297

19. 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 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 importantly 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 2008–2014 

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 Expenditure Estimates

All tax expenditure estimates presented here are based 

upon current tax law enacted as of December 31, 2008. 

Expired or repealed provisions are not listed if their revenue effects result only from taxpayer activity occurring 

before fiscal year 2008. The estimates reflect preliminary 

2010 Budget economic assumptions. Legislation enacted 

in 2009 is not reflected in the current exercise.

The total revenue effects for tax expenditures for fiscal 

years 2008–2014 are displayed according to the Budget’s 

functional categories in Table 19–1. 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 expenditures 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 19–2 reports the respective portions of the total 

revenue effects that arise under the individual and corporate income taxes separately. The location of the esti1 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.

mates 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 specific tax accounts through which the various 

provisions are cleared. The ultimate beneficiaries of corporate tax expenditures could be shareholders, employees, customers, or other providers of capital, depending 

on economic forces.

Table 19–3 ranks the major tax expenditures by the 

size of their 2010–2014 revenue effect. The first column 

provides the number of the provision in order to cross 

reference this table to Tables 19–1 and 19–2, as well as 

to the descriptions below. Outlay Equivalent Estimates 

of Income Tax Expenditures, which were included in the 

2007 and prior volumes of Analytical Perspectives, are no 

longer included in this chapter. 

In the 2005 Analytical Perspectives, the treatment of 

capital gains was changed to exclude the portion of capital gains derived from corporate equity from the estimate 

of the tax expenditure for preferential tax rates on capital gains under the normal tax baseline. In addition, the 

preferential rates on qualified dividend income that were 

enacted in the Jobs and Growth Tax Relief Reconciliation 

Act of 2003 were not identified as a tax expenditure. The 

estimate of other tax expenditures related to saving and 

retirement plans were also affected by this change in 

methodology. The Administration plans a review of tax 

expenditures for future Analytical Perspectives volumes. 

In anticipation of that review, this chapter shows suppleTAX EXPENDITURES IN THE INCOME TAX
298 ANALYTICAL PERSPECTIVES

mental estimates in Table 19-4 of the full tax expenditure 

for capital gains and dividends under the pre-2005 methodology. 

Interpreting Tax Expenditure Estimates

The estimates shown for individual tax expenditures in 

Tables 19–1, 19–2, and 19–3 do not necessarily equal the 

increase in Federal revenues (or the change in the budget 

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 19–1 

are the totals of individual and corporate income tax 

revenue effects reported in Table 19–2 and do not reflect 

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

Table 19–1 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 19–5. 

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. Present-value estimates, which are a useful complement to the cash-basis estimates for provisions involving deferrals, are discussed below.

Discounted present-value estimates of revenue effects 

are presented in Table 19–5 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 2008 which cause 

the deferrals or other long-term revenue effects. For instance, a pension contribution in 2008 would cause a deferral of tax payments on wages in 2008 and on pension 

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

years. In some future year, however, the 2008 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. An exception is provided for the 

lower tax rate on dividends and capital gains on corporate 

shares as discussed below. 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 in the Tax Code that serve programmatic 

functions. 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 
19. TAX EXPENDITURES 299

Table 19–1. eSTimaTeS oF ToTal income Tax exPendiTureS For FiScal yearS 2008-2014

(In millions of dollars)

Total from corporations and individuals

2008 2009 2010 2011 2012 2013 2014 2010–14

national defense

1 Exclusion of benefits and allowances to armed forces personnel ������������������������������������������� 11,190 11,710 10,210 10,550 10,900 11,270 11,660 54,590

international affairs: 

2 Exclusion of income earned abroad by U�S� citizens ��������������������������������������������������������������� 5,070 5,320 5,590 5,870 6,160 6,470 6,790 30,880

3 Exclusion of certain allowances for Federal employees abroad ���������������������������������������������� 880 920 970 1,020 1,070 1,120 1,180 5,360

4 Inventory property sales source rules exception ��������������������������������������������������������������������� 2,200 2,440 2,640 2,860 3,100 3,360 3,640 15,600

5 Deferral of income from controlled foreign corporations (normal tax method) ������������������������ 31,580 30,960 32,720 33,870 34,490 33,930 34,130 169,140

6 Deferred taxes for financial firms on certain income earned overseas ������������������������������������ 5,570 5,460 5,770 5,980 6,090 5,990 6,020 29,850

general science, space, and technology: 

7 Expensing of research and experimentation expenditures (normal tax method) �������������������� 5,180 3,820 3,500 4,560 5,720 6,690 6,930 27,400

8 Credit for increasing research activities ����������������������������������������������������������������������������������� 7,440 8,010 5,880 3,850 3,080 2,460 1,960 17,230

energy: 

9 Expensing of exploration and development costs, fuels ���������������������������������������������������������� 1,650 2,480 2,390 1,850 1,580 1,260 940 8,020

10 Excess of percentage over cost depletion, fuels ��������������������������������������������������������������������� 920 1,360 1,350 1,370 1,380 1,390 1,400 6,890

11 Alternative fuel production credit ��������������������������������������������������������������������������������������������� 590 70 80 10 10 0 0 100

12 Exception from passive loss limitation for working interests in oil and gas properties ������������ 10 10 10 10 10 10 10 50

13 Capital gains treatment of royalties on coal ����������������������������������������������������������������������������� 110 110 140 110 110 130 140 630

14 Exclusion of interest on energy facility bonds �������������������������������������������������������������������������� 10 20 20 30 30 30 30 140

15 New technology credit ������������������������������������������������������������������������������������������������������������� 920 1,130 1,180 1,180 1,150 1,140 1,120 5,770

16 Energy investment credit ��������������������������������������������������������������������������������������������������������� 50 50 50 50 50 50 50 250

17 Alcohol fuel credits 1

 ���������������������������������������������������������������������������������������������������������������� 50 60 90 190 390 230 0 900

18 Bio-Diesel and small agri-biodiesel producer tax credits 2

 ������������������������������������������������������� 40 30 20 0 0 0 0 20

19 Tax credit and deduction for clean-fuel burning vehicles ��������������������������������������������������������� 170 90 80 40 10 60 100 290

20 Exclusion of utility conservation subsidies ������������������������������������������������������������������������������� 120 120 110 110 110 110 110 550

21 Credit for holding clean renewable energy bonds ������������������������������������������������������������������� 40 70 70 70 70 70 70 350

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

policy ���������������������������������������������������������������������������������������������������������������������������������� –30 –50 –120 –320 –400 –480 –490 –1,810

23 Credit for investment in clean coal facilities ����������������������������������������������������������������������������� 30 200 290 260 240 230 210 1,230

24 Temporary 50% expensing for equipment used in the refining of liquid fuels �������������������������� 350 750 890 900 800 700 630 3,920

25 Natural gas distribution pipelines treated as 15-year property ������������������������������������������������ 80 90 110 120 110 100 90 530

26 Amortize all geological and geophysical expenditures over 2 years ���������������������������������������� 20 90 130 120 90 60 40 440

27 Allowance of deduction for certain energy efficient commercial building property ������������������ 170 200 210 190 200 20 60 680

28 Credit for construction of new energy efficient homes ������������������������������������������������������������� 30 20 10 0 0 0 0 10

29 Credit for energy efficiency improvements to existing homes �������������������������������������������������� 230 380 150 0 0 0 0 150

30 Credit for energy efficient appliances �������������������������������������������������������������������������������������� 120 130 130 50 0 0 0 180

31 Credit for residential purchases/installations of solar and fuel cells ���������������������������������������� 20 30 20 0 0 0 0 20

32 Partial expensing for advanced mine safety equipment ���������������������������������������������������������� 20 0 0 0 0 0 0 0

33 Qualified energy conservation bonds �������������������������������������������������������������������������������������� 0 0 10 30 40 40 40 160

natural resources and environment: 

34 Expensing of exploration and development costs, nonfuel minerals ��������������������������������������� 210 220 230 230 240 250 250 1,200

35 Excess of percentage over cost depletion, nonfuel minerals ��������������������������������������������������� 720 740 770 790 810 850 860 4,080

36 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities ������������������ 170 370 390 410 450 460 470 2,180

37 Capital gains treatment of certain timber income �������������������������������������������������������������������� 110 110 140 110 110 130 140 630

38 Expensing of multiperiod timber growing costs ����������������������������������������������������������������������� 290 290 310 310 320 340 340 1,620

39 Tax incentives for preservation of historic structures ��������������������������������������������������������������� 480 500 520 550 580 610 640 2,900

40 Expensing of capital costs with respect to complying with EPA sulfur regulations ������������������ 30 50 30 –10 0 0 0 20

41 Exclusion of gain or loss on sale or exchange of certain brownfield sites ������������������������������� 30 40 40 40 30 30 30 170

42 Industrial CO2

 capture and sequestration tax credit ���������������������������������������������������������������� 0 0 0 40 130 240 290 700

43 Deduction for endangered species recovery expenditures ������������������������������������������������������ 0 10 20 20 30 30 30 130

agriculture: 

44 Expensing of certain capital outlays ���������������������������������������������������������������������������������������� 110 110 110 120 120 120 120 590

45 Expensing of certain multiperiod production costs ������������������������������������������������������������������ 80 80 80 80 90 90 90 430

46 Treatment of loans forgiven for solvent farmers ����������������������������������������������������������������������� 10 10 10 20 20 20 20 90

47 Capital gains treatment of certain income ������������������������������������������������������������������������������� 1,160 1,130 1,390 1,190 1,140 1,300 1,460 6,480

48 Income averaging for farmers �������������������������������������������������������������������������������������������������� 80 80 80 80 80 80 80 400

49 Deferral of gain on sale of farm refiners ���������������������������������������������������������������������������������� 20 20 20 20 20 20 20 100
300 ANALYTICAL PERSPECTIVES

Table 19–1. eSTimaTeS oF ToTal income Tax exPendiTureS For FiScal yearS 2008-2014—continued

(In millions of dollars)

Total from corporations and individuals

2008 2009 2010 2011 2012 2013 2014 2010–14

commerce and housing: 

Financial institutions and insurance: 

50 Exemption of credit union income ��������������������������������������������������������������������������������������� 1140 1190 1230 1280 1330 1380 1430 6,650

51 Exclusion of interest on life insurance savings ������������������������������������������������������������������� 21,190 22,790 24,450 26,770 29,830 32,580 34,860 148,490

52 Special alternative tax on small property and casualty insurance companies �������������������� 40 40 40 40 50 50 60 240

53 Tax exemption of certain insurance companies owned by tax-exempt organizations ��������� 190 190 200 200 210 210 220 1,040

54 Small life insurance company deduction ���������������������������������������������������������������������������� 50 50 50 50 50 50 50 250

55 Exclusion of interest spread of financial institutions ����������������������������������������������������������� 270 220 240 280 290 310 320 1,930

Housing: 

56 Exclusion of interest on owner-occupied mortgage subsidy bonds ������������������������������������ 460 990 1,030 1,110 1,180 1,220 1,270 5,810

57 Exclusion of interest on rental housing bonds �������������������������������������������������������������������� 410 890 930 1,000 1,060 1,090 1,120 5,200

58 Deductibility of mortgage interest on owner-occupied homes �������������������������������������������� 88,500 97,280 107,980 119,750 131,230 139,990 147,130 646,080

59 Deductibility of State and local property tax on owner-occupied homes ���������������������������� 29,130 20,850 14,980 24,550 30,630 31,870 32,540 134,570

60 Deferral of income from installment sales ��������������������������������������������������������������������������� 1,230 1,250 1,370 1,500 1,650 1,810 1,950 8,280

61 Capital gains exclusion on home sales ������������������������������������������������������������������������������� 30,090 27,980 30,460 39,530 49,550 54,720 60,440 234,700

62 Exclusion of net imputed rental income ������������������������������������������������������������������������������ –1,720 –5,850 –2,200 2,230 3,680 4,390 5,720 13,820

63 Exception from passive loss rules for $25,000 of rental loss ���������������������������������������������� 8,430 8,840 9,160 9,580 10,090 10,240 10,620 49,690

64 Credit for low-income housing investments ������������������������������������������������������������������������ 3,210 3,750 4,340 4,920 5,520 6,130 6,730 27,640

65 Accelerated depreciation on rental housing (normal tax method) �������������������������������������� 9,690 10,150 10,770 13,620 14,610 15,770 17,090 71,860

66 Discharge of mortgage indebtedness ��������������������������������������������������������������������������������� 310 330 260 190 140 80 0 670

67 Credit for first-time homebuyer ������������������������������������������������������������������������������������������� 9,530 1,230 –1,350 –1,400 –1,400 –1,060 –910 –6,120

Commerce: 

68 Cancellation of indebtedness ��������������������������������������������������������������������������������������������� 60 30 20 40 50 40 30 180

69 Exceptions from imputed interest rules ������������������������������������������������������������������������������ 50 50 50 50 50 50 50 250

70 Capital gains (except agriculture, timber, and coal) 3

 ���������������������������������������������������������� 24,240 23,640 28,920 24,840 23,890 27,270 30,480 135,400

71 Capital gains exclusion of small corporation stock ������������������������������������������������������������� 60 60 60 200 340 350 370 1,320

72 Step-up basis of capital gains at death ������������������������������������������������������������������������������� 21,590 19,530 20,830 25,210 31,720 34,100 36,650 148,510

73 Carryover basis of capital gains on gifts ����������������������������������������������������������������������������� 670 730 710 2,370 1,030 1,370 1,470 6,950

74 Ordinary income treatment of loss from small business corporation stock sale ����������������� 50 50 60 60 60 60 60 300

75 Accelerated depreciation of buildings other than rental housing (normal tax method) ������� –6,640 –6,640 –6,560 –7,370 –7,360 –7,360 –7,340 –35,990

76 Accelerated depreciation of machinery and equipment (normal tax method) �������������������� 55,890 –11,140 –3,820 –1,190 6,010 10,940 15,130 27,070

77 Expensing of certain small investments (normal tax method) �������������������������������������������� 930 90 910 –3,400 –1,680 –850 –260 –5,280

