247

17. TAX EXPENDITURES

The Congressional Budget Act of 1974 (Public Law 93-

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

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

“revenue losses attributable to provisions of the Federal tax 

laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a 

preferential rate of tax, or a deferral of tax liability.’’ These 

exceptions may be viewed as alternatives to other policy 

instruments, such as spending or regulatory programs.

Identification and measurement of tax expenditures 

depends 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 2011–

2017 using two methods of accounting: current revenue 

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

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

A discussion of performance measures and economic 

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

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

by the Government Performance and Results Act of 1993.

TAX EXPENDITURES IN THE INCOME TAX

Tax Expenditure Estimates

All tax expenditure estimates presented here are based 

upon current tax law enacted as of December 31, 2011. 

Expired or repealed provisions are not listed if their revenue effects result only from taxpayer activity occurring 

before fiscal year 2011. The estimates are based on the 

economic assumptions from the Mid-session Review of 

the 2012 Budget. 

The total revenue effects for tax expenditures for fiscal 

years 2011–2017 are displayed according to the Budget’s 

functional categories in Table 17–1. Descriptions of the 

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

expenditure concept.

Two baseline concepts—the normal tax baseline and 

the reference tax law baseline—are used to identify and 

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

concepts coincide. However, items treated as tax expenditures under the normal tax baseline, but not the reference 

tax law baseline, are indicated by the designation “normal 

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

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

the tables.

Table 17–2 reports the respective portions of the total 

revenue effects that arise under the individual and corporate income taxes separately. The location of the esti1 These baseline concepts are thoroughly discussed in Special Analysis G of the 1985 Budget, where the former is referred to as the pre-1983 

method and the latter the post-1982 method.

mates under the individual and corporate headings does 

not imply that these categories of filers benefit from the 

special tax provisions in proportion to the respective tax 

expenditure amounts shown. Rather, these breakdowns 

show the specific tax accounts through which the various 

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

economic forces.

Table 17–3 ranks the major tax expenditures by the 

size of their 2013–2017 revenue effect. The first column 

provides the number of the provision in order to cross reference this table to Tables 17–1 and 17–2, 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, 

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

qualified dividends is identified as a tax expenditure.
248 ANALYTICAL PERSPECTIVES

Interpreting Tax Expenditure Estimates

The estimates shown for individual tax expenditures in 

Tables 17–1, 17–2, and 17–3 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 17–1 

are the totals of individual and corporate income tax 

revenue effects reported in Table 17–2 and do not reflect 

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

Table 17–1 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 17–4. 

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 17–4 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 2011 which cause 

the deferrals or other long-term revenue effects. For instance, a pension contribution in 2011 would cause a deferral of tax payments on wages in 2011 and on pension 

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

years. In some future year, however, the 2011 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.

•	 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.
17. TAX EXPENDITURES 249

Table 17–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2011-2017

(In millions of dollars)

Total from corporations and individuals

2011 2012 2013 2014 2015 2016 2017 2013–17

National Defense

1 Exclusion of benefits and allowances to armed forces personnel .................................. 13,250 14,270 14,900 15,380 12,960 12,710 13,030 68,980

International affairs: 

2 Exclusion of income earned abroad by U.S. citizens ...................................................... 5,550 5,400 5,800 6,140 6,430 6,740 7,050 32,160

3 Exclusion of certain allowances for Federal employees abroad ...................................... 1,020 1,070 1,120 1,180 1,240 1,300 1,370 6,210

4 Inventory property sales source rules exception ............................................................. 3,160 3,430 3,730 4,050 4,400 4,780 5,180 22,140

5 Deferral of income from controlled foreign corporations (normal tax method) ............... 41,410 42,000 41,810 41,770 43,020 44,240 45,180 216,020

6 Deferred taxes for financial firms on certain income earned overseas ............................ 6,180 2,510 0 0 0 0 0 0

General science, space, and technology: 

7 Expensing of research and experimentation expenditures (normal tax method) ........... 800 3,060 5,070 6,190 6,910 7,420 7,680 33,270

8 Credit for increasing research activities .......................................................................... 8,760 6,420 4,230 3,380 2,700 2,160 1,720 14,190

Energy: 

9 Expensing of exploration and development costs, fuels ................................................. 500 470 790 880 630 390 260 2,950

10 Excess of percentage over cost depletion, fuels ............................................................ 1,190 1,220 1,260 1,310 1,370 1,430 1,490 6,860

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

12 Exception from passive loss limitation for working interests in oil and gas properties ... 30 20 30 30 30 20 20 130

13 Capital gains treatment of royalties on coal .................................................................... 60 90 80 60 80 100 110 430

14 Exclusion of interest on energy facility bonds ................................................................. 20 30 30 30 40 40 60 200

15 Energy production credit 1 ............................................................................................... 1,560 1,710 1,900 1,960 1,940 1,850 1,680 9,330

16 Energy investment credit 1 ............................................................................................... 700 920 1,510 2,290 2,900 3,250 2,260 12,210

17 Alcohol fuel credits 2 ........................................................................................................ 500 140 110 50 30 10 10 210

18 Bio-Diesel and small agri-biodiesel producer tax credits 3 .............................................. 20 10 0 0 0 0 0 0

19 Tax credit and deduction for clean-fuel burning vehicles ................................................. 90 100 180 240 390 620 680 2,110

20 Exclusion of utility conservation subsidies ....................................................................... 220 210 210 210 210 200 190 1,020

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

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

restructuring policy ..................................................................................................... 120 –70 –180 –190 –180 –150 –120 –820

23 Credit for investment in clean coal facilities ..................................................................... 370 400 410 470 510 280 40 1,710

24 Temporary 50% expensing for equipment used in the refining of liquid fuels .................. 670 580 530 –560 –1,170 –990 –830 –3,020

25 Natural gas distribution pipelines treated as 15-year property ........................................ 120 110 90 80 80 90 100 440

26 Amortize all geological and geophysical expenditures over 2 years ................................ 120 150 160 140 90 60 30 480

27 Allowance of deduction for certain energy efficient commercial building property .......... 80 90 100 70 30 10 0 210

28 Credit for construction of new energy efficient homes ..................................................... 50 50 20 20 20 10 0 70

29 Credit for energy efficiency improvements to existing homes .......................................... 4,370 1,110 0 0 0 0 0 0

30 Credit for energy efficient appliances .............................................................................. 280 200 140 120 110 90 0 460

31 Credit for residential energy efficient property ................................................................ 840 950 1,030 1,090 1,160 1,220 500 5,000

32 Qualified energy conservation bonds 5 ............................................................................ 10 20 30 30 30 30 30 150

33 Advanced energy property credit ..................................................................................... 430 460 380 270 120 –10 –60 700

34 Advanced nuclear power production credit ...................................................................... 0 0 0 0 0 0 80 80

Natural resources and environment: 

35 Expensing of exploration and development costs, nonfuel minerals .............................. 60 60 70 80 80 90 100 420

36 Excess of percentage over cost depletion, nonfuel minerals .......................................... 580 580 590 600 610 620 620 3,040

37 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities .......... 420 470 580 690 750 790 830 3,640

38 Capital gains treatment of certain timber income ........................................................... 60 90 80 60 80 100 110 430

39 Expensing of multiperiod timber growing costs .............................................................. 250 270 280 290 310 320 320 1,520

40 Tax incentives for preservation of historic structures ...................................................... 510 540 570 610 630 660 700 3,170

41 Exclusion of gain or loss on sale or exchange of certain brownfield sites ....................... 60 40 30 10 0 0 0 40

42 Industrial CO2 capture and sequestration tax credit ....................................................... 60 60 60 70 90 220 400 840

43 Deduction for endangered species recovery expenditures .............................................. 20 20 20 20 20 30 30 120

Agriculture: 

44 Expensing of certain capital outlays ............................................................................... 70 70 110 130 130 140 150 660

45 Expensing of certain multiperiod production costs ......................................................... 130 140 170 180 180 180 190 900

46 Treatment of loans forgiven for solvent farmers ............................................................... 20 20 20 20 20 20 20 100
250 ANALYTICAL PERSPECTIVES

Table 17–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2011-2017—Continued

(In millions of dollars)

Total from corporations and individuals

2011 2012 2013 2014 2015 2016 2017 2013–17

47 Capital gains treatment of certain income ...................................................................... 630 890 830 650 800 960 1,070 4,310

48 Income averaging for farmers .......................................................................................... 90 90 90 90 100 100 100 480

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

50 Expensing of reforestation expenditures ......................................................................... 60 70 80 80 90 90 90 430

Commerce and housing: 

Financial institutions and insurance: 

51 Exemption of credit union income .............................................................................. 1,110 1,140 1,160 1,120 1,120 1,210 1,520 6,130

52 Exclusion of interest on life insurance savings .......................................................... 22,060 23,570 25,150 26,810 28,350 29,890 30,430 140,630

53 Special alternative tax on small property and casualty insurance companies ........... 40 40 40 40 40 40 40 200

54 Tax exemption of certain insurance companies owned by tax-exempt organizations 200 210 210 210 220 220 220 1,080

55 Small life insurance company deduction ................................................................... 30 30 30 30 30 30 30 150

56 Exclusion of interest spread of financial institutions ................................................... 260 490 600 690 760 810 870 3,730

Housing: 

57 Exclusion of interest on owner-occupied mortgage subsidy bonds ........................... 1,060 1,170 1,460 1,720 1,890 2,000 2,100 9,170

58 Exclusion of interest on rental housing bonds ............................................................ 900 1,000 1,240 1,470 1,610 1,690 1,780 7,790

59 Deductibility of mortgage interest on owner-occupied homes ................................... 72,240 86,910 100,910 110,830 120,240 130,920 143,520 606,420

60 Deductibility of State and local property tax on owner-occupied homes ................... 23,210 16,150 22,320 27,900 29,060 30,080 31,270 140,630

61 Deferral of income from installment sales .................................................................. 970 1,380 1,350 1,180 1,390 1,610 1,770 7,300

62 Capital gains exclusion on home sales ....................................................................... 15,060 16,040 23,440 31,610 34,910 38,560 42,590 171,110

63 Exclusion of net imputed rental income ...................................................................... 46,950 50,640 51,080 58,740 66,860 75,480 85,220 337,380

64 Exception from passive loss rules for $25,000 of rental loss ..................................... 11,080 12,550 15,380 18,450 20,680 21,990 23,310 99,810

65 Credit for low-income housing investments 6 .............................................................. 6,150 6,530 7,380 7,830 7,850 7,920 8,320 39,300

66 Accelerated depreciation on rental housing (normal tax method) ............................. –140 –50 90 350 690 1,020 1,330 3,480

67 Discharge of mortgage indebtedness ......................................................................... 1,370 1,080 250 0 0 0 0 250

68 Credit for homebuyer 7 ................................................................................................ 2,400 –2,350 –1,150 –590 –520 –470 –410 –3,140

Commerce: 

69 Cancellation of indebtedness .................................................................................... 690 330 –20 –220 –290 –310 –260 –1,100

70 Exceptions from imputed interest rules ..................................................................... 50 50 50 50 50 50 50 250

71 Treatment of qualified dividends ................................................................................. 16,550 30,580 21,900 0 0 0 0 21,900

72 Capital gains (except agriculture, timber, iron ore, and coal) ...................................... 47,390 66,210 62,040 48,300 59,380 71,550 80,200 321,470

73 Capital gains exclusion of small corporation stock ..................................................... 60 60 280 660 1,020 1,060 830 3,850

74 Step-up basis of capital gains at death ...................................................................... 3,940 19,940 23,860 36,200 38,370 40,670 43,110 182,210

75 Carryover basis of capital gains on gifts .................................................................... 1,930 1,860 2,070 3,360 3,530 3,650 3,830 16,440

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

77 Accelerated depreciation of buildings other than rental housing (normal tax method) ..... –7,290 –6,970 –7,370 –7,390 –7,220 –7,010 –6,800 –35,790

78 Accelerated depreciation of machinery and equipment (normal tax method) ........... 118,530 76,280 33,180 48,730 77,350 98,970 116,410 374,640

79 Expensing of certain small investments (normal tax method) ................................... –30 3,060 940 440 1,330 1,570 1,760 6,040

80 Graduated corporation income tax rate (normal tax method) .................................... 3,280 3,220 3,300 3,590 3,770 3,960 4,050 18,670

81 Exclusion of interest on small issue bonds ................................................................ 240 270 340 400 430 460 480 2,110

82 Deduction for US production activities ........................................................................ 13,130 13,750 14,500 15,330 16,200 17,090 17,960 81,080

83 Special rules for certain film and TV production ......................................................... 160 130 80 50 20 10 0 160

Transportation: 

84 Deferral of tax on shipping companies 8 .......................................................................... 20 20 20 20 20 20 20 100

85 Exclusion of reimbursed employee parking expenses .................................................... 3,060 3,170 3,290 3,440 3,590 3,750 3,900 17,970

86 Exclusion for employer-provided transit passes ............................................................. 560 570 560 590 630 670 720 3,170

87 Tax credit for certain expenditures for maintaining railroad tracks ................................... 160 130 80 50 20 10 0 160

88 Exclusion of interest on bonds for Highway Projects and rail-truck transfer facilities ...... 250 240 230 210 200 190 170 1,000

Community and regional development: 

89 Investment credit for rehabilitation of structures (other than historic) ............................. 20 20 20 20 20 20 20 100

90 Exclusion of interest for airport, dock, and similar bonds ................................................ 700 780 970 1,160 1,260 1,330 1,410 6,130

91 Exemption of certain mutuals’ and cooperatives’ income ............................................... 110 110 120 120 120 130 130 620

92 Empowerment zones and renewal communities ............................................................. 980 670 460 470 480 480 440 2,330

93 New markets tax credit .................................................................................................... 820 900 930 930 910 830 680 4,280
17. TAX EXPENDITURES 251

Table 17–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2011-2017—Continued

(In millions of dollars)

Total from corporations and individuals

2011 2012 2013 2014 2015 2016 2017 2013–17

94 Expensing of environmental remediation costs ............................................................... 200 –20 –170 –160 –140 –130 –130 –730

95 Credit to holders of Gulf Tax Credit Bonds. ...................................................................... 80 70 50 50 50 50 40 240

96 Recovery Zone Bonds 9 ................................................................................................... 0 0 0 0 0 0 0

97 Tribal Economic Development Bonds .............................................................................. 170 380 480 580 630 660 690 3,040

Education, training, employment, and social services: 

Education: 

98 Exclusion of scholarship and fellowship income (normal tax method) ....................... 3,060 3,170 3,290 3,410 3,530 3,660 3,800 17,690

99 HOPE tax credit .......................................................................................................... 0 0 580 5,780 5,780 5,770 5,800 23,710

100 Lifetime Learning tax credit ........................................................................................ 2,800 3,250 3,920 5,750 5,810 5,850 5,880 27,210

101 American Opportunity Tax Credit 10 ............................................................................ 13,060 14,290 13,710 0 0 0 0 13,710

102 Education Individual Retirement Accounts ................................................................. 70 80 80 90 100 100 110 480

103 Deductibility of student-loan interest ........................................................................... 1,400 850 900 960 1,020 1,090 1,160 5,130

104 Deduction for higher education expenses .................................................................. 690 470 0 0 0 0 0 0

105 Qualified tuition programs ........................................................................................... 1,610 1,780 1,890 1,980 2,070 2,170 2,280 10,390

106 Exclusion of interest on student-loan bonds .............................................................. 480 530 660 780 850 900 940 4,130

107 Exclusion of interest on bonds for private nonprofit educational facilities .................. 2,100 2,320 2,900 3,430 3,760 3,970 4,170 18,230

108 Credit for holders of zone academy bonds 11 ............................................................. 200 200 180 160 130 120 110 700

109 Exclusion of interest on savings bonds redeemed to finance educational expenses . 20 20 20 20 30 30 30 130

110 Parental personal exemption for students age 19 or over ......................................... 5,600 3,120 2,800 3,060 2,780 2,510 2,260 13,410

111 Deductibility of charitable contributions (education) ................................................... 3,520 3,910 4,610 5,060 5,500 5,930 6,370 27,470

112 Exclusion of employer-provided educational assistance ........................................... 710 750 40 0 0 0 0 40

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

114 Discharge of student loan indebtedness .................................................................... 20 20 20 20 20 20 20 100

115 Qualified school construction bonds 12 ....................................................................... 210 400 580 650 650 650 0 2,530

Training, employment, and social services: 

116 Work opportunity tax credit ......................................................................................... 1,110 930 620 340 140 70 20 1,190

117 Welfare-to-work tax credit ........................................................................................... 0 0 0 0 0 0 0 0

118 Employer provided child care exclusion ...................................................................... 840 1,350 1,580 1,670 1,780 1,900 2,040 8,970

