considered a tax expenditure under the normal tax method, which includes 

gift-like transfers of Government funds in gross income 

(many scholarships are derived directly or indirectly from 

Government funding).

98. HOPE tax credit.—The baseline tax system 

would not allow credits for particular activities, investments, or industries. Under current law, however, the 

non-refundable HOPE tax credit allows a credit for 100 

percent of an eligible student’s first $1,200 of tuition and 

fees and 50 percent of the next $1,200 of tuition and fees. 

The credit only covers tuition and fees paid during the 

first two years of a student’s post-secondary education. In 

2013, the credit is phased out ratably for taxpayers with 

modified AGI between $107,000 and $127,000 if married 

filing jointly ($53,000 and $63,000 for other taxpayers), 

indexed.

99. Lifetime Learning tax credit.—The baseline 

tax system would not allow credits for particular activities, investments, or industries. Under current law, however, the non-refundable Lifetime Learning tax credit allows a credit for 20 percent of an eligible student’s tuition 

and fees, up to a maximum credit per return of $2,000. In 

2013, the credit is phased out ratably for taxpayers with 

modified AGI between $107,000 and $127,000 if married 

filing jointly ($53,000 and $63,000 for other taxpayers), 

indexed. The credit applies to both undergraduate and 

graduate students.

100. American Opportunity Tax Credit.—The 

baseline tax system would not allow credits for particular 

activities, investments, or industries. Under current law 

in 2013, however, the American Opportunity tax credit 

allows a partially refundable credit of up to $2,500 per 

eligible student for qualified tuition and related expenses 

paid during each of the first four years of the student’s 

post-secondary education. The credit is phased out for 

taxpayers with modified adjusted gross income between 

$80,000 and $90,000 ($160,000 and $180,000 for married 

taxpayers filing a joint return). The credit expires at the 

end of 2017.

101. Education Individual Retirement Accounts 

(IRA).—The baseline tax system generally would tax all 

income under the regular tax rate schedule. It would not 

allow preferentially low (or zero) tax rates to apply to certain types or sources of income. While contributions to 

an education IRA are not tax-deductible under current 

law, investment income earned by education IRAs is not 

taxed when earned, and investment income from an education IRA is tax-exempt when withdrawn to pay for a 

student’s education expenses. The maximum contribution 

to an education IRA in 2013 is $2,000 per beneficiary. In 

2013, the maximum contribution is phased down ratably 

for taxpayers with modified AGI between $190,000 and 

$220,000 if married filing jointly ($95,000 and $110,000 

for other taxpayers).

102. Student-loan interest.—The baseline tax system accepts current law’s general rule limiting taxpayers’ ability to deduct non-business interest expenses. In

contrast, taxpayers may claim an above-the-line deduction of up to $2,500 on interest paid on an education loan. 

In 2013, the maximum deduction is phased down ratably 

for taxpayers with modified AGI between $125,000 and 

$155,000 if married filing jointly ($60,000 and $75,000 for 

other taxpayers).
230 ANALYTICAL PERSPECTIVES

103. Deduction for higher education expenses.—

The baseline tax system would not allow a deduction for 

personal expenditures. In contrast, the Tax Code provides 

a maximum annual deduction of $4,000 for qualified 

higher education expenses for taxpayers with adjusted 

gross income up to $130,000 on a joint return ($65,000 for 

other taxpayers). Taxpayers with adjusted gross income 

up to $160,000 on a joint return ($80,000 for other taxpayers) may deduct up to $2,000. This provision expired on 

December 31, 2013. 

104. Qualified tuition programs.—The baseline 

tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low 

(or zero) tax rates to apply to certain types or sources of 

income. Some States have adopted prepaid tuition plans, 

prepaid room and board plans, and college savings plans, 

which allow persons to pay in advance or save for college 

expenses for designated beneficiaries. Under current law, 

investment income, or the return on prepayments, is not 

taxed when earned, and is tax-exempt when withdrawn 

to pay for qualified expenses.

105. Student-loan bonds.—The baseline tax system

generally would tax all income under the regular tax rate 

schedule. It would not allow preferentially low (or zero) 

tax rates to apply to certain types or sources of income. In 

contrast, interest earned on State and local bonds issued 

to finance student loans is tax-exempt under current law. 

The volume of all such private activity bonds that each 

State may issue annually is limited.

106. Bonds for private nonprofit educational institutions.—The baseline tax system generally would tax 

all income under the regular tax rate schedule. It would 

not allow preferentially low (or zero) tax rates to apply to 

certain types or sources of income. In contrast, under current law interest earned on State and local Government 

bonds issued to finance the construction of facilities used 

by private nonprofit educational institutions is not taxed.

107. Credit for holders of zone academy bonds.—

The baseline tax system would not allow credits for particular activities, investments, or industries. Under current 

law, however, financial institutions that own zone academy bonds receive a non-refundable tax credit rather than 

interest. The credit is included in gross income. Proceeds 

from zone academy bonds may only be used to renovate, 

but not construct, qualifying schools and for certain other 

school purposes. The total amount of zone academy bonds 

that may be issued was limited to $1.4 billion in 2009 and 

2010. As of March 2010, issuers of the unused authorization of such bonds could opt to receive direct payment 

with the yield becoming fully taxable. An additional $0.4 

billion of these bonds with a tax credit was authorized to 

be issued before January 1, 2013. 

108. U.S. savings bonds for education.—The 

baseline tax system generally would tax all income under 

the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types 

or sources of income. Under current law, however, interest earned on U.S. savings bonds issued after December 

31, 1989 is tax-exempt if the bonds are transferred to an 

educational institution to pay for educational expenses. 

The tax exemption is phased out for taxpayers with AGI 

between $112,050 and $142,050 if married filing jointly 

($74,700 and $89,700 for other taxpayers) in 2013.

109. Dependent students age 19 or older.—Under 

the baseline tax system, a personal exemption for the taxpayer is allowed. However, additional exemptions for targeted groups within a given filing status would not be allowed. In contrast, the Tax Code allows taxpayers to claim 

personal exemptions for dependent children who are over 

the age of 18 and under the age of 24 and who (1) reside 

with the taxpayer for over half the year (with exceptions 

for temporary absences from home, such as for school attendance), (2) are full-time students, and (3) do not claim 

a personal exemption on their own tax returns.

