207

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 2009–

2015 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.

16. TAX EXPENDITURES

Tax Expenditure Estimates

All tax expenditure estimates presented here are based 

upon current tax law enacted as of December 31, 2009. 

Expired or repealed provisions are not listed if their revenue effects result only from taxpayer activity occurring 

before fiscal year 2009. The estimates reflect 2010 Budget 

Midsession Review economic assumptions. Legislation 

enacted in 2010 is not reflected in these estimates.

The total revenue effects for tax expenditures for fiscal 

years 2009–2015 are displayed according to the Budget’s 

functional categories in Table 16–1. 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.

1 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.

Table 16–2 reports the respective portions of the total 

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

not imply that these categories of filers benefit from the 

special tax provisions in proportion to the respective tax 

expenditure amounts shown. Rather, these breakdowns 

show the 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 16–3 ranks the major tax expenditures by the 

size of their 2011–2015 revenue effect. The first column 

provides the number of the provision in order to cross reference this table to Tables 16–1 and 16–2, as well as to the 

descriptions below. 

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. 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. In this volume, the 

estimates reflect the pre-2005 methodology where no interaction effects among the various taxes are taken into 

account. For example, preferences under the personal 

income tax are evaluated in isolation of additional taxes 

that may apply under the corporate tax, the payroll tax, 

TAX EXPENDITURES IN THE INCOME TAX
208 ANALYTICAL PERSPECTIVES

the estate tax, and excise taxes. The preferential rate on 

qualified dividends is identified as a tax expenditure.

Interpreting Tax Expenditure Estimates

The estimates shown for individual tax expenditures in 

Tables 16–1, 16–2, and 16–3 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 16–1 are the totals of individual and corporate income tax revenue effects reported in Table 16–2 

and do not reflect any possible interactions between individual and corporate income tax receipts. For this reason, the estimates in Table 16–1 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 16–4. 

Cash-based estimates reflect the difference between taxes 

deferred in the current year and incoming revenues that 

are received due to deferrals of taxes from prior years. 

Although such estimates are useful as a measure of cash 

flows into the Government, they do not accurately reflect 

the true economic cost of these provisions. For example, 

for a provision where activity levels have changed, so that 

incoming tax receipts from past deferrals are greater than 

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

in present-value terms current deferrals have a real cost 

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

enacted deferral provision, a cash-based estimate can 

overstate the real effect on receipts to the Government 

because the newly deferred taxes will ultimately be received. 

Discounted present-value estimates of revenue effects 

are presented in Table 16–4 for certain provisions that 

involve tax deferrals or other long-term revenue effects. 

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

The present-value estimates represent the revenue effects, net of future tax payments that follow from activities 

undertaken during calendar year 2009 which cause the 

deferrals or other long-term revenue effects. For instance, 

a pension contribution in 2009 would cause a deferral of 

tax payments on wages in 2009 and on pension fund earnings on this contribution (e.g., interest) in later years. In 

some future year, however, the 2009 pension contribution 

and accrued earnings will be paid out and taxes will be 

due; these receipts are included in the present-value estimate. In general, this conceptual approach is similar to 

the one used for reporting the budgetary effects of credit 

programs, where direct loans and guarantees in a given 

year affect future cash flows.

Tax Expenditure Baselines

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

Budget Act, which mandated the tax expenditure budget, 

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

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

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

reference tax law baseline. Tax expenditures may take 

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

by the baseline tax system.

The normal tax baseline is patterned on a practical 

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

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

allows personal exemptions, a standard deduction, and 

deduction of expenses incurred in earning income. It is 

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

specific definition of the taxpaying unit.

The reference tax law baseline is also patterned on 

a comprehensive income tax, but it is closer to existing 

law. Reference law tax expenditures are limited to special 

exceptions from a generally provided tax rule that serve 

programmatic functions in a way that is analogous to 

spending programs. Provisions under the reference law 

baseline are generally tax expenditures under the normal 

tax baseline, but the reverse is not always true.

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

tax. For example, under the normal and reference tax 

baselines:

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

income tax.
16. TAX EXPENDITURES 209

Table 16–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2009-2015

(In millions of dollars)

Total from corporations and individuals

2009 2010 2011 2012 2013 2014 2015 2011–15

National Defense

1 Exclusion of benefits and allowances to armed forces personnel ��������������������������������������� 11,930 12,570 11,530 11,570 11,920 12,370 12,860 60,250

International affairs: 

2 Exclusion of income earned abroad by U.S. citizen  ����������������������������������������������������������� 5,320 5,590 5,870 6,160 6,470 6,790 7,130 32,4

3 Exclusion of certain allowances for Federal employees abroad ������������������������������������������� 920 970 1,020 1,070 1,120 1,180 1,240 5,630

4 Inventory property sales source rules exception ������������������������������������������������������������������ 2,420 2,620 2,830 3,070 3,320 3,590 3,890 16,700

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 35,840

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 6,320

General science, space, and technology: 

7 Expensing of research and experimentation expenditures (normal tax method) ���������������� 3,820 3,500 4,560 5,720 6,690 6,930 7,710 31,610

8 Credit for increasing research activities ������������������������������������������������������������������������������� 8,010 5,890 3,850 3,080 2,460 1,964 1,568 12,922

Energy: 

9 Expensing of exploration and development costs, fuels ������������������������������������������������������ 1,640 2,040 1,180 920 900 680 340 4,020

10 Excess of percentage over cost depletion, fuels ����������������������������������������������������������������� 340 610 670 940 1,130 1,160 1,190 5,090

11 Alternative fuel production credit ����������������������������������������������������������������������������������������� 60 50 20 10 0 0 0 30

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

13 Capital gains treatment of royalties on coal ������������������������������������������������������������������������� 70 60 60 60 70 80 100 370

14 Exclusion of interest on energy facility bonds ���������������������������������������������������������������������� 10 10 30 30 30 30 30 150

15 New technology credit ��������������������������������������������������������������������������������������������������������� 430 880 1,160 1,430 1,530 1,530 1,500 7,150

16 Energy investment credit ������������������������������������������������������������������������������������������������������ 270 530 600 680 420 370 450 2,520

17 Alcohol fuel credits 1 ����������������������������������������������������������������������������������������������������������� 50 1,200 8,870 10,940 6,690 3,610 2,030 32,140

18 Bio-Diesel and small agri-biodiesel producer tax credits 2 ��������������������������������������������������� 30 10 10 0 0 0 0 10

19 Tax credit and deduction for clean-fuel burning vehicles ������������������������������������������������������ 130 240 260 130 170 230 390 1,180

20 Exclusion of utility conservation subsidies ���������������������������������������������������������������������������� 140 140 130 120 120 120 120 610

21 Credit for holding clean renewable energy bonds ���������������������������������������������������������������� 70 80 100 120 140 140 140 640

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

restructuring policy ���������������������������������������������������������������������������������������������������������� –10 –150 –400 –460 –490 –500 –470 –2,320

23 Credit for investment in clean coal facilities �������������������������������������������������������������������������� 180 290 480 550 440 360 250 2,080

24 Temporary 50% expensing for equipment used in the refining of liquid fuels ����������������������� 770 1,140 930 760 630 –300 –790 1,230

25 Natural gas distribution pipelines treated as 15-year property ��������������������������������������������� 80 110 120 110 90 80 80 480

26 Amortize all geological and geophysical expenditures over 2 years ������������������������������������� 40 150 240 240 190 140 90 900

27 Allowance of deduction for certain energy efficient commercial building property ��������������� 60 80 90 90 130 80 10 400

28 Credit for construction of new energy efficient homes ���������������������������������������������������������� 30 20 20 20 0 0 0 40

29 Credit for energy efficiency improvements to existing homes ����������������������������������������������� 570 1,950 1,460 0 0 0 0 1,460

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

31 Credit for residential purchases/installations of solar and fuel cells ������������������������������������� 110 180 180 180 190 190 190 930

32 Qualified energy conservation bonds ����������������������������������������������������������������������������������� 0 10 40 80 110 120 120 470

Natural resources and environment: 

33 Expensing of exploration and development costs, nonfuel minerals ����������������������������������� 50 90 90 100 100 100 100 490

34 Excess of percentage over cost depletion, nonfuel minerals ����������������������������������������������� 700 710 740 750 770 810 830 3,900

35 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities ��������������� 340 310 420 520 550 580 610 2,680

36 Capital gains treatment of certain timber income ���������������������������������������������������������������� 70 60 60 60 70 80 100 370

37 Expensing of multiperiod timber growing costs ������������������������������������������������������������������� 210 260 290 290 320 310 310 1,520

38 Tax incentives for preservation of historic structures ����������������������������������������������������������� 430 440 470 490 520 540 570 2,590

39 Expensing of capital costs with respect to complying with EPA sulfur regulations ��������������� 10 0 0 0 0 0 0 0

40 Exclusion of gain or loss on sale or exchange of certain brownfield sites ���������������������������� 40 70 60 40 30 10 0 140

41 Industrial CO2 capture and sequestration tax credit ������������������������������������������������������������ 0 0 0 0 0 60 130 190

42 Deduction for endangered species recovery expenditures ��������������������������������������������������� 0 20 30 30 30 50 50 190

Agriculture: 

43 Expensing of certain capital outlays ������������������������������������������������������������������������������������ 70 70 70 80 90 90 90 420

44 Expensing of certain multiperiod production costs �������������������������������������������������������������� 120 110 110 110 120 120 120 580

45 Treatment of loans forgiven for solvent farmers �������������������������������������������������������������������� 20 20 20 20 20 20 20 100

46 Capital gains treatment of certain income ��������������������������������������������������������������������������� 700 610 590 550 680 830 970 3,620

47 Income averaging for farmers ����������������������������������������������������������������������������������������������� 90 90 90 90 90 90 100 460

48 Deferral of gain on sale of farm refiners ������������������������������������������������������������������������������� 20 20 20 20 20 20 20 100
210 ANALYTICAL PERSPECTIVES

Table 16–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2009-2015—Continued

(In millions of dollars)

Total from corporations and individuals

2009 2010 2011 2012 2013 2014 2015 2011–15

Commerce and housing: 

Financial institutions and insurance: 

49 Exemption of credit union income ����������������������������������������������������������������������������������� 650 650 710 790 880 960 1,030 4,370

50 Exclusion of interest on life insurance savings ��������������������������������������������������������������� 20,280 21,140 23,070 24,700 26,420 28,220 29,860 132,270

51 Special alternative tax on small property and casualty insurance companies ���������������� 40 40 40 50 50 50 60 250

52 Tax exemption of certain insurance companies owned by tax-exempt organizations ������ 190 200 200 210 210 220 220 1,060

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

54 Exclusion of interest spread of financial institutions �������������������������������������������������������� –120 520 960 1,070 1,160 1,250 1,330 6,170

Housing: 

55 Exclusion of interest on owner-occupied mortgage subsidy bonds �������������������������������� 960 870 1,190 1,470 1,540 1,610 1,710 7,520

56 Exclusion of interest on rental housing bonds ����������������������������������������������������������������� 810 730 1,010 1,240 1,300 1,370 1,450 6,370

57 Deductibility of mortgage interest on owner-occupied homes ���������������������������������������� 79,400 92,180 104,540 116,620 127,840 139,000 149,560 637,560

58 Deductibility of State and local property tax on owner-occupied homes ������������������������ 29,010 18,860 23,710 29,730 31,340 32,700 33,690 151,170

59 Deferral of income from installment sales ����������������������������������������������������������������������� 720 720 810 880 1,020 1,150 1,260 5,120

60 Capital gains exclusion on home sales ���������������������������������������������������������������������������� 23,500 23,860 31,300 39,510 43,640 48,200 53,230 215,880

61 Exclusion of net imputed rental income ��������������������������������������������������������������������������� 27,040 32,530 37,630 40,810 41,020 48,330 56,100 223,890

62 Exception from passive loss rules for $25,000 of rental loss ������������������������������������������ 6,020 5,910 7,330 8,510 9,670 11,120 13,010 49,640

63 Credit for low-income housing investments �������������������������������������������������������������������� 3,800 5,680 6,170 6,660 7,540 7,910 8,030 36,310

64 Accelerated depreciation on rental housing (normal tax method) ���������������������������������� 3,860 4,640 5,870 7,100 8,380 9,360 9,970 40,680

65 Discharge of mortgage indebtedness ������������������������������������������������������������������������������ 360 260 200 180 120 0 0 500

66 Credit for homebuyer ������������������������������������������������������������������������������������������������������� 9,730 16,540 1,530 –1,980 –1,210 –800 –490 –2,950

Commerce: 

67 Cancellation of indebtedness ����������������������������������������������������������������������������������������� 300 130 –10 –50 –30 0 40 –50

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

69 Treatment of qualified dividends �������������������������������������������������������������������������������������� 22,425 38,012 26,869 0 0 0 0 26,869

70 Capital gains (except agriculture, timber, iron ore, and coal) 3 ���������������������������������������� 52,590 45,360 44,290 41,090 51,120 62,230 72,180 270,910

71 Capital gains exclusion of small corporation stock ���������������������������������������������������������� 50 50 170 290 300 470 690 1,920