78 Graduated corporation income tax rate (normal tax method) ��������������������������������������������� 2,460 2,460 2,880 3,090 3,120 3,300 3,310 15,700

79 Exclusion of interest on small issue bonds ������������������������������������������������������������������������� 140 320 330 350 380 390 400 1,850

80 Deduction for U�S� production activities ������������������������������������������������������������������������������ 10,660 10,820 14,140 16,890 17,910 19,010 20,010 87,960

81 Special rules for certain film and TV production ����������������������������������������������������������������� 70 60 –50 –100 –80 –50 –40 –320

Transportation: 

82 Deferral of tax on shipping companies ������������������������������������������������������������������������������������ 20 20 20 20 20 20 20 100

83 Exclusion of reimbursed employee parking expenses ������������������������������������������������������������� 2,920 3,000 3,120 3,270 3,400 3,520 3,630 16,940

84 Exclusion for employer-provided transit passes ���������������������������������������������������������������������� 480 500 530 570 600 630 660 2,990

85 Tax credit for certain expenditures for maintaining railroad tracks ������������������������������������������� 180 180 70 20 10 10 0 110

86 Exclusion of interest on bonds for Financing of Highway Projects and rail-truck transfer 

facilities ������������������������������������������������������������������������������������������������������������������������������� 80 90 100 100 90 60 60 410

community and regional development: 

87 Investment credit for rehabilitation of structures (other than historic) �������������������������������������� 40 40 40 40 40 50 50 220

88 Exclusion of interest for airport, dock, and similar bonds �������������������������������������������������������� 380 820 850 920 990 1,020 1,050 4,830

89 Exemption of certain mutuals’ and cooperatives’ income �������������������������������������������������������� 70 70 70 70 70 80 80 370

90 Empowerment zones and renewal communities ��������������������������������������������������������������������� –1,650 –1,960 –1,150 –420 –680 –830 –940 –4,020

91 New markets tax credit ������������������������������������������������������������������������������������������������������������ 990 1,110 1,050 920 810 580 300 3,660

92 Expensing of environmental remediation costs ����������������������������������������������������������������������� 590 290 20 –140 –140 –140 –130 –530

93 Credit to holders of Gulf Tax Credit Bonds ������������������������������������������������������������������������������ 10 30 80 80 70 50 50 330

education, training, employment, and social services: 

Education: 

94 Exclusion of scholarship and fellowship income (normal tax method) �������������������������������� 2,000 2,080 2,160 2,250 2,340 2,440 2,540 11,730

95 HOPE tax credit ������������������������������������������������������������������������������������������������������������������ 3,770 3,800 3,890 4,650 5,100 5,340 5,580 24,560

96 Lifetime Learning tax credit ������������������������������������������������������������������������������������������������ 2,470 2,460 2,510 2,980 3,260 3,410 3,570 15,730

97 Education Individual Retirement Accounts ������������������������������������������������������������������������� 30 40 60 70 80 80 90 380

98 Deductibility of student-loan interest ����������������������������������������������������������������������������������� 1,250 1,260 1,270 1,220 970 980 990 5,430
19. TAX EXPENDITURES 301

Table 19–1. eSTimaTeS oF ToTal income Tax exPendiTureS For FiScal yearS 2008-2014—continued

(In millions of dollars)

Total from corporations and individuals

2008 2009 2010 2011 2012 2013 2014 2010–14

99 Deduction for higher education expenses �������������������������������������������������������������������������� 1,550 1,680 1,430 0 0 0 0 1,430

100 State prepaid tuition plans �������������������������������������������������������������������������������������������������� 1,030 1,250 1,480 1,700 1,900 2,030 2,140 9,250

101 Exclusion of interest on student-loan bonds ����������������������������������������������������������������������� 210 470 490 530 560 590 600 2,770

102 Exclusion of interest on bonds for private nonprofit educational facilities ��������������������������� 860 1,870 1,960 2,110 2,260 2,320 2,390 11,040

103 Credit for holders of zone academy bonds ������������������������������������������������������������������������� 160 170 170 170 160 140 130 770

104 Exclusion of interest on savings bonds redeemed to finance educational expenses ��������� 20 20 20 20 20 20 20 100

105 Parental personal exemption for students age 19 or over �������������������������������������������������� 4,690 2,670 1,660 2,680 3,060 2,860 2,640 12,900

106 Deductibility of charitable contributions (education) ����������������������������������������������������������� 4,330 4,880 5,270 5,670 6,110 6,600 7,010 30,660

107 Exclusion of employer-provided educational assistance ���������������������������������������������������� 650 680 710 40 0 0 0 750

108 Special deduction for teacher expenses ����������������������������������������������������������������������������� 180 180 160 0 0 0 0 160

109 Discharge of student loan indebtedness ���������������������������������������������������������������������������� 20 20 20 20 20 20 20 100

Training, employment, and social services: 

110 Work opportunity tax credit ������������������������������������������������������������������������������������������������� 490 740 790 700 520 260 110 2,380

111 Welfare-to-work tax credit ��������������������������������������������������������������������������������������������������� 80 50 20 10 10 0 0 40

112 Employer provided child care exclusion ������������������������������������������������������������������������������ 940 1,240 1,480 1,490 1,550 1,620 1,700 7,840

113 Employer-provided child care credit ����������������������������������������������������������������������������������� 20 20 30 10 0 0 0 40

114 Assistance for adopted foster children �������������������������������������������������������������������������������� 430 450 480 510 550 580 620 2,740

115 Adoption credit and exclusion ��������������������������������������������������������������������������������������������� 470 480 500 470 90 100 100 1,260

116 Exclusion of employee meals and lodging (other than military) ������������������������������������������ 970 1,010 1,060 1,110 1,170 1,230 1,300 5,870

117 Child credit 4

 ������������������������������������������������������������������������������������������������������������������������ 28,420 27,250 27,032 20,250 10,072 9,580 9,120 76,054

118 Credit for child and dependent care expenses ������������������������������������������������������������������� 3,020 3,670 2,070 1,920 1,710 1,600 1,520 8,820

119 Credit for disabled access expenditures ����������������������������������������������������������������������������� 30 30 30 30 30 30 30 150

120 Deductibility of charitable contributions, other than education and health �������������������������� 38,200 43,370 46,980 50,550 54,600 59,070 62,790 273,990

121 Exclusion of certain foster care payments �������������������������������������������������������������������������� 480 480 480 480 480 480 480 2,400

122 Exclusion of parsonage allowances ������������������������������������������������������������������������������������ 550 580 620 660 700 740 790 3,510

123 Employee retention credit for employers in certain Federal disaster areas ������������������������ 30 140 40 0 0 0 0 40

124 Exclusion for benefits provided to volunteer EMS and firefighters ������������������������������������� 20 80 80 60 0 0 0 140

125 Temporary income exclusion for employer provided lodging in Midwestern disaster area �

Health: 

126 Exclusion of employer contributions for medical insurance premiums and medical care 5

 ������ 131,080 142,010 155,050 169,190 184,860 199,900 214,740 923,740

127 Self-employed medical insurance premiums ��������������������������������������������������������������������������� 5,080 5,470 6,020 6,680 7,490 8,250 9,100 37,540

128 Medical Savings Accounts / Health Savings Accounts ������������������������������������������������������������ 1,830 1,930 2,030 2,130 2,240 2,350 2,470 11,220

129 Deductibility of medical expenses ������������������������������������������������������������������������������������������� 9,320 9,660 10,760 12,540 14,750 16,850 19,260 74,160

130 Exclusion of interest on hospital construction bonds ��������������������������������������������������������������� 1,350 2,940 3,070 3,310 3,530 3,640 3,750 17,300

131 Deductibility of charitable contributions (health) ���������������������������������������������������������������������� 4,310 4,890 5,300 5,700 6,160 6,660 7,080 30,900

132 Tax credit for orphan drug research ����������������������������������������������������������������������������������������� 290 320 360 410 460 510 570 2,310

133 Special Blue Cross/Blue Shield deduction ������������������������������������������������������������������������������ 620 600 650 660 670 680 690 3,350

134 Tax credit for health insurance purchased by certain displaced and retired individuals 6

 �������� 0 10 10 10 10 10 10 50

135 Distributions from retirement plans for premiums for health and long-term care insurance ���� 240 280 310 340 380 420 460 1,910

income security: 

136 Exclusion of railroad retirement system benefits ��������������������������������������������������������������������� 390 390 370 370 370 360 350 1,820

137 Exclusion of workers’ compensation benefits �������������������������������������������������������������������������� 5,830 5,920 6,010 6,110 6,200 6,300 6,400 31,020

138 Exclusion of public assistance benefits (normal tax method) �������������������������������������������������� 560 590 620 650 690 740 780 3,480

139 Exclusion of special benefits for disabled coal miners ������������������������������������������������������������� 40 40 40 40 40 40 40 200

140 Exclusion of military disability pensions ���������������������������������������������������������������������������������� 110 130 150 180 220 260 320 1,130

Net exclusion of pension contributions and earnings: 

141 Employer plans ������������������������������������������������������������������������������������������������������������������� 46,120 45,670 44,370 42,420 42,230 41,620 43,600 214,240

142 401(k) plans ������������������������������������������������������������������������������������������������������������������������ 47,000 50,000 53,000 66,000 72,000 75,000 77,000 343,000

143 Individual Retirement Accounts ������������������������������������������������������������������������������������������ 11,700 12,700 13,500 14,800 16,500 17,000 17,200 79,000

144 Low and moderate income savers credit ���������������������������������������������������������������������������� 890 980 1,050 1,050 1,010 940 920 4,970

145 Keogh plans ������������������������������������������������������������������������������������������������������������������������ 12,000 13,000 14,000 15,000 17,000 20,000 21,000 87,000

Exclusion of other employee benefits: 

146 Premiums on group term life insurance ������������������������������������������������������������������������������ 2,230 2,250 2,320 2,460 2,480 2,490 2,510 12,260

147 Premiums on accident and disability insurance ������������������������������������������������������������������ 310 320 330 340 350 360 360 1,740

148 Income of trusts to finance supplementary unemployment benefits ���������������������������������������� 30 30 40 40 50 50 50 230

149 Special ESOP rules ����������������������������������������������������������������������������������������������������������������� 1,600 1,700 1,800 1,900 1,900 2,000 2,100 10,600

150 Additional deduction for the blind ��������������������������������������������������������������������������������������������� 40 30 30 40 50 50 50 220

151 Additional deduction for the elderly ����������������������������������������������������������������������������������������� 2,250 1,940 1,940 2,730 3,290 3,470 3,570 15,000

152 Tax credit for the elderly and disabled ������������������������������������������������������������������������������������� 10 10 10 10 10 10 10 50
302 ANALYTICAL PERSPECTIVES

Table 19–1. eSTimaTeS oF ToTal income Tax exPendiTureS For FiScal yearS 2008-2014—continued

(In millions of dollars)

Total from corporations and individuals

2008 2009 2010 2011 2012 2013 2014 2010–14

153 Deductibility of casualty losses ������������������������������������������������������������������������������������������������ 540 580 620 690 740 780 810 3,640

154 Earned income tax credit 7

 ������������������������������������������������������������������������������������������������������� 5,380 5,740 6,130 6,390 8,530 8,790 9,140 38,980

155 Additional exemption for housing Hurricane Katrina displaced individuals ������������������������������ 20 10 0 0 0 0 0 0

Social Security: 

Exclusion of social security benefits: 

156 Social Security benefits for retired workers ������������������������������������������������������������������������ 19,700 20,610 19,330 20,420 23,130 25,350 25,750 113,980

157 Social Security benefits for disabled ����������������������������������������������������������������������������������� 5,420 5,770 5,840 6,230 6,750 7,090 7,140 33,050

158 Social Security benefits for dependents and survivors ������������������������������������������������������� 3,570 3,610 3,280 3,350 3,670 3,880 3,800 17,980

veterans benefits and services: 

159 Exclusion of veterans death benefits and disability compensation ������������������������������������������ 3,870 3,950 4,140 4,480 4,850 5,260 5,690 24,420

160 Exclusion of veterans pensions ����������������������������������������������������������������������������������������������� 180 180 180 190 220 220 220 1,030

161 Exclusion of GI bill benefits ����������������������������������������������������������������������������������������������������� 280 280 290 300 330 330 340 1,590

162 Exclusion of interest on veterans housing bonds �������������������������������������������������������������������� 10 20 30 30 30 30 30 150

general purpose fiscal assistance: 

163 Exclusion of interest on public purpose State and local bonds ����������������������������������������������� 11,110 24,610 25,730 27,820 29,810 30,700 31,620 145,680

164 Deductibility of nonbusiness State and local taxes other than on owner-occupied homes ����� 49,140 36,270 30,290 48,750 60,350 63,330 65,390 268,110

interest: 

165 Deferral of interest on U�S� savings bonds ������������������������������������������������������������������������������� 1,310 1,320 1,330 1,380 1,470 1,490 1,500 7,170

addendum: aid to State and local governments: 

Deductibility of: 

Property taxes on owner-occupied homes ������������������������������������������������������������������������� 29,130 20,850 14,980 24,550 30,630 31,870 32,540 134,570

Nonbusiness State and local taxes other than on owner-occupied homes ������������������������ 49,140 36,270 30,290 48,750 60,350 63,330 65,390 268,110

Exclusion of interest on State and local bonds for: 

Public purposes ������������������������������������������������������������������������������������������������������������������ 11,110 24,610 25,730 27,820 29,810 30,700 31,620 145,680

Energy facilities ������������������������������������������������������������������������������������������������������������������� 10 20 20 30 30 30 30 140

Water, sewage, and hazardous waste disposal facilities ���������������������������������������������������� 170 370 390 410 450 460 470 2,180

Small-issues ����������������������������������������������������������������������������������������������������������������������� 140 320 330 350 380 390 400 1,850

Owner-occupied mortgage subsidies ��������������������������������������������������������������������������������� 460 990 1,030 1,110 1,180 1,220 1,270 5,810

Rental housing �������������������������������������������������������������������������������������������������������������������� 410 890 930 1,000 1,060 1,090 1,120 5,200