110. Charitable contributions to educational institutions.—The baseline tax system would not allow a 

deduction for personal expenditures. In contrast, the Tax 

Code provides taxpayers a deduction for contributions to 

nonprofit educational institutions. Moreover, taxpayers 

who donate capital assets to educational institutions can 

deduct the asset’s current value without being taxed on 

any appreciation in value. An individual’s total charitable 

contribution generally may not exceed 50 percent of adjusted gross income; a corporation’s total charitable contributions generally may not exceed 10 percent of pre-tax 

income.

111. Employer-provided educational assistance.—Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits,

should be included in taxable income because they represent accretions to wealth that do not materially differ 

from cash wages. Under current law, however, employerprovided educational assistance is excluded from an employee’s gross income even though the employer’s costs 

for this assistance are a deductible business expense. The 

maximum exclusion is $5,250 per taxpayer.

112. Special deduction for teacher expenses.—

The baseline tax system would not allow a deduction for 

personal expenditures. In contrast, under current law 

educators in both public and private elementary and 

secondary schools, who work at least 900 hours during a 

school year as a teacher, instructor, counselor, principal or 

aide, may subtract up to $250 of qualified expenses when 

figuring their adjusted gross income (AGI). This provision 

expired on December 31, 2013. 

113. Discharge of student loan indebtedness.—

Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be 

included in taxable income. In contrast, the Tax Code allows certain professionals who perform in underserved 

areas or specific fields, and as a consequence have their 

student loans discharged, not to recognize such discharge 

as income.

114. Qualified school construction bonds.—The 

baseline tax system would not allow credits for particular 

activities, investments, or industries. Instead, it generally 

would seek to tax uniformly all returns from investmentlike activities. In contrast, the Tax Code was modified in 

2009 to provide a tax credit in lieu of interest to holders 

of qualified school construction bonds. The national vol-
14. TAX EXPENDITURES 231

ume limit is $22.4 billion over 2009 and 2010. As of March 

2010, issuers of such bonds could opt to receive direct payment with the yield becoming fully taxable.

115. Work opportunity tax credit (WOTC).—The 

baseline tax system would not allow credits for particular 

activities, investments, or industries. Instead, it generally 

would seek to tax uniformly all returns from investmentlike activities. In contrast, the Tax Code provides employers with a tax credit for qualified wages paid to individuals. The credit applies to employees who begin work on or 

before December 31, 2013 and who are certified as members of various targeted groups. The amount of the credit 

that can be claimed is 25 percent of qualified wages for 

employment less than 400 hours and 40 percent for employment of 400 hours or more. Generally, the maximum 

credit per employee is $2,400 and can only be claimed on 

the first year of wages an individual earns from an employer. However, the credit for long-term welfare recipients can be claimed on second year wages as well and has 

a $9,000 maximum. Also, certain categories of veterans 

are eligible for a higher maximum credit of up to $9,600. 

Employees must work at least 120 hours to be eligible 

for the credit. Employers must reduce their deduction for 

wages paid by the amount of the credit claimed. 

116. Employer-provided child care exclusion.

Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be 

included in taxable income. In contrast, under current 

law up to $5,000 of employer-provided child care is excluded from an employee’s gross income even though the 

employer’s costs for the child care are a deductible business expense.

117. Employer-provided child care credit.—The

baseline tax system would not allow credits for particular activities, investments, or industries. Instead, current 

law provides a credit equal to 25 percent of qualified expenses for employee child care and 10 percent of qualified expenses for child care resource and referral services. 

Employer deductions for such expenses are reduced by 

the amount of the credit. The maximum total credit is 

limited to $150,000 per taxable year.

118. Assistance for adopted foster children.—

Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be 

included in taxable income. Taxpayers who adopt eligible 

children from the public foster care system can receive 

monthly payments for the children’s significant and varied needs and a reimbursement of up to $2,000 for nonrecurring adoption expenses; special needs adoptions receive the maximum benefit even if that amount not spent. 

These payments are excluded from gross income under 

current law.

119. Adoption credit and exclusion.—The baseline tax system would not allow credits for particular 

activities. Instead, taxpayers can receive a tax credit 

for qualified adoption expenses under current law. The 

maximum credit is $12,970 per child for 2013, and is 

phased-out ratably for taxpayers with modified AGI between $194,580 and $234,580 The credit amounts and the 

phase-out thresholds are indexed for inflation. Taxpayers 

may also exclude qualified adoption expenses provided or 

reimbursed by an employer from income, subject to the 

same maximum amounts and phase-out as the credit. The 

same expenses cannot qualify for tax benefits under both 

programs; however, a taxpayer may use the benefits of the 

exclusion and the tax credit for different expenses. 

120. Employer-provided meals and lodging.

Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be 

included in taxable income. In contrast, under current law 

employer-provided meals and lodging are excluded from 

an employee’s gross income even though the employer’s 

costs for these items are a deductible business expense.

121. Child credit.—The baseline tax system would 

not allow credits for particular activities or targeted at 

specific groups. Under current law, however, taxpayers 

with children under age 17 can qualify for a $1,000 partially refundable per child credit. Any unclaimed credit 

due to insufficient tax liability may be refundable – taxpayers may claim a refund for 15 percent of earnings in 

excess of a $3,000 floor, up to the amount of unused credit. 

Alternatively, taxpayers with three or more children may 

claim a refund of the amount of payroll taxes paid in excess of EITC received (up to the amount of unused credit) 

if this results in a larger refund. The credit is phased out 

for taxpayers at the rate of $50 per $1,000 of modified 

AGI above $110,000 ($75,000 for single or head of household filers and $55,000 for married taxpayers filing separately). After 2017 refundability is based on earnings in 

excess of $10,000 indexed from 2000, rather than from 

$3,000 (unindexed); taxpayers with three or more children may continue to use the alternative calculation.