72 Step-up basis of capital gains at death ��������������������������������������������������������������������������� 41,370 36,740 44,520 53,270 57,260 61,560 66,180 282,790

73 Carryover basis of capital gains on gifts ������������������������������������������������������������������������� 1,630 1,430 4,790 2,050 2,740 2,940 3,160 15,680

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

75 Accelerated depreciation of buildings other than rental housing (normal tax method) ��� –9,350 –11,080 –12,860 –13,960 –15,530 –16,360 –17,540 –76,250

76 Accelerated depreciation of machinery and equipment (normal tax method) ���������������� 57,400 10,470 1,170 14,120 30,710 44,310 56,400 146,710

77 Expensing of certain small investments (normal tax method) ���������������������������������������� –130 410 –3,200 –2,820 –710 210 760 –5,760

78 Graduated corporation income tax rate (normal tax method) ����������������������������������������� 2,720 2,860 3,120 3,070 3,150 3,420 3,600 16,360

79 Exclusion of interest on small issue bonds ��������������������������������������������������������������������� 250 230 320 400 420 430 460 2,030

80 Deduction for US production activities ����������������������������������������������������������������������������� 9,020 11,530 13,640 14,420 15,290 16,210 17,120 76,680

81 Special rules for certain film and TV production �������������������������������������������������������������� 60 50 –60 –110 –90 –60 –50 –370

Transportation: 

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

83 Exclusion of reimbursed employee parking expenses ��������������������������������������������������������� 2,960 3,020 3,100 3,190 3,320 3,460 3,590 16,660

84 Exclusion for employer-provided transit passes ������������������������������������������������������������������ 540 560 530 560 600 640 670 3,000

85 Tax credit for certain expenditures for maintaining railroad tracks ���������������������������������������� 80 110 70 30 10 10 0 120

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

facilities ���������������������������������������������������������������������������������������������������������������������������� 90 100 100 90 60 60 60 370

Community and regional development: 

87 Investment credit for rehabilitation of structures (other than historic) ���������������������������������� 30 30 30 30 30 30 30 150

88 Exclusion of interest for airport, dock, and similar bonds ����������������������������������������������������� 680 610 850 1,040 1,090 1,140 1,210 5,330

89 Exemption of certain mutuals’ and cooperatives’ income ���������������������������������������������������� 110 110 110 110 120 120 120 580

90 Empowerment zones and renewal communities ������������������������������������������������������������������ 1,130 750 430 580 680 740 730 3,160

91 New markets tax credit ��������������������������������������������������������������������������������������������������������� 580 720 800 810 780 740 660 3,790

92 Expensing of environmental remediation costs �������������������������������������������������������������������� 290 20 –140 –140 –140 –130 –120 –670

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

94 Recovery Zone Bonds 4 �������������������������������������������������������������������������������������������������������� 0 0 30 40 40 40 40 190

95 Tribal Economic Development Bonds ����������������������������������������������������������������������������������� 0 140 390 470 490 520 550 2,420
16. TAX EXPENDITURES 211

Table 16–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2009-2015—Continued

(In millions of dollars)

Total from corporations and individuals

2009 2010 2011 2012 2013 2014 2015 2011–15

Education, training, employment, and social services: 

Education: 

96 Exclusion of scholarship and fellowship income (normal tax method) ���������������������������� 2,080 2,160 2,250 2,340 2,440 2,540 2,650 12,220

97 HOPE tax credit ��������������������������������������������������������������������������������������������������������������� 2,920 0 840 4,250 4,460 4,680 4,900 19,130

98 Lifetime Learning tax credit ��������������������������������������������������������������������������������������������� 3,860 2,910 3,360 4,780 5,010 5,250 5,510 23,910

99 American Opportunity Tax Credit ������������������������������������������������������������������������������������� 2,460 13,590 11,380 0 0 0 0 11,380

100 Education Individual Retirement Accounts ���������������������������������������������������������������������� 40 60 70 80 80 90 100 420

101 Deductibility of student-loan interest �������������������������������������������������������������������������������� 1,250 1,260 1,130 590 610 640 660 3,630

102 Deduction for higher education expenses ����������������������������������������������������������������������� 1,790 520 0 0 0 0 0 0

103 State prepaid tuition plans ����������������������������������������������������������������������������������������������� 1,200 1,390 1,580 1,750 1,860 1,950 2,050 9,190

104 Exclusion of interest on student-loan bonds ������������������������������������������������������������������� 440 400 550 670 710 740 780 3,450

105 Exclusion of interest on bonds for private nonprofit educational facilities ����������������������� 1,780 1,610 2,220 2,720 2,850 3,000 3,170 13,960

106 Credit for holders of zone academy bonds ���������������������������������������������������������������������� 190 220 260 290 280 250 230 1,310

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

108 Parental personal exemption for students age 19 or over ���������������������������������������������� 4,440 2,710 2,780 3,140 2,950 2,750 2,550 14,170

109 Deductibility of charitable contributions (education) �������������������������������������������������������� 4,170 4,290 4,940 5,370 5,800 6,190 6,610 28,910

110 Exclusion of employer-provided educational assistance ������������������������������������������������ 660 690 30 0 0 0 0 30

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

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

113 Qualified school construction bonds �������������������������������������������������������������������������������� 20 110 310 630 940 1,060 1,060 4,000

Training, employment, and social services: 

114 Work opportunity tax credit ���������������������������������������������������������������������������������������������� 870 910 830 540 260 130 60 1,820

115 Welfare-to-work tax credit ������������������������������������������������������������������������������������������������ 50 30 10 10 0 0 0 20

116 Employer provided child care exclusion ��������������������������������������������������������������������������� 770 1,210 1,370 1,410 1,480 1,550 1,630 7,440

117 Employer-provided child care credit �������������������������������������������������������������������������������� 10 20 10 0 0 0 0 10

118 Assistance for adopted foster children ����������������������������������������������������������������������������� 450 460 490 520 550 580 610 2,750

119 Adoption credit and exclusion ������������������������������������������������������������������������������������������ 530 580 460 90 90 90 90 820

120 Exclusion of employee meals and lodging (other than military) �������������������������������������� 1,010 1,060 1,110 1,170 1,230 1,300 1,370 6,180

121 Child credit 5 �������������������������������������������������������������������������������������������������������������������� 25,640 23,450 18,550 10,870 10,610 10,320 9,990 60,340

122 Credit for child and dependent care expenses ��������������������������������������������������������������� 4,330 3,750 2,200 1,890 1,830 1,730 1,650 9,300

123 Credit for disabled access expenditures ������������������������������������������������������������������������� 20 20 20 30 30 30 30 140

124 Deductibility of charitable contributions, other than education and health ����������������������� 36,710 37,720 43,850 47,730 51,570 55,140 58,850 257,140

125 Exclusion of certain foster care payments ���������������������������������������������������������������������� 440 420 400 390 390 390 370 1,940

126 Exclusion of parsonage allowances �������������������������������������������������������������������������������� 580 620 660 700 740 790 840 3,730

127 Employee retention credit for employers in certain federal disaster areas ���������������������� 140 40 0 0 0 0 0 0

128 Exclusion for benefits provided to volunteer EMS and firefighters ���������������������������������� 80 80 60 0 0 0 0 60

129 Temporary income exclusion for employer provided lodging in Midwestern disaster area ��������� 20 0 0 0 0 0 0 0

130 Making work pay tax credit 6 �������������������������������������������������������������������������������������������� 9,340 23,450 14,160 0 0 0 0 14,160

Health: 

131 Exclusion of employer contributions for medical insurance premiums and medical care 7 � 144,412 159,868 176,964 191,540 208,650 228,040 248,600 1,053,794

132 Self-employed medical insurance premiums ������������������������������������������������������������������������ 4,870 5,250 5,740 6,150 6,580 7,120 7,780 33,370

133 Medical Savings Accounts / Health Savings Accounts ��������������������������������������������������������� 1,930 2,030 2,130 2,240 2,350 2,470 2,590 11,780

134 Deductibility of medical expenses ��������������������������������������������������������������������������������������� 8,760 9,090 10,030 10,980 11,970 13,260 14,910 61,150

135 Exclusion of interest on hospital construction bonds ������������������������������������������������������������ 2,690 2,440 3,350 4,110 4,310 4,540 4,790 21,100

136 Deductibility of charitable contributions (health) ������������������������������������������������������������������� 4,150 4,260 4,950 5,380 5,810 6,230 6,640 29,010

137 Tax credit for orphan drug research ������������������������������������������������������������������������������������� 270 290 320 350 380 410 450 1,910

138 Special Blue Cross/Blue Shield deduction �������������������������������������������������������������������������� 760 890 690 660 590 530 690 3,160

139 Tax credit for health insurance purchased by certain displaced and retired individuals 8 ���� 10 10 10 10 10 10 10 50

140 Distributions from retirement plans for premiums for health and long-term care insurance � 260 300 330 360 400 440 490 2,020

Income security: 

141 Exclusion of railroad retirement system benefits ����������������������������������������������������������������� 330 320 300 280 260 250 250 1,340

142 Exclusion of workers’ compensation benefits ����������������������������������������������������������������������� 5,810 5,870 5,940 6,070 6,170 6,270 6,370 30,820

143 Exclusion of public assistance benefits (normal tax method) ���������������������������������������������� 600 640 670 710 740 760 790 3,670

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

145 Exclusion of military disability pensions ������������������������������������������������������������������������������ 110 110 110 110 110 110 120 560
212 ANALYTICAL PERSPECTIVES

Table 16–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2009-2015—Continued

(In millions of dollars)

Total from corporations and individuals

2009 2010 2011 2012 2013 2014 2015 2011–15

Net exclusion of pension contributions and earnings: 

146 Employer plans ��������������������������������������������������������������������������������������������������������������� 40,670 41,360 44,630 47,870 49,050 51,950 53,980 247,480

147 401(k) plans ��������������������������������������������������������������������������������������������������������������������� 44,126 53,549 67,061 70,168 72,716 74,712 76,183 360,840

148 Individual Retirement Accounts �������������������������������������������������������������������������������������� 12,090 12,780 14,080 15,770 16,190 16,400 16,500 78,940

149 Low and moderate income savers credit ������������������������������������������������������������������������� 1,050 1,180 1,170 1,130 1,060 1,000 960 5,320

150 Keogh plans �������������������������������������������������������������������������������������������������������������������� 12,770 13,890 15,120 17,190 19,740 21,100 22,610 95,760

Exclusion of other employee benefits: 

151 Premiums on group term life insurance �������������������������������������������������������������������������� 2,160 2,110 2,160 2,280 2,320 2,350 2,390 11,500

152 Premiums on accident and disability insurance �������������������������������������������������������������� 320 330 340 350 360 360 360 1,770

153 Income of trusts to finance supplementary unemployment benefits ������������������������������������ 30 40 50 50 50 50 60 260

154 Special ESOP rules �������������������������������������������������������������������������������������������������������������� 1,700 1,700 1,800 1,900 2,000 2,100 2,200 10,000

155 Additional deduction for the blind ����������������������������������������������������������������������������������������� 40 30 40 50 50 50 50 240

156 Additional deduction for the elderly ������������������������������������������������������������������������������������� 2,230 2,030 2,600 3,100 3,300 3,550 3,690 16,240

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

158 Deductibility of casualty losses �������������������������������������������������������������������������������������������� 510 560 640 680 720 750 780 3,570

159 Earned income tax credit 9 ������������������������������������������������������������������������������������������������� 4,420 6,190 6,200 8,380 8,540 8,790 9,090 41,000

160 Additional exemption for housing Hurricane Katrina displaced individuals ��������������������������� 10 0 0 0 0 0 0 0

161 Exclusion of unemployment insurance benefits �������������������������������������������������������������������� 1,310 5,220 0 0 0 0 0 0

Social Security: 

Exclusion of social security benefits: 

162 Social Security benefits for retired workers �������������������������������������������������������������������� 20,970 21,410 20,240 21,380 22,560 24,160 26,810 115,150

163 Social Security benefits for disabled workers ������������������������������������������������������������������ 6,460 6,950 7,160 7,450 7,750 8,080 8,580 39,020

164 Social Security benefits for spouses, dependents and survivors ������������������������������������� 3,650 3,850 3,140 3,150 3,170 3,200 3,330 15,990

165 Tax Credit for Certain Government Retirees 10 ��������������������������������������������������������������������� 40 110 0 0 0 0 0 0

Veterans benefits and services: 

166 Exclusion of veterans death benefits and disability compensation �������������������������������������� 3,900 4,130 4,370 4,630 4,910 5,200 5,510 24,620

167 Exclusion of veterans pensions ������������������������������������������������������������������������������������������� 190 200 220 250 260 270 270 1,270

168 Exclusion of GI bill benefits ������������������������������������������������������������������������������������������������� 300 470 770 1,010 1,270 1,570 1,910 6,530

169 Exclusion of interest on veterans housing bonds ����������������������������������������������������������������� 20 30 30 40 50 60 60 240

General purpose fiscal assistance: 

170 Exclusion of interest on public purpose State and local bonds ������������������������������������������� 22,990 20,810 28,660 35,130 36,900 38,780 40,910 180,380

