239

The Congressional Budget Act of 1974 (Public Law 93-

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

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

“revenue losses attributable to provisions of the Federal 

tax laws which allow a special exclusion, exemption, or 

deduction from gross income or which provide a special 

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

These exceptions may be viewed as alternatives to other 

policy instruments, such as spending or regulatory programs.

Identification and measurement of tax expenditures 

depends importantly on the baseline tax system against 

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

on a comprehensive income tax, which defines income as 

the sum of consumption and the change in net wealth in 

a given period of time.

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

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

because of potential interactions among provisions. For 

that reason, this chapter does not present a grand total 

for the estimated tax expenditures.

Tax expenditures relating to the individual and corporate income taxes are estimated for fiscal years 2010–

2016 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 September 30, 2010. 

The estimates reflect 2010 Budget Midsession Review 

economic assumptions. Legislation enacted in 2011 is not 

reflected in these estimates. On December 17, the Tax 

Relief, Unemployment Insurance Reauthorization, and 

Job Creation Act of 2010 not only extended many tax expenditure provisions, but also changed income tax rates 

for the years 2011-12 affecting the estimates of many tax 

expenditures. Given the late passage of this legislation, 

revised estimates will be released in the spring of 2011 to 

reflect tax law enacted as of December 31, 2010.

The total revenue effects for tax expenditures for fiscal 

years 2010–2016 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 

1 These baseline concepts are thoroughly discussed in Special Analysis 

G of the 1985 Budget, where the former is referred to as the pre-1983 

method and the latter the post-1982 method.

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 estimates under the individual and corporate headings does 

not imply that these categories of filers benefit from the 

special tax provisions in proportion to the respective tax 

expenditure amounts shown. Rather, these breakdowns 

show the specific tax accounts through which the various 

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

economic forces.

Table 17–3 ranks the major tax expenditures by the 

size of their 2012–2016 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 in17. TAX EXPENDITURES
240 ANALYTICAL PERSPECTIVES

teraction 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.

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 2010 which cause the 

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

a pension contribution in 2010 would cause a deferral of 

tax payments on wages in 2010 and on pension fund earnings on this contribution (e.g., interest) in later years. In 

some future year, however, the 2010 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. Ac-
17. TAX EXPENDITURES 241

Table 17–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2010-2016

(In millions of dollars)

Total from corporations and individuals

2010 2011 2012 2013 2014 2015 2016 2012-16

National Defense

1 Exclusion of benefits and allowances to armed forces personnel ���������������������������������������� 12,740 13,290 13,710 12,200 12,680 13,190 13,720 65,500

International affairs: 

2 Exclusion of income earned abroad by U.S. citizen  ������������������������������������������������������������ 6,800 5,550 5,400 5,800 6,140 6,430 6,730 30,5

3 Exclusion of certain allowances for Federal employees abroad �������������������������������������������� 970 1,020 1,070 1,120 1,180 1,240 1,300 5,910

4 Inventory property sales source rules exception ������������������������������������������������������������������� 2,680 2,910 3,160 3,430 3,730 4,050 4,400 18,770

5 Deferral of income from controlled foreign corporations (normal tax method) ��������������������� 38,130 41,410 42,000 41,810 41,770 43,020 44,240 212,840

6 Deferred taxes for financial firms on certain income earned overseas ���������������������������������� 2,330 0 0 0 0 0 0 0

General science, space, and technology: 

7 Expensing of research and experimentation expenditures (normal tax method) ����������������� 3,560 4,610 5,770 6,730 6,970 7,760 7,850 35,080

8 Credit for increasing research activities �������������������������������������������������������������������������������� 5,890 3,850 3,080 2,460 1,960 1,570 1,250 10,320

Energy: 

9 Expensing of exploration and development costs, fuels ������������������������������������������������������� 400 520 700 540 400 340 320 2,300

10 Excess of percentage over cost depletion, fuels ������������������������������������������������������������������ 980 1,070 1,120 1,150 1,170 1,180 1,200 5,820

11 Alternative fuel production credit ������������������������������������������������������������������������������������������ 170 170 120 90 60 20 0 290

12 Exception from passive loss limitation for working interests in oil and gas properties ��������� 30 40 30 30 30 30 30 150

13 Capital gains treatment of royalties on coal �������������������������������������������������������������������������� 50 50 50 60 60 80 90 340