Airports, docks, and similar facilities ����������������������������������������������������������������������������������� 380 820 850 920 990 1,020 1,050 4,830

Student loans ���������������������������������������������������������������������������������������������������������������������� 210 470 490 530 560 590 600 2,770

Private nonprofit educational facilities �������������������������������������������������������������������������������� 860 1,870 1,960 2,110 2,260 2,320 2,390 11,040

Hospital construction ���������������������������������������������������������������������������������������������������������� 1,350 2,940 3,070 3,310 3,530 3,640 3,750 17,300

Veterans’ housing ��������������������������������������������������������������������������������������������������������������� 10 20 30 30 30 30 30 150

GO Zone and GO Zone mortgage �������������������������������������������������������������������������������������� 0 10 10 10 10 10 20 60

Credit for holders of zone academy bonds ������������������������������������������������������������������������������ 160 170 170 170 160 140 130 770

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�

1

 In addition, the alcohol fuel credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2008 $4,410; 2009 $4,730; 2010 $5,230; 2011 $1,630; 2012 $0; 2013 

$0; 2014 $0�

2

 In addition, the bio-diesel producer tax credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2008 $940; 2009 $780; 2010 $70; 2011 $60; 2012 $40; 

2013 $40; 2014 $10�

3

 An alternative calculation for this tax expenditure based on pre-2005 methodology is shown in Table 19-4�

4

 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: 2008 $34,020 2009 $26,940; 2010 

$17,230; 2011 $16,740; 2012 $1,510; 2013 $1,490; and 2014 $1,480�

5

 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: 

2008 $83,150; 2009 $86,490; 2010 $91,460; 2011 $97,820; 2012 $104,660; 2013 $111,000; and 2014 $117,560�

6

 The figures in the table indicate the effect of the health insurance tax credit on receipts� The effect of the credit on outlays (in millions of dollars) is as follows: 2007 $100; 2008 $110; 

2009 $120; 2010 $130; 2011 $140; 2012 $150; and 2013 $160�

7

 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: 2008 $45,282; 2009 

$42,271; 2010 $49,733; 2011 $50,954; 2012 $45,837; 2013 $46,667; and 2014 $47,974�
19. TAX EXPENDITURES 303

Table 19–2. eSTimaTeS oF Tax exPendiTureS For THe corPoraTe and individual income TaxeS 

For FiScal yearS 2008-2014

(In millions of dollars)

Corporations Individuals

2008 2009 2010 2011 2012 2013 2014 2010–14 2008 2009 2010 2011 2012 2013 2014 2010–14

national defense

1 Exclusion of benefits and allowances to Armed Forces personnel ������������������������������������������������������������������������� 11,190 11,710 10,210 10,550 10,900 11,270 11,660 54,590

international affairs: 

2 Exclusion of income earned abroad by U�S� citizens �������������� 5,070 5,320 5,590 5,870 6,160 6,470 6,790 30,880

3 Exclusion of certain allowances for Federal employees 

abroad ������������������������������������������������������������������������������� 880 920 970 1020 1070 1120 1180 5,360

4 Inventory property sales source rules exception ��������������������� 2,200 2,440 2,640 2,860 3,100 3,360 3,640 15,600

5 Deferral of income from controlled foreign corporations 

(normal tax method) ��������������������������������������������������������� 31,580 30,960 32,720 33,870 34,490 33,930 34,130 169,140

6 Deferred taxes for financial firms on certain income earned 

overseas���������������������������������������������������������������������������� 5,570 5,460 5,770 5,980 6,090 5,990 6,020 29,850

general science, space, and technology:

7 Expensing of research and experimentation expenditures 

(normal tax method) ��������������������������������������������������������� 4,930 3,560 3,220 4,250 5,390 6,330 6,550 25,740 250 260 280 310 330 360 380 1,660

8 Credit for increasing research activities ���������������������������������� 7,080 7,620 5,760 3,850 3,080 2,460 1,960 17,110 360 390 120 0 0 0 0 120

energy: 

9 Expensing of exploration and development costs, fuels ��������� 1,380 2,070 1,990 1,540 1,320 1,050 780 6,680 270 410 400 310 260 210 160 1,340

10 Excess of percentage over cost depletion, fuels �������������������� 830 1,230 1,220 1,240 1,250 1,260 1,270 6,240 90 130 130 130 130 130 130 650

11 Alternative fuel production credit �������������������������������������������� 570 70 80 10 10 0 0 100 20 0 0 0 0 0 0 0

12 Exception from passive loss limitation for working interests in 

oil and gas properties ������������������������������������������������������ 10 10 10 10 10 10 10 50

13 Capital gains treatment of royalties on coal ���������������������������� 110 110 140 110 110 130 140 630

14 Exclusion of interest on energy facility bonds ������������������������� 0 10 10 10 10 10 10 50 10 10 10 20 20 20 20 90

15 Energy production credit ���������������������������������������������������������� 840 1,030 1,070 1,070 1,050 1,040 1,020 5,250 80 100 110 110 100 100 100 520

16 Energy investment credit ��������������������������������������������������������� 30 30 30 30 30 30 30 150 20 20 20 20 20 20 20 100

17 Alcohol fuel credits 1

 ���������������������������������������������������������������� 40 50 70 160 320 160 0 710 10 10 20 30 70 70 0 190

18 Bio-Diesel and small agri-biodiesel producer tax credits 2

 ������� 30 20 20 0 0 0 0 20 10 10 0 0 0 0 0 0

19 Tax credit and deduction for clean-fuel burning vehicles ��������� 60 30 50 10 –20 10 40 90 110 60 30 30 30 50 60 200

20 Exclusion of utility conservation subsidies ������������������������������� 0 0 0 0 0 0 0 0 120 120 110 110 110 110 110 550

21 Credit for holding clean renewable energy bonds ������������������� 10 20 20 20 20 20 20 100 30 50 50 50 50 50 50 250

22 Deferral of gain from dispositions of transmission property to 

implement FERC restructuring policy ������������������������������� –30 –50 –120 –320 –400 –480 –490 –1,810

23 Credit for investment in clean coal facilities ����������������������������� 30 200 290 260 240 230 210 1,230

24 Temporary 50% expensing for equipment used in the refining 

of liquid fuels ��������������������������������������������������������������������� 350 750 890 900 800 700 630 3,920

25 Natural gas distribution pipelines treated as 15-year property 80 90 110 120 110 100 90 530

26 Amortize all geological and geophysical expenditures over 2 

years ��������������������������������������������������������������������������������� 20 70 100 100 70 50 30 350 0 20 30 20 20 10 10 90

27 Allowance of deduction for certain energy efficient 

commercial building property �������������������������������������������� 130 150 160 130 130 10 40 470 40 50 50 60 70 10 20 210

28 Credit for construction of new energy efficient homes ������������� 20 20 10 0 0 0 0 10 10 0 0 0 0 0 0 0

29 Credit for energy efficiency improvements to existing homes�� 230 380 150 0 0 0 0 150

30 Credit for energy efficient appliances �������������������������������������� 120 130 130 50 0 0 0 180 0

31 Credit for residential energy efficient property ������������������������ 20 30 20 0 0 0 0 20

32 Partial expensing for advanced mine safety equipment ��������� 20 0 0 0 0 0 0 0

33 Qualified energy conservation bonds �������������������������������������� 0 0 0 10 10 10 10 40 0 0 10 20 30 30 30 120

natural resources and environment: 

34 Expensing of exploration and development costs, nonfuel minerals ��������������������������������������������������������������������������� 210 220 230 230 240 250 250 1,200 0

35 Excess of percentage over cost depletion, nonfuel minerals �� 700 720 750 770 790 820 830 3,960 20 20 20 20 20 30 30 120

36 Exclusion of interest on bonds for water, sewage, and 

hazardous waste facilities ������������������������������������������������� 70 120 130 130 140 140 140 680 100 250 260 280 310 320 330 1,500

37 Capital gains treatment of certain timber income ������������������� 110 110 140 110 110 130 140 630

38 Expensing of multiperiod timber growing costs ���������������������� 180 180 190 190 200 210 210 1,000 110 110 120 120 120 130 130 620

39 Tax incentives for preservation of historic structures �������������� 380 390 410 430 460 480 500 2,280 100 110 110 120 120 130 140 620

40 Expensing of capital costs with respect to complying with 

EPA sulfur regulations ������������������������������������������������������� 30 50 30 –10 0 0 0 20 0 0 0 0 0 0 0 0

41 Exclusion of gain or loss on sale or exchange of certain brownfield sites ����������������������������������������������������������������� 20 30 30 30 20 20 20 120 10 10 10 10 10 10 10 50

42 Industrial CO2

 capture and sequestration tax credit ���������������� 0 0 0 40 130 240 290 700

43 Deduction for endangered species recovery expenditures ������ 0 10 20 20 30 30 30 130

agriculture: 

44 Expensing of certain capital outlays ��������������������������������������� 10 10 10 10 10 10 10 50 100 100 100 110 110 110 110 540

45 Expensing of certain multiperiod production costs ����������������� 10 10 10 10 10 10 10 50 70 70 70 70 80 80 80 380

46 Treatment of loans forgiven for solvent farmers ����������������������� 10 10 10 20 20 20 20 90

47 Capital gains treatment of certain income ������������������������������ 1,160 1,130 1,390 1,190 1,140 1,300 1,460 6,480

48 Income averaging for farmers �������������������������������������������������� 80 80 80 80 80 80 80 400

49 Deferral of gain on sale of farm refiners ���������������������������������� 20 20 20 20 20 20 20 100
304 ANALYTICAL PERSPECTIVES

Table 19–2. eSTimaTeS oF Tax exPendiTureS For THe corPoraTe and individual income TaxeS 

For FiScal yearS 2008-2014—continued

(In millions of dollars)

Corporations Individuals

2008 2009 2010 2011 2012 2013 2014 2010–14 2008 2009 2010 2011 2012 2013 2014 2010–14

commerce and housing: 

Financial institutions and insurance: ���������������������������������������

50 Exemption of credit union income ���������������������������������� 1140 1190 1230 1280 1330 1380 1430 6,650

51 Exclusion of interest on life insurance savings ��������������� 2660 2830 3010 3160 3380 3630 3880 17,060 18530 19960 21440 23610 26450 28950 30980 131,430

52 Special alternative tax on small property and casualty 

insurance companies ���������������������������������������������� 40 40 40 40 50 50 60 240

53 Tax exemption of certain insurance companies owned by 

tax-exempt organizations ����������������������������������������� 190 190 200 200 210 210 220 1,040

54 Small life insurance company deduction ������������������������ 50 50 50 50 50 50 50 250

55 Exclusion of interest spread of financial institutions �������� 270 220 240 280 290 310 320 1,930

Housing: ����������������������������������������������������������������������������������

56 Exclusion of interest on owner-occupied mortgage 

subsidy bonds ��������������������������������������������������������� 200 330 340 350 360 370 390 1,810 260 660 690 760 820 850 880 4,000

57 Exclusion of interest on rental housing bonds ���������������� 180 300 310 320 320 330 340 1,620 230 590 620 680 740 760 780 3,580

58 Deductibility of mortgage interest on owner-occupied 

homes ���������������������������������������������������������������������� 88,500 97,280 107,980 119,750 131,230 139,990 147,130 646,080

59 Deductibility of State and local property tax on owneroccupied homes ������������������������������������������������������ 29,130 20,850 14,980 24,550 30,630 31,870 32,540 134,570

60 Deferral of income from installment sales ���������������������� 310 320 320 320 330 330 330 1,630 920 930 1,050 1,180 1,320 1,480 1,620 6,650

61 Capital gains exclusion on home sales ��������������������������� 30,090 27,980 30,460 39,530 49,550 54,720 60,440 234,700

62 Exclusion of net imputed rental income �������������������������� –1,720 –5,850 –2,200 2,230 3,680 4,390 5,720 13,820

63 Exception from passive loss rules for $25,000 of rental 

loss �������������������������������������������������������������������������� 8,430 8,840 9,160 9,580 10,090 10,240 10,620 49,690

64 Credit for low-income housing investments �������������������� 2,960 3,480 4,050 4,620 5,210 5,800 6,390 26,070 250 270 290 300 310 330 340 1,570

65 Accelerated depreciation on rental housing (normal tax 

method) ������������������������������������������������������������������� 600 620 640 730 770 820 880 3,840 9,090 9,530 10,130 12,890 13,840 14,950 16,210 68,020

66 Discharge of mortgage indebtedness ����������������������������� 310 330 260 190 140 80 0 670

67 Credit for first-time homebuyer ���������������������������������������� 9,530 1,230 –1,350 –1,400 –1,400 –1,060 –910 –6,120

Commerce: �����������������������������������������������������������������������������

68 Cancellation of indebtedness ����������������������������������������� 60 30 20 40 50 40 30 180

69 Exceptions from imputed interest rules �������������������������� 50 50 50 50 50 50 50 250

70 Capital gains (except agriculture, timber, and coal) 3

 ������ 24,240 23,640 28,920 24,840 23,890 27,270 30,480 135,400

71 Capital gains exclusion of small corporation stock ���������� 60 60 60 200 340 350 370 1,320

72 Step-up basis of capital gains at death �������������������������� 21,590 19,530 20,830 25,210 31,720 34,100 36,650 148,510

73 Carryover basis of capital gains on gifts ������������������������ 670 730 710 2,370 1,030 1,370 1,470 6,950

74 Ordinary income treatment of loss from small business 

corporation stock sale ��������������������������������������������� 50 50 60 60 60 60 60 300

75 Accelerated depreciation of buildings other than rental 

housing (normal tax method) ����������������������������������� –2,390 –2,380 –2,330 –2,430 –2,430 –2,440 –2,440 –12,070 –4,250 –4,260 –4,230 –4,940 –4,930 –4,920 –4,900 –23,920

76 Accelerated depreciation of machinery and equipment 

(normal tax method) ������������������������������������������������ 39,090 –14,300 –8,170 –3,610 610 3,970 6,930 –270 16,800 3,160 4,350 2,420 5,400 6,970 8,200 27,340