122. Child and dependent care expenses.—The 

baseline tax system would not allow credits for particular activities or targeted at specific groups. In contrast, 

the Tax Code provides parents who work or attend school 

and who have child and dependent care expenses a tax 

credit. In 2013, expenditures up to a maximum $3,000 for 

one dependent and $6,000 for two or more dependents are 

eligible for the credit. The credit is equal to 35 percent 

of qualified expenditures for taxpayers with incomes of 

$15,000. The credit is reduced to a minimum of 20 percent by one percentage point for each $2,000 of income in 

excess of $15,000.

123. Disabled access expenditure credit.—The 

baseline tax system would not allow credits for particular activities, investments, or industries. In contrast, the 

Tax Code provides small businesses (less than $1 million 

in gross receipts or fewer than 31 full-time employees) 

a 50-percent credit for expenditures in excess of $250 to 

remove access barriers for disabled persons. The credit is 

limited to $5,000. 

124. Charitable contributions, other than education and health.—The baseline tax system would not 

allow a deduction for personal expenditures. In contrast, 

the Tax Code provides taxpayers a deduction for contributions to charitable, religious, and certain other nonprofit 

organizations. Taxpayers who donate capital assets to 

charitable organizations can deduct the assets’ current 

value without being taxed on any appreciation in value. 
232 ANALYTICAL PERSPECTIVES

An individual’s total charitable contribution generally 

may not exceed 50 percent of adjusted gross income; a 

corporation’s total charitable contributions generally may 

not exceed 10 percent of pre-tax income.

125. Foster care payments.—The baseline tax system generally would tax all income under the regular tax 

rate schedule. It would not allow preferentially low (or 

zero) tax rates to apply to certain types or sources of income. Foster parents provide a home and care for children 

who are wards of the State, under contract with the State. 

However, compensation received for this service is excluded from the gross incomes of foster parents; the expenses 

they incur are nondeductible.

126. Parsonage allowances.—Under the baseline 

tax system, all compensation, including dedicated payments and in-kind benefits, would be included in taxable 

income. Dedicated payments and in-kind benefits represent accretions to wealth that do not differ materially 

from cash wages. In contrast, the Tax Code allows an exclusion from a clergyman’s taxable income for the value of 

the clergyman’s housing allowance or the rental value of 

the clergyman’s parsonage.

127. Indian employment credit.—The baseline tax 

system would not allow credits for particular activities, 

investments, or industries. Instead, it generally would 

seek to tax uniformly all returns from investment-like 

activities. In contrast, the Tax Code provides employers 

with a tax credit for qualified wages paid to employees 

who are enrolled members of Indian tribes. The amount of 

the credit that can be claimed is 20 percent of the excess 

of qualified wages and health insurance costs paid by the 

employer in the current tax year over the amount of such 

wages and costs paid by the employer in 1993. Qualified 

wages and health insurance costs with respect to any 

employee for the taxable year may not exceed $20,000. 

Employees must live on or near the reservation where he 

or she works to be eligible for the credit. Employers must 

reduce their deduction for wages paid by the amount of 

the credit claimed. The credit does not apply to taxable 

years beginning after December 31, 2013.

Health

128. Employer-paid medical insurance and expenses.—Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits,

should be included in taxable income. In contrast, under 

current law, employer-paid health insurance premiums 

and other medical expenses (including long-term care) 

are deducted as a business expense by employers, but 

they are not included in employee gross income.

129. Self-employed medical insurance premiums.—Under the baseline tax system, all compensation

and remuneration, including dedicated payments and 

in-kind benefits, should be included in taxable income. 

In contrast, under current law self-employed taxpayers 

may deduct their family health insurance premiums. 

Taxpayers without self-employment income are not eligible for this special deduction. The deduction is not available for any month in which the self-employed individual 

is eligible to participate in an employer-subsidized health 

plan and the deduction may not exceed the self-employed 

individual’s earned income from self-employment.

130. Medical and health savings accounts.—

Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be 

included in taxable income. Also, the baseline tax system 

would not allow a deduction for personal expenditures. 

In contrast, individual contributions to Archer Medical 

Savings Accounts (Archer MSAs) and Health Savings 

Accounts (HSAs) are allowed as a deduction in determining adjusted gross income whether or not the individual 

itemizes deductions. Employer contributions to Archer 

MSAs and HSAs are excluded from income and employment taxes. Archer MSAs and HSAs require that the individual have coverage by a qualifying high deductible 

health plan. Earnings from the accounts are excluded 

from taxable income. Distributions from the accounts 

used for medical expenses are not taxable. The rules for 

HSAs are generally more flexible than for Archer MSAs 

and the deductible contribution amounts are greater (in 

2013, $3,250 for taxpayers with individual coverage and 

$6,450 for taxpayers with family coverage). Thus, HSAs 

have largely replaced MSAs.

131. Medical care expenses.—The baseline tax 

system would not allow a deduction for personal expenditures. In contrast, under current law personal expenditures for medical care (including the costs of prescription 

drugs) exceeding 7.5 percent of the taxpayer’s adjusted 

gross income are deductible. For tax years beginning after 2012, only medical expenditures exceeding 10 percent 

of the taxpayer’s adjusted gross income are deductible. 

However, for the years 2013, 2014, 2015 and 2016, if either the taxpayer or the taxpayer’s spouse turns 65 before 

the end of the taxable year, the threshold remains at 7.5 

percent of adjusted income.

132. Hospital construction bonds.—The baseline 

tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially 

low (or zero) tax rates to apply to certain types or sources 

of income. In contrast, under current law interest earned 

on State and local government debt issued to finance hospital construction is excluded from income subject to tax.

133. Refundable Premium Assistance Tax 

Credit.—The baseline tax system would not allow credits for particular activities or targeted at specific groups. 