14 Exclusion of interest on energy facility bonds ����������������������������������������������������������������������� 20 30 30 30 30 40 40 170

15 Energy production credit 1 ����������������������������������������������������������������������������������������������������� 1,540 1,620 1,740 1,900 1,950 1,890 1,770 9,250

16 Energy investment credit 1 ���������������������������������������������������������������������������������������������������� 130 170 960 1,690 1,030 480 490 4,650

17 Alcohol fuel credits 2 ����������������������������������������������������������������������������������������������������������� 70 90 130 110 50 30 10 330

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 ������������������������������������������������������� 250 260 140 170 230 390 660 1,590

20 Exclusion of utility conservation subsidies ����������������������������������������������������������������������������� 220 220 220 220 210 210 210 1,070

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 ����������������������������������������������������������������������������������������������������������� –50 –150 –150 –130 –110 –80 –50 –520

23 Credit for investment in clean coal facilities ��������������������������������������������������������������������������� 240 400 460 450 360 300 200 1,770

24 Temporary 50% expensing for equipment used in the refining of liquid fuels ������������������������ 760 620 520 420 –580 –1,110 –950 –1,700

25 Natural gas distribution pipelines treated as 15-year property ���������������������������������������������� 120 120 100 80 80 80 90 430

26 Amortize all geological and geophysical expenditures over 2 years �������������������������������������� 150 110 90 60 40 30 30 250

27 Allowance of deduction for certain energy efficient commercial building property ���������������� 60 80 90 100 70 30 10 300

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

29 Credit for energy efficiency improvements to existing homes ������������������������������������������������ 3,190 5,530 2,270 0 0 0 0 2,270

30 Credit for energy efficient appliances ������������������������������������������������������������������������������������ 150 60 0 0 0 0 0 0

31 Credit for residential energy efficient property ���������������������������������������������������������������������� 220 220 220 230 230 230 240 1,150

32 Qualified energy conservation bonds 5 ��������������������������������������������������������������������������������� 0 10 20 30 30 30 30 140

33 Advanced Energy Property Credit ����������������������������������������������������������������������������������������� 180 600 900 460 –10 –90 –80 1,180

Natural resources and environment: 

34 Expensing of exploration and development costs, nonfuel minerals ������������������������������������ 110 110 130 140 140 150 150 710

35 Excess of percentage over cost depletion, nonfuel minerals ������������������������������������������������ 770 790 770 740 750 770 780 3,810

36 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities ���������������� 460 460 550 650 710 750 790 3,450

37 Capital gains treatment of certain timber income ����������������������������������������������������������������� 50 50 50 60 60 80 90 340

38 Expensing of multiperiod timber growing costs �������������������������������������������������������������������� 230 290 290 300 310 330 310 1,540

39 Tax incentives for preservation of historic structures ������������������������������������������������������������ 390 390 400 410 420 430 430 2,090

40 Exclusion of gain or loss on sale or exchange of certain brownfield sites ����������������������������� 70 60 40 30 10 0 0 80

41 Industrial CO2 capture and sequestration tax credit ������������������������������������������������������������� 20 30 30 40 80 130 170 450

42 Deduction for endangered species recovery expenditures ���������������������������������������������������� 20 30 30 30 50 50 60 220

Agriculture: 

43 Expensing of certain capital outlays ������������������������������������������������������������������������������������� 70 80 100 110 130 130 140 610

44 Expensing of certain multiperiod production costs ��������������������������������������������������������������� 140 150 150 170 180 180 180 860

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

46 Capital gains treatment of certain income ���������������������������������������������������������������������������� 490 500 520 580 630 780 930 3,440
242 ANALYTICAL PERSPECTIVES

Table 17–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2010-2016—Continued

(In millions of dollars)

Total from corporations and individuals

2010 2011 2012 2013 2014 2015 2016 2012-16

47 Income averaging for farmers ������������������������������������������������������������������������������������������������ 90 90 90 90 90 100 100 470

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

49 Expensing of reforestation expenditures ������������������������������������������������������������������������������� 50 70 80 80 80 90 90 420

Commerce and housing: 

Financial institutions and insurance: 

50 Exemption of credit union income ������������������������������������������������������������������������������������ 1,270 1,240 1,310 1,470 1,600 1,710 1,830 7,920