119 Employer-provided child care credit ........................................................................... 10 10 0 0 0 0 0 0

120 Assistance for adopted foster children ........................................................................ 500 530 560 600 650 690 730 3,230

121 Adoption credit and exclusion 13 ................................................................................. 1,200 760 380 110 80 80 80 730

122 Exclusion of employee meals and lodging (other than military) ................................. 9,980 6,620 10,290 10,460 10,640 10,830 11,020 53,240

123 Child credit 14 .............................................................................................................. 23,410 24,470 18,390 9,280 8,900 8,500 8,060 53,130

124 Credit for child and dependent care expenses .......................................................... 4,200 3,400 1,620 1,460 1,380 1,320 1,260 7,040

125 Credit for disabled access expenditures .................................................................... 20 20 20 20 20 20 20 100

126 Deductibility of charitable contributions, other than education and health .................. 29,820 33,290 39,770 43,900 47,800 51,660 55,590 238,720

127 Exclusion of certain foster care payments ................................................................. 410 410 400 410 400 390 380 1,980

128 Exclusion of parsonage allowances ........................................................................... 660 710 770 830 900 970 1,050 4,520

129 Employee retention credit for employers in certain federal disaster areas ................. 30 10 0 0 0 0 0 0

130 Exclusion for benefits provided to volunteer EMS and firefighters ............................. 20 0 0 0 0 0 0 0

131 Making work pay tax credit 15 ..................................................................................... 23,528 0 0 0 0 0 0 0

Health: 

132 Exclusion of employer contributions for medical insurance premiums and medical care 16 ... 163,040 170,650 180,580 189,670 200,640 213,620 227,810 1,012,320

133 Self-employed medical insurance premiums 17 ............................................................... 5,170 5,520 5,970 6,970 7,750 8,270 8,800 37,760

134 Medical Savings Accounts / Health Savings Accounts .................................................... 1,880 1,980 2,070 2,210 2,350 2,510 2,680 11,820

135 Deductibility of medical expenses .................................................................................. 8,280 9,320 9,910 10,710 12,490 14,420 15,640 63,170

136 Exclusion of interest on hospital construction bonds ....................................................... 3,100 3,440 4,280 5,050 5,550 5,860 6,150 26,890

137 Refundable Premium Assistance Tax Credit 18 ................................................................ 0 0 0 0 –2,440 –3,610 –4,460 –10,510

138 Credit for employee health insurance expenses of small business 19 ............................. 830 1,470 1,750 2,500 2,870 2,500 2,060 11,680

139 Deductibility of charitable contributions (health) .............................................................. 3,370 3,760 4,490 4,960 5,400 5,840 6,280 26,970

140 Tax credit for orphan drug research ................................................................................ 770 930 1,120 1,360 1,640 1,990 2,410 8,520

141 Special Blue Cross/Blue Shield deduction ..................................................................... 715 680 590 530 610 710 690 3,130

142 Tax credit for health insurance purchased by certain displaced and retired individuals 20 ..... 10 10 10 0 0 0 0 10
252 ANALYTICAL PERSPECTIVES

Table 17–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2011-2017—Continued

(In millions of dollars)

Total from corporations and individuals

2011 2012 2013 2014 2015 2016 2017 2013–17

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

insurance .................................................................................................................... 300 330 360 400 440 490 510 2,200

Income security: 

144 Exclusion of railroad retirement system benefits ............................................................ 360 340 290 260 250 240 220 1,260

145 Exclusion of workers’ compensation benefits .................................................................. 7,050 7,410 7,790 8,170 8,570 9,000 9,440 42,970

146 Exclusion of public assistance benefits (normal tax method) ......................................... 670 710 750 770 800 840 850 4,010

147 Exclusion of special benefits for disabled coal miners .................................................... 40 40 40 40 40 40 40 200

148 Exclusion of military disability pensions ......................................................................... 120 120 130 130 130 130 140 660

Net exclusion of pension contributions and earnings: 

149 Employer plans .......................................................................................................... 36,390 44,490 52,330 56,650 59,840 62,960 66,260 298,040

150 401(k)-type plans ........................................................................................................ 53,360 60,090 72,740 81,030 86,740 92,230 96,020 428,760

151 Individual Retirement Accounts ................................................................................. 12,840 15,410 19,650 18,450 19,740 20,790 21,450 100,080

152 Low and moderate income savers credit .................................................................... 1,070 1,040 1,130 1,110 1,090 1,110 1,070 5,510

153 Self-Employed plans .................................................................................................. 15,030 17,070 19,580 20,940 22,450 23,840 25,390 112,200

Exclusion of other employee benefits: 

154 Premiums on group term life insurance ..................................................................... 1,980 2,080 2,120 2,150 2,190 2,250 2,310 11,020

155 Premiums on accident and disability insurance ......................................................... 340 350 360 360 370 370 370 1,830

156 Income of trusts to finance supplementary unemployment benefits ............................... 30 30 40 50 60 70 80 300

157 Special ESOP rules ......................................................................................................... 1,500 1,600 1,700 1,700 1,800 1,900 2,000 9,100

158 Additional deduction for the blind .................................................................................... 40 30 40 50 50 50 50 240

159 Additional deduction for the elderly ................................................................................ 2,390 2,110 2,780 3,350 3,480 3,500 3,490 16,600

160 Tax credit for the elderly and disabled ............................................................................ 10 10 10 10 10 10 0 40

161 Deductibility of casualty losses ....................................................................................... 270 300 350 380 390 420 440 1,980

162 Earned income tax credit 21 ............................................................................................. 1,172 1,128 3,155 3,265 3,423 3,550 3,769 17,162

Social Security: 

Exclusion of social security benefits: 

163 Social Security benefits for retired workers ............................................................... 25,360 25,970 25,620 27,580 29,690 31,970 34,420 149,280

164 Social Security benefits for disabled workers ............................................................. 7,690 8,030 8,230 8,590 9,000 9,430 9,860 45,110

165 Social Security benefits for spouses, dependents and survivors ................................ 4,710 4,470 3,890 3,960 4,040 4,110 4,190 20,190

Veterans benefits and services: 

166 Exclusion of veterans death benefits and disability compensation ................................. 5,200 5,880 5,650 6,060 6,210 6,520 6,770 31,210

167 Exclusion of veterans pensions ...................................................................................... 240 300 340 370 390 420 440 1,960

168 Exclusion of GI bill benefits ............................................................................................ 810 1,030 1,190 1,280 1,350 1,420 1,470 6,710

169 Exclusion of interest on veterans housing bonds ............................................................ 10 10 20 30 30 30 30 140

General purpose fiscal assistance: 

170 Exclusion of interest on public purpose State and local bonds ....................................... 26,190 29,080 36,210 42,770 46,920 49,570 52,030 227,500

171 Build America Bonds 22 ................................................................................................... 0 0 0 0 0 0 0 0

172 Deductibility of nonbusiness State and local taxes other than on owner-occupied homes .... 41,060 33,180 46,260 56,980 60,500 63,880 67,430 295,050

Interest: 

173 Deferral of interest on U.S. savings bonds ...................................................................... 1,190 1,200 1,250 1,330 1,340 1,360 1,370 6,650

Addendum: Aid to State and local governments: 

Deductibility of: 

Property taxes on owner-occupied homes ................................................................ 23,210 16,150 22,320 27,900 29,060 30,080 31,270 140,630

Nonbusiness State and local taxes other than on owner-occupied homes ............... 41,060 33,180 46,260 56,980 60,500 63,880 67,430 295,050

Exclusion of interest on State and local bonds for: 

Public purposes .......................................................................................................... 26,190 29,080 36,210 42,770 46,920 49,570 52,030 227,500

Energy facilities ........................................................................................................... 20 30 30 30 40 40 60 200

Water, sewage, and hazardous waste disposal facilities ........................................... 420 470 580 690 750 790 830 3,640

Small-issues ............................................................................................................... 240 270 340 400 430 460 480 2,110

Owner-occupied mortgage subsidies ......................................................................... 1,060 1,170 1,460 1,720 1,890 2,000 2,100 9,170

Rental housing ........................................................................................................... 900 1,000 1,240 1,470 1,610 1,690 1,780 7,790

Airports, docks, and similar facilities .......................................................................... 700 780 970 1,160 1,260 1,330 1,410 6,130
17. TAX EXPENDITURES 253

Table 17–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2011-2017—Continued

(In millions of dollars)

Total from corporations and individuals

2011 2012 2013 2014 2015 2016 2017 2013–17

Student loans ............................................................................................................. 480 530 660 780 850 900 940 4,130

Private nonprofit educational facilities ....................................................................... 2,100 2,320 2,900 3,430 3,760 3,970 4,170 18,230

Hospital construction .................................................................................................. 3,100 3,440 4,280 5,050 5,550 5,860 6,150 26,890

Veterans’ housing ...................................................................................................... 10 10 20 30 30 30 30 140

GO Zone and GO Zone mortgage .............................................................................. 80 70 50 50 50 50 40 240

Credit for holders of zone academy bonds ...................................................................... 200 200 180 160 130 120 110 700

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: 2011 $3,510; 2012 $4,130; 2013 $3,850; 2014 $3,210; 2015 $1,230; 2016 $290; 2017 $110;

2 In addition, the alcohol fuel mixture credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2011 $6,520; 2012 $3,590; 2013 $0; 2014 $0; 2015 $0; 2016 

$0; 2017 $0.

The alternative fuel mixture credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2011 $160; 2012 $170; 2013 $0; 2014 $0; 2015 $0; 2016 $0; 2017 $0.

3 In addition, the biodiesel producer tax credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2011 $760; 2012 $210; 2013 $0; 2014 $0; 2015 $0; 2016 $0; 

2017: $0.

4 In addition, the provision has outlay effects of (in millions of dollars): 2011 $20 ; 2012 $40; 2013 $50; 2014 $50; 2015 $50; 2016 $50; 2017 $50.

5 In addition, the provision has outlay effects of (in millions of dollars): 2011 $30 ; 2012 $50; 2013 $60; 2014 $60; 2015 $60; 2016 $60; 2017 $60.

6 In addition, the credit for low-income housing investments has outlay effects (in millions of dollars) as follows: 2010 $1940; 2011 $3480; 2012 $180.

7 The figures in the table indicate the effect of the homebuyer credits on receipts. The effect of the credits on outlays (in millions of dollars) is as follows: 2010 $8,670; 2011 $2,760; 

2012 $310; 2013 $0; 2014 $0; 2015 $0; 2016 $0; and 2017 $0.

8 These figures do not account for the tonnage tax which shipping companies may opt into in lieu of the corporate income tax. 

The tonnage tax reduces the cost of this tax expenditure by $20 per year in each year of the budget.

9 In addition, recovery zone bonds have outlay effects (in millions of dollars) as follows: 2011 $160, 2012 $160, 2013 $160, 2014 $160, 2015 $160, 2016 $160; and 2017 $160.

10 The figures in the table indicate the effect of the American opportunity tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2011 $5,770: 2012 

$6,560: 2013 $7,850.

11 In addition, the credit for holders of zone academy bonds has outlay effects of (in millions of dollars): 2011 $10 ; 2012 $20; 2013 $30; 2014 $30; 2015 $30; 2016 $30; 2017 $30.

12 In addition, the provision for school construction bonds has outlay effects of (in millions of dollars): 2011 $430 ; 2012 $780; 2013 $940; 2014 $940; 2015 $940; 2016 $940; 2017 $940.

13 The figures in the table indicate the effect of the adoption tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2011 $1,150 and 2012 $540.

14 The figures in the table indicate the effect of the child tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2011 $22,890; 2012 $22,660; 2013 

$22,390; 2014 $1,670; 2015 $1,680; 2016 $1,420; and 2017 $1,650.

15 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: 2011 $13,876.

16 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: 

2011 $104,800; 2012 $108,850; 2013 $113,690; 2014 $117,160; 2015 $122,260; 2016 $129,280; and 2017 $136,760.

17 In 2010 only, there is an additional exclusion of self-employed insurance premiums from payroll taxes. The effect on payroll tax receipts FY 2010 (in millions of dollars) is $1,570.

18 In addition, the premium assistance credit provision has outlay effects (in millions of dollars) as follows: 2014 $21,550; 2015 $43,260; 2016 $55,900; and 2017 $61,800.

19 In addition, the small business credit provision has outlay effects (in millions of dollars) as follows: 2011 $30; 2012 $110; 2013 $130; 2014 $180; 2015 $210; 2016 $180; and 2017 

$150.

20 The figures in the table indicate the effect of the health coverage tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2011 $190; 2012 $150; 

2013 $140; 2014 $40; 2015 $0; 2016 $0; and 2017 $0.

21 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: 2011 $55,670; 2012 

$52,120; 2013 $52,500; 2014 $46,570; 2015 $47,270; 2016 $47,900; and 2017 $48,790.

22 In addition, Build America Bonds have outlay effects of (in millions of dollars): 2011 $3,190; 2012 $3,190; 2013 $3,190; 2014 $3,190; 2015 $3,190; 2016 $3,190; and 2017 $3,190.

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

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

Table 17–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND 

INDIVIDUAL INCOME TAXES FOR FISCAL YEARS 2011–2017

(In millions of dollars)

Corporations Individuals

2011 2012 2013 2014 2015 2016 2017 2013–17 2011 2012 2013 2014 2015 2016 2017 2013–17

National Defense

1 Exclusion of benefits and allowances to 

armed forces personnel ......................... 13,250 14,270 14,900 15,380 12,960 12,710 13,030 68,980

International affairs: 

2 Exclusion of income earned abroad by U.S. 

citizens ................................................... 5,550 5,400 5,800 6,140 6,430 6,740 7050 32,160

3 Exclusion of certain allowances for Federal 

employees abroad ................................. 1020 1070 1120 1180 1240 1300 1370 6,210

4 Inventory property sales source rules 

exception ............................................... 3,160 3,430 3,730 4,050 4,400 4,780 5,180 22,140

5 Deferral of income from controlled foreign 

corporations (normal tax method) ......... 41,410 42,000 41,810 41,770 43,020 44,240 45,180 216,020

6 Deferred taxes for financial firms on certain 

income earned overseas ....................... 6,180 2,510 0 0 0 0 0 0

General science, space, and technology: 

7 Expensing of research and ......................... 960 3,060 4,950 6,000 6,700 7,190 7,430 32,270 –160 0 120 190 210 230 250 1,000

8 Credit for increasing research activities ...... 8,300 6,280 4,230 3,380 2,700 2,160 1,720 14,190 460 140 0 0 0 0 0 0

Energy: 

9 Expensing of exploration and development 

costs, fuels ............................................. 440 410 690 770 550 340 230 2,580 60 60 100 110 80 50 30 370

10 Excess of percentage over cost depletion, 

fuels ....................................................... 1,010 1,040 1,070 1,110 1,160 1,210 1,260 5,810 180 180 190 200 210 220 230 1,050

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

12 Exception from passive loss limitation 

for working interests in oil and gas 

properties .............................................. 30 20 30 30 30 20 20 130

13 Capital gains treatment of royalties on coal 60 90 80 60 80 100 110 430

14 Exclusion of interest on energy facility 

bonds ..................................................... 10 10 10 10 10 10 30 70 10 20 20 20 30 30 30 130

15 Energy production credit 1 ........................... 1,410 1,540 1,710 1,770 1,750 1,670 1,510 8,410 150 170 190 190 190 180 170 920

16 Energy investment credit 1 .......................... 560 740 1210 1830 2320 2600 1810 9,770 140 180 300 460 580 650 450 2,440

17 Alcohol fuel credits 2 ................................... 480 110 80 40 20 10 10 160 20 30 30 10 10 0 0 50

18 Bio-Diesel and small agri-biodiesel 

producer tax credits 3 ............................. 20 10 0 0 0 0 0 0 0 0 0 0 0 0 0 0

19 Tax credit and deduction for clean-fuel 

burning vehicles ..................................... 40 20 20 30 50 60 60 220 50 80 160 210 340 560 620 1,890

20 Exclusion of utility conservation subsidies .. 10 10 10 10 10 10 0 40 210 200 200 200 200 190 190 980

21 Credit for holding clean renewable energy 

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

22 Deferral of gain from dispositions of 

transmission property to implement 

FERC restructuring policy ...................... 120 –70 –180 –190 –180 –150 –120 –820

23 Credit for investment in clean coal facilities ...... 370 400 410 470 510 280 40 1,710 0 0 0 0 0 0 0

24 Temporary 50% expensing for equipment 

used in the refining of liquid fuels .......... 670 580 530 –560 –1170 –990 –830 –3,020 0 0 0 0 0 0 0

25 Natural gas distribution pipelines treated as 

15-year property .................................... 120 110 90 80 80 90 100 440 0 0 0 0 0 0 0 0