77 Expensing of certain small investments (normal tax 

method) ������������������������������������������������������������������� 200 60 180 –800 –440 –250 –120 –1,430 730 30 730 –2600 –1240 –600 –140 –3,850

78 Graduated corporation income tax rate (normal tax 

method) ������������������������������������������������������������������� 2,460 2,460 2,880 3,090 3,120 3,300 3,310 15,700

79 Exclusion of interest on small issue bonds �������������������� 60 110 110 110 120 120 120 580 80 210 220 240 260 270 280 1,270

80 Deduction for U�S� production activities ��������������������������� 8,630 8,760 11,380 13,560 14,380 15,260 16,070 70,650 2,030 2,060 2,760 3,330 3,530 3,750 3,940 17,310

81 Special rules for certain film and TV production �������������� 60 50 –40 –80 –60 –40 –30 –250 10 10 –10 –20 –20 –10 –10 –70

Transportation: 

82 Deferral of tax on shipping companies ����������������������������������� 20 20 20 20 20 20 20 100

83 Exclusion of reimbursed employee parking expenses ������������ 2,920 3,000 3,120 3,270 3,400 3,520 3,630 16,940

84 Exclusion for employer-provided transit passes ��������������������� 480 500 530 570 600 630 660 2,990

85 Tax credit for certain expenditures for maintaining railroad tracks �������������������������������������������������������������������������������� 160 160 60 20 10 10 0 100 20 20 10 0 0 0 0 10

86 Exclusion of interest on bonds for Financing of Highway 

Projects and rail-truck transfer facilities����������������������������� 20 20 30 30 20 10 10 100 60 70 70 70 70 50 50 310

community and regional development: 

87 Investment credit for rehabilitation of structures (other than 

historic) ���������������������������������������������������������������������������� 20 20 20 20 20 20 20 100 20 20 20 20 20 30 30 120

88 Exclusion of interest for airport, dock, and similar bonds �������� 160 280 280 290 300 310 320 1,500 220 540 570 630 690 710 730 3,330

89 Exemption of certain mutuals’ and cooperatives’ income ������� 70 70 70 70 70 80 80 370 

90 Empowerment zones and renewal communities ��������������������� –400 –470 –200 –50 –120 –150 –180 –700 –1,250 –1,490 –950 –370 –560 –680 –760 –3,320

91 New markets tax credit ������������������������������������������������������������ 250 280 260 230 200 140 70 900 740 830 790 690 610 440 230 2,760

92 Expensing of environmental remediation costs ����������������������� 490 240 20 –120 –120 –120 –110 –450 100 50 0 –20 –20 –20 –20 –80

93 Credit to holders of Gulf Tax Credit Bonds� ������������������������������ 0 0 20 20 20 10 10 80 10 30 60 60 50 40 40 250

education, training, employment, and social services: 

Education: �������������������������������������������������������������������������������

94 Exclusion of scholarship and fellowship income (normal 

tax method) ������������������������������������������������������������� 2,000 2,080 2,160 2,250 2,340 2,440 2,540 11,730

95 HOPE tax credit �������������������������������������������������������������� 3,770 3,800 3,890 4,650 5,100 5,340 5,580 24,560

96 Lifetime Learning tax credit ��������������������������������������������� 2,470 2,460 2,510 2,980 3,260 3,410 3,570 15,730

97 Education Individual Retirement Accounts ��������������������� 30 40 60 70 80 80 90 380
19. TAX EXPENDITURES 305

Table 19–2. eSTimaTeS oF Tax exPendiTureS For THe corPoraTe and individual income TaxeS 

For FiScal yearS 2008-2014—continued

(In millions of dollars)

Corporations Individuals

2008 2009 2010 2011 2012 2013 2014 2010–14 2008 2009 2010 2011 2012 2013 2014 2010–14

98 Deductibility of student-loan interest ������������������������������� 1,250 1,260 1,270 1,220 970 980 990 5,430

99 Deduction for higher education expenses ����������������������� 1,550 1,680 1,430 0 0 0 0 1,430

100 State prepaid tuition plans ���������������������������������������������� 1,030 1,250 1,480 1,700 1,900 2,030 2,140 9,250

101 Exclusion of interest on student-loan bonds ������������������ 90 160 160 170 170 180 180 860 120 310 330 360 390 410 420 1,910

102 Exclusion of interest on bonds for private nonprofit 

educational facilities ������������������������������������������������ 370 630 650 670 690 710 730 3,450 490 1240 1310 1440 1570 1610 1660 7,590

103 Credit for holders of zone academy bonds ��������������������� 160 170 170 170 160 140 130 770

104 Exclusion of interest on savings bonds redeemed to 

finance educational expenses ���������������������������������� 20 20 20 20 20 20 20 100

105 Parental personal exemption for students age 19 or over ���� 4,690 2,670 1,660 2,680 3,060 2,860 2,640 12,900

106 Deductibility of charitable contributions (education) �������� 600 630 670 710 750 790 830 3,750 3,730 4,250 4,600 4,960 5,360 5,810 6,180 26,910

107 Exclusion of employer-provided educational assistance 650 680 710 40 0 0 0 750

108 Special deduction for teacher expenses ������������������������� 180 180 160 0 0 0 0 160

109 Discharge of student loan indebtedness ������������������������� 20 20 20 20 20 20 20 100

Training, employment, and social services: ����������������������������

110 Work opportunity tax credit ��������������������������������������������� 440 610 620 570 420 220 100 1,930 50 130 170 130 100 40 10 450

111 Welfare-to-work tax credit ����������������������������������������������� 60 40 20 10 10 40 20 10 0

112 Employer provided child care exclusion �������������������������� 940 1240 1480 1490 1550 1620 1700 7,840

113 Employer-provided child care credit �������������������������������� 20 20 30 10 0 0 0 40 0

114 Assistance for adopted foster children ���������������������������� 430 450 480 510 550 580 620 2,740

115 Adoption credit and exclusion ����������������������������������������� 470 480 500 470 90 100 100 1,260

116 Exclusion of employee meals and lodging (other than 

military) �������������������������������������������������������������������� 970 1,010 1,060 1,110 1,170 1,230 1,300 5,870

117 Child credit 4

 �������������������������������������������������������������������� 28,420 27,250 27,032 20,250 10,072 9,580 9,120 76,054

118 Credit for child and dependent care expenses ��������������� 3,020 3,670 2,070 1,920 1,710 1,600 1,520 8,820

119 Credit for disabled access expenditures ������������������������ 10 10 10 10 10 10 10 50 20 20 20 20 20 20 20 100

120 Deductibility of charitable contributions, other than 

education and health ������������������������������������������������ 1,370 1,440 1,510 1,580 1,650 1,720 1790 8,250 36,830 41,930 45,470 48,970 52,950 57,350 61,000 265,740

121 Exclusion of certain foster care payments ��������������������� 480 480 480 480 480 480 480 2,400

122 Exclusion of parsonage allowances ������������������������������� 550 580 620 660 700 740 790 3,510

123 Employee retention credit for employers in certain 

Federal disaster areas ���������������������������������������������� 10 70 20 0 0 0 0 20 20 70 20 0 0 0 0 20

124 Exclusion for benefits provided to volunteer EMS and 

firefighters ����������������������������������������������������������������� 20 80 80 60 0 0 0 140

125 Temporary income exclusion for employer provided 

lodging in Midwestern disaster area ������������������������� 0 20 0 0 0 0 0 0

Health: 

126 Exclusion of employer contributions for medical insurance 

premiums and medical care 5

 �������������������������������������������� 131,080 142,010 155,050 169,190 184,860 199,900 214,740 923,740

127 Self-employed medical insurance premiums ��������������������������� 5,080 5,470 6,020 6,680 7,490 8,250 9,100 37,540

128 Medical Savings Accounts / Health Savings Accounts ������������ 1,830 1,930 2,030 2,130 2,240 2,350 2,470 11,220

129 Deductibility of medical expenses ������������������������������������������� 9,320 9,660 10,760 12,540 14,750 16,850 19,260 74,160

130 Exclusion of interest on hospital construction bonds ��������������� 580 990 1,020 1,050 1,080 1,110 1,150 5,410 770 1,950 2,050 2,260 2,450 2,530 2,600 11,890

131 Deductibility of charitable contributions (health) ���������������������� 180 190 200 210 220 230 240 1,100 4,130 4,700 5,100 5,490 5,940 6,430 6,840 29,800

132 Tax credit for orphan drug research ���������������������������������������� 290 320 360 410 460 510 570 2,310

133 Special Blue Cross/Blue Shield deduction ����������������������������� 620 600 650 660 670 680 690 3,350

134 Tax credit for health insurance purchased by certain 

displaced and retired individuals 6 ������������������������������������ 0 10 10 10 10 10 10 50

135 Distributions from retirement plans for premiums for health 

and long-term care insurance ������������������������������������������� 240 280 310 340 380 420 460 1,910

income security: 

136 Exclusion of railroad retirement system benefits �������������������� 390 390 370 370 370 360 350 1,820

137 Exclusion of workers’ compensation benefits �������������������������� 5,830 5,920 6,010 6,110 6,200 6,300 6,400 31,020

138 Exclusion of public assistance benefits (normal tax method) � 560 590 620 650 690 740 780 3,480

139 Exclusion of special benefits for disabled coal miners ������������ 40 40 40 40 40 40 40 200

140 Exclusion of military disability pensions ��������������������������������� 110 130 150 180 220 260 320 1,130

Net exclusion of pension contributions and earnings: ������������

141 Employer plans �������������������������������������������������������������� 46,120 45,670 44,370 42,420 42,230 41,620 43,600 214,240

142 401(k) plans �������������������������������������������������������������������� 47,000 50,000 53,000 66,000 72,000 75,000 77,000 343,000

143 Individual Retirement Accounts ������������������������������������� 11,700 12,700 13,500 14,800 16,500 17,000 17,200 79,000

144 Low and moderate income savers credit ������������������������ 890 980 1,050 1,050 1,010 940 920 4,970

145 Keogh plans ������������������������������������������������������������������� 12,000 13,000 14,000 15,000 17,000 20,000 21,000 87,000

Exclusion of other employee benefits: ������������������������������������

146 Premiums on group term life insurance ������������������������� 2,230 2,250 2,320 2,460 2,480 2,490 2,510 12,260

147 Premiums on accident and disability insurance ������������� 310 320 330 340 350 360 360 1,740

148 Income of trusts to finance supplementary unemployment benefits ���������������������������������������������������������������������������� 30 30 40 40 50 50 50 230

149 Special ESOP rules ����������������������������������������������������������������� 1,200 1,200 1,300 1,400 1,400 1,400 1,500 7,000 400 500 500 500 500 600 600 3,600

150 Additional deduction for the blind �������������������������������������������� 40 30 30 40 50 50 50 220

151 Additional deduction for the elderly ���������������������������������������� 2,250 1,940 1,940 2,730 3,290 3,470 3,570 15,000

152 Tax credit for the elderly and disabled ������������������������������������ 10 10 10 10 10 10 10 50
306 ANALYTICAL PERSPECTIVES

Table 19–2. eSTimaTeS oF Tax exPendiTureS For THe corPoraTe and individual income TaxeS 

For FiScal yearS 2008-2014—continued

(In millions of dollars)

Corporations Individuals

2008 2009 2010 2011 2012 2013 2014 2010–14 2008 2009 2010 2011 2012 2013 2014 2010–14

153 Deductibility of casualty losses ����������������������������������������������� 540 580 620 690 740 780 810 3,640

154 Earned income tax credit 7

 ������������������������������������������������������ 5,380 5,740 6,130 6,390 8,530 8,790 9,140 38,980

155 Additional exemption for housing disaster related displaced 

individuals ������������������������������������������������������������������������� 20 10 0 0 0 0 0 0

Social Security: 

Exclusion of social security benefits: ��������������������������������������

156 Social Security benefits for retired workers �������������������� 19,700 20,610 19,330 20,420 23,130 25,350 25,750 113,980

157 Social Security benefits for disabled ������������������������������� 5,420 5,770 5,840 6,230 6,750 7,090 7,140 33,050

158 Social Security benefits for dependents and survivors ��� 3,570 3,610 3,280 3,350 3,670 3,880 3,800 17,980

veterans benefits and services: 

159 Exclusion of veterans death benefits and disability 

compensation ������������������������������������������������������������������� 3,870 3,950 4,140 4,480 4,850 5,260 5,690 24,420

160 Exclusion of veterans pensions ���������������������������������������������� 180 180 180 190 220 220 220 1,030

161 Exclusion of GI bill benefits ���������������������������������������������������� 280 280 290 300 330 330 340 1,590

162 Exclusion of interest on veterans housing bonds �������������������� 0 10 10 10 10 10 10 50 10 10 20 20 20 20 20 100

general purpose fiscal assistance: 

163 Exclusion of interest on public purpose State and local bonds ���� 4,190 7,100 7,320 7,540 7,760 7,990 8,230 38,840 6,920 17,510 18,410 20,280 22,050 22,710 23,390 106,840

164 Deductibility of nonbusiness State and local taxes other than 

on owner-occupied homes ����������������������������������������������� 49,140 36,270 30,290 48,750 60,350 63,330 65,390 268,110

interest: 

165 Deferral of interest on U�S� savings bonds ������������������������������ 1,310 1,320 1,330 1,380 1,470 1,490 1,500 7,170

addendum: aid to State and local governments: 

Deductibility of: �����������������������������������������������������������������������

Property taxes on owner-occupied homes ��������������������� 29,130 20,850 14,980 24,550 30,630 31,870 32,540 134,570

Nonbusiness State and local taxes other than on owneroccupied homes ������������������������������������������������������ 49,140 36,270 30,290 48,750 60,350 63,330 65,390 268,110

Exclusion of interest on State and local bonds for: �����������������

Public purposes �������������������������������������������������������������� 4,190 7,100 7,320 7,540 7,760 7,990 8,230 38,840 6,920 17,510 18,410 20,280 22,050 22,710 23,390 106,840

Energy facilities ��������������������������������������������������������������� 0 10 10 10 10 10 10 50 10 10 10 20 20 20 20 90