51 Exclusion of interest on life insurance savings ���������������������������������������������������������������� 19,910 21,210 22,660 24,220 25,830 27,380 28,970 129,060

52 Special alternative tax on small property and casualty insurance companies ����������������� 40 40 40 40 40 40 40 200

53 Tax exemption of certain insurance companies owned by tax-exempt organizations ������� 200 200 210 210 210 220 220 1,070

54 Small life insurance company deduction ������������������������������������������������������������������������� 30 30 30 30 30 30 30 150

55 Exclusion of interest spread of financial institutions ��������������������������������������������������������� –170 300 550 630 700 760 810 3,450

Housing: 

56 Exclusion of interest on owner-occupied mortgage subsidy bonds ��������������������������������� 1,230 1,260 1,490 1,760 1,920 2,010 2,120 9,300

57 Exclusion of interest on rental housing bonds ������������������������������������������������������������������ 1,050 1,080 1,270 1,500 1,640 1,710 1,800 7,920

58 Deductibility of mortgage interest on owner-occupied homes ����������������������������������������� 79,150 88,720 98,550 110,660 122,970 133,300 143,700 609,180

59 Deductibility of State and local property tax on owner-occupied homes ������������������������� 15,120 19,320 24,910 27,000 28,760 30,250 31,370 142,290

60 Deferral of income from installment sales ������������������������������������������������������������������������ 620 730 830 1,020 1,230 1,420 1,600 6,100

61 Capital gains exclusion on home sales ����������������������������������������������������������������������������� 22,160 27,650 35,200 38,880 42,940 47,420 52,380 216,820

62 Exclusion of net imputed rental income ���������������������������������������������������������������������������� 41,200 46,950 50,640 51,080 58,740 66,860 75,480 302,800

63 Exception from passive loss rules for $25,000 of rental loss ������������������������������������������� 8,790 10,860 13,110 14,830 16,730 18,880 20,200 83,750

64 Credit for low-income housing investments ��������������������������������������������������������������������� 5,650 5,990 6,290 7,130 7,430 7,580 7,640 36,070

65 Accelerated depreciation on rental housing (normal tax method) ����������������������������������� –1,490 –1,670 –1,580 –1,370 –1,100 –890 –700 –5,640

66 Discharge of mortgage indebtedness ������������������������������������������������������������������������������� 1,480 1,390 1,100 250 0 0 0 1,350

67 Credit for homebuyer �������������������������������������������������������������������������������������������������������� 13,680 10,410 –2,160 –1,450 –590 –520 –470 –5,190

Commerce: 

68 Cancellation of indebtedness ������������������������������������������������������������������������������������������ 750 430 130 –70 –180 –250 –230 –600

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

70 Treatment of qualified dividends ��������������������������������������������������������������������������������������� 31,050 23,600 0 0 0 0 0 0

71 Capital gains (except agriculture, timber, iron ore, and coal) �������������������������������������������� 36,300 37,560 38,490 43,260 46,880 58,110 69,540 256,280

72 Capital gains exclusion of small corporation stock ����������������������������������������������������������� 50 170 290 300 470 820 850 2,730

73 Step-up basis of capital gains at death ���������������������������������������������������������������������������� 39,520 50,940 61,480 66,090 71,040 76,370 82,100 357,080

74 Carryover basis of capital gains on gifts �������������������������������������������������������������������������� 1,400 4,790 1,990 2,660 2,850 3,070 3,290 13,860

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

76 Accelerated depreciation of buildings other than rental housing (normal tax method) ���� –11,130 –13,010 –13,750 –14,380 –14,970 –15,530 –15,840 –74,470

77 Accelerated depreciation of machinery and equipment (normal tax method) ����������������� 39,790 17,540 24,450 44,290 58,250 68,740 73,950 269,680

78 Expensing of certain small investments (normal tax method) ����������������������������������������� 950 6,710 –710 –2,820 –840 150 930 –3,290

79 Graduated corporation income tax rate (normal tax method) ������������������������������������������ 3,000 3,280 3,220 3,300 3,590 3,770 3,960 17,840

80 Exclusion of interest on small issue bonds ���������������������������������������������������������������������� 330 340 400 470 510 530 560 2,470

81 Deduction for US production activities ������������������������������������������������������������������������������ 13,140 13,800 14,630 15,510 16,410 17,290 18,160 82,000