In contrast, for taxable years ending after 2013, the Tax 

Code provides a premium assistance credit to any eligible 

taxpayer for any qualified health insurance purchased 

through a Health Insurance Exchange. In general, an 

eligible taxpayer is a taxpayer with annual household 

income between 100% and 400% of the federal poverty 

level for a family of the taxpayer’s size and that does not 

have access to affordable minimum essential health care 

coverage. The amount of the credit equals the lesser of (i) 

the actual premiums paid by the taxpayer for such coverage or (ii) the difference between the cost of a statutorilyidentified benchmark plan offered on the exchange and 

a required payment by the taxpayer that increases with 

income. 
14. TAX EXPENDITURES 233

134. Credit for employee health insurance expenses of small business.—The baseline tax system 

would not allow credits for particular activities or targeted at specific groups. In contrast, the Tax Code provides a tax credit to qualified small employers that make 

a certain level of non-elective contributions towards the 

purchase of certain health insurance coverage for its 

employees. To receive a credit, an employer must have 

fewer than 25 full-time-equivalent employees whose average annual full-time-equivalent wages from the employer are less than $50,000 (indexed for taxable years 

after 2013). However, to receive a full credit, an employer 

must have no more than 10 full-time employees, and the 

average wage paid to these employees must be no more 

than $25,000 (indexed for taxable years after 2013). A 

qualifying employer may claim the credit for any taxable 

year beginning in 2010, 2011, 2012, and 2013 and for up 

to two years for insurance purchased through a Health 

Insurance Exchange thereafter. For taxable beginning 

in 2010, 2011, 2012, and 2013, the maximum credit is 35 

percent of premiums paid by qualified taxable employers 

and 25 percent of premiums paid by qualified tax-exempt 

organizations. For taxable years beginning in 2014 and 

later years, the maximum tax credit will increase to 50 

percent of premiums paid by qualified taxable employers 

and 35 percent of premiums paid by qualified tax-exempt 

organizations.

135. Charitable contributions to health institutions.—The baseline tax system would not allow a deduction for personal expenditures. In contrast, the Tax Code 

provides individuals and corporations a deduction for contributions to nonprofit health institutions. Tax expenditures resulting from the deductibility of contributions to 

other charitable institutions are listed under the education, training, employment, and social services function.

136. Orphan drugs.—The baseline tax system would 

not allow credits for particular activities, investments, or 

industries. In contrast, under current law drug firms can 

claim a tax credit of 50 percent of the costs for clinical 

testing required by the Food and Drug Administration for 

drugs that treat rare physical conditions or rare diseases.

137. Blue Cross and Blue Shield.—The baseline 

tax system generally would tax all profits under the regular tax rate schedule. It would not allow preferentially low 

tax rates to apply to certain types or sources of income. 

In contrast, Blue Cross and Blue Shield health insurance 

providers in existence on August 16, 1986 and certain 

other nonprofit health insurers are provided exceptions 

from otherwise applicable insurance company income tax 

accounting rules that substantially reduce their tax liabilities, provided that their percentage of total premium 

revenue expended on reimbursement for clinical services 

provided to enrollees is not less than 85 percent for the 

taxable year.

138. Tax credit for health insurance purchased 

by certain displaced and retired individuals.—The 

baseline tax system would not allow credits for particular activities, investments, or industries. In contrast, the 

Trade Act of 2002 provides a refundable tax credit of 65 

percent for the purchase of health insurance coverage by 

individuals eligible for Trade Adjustment Assistance and 

certain Pension Benefit Guarantee Corporation pension 

recipients. The American Recovery and Reinvestment Act 

and a subsequent extension increased the credit to 80 percent in coverage months preceding March 2011. The Trade 

Adjustment Assistance Extension Act of 2011 extended 

an enhanced credit of 72.5% through December 2013, but 

eliminated the credit entirely beginning January 1, 2014.

139. Distributions for premiums for health and 

long-term care insurance.—Under the baseline tax

system, all compensation, including dedicated and deferred payments, should be included in taxable income. 

In contrast, the Tax Code provides for tax-free distributions of up to $3,000 from governmental retirement plans 

for premiums for health and long term care premiums of 

public safety officers.

Income Security

140. Railroad retirement benefits.—Under the 

baseline tax system, all compensation, including dedicated and deferred payments, should be included in taxable income. In contrast, railroad retirement benefits are 

not generally subject to the income tax unless the recipient’s gross income reaches a certain threshold under current law. The threshold is discussed more fully under the 

Social Security function.

141. Workers’ compensation benefits.—Under the 

baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included 

in taxable income. However, workers compensation is not 

subject to the income tax under current law.

142. Public assistance benefits.—Under the reference law baseline tax system, gifts and transfers are 

not treated as income to the recipients. In contrast, the 

normal tax method considers cash transfers from the 

Government as part of the recipients’ income, and thus, 

treats the exclusion for public assistance benefits under 

current law as a tax expenditure. 

143. Special benefits for disabled coal miners.—

Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be 

included in taxable income. However, disability payments 

to former coal miners out of the Black Lung Trust Fund, 

although income to the recipient, are not subject to the 

income tax.

144. Military disability pensions.—Under the 

baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in 

taxable income. In contrast, most of the military pension 

income received by current disabled retired veterans is 

excluded from their income subject to tax.

145. Defined benefit employer plans.—Under the 

baseline tax system, all compensation, including deferred 

and dedicated payments, should be included in taxable 

income. In contrast, under current law certain contributions to defined benefit pension plans are excluded from 

an employee’s gross income even though employers can 

deduct their contributions. In addition, the tax on the in-
234 ANALYTICAL PERSPECTIVES

vestment income earned by defined benefit pension plans 

is deferred until the money is withdrawn.

146. Defined contribution employer plans.—

Under the baseline tax system, all compensation, including deferred and dedicated payments, should be included 

in taxable income. In contrast, under current law individual taxpayers and employers can make tax-preferred contributions to employer-provided 401(k) and similar plans 

(e.g. 403(b) plans and the Federal Government’s Thrift 

Savings Plan). In 2013, an employee could exclude up to 

$17,500 (indexed) of wages from AGI under a qualified 

arrangement with an employer’s 401(k) plan. Employees 

age 50 or over could exclude up to $23,000 in contributions (indexed). The defined contribution plan limit, including both employee and employer contributions, is 

$51,000 in 2013 (indexed). The tax on contributions made 

by both employees and employers and the investment income earned by these plans is deferred until withdrawn.