171 Build America Bonds 11 �������������������������������������������������������������������������������������������������������� –200 –1,300 –2,120 –2,110 –2,030 –1,960 –1,880 –10,100

172 Deductibility of nonbusiness state and local taxes other than on owner-occupied homes �� 45,310 33,920 46,500 58,100 61,890 65,320 68,250 300,060

Interest: 

173 Deferral of interest on U.S. savings bond  ��������������������������������������������������������������������������� 1,270 1,180 1,220 1,300 1,320 1,330 1,340 6,5

Addendum: Aid to State and local governments: 

Deductibility of: 

Property taxes on owner-occupied homes ��������������������������������������������������������������������� 29,010 18,860 23,710 29,730 31,340 32,700 33,690 151,170

Nonbusiness State and local taxes other than on owner-occupied homes �������������������� 45,310 33,920 46,500 58,100 61,890 65,320 68,250 300,060

Exclusion of interest on State and local bonds for: 

Public purposes ��������������������������������������������������������������������������������������������������������������� 22,990 20,810 28,660 35,130 36,900 38,780 40,910 180,380

Energy facilities ���������������������������������������������������������������������������������������������������������������� 10 10 30 30 30 30 30 150

Water, sewage, and hazardous waste disposal facilities ������������������������������������������������ 340 310 420 520 550 580 610 2,680

Small-issues �������������������������������������������������������������������������������������������������������������������� 250 230 320 400 420 430 460 2,030

Owner-occupied mortgage subsidies ������������������������������������������������������������������������������ 960 870 1,190 1,470 1,540 1,610 1,710 7,520

Rental housing ���������������������������������������������������������������������������������������������������������������� 810 730 1,010 1,240 1,300 1,370 1,450 6,370

Airports, docks, and similar facilities ������������������������������������������������������������������������������� 680 610 850 1,040 1,090 1,140 1,210 5,330

Student loans ������������������������������������������������������������������������������������������������������������������ 440 400 550 670 710 740 780 3,450

Private nonprofit educational facilities ���������������������������������������������������������������������������� 1,780 1,610 2,220 2,720 2,850 3,000 3,170 13,960

Hospital construction ������������������������������������������������������������������������������������������������������� 2,690 2,440 3,350 4,110 4,310 4,540 4,790 21,100

Veterans’ housing ����������������������������������������������������������������������������������������������������������� 10 10 20 20 20 20 20 100

GO Zone and GO Zone mortgage ����������������������������������������������������������������������������������� 80 70 90 110 120 120 130 610

Credit for holders of zone academy bonds ��������������������������������������������������������������������������� 190 220 260 290 280 250 230 1,310
16. TAX EXPENDITURES 213

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

commenced in 2009 and 2010

The effect of the grant on outlays (in millions of dollars) is as follows: 2009 $1,050; 2010 $3,090; 2011 $4,460; 2012 $4,240; 2013 $2,360; 2014 $230; 2015 $30. 2 In addition, the alcohol fuel credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2009 $5,160; 2010 $6,100; 2011 $1,940; 2012 $0; 2013 $0; 2014

$0; 2015 $0. 3 In addition, the biodiesel producer tax credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2009 $810; 2010 $200; 2011 $0; 2012 $0; 2013 $0;

2014 $0; 2015 $0. 4 In addition, recovery zone bonds have outlay effects (in millions of dollars) as follows: 2009 $0; 2010 $80; 2011 $150; 2012 $170; 2013 $170; 2014 $170; and 2015 $170. 5 The figures in the table indicate the effect of the child tax credit on receipt.  The effect of the credit on outlays (in millions of dollars) is as follow:  2009 $19,150; 2010 $30,29

2011 $29,790; 2012 $1,490; 2013 $1,460; 2014 $1,420; and 2015 $1,380. 6 The figures in the table indicate the effect of the making work pay tax credit on receipts  The effect of the credit on outlays (in millions of dollars) is as follows: 2009 $645  201

$32,528; and 2011 $31,490. 7 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 a

follows: 2009 $97,130; 2010 $101,710; 2011 $106,730; 2012 $113,570; 2013 $121,770; 2014 $130,860; and 2015 $140,400. 8 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  2009 $100; 201

$110; 2011 $110; 2012 $120; 2013 $130; 2014 $140; and 2015 $150. 9 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: 2009 $44,370

2010 $51,500; 2011 $51,450; 2012 $43,980; 2013 $43,860; 2014 $44,130; and 2015 $44,380. 10 The figures in the table indicate the effect of the tax credit for certain government retirees on receipts  The effect of the credit on outlays (in millions of dollars) is as follows

2010 $99. 11 In addition, Build America Bonds have outlay effects of (in millions of dollars): 2009 $20; 2010 $2,900; 2011 $3,050; 2012 $2,960; 2013 $2,850; 2014 $2,740; and 2015 $2,64
214 ANALYTICAL PERSPECTIVES

Table 16–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL 

INCOME TAXES FOR FISCAL YEARS 2009-2015

(In millions of dollars)

Corporations Individuals

2009 2010 2011 2012 2013 2014 2015 2011–15 2009 2010 2011 2012 2013 2014 2015 2011–15

National Defense:

1 Exclusion of benefits and allowances to 

armed forces personnel ������������������������ 11,930 12,570 11,530 11,570 11,920 12,370 12,860 60,250

International affairs: 

2 Exclusion of income earned abroad by U.

citizens �������������������������������������������������� 5,320 5,590 5,870 6,160 6,470 6,790 7,130 32,420

3 Exclusion of certain allowances for Federal 

employees abroad ��������������������������������� 920 970 1020 1070 1120 1180 1240 5,630

4 Inventory property sales source rules 

exception ����������������������������������������������� 2,420 2,620 2,830 3,070 3,320 3,590 3,890 16,700

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 35,840

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 6,320

General science, space, and technology: 

7 Expensing of research and experimentation 

expenditures (normal tax method) �������� 3,560 3,220 4,250 5,390 6,330 6,550 7,310 29,830 260 280 310 330 360 380 400 1,780

8 Credit for increasing research activities ����� 7,620 5,770 3,850 3,080 2,460 1,964 1,568 12,922 390 120 0 0 0 0 0 0

Energy: 

9 Expensing of exploration and development 

costs, fuels �������������������������������������������� 1,370 1,710 990 770 760 570 290 3,380 270 330 190 150 140 110 50 640

10 Excess of percentage over cost depletion, 

fuels ������������������������������������������������������ 310 560 610 860 1,030 1,060 1,090 4,650 30 50 60 80 100 100 100 440

11 Alternative fuel production credit ��������������� 60 50 20 10 0 0 0 30 0 0 0 0 0 0 0 0

12 Exception from passive loss limitation 

for working interests in oil and gas 

properties ��������������������������������������������� 20 20 20 20 20 20 20 100

13 Capital gains treatment of royalties on coal 70 60 60 60 70 80 100 370

14 Exclusion of interest on energy facility 

bonds ���������������������������������������������������� 0 0 10 10 10 10 10 50 10 10 20 20 20 20 20 100

15 Energy production credit 1 �������������������������� 380 770 1,010 1,230 1,300 1,290 1,260 6,090 50 110 150 200 230 240 240 1,060

16 Energy investment credit 1 �������������������������� 230 430 480 540 350 330 400 2,100 40 100 120 140 70 40 50 420

17 Alcohol fuel credits 2 ��������������������������������� 40 1,190 8,850 10,900 6,640 3,590 2,020 32,000 10 10 20 40 50 20 10 140

18 Bio-Diesel and small agri-biodiesel 

producer tax credits 3 ��������������������������� 20 10 10 0 0 0 0 10 10 0 0 0 0 0 0 0

19 Tax credit and deduction for clean-fuel 

burning vehicles ������������������������������������� 80 180 220 120 160 210 340 1,050 50 60 40 10 10 20 50 130

20 Exclusion of utility conservation subsidies �� 10 10 0 0 0 0 0 0 130 130 130 120 120 120 120 610

21 Credit for holding clean renewable energy 

bonds ����������������������������������������������������� 20 20 30 30 40 40 40 180 50 60 70 90 100 100 100 460

22 Deferral of gain from dispositions of 

transmission property to implement 

FERC restructuring policy ���������������������� –10 –150 –400 –460 –490 –500 –470 –2,320

23 Credit for investment in clean coal facilities 180 290 480 550 440 360 250 2,080 0 0 0 0 0 0 0 0

24 Temporary 50% expensing for equipment 

used in the refining of liquid fuels ���������� 770 1140 930 760 630 –300 –790 1,230 0 0 0 0 0 0 0 0

25 Natural gas distribution pipelines treated as 

15-year property ������������������������������������ 80 110 120 110 90 80 80 480 0 0 0 0 0 0 0 0

26 Amortize all geological and geophysical 

expenditures over 2 years ���������������������� 30 120 190 190 150 110 70 710 10 30 50 50 40 30 20 190

27 Allowance of deduction for certain energy 

efficient commercial building property ��� 50 60 70 70 100 60 10 310 10 20 20 20 30 20 0 90

28 Credit for construction of new energy 

efficient homes �������������������������������������� 10 10 10 10 0 0 0 20 20 10 10 10 0 0 0 20

29 Credit for energy efficiency improvements 

to existing homes ����������������������������������� 0 0 0 0 0 0 0 0 570 1,950 1,460 0 0 0 0 1,460

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

31 Credit for residential energy efficient 

property ������������������������������������������������ 0 0 0 0 0 0 0 0 110 180 180 180 190 190 190 930

32 Qualified energy conservation bonds ��������� 0 0 10 20 30 30 30 120 0 10 30 60 80 90 90 350
16. TAX EXPENDITURES 215

Table 16–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL 

INCOME TAXES FOR FISCAL YEARS 2009-2015—Continued

(In millions of dollars)

Corporations Individuals

2009 2010 2011 2012 2013 2014 2015 2011–15 2009 2010 2011 2012 2013 2014 2015 2011–15

Natural resources and environment: 

33 Expensing of exploration and development 

costs, nonfuel minerals ������������������������� 50 90 90 100 100 100 100 490 0

34 Excess of percentage over cost depletion, 

nonfuel minerals ����������������������������������� 680 690 720 730 750 780 800 3,780 20 20 20 20 20 30 30 120

35 Exclusion of interest on bonds for water, 

sewage, and hazardous waste facilities � 70 80 140 180 180 190 200 890 270 230 280 340 370 390 410 1,790

36 Capital gains treatment of certain timber 

income �������������������������������������������������� 70 60 60 60 70 80 100 370

37 Expensing of multiperiod timber growing 

costs ����������������������������������������������������� 130 170 180 180 210 200 200 970 80 90 110 110 110 110 110 550

38 Tax incentives for preservation of historic 

structures ���������������������������������������������� 330 340 360 380 400 420 440 2,000 100 100 110 110 120 120 130 590

39 Expensing of capital costs with respect to 

complying with EPA sulfur regulations ��� 10 0 0 0 0 0 0 0

40 Exclusion of gain or loss on sale or 

exchange of certain brownfield sites ����� 30 50 40 30 20 10 0 100 10 20 20 10 10 0 0 40

41 Industrial CO2 capture and sequestration 

tax credit ������������������������������������������������ 0 0 0 0 0 60 130 190

42 Deduction for endangered species recovery 

expenditures ������������������������������������������ 0 10 20 20 20 30 30 120 0 10 10 10 10 20 20 70

Agriculture: 

43 Expensing of certain capital outlays ���������� 10 10 10 10 10 10 10 50 60 60 60 70 80 80 80 370

44 Expensing of certain multiperiod production 

costs ����������������������������������������������������� 10 10 10 10 10 10 10 50 110 100 100 100 110 110 110 530

45 Treatment of loans forgiven for solvent 

farmers �������������������������������������������������� 20 20 20 20 20 20 20 100

46 Capital gains treatment of certain income � 700 610 590 550 680 830 970 3,620

47 Income averaging for farmers ��������������������� 90 90 90 90 90 90 100 460

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

Commerce and housing: 

Financial institutions and insurance: 

49 Exemption of credit union income ��������� 650 650 710 790 880 960 1,030 4,370

50 Exclusion of interest on life insurance 

savings ��������������������������������������������� 1,530 1590 1680 1770 1860 1970 2070 9,350 18750 19550 21390 22930 24560 26250 27790 122,920

51 Special alternative tax on small property 

and casualty insurance companies �� 40 40 40 50 50 50 60 250

52 Tax exemption of certain insurance 

companies owned by tax-exempt 

organizations ������������������������������������ 190 200 200 210 210 220 220 1,060

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

54 Exclusion of interest spread of financial 

institutions ����������������������������������������� –120 520 960 1,070 1,160 1,250 1,330 6,170

Housing: 

55 Exclusion of interest on owner-occupied 

mortgage subsidy bonds ����������������� 200 220 400 510 510 520 550 2,490 760 650 790 960 1,030 1,090 1,160 5,030

56 Exclusion of interest on rental housing 

bonds ������������������������������������������������ 170 180 340 430 430 440 470 2,110 640 550 670 810 870 930 980 4,260