82 Special rules for certain film and TV production ��������������������������������������������������������������� 50 30 30 10 0 0 0 40

Transportation: 

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

84 Exclusion of reimbursed employee parking expenses ���������������������������������������������������������� 2,970 3,050 3,180 3,320 3,470 3,620 3,760 17,350

85 Exclusion for employer-provided transit passes ������������������������������������������������������������������� 580 510 520 560 590 640 680 2,990

86 Tax credit for certain expenditures for maintaining railroad tracks ����������������������������������������� 50 30 30 10 0 0 0 40

87 Exclusion of interest on bonds for Highway Projects and rail-truck transfer facilities ������������ 240 250 240 230 210 200 190 1,070

Community and regional development: 

88 Investment credit for rehabilitation of structures (other than historic) ����������������������������������� 20 20 20 20 20 20 20 100

89 Exclusion of interest for airport, dock, and similar bonds ������������������������������������������������������ 840 870 1,020 1,210 1,310 1,380 1,450 6,370

90 Exemption of certain mutuals’ and cooperatives’ income ����������������������������������������������������� 110 110 110 120 120 120 130 600

91 Empowerment zones and renewal communities ������������������������������������������������������������������� 730 500 570 620 630 600 520 2,940

92 New markets tax credit ���������������������������������������������������������������������������������������������������������� 720 800 810 780 740 660 540 3,530

93 Expensing of environmental remediation costs ��������������������������������������������������������������������� 10 –130 –140 –140 –130 –120 –110 –640
17. TAX EXPENDITURES 243

Table 17–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2010-2016—Continued

(In millions of dollars)

Total from corporations and individuals

2010 2011 2012 2013 2014 2015 2016 2012-16

94 Credit to holders of Gulf Tax Credit Bonds. ���������������������������������������������������������������������������� 80 80 70 50 50 50 50 27

95 Recovery Zone Bonds 6 

96 Tribal Economic Development Bonds ������������������������������������������������������������������������������������ 10 30 30 30 20 20 10 110

Education, training, employment, and social services: 

Education: 

97 Exclusion of scholarship and fellowship income (normal tax method) ����������������������������� 2,760 3,010 3,130 3,240 3,360 3,480 3,610 16,820

98 HOPE tax credit ���������������������������������������������������������������������������������������������������������������� 0 540 5,410 5,510 5,830 5,770 5,760 28,280

99 Lifetime Learning tax credit ���������������������������������������������������������������������������������������������� 3,490 3,880 5,530 5,660 5,790 5,800 5,840 28,620

100 American Opportunity Tax Credit �������������������������������������������������������������������������������������� 15,110 14,400 0 0 0 0 0 0

101 Education Individual Retirement Accounts ����������������������������������������������������������������������� 60 70 80 80 90 100 100 450

102 Deductibility of student-loan interest ��������������������������������������������������������������������������������� 1,480 1,400 900 960 1,030 1,100 1,170 5,160

103 Deduction for higher education expenses ������������������������������������������������������������������������ 760 0 0 0 0 0 0 0

104 State prepaid tuition plans ������������������������������������������������������������������������������������������������ 1,390 1,580 1,750 1,860 1,950 2,050 2,150 9,760

105 Exclusion of interest on student-loan bonds �������������������������������������������������������������������� 550 560 660 790 860 890 940 4,140

106 Exclusion of interest on bonds for private nonprofit educational facilities ������������������������ 2,340 2,400 2,840 3,360 3,660 3,830 4,020 17,710

107 Credit for holders of zone academy bonds 7 �������������������������������������������������������������������� 190 200 200 180 160 130 120 790

108 Exclusion of interest on savings bonds redeemed to finance educational expenses ������� 20 20 20 20 20 30 30 120

109 Parental personal exemption for students age 19 or over ����������������������������������������������� 2,960 2,990 3,400 3,210 2,950 2,690 2,440 14,690

110 Deductibility of charitable contributions (education) ��������������������������������������������������������� 3,930 4,520 4,900 5,290 5,660 6,040 6,410 28,300

111 Exclusion of employer-provided educational assistance ������������������������������������������������� 680 30 0 0 0 0 0 0

112 Special deduction for teacher expenses ��������������������������������������������������������������������������� 160 0 0 0 0 0 0 0

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

114 Qualified school construction bonds 8 ������������������������������������������������������������������������������ 80 210 400 580 650 650 650 2,930