147. Individual Retirement Accounts (IRAs).—

Under the baseline tax system, all compensation, including deferred and dedicated payments, should be included 

in taxable income. In contrast, under current law individual taxpayers can take advantage of traditional and Roth 

IRAs to defer or otherwise reduce the tax on the return 

to their retirement savings. The IRA contribution limit 

is $5,500 in 2012 (indexed); taxpayers age 50 or over are 

allowed to make additional “catch-up’’ contributions of 

$1,000. Contributions to a traditional IRA are generally 

deductible but the deduction is phased out for workers 

with incomes above certain levels who, or whose spouses, 

are active participants in an employer-provided retirement plan. Contributions and account earnings are includible in income when withdrawn from traditional IRAs. 

Roth IRA contributions are not deductible, but earnings 

and withdrawals are exempt from taxation. Income limits 

also apply to Roth IRA contributions.

148. Low and moderate-income savers’ credit.

The baseline tax system would not allow credits for particular activities or targeted at specific groups. In contrast, the Tax Code provides an additional incentive for 

lower-income taxpayers to save through a nonrefundable 

credit of up to 50 percent on IRA and other retirement 

contributions of up to $2,000. This credit is in addition 

to any deduction or exclusion. The credit is completely 

phased out by $59,500 for joint filers, $444,250 for head of 

household filers, and $29,500 for other filers in 2013. 

149. Self-Employed plans.—Under the baseline

tax system, all compensation, including deferred and dedicated payments, should be included in taxable income. 

In contrast, under current law self-employed individuals 

can make deductible contributions to their own retirement plans equal to 25 percent of their income, up to a 

maximum of $51,000 in 2013. Total plan contributions 

are limited to 25 percent of a firm’s total wages. The tax 

on the investment income earned by self-employed SEP, 

SIMPLE, and qualified plans is deferred until withdrawn.

150. Employer-provided life insurance benefits.—Under the baseline tax system, all compensation,

including deferred and dedicated payments, should be included in taxable income. In contrast, under current law 

employer-provided life insurance benefits are excluded 

from an employee’s gross income (to the extent that the 

employer’s share of the total costs does not exceed the cost 

of $50,000 of such insurance) even though the employer’s 

costs for the insurance are a deductible business expense.

151. Employer-provided accident and disability

benefits.—Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, 

should be included in taxable income. In contrast, and under current law, employer-provided accident and disability benefits are excluded from an employee’s gross income 

even though the employer’s costs for the benefits are a 

deductible business expense.

152. Employer-provided supplementary unemployment benefits.—Under the baseline tax system, all

compensation, including dedicated payments and in-kind 

benefits, should be included in taxable income. Employers 

may establish trusts to pay supplemental unemployment benefits to employees separated from employment. 

Investment income earned by such trusts is exempt from 

taxation.

153. Employer Stock Ownership Plan (ESOP) 

provisions.—ESOPs are a special type of tax-exempt 

employee benefit plan. Under the baseline tax system, 

all compensation, including dedicated payments and inkind benefits, should be included in taxable income. In 

contrast, employer-paid contributions (the value of stock 

issued to the ESOP) are deductible by the employer as 

part of employee compensation costs. They are not included in the employees’ gross income for tax purposes, 

however, until they are paid out as benefits. In addition, 

the following special income tax provisions for ESOPs are 

intended to increase ownership of corporations by their 

employees: (1) annual employer contributions are subject 

to less restrictive limitations than other qualified retirement plans; (2) ESOPs may borrow to purchase employer 

stock, guaranteed by their agreement with the employer 

that the debt will be serviced by his payment (deductible 

by him) of a portion of wages (excludable by the employees) to service the loan; (3) employees who sell appreciated company stock to the ESOP may defer any taxes due 

until they withdraw benefits; and (4) dividends paid to 

ESOP-held stock are deductible by the employer.

154. Additional deduction for the blind.—Under 

the baseline tax system, the standard deduction is allowed. An additional standard deduction for a targeted 

group within a given filing status would not be allowed. In 

contrast, the Tax Code allows taxpayers who are blind to 

claim an additional $1,500 standard deduction if single, 

or $1,200 if married in 2013.

155. Additional deduction for the elderly.—

Under the baseline tax system, the standard deduction is 

allowed. An additional standard deduction for a targeted 

group within a given filing status would not be allowed. In 

contrast, the Tax Code allows taxpayers who are 65 years 

or older to claim an additional $1,500 standard deduction 

if single, or $1,200 if married in 2013.

156. Tax credit for the elderly and disabled.—

Under the baseline tax system, a credit targeted at a specific group within a given filing status or for particular 
14. TAX EXPENDITURES 235

activities would not be allowed. In contrast, the Tax Code 

allows taxpayers who are 65 years of age or older, or who 

are permanently disabled, to claim a tax credit equal to 15 

percent of the sum of their earned and retirement income. 

The amount to which the 15 percent rate is applied is limited to no more than $5,000 for single individuals or married couples filing a joint return where only one spouse 

is 65 years of age or older or disabled, and up to $7,500 

for joint returns where both spouses are 65 years of age 

or older or disabled. These limits are reduced by one-half 

of the taxpayer’s adjusted gross income over $7,500 for 

single individuals and $10,000 for married couples filing 

a joint return. 

157. Casualty losses.—Under the baseline tax system, neither the purchase of property nor insurance premiums to protect its value are deductible as costs of earning income. Therefore, reimbursement for insured loss of 

such property is not included as a part of gross income, 

and uninsured losses are not deductible. In contrast, the 

Tax Code provides a deduction for uninsured casualty and 

theft losses of more than $100 each, to the extent that 

total losses during the year exceed 10 percent of the taxpayer’s adjusted gross income.

158. Earned income tax credit (EITC).—The baseline tax system would not allow credits for particular activities or targeted at specific groups. In contrast, the Tax 

Code provides an EITC to low-income workers at a maximum rate of 45 percent of income. For a family with one 

qualifying child, the credit is 34 percent of the first $9,560 

of earned income in 2013. The credit is 40 percent of the 

first $13,430 of income for a family with two qualifying 

children, and it is 45 percent of the first $13,430 of income 

for a family with three or more qualifying children. Lowincome workers with no qualifying children are eligible for 

a 7.65 percent credit on the first $6,370 of earned income. 