26 Amortize all geological and geophysical 

expenditures over 2 years ...................... 100 120 130 110 70 50 20 380 20 30 30 30 20 10 10 100

27 Allowance of deduction for certain energy 

efficient commercial building property ... 60 70 80 50 20 10 0 160 20 20 20 20 10 0 0 50

28 Credit for construction of new energy 

efficient homes ...................................... 20 20 10 10 10 10 0 40 30 30 10 10 10 0 0 30

29 Credit for energy efficiency improvements 

to existing homes ................................... 0 0 0 0 0 0 0 0 4,370 1,110 0 0 0 0 0 0

30 Credit for energy efficient appliances ......... 280 200 140 120 110 90 0 460 0 0 0 0 0 0 0 0

31 Credit for residential energy efficient 

property ................................................. 0 0 0 0 0 0 0 0 840 950 1030 1090 1160 1220 500 5,000

32 Qualified energy conservation bonds 5 ....... 0 10 10 10 10 10 10 50 10 10 20 20 20 20 20 100

33 Advanced Energy Property Credit .............. 390 410 340 240 110 –10 –50 630 40 50 40 30 10 0 –10 70
17. TAX EXPENDITURES 255

Table 17–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL 

INCOME TAXES FOR FISCAL YEARS 2011–2017—Continued

(In millions of dollars)

Corporations Individuals

2011 2012 2013 2014 2015 2016 2017 2013–17 2011 2012 2013 2014 2015 2016 2017 2013–17

34 Advanced nuclear power production credit ...... 0 0 0 0 0 0 80 80 0 0 0 0 0 0 0 0

Natural resources and environment: 

35 Expensing of exploration and development 

costs, nonfuel minerals .......................... 60 60 70 80 80 90 100 420 0 0 0 0 0 0 0 0

36 Excess of percentage over cost depletion, 

nonfuel minerals .................................... 550 550 560 560 570 580 580 2,850 30 30 30 40 40 40 40 190

37 Exclusion of interest on bonds for water, 

sewage, and hazardous waste facilities ...... 120 130 170 200 210 220 230 1,030 300 340 410 490 540 570 600 2,610

38 Capital gains treatment of certain timber 

income ................................................... 60 90 80 60 80 100 110 430

39 Expensing of multiperiod timber growing 

costs ...................................................... 160 170 170 180 190 200 200 940 90 100 110 110 120 120 120 580

40 Tax incentives for preservation of historic 

structures ............................................... 470 500 530 560 580 610 640 2,920 40 40 40 50 50 50 60 250

41 Exclusion of gain or loss on sale or 

exchange of certain brownfield sites ..... 40 30 20 10 0 0 0 30 20 10 10 0 0 0 0 10

42 Industrial CO2 capture and sequestration 

tax credit ................................................ 60 60 60 70 90 220 400 840 0 0 0 0 0 0 0 0

43 Deduction for endangered species recovery 

expenditures .......................................... 10 10 10 10 10 10 10 50 10 10 10 10 10 20 20 70

Agriculture: 

44 Expensing of certain capital outlays ........... 0 0 10 10 10 10 10 50 70 70 100 120 120 130 140 610

45 Expensing of certain multiperiod production 

costs ...................................................... 10 10 10 10 10 10 10 50 120 130 160 170 170 170 180 850

46 Treatment of loans forgiven for solvent 

farmers .................................................. 20 20 20 20 20 20 20 100

47 Capital gains treatment of certain income .... 630 890 830 650 800 960 1,070 4,310

48 Income averaging for farmers ..................... 90 90 90 90 100 100 100 480

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

50 Expensing of reforestation expenditures ...... 10 10 10 10 10 10 10 50 50 60 70 70 80 80 80 380

Commerce and housing: 

Financial institutions and insurance: 

51 Exemption of credit union income .......... 1,110 1,140 1,160 1,120 1,120 1,210 1,520 6,130

52 Exclusion of interest on life insurance 

savings .............................................. 2,420 2,560 2,670 2,820 2,910 2,970 3,080 14,450 19,640 21,010 22,480 23,990 25,440 26,920 27,350 126,180

53 Special alternative tax on small property 

and casualty insurance companies .... 40 40 40 40 40 40 40 200

54 Tax exemption of certain insurance 

companies owned by ........................ 200 210 210 210 220 220 220 1,080

55 Small life insurance company deduction ..... 30 30 30 30 30 30 30 150

56 Exclusion of interest spread of financial 

institutions ......................................... 260 490 600 690 760 810 870 3,730

Housing: 

57 Exclusion of interest on owner-occupied 

mortgage subsidy bonds .................... 310 310 420 500 540 560 580 2,600 750 860 1,040 1,220 1,350 1,440 1,520 6,570

58 Exclusion of interest on rental housing 

bonds ................................................ 260 270 360 430 460 470 490 2,210 640 730 880 1,040 1,150 1,220 1,290 5,580

59 Deductibility of mortgage interest on 

owner-occupied homes ..................... 0 0 0 0 0 0 0 0 72,240 86,910 100,910 110,830 120,240 130,920 143,520 606,420

60 Deductibility of State and local property 

tax on owner-occupied homes .......... 0 0 0 0 0 0 0 0 23,210 16,150 22,320 27,900 29,060 30,080 31,270 140,630

61 Deferral of income from installment 

sales ................................................. 970 1,380 1,350 1,180 1,390 1,610 1,770 7,300

62 Capital gains exclusion on home sales ... 15,060 16,040 23,440 31,610 34,910 38,560 42,590 171,110

63 Exclusion of net imputed rental income ... 46,950 50,640 51,080 58,740 66,860 75,480 85,220 337,380

64 Exception from passive loss rules for 

$25,000 of rental loss ....................... 11,080 12,550 15,380 18,450 20,680 21,990 23310 99,810

65 Credit for low-income housing 

investments 6 .................................... 5,840 6,200 7,010 7,440 7,460 7,520 7,900 37,330 310 330 370 390 390 400 420 1,970
256 ANALYTICAL PERSPECTIVES

Table 17–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL 

INCOME TAXES FOR FISCAL YEARS 2011–2017—Continued

(In millions of dollars)

Corporations Individuals

2011 2012 2013 2014 2015 2016 2017 2013–17 2011 2012 2013 2014 2015 2016 2017 2013–17

66 Accelerated depreciation on rental 

housing (normal tax method) ............ –20 –10 10 50 100 150 200 510 –120 –40 80 300 590 870 1,130 2,970

67 Discharge of mortgage indebtedness 0 0 0 0 0 0 0 0 1,370 1,080 250 0 0 0 0 250

68 Credit for homebuyer 7 ........................... 2,400 –2,350 –1,150 –590 –520 –470 –410 –3,140

Commerce: 

69 Cancellation of indebtedness ................ 690 330 –20 –220 –290 –310 –260 –1,100

70 Exceptions from imputed interest rules ..... 50 50 50 50 50 50 50 250

71 Treatment of qualified dividends ............ 16,550 30,580 21,900 0 0 0 0 21,900

72 Capital gains (except agriculture, timber, 

iron ore, and coal) ............................. 47,390 66,210 62,040 48,300 59,380 71,550 80,200 321,470

73 Capital gains exclusion of small 

corporation stock .............................. 60 60 280 660 1,020 1,060 830 3,850

74 Step-up basis of capital gains at death ....... 3,940 19,940 23,860 36,200 38,370 40,670 43,110 182,210

75 Carryover basis of capital gains on gifts 1,930 1,860 2,070 3,360 3,530 3,650 3,830 16,440

76 Ordinary income treatment of loss from 

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

77 Accelerated depreciation of buildings 

other than rental housing (normal tax 

method) ............................................ –3,300 –3,140 –3,100 –3,000 –2,950 –2,890 –2,820 –14,760 –3,990 –3,830 –4,270 –4,390 –4,270 –4,120 –3,980 –21,030

78 Accelerated depreciation of machinery 

and equipment (normal tax method) .... 76,140 46,650 13,750 23,170 43,080 58,140 70,450 208,590 42,390 29,630 19,430 25,560 34,270 40,830 45,960 166,050

79 Expensing of certain small investments 

(normal tax method) ......................... –40 460 50 –60 90 130 170 380 10 2,600 890 500 1,240 1,440 1,590 5,660

80 Graduated corporation income tax rate 

(normal tax method) 3,280 3,220 3,300 3,590 3,770 3,960 4,050 18,670 0 0 0 0 0 0 0 0

81 Exclusion of interest on small issue 

bonds ................................................ 70 70 100 120 120 130 130 600 170 200 240 280 310 330 350 1,510

82 Deduction for US production activities 9840 10310 10870 11490 12140 12810 13460 60,770 3,290 3,440 3,630 3,840 4,060 4,280 4500 20,310

83 Special rules for certain film and TV 

production ......................................... 130 100 60 40 20 10 0 130 30 30 20 10 0 0 0 30

Transportation

84 Deferral of tax on shipping companies 8 ..... 20 20 20 20 20 20 20 100 0 0 0 0 0 0 0 0

85 Exclusion of reimbursed employee parking 

expenses ............................................... 0 0 0 0 0 0 0 0 3,060 3,170 3,290 3,440 3,590 3,750 3,900 17,970

86 Exclusion for employer-provided transit 

passes ................................................... 0 0 0 0 0 0 0 0 560 570 560 590 630 670 720 3,170

87 Tax credit for certain expenditures for 

maintaining railroad tracks ..................... 130 100 60 40 20 10 0 130 30 30 20 10 0 0 0 30

88 Exclusion of interest on bonds for Highway 

Projects and rail-truck transfer facilities ... 60 60 60 50 50 50 40 250 190 180 170 160 150 140 130 750

Community and regional development: 

89 Investment credit for rehabilitation of 

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

90 Exclusion of interest for airport, dock, and 

similar bonds ......................................... 200 210 280 340 360 370 390 1,740 500 570 690 820 900 960 1,020 4,390

91 Exemption of certain mutuals’ and 

cooperatives’ income ............................. 110 110 120 120 120 130 130 620

92 Empowerment zones, the DC enterprise 

zone, and renewal communities ............ 450 230 140 140 140 130 120 670 530 440 320 330 340 350 320 1,660

93 New markets tax credit ............................... 800 880 910 910 890 810 660 4,180 20 20 20 20 20 20 20 100

94 Expensing of environmental remediation 

costs ...................................................... 170 –20 –140 –130 –120 –110 –110 –610 30 0 –30 –30 –20 –20 –20 –120

95 Credit to holders of Gulf Tax Credit Bonds. ...... 20 20 10 10 10 10 10 50 60 50 40 40 40 40 30 190

96 Recovery Zone Bonds 9 .............................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0

97 Tribal Economic Development Bonds ......... 60 100 140 170 180 180 190 860 110 280 340 410 450 480 500 2,180

Education, training, employment, and social 

services: 

Education: 

98 Exclusion of scholarship and fellowship 

income (normal tax method) ............. 3,060 3,170 3,290 3,410 3,530 3,660 3,800 17,690
17. TAX EXPENDITURES 257

Table 17–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL 

INCOME TAXES FOR FISCAL YEARS 2011–2017—Continued

(In millions of dollars)

Corporations Individuals

2011 2012 2013 2014 2015 2016 2017 2013–17 2011 2012 2013 2014 2015 2016 2017 2013–17

99 HOPE tax credit ..................................... 0 0 580 5,780 5,780 5,770 5,800 23,710

100 Lifetime Learning tax credit ................... 2,800 3,250 3,920 5,750 5,810 5,850 5,880 27,210

101 American Opportunity Tax Credit 10 ....... 13,060 14,290 13,710 0 0 0 0 13,710

102 Education Individual Retirement 

Accounts ........................................... 70 80 80 90 100 100 110 480

103 Deductibility of student-loan interest ...... 1,400 850 900 960 1,020 1,090 1,160 5,130

104 Deduction for higher education 

expenses .......................................... 690 470 0 0 0 0 0 0

105 Qualified tuition programs ...................... 1,610 1,780 1,890 1,980 2,070 2,170 2,280 10,390

106 Exclusion of interest on student-loan 

bonds ................................................ 140 140 190 230 240 250 260 1,170 340 390 470 550 610 650 680 2,960

107 Exclusion of interest on bonds for private 

nonprofit educational facilities ............ 610 620 840 1,000 1,070 1,110 1,150 5,170 1490 1700 2060 2430 2690 2860 3,020 13,060

108 Credit for holders of zone academy 

bonds 11 ............................................ 200 200 180 160 130 120 110 700

109 Exclusion of interest on savings bonds 

redeemed to finance educational 

expenses .......................................... 0 20 20 20 20 30 30 30 130

110 Parental personal exemption for 

students age 19 or over .................... 0 5,600 3,120 2,800 3,060 2,780 2,510 2,260 13,410

111 Deductibility of charitable contributions 

(education) ........................................ 650 690 740 790 840 890 940 4,200 2,870 3,220 3,870 4,270 4,660 5,040 5,430 23,270

112 Exclusion of employer-provided 

educational assistance ..................... 0 710 750 40 0 0 0 0 40

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

114 Discharge of student loan indebtedness ... 0 20 20 20 20 20 20 20 100

115 Qualified school construction bonds 12 .... 60 110 150 160 160 160 630 150 290 430 490 490 490 1,900

Training, employment, and social services: 

116 Work opportunity tax credit .................... 860 790 570 310 130 60 20 1,090 250 140 50 30 10 10 0 100

117 Welfare-to-work tax credit ...................... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

118 Employer provided child care exclusion ...... 840 1350 1580 1670 1780 1900 2040 8,970

119 Employer-provided child care credit ...... 10 10 0 0 0 0 0 0 0

120 Assistance for adopted foster children ... 500 530 560 600 650 690 730 3,230

121 Adoption credit and exclusion 13 ............ 1,200 760 380 110 80 80 80 730

122 Exclusion of employee meals and 

lodging (other than military) .............. 9,980 6,620 10,290 10,460 10,640 10,830 11,020 53,240

123 Child credit 14 ......................................... 23,410 24,470 18,390 9,280 8,900 8,500 8,060 53,130

124 Credit for child and dependent care 

expenses .......................................... 4,200 3,400 1,620 1,460 1,380 1,320 1,260 7,040

125 Credit for disabled access expenditures ....... 10 10 10 10 10 10 10 50 10 10 10 10 10 10 10 50

126 Deductibility of charitable contributions, 

other than education and health ....... 1,430 1,510 1,600 1,690 1,770 1,860 1940 8,860 28,390 31,780 38,170 42,210 46,030 49,800 53,650 229,860

127 Exclusion of certain foster care 

payments .......................................... 410 410 400 410 400 390 380 1,980

128 Exclusion of parsonage allowances ....... 660 710 770 830 900 970 1,050 4,520

129 Employee retention credit for employers 

in certain federal disaster areas ....... 20 10 0 0 0 0 0 0 10 0 0 0 0 0 0 0

130 Exclusion for benefits provided to 

volunteer EMS and firefighters ......... 20 0 0 0 0 0 0 0

131 Making work pay tax credit 15 ................ 23,528 0 0 0 0 0 0 0

Health: 

132 Exclusion of employer contributions for 

medical insurance premiums and 

medical care 16 ...................................... 163,040 170,650 180,580 189,670 200,640 213,620 227,810 1,012,320

133 Self-employed medical insurance 

premiums 17 ........................................... 5,170 5,520 5,970 6,970 7,750 8,270 8,800 37,760

134 Medical Savings Accounts / Health Savings 

Accounts ................................................ 1,880 1,980 2,070 2,210 2,350 2,510 2,680 11,820

135 Deductibility of medical expenses .............. 8,280 9,320 9,910 10,710 12,490 14,420 15,640 63,170
258 ANALYTICAL PERSPECTIVES

Table 17–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL 

INCOME TAXES FOR FISCAL YEARS 2011–2017—Continued

(In millions of dollars)

Corporations Individuals

2011 2012 2013 2014 2015 2016 2017 2013–17 2011 2012 2013 2014 2015 2016 2017 2013–17

136 Exclusion of interest on hospital 

construction bonds ................................ 900 920 1,240 1,470 1,580 1,630 1,700 7,620 2,200 2,520 3,040 3,580 3,970 4,230 4,450 19,270

137 Refundable Premium Assistance Tax Credit 18 .... 0 0 0 0 –2,440 –3,610 –4,460 –10,510

138 Credit for employee health insurance 

expenses of small business 19 ............... 270 480 570 820 940 820 670 3,820 560 990 1,180 1,680 1,930 1,680 1,390 7,860

139 Deductibility of charitable contributions 

(health) .................................................. 190 200 210 230 240 250 260 1,190 3,180 3,560 4,280 4,730 5,160 5,590 6020 25,780