Training, employment, and social services: 

115 Work opportunity tax credit ����������������������������������������������������������������������������������������������� 1,110 1,020 680 340 160 70 30 1,280

116 Welfare-to-work tax credit ������������������������������������������������������������������������������������������������� 20 10 0 0 0 0 0 0

117 Employer provided child care exclusion ���������������������������������������������������������������������������� 1,220 1,380 1,450 1,570 1,690 1,800 1,900 8,410

118 Employer-provided child care credit ��������������������������������������������������������������������������������� 10 0 0 0 0 0 0 0

119 Assistance for adopted foster children ������������������������������������������������������������������������������ 460 500 530 560 600 650 690 3,030

120 Adoption credit and exclusion 9 ���������������������������������������������������������������������������������������� 660 160 190 110 100 100 90 590

121 Exclusion of employee meals and lodging (other than military) ��������������������������������������� 1,060 1,110 1,170 1,230 1,300 1,370 1,440 6,510

122 Child credit 10 ������������������������������������������������������������������������������������������������������������������� 23,030 18,330 10,580 10,290 9,900 9,430 9,000 49,200

123 Credit for child and dependent care expenses ���������������������������������������������������������������� 3,470 1,900 1,710 1,660 1,590 1,500 1,440 7,900

124 Credit for disabled access expenditures �������������������������������������������������������������������������� 20 20 20 20 20 20 20 100

125 Deductibility of charitable contributions, other than education and health ������������������������ 34,080 39,610 43,110 46,570 49,790 53,120 56,340 248,930

126 Exclusion of certain foster care payments ����������������������������������������������������������������������� 420 410 410 400 410 400 390 2,010

127 Exclusion of parsonage allowances ��������������������������������������������������������������������������������� 660 700 750 800 860 920 980 4,310

128 Employee retention credit for employers in certain federal disaster areas ����������������������� 70 30 10 0 0 0 0 10

129 Exclusion for benefits provided to volunteer EMS and firefighters ����������������������������������� 70 20 0 0 0 0 0 0

130 Making work pay tax credit 11 ������������������������������������������������������������������������������������������� 38,850 23,460 0 0 0 0 0 0

Health: 

131 Exclusion of employer contributions for medical insurance premiums and medical care 12 � 160,110 173,750 184,460 196,220 211,470 230,080 248,980 1,071,210

132 Self-employed medical insurance premiums 13 ��������������������������������������������������������������������� 5,680 6,210 6,690 7,200 7,740 8,310 8,900 38,840

133 Medical Savings Accounts / Health Savings Accounts ���������������������������������������������������������� 1,790 1,880 1,980 2,070 2,210 2,350 2,510 11,120

134 Deductibility of medical expenses ���������������������������������������������������������������������������������������� 9,090 10,030 10,010 9,930 11,240 13,390 15,450 60,020

135 Exclusion of interest on hospital construction bonds ������������������������������������������������������������� 3,530 3,630 4,290 5,080 5,520 5,790 6,080 26,760

136 Refundable Premium Assistance Tax Credit 14 ��������������������������������������������������������������������� 0 0 0 0 0 –1,010 –1,530 –2,540

137 Credit for employee health insurance expenses of small business 15 ����������������������������������� 2,300 2,420 3,440 3,810 4,460 4,740 4,190 20,640

138 Deductibility of charitable contributions (health) �������������������������������������������������������������������� 3,850 4,470 4,870 5,250 5,630 6,000 6,360 28,110

139 Tax credit for orphan drug research �������������������������������������������������������������������������������������� 470 550 650 770 900 1,060 1,250 4,630

140 Special Blue Cross/Blue Shield deduction ��������������������������������������������������������������������������� 750 715 680 590 530 610 710 3,120

141 Tax credit for health insurance purchased by certain displaced and retired individuals 16 ��� 0 0 0 0 0 0 0 0

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

Table 17–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2010-2016—Continued

(In millions of dollars)

Total from corporations and individuals

2010 2011 2012 2013 2014 2015 2016 2012-16

Income security: 

143 Exclusion of railroad retirement system benefits ������������������������������������������������������������������ 350 330 310 280 270 260 260 1,380

144 Exclusion of workers’ compensation benefits ������������������������������������������������������������������������ 6,770 7,050 7,410 7,790 8,170 8,570 9,000 40,940