The credit is phased out at income levels and rates which 

depend upon how many qualifying children are eligible 

and marital status. In 2013, the phasedown for married 

filers begins at incomes $5,340 greater than for otherwise 

similar unmarried filers. Earned income tax credits in excess of tax liabilities owed through the individual income 

tax system are refundable to individuals. After 2017, the 

additional benefit for families with three or more children 

will be eliminated and the marriage penalty relief will be 

reduced to $3,000 (indexed from 2008). 

Social Security

159. Social Security benefits for retired workers.—Under the baseline tax system, all compensation, 

including dedicated payments and in-kind benefits, would 

be included in taxable income because they represent accretions to wealth that do not materially differ from cash 

wages. Thus, the portion of Social Security benefits that 

is attributable to employer contributions and earnings on 

employer and employee contributions (and not attributable to employee contributions) would be subject to tax. 

In contrast, the Tax Code may not tax all of the Social 

Security benefits that exceed the beneficiary’s contributions from previously taxed income. Actuarially, previously taxed contributions generally do not exceed 15 percent 

of benefits, even for retirees receiving the highest levels 

of benefits. Up to 85 percent of recipients’ Social Security 

and tier 1 railroad retirement benefits are included in 

(phased into) the income tax base if the recipient’s provisional income exceeds certain base amounts. (Provisional 

income is equal to other items included in adjusted gross 

income plus foreign or U.S. possession income, tax-exempt 

interest, and one half of Social Security and tier 1 railroad 

retirement benefits.) The untaxed portion of the benefits 

received by taxpayers who are below the income amounts 

at which 85 percent of the benefits are taxable is counted 

as a tax expenditure.

160. Social Security benefits for the disabled.—

Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be 

included in taxable income because they represent accretions to wealth that do not materially differ from cash 

wages. Under current law, however, benefit payments from 

the Social Security Trust Fund for disability are fully or 

partially excluded from a beneficiary’s gross income. (See 

provision number 161, Social Security benefits for retired 

workers.)

161. Social Security benefits for dependents and 

survivors.—Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income because they 

represent accretions to wealth that do not materially differ from cash wages. Under current law, however, benefit 

payments from the Social Security Trust Fund for dependents and survivors are fully or partially excluded from 

a beneficiary’s gross income. (See provision number 159, 

Social Security benefits for retired workers.)

Veterans Benefits and Services

162. Veterans death benefits and disability compensation.—Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income because they 

represent accretions to wealth that do not materially differ from cash wages. In contrast, all compensation due to 

death or disability paid by the Veterans Administration is 

excluded from taxable income under current law.

163. Veterans pension payments.—Under the 

baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included 

in taxable income because they represent accretions to 

wealth that do not materially differ from cash wages. 

Under current law, however, pension payments made by 

the Veterans Administration are excluded from gross income.

164. G.I. Bill benefits.—Under the baseline tax system, all compensation, including dedicated payments and 

in-kind benefits, should be included in taxable income because they represent accretions to wealth that do not materially differ from cash wages. Under current law, however, G.I. Bill benefits paid by the Veterans Administration 

are excluded from gross income.
236 ANALYTICAL PERSPECTIVES

165. Tax-exempt mortgage bonds for veterans.

The baseline tax system generally would tax all income 

under the regular tax rate schedule. It would not allow 

preferentially low (or zero) tax rates to apply to certain 

types or sources of income. In contrast, under current law, 

interest earned on general obligation bonds issued by 

State and local governments to finance housing for veterans is excluded from taxable income.

General Government

166. Public purpose State and local bonds.—The 

baseline tax system generally would tax all income under 

the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or 

sources of income. In contrast, under current law interest earned on State and local government bonds issued to 

finance public-purpose construction (e.g., schools, roads, 

sewers), equipment acquisition, and other public purposes is tax-exempt. Interest on bonds issued by Indian tribal 

governments for essential governmental purposes is also 

tax-exempt.

167. Build America Bonds—The baseline tax system would not allow credits for particular activities or 

targeted at specific group. In contrast, the Tax Code in 

2009 allowed State and local governments to issue taxable bonds through 2010 and receive a direct payment 

from Treasury equal to 35 percent of interest expenses. 

Alternatively, State and local governments could issue 

taxable bonds and the private lenders receive the 35 percent credit which is included in taxable income.

168. Deductibility of certain nonbusiness State 

and local taxes.—Under the baseline tax system, a deduction for personal consumption expenditures would 

not be allowed. In contrast, the Tax Code allows taxpayers who itemize their deductions to claim a deduction for 

State and local income taxes (or, at the taxpayer’s election, State and local sales taxes) and property taxes, even 

though these taxes primarily pay for services that, if purchased directly by taxpayers, would not be deductible. 

The ability for taxpayers to elect to deduct State and local 

sales taxes in lieu of State and local income taxes applies 

to taxable years beginning after December 31, 2003 and 

before January 1, 2014. (The estimates for this tax expenditure do not include the estimates for the deductibility 

of State and local property tax on owner-occupied homes. 

See item 59.)

Interest

169. U.S. savings bonds.—The baseline tax system 

would uniformly tax all returns to investments and not 

allow an exemption or deferral for particular activities, 

investments, or industries. In contrast, taxpayers may defer paying tax on interest earned on U.S. savings bonds 

until the bonds are redeemed.

APPENDIX 

Performance Measures and the Economic 

Effects of Tax Expenditures

The Government Performance and Results Act of 1993 

(GPRA) directs Federal agencies to develop annual and 

strategic plans for their programs and activities. These 

plans set out performance objectives to be achieved over a 

specific time period. Most of these objectives are achieved 

through direct expenditure programs. Tax expenditures – 

spending programs implemented through the tax code by 

reducing tax obligations for certain activities -- contribute 

to achieving these goals in a manner similar to direct expenditure programs. 

Tax expenditures by definition work through the tax 

system and, particularly, the income tax. Thus, they may 

be relatively advantageous policy approaches when the 

benefit or incentive is related to income and is intended to 

be widely available.4 Because there is an existing public 

administrative and private compliance structure for the 

tax system, income based programs that require little 

oversight might be efficiently run through the tax system. 