140 Tax credit for orphan drug research ............ 770 930 1120 1360 1640 1,990 2,410 8,520

141 Special Blue Cross/Blue Shield deduction ....... 715 680 590 530 610 710 690 3,130

142 Tax credit for health insurance purchased 

by certain displaced and retired 

individuals 20 .......................................... 10 10 10 0 0 0 0 10

143 Distributions from retirement plans for 

premiums for health and long-term care 

insurance ............................................... 300 330 360 400 440 490 510 2,200

Income security: 

144 Exclusion of railroad retirement system 

benefits .................................................. 360 340 290 260 250 240 220 1,260

145 Exclusion of workers’ compensation 

benefits .................................................. 7,050 7,410 7,790 8,170 8,570 9,000 9,440 42,970

146 Exclusion of public assistance benefits 

(normal tax method) .............................. 670 710 750 770 800 840 850 4,010

147 Exclusion of special benefits for disabled 

coal miners ............................................ 40 40 40 40 40 40 40 200

148 Exclusion of military disability pensions ..... 120 120 130 130 130 130 140 660

Net exclusion of pension contributions and 

earnings: 

149 Employer plans ...................................... 36,390 44,490 52,330 56,650 59,840 62,960 66,260 298,040

150 401(k)-type plans ................................... 53,360 60,090 72,740 81,030 86,740 92,230 96,020 428,760

151 Individual Retirement Accounts ............. 12,840 15,410 19,650 18,450 19,740 20,790 21,450 100,080

152 Low and moderate income savers credit ... 1,070 1,040 1,130 1,110 1,090 1,110 1,070 5,510

153 Self-Employed plans .............................. 15,030 17,070 19,580 20,940 22,450 23,840 25,390 112,200

Exclusion of other employee benefits: 

154 Premiums on group term life insurance ... 1,980 2,080 2,120 2,150 2,190 2,250 2,310 11,020

155 Premiums on accident and disability 

insurance .......................................... 340 350 360 360 370 370 370 1,830

156 Income of trusts to finance supplementary 

unemployment benefits .......................... 30 30 40 50 60 70 80 300

157 Special ESOP rules .................................... 1,030 1,110 1,180 1,150 1,220 1,290 1,370 6,210 470 490 520 550 580 610 630 2,890

158 Additional deduction for the blind ................ 40 30 40 50 50 50 50 240

159 Additional deduction for the elderly ............ 2,390 2,110 2,780 3,350 3,480 3,500 3,490 16,600

160 Tax credit for the elderly and disabled ........ 10 10 10 10 10 10 0 40

161 Deductibility of casualty losses ................... 270 300 350 380 390 420 440 1,980

162 Earned income tax credit 21 ........................ 1,172 1,128 3,155 3,265 3,423 3,550 3,769 17,162

Social Security: 

Exclusion of social security benefits: 

163 Social Security benefits for retired 

workers ............................................. 25,360 25,970 25,620 27,580 29,690 31,970 34,420 149,280

164 Social Security benefits for disabled 

workers ............................................. 7,690 8,030 8,230 8,590 9,000 9,430 9,860 45,110

165 Social Security benefits for spouses, 

dependents and survivors ................ 4,710 4,470 3,890 3,960 4,040 4,110 4,190 20,190

Veterans benefits and services: 

166 Exclusion of veterans death benefits and 

disability compensation ......................... 5,200 5,880 5,650 6,060 6,210 6,520 6,770 31,210

167 Exclusion of veterans pensions .................. 240 300 340 370 390 420 440 1,960

168 Exclusion of GI bill benefits ........................ 810 1,030 1,190 1,280 1,350 1,420 1,470 6,710
17. TAX EXPENDITURES 259

Table 17–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL 

INCOME TAXES FOR FISCAL YEARS 2011–2017—Continued

(In millions of dollars)

Corporations Individuals

2011 2012 2013 2014 2015 2016 2017 2013–17 2011 2012 2013 2014 2015 2016 2017 2013–17

169 Exclusion of interest on veterans housing 

bonds ..................................................... 0 0 10 10 10 10 10 50 10 10 10 20 20 20 20 90

General purpose fiscal assistance: 

170 Exclusion of interest on public purpose 

State and local bonds ............................ 7,570 7,800 10,510 12,460 13,360 13,820 14,370 64,520 18,620 21,280 25,700 30,310 33,560 35,750 37,660 162,980

171 Build America Bonds 22 .............................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

172 Deductibility of nonbusiness State and local 

taxes other than on owner-occupied 

homes .................................................... 41,060 33,180 46,260 56,980 60,500 63,880 67,430 295,050

Interest: 

173 Deferral of interest on U.S. savings bonds ... 1,190 1,200 1,250 1,330 1,340 1,360 1,370 6,650

Addendum: Aid to State and local 

governments: 

Deductibility of: 

Property taxes on owner-occupied 

homes ............................................... 23,210 16,150 22,320 27,900 29,060 30,080 31,270 140,630

 Nonbusiness State and local taxes other 

than on owner-occupied homes ......... 41,060 33,180 46,260 56,980 60,500 63,880 67,430 295,050

Exclusion of interest on State and local 

bonds for: 

Public purposes ..................................... 7,570 7,800 10,510 12,460 13,360 13,820 14,370 64,520 18,620 21,280 25,700 30,310 33,560 35,750 37,660 162,980

Energy facilities ...................................... 10 10 10 10 10 10 30 70 10 20 20 20 30 30 30 130

Water, sewage, and hazardous waste 

disposal facilities ............................... 120 130 170 200 210 220 230 1,030 300 340 410 490 540 570 600 2,610

Small-issues .......................................... 70 70 100 120 120 130 130 600 170 200 240 280 310 330 350 1,510

Owner-occupied mortgage subsidies ...... 310 310 420 500 540 560 580 2,600 750 860 1,040 1,220 1,350 1,440 1,520 6,570

Rental housing ....................................... 260 270 360 430 460 470 490 2,210 640 730 880 1,040 1,150 1,220 1,290 5,580

Airports, docks, and similar facilities ...... 200 210 280 340 360 370 390 1,740 500 570 690 820 900 960 1,020 4,390

Student loans ......................................... 140 140 190 230 240 250 260 1,170 340 390 470 550 610 650 680 2,960

Private nonprofit educational facilities ... 610 620 840 1,000 1,070 1,110 1,150 5,170 1,490 1,700 2,060 2,430 2,690 2,860 3,020 13,060

Hospital construction ............................. 900 920 1,240 1,470 1,580 1,630 1,700 7,620 2,200 2,520 3,040 3,580 3,970 4,230 4,450 19,270

Veterans’ housing .................................. 0 0 10 10 10 10 10 50 10 10 10 20 20 20 20 90

GO Zone and GO Zone mortgage ......... 20 20 10 10 10 10 10 50 60 50 40 40 40 40 30 190

Credit for holders of zone academy bonds ..... 200 200 180 160 130 120 110 700

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: 2011 $3,510; 2012 $4,130; 2013 $3,850; 2014 $3,210; 2015 $1,230; 2016 $290; 2017 $110.

2 In addition, the alcohol fuel mixture credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 

2011 $6,520; 2012 $3,590; 2013 $0; 2014 $0; 2015 $0; 2016 $0; 2017 $0.

The alternative fuel mixture credit results in a reduction in excise tax receipts (in millions of dollars) as follows:

2011 $160; 2012 $170; 2013 $0; 2014 $0; 2015 $0; 2016 $0; 2017 $0.

3 In addition, the biodiesel producer tax credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 

2011 $760; 2012 $210; 2013 $0; 2014 $0; 2015 $0; 2016 $0; 2017: $0.

4 In addition, the provision has outlay effects of (in millions of dollars):

2011 $20 ; 2012 $40; 2013 $50; 2014 $50; 2015 $50; 2016 $50; 2017 $50.

5 In addition, the provision has outlay effects of (in millions of dollars):

2011 $30 ; 2012 $50; 2013 $60; 2014 $60; 2015 $60; 2016 $60; 2017 $60.

6 In addition, the credit for low-income housing investments has outlay effects (in millions of dollars) as follows:

2010 $1940; 2011 $3480; 2012 $180.

7 The figures in the table indicate the effect of the homebuyer credits on receipts. The effect of the credits on outlays (in millions of dollars) is as follows:

2010 $8,670; 2011 $2,760; 2012 $310; 2013 $0; 2014 $0; 2015 $0; 2016 $0; and 2017 $0.

8 These figures do not account for the tonnage tax which shipping companies may opt into in lieu of the corporate income tax. 

The tonnage tax reduces the cost of this tax expenditure by $20 per year in each year of the budget.
260 ANALYTICAL PERSPECTIVES

9 In addition, recovery zone bonds have outlay effects (in millions of dollars) as follows:

2011 $160, 2012 $160, 2013 $160, 2014 $160, 2015 $160, 2016 $160; and 2017 $160.

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

2011 $5,770: 2012 $6,560: 2013 $7,850.

11 In addition, the credit for holders of zone academy bonds has outlay effects of (in millions of dollars):

2011 $10 ; 2012 $20; 2013 $30; 2014 $30; 2015 $30; 2016 $30; 2017 $30.

12 In addition, the provision for school construction bonds has outlay effects of (in millions of dollars):

2011 $430 ; 2012 $780; 2013 $940; 2014 $940; 2015 $940; 2016 $940; 2017 $940.

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

 2011 $1,150 and 2012 $540.

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

2011 $22,890; 2012 $22,660; 2013 $22,390; 2014 $1,670; 2015 $1,680; 2016 $1,420; and 2017 $1,650.

15 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:

2011 $13,876.

16 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:

2011 $104,800; 2012 $108,850; 2013 $113,690; 2014 $117,160; 2015 $122,260; 2016 $129,280; and 2017 $136,760.

17 In 2010 only, there is an additional exclusion of self-employed insurance premiums from payroll taxes. The effect on payroll tax receipts FY 2010 (in millions of dollars) is $1,570.

18 In addition, the premium assistance credit provision has outlay effects (in millions of dollars) as follows:

2014 $21,550; 2015 $43,260; 2016 $55,900; and 2017 $61,800.

19 In addition, the small business credit provision has outlay effects (in millions of dollars) as follows:

2011 $30; 2012 $110; 2013 $130; 2014 $180; 2015 $210; 2016 $180; and 2017 $150.

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

2011 $190; 2012 $150; 2013 $140; 2014 $40; 2015 $0; 2016 $0; and 2017 $0.

21 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:

2011 $55,670; 2012 $52,120; 2013 $52,500; 2014 $46,570; 2015 $47,270; 2016 $47,900; and 2017 $48,790.

22 In addition, Build America Bonds have outlay effects of (in millions of dollars):

2011 $3,190; 2012 $3,190; 2013 $3,190; 2014 $3,190; 2015 $3,190; 2016 $3,190; and 2017 $3,190.

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

All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in each year are not included in the table.
17. TAX EXPENDITURES 261

Table 17–3. INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2013-2017 PROJECTED REVENUE EFFECT

(In millions of dollars)

Provision 2013 2013–17

132 Exclusion of employer contributions for medical insurance premiums and medical care ..................................................................................................... 180,580 1,012,320

59 Deductibility of mortgage interest on owner-occupied homes .............................................................................................................................................. 100,910 606,420

150 401(k)-type plans ................................................................................................................................................................................................................... 72,740 428,760

78 Accelerated depreciation of machinery and equipment (normal tax method) ...................................................................................................................... 33,180 374,640

63 Exclusion of net imputed rental income ................................................................................................................................................................................. 51,080 337,380

72 Capital gains (except agriculture, timber, iron ore, and coal) ................................................................................................................................................. 62,040 321,470

149 Employer plans ..................................................................................................................................................................................................................... 52,330 298,040

172 Deductibility of nonbusiness State and local taxes other than on owner-occupied homes .................................................................................................. 46,260 295,050

126 Deductibility of charitable contributions, other than education and health ............................................................................................................................. 39,770 238,720

170 Exclusion of interest on public purpose State and local bonds ............................................................................................................................................ 36,210 227,500

5 Deferral of income from controlled foreign corporations (normal tax method) ..................................................................................................................... 41,810 216,020

74 Step-up basis of capital gains at death ................................................................................................................................................................................. 23,860 182,210

62 Capital gains exclusion on home sales ................................................................................................................................................................................. 23,440 171,110

163 Social Security benefits for retired workers .......................................................................................................................................................................... 25,620 149,280

52 Exclusion of interest on life insurance savings ..................................................................................................................................................................... 25,150 140,630

60 Deductibility of State and local property tax on owner-occupied homes .............................................................................................................................. 22,320 140,630

153 Self-Employed plans ............................................................................................................................................................................................................. 19,580 112,200

151 Individual Retirement Accounts ............................................................................................................................................................................................ 19,650 100,080

64 Exception from passive loss rules for $25,000 of rental loss ................................................................................................................................................ 15,380 99,810

82 Deduction for US production activities ................................................................................................................................................................................... 14,500 81,080

1 Exclusion of benefits and allowances to armed forces personnel ........................................................................................................................................ 14,900 68,980

135 Deductibility of medical expenses ........................................................................................................................................................................................ 9,910 63,170

122 Exclusion of employee meals and lodging (other than military) ........................................................................................................................................... 10,290 53,240

123 Child credit ............................................................................................................................................................................................................................. 18,390 53,130

164 Social Security benefits for disabled workers ........................................................................................................................................................................ 8,230 45,110

145 Exclusion of workers’ compensation benefits ........................................................................................................................................................................ 7,790 42,970

65 Credit for low-income housing investments .......................................................................................................................................................................... 7,380 39,300

133 Self-employed medical insurance premiums ......................................................................................................................................................................... 5,970 37,760

7 Expensing of research and experimentation expenditures (normal tax method) ................................................................................................................. 5,070 33,270

2 Exclusion of income earned abroad by U.S. citizens ............................................................................................................................................................ 5,800 32,160

166 Exclusion of veterans death benefits and disability compensation ....................................................................................................................................... 5,650 31,210

111 Deductibility of charitable contributions (education) .............................................................................................................................................................. 4,610 27,470

100 Lifetime Learning tax credit ................................................................................................................................................................................................... 3,920 27,210

139 Deductibility of charitable contributions (health) .................................................................................................................................................................... 4,490 26,970

136 Exclusion of interest on hospital construction bonds ............................................................................................................................................................. 4,280 26,890

99 HOPE tax credit ..................................................................................................................................................................................................................... 580 23,710

4 Inventory property sales source rules exception ................................................................................................................................................................... 3,730 22,140

71 Treatment of qualified dividends ............................................................................................................................................................................................ 21,900 21,900

165 Social Security benefits for spouses, dependents and survivors .......................................................................................................................................... 3,890 20,190

80 Graduated corporation income tax rate (normal tax method) ............................................................................................................................................... 3,300 18,670

107 Exclusion of interest on bonds for private nonprofit educational facilities ............................................................................................................................. 2,900 18,230

85 Exclusion of reimbursed employee parking expenses .......................................................................................................................................................... 3,290 17,970

98 Exclusion of scholarship and fellowship income (normal tax method) ................................................................................................................................. 3,290 17,690

162 Earned income tax credit ....................................................................................................................................................................................................... 3,155 17,162

159 Additional deduction for the elderly ...................................................................................................................................................................................... 2,780 16,600

75 Carryover basis of capital gains on gifts ............................................................................................................................................................................... 2,070 16,440

8 Credit for increasing research activities ................................................................................................................................................................................ 4,230 14,190

101 Lifetime Learning tax credit ................................................................................................................................................................................................... 13,710 13,710

110 Parental personal exemption for students age 19 or over .................................................................................................................................................... 2,800 13,410

16 Energy investment credit ....................................................................................................................................................................................................... 1,510 12,210

134 Medical Savings Accounts / Health Savings Accounts .......................................................................................................................................................... 2,070 11,820

138 Credit for employee health insurance expenses of small business. ....................................................................................................................................... 1,750 11,680

154 Premiums on group term life insurance ................................................................................................................................................................................ 2,120 11,020

105 Qualified Tuition Programs ..................................................................................................................................................................................................... 1,890 10,390

15 New technology credit .......................................................................................................................................................................................................... 1,900 9,330

57 Exclusion of interest on owner-occupied mortgage subsidy bonds ...................................................................................................................................... 1,460 9,170
262 ANALYTICAL PERSPECTIVES

Table 17–3. INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2013-2017 PROJECTED REVENUE EFFECT—Continued

(In millions of dollars)

Provision 2013 2013–17

157 Special ESOP rules ............................................................................................................................................................................................................... 1,700 9,100

118 Employer provided child care exclusion ................................................................................................................................................................................. 1,580 8,970

140 Tax credit for orphan drug research ...................................................................................................................................................................................... 1,120 8,520

58 Exclusion of interest on rental housing bonds ....................................................................................................................................................................... 1,240 7,790

61 Deferral of income from installment sales ............................................................................................................................................................................. 1,350 7,300