Water, sewage, and hazardous waste disposal facilities ������ 70 120 130 130 140 140 140 680 100 250 260 280 310 320 330 1,500

Small-issues �������������������������������������������������������������������� 60 110 110 110 120 120 120 580 80 210 220 240 260 270 280 1,270

Owner-occupied mortgage subsidies ����������������������������� 200 330 340 350 360 370 390 1,810 260 660 690 760 820 850 880 4,000

Rental housing ��������������������������������������������������������������� 180 300 310 320 320 330 340 1,620 230 590 620 680 740 760 780 3,580

Airports, docks, and similar facilities ������������������������������ 160 280 280 290 300 310 320 1,500 220 540 570 630 690 710 730 3,330

Student loans ����������������������������������������������������������������� 90 160 160 170 170 180 180 860 120 310 330 360 390 410 420 1,910

Private nonprofit educational facilities ���������������������������� 370 630 650 670 690 710 730 3,450 490 1,240 1,310 1,440 1,570 1,610 1,660 7,590

Hospital construction ������������������������������������������������������� 580 990 1020 1050 1080 1110 1150 5,410 770 1,950 2,050 2,260 2,450 2,530 2,600 11,890

Veterans’ housing ����������������������������������������������������������� 0 10 10 10 10 10 10 50 10 10 20 20 20 20 20 100

GO Zone and GO Zone mortgage ���������������������������������� 0 0 0 0 0 0 10 10 0 10 10 10 10 10 10 50

Credit for holders of zone academy bonds ������������������������������ 160 170 170 170 160 140 130 770

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�

1

In addition, the alcohol fuel credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2008 $4,410; 2009 $4,730; 2010 

$5,230; 2011 $1,630; 2012 $0; 2013 $0; 2014 $0�

2

In addition, the bio-diesel producer tax credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2008 $940; 2009 $780; 2010 

$70; 2011 $60; 2012 $40; 2013 $40; 2014 $10�

3

An alternative calculation for this tax expenditure based on pre-2005 methodology is shown in Table 19-4�

4

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: 

2008 $34,020 2009 $26,940; 2010 $17,230; 2011 $16,740; 2012 $1,510; 2013 $1,490; and 2014 $1,480�

5

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:

2008 $83,150; 2009 $86,490; 2010 $91,460; 2011 $97,820; 2012 $104,660; 2013 $111,000; and 2014 $117,560�

6

The figures in the table indicate the effect of the health insurance tax credit on receipts� The effect of the credit on outlays (in millions of dollars) is as follows: 

2008 $100; 2009 $100; 2010 $110; 2011 $110; 2012 $120; 2013 $140; and 2014 $150�

7

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:

2008 $45,280; 2009 $42,270; 2010 $49,730; 2011 $50,950; 2012 $45,840; 2013 $46,670; and 2014 $47,970�
19. TAX EXPENDITURES 307

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. Under a 

comprehensive income tax, corporate income would 

be taxed only once – at the shareholder level, whether or not distributed in the form of dividends.

•	 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 

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 tax2 Gross income does, however, include transfer payments associated with past employment, 

such as Social Security benefits.

able 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 allowance for property is computed using estimates of economic depreciation. The latter represents a change in the 

calculation of the tax expenditure under normal law first 

made in the 2004 Budget.

 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, 2008, and do not reflect proposals made elsewhere 

in the Budget. Legislation enacted in 2008, such as the 

Energy Improvement and Extension Act of 2008, the 

Tax Extenders and Alternative Minimum Tax Relief 

Act of 2008, the Emergency Economic Stabilization Act 

of 2008, the Emergency Economic Stabilization Act of 

2008, the Economic Stimulus Act of 2008, the Heroes 

Earnings Assistance and Relief Tax Act of 2008, the Food, 

Conservation, and Energy Act of 2008, and the Housing 

and Economic Recovery Act of 2008 introduced many 

changes which for the most part expanded the scope of a 

number of existing provisions in the Tax Code.

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 

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.
308 ANALYTICAL PERSPECTIVES

Table 19–3. income Tax exPendiTureS ranked by ToTal FiScal year 2010–2014 ProJecTed revenue eFFecT

 (In millions of dollars)

 Provision 2010 2010–14

 126 Exclusion of employer contributions for medical insurance premiums and medical care ��������������������������������������������������������������������������������������������� 155,050 923,740

58 Deductibility of mortgage interest on owner-occupied homes ������������������������������������������������������������������������������������������������������������������������������������� 107,980 646,080

142 401(k) plans ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 53,000 343,000

120 Deductibility of charitable contributions, other than education and health �������������������������������������������������������������������������������������������������������������������� 46,980 273,990

164 Deductibility of nonbusiness State and local taxes other than on owner-occupied homes ����������������������������������������������������������������������������������������� 30,290 268,110

61 Capital gains exclusion on home sales ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 30,460 234,700

141 Employer plans ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 44,370 214,240

5 Deferral of income from controlled foreign corporations (normal tax method) ������������������������������������������������������������������������������������������������������������ 32,720 169,140

72 Step-up basis of capital gains at death ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 20,830 148,510

51 Exclusion of interest on life insurance savings ������������������������������������������������������������������������������������������������������������������������������������������������������������ 24,450 148,490

163 Exclusion of interest on public purpose State and local bonds ����������������������������������������������������������������������������������������������������������������������������������� 25,730 145,680

70 Capital gains (except agriculture, timber, and coal) ������������������������������������������������������������������������������������������������������������������������������������������������������ 28,920 135,400

59 Deductibility of State and local property tax on owner-occupied homes ��������������������������������������������������������������������������������������������������������������������� 14,980 134,570

156 Social Security benefits for retired workers ����������������������������������������������������������������������������������������������������������������������������������������������������������������� 19,330 113,980

80 Deduction for U�S� production activities ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 14,140 87,960

145 Keogh plans ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 14,000 87,000

143 Individual Retirement Accounts ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 13,500 79,000

117 Child credit �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 27,032 76,054

129 Deductibility of medical expenses ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 10,760 74,160

65 Accelerated depreciation on rental housing (normal tax method) ������������������������������������������������������������������������������������������������������������������������������� 10,770 71,860

1 Exclusion of benefits and allowances to Armed Forces personnel ����������������������������������������������������������������������������������������������������������������������������� 10,210 54,590

63 Exception from passive loss rules for $25,000 of rental loss ��������������������������������������������������������������������������������������������������������������������������������������� 9,160 49,690

154 Earned income tax credit ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 6,130 38,980

127 Self-employed medical insurance premiums ���������������������������������������������������������������������������������������������������������������������������������������������������������������� 6,020 37,540

157 Social Security benefits for disabled ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 5,840 33,050

137 Exclusion of workers’ compensation benefits ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 6,010 31,020

131 Deductibility of charitable contributions (health) ����������������������������������������������������������������������������������������������������������������������������������������������������������� 5,300 30,900

2 Exclusion of income earned abroad by U�S� citizens ��������������������������������������������������������������������������������������������������������������������������������������������������� 5,590 30,880

106 Deductibility of charitable contributions (education) ����������������������������������������������������������������������������������������������������������������������������������������������������� 5,270 30,660

6 Deferred taxes for financial firms on certain income earned overseas ������������������������������������������������������������������������������������������������������������������������� 5,770 29,850

64 Credit for low-income housing investments ����������������������������������������������������������������������������������������������������������������������������������������������������������������� 4,340 27,640

7 Expensing of research and experimentation expenditures (normal tax method) �������������������������������������������������������������������������������������������������������� 3,500 27,400

76 Accelerated depreciation of machinery and equipment (normal tax method) ������������������������������������������������������������������������������������������������������������� –3,820 27,070

95 HOPE tax credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 3,890 24,560

159 Exclusion of veterans death benefits and disability compensation ������������������������������������������������������������������������������������������������������������������������������ 4,140 24,420

158 Social Security benefits for dependents and survivors ������������������������������������������������������������������������������������������������������������������������������������������������� 3,280 17,980

130 Exclusion of interest on hospital construction bonds ���������������������������������������������������������������������������������������������������������������������������������������������������� 3,070 17,300

8 Credit for increasing research activities ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� 5,880 17,230

83 Exclusion of reimbursed employee parking expenses ������������������������������������������������������������������������������������������������������������������������������������������������� 3,120 16,940

96 Lifetime Learning tax credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 2,510 15,730

78 Graduated corporation income tax rate (normal tax method) �������������������������������������������������������������������������������������������������������������������������������������� 2,880 15,700

4 Inventory property sales source rules exception ���������������������������������������������������������������������������������������������������������������������������������������������������������� 2,640 15,600

151 Additional deduction for the elderly ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,940 15,000

62 Exclusion of net imputed rental income ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ –2,200 13,820

105 Parental personal exemption for students age 19 or over ������������������������������������������������������������������������������������������������������������������������������������������� 1,660 12,900

146 Premiums on group term life insurance ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� 2,320 12,260

94 Exclusion of scholarship and fellowship income (normal tax method) ������������������������������������������������������������������������������������������������������������������������ 2,160 11,730

128 Medical Savings Accounts / Health Savings Accounts ������������������������������������������������������������������������������������������������������������������������������������������������� 2,030 11,220

102 Exclusion of interest on bonds for private nonprofit educational facilities �������������������������������������������������������������������������������������������������������������������� 1,960 11,040

149 Special ESOP rules ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 1,800 10,600

100 State prepaid tuition plans �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,480 9,250

118 Credit for child and dependent care expenses ������������������������������������������������������������������������������������������������������������������������������������������������������������ 2,070 8,820

60 Deferral of income from installment sales �������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,370 8,280

9 Expensing of exploration and development costs, fuels ���������������������������������������������������������������������������������������������������������������������������������������������� 2,390 8,020

112 Employer provided child care exclusion ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 1,480 7,840

165 Deferral of interest on U�S� savings bonds ������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,330 7,170

73 Carryover basis of capital gains on gifts ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� 710 6,950

10 Excess of percentage over cost depletion, fuels ��������������������������������������������������������������������������������������������������������������������������������������������������������� 1,350 6,890

50 Exemption of credit union income ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,230 6,650

47 Capital gains treatment of certain income ������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,390 6,480

116 Exclusion of employee meals and lodging (other than military) ���������������������������������������������������������������������������������������������������������������������������������� 1,060 5,870

56 Exclusion of interest on owner-occupied mortgage subsidy bonds ����������������������������������������������������������������������������������������������������������������������������� 1,030 5,810

15 New technology credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,180 5,770

98 Deductibility of student-loan interest ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,270 5,430
19. TAX EXPENDITURES 309

Table 19–3. income Tax exPendiTureS ranked by ToTal FiScal year 2010–2014 ProJecTed revenue eFFecT—continued

 (In millions of dollars)

 Provision 2010 2010–14

3 Exclusion of certain allowances for Federal employees abroad ����������������������������������������������������������������������������������������������������������������������������������� 970 5,360

57 Exclusion of interest on rental housing bonds �������������������������������������������������������������������������������������������������������������������������������������������������������������� 930 5,200

144 Low and moderate income savers credit ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,050 4,970

88 Exclusion of interest for airport, dock, and similar bonds ��������������������������������������������������������������������������������������������������������������������������������������������� 850 4,830

35 Excess of percentage over cost depletion, nonfuel minerals ��������������������������������������������������������������������������������������������������������������������������������������� 770 4,080

24 Temporary 50% expensing for equipment used in the refining of liquid fuels ��������������������������������������������������������������������������������������������������������������� 890 3,920

91 New markets tax credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,050 3,660

153 Deductibility of casualty losses ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 620 3,640

122 Exclusion of parsonage allowances ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 620 3,510

138 Exclusion of public assistance benefits (normal tax method) �������������������������������������������������������������������������������������������������������������������������������������� 620 3,480

133 Special Blue Cross/Blue Shield deduction ������������������������������������������������������������������������������������������������������������������������������������������������������������������ 650 3,350

84 Exclusion for employer-provided transit passes ���������������������������������������������������������������������������������������������������������������������������������������������������������� 530 2,990

39 Tax incentives for preservation of historic structures ��������������������������������������������������������������������������������������������������������������������������������������������������� 520 2,900

101 Exclusion of interest on student-loan bonds ���������������������������������������������������������������������������������������������������������������������������������������������������������������� 490 2,770

114 Assistance for adopted foster children �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 480 2,740

121 Exclusion of certain foster care payments ������������������������������������������������������������������������������������������������������������������������������������������������������������������� 480 2,400

110 Work opportunity tax credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 790 2,380

132 Tax credit for orphan drug research ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 360 2,310

36 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities ������������������������������������������������������������������������������������������������������� 390 2,180

55 Exclusion of interest spread of financial institutions ����������������������������������������������������������������������������������������������������������������������������������������������������� 240 1,930

135 Distributions from retirement plans for premiums for health and long-term care insurance ����������������������������������������������������������������������������������������� 310 1,910

79 Exclusion of interest on small issue bonds ������������������������������������������������������������������������������������������������������������������������������������������������������������������ 330 1,850

136 Exclusion of railroad retirement system benefits ��������������������������������������������������������������������������������������������������������������������������������������������������������� 370 1,820

147 Premiums on accident and disability insurance ����������������������������������������������������������������������������������������������������������������������������������������������������������� 330 1,740

38 Expensing of multiperiod timber growing costs ����������������������������������������������������������������������������������������������������������������������������������������������������������� 310 1,620

161 Exclusion of GI bill benefits ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 290 1,590

99 Deduction for higher education expenses �������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,430 1,430

71 Capital gains exclusion of small corporation stock ������������������������������������������������������������������������������������������������������������������������������������������������������� 60 1,320

115 Adoption credit and exclusion ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 500 1,260

23 Credit for investment in clean coal facilities ������������������������������������������������������������������������������������������������������������������������������������������������������������������ 290 1,230

34 Expensing of exploration and development costs, nonfuel minerals ��������������������������������������������������������������������������������������������������������������������������� 230 1,200

140 Exclusion of military disability pensions ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� 150 1,130

53 Tax exemption of certain insurance companies owned by tax-exempt organizations �������������������������������������������������������������������������������������������������� 200 1,040