In addition, some tax expenditures actually simplify the 

operation of the tax system (for example, the exclusion 

4 Although this chapter focuses upon tax expenditures under the income tax, tax expenditures also arise under the unified transfer, payroll, 

and excise tax systems. Such provisions can be useful when they relate 

to the base of those taxes, such as excise tax exemption for certain types 

of consumption deemed meritorious.

for up to $500,000 of capital gains on home sales). Tax 

expenditures also implicitly subsidize certain activities 

in a manner similar to direct expenditures. For example, 

exempting employer-sponsored health insurance from 

income taxation is equivalent to a direct spending subsidy equal to the forgone tax obligations for this type of 

compensation. Spending, regulatory or tax-disincentive 

policies can also modify behavior, but may have different economic effects. Finally, a variety of tax expenditure 

tools can be used, e.g., deductions; credits; exemptions; 

deferrals; floors; ceilings; phase-ins; phase-outs; and these 

can be dependent on income, expenses, or demographic 

characteristics (age, number of family members, etc.). 

This wide range of policy instruments means that tax 

expenditures can be flexible and can have very different 

economic effects.

Tax expenditures also have limitations. In many cases 

they add to the complexity of the tax system, which raises 

both administrative and compliance costs. For example, 

personal exemptions, deductions, credits, and phase-outs 

can complicate filing and decision-making. The income 

tax system may have little or no contact with persons who 

have no or very low incomes, and does not require information on certain characteristics of individuals used in 

some spending programs, such as wealth or duration of 

employment. These features may reduce the effectiveness 

of tax expenditures for addressing socioeconomic dispari-
14. TAX EXPENDITURES 237

ties. Tax expenditures also generally do not enable the 

same degree of agency discretion as an outlay program. 

For example, grant or direct Federal service delivery programs can prioritize activities to be addressed with specific resources in a way that is difficult to emulate with 

tax expenditures.

Outlay programs have advantages where the direct 

provision of government services is particularly warranted, such as equipping and maintaining the armed forces 

or administering the system of justice. Outlay programs 

may also be specifically designed to meet the needs of 

low-income families who would not otherwise be subject 

to income taxes or need to file a tax return. Outlay programs may also receive more year-to-year oversight and 

fine tuning through the legislative and executive budget 

process. In addition, many different types of spending 

programs include direct Government provision; credit 

programs; and payments to State and local governments, 

the private sector, or individuals in the form of grants or 

contracts provide flexibility for policy design. On the other 

hand, certain outlay programs may rely less directly on 

economic incentives and private-market provision than 

tax incentives, thereby reducing the relative efficiency 

of spending programs for some goals. Finally, spending 

programs, particularly on the discretionary side, may respond less rapidly to changing activity levels and economic conditions than tax expenditures.

Regulations may have more direct and immediate effects 

than outlay and tax-expenditure programs because regulations apply directly and immediately to the regulated party (i.e., the intended actor), generally in the private sector. 

Regulations can also be fine-tuned more quickly than tax 

expenditures because they can often be changed as needed by the Executive Branch without legislation. Like tax 

expenditures, regulations often rely largely on voluntary 

compliance, rather than detailed inspections and policing. 

As such, the public administrative costs tend to be modest relative to the private resource costs associated with 

modifying activities. Historically, regulations have tended 

to rely on proscriptive measures, as opposed to economic 

incentives. This reliance can diminish their economic efficiency, although this feature can also promote full compliance where (as in certain safety-related cases) policymakers believe that trade-offs with economic considerations 

are not of paramount importance. Also, regulations generally do not directly affect Federal outlays or receipts. 

Thus, like tax expenditures, they may escape the degree of 

scrutiny that outlay programs receive. Some policy objectives are achieved using multiple approaches. For example, 

minimum wage legislation, the earned income tax credit, 

and the food stamp program (SNAP) are regulatory, tax 

expenditure, and direct outlay programs, respectively, all 

having the objective of improving the economic welfare of 

low-wage workers and families.

A Framework for Evaluating the 

Effectiveness of Tax Expenditures

Across all major budgetary categories - from housing 

and health to space, technology, agriculture, and national 

defense - tax expenditures make up a significant portion 

of Federal activity and affect every area of the economy. 

For these reasons, a comprehensive evaluation framework 

that examines incentives, direct results, and spillover effects will benefit the budgetary process by informing decisions on tax expenditure policy.

As described above, tax expenditures, like spending 

and regulatory programs, have a variety of objectives and 

economic effects. These include: encouraging certain types 

of activities (e.g., saving for retirement or investing in certain sectors); increasing certain types of after-tax income 

(e.g., favorable tax treatment of Social Security income); 

and reducing private compliance costs and Government 

administrative costs (e.g., the exclusion for up to $500,000 

of capital gains on home sales). Some of these objectives 

are well suited to quantitative measurement and evaluation, while others are less well suited.

Performance measurement is generally concerned with 

inputs, outputs, and outcomes. In the case of tax expenditures, the principal input is usually the revenue effect. 

Outputs are quantitative or qualitative measures of goods 

and services, or changes in income and investment, directly produced by these inputs. Outcomes, in turn, represent the changes in the economy, society, or environment 

that are the ultimate goals of programs. Evaluations assess whether programs are meeting intended goals, but 

may also encompass analyzing whether initiatives are 

superior to other policy alternatives.

The Administration is working towards examining the 

objectives and effects of the wide range of tax expenditures in our budget, despite challenges related to data 

availability, measurement, and analysis. Evaluations 

include an assessment of whether tax expenditures are 

achieving intended policy results in an efficient manner, 

with minimal burdens on individual taxpayers, consumers, and firms; and an examination of possible unintended 

effects and their consequences.

As an illustration of how evaluations can inform budgetary decisions, consider education, and research investment credits. 

Education. There are millions of individuals taking advantage of tax credits designed to help pay for educational 

expenses. There are a number of different credits available as well as other important forms of Federal support 

for higher education such as subsidized loans and grants. 

An evaluation would explore the possible relationships 

between use of the credits and the use of loans and grants, 

seeking to answer, for example, whether the use of credits 

reduce or increase the likelihood of the students applying 

for loans. Such an evaluation would allow stakeholders to 

determine the most effective program – whether it is a tax 

credit, a subsidized loan, or a grant.