124 Credit for child and dependent care expenses ..................................................................................................................................................................... 1,620 7,040

10 Excess of percentage over cost depletion, fuels .................................................................................................................................................................. 1,260 6,860

168 Exclusion of GI bill benefits .................................................................................................................................................................................................. 1,190 6,710

173 Deferral of interest on U.S. savings bonds ............................................................................................................................................................................ 1,250 6,650

3 Exclusion of certain allowances for Federal employees abroad ............................................................................................................................................ 1,120 6,210

51 Exemption of credit union income ........................................................................................................................................................................................ 1,160 6,130

90 Exclusion of interest for airport, dock, and similar bonds ...................................................................................................................................................... 970 6,130

79 Expensing of certain small investments (normal tax method) .............................................................................................................................................. 940 6,040

152 Low and moderate income savers credit ............................................................................................................................................................................... 1,130 5,510

103 Deductibility of student-loan interest ...................................................................................................................................................................................... 900 5,130

31 30% credit for residential purchases/installations of solar and fuel cells ............................................................................................................................... 1,030 5,000

128 Exclusion of parsonage allowances ..................................................................................................................................................................................... 770 4,520

47 Capital gains treatment of certain income ............................................................................................................................................................................ 830 4,310

93 New markets tax credit .......................................................................................................................................................................................................... 930 4,280

106 Exclusion of interest on student-loan bonds ......................................................................................................................................................................... 660 4,130

146 Exclusion of public assistance benefits (normal tax method) ............................................................................................................................................... 750 4,010

73 Capital gains exclusion of small corporation stock ................................................................................................................................................................ 280 3,850

56 Exclusion of interest spread of financial institutions .............................................................................................................................................................. 600 3,730

37 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities ................................................................................................................ 580 3,640

66 Accelerated depreciation on rental housing (normal tax method) ........................................................................................................................................ 90 3,480

120 Assistance for adopted foster children ................................................................................................................................................................................... 560 3,230

40 Tax incentives for preservation of historic structures ............................................................................................................................................................ 570 3,170

86 Exclusion for employer-provided transit passes ................................................................................................................................................................... 560 3,170

141 Special Blue Cross/Blue Shield deduction ........................................................................................................................................................................... 590 3,130

36 Excess of percentage over cost depletion, nonfuel minerals ................................................................................................................................................ 590 3,040

97 Tribal Economic Development Bonds .................................................................................................................................................................................... 480 3,040

9 Expensing of exploration and development costs, fuels ....................................................................................................................................................... 790 2,950

115 Qualified school construction bonds ...................................................................................................................................................................................... 580 2,530

92 Empowerment zones, Enterprise communities, and Renewal communities ......................................................................................................................... 460 2,330

143 Distributions from retirement plans for premiums for health and long-term care insurance .................................................................................................. 360 2,200

19 Tax credit and deduction for clean-fuel burning vehicles ....................................................................................................................................................... 180 2,110

81 Exclusion of interest on small issue bonds ........................................................................................................................................................................... 340 2,110

127 Exclusion of certain foster care payments ............................................................................................................................................................................ 400 1,980

161 Deductibility of casualty losses ............................................................................................................................................................................................. 350 1,980

167 Exclusion of veterans pensions ............................................................................................................................................................................................ 340 1,960

155 Premiums on accident and disability insurance .................................................................................................................................................................... 360 1,830

23 Credit for investment in clean coal facilities ........................................................................................................................................................................... 410 1,710

39 Expensing of multiperiod timber growing costs .................................................................................................................................................................... 280 1,520

144 Exclusion of railroad retirement system benefits .................................................................................................................................................................. 290 1,260

116 Work opportunity tax credit .................................................................................................................................................................................................... 620 1,190

54 Tax exemption of certain insurance companies owned by tax-exempt organizations ........................................................................................................... 210 1,080

20 Exclusion of utility conservation subsidies ............................................................................................................................................................................. 210 1,020

88 Exclusion of interest on bonds for Financing of Highway Projects and rail-truck transfer facilities ........................................................................................ 230 1,000

45 Expensing of certain multiperiod production costs ............................................................................................................................................................... 170 900

42 Industrial CO2 capture and sequestration tax credit ............................................................................................................................................................. 60 840

121 Adoption credit and exclusion ................................................................................................................................................................................................ 380 730

33 Advanced Energy Property Credit ......................................................................................................................................................................................... 380 700

108 Credit for holders of zone academy bonds ............................................................................................................................................................................ 180 700

44 Expensing of certain capital outlays ...................................................................................................................................................................................... 110 660

148 Exclusion of military disability pensions ............................................................................................................................................................................... 130 660

91 Exemption of certain mutuals’ and cooperatives’ income ..................................................................................................................................................... 120 620

26 Amortize all geological and geophysical expenditures over 2 years ...................................................................................................................................... 160 480
17. TAX EXPENDITURES 263

Table 17–3. INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2013-2017 PROJECTED REVENUE EFFECT—Continued

(In millions of dollars)

Provision 2013 2013–17

48 Income averaging for farmers ................................................................................................................................................................................................ 90 480

102 Education Individual Retirement Accounts ............................................................................................................................................................................ 80 480

30 Credit for energy efficient appliances .................................................................................................................................................................................... 140 460

25 Natural gas distribution pipelines treated as 15-year property .............................................................................................................................................. 90 440

13 Capital gains treatment of royalties on coal .......................................................................................................................................................................... 80 430

38 Capital gains treatment of certain timber income ................................................................................................................................................................. 80 430

50 Expensing of reforestation expenditures ............................................................................................................................................................................... 80 430

35 Expensing of exploration and development costs, nonfuel minerals .................................................................................................................................... 70 420

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

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

156 Income of trusts to finance supplementary unemployment benefits ..................................................................................................................................... 40 300

67 Discharge of mortgage indebtedness .................................................................................................................................................................................... 250 250

70 Exceptions from imputed interest rules ................................................................................................................................................................................ 50 250

95 Credit to holders of Gulf Tax Credit Bonds. ............................................................................................................................................................................ 50 240

158 Additional deduction for the blind .......................................................................................................................................................................................... 40 240

17 Alcohol fuel credits ................................................................................................................................................................................................................ 110 210

27 Allowance of deduction for certain energy efficient commercial building property ................................................................................................................ 100 210

14 Exclusion of interest on energy facility bonds ....................................................................................................................................................................... 30 200

53 Special alternative tax on small property and casualty insurance companies ..................................................................................................................... 40 200

147 Exclusion of special benefits for disabled coal miners .......................................................................................................................................................... 40 200

83 Special rules for certain film and TV production .................................................................................................................................................................... 80 160

87 Tax credit for certain expenditures for maintaining railroad tracks ......................................................................................................................................... 80 160

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

55 Small life insurance company deduction .............................................................................................................................................................................. 30 150

169 Exclusion of interest on veterans housing bonds .................................................................................................................................................................. 20 140

12 Exception from passive loss limitation for working interests in oil and gas properties ......................................................................................................... 30 130

109 Exclusion of interest on savings bonds redeemed to finance educational expenses ............................................................................................................ 20 130

43 Deduction for endangered species recovery expenditures .................................................................................................................................................... 20 120

46 Treatment of loans forgiven for solvent farmers ..................................................................................................................................................................... 20 100

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

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

89 Investment credit for rehabilitation of structures (other than historic) ................................................................................................................................... 20 100

114 Discharge of student loan indebtedness ............................................................................................................................................................................... 20 100

125 Credit for disabled access expenditures ............................................................................................................................................................................... 20 100

34 Advanced nuclear power production credit ............................................................................................................................................................................ 0 80

28 Credit for construction of new energy efficient homes ........................................................................................................................................................... 20 70

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

112 Exclusion of employer-provided educational assistance ...................................................................................................................................................... 40 40

160 Tax credit for the elderly and disabled .................................................................................................................................................................................. 10 40

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

142 Tax credit for health insurance purchased by certain displaced and retired individuals ........................................................................................................ 10 10

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

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

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

96 Recovery Zone Bonds ........................................................................................................................................................................................................... 0 0

104 Deduction for higher education expenses ............................................................................................................................................................................. 0 0

113 Special deduction for teacher expenses ................................................................................................................................................................................ 0 0

117 Welfare-to-work tax credit ...................................................................................................................................................................................................... 0 0

119 Employer-provided child care credit ...................................................................................................................................................................................... 0 0

129 Employee retention credit for employers affected by Hurricane Katrina, Rita, and Wilma ..................................................................................................... 0 0

130 Exclusion for benefits provided to volunteer EMS and firefighters ........................................................................................................................................ 0 0

131 Making work pay tax credit .................................................................................................................................................................................................... 0 0

171 Build America Bonds ............................................................................................................................................................................................................. 0 0

94 Expensing of environmental remediation costs ..................................................................................................................................................................... –170 –730

22 Deferral of gain from dispositions of transmission property to implement FERC restructuring policy ................................................................................... –180 –820

69 Cancellation of indebtedness ............................................................................................................................................................................................... –20 –1,100
264 ANALYTICAL PERSPECTIVES

Table 17–3. INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2013-2017 PROJECTED REVENUE EFFECT—Continued

(In millions of dollars)

Provision 2013 2013–17

24 Temporary 50% expensing for equipment used in the refining of liquid fuels ........................................................................................................................ 530 –3,020

67 Credit for homebuyer ............................................................................................................................................................................................................. –1,150 –3,140

137 Refundable Premium Assistance Tax Credit ......................................................................................................................................................................... 0 –10,510

77 Accelerated depreciation of buildings other than rental housing (normal tax method) ......................................................................................................... –7,370 –35,790

•	 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 inTable 17–4. PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR ACTIVITY IN CALENDAR YEAR 2011

(In millions of dollars)

Provision

2011

Present Value

of Revenue 

Loss

5 Deferral of income from controlled foreign corporations (normal tax method) ....................................................................... 24,420

7 Expensing of research and experimentation expenditures (normal tax method) ................................................................... 3,400

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

9 Expensing of exploration and development costs - fuels ........................................................................................................ 280

35 Expensing of exploration and development costs - nonfuels .................................................................................................. 60

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

45 Expensing of certain multiperiod production costs - agriculture ............................................................................................. 230

44 Expensing of certain capital outlays - agriculture ................................................................................................................... 150

50 Expensing of reforestation expenditures ................................................................................................................................ 30

52 Deferral of income on life insurance and annuity contracts .................................................................................................... 19,240

66 Accelerated depreciation on rental housing ........................................................................................................................... 8,100

77 Accelerated depreciation of buildings other than rental ........................................................................................................ –10,990

78 Accelerated depreciation of machinery and equipment .......................................................................................................... 27,085

79 Expensing of certain small investments (normal tax method) ................................................................................................ 190

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

65 Credit for low-income housing investments ............................................................................................................................ 6,580

105 Deferral for state prepaid tuition plans .................................................................................................................................... 4,300

149 Exclusion of pension contributions - employer plans .............................................................................................................. 82,920

150 Exclusion of 401(k) contributions ............................................................................................................................................ 89,190

151 Exclusion of IRA contributions and earnings .......................................................................................................................... 1,290

151 Exclusion of Roth earnings and distributions ......................................................................................................................... 3,570

151 Exclusion of non-deductible IRA earnings .............................................................................................................................. 140

153 Exclusion of contributions and earnings for Self-Employed plans .......................................................................................... 3,380

170 Exclusion of interest on public-purpose bonds ....................................................................................................................... 18,720

Exclusion of interest on non-public purpose bonds ................................................................................................................ 6,320

173 Deferral of interest on U.S. savings bonds .............................................................................................................................. 260
17. TAX EXPENDITURES 265

come. Under the reference tax rules, gross income does 

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

gross income include most transfer payments from the 

Government.2 The normal tax baseline also excludes 

gifts between individuals from gross income. Under the 

normal tax baseline, however, all cash transfer payments 

from the Government to private individuals are counted 

in gross income, and exemptions of such transfers from 

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

baselines.3 

Capital recovery. Under the reference tax law baseline 

no tax expenditures arise from accelerated depreciation. 

Under the normal tax baseline, the depreciation 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, 2011. Legislation enacted in 2011 extended and expanded the work opportunity credit to employers for 

hiring unemployed veterans, as well as changed the 

calculation of modified Adjusted Gross Income (AGI) in 

determining certain federal health care program eligibility. 

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.

National Defense

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

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

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

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

In contrast to this treatment, certain housing and meals, 

in addition to other benefits provided military personnel, 

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

pay related to combat service, are excluded from income 

subject to tax. 

2. Income earned abroad.—Under the baseline 

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

properly included in their taxable income. It makes no 

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

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

and satisfy a foreign residency requirement to exclude 

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

in foreign earned income from U.S. taxes. In addition, if 

these taxpayers receive a specific allowance for foreign 

housing from their employers, then they may also exclude 

such expenses to the extent that they do not exceed 30 

percent of the earned income inclusion, with geographical adjustments, over 16 percent of the earned income 

limit. If taxpayers do not receive a specific allowance for 

housing expenses, they may deduct housing expenses up 

to the amount by which foreign earned income exceeds 

their foreign earned income exclusion.

3. Exclusion of certain allowances for Federal 

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

income. It makes no difference whether the compensation 

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

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

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

Corps members who work outside the continental United 

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

certain special allowances they receive to compensate 

them for the relatively high costs associated with living 

overseas. The allowances supplement wage income and 

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

travel to and from the United States.

4. Sales source rule exceptions.—The United 

States generally taxes the worldwide income of U.S. persons, 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, 
266 ANALYTICAL PERSPECTIVES

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, 2011.

Energy

9. Exploration and development costs.—Under 

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

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

well is measured appropriately each year. 

In contrast to this treatment, current law allows intangible drilling costs for successful investments in domestic oil and gas wells (such as wages, the cost of using 

machinery for grading and drilling, and the cost of unsalvageable materials used in constructing wells) to be 

deducted immediately, i.e., expensed. Because it allows 

recovery of costs sooner, expensing is more generous for 

the taxpayer than would be amortization. Integrated oil 

companies may deduct only 70 percent of such costs and 

must amortize the remaining 30 percent over five years. 

The same rule applies to the exploration and development 

costs of surface stripping and the construction of shafts 

and tunnels for other fuel minerals.

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

depletion is similar in concept to depreciation, in that the 

costs of developing or acquiring the asset are capitalized 

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

income.

In contrast, the Tax Code generally allows independent 

fuel and mineral producers and royalty owners to take 

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

depletion, taxpayers deduct a percentage of gross income 

from mineral production. In certain cases the deduction 

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

life of an investment, percentage depletion deductions can 

exceed the cost of the investment. Consequently, percentage depletion offers more generous tax treatment than 

would cost depletion, which would limit deductions to an 

investment’s cost.

11. Alternative fuel production credit.—The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally 

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

$3 per oil-equivalent barrel of production (in 2004 dollars) 

for coke or coke gas during a four-year period for qualified 

facilities. With the exception of liquefied hydrogen, these 

facilities must be placed in service before January 1, 2011.

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. 
17. TAX EXPENDITURES 267

Passive losses that are unused may be carried forward 

and applied against future passive income. 

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

taxpayer holds directly or through an entity that does not 

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

interests against nonpassive income without regard to 

whether they materially participate in the activity. 

13. Capital gains treatment of royalties on 

coal.—For individuals in 2011, 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. Beginning in 2013, the top preferential tax 

rate on capital gains will be 20 percent.

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. With the exception of the cellulosic biofuel credit, 

these provisions expired on December 31, 2011.

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

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

tax uniformly all returns from investment-like activities. 

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

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

claim a refundable excise tax credit. In addition, small 

agri-biodiesel producers are eligible for a separate income 

tax credit for ethanol production and a separate credit 

is available for qualified renewable diesel fuel mixtures. 

This provision expired on December 31, 2011.

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 fuel vehicle refueling property, 

fuel cell vehicles and plug-ins (including plug-in electric 

vehicles, plug-in electric drive motor vehicles, and plug-in 

conversion kits). The credits for advanced lean burn technology, and for hybrid and alternative motor vehicles, expired on December 31, 2010, while the credit for non-hydrogen refueling stations expired on December 31, 2011.

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

variety of (measurable) accretions to wealth. In certain 

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

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

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

customer under the baseline tax system. In contrast, the 

Tax Code exempts these subsidies from the non-business 

customer’s gross income.

21. Credit to holders of clean renewable energy 

bonds.—The baseline tax system would uniformly tax all 

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

Tax Code provides for the issuance of Clean Renewable 

Energy Bonds which entitles the bond holder to a Federal 

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

issuers of the unused authorization of such bonds could 

opt to receive direct payment with the yield becoming 

fully taxable.

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

policy.—The baseline tax system generally would tax 
268 ANALYTICAL PERSPECTIVES

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. The sale of property must be made 

prior to January 1, 2012.