160 Exclusion of veterans pensions ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 180 1,030

17 Alcohol fuel credits ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 90 900

103 Credit for holders of zone academy bonds ������������������������������������������������������������������������������������������������������������������������������������������������������������������� 170 770

107 Exclusion of employer-provided educational assistance ��������������������������������������������������������������������������������������������������������������������������������������������� 710 750

42 Industrial CO2

 capture and sequestration tax credit ����������������������������������������������������������������������������������������������������������������������������������������������������� 0 700

27 Allowance of deduction for certain energy efficient commercial building property ������������������������������������������������������������������������������������������������������� 210 680

66 Discharge of mortgage indebtedness ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 260 670

13 Capital gains treatment of royalties on coal ����������������������������������������������������������������������������������������������������������������������������������������������������������������� 140 630

37 Capital gains treatment of certain timber income �������������������������������������������������������������������������������������������������������������������������������������������������������� 140 630

44 Expensing of certain capital outlays ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 110 590

20 Exclusion of utility conservation subsidies �������������������������������������������������������������������������������������������������������������������������������������������������������������������� 110 550

25 Natural gas distribution pipelines treated as 15-year property ������������������������������������������������������������������������������������������������������������������������������������� 110 530

26 Amortize all geological and geophysical expenditures over 2 years ����������������������������������������������������������������������������������������������������������������������������� 130 440

45 Expensing of certain multiperiod production costs ������������������������������������������������������������������������������������������������������������������������������������������������������ 80 430

86 Exclusion of interest on bonds for Financing of Highway Projects and rail-truck transfer facilities ������������������������������������������������������������������������������� 100 410

48 Income averaging for farmers ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 80 400

97 Education Individual Retirement Accounts ������������������������������������������������������������������������������������������������������������������������������������������������������������������� 60 380

89 Exemption of certain mutuals’ and cooperatives’ income ��������������������������������������������������������������������������������������������������������������������������������������������� 70 370

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

93 Credit to holders of Gulf Tax Credit Bonds ������������������������������������������������������������������������������������������������������������������������������������������������������������������� 80 330

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

19 Tax credit and deduction for clean-fuel burning vehicles ���������������������������������������������������������������������������������������������������������������������������������������������� 80 290

16 Energy investment credit ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 50 250

54 Small life insurance company deduction ��������������������������������������������������������������������������������������������������������������������������������������������������������������������� 50 250

69 Exceptions from imputed interest rules ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� 50 250

52 Special alternative tax on small property and casualty insurance companies ������������������������������������������������������������������������������������������������������������ 40 240

148 Income of trusts to finance supplementary unemployment benefits ���������������������������������������������������������������������������������������������������������������������������� 40 230

87 Investment credit for rehabilitation of structures (other than historic) �������������������������������������������������������������������������������������������������������������������������� 40 220

150 Additional deduction for the blind ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 30 220

139 Exclusion of special benefits for disabled coal miners ������������������������������������������������������������������������������������������������������������������������������������������������� 40 200

30 Credit for energy efficient appliances ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 130 180
310 ANALYTICAL PERSPECTIVES

Table 19–3. income Tax exPendiTureS ranked by ToTal FiScal year 2010–2014 ProJecTed revenue eFFecT—continued

 (In millions of dollars)

 Provision 2010 2010–14

68 Cancellation of indebtedness �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 20 180

41 Exclusion of gain or loss on sale or exchange of certain brownfield sites �������������������������������������������������������������������������������������������������������������������� 40 170

33 Qualified energy conservation bonds ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 10 160

108 Special deduction for teacher expenses ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� 160 160

29 Credit for energy efficiency improvements to existing homes ��������������������������������������������������������������������������������������������������������������������������������������� 150 150

119 Credit for disabled access expenditures ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� 30 150

162 Exclusion of interest on veterans housing bonds ��������������������������������������������������������������������������������������������������������������������������������������������������������� 30 150

14 Exclusion of interest on energy facility bonds �������������������������������������������������������������������������������������������������������������������������������������������������������������� 20 140

124 Exclusion for benefits provided to volunteer EMS and firefighters ������������������������������������������������������������������������������������������������������������������������������� 80 140

43 Deduction for endangered species recovery expenditures ������������������������������������������������������������������������������������������������������������������������������������������� 20 130

85 Tax credit for certain expenditures for maintaining railroad tracks �������������������������������������������������������������������������������������������������������������������������������� 70 110

11 Alternative fuel production credit ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 80 100

49 Deferral of gain on sale of farm refiners ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� 20 100

82 Deferral of tax on shipping companies ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 20 100

104 Exclusion of interest on savings bonds redeemed to finance educational expenses ��������������������������������������������������������������������������������������������������� 20 100

109 Discharge of student loan indebtedness ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� 20 100

46 Treatment of loans forgiven for solvent farmers ������������������������������������������������������������������������������������������������������������������������������������������������������������ 10 90

12 Exception from passive loss limitation for working interests in oil and gas properties ������������������������������������������������������������������������������������������������ 10 50

134 Tax credit for health insurance purchased by certain displaced and retired individuals ����������������������������������������������������������������������������������������������� 10 50

152 Tax credit for the elderly and disabled ������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 10 50

111 Welfare-to-work tax credit ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 20 40

113 Employer-provided child care credit ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 30 40

123 Employee retention credit for employers affected by Hurricane Katrina, Rita, and Wilma �������������������������������������������������������������������������������������������� 40 40

18 Bio-Diesel and small agri-biodiesel producer tax credits ���������������������������������������������������������������������������������������������������������������������������������������������� 20 20

31 30% credit for residential purchases/installations of solar and fuel cells ���������������������������������������������������������������������������������������������������������������������� 20 20

40 Expensing of capital costs with respect to complying with EPA sulfur regulations ������������������������������������������������������������������������������������������������������� 30 20

28 Credit for construction of new energy efficient homes �������������������������������������������������������������������������������������������������������������������������������������������������� 10 10

32 Partial expensing for advanced mine safety equipment ���������������������������������������������������������������������������������������������������������������������������������������������� 0 0

125 Temporary income exclusion for employer provided lodging in Midwestern disaster area ������������������������������������������������������������������������������������������� 0 0

155 Additional exemption for housing Hurricane Katrina displaced individuals ������������������������������������������������������������������������������������������������������������������� 0 0

81 Special rules for certain film and TV production ����������������������������������������������������������������������������������������������������������������������������������������������������������� –50 –320

92 Expensing of environmental remediation costs ������������������������������������������������������������������������������������������������������������������������������������������������������������ 20 –530

22 Deferral of gain from dispositions of transmission property to implement FERC restructuring policy �������������������������������������������������������������������������� –120 –1,810

90 Empowerment zones, Enterprise communities, and Renewal communities ���������������������������������������������������������������������������������������������������������������� –1,150 –4,020

77 Expensing of certain small investments (normal tax method) ������������������������������������������������������������������������������������������������������������������������������������� 910 –5,280

67 Credit for first-time homebuyer ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� –1,350 –6,120

75 Accelerated depreciation of buildings other than rental housing (normal tax method) ������������������������������������������������������������������������������������������������� –6,560 –35,990
19. TAX EXPENDITURES 311

Table 19-5. PreSenT value oF SelecTed Tax exPendiTureS

For acTiviTy in calendar year 2008

(In millions of dollars)

Provision

2008

Present Value

of Revenue Loss

5 Deferral of income from controlled foreign corporations (normal tax method) ������������������������������������������������������������������������ 19,100

6 Deferred taxes for financial firms on income earned overseas ������������������������������������������������������������������������������������������������ 3,370

7 Expensing of research and experimentation expenditures (normal tax method) �������������������������������������������������������������������� 2,750

21 Credit for holding clean renewable energy bonds ������������������������������������������������������������������������������������������������������������������� 360

9 Expensing of exploration and development costs - fuels ��������������������������������������������������������������������������������������������������������� 510

34 Expensing of exploration and development costs - nonfuels ��������������������������������������������������������������������������������������������������� 40

38 Expensing of multiperiod timber growing costs ����������������������������������������������������������������������������������������������������������������������� 190

45 Expensing of certain multiperiod production costs - agriculture ���������������������������������������������������������������������������������������������� 150

44 Expensing of certain capital outlays - agriculture �������������������������������������������������������������������������������������������������������������������� 200

51 Deferral of income on life insurance and annuity contracts ����������������������������������������������������������������������������������������������������� 19,310

65 Accelerated depreciation on rental housing ���������������������������������������������������������������������������������������������������������������������������� 7,290

75 Accelerated depreciation of buildings other than rental ��������������������������������������������������������������������������������������������������������� -3,720

76 Accelerated depreciation of machinery and equipment ����������������������������������������������������������������������������������������������������������� 18,600

77 Expensing of certain small investments (normal tax method) ������������������������������������������������������������������������������������������������� 504

82 Deferral of tax on shipping companies ������������������������������������������������������������������������������������������������������������������������������������ 20

103 Credit for holders of zone academy bonds ������������������������������������������������������������������������������������������������������������������������������ 160

64 Credit for low-income housing investments ����������������������������������������������������������������������������������������������������������������������������� 5,020

100 Deferral for State prepaid tuition plans ������������������������������������������������������������������������������������������������������������������������������������ 7,400

141 Exclusion of pension contributions - employer plans ��������������������������������������������������������������������������������������������������������������� 71,270

142 Exclusion of 401(k) contributions ��������������������������������������������������������������������������������������������������������������������������������������������� 132,000

143 Exclusion of IRA contributions and earnings ��������������������������������������������������������������������������������������������������������������������������� 4,900

143 Exclusion of Roth earnings and distributions �������������������������������������������������������������������������������������������������������������������������� 500

143 Exclusion of non-deductible IRA earnings ������������������������������������������������������������������������������������������������������������������������������� 9,200

145 Exclusion of contributions and earnings for Keogh plans �������������������������������������������������������������������������������������������������������� 8,290

163 Exclusion of interest on public-purpose bonds ������������������������������������������������������������������������������������������������������������������������ 24,920

Exclusion of interest on non-public purpose bonds ����������������������������������������������������������������������������������������������������������������� 8,930

165 Deferral of interest on U�S� savings bonds ������������������������������������������������������������������������������������������������������������������������������� 330

Table 19–4. alTernaTive eSTimaTeS For caPiTal

gainS and dividendS, Pre-2005 meTHodology

(In millions of dollars)

2008 2009 2010 2011 2012 2013 2014 2010-14

Capital Gains * ���������������������������������������� 59,230 57,760 70,640 60,690 58,380 66,600 74,450 330,760

Qualified Dividends ��������������������������������� 21,400 23,110 45,390 18,750 ������ ������ ������ 64,140

* This is an alternative estimate for tax expenditure provision number 70� It does not include tax expenditures for capital gains from agriculture, timber, and coal� These are listed 

separately in tables 19–1 and 19–2�
312 ANALYTICAL PERSPECTIVES

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.

International Affairs

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 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 the value of that allowance. If they do not receive 

a specific allowance for housing expenses, they may deduct against their U.S. taxes that portion of such expenses that exceeds one-sixth the salary of a civil servant at 

grade GS–14, step 1 ($81,093 in 2008).

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, with 

taxpayers receiving a credit for foreign taxes paid, limited 

to the pre-credit U.S. tax on the foreign source income. 

In contrast, the sales source rules for inventory property 

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. —

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 tax-deferred 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. 

It 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.

General Science, Space, and Technology

7. Expensing R&E expenditures.—Research and 

experimentation (R&E) projects can be viewed as investments 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 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 (12 percent prior 

to 2009) of qualified research expenses that exceed 50 

percent of the average qualified research expenses for the 

three preceding taxable years. Prior to January 1, 2009, 

taxpayers could also elect an alternative incremental 

credit regime. Under the alternative incremental credit 

regime the taxpayer was assigned a three-tiered fixed 

base percentage that is lower than the fixed-base percentage that would otherwise apply, and the credit rate was 

reduced. The rates for the alternative incremental credit 

ranged from 3 percent to 5 percent. The research credit 

expires on December 31, 2009.

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 
19. TAX EXPENDITURES 313

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 placed in service before January 1, 

2010.

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. 

In contrast to the general restrictions on passive losses, the Tax Code exempts owners of working interests in 

oil and gas properties from “passive income’’ limitations, 

such that the working interest-holder who manages the 

development of wells and incurs all operating costs on 

behalf of himself and all other owners may aggregate 

negative taxable income (i.e., losses) from such interests 

with his other income. Thus, these taxpayers are able to 

fully deduct passive losses against nonpassive income, 

in contradiction to the general prohibition against such 

deductions.

13. Capital gains treatment of royalties on coal.—

For individuals in 2008, tax rates on regular income vary 

from 10 percent to 35 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 15 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 15 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.

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.

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 ethanol derived from renewable sources and used as 

fuel. In lieu of the alcohol mixture credit, the taxpayer 

may claim a refundable excise tax credit. In addition, 

small ethanol producers are eligible for a separate income tax credit for ethanol production and a separate income tax credit is available for qualified cellulosic biofuel 

production.

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

would not allow credits for particular activities, invest-
314 ANALYTICAL PERSPECTIVES

ments, 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.

19. Credit and deduction for clean-fuel vehicles 

and property and alternative motor vehicle credits.—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 number of credits and deductions for 

certain types of vehicles. These are available for the purchase of hybrid vehicles, fuel cell vehicles, alternative fuel 

vehicles and advanced lean burn vehicles and the installing of refueling property.

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 non-business 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. 

22. Deferral of gain from dispositions of transmission property to implement FERC restructuring policy.—The baseline tax system generally would tax gains 

from sale when realized. However, the Tax Code allows 

utilities to defer gains from the sale of their transmission 

assets to a FERC-approved independent transmission 

company.

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 time. 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 time. 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 normal 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. 

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.

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 investment-like 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. 

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 
19. TAX EXPENDITURES 315

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. Expensing for advanced mine safety equipment.—The baseline tax system generally allows depreciation deductions based on estimates of the decline in 

the value of an asset as it ages. It would not allow faster 

write-offs for a particular class of assets or industries. In 

contrast, the Tax Code allows qualified mine safety equipment placed in service before 2009 to be expensed (deducted immediately) rather than depreciated over time.