Investment. A series of tax expenditures reduce the cost 

of investment, both in specific activities such as research 

and experimentation, extractive industries, and certain 

financial activities and more generally throughout the 

economy, through accelerated depreciation for plant and 

equipment. These provisions can be evaluated along a 

number of dimensions. For example, it is useful to consider the strength of the incentives by measuring their ef-
238 ANALYTICAL PERSPECTIVES

fects on the cost of capital (the return which investments 

must yield to cover their costs) and effective tax rates. The 

impact of these provisions on the amounts of corresponding forms of investment (e.g., research spending, exploration activity, equipment) might also be estimated. In some 

cases, such as research, there is evidence that the investment can provide significant positive externalities—that 

is, economic benefits that are not reflected in the market 

transactions between private parties. It could be useful 

to quantify these externalities and compare them with 

the size of tax expenditures. Measures could also indicate 

the effects on production from these investments such 

as numbers or values of patents, energy production and 

reserves, and industrial production. Issues to be considered include the extent to which the preferences increase 

production (as opposed to benefiting existing output) and 

their cost-effectiveness relative to other policies. Analysis 

could also consider objectives that are more difficult to 

measure but still are ultimate goals, such as promoting 

the Nation’s technological base, energy security, environmental quality, or economic growth. Such an assessment 

is likely to involve tax analysis as well as consideration of 

non-tax matters such as market structure, scientific, and 

other information (such as the effects of increased domestic fuel production on imports from various regions, or the 

effects of various energy sources on the environment).

The tax proposals subject to these analyses include 

items that indirectly affect the estimated value of tax 

expenditures (such as changes in income tax rates), proposals that make reforms to improve tax compliance and 

administration, as well as proposals which would change, 

add, or delete tax expenditures. 

Barriers to Evaluation. Developing a framework that 

is sufficiently comprehensive, accurate, and flexible is a 

significant challenge. Evaluations are constrained by the 

availability of appropriate data and challenges in economic modeling:

1. Data availability. Data may not exist, or may not exist in an analytically appropriate form, to conduct 

rigorous evaluations of certain types of expenditures. 

For example, measuring the effects of tax expenditures designed to achieve tax neutrality for individuals and firms earning income abroad, and foreign 

firms could require data from foreign governments 

or firms which are not readily available.

2. Analytical constraints. Evaluations of tax expenditures face analytical constraints even when data 

are available. For example, individuals might have 

access to several tax expenditures and programs 

aimed at improving the same outcome. Isolating the 

effect of a single tax credit is challenging absent a 

well-specified research design. 

3. Resources. Tax expenditure analyses are seriously 

constrained by staffing considerations. Evaluations 

typically require expert analysts who are often engaged in other more competing areas of work related 

to the budget.

The Executive Branch is focused on addressing these 

challenges to lay the foundation for the analysis of tax expenditures comprehensively, alongside evaluations of the 

effectiveness of direct spending initiatives.

Current Administration Proposals 

on Tax Expenditures

The Administration considers performance measurement, evaluations, and the economic effects of tax expenditures each year in its deliberation for the Budget and 

proposals are informed by these analyses. The President’s 

National Commission on Fiscal Responsibility and Reform 

submitted a report in 2010 in which they said that the income tax system is unduly complicated and that the government should “sharply reduce rates, broaden the base, 

simplify the tax code, and reduce the many ‘tax expenditures’ —another name for spending through the tax code.”

The current Budget and enacted Administration policies include several proposals that would change existing 

tax expenditures to raise revenue, eliminate ineffective 

or counterproductive tax expenditures, and enhance effective tax expenditures. The tax expenditure proposals in 

the budget further the Administration’s goals of economic 

recovery and growth, clean and secure energy, a worldclass education for all Americans, and fairness in the tax 

code. Some of these proposals are highlighted below.

Reduce the value of certain tax expenditures. The 

Administration proposes to limit the tax rate at which 

upper-income taxpayers can use itemized deductions and 

other tax preferences to reduce tax liability to a maximum of 28 percent, a limitation that would affect only 

the highest-income households. The limit would apply to 

all itemized deductions, tax-exempt interest, employersponsored health insurance, deductions and income exclusions for employee retirement contributions, and certain above-the-line deductions, effective for taxable years 

beginning after December 31, 2014. These are among the 

largest tax expenditures. This proposal would make the 

tax code more equitable because the value of the tax expenditure as a percentage of the deduction is proportional 

to one’s tax bracket, so it is less valuable to those in lower 

brackets. 

Enhance and make permanent the Research and 

Experimentation (R&E) credit and modify and make permanent the Renewable Energy Production Tax Credit. The 

extension of the R&E credit every year creates uncertainty reducing firms’ incentive to expand their research activities. For this reason, and more generally to achieve the 

President’s R&D goals, the Budget proposes making the 

R&E credit permanent. For similar reasons, the Budget 

also proposes to permanently extend and enhance the 

production tax credit for renewable energy property. 

Make permanent the American Opportunity Tax Credit 

(AOTC), the expansion of the EITC for larger families, 

EITC marriage penalty relief, and the refundability of the 

child tax credit. These provisions were extended through 

2017 in ATRA and the Budget assumes in its baseline 

that these provisions would be permanently extended. 

Although permanent extension would increase the cost of 
14. TAX EXPENDITURES 239

these tax expenditures, it would increase the equity of the 

overall tax system and provide benefits to low and middle 

income families. 

Eliminate a range of tax expenditures in the context of 

business tax reform. The President’s framework for business tax reform calls for eliminating dozens of tax loopholes and subsidies and reinvesting the revenue to lower 

the corporate tax rate to 28 percent. Consistent with the 

framework, the Budget includes a number of proposals 

to eliminate inefficient business tax expenditures. For 

example, current law provides a number of credits and 

deductions that are targeted towards certain oil, gas, and 

coal activities. These tax preferences run counter to our 

policies for reducing greenhouse gas emissions. In accordance with the President’s agreement at the G–20 summit in Pittsburgh to phase out subsidies for fossil fuels so 

that we can transition to a 21st century energy economy, 

the Administration proposes to repeal a number of tax 

preferences available for fossil fuels.