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. This provision expired on December 31, 

2011. 

29. Credit for energy efficiency improvements 

to existing homes.—The baseline tax system would not 

allow credits for particular activities, investments, or industries. However, the Tax Code provides an investment 

tax credit for expenditures made on insulation, exterior 

windows, and doors that improve the energy efficiency 

of homes and meet certain standards. The Tax Code also 

provides a credit for purchases of advanced main air circulating fans, natural gas, propane, or oil furnaces or hot 

water boilers, and other qualified energy efficient property. This provision expired on December 31, 2011.

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. This provision 

expired on December 31, 2011.

31. Credit for residential energy efficient property.—The baseline tax system would uniformly tax all 

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

Tax Code provides a credit for the purchase of a qualified 

photovoltaic property and solar water heating property, as 

well as for fuel cell power plants, geothermal heat pumps 

and small wind property.

32. Credit for qualified energy conservation 

bonds.—The baseline tax system would uniformly tax 

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

the Tax Code provides for the issuance of energy conservation bonds which entitle the bond holder to a Federal 

income tax credit in lieu of interest. The limit on the 

volume issued in 2009-2010 is $3.2 billion. As of March 

2010, issuers of the unused authorization of such bonds 

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

33. Advanced energy property credit.—The baseline tax system would not allow credits for particular 

activities, investments, or industries. However, the Tax 

Code provides a 30 percent investment credit for property used in a qualified advanced energy manufacturing 

project. The Treasury Department may award up to $2.3 

billion in tax credits for qualified investments. 

34. Advanced nuclear power facilities production credit.—The baseline tax system would not allow 

credits or deductions for particular activities, investments, or industries. Instead, it generally would seek to 

tax uniformly all returns from investment-like activities. 

In contrast, the Tax Code allows a tax credit equal to 1.8 

cents times the number of kilowatt hours of electricity 

produced at a qualifying advanced nuclear power facility. A taxpayer may claim no more than $125 million per 

1,000 MW of capacity. The Treasury Department may allocate up to 6,000 megawatts of credit-eligible capacity.
17. TAX EXPENDITURES 269

Natural Resources and Environment

35. Exploration and development costs.—The 

baseline tax system allows the taxpayer to deduct the depreciation of an asset according to the decline in its economic value over time. However, certain capital outlays 

associated with exploration and development of nonfuel 

minerals may be expensed rather than depreciated over 

the life of the asset.

36. Percentage depletion.—The baseline tax system allows the taxpayer to deduct the decline in the economic value of an investment over time. Under current 

law, however, most nonfuel mineral extractors may use 

percentage depletion (whereby the deduction is fixed as a 

percentage of revenue and can exceed total costs) rather 

than cost depletion, with percentage depletion rates ranging from 22 percent for sulfur to 5 percent for sand and 

gravel. Over the life of an investment, percentage depletion deductions can exceed the cost of the investment. 

Consequently, percentage depletion offers more generous 

tax treatment than would cost depletion, which would 

limit deductions to an investment’s cost.

37. Sewage, water, solid and hazardous waste 

facility bonds.—The baseline tax system generally 

would tax all income under the regular tax rate schedule. 

It would not allow preferentially low (or zero) tax rates to 

apply to certain types or sources of income. In contrast, 

the Tax Code allows interest earned on State and local 

bonds used to finance construction of sewage, water, or 

hazardous waste facilities to be exempt from tax. These 

bonds are generally subject to the State private-activitybond annual volume cap.

38. Capital gains treatment of certain timber.—

The baseline tax system generally would tax all income 

under the regular tax rate schedule. It would not allow 

preferentially low tax rates to apply to certain types or 

sources of income. However, under current law certain 

timber sales can be treated as a capital gain rather than 

ordinary income and therefore subject to the lower capital-gains tax rate. For individuals in 2011, 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. Beginning in 

2013, the top preferential tax rate on capital gains will be 

20 percent.

39. Expensing multi-period timber growing 

costs.—The baseline tax system requires the taxpayer 

to capitalize costs associated with investment property. 

However, most of the production costs of growing timber 

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

40. Historic preservation.—The baseline tax system 

would not allow credits for particular activities, investments, or industries. However, expenditures to preserve 

and restore certified historic structures qualify for an investment tax credit of 20 percent under current law for 

certified rehabilitation activities. The taxpayer’s recoverable basis must be reduced by the amount of the credit. 

Qualified GO (Gulf Opportunity) Zone expenditures qualify for a 26 percent credit. 

41. Exclusion of gain or loss on sale or exchange 

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

organization must pay taxes on income from activities 

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

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

of certain qualifying brownfield properties.

42. Industrial CO2 capture and sequestration 

tax credit.—The baseline tax system would uniformly 

tax all returns to investments and not allow credits for 

particular activities, investments, or industries. In contrast, the Tax Code allows a credit of $20 per metric ton 

for qualified carbon dioxide captured at a qualified facility 

and disposed of in secure geological storage. In addition, 

the provision allows a credit of $10 per metric ton of qualified carbon dioxide that is captured at a qualified facility 

and as a tertiary injectant in a qualified enhanced oil or 

natural gas recovery project.

43. Deduction for endangered species recovery 

expenditures.—The baseline tax system generally would 

tax all income under the regular tax rate schedule. It 

would not allow preferentially low tax rates to apply to 

certain types or sources of income. In contrast, under current law farmers can deduct up to 25 percent of their gross 

income for expenses incurred as a result of site and habitat improvement activities that will benefit endangered 

species on their farm land, in accordance with site specific 

management actions included in species recovery plans approved pursuant to the Endangered Species Act of 1973.

Agriculture

44. Expensing certain capital outlays.—The 

baseline tax system 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.

45. Expensing multi-period livestock and crop 

production costs.—The baseline tax system requires the 

taxpayer to capitalize costs associated with an investment 

over time. However, the production of livestock and crops 

with a production period greater than two years (e.g., establishing orchards or constructing barns) is exempt from 

the uniform cost capitalization rules, thereby accelerating 

cost recovery.

46. Loans forgiven solvent farmers.—The baseline 

tax system requires debtors to include the amount of loan 

forgiveness as income or else reduce their recoverable basis 

in the property related to the loan. If the amount of forgiveness exceeds the basis, the excess forgiveness is taxable. 

However, for bankrupt debtors, the amount of loan forgiveness reduces carryover losses, unused credits, and then basis, with the remainder of the forgiven debt excluded from 

taxation.

47. Capital gains treatment of certain income.—

For individuals in 2011, tax rates on regular income vary 

from 10 percent to 35 percent, depending on the taxpayer’s 
270 ANALYTICAL PERSPECTIVES

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. . Beginning in 2013, the top preferential tax rate on 

capital gains will be 20 percent.

48. Income averaging for farmers.—The baseline tax system generally taxes all earned income each 

year at the rate determined by the income tax. However, 

taxpayers may average their taxable income from farming and fishing over the previous three years.

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

The baseline tax system generally subjects capital gains 

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

Code allows a taxpayer who sells stock in a farm refiner 

to a farmers’ cooperative to defer recognition of the gain 

if the proceeds are re-invested in a qualified replacement 

property.

50. Expensing of reforestation expenditures.—

The baseline tax system requires the taxpayer to capitalize costs associated with an investment over time. In 

contrast, the Tax Code provides for the expensing of the 

first $10,000 in reforestation expenditures with 7-year 

amortization of the remaining expenses.

Commerce and Housing

This category includes a number of tax expenditure 

provisions that also affect economic activity in other 

functional categories. For example, provisions related to 

investment, such as accelerated depreciation, could be 

classified under the energy, natural resources and environment, agriculture, or transportation categories.

51. 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.

52. 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.

53. 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.

54. 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.

55. 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.

56. 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.

57. 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 
17. TAX EXPENDITURES 271

to be exempt. These bonds are generally subject to the 

State private-activity-bond annual volume cap.

58. 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.

59. Interest on owner-occupied homes.—Under 

the baseline tax system, expenses incurred in earning income would be deductible. However, such expenses would 

not be deductible when the income or the return on an 

investment is not taxed. In contrast, the Tax Code allows 

an exclusion from a taxpayer’s taxable income for the 

value of owner-occupied housing services and also allows 

the owner-occupant to deduct mortgage interest paid on 

his or her primary and secondary residences as an itemized non-business deduction. In general, the mortgage interest deduction is limited to interest on debt no greater 

than the owner’s basis in the residence, and is also limited 

to interest on debt of no more than $1 million. Interest on 

up to $100,000 of other debt secured by a lien on a principal or second residence is also deductible, irrespective of 

the purpose of borrowing, provided the total debt does not 

exceed the fair market value of the residence. As an alternative to the deduction, holders of qualified Mortgage 

Credit Certificates issued by State or local governmental 

units or agencies may claim a tax credit equal to a proportion of their interest expense.

60. Taxes on owner-occupied homes.—Under the 

baseline tax system, expenses incurred in earning income 

would be deductible. However, such expenses would not 

be deductible when the income or the return on an investment is not taxed. In contrast, the Tax Code allows an 

exclusion from a taxpayer’s taxable income for the value 

of owner-occupied housing services and also allows the 

owner-occupant to deduct property taxes paid on his or 

her primary and secondary residences.

61. 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.

62. Capital gains exclusion on home sales.—The 

baseline tax system would not allow deductions and exemptions for certain types of income. In contrast, the Tax 

Code allows homeowners to exclude from gross income up 

to $250,000 ($500,000 in the case of a married couple filing a joint return) of the capital gains from the sale of 

a principal residence. To qualify, the taxpayer must have 

owned and used the property as the taxpayer’s principal 

residence for a total of at least two of the five years preceding the date of sale, In addition, the exclusion may not 

be used more than once every two years.

63. Imputed net rental income on owner-occupied housing.—Under the baseline tax system, the 

taxable income of a taxpayer who is an owner-occupant 

would include the implicit value of gross rental income on 

housing services earned on the investment in owner-occupied housing and would allow a deduction for expenses, 

such as interest, depreciation, property taxes, and other 

costs, associated with earning such rental income.  In contrast, the Tax Code allows an exclusion from taxable income for the implicit gross rental income on housing services, while in certain circumstances allows a deduction 

for some costs associated with such income, such as for 

mortgage interest and property taxes.

64. 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. 

65. 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. 

66. 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 
272 ANALYTICAL PERSPECTIVES

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

67. Discharge of mortgage indebtedness.—Under 

the baseline tax system, all income would generally be 

taxed under the regular tax rate schedule. The baseline 

tax system would not allow preferentially low (or zero) 

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

In contrast, the Tax Code allows an exclusion from a taxpayer’s taxable income for any discharge of indebtedness 

of up to $2 million ($1 million in the case of a married 

individual filing a separate return) from a qualified principal residence. The provision applies to debt discharged 

after January 1, 2007, and before January 1, 2013.

68. 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. 

69. 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.

70. 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.

71. Treatment of qualified dividends.—For individuals in 2011, 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, in 2011 qualified dividends were taxed at a preferentially low rate that is no 

higher than 15 percent. Beginning in 2013, dividends will 

be taxed as ordinary income. 

72. Capital gains (other than agriculture, timber, and coal).—For individuals in 2011, 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, in 2011 capital gains on assets held for more 

than one year were taxed at a preferentially low rate that 

is no higher than 15 percent. Beginning in 2013, the top 

preferential tax rate on capital gains will be 20 percent.

73. 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 after February 17, 2009 

and before September 28, 2010; and 100 percent for stock 

issued after September 27, 2010 and before January 1, 

2012. A qualified small business is a corporation whose 

gross assets do not exceed $50 million as of the date of 

issuance of the stock.

74. Step-up in basis of capital gains at death.— 

Under the baseline tax system, unrealized capital gains 

would be taxed when assets are transferred at death or 

by gift. 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.

75. Carryover basis of capital gains on gifts.— 

Under the baseline tax system, unrealized capital gains 

would be taxed when assets are transferred at death or by 

gift. In contrast, when a gift of appreciated asset is made 

under current law, the donor’s basis in the transferred 

property (the cost that was incurred when the transferred 

property was first acquired) carries over to the donee. The 

carryover of the donor’s basis allows a continued deferral 

of unrealized capital gains.

76. 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.

77. 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.

78. 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 
17. TAX EXPENDITURES 273

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.

79. 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.

80. Graduated corporation income tax rate 

schedule.—Because the corporate rate schedule is part 

of reference tax law, it is not considered a tax expenditure 

under the reference method. A flat corporation income 

tax rate is taken as the baseline under the normal tax 

method; therefore the lower rate is considered a tax expenditure under this concept.

81. 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.

82. 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.

83. 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

84. 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. U.S. shipping companies may choose to be subject to a tonnage tax 

based on gross shipping weight in lieu of an income tax, 

in which case profits would not be subject to tax under the 

regular tax rate schedule.

85. Exclusion of employee parking expenses.—

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

included in taxable income. Dedicated payments and inkind benefits represent accretions to wealth that do not 

differ materially from cash wages. In contrast, the Tax 

Code allows an exclusion from taxable income for employee parking expenses that are paid for by the employer or 

that are received by the employee in lieu of wages. In 

2012, the maximum amount of the parking exclusion 

will be $240 per month. The tax expenditure estimate 

does not include any subsidy provided through employerowned parking facilities.

86. Exclusion of employee transit pass expenses.—Under the baseline tax system, all compensation, 

including dedicated payments and in-kind benefits, would 

be included in taxable income. Dedicated payments and 

in-kind benefits represent accretions to wealth that do 

not differ materially from cash wages. In contrast, the 

Tax Code allows an exclusion from a taxpayer’s taxable 

income for passes, tokens, fare cards, and vanpool expenses that are paid for by an employer or that are received by 

the employee in lieu of wages to defray an employee’s commuting costs. The American Recovery and Reinvestment 

Act of 2009 (“ARRA,” Pub. L. 111-5) included a provision 

that equalized the maximum exclusion amount for these 

expenses with the maximum exclusion amount for employee parking expenses. This parity provision was to 

sunset on December 31, 2010, but was extended by the 

Tax Relief, Unemployment Insurance Reauthorization, 

and Job Creation Act of 2010 (“TRUIRJCA,” Pub. L. 111-

312) through December 31, 2011. The maximum amount 

of the exclusion in 2012 is set at $125 per month. 

87. 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. 

88. 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

89. Rehabilitation of structures.—The baseline 

tax system would uniformly tax all returns to invest-
274 ANALYTICAL PERSPECTIVES

ments 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. Qualified GO Zone 

expenditures qualify for a 13 percent credit.

90. 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.

91. 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.

92. 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 write-offs 

faster than economic depreciation. In contrast, under current law qualifying businesses in designated economically 

depressed areas can receive tax benefits such as an employer wage credit, increased expensing of investment in 

equipment, special tax-exempt financing, accelerated depreciation, and certain capital gains incentives. A taxpayer’s ability to accrue new tax benefits for Empowerment 

Zones and the DC Enterprise Zone expired December 31, 

2011. A taxpayer’s ability to accrue new tax benefits for 

Renewal Communities expired December 31, 2009.

93. New markets tax credit.—The baseline tax 

system would not allow credits for particular activities, 

investments, or industries. However, under current law 

taxpayers who make qualified equity investments in a 

community development entity (CDE), which then makes 

qualified investments in low-income communities, are eligible for a tax credit received over 7 years. A CDE must 

first receive an allocation of tax credit from Treasury before it can sell the tax credit to the investor in exchange 

for the equity investment. The total equity investment 

available for the credit across all CDEs is $5 billion in 

2011, the last year for which allocations can be made.

94. 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.

95. 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.

96. 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.

97. 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

98. 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).

99. 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 

(dollar amounts are for 2011). The credit only covers tuition and fees paid during the first two years of a student’s 
17. TAX EXPENDITURES 275

post-secondary education. In 2011, the credit is phased 

out ratably for taxpayers with modified AGI between 

$102,000 and $122,000 if married filing jointly ($51,000 

and $61,000 for other taxpayers), indexed.

100. Lifetime Learning tax credit.—The baseline 

tax system would not allow credits for particular activities, investments, or industries. Under current law, however, the non-refundable Lifetime Learning tax credit allows a credit for 20 percent of an eligible student’s tuition 

and fees, up to a maximum credit per return of $2,000. In 

2011, the credit is phased out ratably for taxpayers with 

modified AGI between $102,000 and $122,000 if married 

filing jointly ($51,000 and $61,000 for other taxpayers), 

indexed. The credit applies to both undergraduate and 

graduate students.

101. American Opportunity Tax Credit.—The 

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

law, however, the American Opportunity tax credit allows 

a partially refundable credit of up to $2,500 per eligible 

student for qualified tuition and related expenses paid 

during each of the first four years of the student’s postsecondary education. The credit is phased out for taxpayers with modified adjusted gross income between $80,000 

and $90,000 ($160,000 and $180,000 for married taxpayers filing a joint return). The credit is available for qualified expenses incurred in tax years beginning on or after 

January 1, 2009 and on or before December 31, 2012.