33. 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.

Natural Resources and Environment

34. 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.

35. 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.

36. 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.

37. 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 2008, tax rates on 

regular income vary from 10 percent to 35 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 15 percent.

38. Expensing multi-period timber growing 

costs.—The baseline tax system allows the taxpayer to 

deduct the decline in the economic value of an investment 

over time. 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.

39. 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. 

40. Expensing of capital costs with respect to complying with EPA sulfur regulations.—The baseline 

tax system allows the taxpayer to deduct the decline in 

the economic value of an investment over time. However, 

the Tax Code allows small refiners to deduct 75 percent 

of qualified capital costs incurred during the taxable year, 

thereby accelerating cost recovery relative to economic 

depreciation.

41. Exclusion of gain or loss on sale or exchange 

of certain brownfield sites.—In general, a tax-exempt 

organization must pay taxes on income from activities 

unrelated to its nonprofit status. The Tax Code, however, 

provides a special exclusion from unrelated business taxable income of the gain or loss from the sale or exchange 

of certain qualifying brownfield properties.

42. 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.

43. 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

44. Expensing certain capital outlays.—The baseline tax system allows the taxpayer to deduct the de-
316 ANALYTICAL PERSPECTIVES

cline in the economic value of an investment over time. 

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.

45. Expensing multi-period livestock and crop 

production costs.—The baseline tax system allows the 

taxpayer to deduct the decline in the economic value of 

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.

46. 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.

47. Capital gains treatment of certain income.—

For individuals in 2008, tax rates on regular income vary 

from 10 percent to 35 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 15 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 15 percent maximum tax rate 

on capital gains.

48. 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.

49. 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.

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.—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 

permanently exempt from income tax. Investment income 

distributed prior to the death of the insured is generally 

tax-deferred. 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 consists 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 
19. TAX EXPENDITURES 317

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 private-activity-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.—The baseline tax system would allow the write-off of expenses 

incurred in earning income. It would not allow the deductibility of expenses when income or the return on 

investments are not taxed. In contrast, the Tax Code 

provides that owner-occupants of homes may deduct 

mortgage interest on their primary and secondary residences as itemized nonbusiness deductions even though 

the value of owner-occupied housing services is not included in a taxpayer’s taxable income. 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 debt 

does not exceed the fair market value of the residence.

59. Taxes on owner-occupied homes.—The Tax 

Code allows owner-occupants of homes to deduct property taxes on their primary and secondary residences even 

though they are not required to report the value of owneroccupied housing services as gross income.

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 includable 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 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, a homeowner can exclude from tax up to $500,000 ($250,000 for 

singles) of the capital gains from the sale of a principal 

residence. The exclusion may not be used more than once 

every two years.

62. Imputed net rental income on owner-occupied 

housing.—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, the 

implicit rental value of home ownership, net of expenses 

such as mortgage interest and depreciation, is excluded 

from income.

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 working interests in 

rental real estate activities are exempt from “passive income’’ limitations. The exemption is limited to $25,000 in 

losses.

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 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 refer-
318 ANALYTICAL PERSPECTIVES

ence law. Under normal law, however, depreciation allowances reflect estimates of economic depreciation.

66. Discharge of mortgage 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 the income of a taxpayer any discharge of 

indebtedness of a qualified principal residence. The provision sunsets on December 31, 2009.

67. Credit for first-time homebuyer.—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 allows a tax credit of $7,500 for first time home buyers on purchases on or 

after April 9, 2008 and before July 1, 2009. The credit will 

be repaid by the homeowner over time. 

68. Cancellation of 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, under current law individuals are not 

required to report the cancellation of certain indebtedness 

as current income. If the canceled debt is not reported as 

current income, however, the basis of the underlying property must be reduced by the amount canceled.

69. Imputed interest rules.—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. 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.

70. Capital gains (other than agriculture, timber, 

and coal).— For individuals in 2008, tax rates on regular 

income vary from 10 percent to 35 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 on assets held for more than 

one year to be taxed at a preferentially low rate that is 

no higher than 15 percent. Table 19-4 shows the full tax 

expenditure from taxing capital gains (other than capital 

gains from agriculture, timber, and coal) at a preferential 

rate. Tables 19-1 to 19-3 show the tax expenditure limited only to capital gains that have not been previously 

taxed under the corporate income tax. 

71. Capital gains exclusion for small business 

stock.—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 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 in 2009 and 2010. 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.—

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, 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 upward to the market value at the 

owner’s date of death.

73. Carryover basis of capital gains on gifts.—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 tax deferral to apply to 

certain types or sources of income. 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. Accelerated depreciation of non-rental-housing buildings.—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.

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 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.
19. TAX EXPENDITURES 319

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 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.

Transportation

82. 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.

83. Exclusion of employee parking expenses.—

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, under current law employee parking 

expenses that are paid for by the employer or that are 

received in lieu of wages are excludable from the income 

of the employee. In 2008, the maximum amount of the 

parking exclusion is $220 (indexed) per month. The tax 

expenditure estimate does not include parking at facilities owned by the employer.

84. Exclusion of employee transit pass expenses.—

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, under current law transit passes, tokens, fare cards, and vanpool expenses paid for by an employer or provided in lieu of wages to defray an employee’s commuting costs are excludable from the employee’s 

income. In 2008, the maximum amount of the exclusion is 

$115 (indexed) per month.

85. 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. 

86. 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

87. 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.

88. 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.
320 ANALYTICAL PERSPECTIVES

89. 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.

90. Empowerment zones 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 writeoffs 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.

91. 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. The total equity investment available for the credit across all CDEs is 

$3.5 billion in 2008. 

92. 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.

93. 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.

Education, Training, Employment, and Social 

Services

94. 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).

95. 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 $1,100 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 2008, the 

credit is phased out ratably for taxpayers with modified 

AGI between $96,000 and $116,000 ($48,000 and $58,000 

for singles), indexed.

96. 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. The 

credit is phased out ratably for taxpayers with modified 

AGI between $96,000 and $116,000 ($48,000 and $58,000 

for singles) (indexed beginning in 2002). The credit applies to both undergraduate and graduate students.

97. 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. Contributions to an 

education IRA are not tax-deductible. However, 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 tuition 

and fees. The maximum contribution to an education IRA 

in 2008 is $2,000 per beneficiary. The maximum contribution is phased down ratably for taxpayers with modified AGI between $190,000 and $220,000 ($95,000 and 

$110,000 for singles).

98. 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. Interest may 

only be deducted for the first five years in which interest 

payments are required. In 2008, the maximum deduction 

is phased down ratably for taxpayers with modified AGI 

between $110,000 and $140,000 ($55,000 and $70,000 for 

singles), indexed.

99. 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 in 2008 for qualified higher education expenses for taxpayers with adjusted gross income up to $130,000 on a joint return ($65,000 

for singles). Taxpayers with adjusted gross income up to 

$160,000 on a joint return ($80,000 for singles) may deduct up to $2,000. No deduction is allowed for expenses 

paid after December 31, 2008.
19. TAX EXPENDITURES 321

100. State prepaid tuition plans.—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 

and prepaid room and board plans, which allow persons 

to pay in advance for college expenses for designated beneficiaries. Under current law, investment income is not 

taxed when earned, and is tax-exempt when withdrawn 

to pay for qualified expenses.

101. 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.

102. 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.

103. 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 is limited to $400 million in each year.

104. 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 $100,650 and $130,650 ($67,100 and $81,100 for 

singles) in 2008.

105. Dependent students age 19 or older.—The tax 

rate schedule, including personal exemptions and the 

standard deduction, are part of the baseline tax system. 

Additional exemptions to targeted groups are not allowed. 

In contrast, the Tax Code provides taxpayers personal exemptions for dependent children who are over the age of 

18 or 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. However, under current law, the dependent/student is not eligible to claim a 

personal exemption on his or her own tax return.

106. 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.

107. 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, employer-provided 

educational assistance is excluded from an employee’s 

gross income even though the employer’s costs for this 

assistance are a deductible business expense.

108. 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 

at end of December 31, 2008.

109. 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, 

and as a consequence get their student loans discharged, 

not to recognize such discharge as income.

110. 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 investment-like 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 August 31, 2011 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. 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. 

111. Welfare-to-work tax credit.—The baseline tax 

system would not allow credits for particular activities, 

investments, or industries. Instead, it generally would 
322 ANALYTICAL PERSPECTIVES

seek to tax uniformly all returns from investment-like activities. In contrast, under current law an employer is eligible for a tax credit on the first $20,000 of eligible wages 

paid to qualified long-term family assistance recipients 

during the first two years of employment. The welfareto-work credit expired on December 31, 2006. After this 

date, long-term welfare recipients became a WOTC target 

group.

112. 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.

113. 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.

114. 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. These payments are excluded 

from gross income under current law.

115. Adoption credit and exclusion.—The baseline 

tax system would not allow credits for particular activities. Instead, taxpayers can receive a nonrefundable tax 

credit for qualified adoption expenses under current law. 

The maximum credit is $11,650 per child for 2008, and 

is phased-out ratably for taxpayers with modified AGI 

between $174,730 and $214,630. The credit amounts 

and the phase-out thresholds are indexed for inflation. 

Taxpayers may also exclude qualified adoption expenses 

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. 

116. 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.

117. 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. The maximum credit declines 

to $500 in 2011 and later years. The credit is phased out 

for taxpayers at the rate of $50 per $1,000 of modified AGI 

above $110,000 ($75,000 for singles). 

118. 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 married couples with child and dependent care expenses a tax credit when one spouse works 

full time and the other works at least part time or goes to 

school. The credit may also be claimed by single parents 

and by divorced or separated parents who have custody of 

children. In 2008, 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.

119. 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. 

120. 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. 

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.

121. 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.

122. Parsonage allowances.—Under the baseline 

tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable 

income. In contrast, the value of a clergyman’s housing 

allowance and the rental value of parsonages are not included in a minister’s taxable income under current law.

123. Provide an employee retention credit to employers affected by hurricanes Katrina, Rita, Wilma, 

and Ike.—The baseline tax system would not allow credits for particular activities, investments, or industries. In 

contrast, the Tax Code provides tax credits against the 

wages paid to eligible employees in areas affected by nat-
19. TAX EXPENDITURES 323

ural disasters such as hurricanes Katrina, Rita, Wilma, 

and Ike.

124. Exclusion for benefits provided to volunteer 

EMS and firefighters.—Under the baseline tax system, 

all compensation, including dedicated payments and inkind benefits, should be included in taxable income. In 

contrast, the Tax Code provides that certain benefits received by volunteer EMS and firefighters excluded from 

income.

125. Temporary income exclusion for employer 

provided lodging in Midwestern disaster area.—

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 in disaster areas are excluded from an employee’s gross income even 

though the employer’s costs for these items are a deductible business expense.

Health

126. 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. The selfemployed also may deduct part of their family health 

insurance premiums.

127. Self-employed medical insurance premiums.—Under the baseline tax system, all compensation 

and remuneration, including dedicated payments and inkind benefits, should be included in taxable income. In 

contrast, under current law self-employed taxpayers may 

deduct a percentage of their family health insurance premiums. Taxpayers without self-employment income are 

not eligible for the special percentage deduction. The deductible percentage is 60 percent in 2001, 70 percent in 

2002, and 100 percent in 2003 and thereafter.

128. 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 2008, $2900 for taxpayers with individual 

coverage and $5,800 for taxpayers with family coverage). Thus, HSAs have largely replaced MSAs.

129. 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.

130. 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.

131. 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.

132. 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.

133. 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 

(or zero) 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 (or 

even eliminate) their tax liabilities.

134. 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. 

135. 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.
324 ANALYTICAL PERSPECTIVES

Income Security

136. 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.

137. 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 provides 

payments to disabled workers. These benefits, although 

income to the recipients, are not subject to the income tax 

under current law.

138. 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 tax expenditure. 

139. 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.

140. 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.

141. Employer-provided pension contributions 

and earnings.—Under the baseline tax system, all compensation, including deferred and dedicated payments, 

should be included in taxable income. In contrast, under 

current law certain employer contributions to pension 

plans are excluded from an employee’s gross income even 

though the employer can deduct the contributions. In addition, the tax on the investment income earned by the 

pension plans is deferred until the money is withdrawn.

142. 401(k) 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 can make 

tax-preferred contributions to certain types of employerprovided 401(k) plans (and 401(k)-type plans like 403(b) 

plans and the Federal Government’s Thrift Savings Plan). 

In 2008, an employee could exclude up to $15,500 (indexed) of wages from AGI under a qualified arrangement 

with an employer’s 401(k) plan. Employees age 50 or over 

could exclude an additional $5,000 “catch-up” contribution (indexed). The tax on the investment income earned 

by 401(k)-type plans is deferred until withdrawn.

143. 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 several different 

IRAs to defer or otherwise reduce the tax on the return 

to their retirement savings. These arrangements include 

deductible IRAs, nondeductible IRAs and Roth IRAs. The 

IRA contribution limit is $5,000 in 2008 (indexed thereafter) and allows taxpayers over age 50 to make additional 

“catch-up’’ contributions of $1,000. Taxpayers can make 

a deductible IRA contribution only up to certain levels of 

AGI. Above those AGI limits, the amount that may be 

deducted is reduced and eventually phased out. There 

is no income limit for nondeductible IRA contributions, 

which still benefit from deferral of tax on earnings. Roth 

IRA contributions are not deductible, but earnings and 

withdrawals are exempt from taxation under certain conditions. AGI limits also apply to Roth IRA contributions.

144. Low and moderate-income savers’ credit.—

The baseline tax system would not allow credits for particular activities or targeted at specific group. In contrast, 

the Tax Code provides an additional incentive for lowerincome 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 $52,000 for joint filers and $26,000 for single filers. 

145. Keogh 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 (Keogh) 

plans equal to 25 percent of their income, up to a maximum of $46,000 in 2008. Total plan contributions are 

limited to 25 percent of a firm’s total wages. The tax on 

the investment income earned by Keogh plans is deferred 

until withdrawn.