57 Deductibility of mortgage interest on 

owner-occupied homes �������������������� 79,400 92,180 104,540 116,620 127,840 139,000 149,560 637,560

58 Deductibility of State and local property 

tax on owner-occupied homes ��������� 29,010 18,860 23,710 29,730 31,340 32,700 33,690 151,170

59 Deferral of income from installment sales ����������������������������������������������������������� 720 720 810 880 1,020 1,150 1,260 5,120

60 Capital gains exclusion on home sales �� 23,500 23,860 31,300 39,510 43,640 48,200 53,230 215,880

61 Exclusion of net imputed rental income � 27,040 32,530 37,630 40,810 41,020 48,330 56,100 223,890

62 Exception from passive loss rules for 

$25,000 of rental loss ���������������������� 6,020 5,910 7,330 8,510 9,670 11,120 13,010 49,640

63 Credit for low-income housing 

investments �������������������������������������� 3,610 5,400 5,860 6,330 7,160 7,510 7,630 34,490 190 280 310 330 380 400 400 1,820
216 ANALYTICAL PERSPECTIVES

Table 16–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL 

INCOME TAXES FOR FISCAL YEARS 2009-2015—Continued

(In millions of dollars)

Corporations Individuals

2009 2010 2011 2012 2013 2014 2015 2011–15 2009 2010 2011 2012 2013 2014 2015 2011–15

64 Accelerated depreciation on rental 

housing (normal tax method) ����������� 500 750 890 1,020 1,350 1,410 1,480 6,150 3,360 3,890 4,980 6,080 7,030 7,950 8,490 34,530

65 Discharge of mortgage indebtedness ���� 360 260 200 180 120 0 0 500

66 Credit for homebuyer ����������������������������� 9,730 16,540 1,530 –1,980 –1,210 –800 –490 –2,950

Commerce: 

67 Cancellation of indebtedness ��������������� 300 130 –10 –50 –30 0 40 –50

68 Exceptions from imputed interest rules 50 50 50 50 50 50 50 250

69 Treatment of qualified dividends ������������ 22,425 38,012 26,869 0 0 0 0 26,869

70 Capital gains (except agriculture, timber, 

iron ore, and coal) ����������������������������� 52,590 45,360 44,290 41,090 51,120 62,230 72,180 270,910

71 Capital gains exclusion of small 

corporation stock ������������������������������ 50 50 170 290 300 470 690 1,920

72 Step-up basis of capital gains at death � 41,370 36,740 44,520 53,270 57,260 61,560 66,180 282,790

73 Carryover basis of capital gains on gifts 1,630 1,430 4,790 2,050 2,740 2,940 3,160 15,680

74 Ordinary income treatment of loss from 

small business corporation stock sale 

����������������������������������������������������������� 50 60 60 60 60 60 60 300

75 Accelerated depreciation of buildings 

other than rental housing (normal tax 

method) ������������������������������������������� –2,380 –3,420 –3,760 –3,880 –4,740 –4,730 –5,020 –22,130 –6,970 –7,660 –9,100 –10,080 –10,790 –11,630 –12,520 –54,120

76 Accelerated depreciation of machinery 

and equipment (normal tax method) 23,040 320 –5,160 1,750 11,810 18,490 24,770 51,660 34,360 10,150 6,330 12,370 18,900 25,820 31,630 95,050

77 Expensing of certain small investments 

(normal tax method) ������������������������ –170 190 –350 –360 –50 70 150 –540 40 220 –2,850 –2,460 –660 140 610 –5,220

78 Graduated corporation income tax rate 

(normal tax method) ������������������������ 2,720 2,860 3,120 3,070 3,150 3,420 3,600 16,360 0 0 0 0 0 0 0 0

79 Exclusion of interest on small issue 

bonds ����������������������������������������������� 50 60 110 140 140 140 150 680 200 170 210 260 280 290 310 1,350

80 Deduction for US production activities ��� 6,930 8,770 10,320 10,910 11,570 12,260 12,950 58,010 2,090 2,760 3,320 3,510 3,720 3,950 4,170 18,670

81 Special rules for certain film and TV 

production ����������������������������������������� 50 40 –50 –90 –70 –50 –40 –300 10 10 –10 –20 –20 –10 –10 –70

Transportation: 

82 Deferral of tax on shipping companies ������ 20 20 20 20 20 20 20 100 0 0 0 0 0 0 0 0

83 Exclusion of reimbursed employee parking 

expenses ���������������������������������������������� 2,960 3,020 3,100 3,190 3,320 3,460 3,590 16,660

84 Exclusion for employer-provided transit 

passes �������������������������������������������������� 540 560 530 560 600 640 670 3,000

85 Tax credit for certain expenditures for 

maintaining railroad tracks ��������������������� 70 100 60 30 10 10 0 110 10 10 10 0 0 0 0 10

86 Exclusion of interest on bonds for Financing 

of Highway Projects and rail-truck 

transfer facilities ������������������������������������� 20 30 30 20 10 10 10 80 70 70 70 70 50 50 50 290

Community and regional development: 

87 Investment credit for rehabilitation of 

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

88 Exclusion of interest for airport, dock, and 

similar bonds ����������������������������������������� 140 150 290 360 360 370 390 1,770 540 460 560 680 730 770 820 3,560

89 Exemption of certain mutuals’ and 

cooperatives’ income ���������������������������� 110 110 110 110 120 120 120 580

90 Empowerment zones and renewal 

communities ������������������������������������������ 270 140 80 110 130 150 140 610 860 610 350 470 550 590 590 2,550

91 New markets tax credit ������������������������������� 520 650 720 730 700 660 590 3,400 60 70 80 80 80 80 70 390

92 Expensing of environmental remediation 

costs ������������������������������������������������������ 240 20 –120 –120 –120 –110 –100 –570 50 0 –20 –20 –20 –20 –20 –100

93 Credit to holders of Gulf Tax Credit Bonds. � 0 20 20 20 10 10 10 70 30 60 60 50 40 40 40 23

94 Recovery Zone Bonds 4 ������������������������������ 0 0 10 10 10 10 10 50 0 0 20 30 30 30 30 140

95 Tribal Economic Development Bonds ��������� 0 50 130 160 160 170 180 800 0 90 260 310 330 350 370 1,620

Education, training, employment, and social 

services: 

Education: 
16. TAX EXPENDITURES 217

Table 16–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL 

INCOME TAXES FOR FISCAL YEARS 2009-2015—Continued

(In millions of dollars)

Corporations Individuals

2009 2010 2011 2012 2013 2014 2015 2011–15 2009 2010 2011 2012 2013 2014 2015 2011–15

96 Exclusion of scholarship and fellowship 

income (normal tax method) ������������ 2,080 2,160 2,250 2,340 2,440 2,540 2,650 12,220

97 HOPE tax credit ������������������������������������� 2,920 0 840 4,250 4,460 4,680 4,900 19,130

98 Lifetime Learning tax credit ������������������� 3,860 2,910 3,360 4,780 5,010 5,250 5,510 23,910

99 American Opportunity Tax Credit ����������� 2,460 13,590 11,380 0 0 0 0 11,380

100 Education Individual Retirement 

Accounts ������������������������������������������� 40 60 70 80 80 90 100 420

101 Deductibility of student-loan interest ������ 1,250 1,260 1,130 590 610 640 660 3,630

102 Deduction for higher education 

expenses ������������������������������������������ 1,790 520 0 0 0 0 0 0

103 State prepaid tuition plans ��������������������� 1,200 1,390 1,580 1,750 1,860 1,950 2,050 9,190

104 Exclusion of interest on student-loan 

bonds ����������������������������������������������� 90 100 190 230 230 240 250 1,140 350 300 360 440 480 500 530 2,310

105 Exclusion of interest on bonds for private 

nonprofit educational facilities ���������� 380 400 750 940 940 970 1,020 4,620 1400 1210 1470 1780 1910 2030 2150 9,340

106 Credit for holders of zone academy 

bonds ������������������������������������������������ 190 220 260 290 280 250 230 1,310

107 Exclusion of interest on savings bonds 

redeemed to finance educational 

expenses ������������������������������������������ 20 20 20 20 20 20 20 100

108 Parental personal exemption for 

students age 19 or over ������������������� 4,440 2,710 2,780 3,140 2,950 2,750 2,550 14,170

109 Deductibility of charitable contributions 

(education) ���������������������������������������� 590 610 640 690 740 780 830 3,680 3,580 3,680 4,300 4,680 5,060 5,410 5,780 25,230

110 Exclusion of employer-provided 

educational assistance �������������������� 660 690 30 0 0 0 0 30

111 Special deduction for teacher expenses 180 160 0 0 0 0 0 0

112 Discharge of student loan indebtedness 20 20 20 20 20 20 20 100

113 Qualified school construction bonds ������ 10 40 90 170 240 260 260 1,020 10 70 220 460 700 800 800 2,980

Training, employment, and social services: 

114 Work opportunity tax credit �������������������� 680 700 620 440 230 110 50 1,450 190 210 210 100 30 20 10 370

115 Welfare-to-work tax credit ���������������������� 40 20 10 10 0 0 0 20 10 10 0 0 0 0 0 0

116 Employer provided child care exclusion � 770 1210 1370 1410 1480 1550 1630 7,440

117 Employer-provided child care credit ������ 10 20 10 0 0 0 0 10 0

118 Assistance for adopted foster children ��� 450 460 490 520 550 580 610 2,750

119 Adoption credit and exclusion ���������������� 530 580 460 90 90 90 90 820

120 Exclusion of employee meals and 

lodging (other than military) ������������� 1,010 1,060 1,110 1,170 1,230 1,300 1,370 6,180

121 Child credit 5 ������������������������������������������ 25,640 23,450 18,550 10,870 10,610 10,320 9,990 60,340

122 Credit for child and dependent care 

expenses ����������������������������������������� 4,330 3,750 2,200 1,890 1,830 1,730 1,650 9,300

123 Credit for disabled access expenditures 10 10 10 10 10 10 10 50 10 10 10 20 20 20 20 90

124 Deductibility of charitable contributions, 

other than education and health ������� 1,350 1,370 1,430 1,510 1,600 1,690 1790 8,020 35,360 36,350 42,420 46,220 49,970 53,450 57,060 249,120

125 Exclusion of certain foster care 

payments ����������������������������������������� 440 420 400 390 390 390 370 1,940

126 Exclusion of parsonage allowances ������ 580 620 660 700 740 790 840 3,730

127 Employee retention credit for employers 

in certain federal disaster areas ������� 70 20 0 0 0 0 0 0 70 20 0 0 0 0 0 0

128 Exclusion for benefits provided to 

volunteer EMS and firefighters ��������� 80 80 60 0 0 0 60

129 Temporary income exclusion for 

employer provided lodging in 

Midwestern disaster area ����������������� 20 0 0 0 0 0 0 0

130 Making work pay tax credit 6 ������������������ 9,340 23,450 14,160 0 0 0 0 14,160

Health: 

131 Exclusion of employer contributions for 

medical insurance premiums and 

medical care 7 ��������������������������������������� 144,412 159,868 176,964 191,540 208,650 228,040 248,600 1,053,794

132 Self-employed medical insurance premiums ��� 4,870 5,250 5,740 6,150 6,580 7,120 7,780 33,370
218 ANALYTICAL PERSPECTIVES

Table 16–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL 

INCOME TAXES FOR FISCAL YEARS 2009-2015—Continued

(In millions of dollars)

Corporations Individuals

2009 2010 2011 2012 2013 2014 2015 2011–15 2009 2010 2011 2012 2013 2014 2015 2011–15

133 Medical Savings Accounts / Health Savings 

Accounts ������������������������������������������������ 1,930 2,030 2,130 2,240 2,350 2,470 2,590 11,780

134 Deductibility of medical expenses ������������� 8,760 9,090 10,030 10,980 11,970 13,260 14,910 61,150

135 Exclusion of interest on hospital 

construction bonds �������������������������������� 570 610 1,130 1,420 1,420 1,470 1,550 6,990 2,120 1,830 2,220 2,690 2,890 3,070 3,240 14,110

136 Deductibility of charitable contributions 

(health) �������������������������������������������������� 180 180 190 200 210 230 240 1,070 3,970 4,080 4,760 5,180 5,600 6,000 6,400 27,940

137 Tax credit for orphan drug research ����������� 270 290 320 350 380 410 450 1,910

138 Special Blue Cross/Blue Shield deduction 760 890 690 660 590 530 690 3,160

139 Tax credit for health insurance purchased 

by certain displaced and retired 

individuals 8 ������������������������������������������ 10 10 10 10 10 10 10 50

140 Distributions from retirement plans for 

premiums for health and long-term care 

insurance ����������������������������������������������� 260 300 330 360 400 440 490 2,020

Income security: 

141 Exclusion of railroad retirement system 

benefits ������������������������������������������������� 330 320 300 280 260 250 250 1,340

142 Exclusion of workers’ compensation 

benefits �������������������������������������������������� 5,810 5,870 5,940 6,070 6,170 6,270 6,370 30,820

143 Exclusion of public assistance benefits 

(normal tax method) ����������������������������� 600 640 670 710 740 760 790 3,670