102. 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 education expenses. The maximum contribution to an education IRA 

in 2011 is $2,000 per beneficiary. In 2011, the maximum 

contribution is phased down ratably for taxpayers with 

modified AGI between $190,000 and $220,000 if married 

filing jointly ($95,000 and $110,000 for other taxpayers).

103. Student-loan interest.—The baseline tax system accepts current law’s general rule limiting taxpayers’ 

ability to deduct non-business interest expenses. In contrast, taxpayers may claim an above-the-line deduction 

of up to $2,500 on interest paid on an education loan. In 

general, interest may only be deducted for the first five 

years in which interest payments are required, and the 

maximum deduction is phased down ratably for taxpayers 

with modified AGI between $60,000 and $75,000 if married filing jointly ($40,000 to $55,000 for other taxpayers), 

indexed from 2001. However, for tax years beginning on 

January 1, 2001 and before December 31, 2011, the first 

five year requirement is suspended, and the phase down 

range for the deduction is raised. In 2011, the maximum 

deduction is phased down ratably for taxpayers with modified AGI between $120,000 and $150,000 if married filing 

jointly ($60,000 and $75,000 for other taxpayers).

104. 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 2011 for 

qualified higher education expenses for taxpayers with 

adjusted gross income up to $130,000 on a joint return 

($65,000 for other taxpayers). Taxpayers with adjusted 

gross income up to $160,000 on a joint return ($80,000 for 

other taxpayers) may deduct up to $2,000. This provision 

expired on December 31, 2011.

105. Qualified tuition programs.—The baseline 

tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially 

low (or zero) tax rates to apply to certain types or sources 

of income. Some States have adopted prepaid tuition plans 

prepaid room and board plans, and college savings plans, 

which allow persons to pay in advance or save for college 

expenses for designated beneficiaries. Under current law, 

investment income, or the return on prepayments, is not 

taxed when earned, and is tax-exempt when withdrawn 

to pay for qualified expenses.

106. 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.

107. 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.

108. 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. Under current law, the total amount of 

zone academy bonds that may be issued is limited to $1.4 

billion in 2009 and 2010 as of March 2010, issuers of the 

unused authorization of such bonds could opt to receive 

direct payment with the yield becoming fully taxable. An 

additional $0.4 billion of these bonds with a tax credit was 

authorized to be issued before January 1, 2011.

109. 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. 
276 ANALYTICAL PERSPECTIVES

The tax exemption is phased out for taxpayers with AGI 

between $106,650 and $136,650 if married filing jointly 

($71,000 and $86,100 for other taxpayers) in 2011.

110. Dependent students age 19 or older.—Under 

the baseline tax system, a personal exemption for the 

taxpayer is allowed. However, additional exemptions for 

targeted groups within a given filing status would not be 

allowed. In contrast, the Tax Code allows taxpayers to 

claim personal exemptions for dependent children who 

are over the age of 18 and under the age of 24 and who 

(1) reside with the taxpayer for over half the year (with 

exceptions for temporary absences from home, such as for 

school attendance), (2) are full-time students, and (3) do 

not claim a personal exemption on their own tax returns.

111. 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.

112. Employer-provided educational assistance.—Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, 

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

from cash wages. Under current law, however, employerprovided educational assistance is excluded from an employee’s gross income even though the employer’s costs 

for this assistance are a deductible business expense. The 

maximum exclusion is $5,250 per taxpayer.

113. Special deduction for teacher expenses.—

The baseline tax system would not allow a deduction for 

personal expenditures. In contrast, under current law 

educators in both public and private elementary and 

secondary schools, who work at least 900 hours during a 

school year as a teacher, instructor, counselor, principal or 

aide, may subtract up to $250 of qualified expenses when 

figuring their adjusted gross income (AGI). This provision 

expired on December 31, 2011.

114. Discharge of student loan indebtedness.—

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

included in taxable income. In contrast, the Tax Code allows certain professionals who perform in underserved 

areas or specific fields, and as a consequence have their 

student loans discharged, not to recognize such discharge 

as income.

115. 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 $22.4 billion over 2009 and 2010. As of March 

2010, issuers of such bonds could opt to receive direct payment with the yield becoming fully taxable.

116. 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 December 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. The credit was extended to certain recently discharged unemployed veterans through 

December 31, 2012 with a maximum credit of $9,600 for 

hiring eligible veterans. 

117. 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.

118. 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.

119. 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.

120. 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 var-
17. TAX EXPENDITURES 277

ied needs and a reimbursement of up to $2,000 for nonrecurring adoption expenses; special needs adoptions receive the maximum benefit even if that amount not spent. 

These payments are excluded from gross income under 

current law.

121. Adoption credit and exclusion.—The baseline tax system would not allow credits for particular activities. Instead, taxpayers can receive a refundable tax 

credit for qualified adoption expenses under current law. 

The maximum credit is $13,360 per child for 2011, and is 

phased-out ratably for taxpayers with modified AGI between $182,520 and $222,520. The credit amounts and the 

phase-out thresholds are indexed for inflation. Taxpayers 

may also exclude qualified adoption expenses provided or 

reimbursed by an employer from income, subject to the 

same maximum amounts and phase-out as the credit. The 

same expenses cannot qualify for tax benefits under both 

programs; however, a taxpayer may use the benefits of the 

exclusion and the tax credit for different expenses. 

122. 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.

123. Child credit.—The baseline tax system would 

not allow credits for particular activities or targeted at 

specific groups. Under current law, however, taxpayers 

with children under age 17 can qualify for a $1,000 partially refundable per child credit. Any unclaimed credit 

due to insufficient tax liability may be refundable – taxpayers may claim a refund for 15 percent of earnings in 

excess of a $3,000 floor, up to the amount of unused credit. Alternatively, taxpayers with three or more children 

may claim a refund of the amount of payroll taxes paid 

in excess of EITC received (up to the amount of unused 

credit) if this results in a larger refund. The maximum 

credit declines to $500 in 2013 and later years and refundability is restricted to taxpayers who are eligible for 

the credit under the alternative calculation. The credit is 

phased out for taxpayers at the rate of $50 per $1,000 of 

modified AGI above $110,000 ($75,000 for single or head 

of household filers and $55,000 for married taxpayers filing separately). 

124. Child and dependent care expenses.—The 

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

the Tax Code provides parents who work or attend school 

and who have child and dependent care expenses a tax 

credit. In 2011, 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.

125. Disabled access expenditure credit.—The 

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

Tax Code provides small businesses (less than $1 million 

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

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

remove access barriers for disabled persons. The credit is 

limited to $5,000. 

126. 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.

127. 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.

128. Parsonage allowances.—Under the baseline 

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

income. Dedicated payments and in-kind benefits represent accretions to wealth that do not differ materially 

from cash wages. In contrast, the Tax Code allows an exclusion from a clergyman’s taxable income for the value of 

the clergyman’s housing allowance or the rental value of 

the clergyman’s parsonage.

129. Provide an employee retention credit to employers affected by certain natural disasters. -- 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 selected areas affected by natural 

disasters such as hurricanes Katrina, Rita, Wilma, and 

Ike. This provision expired on December 31, 2009.

130. Exclusion for benefits provided to volunteer EMS and firefighters.—Under the baseline tax 

system, all compensation, including dedicated payments 

and in-kind benefits, would be included in taxable income. 

Dedicated payments and in-kind benefits represent accretions to wealth that do not differ materially from cash 

wages. In contrast, the Tax Code allows an exclusion from 

taxable income of certain rebates or reductions of state 

and local income and property taxes provided by states or 

localities if the taxpayer is a member of a volunteer emergency response organization. The Tax Code also allows an 

exclusion from taxable income of certain payments such 

as reimbursements for expenses or equipment allowances 

of up to $360 per year provided by states or localities on 

account of performance of services as a member of a volunteer emergency response organization. This provision 

expired on December 31, 2010.
278 ANALYTICAL PERSPECTIVES

131. 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

132. 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.

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

and remuneration, including dedicated payments and 

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

In contrast, under current law self-employed taxpayers 

may deduct their family health insurance premiums. 

Taxpayers without self-employment income are not eligible for this special deduction. The deduction is not available for any month in which the self-employed individual 

is eligible to participate in an employer-subsidized health 

plan and the deduction may not exceed the self-employed 

individual’s earned income from self-employment.

134. 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 

2011, $3050 for taxpayers with individual coverage and 

$6,150 for taxpayers with family coverage). Thus, HSAs 

have largely replaced MSAs.

135. Medical care expenses.—The baseline tax 

system would not allow a deduction for personal expenditures. In contrast, under current law personal expenditures for medical care (including the costs of prescription 

drugs) exceeding 7.5 percent of the taxpayer’s adjusted 

gross income are deductible. For tax years beginning after 2012, only medical expenditures exceeding 10 percent 

of the taxpayer’s adjusted gross income are deductible. 

However, for the years 2013, 2014, 2015 and 2016, if either the taxpayer or the taxpayer’s spouse turns 65 before 

the end of the taxable year, the threshold remains at 7.5 

percent of adjusted income.

136. 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.

137. Refundable Premium Assistance Tax 

Credit.—The baseline tax system would not allow credits for particular activities or targeted at specific groups. 

In contrast, for taxable years ending after 2013, the Tax 

Code provides a premium assistance credit to any eligible 

taxpayer for any qualified health insurance purchased 

through a Health Insurance Exchange. In general, an 

eligible taxpayer is a taxpayer with annual household 

income between 100% and 400% of the federal poverty 

level for a family of the taxpayer’s size and that does not 

have access to affordable minimum essential health care 

coverage. The amount of the credit equals the lesser of (i) 

the actual premiums paid by the taxpayer for such coverage or (ii) the difference between the cost of a statutorilyidentified benchmark plan offered on the exchange and 

a required payment by the taxpayer that increases with 

income. 

138. Credit for employee health insurance expenses of small business.—The baseline tax system 

would not allow credits for particular activities or targeted at specific groups. In contrast, the Tax Code provides a tax credit to qualified small employers that make 

a certain level of non-elective contributions towards the 

purchase of certain health insurance coverage for its 

employees. To receive a credit, an employer must have 

fewer than 25 full-time-equivalent employees whose average annual full-time-equivalent wages from the employer are less than $50,000 (indexed for taxable years 

after 2013). However, to receive a full credit, an employer 

must have no more than 10 full-time employees, and the 

average wage paid to these employees must be no more 

than $25,000 (indexed for taxable years after 2013). A 

qualifying employer may claim the credit for any taxable 

year beginning in 2010, 2011, 2012, and 2013 and for up 

to two years for insurance purchased through a Health 

Insurance Exchange thereafter. For taxable beginning 

in 2010, 2011, 2012, and 2013, the maximum credit is 35 

percent of premiums paid by qualified taxable employers 

and 25 percent of premiums paid by qualified tax-exempt 

organizations. For taxable years beginning in 2014 and 

later years, the maximum tax credit will increase to 50 

percent of premiums paid by qualified taxable employers 

and 35 percent of premiums paid by qualified tax-exempt 

organizations.

139. Charitable contributions to health institutions.—The baseline tax system would not allow a deduction for personal expenditures. In contrast, the Tax Code 

provides individuals and corporations a deduction for contributions to nonprofit health institutions. Tax expenditures resulting from the deductibility of contributions to 
17. TAX EXPENDITURES 279

other charitable institutions are listed under the education, training, employment, and social services function.

140. 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.

141. Blue Cross and Blue Shield.—The baseline 

tax system generally would tax all profits under the regular tax rate schedule. It would not allow preferentially 

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

In contrast, Blue Cross and Blue Shield health insurance 

providers in existence on August 16, 1986 and certain 

other nonprofit health insurers are provided exceptions 

from otherwise applicable insurance company income tax 

accounting rules that substantially reduce their tax liabilities, provided that their percentage of total premium 

revenue expended on reimbursement for clinical services 

provided to enrollees is not less than 85 percent for the 

taxable year.

142. Tax credit for health insurance purchased 

by certain displaced and retired individuals.—The 

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

Trade Act of 2002 provides a refundable tax credit of 65 

percent for the purchase of health insurance coverage by 

individuals eligible for Trade Adjustment Assistance and 

certain Pension Benefit Guarantee Corporation pension 

recipients. The American Recovery and Reinvestment 

Act and a subsequent extension increased the credit to 80 

percent in coverage months preceding March 2011. The 

Trade Adjustment Assistance Extension Act of 2011 extended an enhanced credit of 72.5% through December 

2013, but eliminated the credit entirely beginning 

January 1, 2014.

143. 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

144. 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.

145. 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, although income to the recipients, are not subject to the income tax under current law.

146. 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. 

147. 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.

148. 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.

149. 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 contributions to defined benefit pension plans are excluded from an employee’s gross income 

even though employers can deduct their contributions. In 

addition, the tax on the investment income earned by defined benefit pension plans is deferred until the money is 

withdrawn.

150. 401(k) type plans.—Under the baseline tax 

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

contrast, under current law individual taxpayers and employers can make tax-preferred contributions to 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 2011, 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 401(k)-type plan contribution limit including both employee and employer contributions is $49,000 in 2011 (indexed). The tax on contributions made by both employees and employers and the 

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

151. Individual Retirement Accounts (IRAs).—

Under the baseline tax system, all compensation, including deferred and dedicated payments, should be included 

in taxable income. In contrast, under current law individual taxpayers can take advantage of traditional and 

Roth IRAs to defer or otherwise reduce the tax on the 

return to their retirement savings. The IRA contribution limit is $5,000 in 2011 (indexed); taxpayers age 50 

or over are allowed to make additional “catch-up’’ contributions of $1,000. Contributions to a traditional IRA are 

generally deductible but the deduction is phased out for 
280 ANALYTICAL PERSPECTIVES

workers with incomes above certain levels who, or whose 

spouses, are active participants in an employer-provided 

retirement plan. Contributions and account earnings are 

includible in income when withdrawn from traditional 

IRAs. Individuals who make nondeductible contributions 

to a traditional IRA can still benefit from deferral of tax 

on earnings. Roth IRA contributions are not deductible, 

but earnings and withdrawals are exempt from taxation. 

Income limits also apply to Roth IRA contributions; however, taxpayers at any income level may roll account balances from traditional IRAs into Roth IRAs, after paying 

income tax on any deduction and accrued income.

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

The baseline tax system would not allow credits for particular activities or targeted at specific groups. In contrast, the Tax Code provides an additional incentive for 

lower-income taxpayers to save through a nonrefundable 

credit of up to 50 percent on IRA and other retirement 

contributions of up to $2,000. This credit is in addition 

to any deduction or exclusion. The credit is completely 

phased out by $56,500 for joint filers, $42,375 for head of 

household filers, and $28,250 for other filers in 2011. 

153. Self-Employed plans.—Under the baseline 

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

In contrast, under current law self-employed individuals 

can make deductible contributions to their own retirement plans equal to 25 percent of their income, up to a 

maximum of $49,000 in 2011. Total plan contributions 

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

on the investment income earned by self-employed SEP, 

SIMPLE, and qualified plans is deferred until withdrawn.

154. 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.

155. 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.

156. Employer-provided supplementary unemployment benefits.—Under the baseline tax system, all 

compensation, including dedicated payments and in-kind 

benefits, should be included in taxable income. Employers 

may establish trusts to pay supplemental unemployment benefits to employees separated from employment. 

Investment income earned by such trusts is exempt from 

taxation.

157. Employer Stock Ownership Plan (ESOP) 

provisions.—ESOPs are a special type of tax-exempt 

employee benefit plan. Under the baseline tax system, 

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

contrast, employer-paid contributions (the value of stock 

issued to the ESOP) are deductible by the employer as 

part of employee compensation costs. They are not included in the employees’ gross income for tax purposes, 

however, until they are paid out as benefits. In addition, 

the following special income tax provisions for ESOPs are 

intended to increase ownership of corporations by their 

employees: (1) annual employer contributions are subject 

to less restrictive limitations than other qualified retirement plans; (2) ESOPs may borrow to purchase employer 

stock, guaranteed by their agreement with the employer 

that the debt will be serviced by his payment (deductible 

by him) of a portion of wages (excludable by the employees) to service the loan; (3) employees who sell appreciated company stock to the ESOP may defer any taxes due 

until they withdraw benefits; and (4) dividends paid to 

ESOP-held stock are deductible by the employer.

158. Additional deduction for the blind.—Under 

the baseline tax system, the standard deduction is allowed. However, additional standard deductions for targeted groups within a given filing status would not be allowed. In contrast, the Tax Code allows taxpayers who 

are blind to claim an additional $1,450 standard deduction if single, or $1,150 if married in 2011.