145 Exclusion of public assistance benefits (normal tax method) ����������������������������������������������� 640 670 710 750 770 800 830 3,860

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

147 Exclusion of military disability pensions ������������������������������������������������������������������������������� 110 110 110 110 110 110 110 550

Net exclusion of pension contributions and earnings: 

148 Employer plans ���������������������������������������������������������������������������������������������������������������� 39,580 42,200 45,230 46,460 49,460 51,620 53,200 245,970

149 401(k) plans ���������������������������������������������������������������������������������������������������������������������� 52,240 62,850 67,590 69,060 71,520 72,880 75,210 356,260

150 Individual Retirement Accounts ��������������������������������������������������������������������������������������� 12,630 13,930 15,610 16,020 16,220 16,320 16,320 80,490

151 Low and moderate income savers credit �������������������������������������������������������������������������� 1,130 1,370 1,320 1,320 1,290 1,270 1,290 6,490

152 Keogh plans ��������������������������������������������������������������������������������������������������������������������� 13,820 15,030 17,070 19,580 20,940 22,450 23,840 103,880

Exclusion of other employee benefits: 

153 Premiums on group term life insurance ��������������������������������������������������������������������������� 1,950 1,980 2,080 2,120 2,150 2,190 2,250 10,790

154 Premiums on accident and disability insurance ��������������������������������������������������������������� 330 340 350 360 360 370 370 1,810

155 Income of trusts to finance supplementary unemployment benefits ������������������������������������� 20 30 40 50 60 70 80 300

156 Special ESOP rules ��������������������������������������������������������������������������������������������������������������� 1,400 1,500 1,600 1,700 1,700 1,800 1,900 8,700

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

158 Additional deduction for the elderly �������������������������������������������������������������������������������������� 1,890 2,480 2,980 3,170 3,400 3,560 3,590 16,700

159 Tax credit for the elderly and disabled ���������������������������������������������������������������������������������� 10 10 10 10 10 0 0 30

160 Deductibility of casualty losses ��������������������������������������������������������������������������������������������� 260 300 320 330 360 380 410 1,800

161 Earned income tax credit 17 ������������������������������������������������������������������������������������������������ 4,910 7,510 8,500 8,730 9,020 9,260 9,550 45,060

162 Exclusion of unemployment insurance benefits ��������������������������������������������������������������������� 5,220 0 0 0 0 0 0 0

Social Security: 

Exclusion of social security benefits: 

163 Social Security benefits for retired workers ��������������������������������������������������������������������� 21,440 20,300 21,830 23,350 25,070 27,780 31,010 129,040

164 Social Security benefits for disabled workers ������������������������������������������������������������������� 7,040 7,180 7,510 7,840 8,150 8,610 9,130 41,240

165 Social Security benefits for spouses, dependents and survivors �������������������������������������� 3,850 3,160 3,270 3,300 3,320 3,580 3,920 17,390

Veterans benefits and services: 

166 Exclusion of veterans death benefits and disability compensation ��������������������������������������� 4,130 4,510 5,010 5,520 6,110 6,750 7,460 30,850

167 Exclusion of veterans pensions �������������������������������������������������������������������������������������������� 210 240 300 330 360 380 400 1,770

168 Exclusion of GI bill benefits �������������������������������������������������������������������������������������������������� 450 810 1,010 1,200 1,330 1,440 1,560 6,540

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

General purpose fiscal assistance: 

170 Exclusion of interest on public purpose State and local bonds ��������������������������������������������� 30,440 31,260 36,960 43,720 47,570 49,840 52,350 230,440

171 Build America Bonds 18 ��������������������������������������������������������������������������������������������������������� 0 0 0 0 0 0 0 0

172 Deductibility of nonbusiness State and local taxes other than on owner-occupied homes �� 26,890 37,720 48,640 54,030 59,080 63,470 67,070 292,290

Interest: 

173 Deferral of interest on U.S. savings bond  ���������������������������������������������������������������������������� 1,180 1,220 1,300 1,320 1,330 1,340 1,360 6,6

Addendum: Aid to State and local governments: 

Deductibility of: 

Property taxes on owner-occupied homes ���������������������������������������������������������������������� 15,120 19,320 24,910 27,000 28,760 30,250 31,370 142,290