144 Exclusion of special benefits for disabled 

coal miners ������������������������������������������� 40 40 40 40 40 40 40 200

145 Exclusion of military disability pensions ���� 110 110 110 110 110 110 120 560

Net exclusion of pension contributions and 

earnings: �����������������������������������������������

146 Employer plans ������������������������������������� 40,670 41,360 44,630 47,870 49,050 51,950 53,980 247,480

147 401(k) plans ������������������������������������������� 44,126 53,549 67,061 70,168 72,716 74,712 76,183 360,840

148 Individual Retirement Accounts ������������ 12,090 12,780 14,080 15,770 16,190 16,400 16,500 78,940

149 Low and moderate income savers credit 1,050 1,180 1,170 1,130 1,060 1,000 960 5,320

150 Keogh plans ������������������������������������������ 12,770 13,890 15,120 17,190 19,740 21,100 22,610 95,760

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

151 Premiums on group term life insurance 2,160 2,110 2,160 2,280 2,320 2,350 2,390 11,500

152 Premiums on accident and disability 

insurance ����������������������������������������� 320 330 340 350 360 360 360 1,770

153 Income of trusts to finance supplementary 

unemployment benefits ������������������������� 30 40 50 50 50 50 60 260

154 Special ESOP rules ������������������������������������ 1,280 1,250 1,330 1,410 1,480 1,550 1,620 7,390 420 450 470 490 520 550 580 2,610

155 Additional deduction for the blind ��������������� 40 30 40 50 50 50 50 240

156 Additional deduction for the elderly ����������� 2,230 2,030 2,600 3,100 3,300 3,550 3,690 16,240

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

158 Deductibility of casualty losses ������������������ 510 560 640 680 720 750 780 3,570

159 Earned income tax credit 9 ����������������������� 4,420 6,190 6,200 8,380 8,540 8,790 9,090 41,000

160 Additional exemption for housing disaster 

related displaced individuals ������������������ 10 0 0 0 0 0 0 0

161 Exclusion of unemployment insurance 

benefits �������������������������������������������������� 1,310 5,220 0 0 0 0 0 0

Social Security: 

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

162 Social Security benefits for retired 

workers �������������������������������������������� 20,970 21,410 20,240 21,380 22,560 24,160 26,810 115,150

163 Social Security benefits for disabled 

workers ��������������������������������������������� 6,460 6,950 7,160 7,450 7,750 8,080 8,580 39,020

164 Social Security benefits for spouses, 

dependents and survivors ���������������� 3,650 3,850 3,140 3,150 3,170 3,200 3,330 15,990

165 Tax Credit for Certain Government Retirees 10 �� 40 110 0 0 0 0 0

Veterans benefits and services: 

166 Exclusion of veterans death benefits and 

disability compensation ������������������������ 3,900 4,130 4,370 4,630 4,910 5,200 5,510 24,620

167 Exclusion of veterans pensions ����������������� 190 200 220 250 260 270 270 1,270
16. TAX EXPENDITURES 219

Table 16–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL 

INCOME TAXES FOR FISCAL YEARS 2009-2015—Continued

(In millions of dollars)

Corporations Individuals

2009 2010 2011 2012 2013 2014 2015 2011–15 2009 2010 2011 2012 2013 2014 2015 2011–15

168 Exclusion of GI bill benefits ����������������������� 300 470 770 1,010 1,270 1,570 1,910 6,530

169 Exclusion of interest on veterans housing 

bonds ����������������������������������������������������� 10 10 10 10 20 20 20 80 10 20 20 30 30 40 40 160

General purpose fiscal assistance: 

170 Exclusion of interest on public purpose 

State and local bonds ��������������������������� 4,850 5,180 9,690 12,140 12,170 12,570 13,200 59,770 18,140 15,630 18,970 22,990 24,730 26,210 27,710 120,610

171 Build America Bonds 11 ������������������������������ –40 –390 –540 –570 –550 –530 –510 –2,700 –160 –910 –1,580 –1,540 –1,480 –1,430 –1,370 –7,400

172 Deductibility of nonbusiness State and local 

taxes other than on owner-occupied 

homes ��������������������������������������������������� 45,310 33,920 46,500 58,100 61,890 65,320 68,250 300,060

Interest: 

173 Deferral of interest on U.S. savings bond  � 1,270 1,180 1,220 1,300 1,320 1,330 1,340 6,5

Addendum: Aid to State and local 

governments: 

Deductibility of: 

Property taxes on owner-occupied 

homes ���������������������������������������������� 29,010 18,860 23,710 29,730 31,340 32,700 33,690 151,170

Nonbusiness State and local taxes other 

than on owner-occupied homes ������� 45,310 33,920 46,500 58,100 61,890 65,320 68,250 300,060

Exclusion of interest on State and local 

bonds for: 

Public purposes ������������������������������������� 4,850 5,180 9,690 12,140 12,170 12,570 13,200 59,770 18,140 15,630 18,970 22,990 24,730 26,210 27,710 120,610

Energy facilities �������������������������������������� 0 0 10 10 10 10 10 50 10 10 20 20 20 20 20 100

Water, sewage, and hazardous waste 

disposal facilities ������������������������������ 70 80 140 180 180 190 200 890 270 230 280 340 370 390 410 1,790

Small-issues ������������������������������������������ 50 60 110 140 140 140 150 680 200 170 210 260 280 290 310 1,350

Owner-occupied mortgage subsidies ���� 200 220 400 510 510 520 550 2,490 760 650 790 960 1,030 1,090 1,160 5,030

Rental housing �������������������������������������� 170 180 340 430 430 440 470 2,110 640 550 670 810 870 930 980 4,260

Airports, docks, and similar facilities ����� 140 150 290 360 360 370 390 1,770 540 460 560 680 730 770 820 3,560

Student loans ���������������������������������������� 90 100 190 230 230 240 250 1,140 350 300 360 440 480 500 530 2,310

Private nonprofit educational facilities �� 380 400 750 940 940 970 1,020 4,620 1,400 1,210 1,470 1,780 1,910 2,030 2,150 9,340

Hospital construction ����������������������������� 570 610 1,130 1,420 1,420 1,470 1,550 6,990 2,120 1,830 2,220 2,690 2,890 3,070 3,240 14,110

Veterans’ housing ��������������������������������� 0 0 10 10 10 10 10 50 10 10 10 10 10 10 10 50

GO Zone and GO Zone mortgage ��������� 20 20 30 40 40 40 40 230 60 50 60 70 80 80 90 380

Credit for holders of zone academy bonds � 190 220 260 290 280 250 230 1,310

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

2009 and 2010. The effect of the grant on outlays (in millions of dollars) is as follows: 2009 $1,050; 2010 $3,090; 2011 $4,460; 2012 $4,240; 2013 $2,360; 2014 $230; 2015 $30. 2 In addition, the alcohol fuel credit results in a reduction in excise tax receipts (in millions of dollars) as follows  2009 $5,160; 2010 $6,100; 201  $1,940; 2012 $0; 2013 $0; 2014 $0; 201

$0

3 In addition, the biodiesel producer tax credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2009 $810; 2010 $200; 2011 $0; 2012 $0; 2013 $0; 2014 $0; 

2015 $0. 4 In addition, recovery zone bonds have outlay effects (in millions of dollars) as follows: 2009 $0; 2010 $80; 2011 $150; 2012 $170; 2013 $170; 2014 $170; and 2015 $170. 5 The figures in the table indicate the effect of the child tax credit on receipt.  The effect of the credit on outlays (in millions of dollars) is as follow   2009 $19,150; 2010 $30,290; 20

$29,790; 2012 $1,490; 2013 $1,460; 2014 $1,420; and 2015 $,1380. 6 The figures in the table indicate the effect of the making work pay tax credit on receipts  The effect of the credit on outlays (in millions of dollars) is as follows: 2009 $645  2010 $32,528

and 2011 $31,490. 7 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: 200

$97,130; 2010 $101,710; 2011 $106,730; 2012 $113,570; 2013 $121,770; 2014 $130,860; and 2015 $140,400. 8 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  2009 $100; 2010 $110

2011 $110; 2012 $120; 2013 $130; 2014 $140; and 2015 $150. 9 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:2009 $44,370  2010 $51,500

2011 $51,450; 2012 $43,980; 2013 $43,860; 2014 $44,130; and 2015 $44,380. 10 The figures in the table indicate the effect of the tax credit for certain government retirees on receipts  The effect of the credit on outlays (in millions of dollars) is as follows: 2010 $99. 11 In addition, Build America Bonds have outlay effects of (in millions of dollars): 2009 $20; 2010 $2,900; 2011 $3,050; 2012 $2,960; 2013 $2,850; 2014 $2,740; and 2015 $2,

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 tabl
220 ANALYTICAL PERSPECTIVES

Table 16–3. INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2011-2015 PROJECTED REVENUE EFFECT

(In millions of dollars)

Provision 2011 2011–15

131 Exclusion of employer contributions for medical insurance premiums and medical care ��������������������������������������������������������������������������������������������������� 176,964 1,053,794

57 Deductibility of mortgage interest on owner-occupied homes �������������������������������������������������������������������������������������������������������������������������������������������� 104,540 637,560

147 401(k) plans ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 67,061 360,840

172 Deductibility of nonbusiness State and local taxes other than on owner-occupied homes ������������������������������������������������������������������������������������������������ 46,500 300,060

72 Step-up basis of capital gains at death ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 44,520 282,790

70 Capital gains (except agriculture, timber, iron ore, and coal) ����������������������������������������������������������������������������������������������������������������������������������������������� 44,290 270,910

124 Deductibility of charitable contributions, other than education and health ��������������������������������������������������������������������������������������������������������������������������� 43,850 257,140

146 Employer plans ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 44,630 247,480

61 Exclusion of net imputed rental income ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 37,630 223,890

60 Capital gains exclusion on home sales ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 31,300 215,880

170 Exclusion of interest on public purpose State and local bonds ������������������������������������������������������������������������������������������������������������������������������������������ 28,660 180,380

58 Deductibility of State and local property tax on owner-occupied homes ���������������������������������������������������������������������������������������������������������������������������� 23,710 151,170

76 Accelerated depreciation of machinery and equipment (normal tax method) �������������������������������������������������������������������������������������������������������������������� 1,170 146,710

50 Exclusion of interest on life insurance savings ������������������������������������������������������������������������������������������������������������������������������������������������������������������� 23,070 132,270

162 Social Security benefits for retired workers ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 20,240 115,150

150 Keogh plans ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 15,120 95,760

148 Individual Retirement Accounts ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 14,080 78,940

80 Deduction for US production activities ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 13,640 76,680

134 Deductibility of medical expenses �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 10,030 61,150

121 Child credit ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 18,550 60,340

1 Exclusion of benefits and allowances to armed forces personnel �������������������������������������������������������������������������������������������������������������������������������������� 11,530 60,250

62 Exception from passive loss rules for $25,000 of rental loss ���������������������������������������������������������������������������������������������������������������������������������������������� 7,330 49,640

159 Earned income tax credit ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 6,200 41,000

64 Accelerated depreciation on rental housing (normal tax method) �������������������������������������������������������������������������������������������������������������������������������������� 5,870 40,680

163 Social Security benefits for disabled workers ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� 7,160 39,020

63 Credit for low-income housing investments ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 6,170 36,310

5 Deferral of income from controlled foreign corporations (normal tax method) ������������������������������������������������������������������������������������������������������������������� 32,720 35,840

132 Self-employed medical insurance premiums ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� 5,740 33,370

2 Exclusion of income earned abroad by U.S. citizen  ���������������������������������������������������������������������������������������������������������������������������������������������������������� 5,870 32,4

17 Alcohol fuel credits �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 8,870 32,140

7 Expensing of research and experimentation expenditures (normal tax method) ��������������������������������������������������������������������������������������������������������������� 4,560 31,610

142 Exclusion of workers’ compensation benefits ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� 5,940 30,820

136 Deductibility of charitable contributions (health) ������������������������������������������������������������������������������������������������������������������������������������������������������������������ 4,950 29,010

109 Deductibility of charitable contributions (education) ������������������������������������������������������������������������������������������������������������������������������������������������������������ 4,940 28,910

69 Treatment of qualified dividends ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 26,869 26,869

166 Exclusion of veterans death benefits and disability compensation ������������������������������������������������������������������������������������������������������������������������������������� 4,370 24,620

98 Lifetime Learning tax credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 3,360 23,910

135 Exclusion of interest on hospital construction bonds ����������������������������������������������������������������������������������������������������������������������������������������������������������� 3,350 21,100

97 HOPE tax credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 840 19,130

4 Inventory property sales source rules exception ����������������������������������������������������������������������������������������������������������������������������������������������������������������� 2,830 16,700

83 Exclusion of reimbursed employee parking expenses �������������������������������������������������������������������������������������������������������������������������������������������������������� 3,100 16,660

78 Graduated corporation income tax rate (normal tax method) ��������������������������������������������������������������������������������������������������������������������������������������������� 3,120 16,360

156 Additional deduction for the elderly ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 2,600 16,240

164 Social Security benefits for spouses, dependents and survivors ���������������������������������������������������������������������������������������������������������������������������������������� 3,140 15,990