159. Additional deduction for the elderly.—

Under the baseline tax system, the standard deduction 

is allowed. However, additional standard deductions for 

targeted groups within a given filing status would not be 

allowed. In contrast, the Tax Code allows taxpayers who 

are 65 years or older to claim an additional $1,450 standard deduction if single, or $1,150 if married in 2011.

160. Tax credit for the elderly and disabled.—

Under the baseline tax system, a credit targeted at a specific group within a given filing status or for particular 

activities would not be allowed. In contrast, the Tax Code 

allows taxpayers who are 65 years of age or older, or who 

are permanently disabled, to claim a tax credit equal to 15 

percent of the sum of their earned and retirement income. 

The amount to which the 15 percent rate is applied is limited to no more than $5,000 for single individuals or married couples filing a joint return where only one spouse is 

65 years of age or older and disabled, and up to $7,500 for 

joint returns where both spouses are 65 years of age or 

older and disabled. These limits are reduced by one-half 

of the taxpayer’s adjusted gross income over $7,500 for 

single individuals and $10,000 for married couples filing 

a joint return. 

161. Casualty losses.—Under the baseline tax system, neither the purchase of property nor insurance premiums to protect its value are deductible as costs of earning income. Therefore, reimbursement for insured loss of 

such property is not included as a part of gross income, 

and uninsured losses are not deductible. In contrast, the 

Tax Code provides a deduction for uninsured casualty and 

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

total losses during the year exceed 10 percent of the taxpayer’s adjusted gross income.
17. TAX EXPENDITURES 281

162. 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 45 percent of income. For a family 

with one qualifying child, the credit is 34 percent of the 

first $9,100 of earned income in 2011. The credit is 40 

percent of the first $12,780 of income for a family with 

two or more qualifying children. The credit is 45 percent 

of the first $12,780 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 $5,980 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.

Social Security

163. Social Security benefits for retired workers.—Under the baseline tax system, all compensation, 

including dedicated payments and in-kind benefits, would 

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

wages. Thus, the portion of Social Security benefits that 

is attributable to employer contributions and earnings on 

employer and employee contributions (and not attributable to employee contributions) would be subject to tax.  

In contrast, the Tax Code may not tax all of the Social 

Security benefits that exceed the beneficiary’s contributions from previously taxed income. Actuarially, previously taxed contributions generally do not exceed 15 percent 

of benefits, even for retirees receiving the highest levels 

of benefits. Up to 85 percent of recipients’ Social Security 

and tier 1 railroad retirement benefits are included in 

(phased into) the income tax base if the recipient’s provisional income exceeds certain base amounts. (Provisional 

income is equal to other items included in adjusted gross 

income plus foreign or U.S. possession income, tax-exempt 

interest, and one half of Social Security and tier 1 railroad 

retirement benefits.) The untaxed portion of the benefits 

received by taxpayers who are below the income amounts 

at which 85 percent of the benefits are taxable is counted 

as a tax expenditure.

164. 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 163, Social Security benefits for retired 

workers.)

165. 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.

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 
282 ANALYTICAL PERSPECTIVES

the private lenders receive the 35 percent credit which is 

included in taxable income.

172. Deductibility of certain nonbusiness State 

and local taxes.—Under the baseline tax system, a deduction for personal consumption expenditures would not 

be allowed. In contrast, the Tax Code allows taxpayers 

who itemize their deductions to claim a deduction for 

State and local income taxes (or, at the taxpayer’s election, state and local sales taxes) and property taxes, even 

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

election to deduct sales taxes instead of income taxes expires at the end of 2011.

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.

APPENDIX 

Performance Measures and the Economic 

Effects of Tax Expenditures

The Government Performance and Results Act of 1993 

(GPRA) directs Federal agencies to develop annual and 

strategic plans for their programs and activities. These 

plans set out performance objectives to be achieved over a 

specific time period. Most of these objectives are achieved 

through direct expenditure programs. Tax expenditures – 

spending programs implemented through the tax code by 

reducing tax obligations for certain activities -- contribute 

to achieving these goals in a manner similar to direct expenditure programs. 

Tax expenditures by definition work through the tax 

system and, particularly, the income tax. Thus, they may 

be relatively advantageous policy approaches when the 

benefit or incentive is related to income and is intended to 

be widely available.4 Because there is an existing public 

administrative and private compliance structure for the 

tax system, income based programs that require little 

oversight might be efficiently run through the tax system. 

In addition, some tax expenditures actually simplify the 

operation of the tax system (for example, the exclusion 

for up to $500,000 of capital gains on home sales). Tax 

expenditures also implicitly subsidize certain activities 

in a manner similar to direct expenditures. For example, 

exempting employer-sponsored health insurance from 

income taxation is equivalent to a direct spending subsidy equal to the forgone tax obligations for this type of 

compensation. Spending, regulatory or tax-disincentive 

policies can also modify behavior, but may have different economic effects. Finally, a variety of tax expenditure 

tools can be used, e.g., deductions; credits; exemptions; 

deferrals; floors; ceilings; phase-ins; phase-outs; and these 

can be dependent on income, expenses, or demographic 

characteristics (age, number of family members, etc.). 

This wide range of policy instruments means that tax 

4 Although this chapter focuses upon tax expenditures under the 

income tax, tax expenditures also arise under the unified transfer, 

payroll, and excise tax systems. Such provisions can be useful when they 

relate to the base of those taxes, such as excise tax exemption for certain 

types of consumption deemed meritorious.

expenditures can be flexible and can have very different 

economic effects.

Tax expenditures also have limitations. In many cases 

they add to the complexity of the tax system, which raises 

both administrative and compliance costs. For example, 

personal exemptions, deductions, credits, and phase-outs 

can complicate filing and decision-making. The income 

tax system may have little or no contact with persons who 

have no or very low incomes, and does not require information on certain characteristics of individuals used in 

some spending programs, such as wealth or duration of 

employment. These features may reduce the effectiveness 

of tax expenditures for addressing socioeconomic disparities. Tax expenditures also generally do not enable the 

same degree of agency discretion as an outlay program. 

For example, grant or direct Federal service delivery programs can prioritize activities to be addressed with specific resources in a way that is difficult to emulate with 

tax expenditures.

Outlay programs have advantages where the direct 

provision of government services is particularly warranted, such as equipping and maintaining the armed forces 

or administering the system of justice. Outlay programs 

may also be specifically designed to meet the needs of 

low-income families who would not otherwise be subject 

to income taxes or need to file a tax return. Outlay programs may also receive more year-to-year oversight and 

fine tuning through the legislative and executive budget 

process. In addition, many different types of spending 

programs include direct Government provision; credit 

programs; and payments to State and local governments, 

the private sector, or individuals in the form of grants or 

contracts provide flexibility for policy design. On the other 

hand, certain outlay programs may rely less directly on 

economic incentives and private-market provision than 

tax incentives, thereby reducing the relative efficiency 

of spending programs for some goals. Finally, spending 

programs, particularly on the discretionary side, may respond less rapidly to changing activity levels and economic conditions than tax expenditures.

Regulations may have more direct and immediate effects than outlay and tax-expenditure programs because 

regulations apply directly and immediately to the regulated party (i.e., the intended actor), generally in the 
17. TAX EXPENDITURES 283

private sector. Regulations can also be fine-tuned more 

quickly than tax expenditures because they can often 

be changed as needed by the Executive Branch without 

legislation. Like tax expenditures, regulations often rely 

largely on voluntary compliance, rather than detailed inspections and policing. As such, the public administrative 

costs tend to be modest relative to the private resource 

costs associated with modifying activities. Historically, 

regulations have tended to rely on proscriptive measures, 

as opposed to economic incentives. This reliance can diminish their economic efficiency, although this feature 

can also promote full compliance where (as in certain 

safety-related cases) policymakers believe that trade-offs 

with economic considerations are not of paramount importance. Also, regulations generally do not directly affect 

Federal outlays or receipts. Thus, like tax expenditures, 

they may escape the degree of scrutiny that outlay programs receive. Some policy objectives are achieved using 

multiple approaches. For example, minimum wage legislation, the earned income tax credit, and the food stamp 

program (SNAP) are regulatory, tax expenditure, and direct outlay programs, respectively, all having the objective 

of improving the economic welfare of low-wage workers 

and families.

A Framework for Evaluating the 

Effectiveness of Tax Expenditures

Across all major budgetary categories – from housing 

and health to space, technology, agriculture, and national 

defense tax expenditures make up a significant portion of 

Federal activity and affect every area of the economy. For 

these reasons, a comprehensive evaluation framework 

that examines incentives, direct results, and spillover effects will benefit the budgetary process by informing decisions on tax expenditure policy.

As described above, tax expenditures, like spending 

and regulatory programs, have a variety of objectives and 

economic effects. These include: encouraging certain types 

of activities (e.g., saving for retirement or investing in certain sectors); increasing certain types of after-tax income 

(e.g., favorable tax treatment of Social Security income); 

and reducing private compliance costs and Government 

administrative costs (e.g., the exclusion for up to $500,000 

of capital gains on home sales). Some of these objectives 

are well suited to quantitative measurement and evaluation, while others are less well suited.

Performance measurement is generally concerned with 

inputs, outputs, and outcomes. In the case of tax expenditures, the principal input is usually the revenue effect. 

Outputs are quantitative or qualitative measures of goods 

and services, or changes in income and investment, directly produced by these inputs. Outcomes, in turn, represent the changes in the economy, society, or environment 

that are the ultimate goals of programs. Evaluations assess whether programs are meeting intended goals, but 

may also encompass analyzing whether initiatives are 

superior to other policy alternatives.

The Administration is working towards examining the 

objectives and effects of the wide range of tax expenditures in our budget, despite challenges related to data 

availability, measurement, and analysis. Evaluations 

include an assessment of whether tax expenditures are 

achieving intended policy results in an efficient manner, 

with minimal burdens on individual taxpayers, consumers, and firms; and an examination of possible unintended 

effects and their consequences.

As an illustration of how evaluations can inform budgetary decisions, consider education and research and investment credits. 

Education. There are millions of individuals taking 

advantage of tax credits designed to help pay for educational expenses. There are a number of different credits 

available as well as other important forms of Federal support for higher education such as subsidized loans and 

grants. An evaluation would explore the possible relationships between use of the credits and the use of loans 

and grants, seeking to answer, for examples, whether the 

use of credits reduce or increase the likelihood of the students applying for loans. Such an evaluation would allow 

stakeholders to determine the most effective program – 

whether it is a tax credit, a subsidized loan, or a grant.

Investment. A series of tax expenditures reduce the 

cost of investment, both in specific activities such as research and experimentation, extractive industries, and 

certain financial activities and more generally throughout 

the economy, through accelerated depreciation for plant 

and equipment. These provisions can be evaluated along 

a number of dimensions. For example, it is useful to consider the strength of the incentives by measuring their effects on the cost of capital (the return which investments 

must yield to cover their costs) and effective tax rates. The 

impact of these provisions on the amounts of corresponding forms of investment (e.g., research spending, exploration activity, equipment) might also be estimated. In some 

cases, such as research, there is evidence that the investment can provide significant positive externalities—that 

is, economic benefits that are not reflected in the market 

transactions between private parties. It could be useful 

to quantify these externalities and compare them with 

the size of tax expenditures. Measures could also indicate 

the effects on production from these investments such 

as numbers or values of patents, energy production and 

reserves, and industrial production. Issues to be considered include the extent to which the preferences increase 

production (as opposed to benefiting existing output) and 

their cost-effectiveness relative to other policies. Analysis 

could also consider objectives that are more difficult to 

measure but still are ultimate goals, such as promoting 

the Nation’s technological base, energy security, environmental quality, or economic growth. Such an assessment 

is likely to involve tax analysis as well as consideration of 

non-tax matters such as market structure, scientific, and 

other information (such as the effects of increased domestic fuel production on imports from various regions, or the 

effects of various energy sources on the environment).

The tax proposals subject to these analyses include 

items that indirectly affect the estimated value of tax 

expenditures (such as changes in income tax rates), proposals that make reforms to improve tax compliance and 
284 ANALYTICAL PERSPECTIVES

administration, as well as proposals which would change, 

add, or delete tax expenditures. 

Barriers to Evaluation. Developing a framework that 

is sufficiently comprehensive, accurate, and flexible is a 

significant challenge. Evaluations are constrained by the 

availability of appropriate data and challenges in economic modeling:

1. Data availability. Data may not exist, or may not 

exist in an analytically appropriate form, to conduct rigorous evaluations of certain types of expenditures. For example, measuring the effects of tax expenditures designed 

to achieve tax neutrality for individuals and firms earning income abroad, and foreign firms could require data 

from foreign governments or firms which are not readily 

available.

2. Analytical constraints. Evaluations of tax expenditures face analytical constraints even when data are 

available. For example, individuals might have access to 

several tax expenditures and programs aimed at improving the same outcome. Isolating the effect of a single tax 

credit is challenging absent a well-specified research design. 

3. Resources. Tax expenditure analyses are seriously 

constrained by staffing considerations. Evaluations typically require expert analysts who are often engaged in 

other more competing areas of work related to the budget.

The Executive Branch is focused on addressing these 

challenges in order to lay the foundation for the analysis 

of tax expenditures comprehensively, alongside evaluations of the effectiveness of direct spending initiatives.

Current Administration Proposals 

on Tax Expenditures

The Administration considers performance measurement, evaluations, and the economic effects of tax expenditures each year in its deliberation for the Budget and 

proposals are informed by these analyses. The President’s 

National Commission on Fiscal Responsibility and Reform 

submitted a report in 2010 in which they said that the income tax system is unduly complicated and that the government should “sharply reduce rates, broaden the base, 

simplify the tax code, and reduce the many ‘tax expenditures’ —another name for spending through the tax code.”

The current Budget and enacted Administration policies include several proposals that would change existing 

tax expenditures to raise revenue, eliminate ineffective 

or counterproductive tax expenditures, and enhance effective tax expenditures. The tax expenditure proposals in 

the budget further the Administration’s goals of economic 

recovery and growth, clean and secure energy, a worldclass education for all Americans, and fairness in the tax 

code. Some of these proposals are highlighted below.

Reduce the value of certain tax expenditures. The 

Administration proposes to limit the tax rate at which 

upper-income taxpayers can use itemized deductions and 

other tax preferences to reduce tax liability to a maximum 

of 28 percent.  This limitation would affect only married 

taxpayers filing a joint return with income adjusted for 

these tax preferences of over $250,000 (at 2009 levels) 

and single taxpayers with income over $200,000 (at 2009 

levels).  The limit would apply to all itemized deductions, 

tax-exempt interest, employer-sponsored health insurance, deductions and income exclusions for employee retirement contributions, and certain above-the-line deductions, effective for taxable years beginning after December 

31, 2012. These are among the largest tax expenditures. 

This proposal would make the tax code more equitable 

because the value of the tax expenditure as a percentage 

of the deduction is proportional to one’s tax bracket, so it 

is less valuable to those in lower brackets. 

Reduce preferences for oil, gas, and coal. Current law 

provides a number of credits and deductions that are targeted towards certain oil, gas, and coal activities. These 

tax preferences run counter to our policies for reducing greenhouse gas emissions. In accordance with the 

President’s agreement at the G-20 summit in 2009 to 

phase out subsidies for fossil fuels so that we can transition to a 21st century energy economy, the Administration 

proposes to repeal a number of tax preferences available 

for fossil fuels.

Enhance and make permanent the Research and 

Experimentation (R&E) credit. The extension of this credit every year creates uncertainty reducing firms’ incentive 

to expand their research activities. For this reason, and 

more generally to achieve the President’s R&D goals, the 

Budget proposes making the R&E credit permanent. 

Make the American Opportunity Tax Credit (AOTC) 

Permanent. This tax credit provides a substantial benefit 

to students and families in defraying the cost of college, a 

key Administration priority. For this reason, the Budget 

proposes a permanent extension of this tax expenditure. 

Extend the EITC for larger families, expand the child 

and dependent care tax credit, and provide for automatic 

enrollment in individual retirement accounts. Although 

these reforms would increase the cost of these tax expenditures, they would increase the equity of the overall tax 

system and provide benefits to low and middle income 

families. 

Allow a range of tax expenditures to expire. The 

Tax Reconciliation, Unemployment Insurance 

Reauthorization, and Job Creation Act of 2010 extended 

many provisions of the tax code for up to two years, including many provisions identified as tax expenditures in 

this chapter. However, a number of provisions identified 

as tax expenditures were not extended. For instance, the 

Making Work Pay Credit, the sales tax deduction for new 

cars and trucks, the above-the-line deduction for property 

taxes up to $500 for taxpayers who to not itemize, and the 

exemption from taxes for the first $2,400 of unemployment benefits were allowed to expire.