Nonbusiness State and local taxes other than on owner-occupied homes ��������������������� 26,890 37,720 48,640 54,030 59,080 63,470 67,070 292,290

Exclusion of interest on State and local bonds for: 

Public purposes ���������������������������������������������������������������������������������������������������������������� 30,440 31,260 36,960 43,720 47,570 49,840 52,350 230,440

Energy facilities ����������������������������������������������������������������������������������������������������������������� 20 30 30 30 30 40 40 170

Water, sewage, and hazardous waste disposal facilities ������������������������������������������������� 460 460 550 650 710 750 790 3,450

Small-issues ��������������������������������������������������������������������������������������������������������������������� 330 340 400 470 510 530 560 2,470

Owner-occupied mortgage subsidies ������������������������������������������������������������������������������� 1,230 1,260 1,490 1,760 1,920 2,010 2,120 9,300

Rental housing ����������������������������������������������������������������������������������������������������������������� 1,050 1,080 1,270 1,500 1,640 1,710 1,800 7,920

Airports, docks, and similar facilities �������������������������������������������������������������������������������� 840 870 1,020 1,210 1,310 1,380 1,450 6,370

Student loans ������������������������������������������������������������������������������������������������������������������� 550 560 660 790 860 890 940 4,140
17. TAX EXPENDITURES 245

Table 17–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2010-2016—Continued

(In millions of dollars)

Total from corporations and individuals

2010 2011 2012 2013 2014 2015 2016 2012-16

Private nonprofit educational facilities ����������������������������������������������������������������������������� 2,340 2,400 2,840 3,360 3,660 3,830 4,020 17,710

Hospital construction �������������������������������������������������������������������������������������������������������� 3,530 3,630 4,290 5,080 5,520 5,790 6,080 26,760

Veterans’ housing ������������������������������������������������������������������������������������������������������������ 20 10 20 30 30 30 30 140

GO Zone and GO Zone mortgage ������������������������������������������������������������������������������������ 90 90 100 120 130 140 140 690

Credit for holders of zone academy bonds ���������������������������������������������������������������������������� 190 200 200 180 160 130 120 790

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: 2010 $4,210; 2011 $4,260; 2012 $3,350; 2013 $2,850; 2014 $2,140; 2015 $1,520; 2016 $620. 2 In addition, the alcohol fuel credit results in a reduction in excise tax receipts (in millions of dollars) as follows:

2010 $5680; 2011 $2990; 2012 $0; 2013 $0; 2014 $0; 2015 $0; 2016 $0. 3 In addition, the biodiesel producer tax credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2010 $490 ; 2011 $0; 2012 $0; 2013 $0; 2014 $0; 2015 $0;

2016 $0. 4 In addition, the provision has outlay effects of (in millions of dollars)

2010 $10 ; 2011 $20; 2012 $30; 2013 $30; 2014 $30; 2015 $30; 2016 $30. 5 In addition, the provision has outlay effects of (in millions of dollars)

2010 $30 ; 2011 $50; 2012 $60; 2013 $60; 2014 $60; 2015 $60; 2016 $60. 6 In addition, recovery zone bonds have outlay effects (in millions of dollars) as follows

2010 $60, 2011 $120, 2012 $130, 2013 $130, 2014 $130, 2015 $130, 2016 $130. 7 In addition, the credit for holders of zone academy bonds has outlay effects of (in millions of dollars)

2010 $10 ; 2011 $20; 2012 $30; 2013 $30; 2014 $30; 2015 $30; 2016 $30. 8 In addition, the provision has outlay effects of (in millions of dollars)

2010 $460 ; 2011 $850; 2012 $1020; 2013 $1020; 2014 $1020; 2015 $1020; 2016 $1020. 9 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  2010 $940 and 2011 $410. 10 The figures in the table indicate the effect of the child tax credit on receips.  The effect of the credit on outlays (in millions of dollars) is as follos:  2010 $24,470; 2011 $24,170; 2

$1,470; 2013 $1,460; 2014 $1,440; 2015 $1,440; and 2016 $,1420. 11 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: 2010 $21,410 and 2011 $20,490. 12 The figures in the table indicate the effect on income taxes of the employer contributions for healh.  In addition, the effect on payroll tax receipts (in millions of dollars) is as follo