73 Carryover basis of capital gains on gifts ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 4,790 15,680

108 Parental personal exemption for students age 19 or over �������������������������������������������������������������������������������������������������������������������������������������������������� 2,780 14,170

130 Making work pay tax credit �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 14,160 14,160

105 Exclusion of interest on bonds for private nonprofit educational facilities ��������������������������������������������������������������������������������������������������������������������������� 2,220 13,960

8 Credit for increasing research activities ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 3,850 12,922

96 Exclusion of scholarship and fellowship income (normal tax method) ������������������������������������������������������������������������������������������������������������������������������� 2,250 12,220

133 Medical Savings Accounts / Health Savings Accounts �������������������������������������������������������������������������������������������������������������������������������������������������������� 2,130 11,780

151 Premiums on group term life insurance ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 2,160 11,500

99 Lifetime Learning tax credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 11,380 11,380

154 Special ESOP rules ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,800 10,000

122 Credit for child and dependent care expenses ������������������������������������������������������������������������������������������������������������������������������������������������������������������� 2,200 9,300

103 State prepaid tuition plans ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,580 9,190

55 Exclusion of interest on owner-occupied mortgage subsidy bonds ������������������������������������������������������������������������������������������������������������������������������������ 1,190 7,520

116 Employer provided child care exclusion ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,370 7,440

15 New technology credit �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,160 7,150

168 Exclusion of GI bill benefits ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 770 6,530
16. TAX EXPENDITURES 221

Table 16–3. INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2011-2015 PROJECTED REVENUE EFFECT—Continued

(In millions of dollars)

Provision 2011 2011–15

173 Deferral of interest on U.S. savings bond  �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,220 6,5

56 Exclusion of interest on rental housing bonds ��������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,010 6,370

6 Deferred taxes for financial firms on certain income earned overseas �������������������������������������������������������������������������������������������������������������������������������� 5,770 6,320

120 Exclusion of employee meals and lodging (other than military) ����������������������������������������������������������������������������������������������������������������������������������������� 1,110 6,180

54 Exclusion of interest spread of financial institutions ������������������������������������������������������������������������������������������������������������������������������������������������������������ 960 6,170

3 Exclusion of certain allowances for Federal employees abroad ������������������������������������������������������������������������������������������������������������������������������������������ 1,020 5,630

88 Exclusion of interest for airport, dock, and similar bonds ���������������������������������������������������������������������������������������������������������������������������������������������������� 850 5,330

149 Low and moderate income savers credit ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,170 5,320

59 Deferral of income from installment sales ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 810 5,120

10 Excess of percentage over cost depletion, fuels ���������������������������������������������������������������������������������������������������������������������������������������������������������������� 670 5,090

49 Exemption of credit union income �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 710 4,370

9 Expensing of exploration and development costs, fuels ����������������������������������������������������������������������������������������������������������������������������������������������������� 1,180 4,020

113 Qualified school construction bonds ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 310 4,000

34 Excess of percentage over cost depletion, nonfuel minerals ���������������������������������������������������������������������������������������������������������������������������������������������� 740 3,900

91 New markets tax credit �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 800 3,790

126 Exclusion of parsonage allowances ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 660 3,730

143 Exclusion of public assistance benefits (normal tax method) ��������������������������������������������������������������������������������������������������������������������������������������������� 670 3,670

101 Deductibility of student-loan interest ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 1,130 3,630

46 Capital gains treatment of certain income �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 590 3,620

158 Deductibility of casualty losses ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 640 3,570

104 Exclusion of interest on student-loan bonds ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� 550 3,450

90 Empowerment zones, Enterprise communities, and Renewal communities ����������������������������������������������������������������������������������������������������������������������� 430 3,160

138 Special Blue Cross/Blue Shield deduction ������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 690 3,160

84 Exclusion for employer-provided transit passes ����������������������������������������������������������������������������������������������������������������������������������������������������������������� 530 3,000

118 Assistance for adopted foster children ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 490 2,750

35 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities �������������������������������������������������������������������������������������������������������������� 420 2,680

38 Tax incentives for preservation of historic structures ���������������������������������������������������������������������������������������������������������������������������������������������������������� 470 2,590

16 Energy investment credit ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 600 2,520

95 Tribal Economic Development Bonds ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 390 2,420

23 Credit for investment in clean coal facilities ������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 480 2,080

79 Exclusion of interest on small issue bonds ������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 320 2,030

140 Distributions from retirement plans for premiums for health and long-term care insurance ������������������������������������������������������������������������������������������������ 330 2,020

125 Exclusion of certain foster care payments �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 400 1,940

71 Capital gains exclusion of small corporation stock �������������������������������������������������������������������������������������������������������������������������������������������������������������� 170 1,920

137 Tax credit for orphan drug research ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 320 1,910

114 Work opportunity tax credit �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 830 1,820

152 Premiums on accident and disability insurance ������������������������������������������������������������������������������������������������������������������������������������������������������������������ 340 1,770

37 Expensing of multiperiod timber growing costs ������������������������������������������������������������������������������������������������������������������������������������������������������������������ 290 1,520

29 Credit for energy efficiency improvements to existing homes ���������������������������������������������������������������������������������������������������������������������������������������������� 1,460 1,460

141 Exclusion of railroad retirement system benefits ���������������������������������������������������������������������������������������������������������������������������������������������������������������� 300 1,340

106 Credit for holders of zone academy bonds �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 260 1,310

167 Exclusion of veterans pensions ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 220 1,270

24 Temporary 50% expensing for equipment used in the refining of liquid fuels ���������������������������������������������������������������������������������������������������������������������� 930 1,230

19 Tax credit and deduction for clean-fuel burning vehicles ����������������������������������������������������������������������������������������������������������������������������������������������������� 260 1,180

52 Tax exemption of certain insurance companies owned by tax-exempt organizations ��������������������������������������������������������������������������������������������������������� 200 1,060

31 30% credit for residential purchases/installations of solar and fuel cells ����������������������������������������������������������������������������������������������������������������������������� 180 930

26 Amortize all geological and geophysical expenditures over 2 years ������������������������������������������������������������������������������������������������������������������������������������ 240 900

119 Adoption credit and exclusion ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 460 820

21 Credit for holding clean renewable energy bonds ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 100 640

20 Exclusion of utility conservation subsidies ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 130 610

44 Expensing of certain multiperiod production costs ������������������������������������������������������������������������������������������������������������������������������������������������������������� 110 580

89 Exemption of certain mutuals’ and cooperatives’ income ��������������������������������������������������������������������������������������������������������������������������������������������������� 110 580

145 Exclusion of military disability pensions ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 110 560

65 Discharge of mortgage indebtedness ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 200 500

33 Expensing of exploration and development costs, nonfuel minerals ���������������������������������������������������������������������������������������������������������������������������������� 90 490

25 Natural gas distribution pipelines treated as 15-year property �������������������������������������������������������������������������������������������������������������������������������������������� 120 480

32 Qualified energy conservation bonds ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 40 470

47 Income averaging for farmers ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 90 460

43 Expensing of certain capital outlays ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 70 420

100 Education Individual Retirement Accounts �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 70 420
222 ANALYTICAL PERSPECTIVES

Table 16–3. INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2011-2015 PROJECTED REVENUE EFFECT—Continued

(In millions of dollars)

Provision 2011 2011–15

27 Allowance of deduction for certain energy efficient commercial building property �������������������������������������������������������������������������������������������������������������� 90 400

13 Capital gains treatment of royalties on coal ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 60 370

36 Capital gains treatment of certain timber income ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 60 370

86 Exclusion of interest on bonds for Financing of Highway Projects and rail-truck transfer facilities �������������������������������������������������������������������������������������� 100 370

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

93 Credit to holders of Gulf Tax Credit Bonds. �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 80 30

153 Income of trusts to finance supplementary unemployment benefits ����������������������������������������������������������������������������������������������������������������������������������� 50 260

51 Special alternative tax on small property and casualty insurance companies ������������������������������������������������������������������������������������������������������������������� 40 250

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

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

155 Additional deduction for the blind ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 40 240

169 Exclusion of interest on veterans housing bonds ���������������������������������������������������������������������������������������������������������������������������������������������������������������� 30 240

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

41 Industrial CO2 capture and sequestration tax credit ����������������������������������������������������������������������������������������������������������������������������������������������������������� 0 190

42 Deduction for endangered species recovery expenditures �������������������������������������������������������������������������������������������������������������������������������������������������� 30 190

94 Recovery Zone Bonds ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 30 190

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

87 Investment credit for rehabilitation of structures (other than historic) ��������������������������������������������������������������������������������������������������������������������������������� 30 150

40 Exclusion of gain or loss on sale or exchange of certain brownfield sites ��������������������������������������������������������������������������������������������������������������������������� 60 140

123 Credit for disabled access expenditures ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 20 140

85 Tax credit for certain expenditures for maintaining railroad tracks ��������������������������������������������������������������������������������������������������������������������������������������� 70 120

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

45 Treatment of loans forgiven for solvent farmers ������������������������������������������������������������������������������������������������������������������������������������������������������������������� 20 100

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

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

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

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

128 Exclusion for benefits provided to volunteer EMS and firefighters �������������������������������������������������������������������������������������������������������������������������������������� 60 60

30 Credit for energy efficient appliances ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 50 50

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

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

28 Credit for construction of new energy efficient homes ��������������������������������������������������������������������������������������������������������������������������������������������������������� 20 40

11 Alternative fuel production credit ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 20 30

110 Exclusion of employer-provided educational assistance ���������������������������������������������������������������������������������������������������������������������������������������������������� 30 30

115 Welfare-to-work tax credit ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 10 20

18 Bio-Diesel and small agri-biodiesel producer tax credits ����������������������������������������������������������������������������������������������������������������������������������������������������� 10 10

117 Employer-provided child care credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 10 10

39 Expensing of capital costs with respect to complying with EPA sulfur regulations �������������������������������������������������������������������������������������������������������������� 0 0

102 Deduction for higher education expenses ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 0 0

111 Special deduction for teacher expenses ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 0 0

127 Employee retention credit for employers affected by Hurricane Katrina, Rita, and Wilma ��������������������������������������������������������������������������������������������������� 0 0

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

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

161 Exclusion of unemployment insurance benefits ������������������������������������������������������������������������������������������������������������������������������������������������������������������� 0 0

165 Tax Credit for Certain Government Retirees ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� 0 0

67 Cancellation of indebtedness ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� –10 –50

81 Special rules for certain film and TV production ������������������������������������������������������������������������������������������������������������������������������������������������������������������ –60 –370

92 Expensing of environmental remediation costs ������������������������������������������������������������������������������������������������������������������������������������������������������������������� –140 –670

22 Deferral of gain from dispositions of transmission property to implement FERC restructuring policy ��������������������������������������������������������������������������������� –400 –2,320

67 Credit for homebuyer ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,530 –2,950

77 Expensing of certain small investments (normal tax method) �������������������������������������������������������������������������������������������������������������������������������������������� –3,200 –5,760

171 Build America Bonds ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� –2,120 –10,100

75 Accelerated depreciation of buildings other than rental housing (normal tax method) ������������������������������������������������������������������������������������������������������� –12,860 –76,250
16. TAX EXPENDITURES 223

Table 16–4. PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR ACTIVITY IN CALENDAR YEAR 2009

(In millions of dollars)

Provision 2009 Present Value of 

Revenue Loss

5 Deferral of income from controlled foreign corporations (normal tax method) ����������������������������������������������������������������������� 20,060

6 Deferred taxes for financial firms on income earned overseas ����������������������������������������������������������������������������������������������� 3,540

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

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

9 Expensing of exploration and development costs—fuels ������������������������������������������������������������������������������������������������������� 275

33 Expensing of exploration and development costs—nonfuels ������������������������������������������������������������������������������������������������� 130

37 Expensing of multiperiod timber growing costs ���������������������������������������������������������������������������������������������������������������������� 90

44 Expensing of certain multiperiod production costs—agriculture ��������������������������������������������������������������������������������������������� 180

43 Expensing of certain capital outlays—agriculture ������������������������������������������������������������������������������������������������������������������� 120

50 Deferral of income on life insurance and annuity contracts ���������������������������������������������������������������������������������������������������� 19,400

64 Accelerated depreciation on rental housing ��������������������������������������������������������������������������������������������������������������������������� 6,980

75 Accelerated depreciation of buildings other than rental �������������������������������������������������������������������������������������������������������� –15,850

76 Accelerated depreciation of machinery and equipment ���������������������������������������������������������������������������������������������������������� 3,150

77 Expensing of certain small investments (normal tax method) ������������������������������������������������������������������������������������������������ –40

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

106 Credit for holders of zone academy bonds ����������������������������������������������������������������������������������������������������������������������������� 610

63 Credit for low-income housing investments ���������������������������������������������������������������������������������������������������������������������������� 5,420

103 Deferral for state prepaid tuition plans ������������������������������������������������������������������������������������������������������������������������������������ 7,100

146 Exclusion of pension contributions—employer plans ������������������������������������������������������������������������������������������������������������� 74,280

147 Exclusion of 401(k) contributions �������������������������������������������������������������������������������������������������������������������������������������������� 113,000

148 Exclusion of IRA contributions and earnings �������������������������������������������������������������������������������������������������������������������������� 4,000

148 Exclusion of Roth earnings and distributions ������������������������������������������������������������������������������������������������������������������������� 11,200

148 Exclusion of non-deductible IRA earnings ������������������������������������������������������������������������������������������������������������������������������ 510

150 Exclusion of contributions and earnings for Keogh plans ������������������������������������������������������������������������������������������������������� 6,270

170 Exclusion of interest on public-purpose bonds ����������������������������������������������������������������������������������������������������������������������� 26,470 

Exclusion of interest on non-public purpose bonds ���������������������������������������������������������������������������������������������������������������� 11,460 

173 Deferral of interest on U.S. savings bonds ������������������������������������������������������������������������������������������������������������������������������ 2
224 ANALYTICAL PERSPECTIVES

•	 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 taxable income under both the reference and normal tax baselines.3

2 Gross income does, however, include transfer payments associated 

with past employment, such as Social Security benefits.