146. 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 even though the employer’s costs 

for the insurance are a deductible business expense, but 

only to the extent that the employer’s share of the total 

costs does not exceed the cost of $50,000 of such insurance.

147. 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, 

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.

148. 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 ben-
19. TAX EXPENDITURES 325

efits to employees separated from employment. Interest 

payments to such trusts are exempt from taxation.

149. 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 in-kind 

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. 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; (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.

150. Additional deduction for the blind.—The tax 

rate schedule, including personal exemptions and the 

standard deduction, are part of the baseline tax system. 

Additional exemptions to targeted groups are not allowed. 

In contrast, the Tax Code provides taxpayers who are 

blind an additional $1,350 standard deduction if single, 

or $1,050 if married in 2008.

151. Additional deduction for the elderly.—The 

tax rate schedule, including personal exemptions and the 

standard deduction, are part of the baseline tax system. 

Additional exemptions to targeted groups are not allowed. 

In contrast, the Tax Code provides taxpayers who are 65 

years or older an additional $1,350 standard deduction if 

single, or $1,050 if married in 2008.

152. Tax credit for the elderly and disabled.—The 

baseline tax system would not allow credits for particular 

activities or targeted at specific group. Under current law, 

however, individuals who are 65 years of age or older, or 

who are permanently disabled, can take a tax credit equal 

to 15 percent of the sum of their earned and retirement 

income. Income 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, and up to $7,500 

for joint returns where both spouses are 65 years of age or 

older. 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. 

153. 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 reportable as a part of gross income 

and uninsured losses not deductible. In contrast, the Tax 

Code provides a deduction for uninsured casualty and 

theft losses of more than $100 each, but only to the extent 

that total losses during the year exceed 10 percent of AGI.

154. Earned income tax credit (EITC).— The baseline tax system would not allow credits for particular activities or targeted at specific group. In contrast, the Tax 

Code provides an EITC to low-income workers at a maximum rate of 40 percent of income. For a family with one 

qualifying child, the credit is 34 percent of the first $8,580 

of earned income in 2008. The credit is 40 percent of the 

first $12,060 of income for a family with two or more 

qualifying children. The credit is phased out at income 

levels and rates which depend upon how many qualifying 

children are eligible and marital status. Earned income 

tax credits in excess of tax liabilities owed through the individual income tax system are refundable to individuals.

155. Additional exemption for housing natural disaster displaced individuals.—The tax rate schedule, 

including personal exemptions and the standard deduction, are part of the baseline tax system. Additional exemptions to targeted groups are not allowed. In contrast, 

the Tax Code provides additional exemption to persons 

displaced by natural disasters such as hurricane Katrina.

Social Security

156. Social Security benefits for retired workers.—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, the Tax Code may not 

tax all of the Social Security benefits that exceed the 

beneficiary’s contributions out of taxed income. These 

additional retirement benefits are paid for partly by 

employers’ contributions that were not included in employees’ taxable compensation and partly by earnings 

on employee and employer contributions. Portions of 

benefits (reaching as much as 85 percent) of recipients’ 

Social Security and tier 1 railroad retirement benefits 

are included in (phased-in) the income tax base, however, if the recipient’s provisional income exceeds certain 

base amounts. Provisional income is equal to adjusted 

gross income plus foreign or U.S. possession income and 

tax-exempt interest, and one half of Social Security and 

tier 1 railroad retirement benefits. The tax expenditure 

is limited to the portion of the benefits received by taxpayers who are below the income amounts at which 85 

percent of the benefits are taxable.

157. 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 

incomes. (See provision number 156, Social Security 

benefits for retired workers.)

158. 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 
326 AnAlyticAl PersPectives

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.

Veterans Benefits and Services

159. 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.

160. 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.

161. 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.

162. 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

163. 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.

164. Deductibility of certain nonbusiness State 

and local taxes.— the baseline tax system would not 

allow a deduction for personal expenditures. in contrast, 

the tax code provides taxpayers who itemize a deduction 

for state and local income taxes and property taxes (or at 

the taxpayer’s election state and local sales taxes) even 

though these taxes primarily pay for services that, if purchased directly by taxpayers, would not be deductible. 

Interest

165. 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.

 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, 

however, may also contribute to achieving these goals. 

this Appendix responds to the report of the senate 

Governmental Affairs committee on GPrA4 calling on 

the executive Branch to undertake a series of analyses 

to assess the effect of specific tax expenditures on the 

achievement of agencies’ performance objectives.

Comparison of tax expenditure, spending, and regulatory policies. 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.5 Because there is an ex4 committee on Government Affairs, United states senate, “Government Performance and 

results Act of 1993’’ (report 103–58, 1993).

5 Although this chapter focuses upon tax expenditures under the income tax, tax expendiisting public administrative and private compliance structure for the tax system, the incremental administrative 

and compliance costs for a tax expenditure may be low 

in many cases. in addition, some tax expenditures actually simplify the operation of the tax system, (for example, 

the exclusion for up to $500,000 of capital gains on home 

sales). tax expenditures also implicitly subsidize certain 

activities. 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.

tures 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 an excise tax exemption for certain 

types of consumption deemed meritorious.

AppendIx A 

peRFORMAnCe MeASUReS And THe eCOnOMIC eFFeCTS OF TAx expendITUReS
19. TAX EXPENDITURES 327

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. These features 

may reduce the effectiveness of tax expenditures for addressing socioeconomic disparity. 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 direct 

Government service provision is particularly warranted 

such as equipping and providing the armed forces or administering the system of justice. Outlay programs may 

also be specifically designed to meet the needs of lowincome 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 

including 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, such as direct Government service provision may rely less directly on economic incentives and private-market provision than tax incentives, 

which may reduce the relative efficiency of spending programs for some goals. Finally, spending programs, particularly on the discretionary side, may respond less readily 

to changing activity levels and economic conditions than 

tax expenditures.

Regulations 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. However, 

major regulations are subjected to a formal regulatory 

analysis that goes well beyond the analysis required for 

outlays and tax-expenditures. To some extent, the GPRA 

requirement for performance evaluation will address this 

lack of formal analysis.

Some policy objectives are achieved using multiple approaches. For example, minimum wage legislation, the 

earned income tax credit, and the food stamp program 

are regulatory, tax expenditure, and direct outlay programs, respectively, all having the objective of improving 

the economic welfare of low-wage workers.

Tax expenditures, like spending and regulatory programs, have a variety of objectives and effects. When measured against a comprehensive income tax, for example, 

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); reducing private 

compliance costs and Government administrative costs 

(e.g., the exclusion for up to $500,000 of capital gains on 

home sales); and promoting tax neutrality (e.g., accelerated depreciation in the presence of inflation). Some of 

these objectives are well suited to quantitative measurement, while others are less well suited. Also, many tax 

expenditures, including those cited above, may have more 

than one objective. For example, accelerated depreciation 

may encourage investment. In addition, the economic effects of particular provisions can extend beyond their intended objectives (e.g., a provision intended to promote 

an activity or raise certain incomes may have positive or 

negative effects on tax neutrality).

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.

Thus, for a provision that reduces taxes on certain investment activity, an increase in the amount of investment would likely be a key output. The resulting production from that investment, and, in turn, the associated 

improvements in national income, welfare, or security, 

could be the outcomes of interest. For other provisions, 

such as those designed to address a potential inequity or 

unintended consequence in the Tax Code, an important 

performance measure might be how they change effective 

tax rates (the discounted present value of taxes owed on 

new investments or incremental earnings) or excess burden (an economic measure of the distortions caused by 

taxes). Effects on the incomes of members of particular 

groups may be an important measure for certain provisions.

An Overview of Evaluation Issues by Budget Function.

The discussion below considers the types of measures 

that might be useful for some major programmatic groups 

of tax expenditures. The discussion is intended to be illustrative and not all encompassing. However, it is premised 
328 ANALYTICAL PERSPECTIVES

on the assumption that the data needed to perform the 

analysis are available or can be developed. In practice, 

data availability is likely to be a major challenge, and data 

constraints may limit the assessment of the effectiveness 

of many provisions. In addition, such assessments can 

raise significant challenges in economic modeling.

National defense. Some tax expenditures are intended 

to assist governmental activities. For example, tax preferences for military benefits reflect, among other things, 

the view that benefits such as housing, subsistence, and 

moving expenses are intrinsic aspects of military service, 

and are provided, in part, for the benefit of the employer, 

the U.S. Government. Tax benefits for combat service are 

intended to reduce tax burdens on military personnel undertaking hazardous service for the Nation. A portion of 

the tax expenditure associated with foreign earnings is 

targeted to benefit U.S. Government civilian personnel 

working abroad by offsetting the living costs that can be 

higher than those in the United States. These tax expenditures should be considered together with direct agency 

budget costs in making programmatic decisions.

International affairs. Tax expenditures are also aimed 

at goals such as tax neutrality. These include the exclusion for income earned abroad by nongovernmental employees and exclusions for income of U.S.-controlled foreign corporations. Measuring the effectiveness of these 

provisions raises challenging issues.

General science, space and technology, energy, natural 

resources and the environment, agriculture, and commerce 

and housing. A series of tax expenditures reduces the 

cost of investment, both in specific activities such as research and experimentation, extractive industries, and 

certain financial activities and more generally, through 

accelerated depreciation for plant and equipment. These 

provisions can be evaluated along a number of dimensions. For example, it could be useful to consider the 

strength of the incentives by measuring their effects on 

the cost of capital (the interest rate 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).

Housing investment also benefits from tax expenditures. The imputed net rental income from owner-occupied housing is excluded from the tax base. The mortgage 

interest deduction and property tax deduction on personal residences also are reported as tax expenditures because the value of owner-occupied housing services is not 

included in a taxpayer’s taxable income. Taxpayers also 

may exclude up to $500,000 of the capital gains from the 

sale of personal residences. Measures of the effectiveness 

of these provisions could include their effects on increasing the extent of home ownership and the quality of housing. Similarly, analysis of the extent of accumulated inflationary gains is likely to be relevant to evaluation of the 

capital gains for home sales. Deductibility of State and 

local property taxes assists with making housing more 

affordable as well as easing the cost of providing community services through these taxes. Provisions intended to 

promote investment in rental housing could be evaluated 

for their effects on making such housing more available 

and affordable. These provisions should then be compared 

with alternative programs that address housing supply 

and demand.

Transportation. Employer-provided parking is a fringe 

benefit that, for the most part, is excluded from taxation. 

The tax expenditure estimates reflect the cost of parking 

that is leased by employers for employees; an estimate is 

not currently available for the value of parking owned by 

employers and provided to their employees. The exclusion 

for employer-provided transit passes is intended to promote use of this mode of transportation, which has environmental and congestion benefits. The tax treatments of 

these different benefits could be compared with alternative transportation policies.

Community and regional development. A series of 

tax expenditures is intended to promote community and 

regional development by reducing the costs of financing specialized infrastructure, such as airports, docks, 

and stadiums. Empowerment zone and enterprise community provisions are designed to promote activity in 

disadvantaged areas. These provisions can be compared 

with grants and other policies designed to spur economic 

development.

Education, training, employment, and social services.

Major provisions in this function are intended to promote 

post-secondary education, to offset costs of raising children, and to promote a variety of charitable activities. The 

education incentives can be compared with loans, grants, 

and other programs designed to promote higher education and training. The child credits are intended to adjust 

the tax system for the costs of raising children; as such, 

they could be compared to other Federal tax and spending 

policies, including related features of the tax system, such 

as personal exemptions (which are not defined as a tax 

expenditure). Evaluation of charitable activities requires 

consideration of the beneficiaries of these activities, who 

are generally not the parties receiving the tax reduction.
19. TAX EXPENDITURES 329

Health. Individuals also benefit from favorable treatment of employer-provided health insurance. Measures 

of these benefits could include increased coverage and 

pooling of risks. The effects of insurance coverage on final 

outcome measures of actual health (e.g., infant mortality, days of work lost due to illness, or life expectancy) or 

intermediate outcomes (e.g., use of preventive health care 

or health care costs) could also be investigated.

Income security, Social Security, and veterans benefits 

and services. Major tax expenditures in the income security function benefit retirement savings, through employer-provided pensions, individual retirement accounts, 

and Keogh plans. These provisions might be evaluated in 

terms of their effects on boosting retirement incomes, private savings, and national savings (which would include 

the effect on private savings as well as public savings 

or deficits). Interactions with other programs, including 

Social Security, also may merit analysis. As in the case 

of employer-provided health insurance, analysis of employer-provided pension programs requires imputing the 

value of benefits funded at the firm level to individuals.

Other provisions principally affect the incomes of members of certain groups, rather than affecting incentives. 

For example, tax-favored treatment of Social Security 

benefits, certain veterans’ benefits, and deductions for the 

blind and elderly provide increased incomes to eligible 

parties. The earned-income tax credit, in contrast, should 

be evaluated for its effects on labor force participation as 

well as the income it provides lower-income workers.

General purpose fiscal assistance and interest. The taxexemption for public purpose State and local bonds reduces the costs of borrowing for a variety of purposes (borrowing for non-public purposes is reflected under other 

budget functions). The deductibility of certain State and 

local taxes reflected under this function primarily relates 

to personal income taxes (property tax deductibility is reflected under the commerce and housing function). Tax 

preferences for Puerto Rico and other U.S. possessions 

are also included here. These provisions can be compared 

with other tax and spending policies as means of benefiting fiscal and economic conditions in the States, localities, 

and possessions. Finally, the tax deferral for interest on 

U.S. savings bonds benefits savers who invest in these instruments. The extent of these benefits and any effects on 

Federal borrowing costs could be evaluated.

The above illustrative discussion, although broad, is 

nevertheless incomplete, omitting important details both 

for the provisions mentioned and the many that are not 

explicitly cited. Developing a framework that is sufficiently comprehensive, accurate, and flexible to reflect the 

objectives and effects of the wide range of tax expenditures will be a significant challenge. OMB, Treasury, and 

other agencies will work together, as appropriate, to address this challenge. As indicated above, over the next few 

years the Executive Branch’s focus will be on the availability of the data needed to assess the effects of the tax 

expenditures designed to increase savings.