3 In the case of individuals who hold “passive’’ equity interests in businesses, the pro-rata shares of sales and expense deductions reportable 

in a year are limited. A passive business activity is defined generally to 

be one in which the holder of the interest, usually a partnership interest, 

does not actively perform managerial or other participatory functions. 

The taxpayer may generally report no larger deductions for a year than 

will reduce taxable income from such activities to zero. Deductions in 

excess of the limitation may be taken in subsequent years, or when the 

interest is liquidated. In addition, costs of earning income may be limited under the Alternative Minimum Tax.

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. 

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, 

2009, and do not reflect proposals made elsewhere in the 

Budget. Legislation enacted in 2009, such as the American 

Recovery and Reinvestment Act of 2009, and the Worker, 

Homeownership and Business Assistance Act of 2009, introduced many changes which for the most part expanded the scope of existing provisions in the Tax Code. New 

provisions include recovery zone bonds, tribal economic 

development bonds, American opportunity tax credit, 

qualified school construction bonds, making work pay tax 

credits, credits for certain government retirees, and Build 

America Bonds. Provisions significantly expanded include 

the child and earned income tax credits, energy and investment related incentives, housing related subsidies, 

and health insurance premiums for the unemployed. In 

addition, a number of provisions which were set to expire 

were expected to be extended for another year, but the 

extensions had not yet occurred and are not included in 

these estimates.

National Defense

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

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

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

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

In contrast to this treatment, certain housing and meals, 

in addition to other benefits provided military personnel, 

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

pay related to combat service, are excluded from income 

subject to tax International Affairs. 
16. TAX EXPENDITURES 225

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 ($83,445 in 2009, which excludes 

regional pay adjustments).

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 

expired 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 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 
226 ANALYTICAL PERSPECTIVES

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 2009, 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. Owners of renewable 

power facilities that qualify for the energy production 

credit may instead elect to take an energy investment 

credit.

17. Alcohol fuel credits.—The baseline tax system 

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

tax uniformly all returns from investment-like activities. 

In contrast, the Tax Code provides an income tax credit 

for 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, investments, or industries. Instead, it generally would seek to 

tax uniformly all returns from investment-like activities. 

However, the Tax Code allows an income tax credit for biodiesel used or sold and for bio-diesel derived from virgin 
16. TAX EXPENDITURES 227

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 for alternative motor vehicles and refueling property.—The baseline tax system would not allow credits or deductions for particular activities, investments, or industries. Instead, it generally would seek to 

tax uniformly all returns from investment-like activities. 

In contrast, the Tax Code allows a number of credits for 

certain types of vehicles and property. These are available for alternative motor vehicles (including fuel cell, 

advanced lean burn technology, hybrid, and alternative 

fuel motor vehicles), alternative fuel vehicle refueling 

property, and plug-ins (including plug-in electric vehicles, 

plug-in electric drive motor vehicles, and plug-in conversion kits).

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. The limit on the volume issued in 2009 is $2.4 billion.

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 provides a credit for the purchase of a qualified pho-
228 ANALYTICAL PERSPECTIVES

tovoltaic property and solar water heating property, as 

well as for fuel cell power plants, geothermal heat pumps 

and small wind property.

32. Credit for qualified energy conservation 

bonds.—The baseline tax system would uniformly tax 

all returns to investments and not allow credits for particular activities, investments, or industries. However, the 

Tax Code provides for the issuance of energy conservation 

bonds which entitle the bond holder to a Federal income 

tax credit in lieu of interest. The limit on the volume issued in 2009 is $3.2 billion.

Natural Resources and Environment

33. 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.

34. 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.

35. 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.

36. 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 2009, 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.

37. Expensing multi-period timber growing 

costs.—The baseline tax system requires the taxpayer 

to capitalize costs associated with investment property. 

However, most of the production costs of growing timber 

may be expensed under current law rather than capitalized and deducted when the timber is sold, thereby accelerating cost recovery.

38. 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. 

39. 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.

40. 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.

41. Industrial CO2 capture and sequestration tax 

credit.—The baseline tax system would uniformly tax all 

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

Tax Code allows a credit of $20 per metric ton for qualified carbon dioxide captured at a qualified facility and 

disposed of in secure geological storage. In addition, the 

provision allows a credit of $10 per metric ton of qualified 

carbon dioxide that is captured at a qualified facility and 

as a tertiary injectant in a qualified enhanced oil or natural gas recovery project.

42. Deduction for endangered species recovery expenditures.—The baseline tax system generally would 

tax all income under the regular tax rate schedule. It 

would not allow preferentially low tax rates to apply to 

certain types or sources of income. In contrast, under 

current law farmers can deduct up to 25 percent of their 

gross income for expenses incurred as a result of site and 

habitat improvement activities that will benefit endangered species on their farm land, in accordance with site 

specific management actions included in species recovery 

plans approved pursuant to the Endangered Species Act 

of 1973.

Agriculture

43. Expensing certain capital outlays.—The baseline tax system requires the taxpayer to capitalize costs 

associated with investment property. However, farmers 

may expense certain expenditures for feed and fertilizer 

as well as for soil and water conservation measures as 

well as other capital improvements under current law.

44. Expensing multi-period livestock and crop 

production costs.—The baseline tax system requires 

the taxpayer to capitalize costs associated with an investment over time. However, the production of livestock and 
16. TAX EXPENDITURES 229

crops with a production period greater than two years 

(e.g., establishing orchards or constructing barns) is exempt from the uniform cost capitalization rules, thereby 

accelerating cost recovery.

45. Loans forgiven solvent farmers.—The baseline 

tax system requires debtors to include the amount of loan 

forgiveness as income or else reduce their recoverable 

basis in the property related to the loan. If the amount 

of forgiveness exceeds the basis, the excess forgiveness 

is taxable. However, for bankrupt debtors, the amount of 

loan forgiveness reduces carryover losses, unused credits, 

and then basis, with the remainder of the forgiven debt 

excluded from taxation.

46. Capital gains treatment of certain income.—

For individuals in 2009, 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.

47. Income averaging for farmers.—The baseline 

tax system generally taxes all earned income each year at 

the rate determined by the income tax. However, taxpayers may average their taxable income from farming and 

fishing over the previous three years.

48. Deferral of gain on sales of farm refiners.—

The baseline tax system generally subjects capital gains 

to taxes the year that they are realized. However, the Tax 

Code allows a taxpayer who sells stock in a farm refiner 

to a farmers’ cooperative to defer recognition of the gain 

if the proceeds are re-invested in a qualified replacement 

property.

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.

49. Credit union income exemption.—Under the 

baseline tax system, corporations pay taxes on their profits under the regular tax rate schedule. It would not allow 

preferentially low (or zero) tax rates to apply to certain 

types or sources of income. However, in the Tax Code the 

earnings of credit unions not distributed to members as 

interest or dividends are exempt from the income tax.

50. 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.

51. 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.

52. 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.

53. 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.

54. Exclusion of interest spread of financial institutions.—The baseline tax system generally would tax 

all income under the regular tax rate schedule. It would 

not allow preferentially low (or zero) tax rates to apply to 

certain types or sources of income. Consumers and nonprofit organizations pay for some deposit-linked services, 

such as check cashing, by accepting a below-market interest rate on their demand deposits. If they received a 

market rate of interest on those deposits and paid explicit 

fees for the associated services, they would pay taxes on 

the full market rate and (unlike businesses) could not deduct the fees. The Government thus foregoes tax on the 

difference between the risk-free market interest rate and 

below-market interest rates on demand deposits, which 

under competitive conditions should equal the value added of deposit services.
230 ANALYTICAL PERSPECTIVES

55. Mortgage housing bonds.—The baseline tax system generally would tax all income under the regular tax 

rate schedule. It would not allow preferentially low (or 

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

State and local bonds used to finance homes purchased by 

first-time, low-to-moderate-income buyers to be exempt. 

These bonds are generally subject to the State privateactivity-bond annual volume cap.

56. 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.

57. 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 owneroccupied 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.

58. 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 owner-occupied housing services as gross income.

59. 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.

60. Capital gains exclusion on home sales.—The 

baseline tax system would not allow deductions and exemptions to certain types 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.

61. 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.

62. Passive loss real estate exemption.—The baseline tax system accepts current law’s general rule limiting 

taxpayers’ ability to deduct losses from passive activities 

against nonpassive income (e.g., wages, interest, and dividends). Passive activities generally are defined as those 

in which the taxpayer does not materially participate and 

there are numerous additional considerations brought to 

bear on the determination of which activities are passive 

for a given taxpayer. Losses are limited in an attempt to 

limit tax sheltering activities. Passive losses that are unused may be carried forward and applied against future 

passive income. 

In contrast to the general restrictions on passive losses, 

the Tax Code exempts owners of rental real estate activities from “passive income’’ limitations. The exemption is 

limited to $25,000 in losses and phases out for taxpayers 

with income between $100,000 and $150,000.

63. 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. 

64. Accelerated depreciation of residential rental 

property.—Under an economic income tax, the costs of 

acquiring a building are capitalized and depreciated over 

time in accordance with the decline in the property’s economic value due to wear and tear or obsolescence. This 

insures that the net income from the rental property is 

measured appropriately each year. However, the depreciation provisions of the Tax Code are part of the reference 

law rules, and thus do not give rise to tax expenditures 

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

65. 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 
16. TAX EXPENDITURES 231

indebtedness of a qualified principal residence. The provision sunsets on December 31, 2012.

66. Credit for 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 investment-like activities. 

In contrast, the Tax Code allows a tax credit for home 

buyers on purchases before May 1, 2010. 

67. 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.

68. 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.

69. Treatment of qualified dividends.—For individuals in 2009, 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 qualified dividends to be taxed at a preferentially 

low rate that is no higher than 15 percent. 

70. Capital gains (other than agriculture, timber, 

and coal).—For individuals in 2009, 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.

71. Capital gains exclusion for small business 

stock.—The baseline tax system would not allow deductions and exemptions to certain types 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 would not allow deductions and 

exemptions to certain types 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 to the market value 

at the owner’s date of death.

73. Carryover basis of capital gains on gifts.—The 

baseline tax system would not allow deductions and exemptions to certain types 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. 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 property is measured appropriately each year. However, the depreciation provisions 

of the Tax Code are part of the reference law rules, and 

thus do not give rise to tax expenditures under reference 

law. Under normal law, however, depreciation allowances 

reflect estimates of economic depreciation.

76. Accelerated depreciation of machinery and 

equipment.—Under an economic income tax, the costs 

of acquiring machinery and equipment are capitalized 

and depreciated over time in accordance with the decline 

in the property’s economic value due to wear and tear or 

obsolescence. This insures that the net income from the 

property is measured appropriately each year. However, 

the depreciation provisions of the Tax Code are part of the 

reference law rules, and thus do not give rise to tax expenditures under reference law. Under normal law, however, 

depreciation allowances reflect estimates of economic depreciation.

77. Expensing of certain small investments.—

Under the reference law baseline, the costs of acquiring 

tangible property and computer software would be depreciated using the Tax Code’s depreciation provisions. 

Under the normal tax baseline, depreciation allowances 

are estimates of economic depreciation. However, the Tax 

Code allows qualifying investments by small businesses 

in tangible property and certain computer software to be 

expensed rather than depreciated over time.

78. Graduated corporation income tax rate schedule.—Because the corporate rate schedule is part of refer-
232 ANALYTICAL PERSPECTIVES

ence 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 2009, the maximum amount of the 

parking exclusion is $230 (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. The recent stimulus legislation included a provision 

that equalized the transit subsidy maximum to that for 

employee parking expenses through the end of 2010. In 

2009, the maximum amount of the exclusion is $230 (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.

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.
16. TAX EXPENDITURES 233

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 

$5 billion in 2009. 

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.

94. Recovery Zone Bonds.—The baseline tax system 

would not allow credits for particular activities, investments, or industries. In addition, it would tax all income 

under the regular tax rate schedule. It would not allow 

preferentially low (or zero) tax rates to apply to certain 

types or sources of income. In contrast, the Tax Code allows local governments to issue up $10 billion in taxable 

Recovery Zone Economic Development Bonds in 2009 and 

2010 and receive a direct payment from Treasury equal to 

45 percent of interest expenses. In addition, they would 

be allowed to allocate up to $15 billion in tax exempt 

Recovery Zone Facility Bonds. These bonds finance certain kinds of business development in areas of economic 

distress.

95. Tribal Economic Development Bonds.—The 

baseline tax system generally would tax all income under 

the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or 

sources of income. In contrast, the Tax Code was modified 

in 2009 to allow Indian tribal governments to issue tax 

exempt “tribal economic development bonds.” There is a 

national bond limitation of $2 billion.

Education, Training, Employment, 

and Social Services

96. 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).

97. HOPE tax credit.—The baseline tax system would 

not allow credits for particular activities, investments, or 

industries. Under current law, however, the non-refundable HOPE tax credit allows a credit for 100 percent of an 

eligible student’s first $1,200 of tuition and fees and 50 

percent of the next $1,200 of tuition and fees. The credit 

only covers tuition and fees paid during the first two years 

of a student’s post-secondary education. In 2009, the credit is phased out ratably for taxpayers with modified AGI 

between $100,000 and $120,000 ($50,000 and $60,000 for 

singles), indexed.

98. 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 $100,000 and $120,000 ($50,000 and 

$60,000 for singles), indexed. The credit applies to both 

undergraduate and graduate students.

99. American Opportunity Tax Credit.—The baseline tax system would not allow credits for particular activities, investments, or industries. In contrast, the Tax 

Code was modified in 2009 to provide a tax credit in 2009 

and 2010 of up to $2,500 per eligible student for qualified tuition and related expenses paid for each of the first 

four years of the student’s post-secondary education. The 

credit is phased out for taxpayers with modified adjusted 

gross income between $80,000 and $90,000 ($160,000 and 

$180,000 for married taxpayers filing a joint return).

100. 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 
234 ANALYTICAL PERSPECTIVES

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).

101. 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 2009, 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.

102. 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 2009 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.

103. 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.

104. 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.

105. 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.

106. 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 $1.4 billion in 2009 and 

2010.

107. 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 2009.

108. 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.

109. 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.

110. 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.

111. 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.

112. 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 al-
16. TAX EXPENDITURES 235

lows certain professionals who perform in underserved 

areas, and as a consequence get their student loans discharged, not to recognize such discharge as income.

113. Qualified school construction bonds.—The 

baseline tax system would not allow credits for particular 

activities, investments, or industries. Instead, it generally 

would seek to tax uniformly all returns from investmentlike activities. In contrast, the Tax Code was modified in 

2009 to provide a tax credit in lieu of interest to holders of 

qualified school construction bonds. The national volume 

limit is $22 billion over 2009 and 2010.

114. 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. 

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

system would not allow credits for particular activities, 

investments, or industries. Instead, it generally would 

seek to tax uniformly all returns from investment-like activities. 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.

116. Employer-provided child care exclusion.—

Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be 

included in taxable income. In contrast, under current 

law up to $5,000 of employer-provided child care is excluded from an employee’s gross income even though the 

employer’s costs for the child care are a deductible business expense.

117. Employer-provided child care credit.—The 

baseline tax system would not allow credits for particular activities, investments, or industries. Instead, current 

law provides a credit equal to 25 percent of qualified expenses for employee child care and 10 percent of qualified expenses for child care resource and referral services. 

Employer deductions for such expenses are reduced by 

the amount of the credit. The maximum total credit is limited to $150,000 per taxable year.

118. Assistance for adopted foster children.—

Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be 

included in taxable income. Taxpayers who adopt eligible 

children from the public foster care system can receive 

monthly payments for the children’s significant and varied needs and a reimbursement of up to $2,000 for nonrecurring adoption expenses. These payments are excluded 

from gross income under current law.

119. Adoption credit and exclusion.—The baseline 

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

credit for qualified adoption expenses under current law. 

The maximum credit is $12,150 per child for 2009, and 

is phased-out ratably for taxpayers with modified AGI 

between $182,180 and $220,180. 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. 

120. Employer-provided meals and lodging.—

Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be 

included in taxable income. In contrast, under current law 

employer-provided meals and lodging are excluded from 

an employee’s gross income even though the employer’s 

costs for these items are a deductible business expense.

121. Child credit.—The baseline tax system would not 

allow credits for particular activities or targeted at specific groups. Under current law, however, taxpayers with 

children under age 17 can qualify for a $1,000 partially 

refundable per child credit. 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). 

122. Child and dependent care expenses.—The 

baseline tax system would not allow credits for particular 

activities or targeted at specific groups. In contrast, the 

Tax Code provides 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 2009, expenditures up to a maximum $3,000 

for one dependent and $6,000 for two or more dependents 

are eligible for the credit. The credit is equal to 35 percent 

of qualified expenditures for taxpayers with incomes of 

$15,000. The credit is reduced to a minimum of 20 percent by one percentage point for each $2,000 of income in 

excess of $15,000.

123. Disabled access expenditure credit.—The 

baseline tax system would not allow credits for particular activities, investments, or industries. In contrast, the 

Tax Code provides small businesses (less than $1 million 

in gross receipts or fewer than 31 full-time employees) 

a 50-percent credit for expenditures in excess of $250 to 
236 ANALYTICAL PERSPECTIVES

remove access barriers for disabled persons. The credit is 

limited to $5,000. 

124. Charitable contributions, other than education and health.—The baseline tax system would not 

allow a deduction for personal expenditures. In contrast, 

the Tax Code provides taxpayers a deduction for contributions to charitable, religious, and certain other nonprofit 

organizations. Taxpayers who donate capital assets to 

charitable organizations can deduct the assets’ current 

value without being taxed on any appreciation in value. 

An individual’s total charitable contribution generally 

may not exceed 50 percent of adjusted gross income; a 

corporation’s total charitable contributions generally may 

not exceed 10 percent of pre-tax income.

125. Foster care payments.—The baseline tax system 

generally would tax all income under the regular tax rate 

schedule. It would not allow preferentially low (or zero) 

tax rates to apply to certain types or sources of income. 

Foster parents provide a home and care for children who 

are wards of the State, under contract with the State. 

However, compensation received for this service is excluded from the gross incomes of foster parents; the expenses 

they incur are nondeductible.

126. Parsonage allowances.—Under the baseline 

tax system, all compensation, including dedicated payments and in-kind benefits, 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.

127. 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 natural disasters such as hurricanes Katrina, Rita, Wilma, 

and Ike.

128. 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.

129. 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.

130. Making work pay tax credit.—The baseline tax 

system would not allow credits for particular activities. In 

contrast, the Tax Code was modified in 2009 to provide for 

a tax credit in 2009 and 2010 of the lesser of 6.2 percent 

of an individual’s earned income or $400 ($800 for joint 

filers). It is phased out at a rate of 2 percent of modified 

AGI above $75,000 ($150,000 for joint filers).

Health

131. 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.

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

and remuneration, including dedicated payments and 

in-kind benefits, should be included in taxable income. 

In contrast, under current law self-employed taxpayers 

may deduct 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.

133. 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 2009, $3000 for taxpayers with individual coverage and $5,950 for taxpayers 

with family coverage). Thus, HSAs have largely replaced 

MSAs.

134. 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.

135. 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.

136. 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 con-
16. TAX EXPENDITURES 237

tributions 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.

137. 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.

138. 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.

139. 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. 

140. Distributions for premiums for health and 

long-term care insurance.—Under the baseline tax 

system, all compensation, including dedicated and deferred payments, should be included in taxable income. 

In contrast, the Tax Code provides for tax-free distributions of up to $3,000 from governmental retirement plans 

for premiums for health and long term care premiums of 

public safety officers.

Income Security

141. 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.

142. 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.

143. 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. 

144. 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.

145. 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.

146. 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.

147. 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 employer-provided 

401(k) plans (and 401(k)-type plans like 403(b) plans and 

the Federal Government’s Thrift Savings Plan). In 2009, 

an employee could exclude up to $16,500 (indexed) of 

wages from AGI under a qualified arrangement with an 

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

exclude up to $22,000 in contributions (indexed). The tax 

on the investment income earned by 401(k)-type plans is 

deferred until withdrawn.

148. 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 2009 (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 depending on whether they are active participants in 

employer plans. 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.

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

The baseline tax system would not allow credits for par-
238 ANALYTICAL PERSPECTIVES

ticular 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 $55,500 for joint filers and $27,750 for single filers. 

150. 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 $49,000 in 2009. 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.

151. 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.

152. 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.

153. Employer-provided supplementary unemployment benefits.—Under the baseline tax system, all 

compensation, including dedicated payments and in-kind 

benefits, should be included in taxable income. Employers 

may establish trusts to pay supplemental unemployment benefits to employees separated from employment. 

Interest payments to such trusts are exempt from taxation.

154. 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.

155. 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 $1,400 standard deduction if single, 

or $1,100 if married in 2009.

156. 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 $1,400 standard deduction if 

single, or $1,100 if married in 2009.

157. 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. 

158. 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.

159. 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 $8,950 of earned income in 2009. The credit is 40 

percent of the first $12,570 of income for a family with 

two or more qualifying children. The credit is 45 percent 

of the first $12,570 of income for a family with three or 

more qualifying children. Low-income workers with no 

qualifying children are eligible for a 7.65 percent credit 

on the first $5,970 of earned income. The credit is phased 

out at income levels and rates which depend upon how 

many qualifying children are eligible and marital status. 

Earned income tax credits in excess of tax liabilities owed 

through the individual income tax system are refundable 

to individuals.
16. TAX EXPENDITURES 239

160. 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.

161. Exclusion of unemployment benefits.—The 

baseline tax system would not allow deductions and exemptions to certain types of income. In contrast the Tax 

Code was modified in 2009 to allow an exclusion of up 

to $2,400 of unemployment insurance benefits from gross 

income for taxable year 2009.

Social Security

162. 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 (phasedin) 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.

163. 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.)

164. Social Security benefits for dependents and 

survivors.—Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income because they 

represent accretions to wealth that do not materially differ from cash wages. Under current law, however, benefit 

payments from the Social Security Trust Fund for dependents and survivors are fully or partially excluded from a 

beneficiary’s gross income.

165. Tax Credit for Certain Government Retirees.—

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

the Tax Code was modified in 2009 to provide a tax credit 

of $250 for certain government retirees who do not receive 

social security benefits. This credit is provided so as to 

equalize the treatment with social security beneficiaries 

who received $250 in stimulus payments in 2009.

Veterans Benefits and Services

166. 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.

167. 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.

168. 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.

169. 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

170. 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.

171. Build America Bonds.—The baseline tax system 

would not allow credits for particular activities or targeted at specific group. In contrast, the Tax Code in 2009 allowed State and local governments to issue taxable bonds 

and receive a direct payment from Treasury equal to 35 

percent of interest expenses. Alternatively, State and local governments may issue taxable bonds and the private 
240 ANALYTICAL PERSPECTIVES

lenders receive the 35 percent credit which is included in 

taxable income.4

172. 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. 

4 This payment is treated as an outlay and has no direct revenue effects. To the extent that these bonds displace traditional tax exempt 

bonds, the outlays are in part offset by revenue gains from such displacement. Following tax expenditure estimating conventions on behavioral 

effects, the reported revenue gain estimates in the Tables should be set 

to zero. Nevertheless, such estimates are provided to highlight the dynamics of these new bonds in substituting for traditional bonds as well 

as reflecting on the keen public interest in this provision.

Interest

173. 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 GPRA5 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.6 Because there is an 

existing 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 taxdisincentive 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;

5 Committee on Government Affairs, United States Senate, “Government Performance and Results Act of 1993’’ (Report 103–58, 1993).

6 Although this chapter focuses upon tax expenditures under the income tax, tax expenditures also arise under the unified transfer, payroll, 

and excise tax systems. Such provisions can be useful when they relate 

to the base of those taxes, such as an excise tax exemption for certain 

types of consumption deemed meritorious.

exemptions; deferrals, floors, ceilings; phase-ins; phaseouts; and these can be dependent on income, expenses, or 

demographic characteristics (age, number of family members, etc.). This wide range of policy instruments means 

that tax expenditures can be flexible and can have very 

different economic effects.

Tax expenditures also have limitations. In many cases 

they add to the complexity of the tax system, which raises 

both administrative and compliance costs. For example, 

personal exemptions, deductions, credits, and phase-outs 

can complicate filing and decision-making. The income 

tax system may have little or no contact with persons who 

have no or very low incomes, and does not require information on certain characteristics of individuals used in 

some spending programs, such as wealth. 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 low-income families who would not otherwise be subject to income taxes or need to file a tax return. Outlay programs 

may also receive more year-to-year oversight and fine tuning through the legislative and executive budget process. 

In addition, many different types of spending programs 

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 

APPENDIX A 

PERFORMANCE MEASURES AND THE ECONOMIC EFFECTS OF TAX EXPENDITURES
16. TAX EXPENDITURES 241

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 

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 dimen-
242 ANALYTICAL PERSPECTIVES

sions. 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.

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 
16. TAX EXPENDITURES 243

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.