2010 $103,980; 2011 $107,770; 2012 $113,050; 2013 $118,250; 2014 $124,860; 2015 $133,130; and 2016 $141,330. 13 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. 14 In addition, the premium assistance credit provision has outlay effects (in millions of dollars) as follows: 2014 $16,010; 2015 $32,900; and 2016 $43,840. 15 In addition, the small business credit provision has outlay effects (in millions of dollars) as follows: 2011 $180; 2012 $260; 2013 $290; 2014 $340; 2015 $360; and 2016 $320. 16 The figures in the table indicate the effect of the health coverage tax credit on recepts.  The effect of the credit on outlays (in millions of dollars) is as folws:   2010 $200; 2011 

2012 $130; 2013 $130; 2014 $140; 2015 $150; and 2016 $150. 17 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: 2010 $54,740; 201

$54,960; 2012 $43,980; 2013 $43,860; 2014 $44,130; 2015 $44,380; and 2016 $44,910. 18 In addition, Build America Bonds have outlay effects of (in millions of dollars): 2010 $1,850; 2011 $2,590; 2012 $2,860; 2013 $2,760; 2014 $2,650; 2015 $2,550, and 2016 $2,45

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

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

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

INCOME TAXES FOR FISCAL YEARS 2010-2016

(In millions of dollars)

Corporations Individuals

2010 2011 2012 2013 2014 2015 2016 2012-16 2010 2011 2012 2013 2014 2015 2016 2012-16

National Defense

1

Exclusion of benefits and allowances to 

armed forces personnel ������������������������� 12,740 13,290 13,710 12,200 12,680 13,190 13,720 65,500

International affairs: 

2

Exclusion of income earned abroad by U.

citizens ��������������������������������������������������� 6,800 5,550 5,400 5,800 6,140 6,430 6,730 30,500

3

Exclusion of certain allowances for Federal 

employees abroad ���������������������������������� 970 1020 1070 1120 1180 1240 1300 5,910

4

Inventory property sales source rules 

exception ������������������������������������������������ 2,680 2,910 3,160 3,430 3,730 4,050 4,400 18,770

5

Deferral of income from controlled foreign 

corporations (normal tax method) ��������� 38,130 41,410 42,000 41,810 41,770 43,020 44,240 212,840

6

Deferred taxes for financial firms on certain 

income earned overseas ������������������������ 2,330 0 0 0 0 0 0 0

General science, space, and technology: 

7

Expensing of research and experimentation 

expenditures (normal tax method) ��������� 3220 4250 5390 6330 6550 7310 7380 32,960 340 360 380 400 420 450 470 2,120

8 Credit for increasing research activities ������ 5770 3850 3080 2460 1960 1570 1250 10,320 120 0 0 0 0 0 0 0

Energy: 

9

Expensing of exploration and development 

costs, fuels ��������������������������������������������� 350 460 610 470 350 300 280 2,010 50 60 90 70 50 40 40 290

10

Excess of percentage over cost depletion, 

fuels ������������������������������������������������������� 830 910 950 970 990 1,000 1,020 4,930 150 160 170 180 180 180 180 890

11 Alternative fuel production credit ���������������� 160 160 110 80 60 20 0 270 10 10 10 10 0 0 0 20

12

Exception from passive loss limitation 

for working interests in oil and gas 

properties ���������������������������������������������� 30 40 30 30 30 30 30 150

13 Capital gains treatment of royalties on coal 50 50 50 60 60 80 90 340

14

Exclusion of interest on energy facility 

bonds ����������������������������������������������������� 10 10 10 10 10 10 10 50 10 20 20 20 20 30 30 120

15 Energy production credit 1 ��������������������������� 1,370 1,430 1,510 1,620 1,640 1,580 1,460 7,810 170 190 230 280 310 310 310 1,440

16 Energy investment credit 1 ��������������������������� 100 120 720 1260 790 390 400 3,560 30 50 240 430 240 90 90 1,090

17 Alcohol fuel credits 2 ���������������������������������� 60 70 110 80 40 20 10 260 10 20 20 30 10 10 0 70

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 �������������������������������������� 70 40 20 10 20 50 70 170 180 220 120 160 210 340 590 1,420

20 Exclusion of utility conservation subsidies ��� 10 10 10 10 10 10 10 50 210 210 210 210 200 200 200 1,020

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 ����������������������� –50 –150 –150 –130 –110 –80 –50 –520

23 Credit for investment in clean coal facilities � 240 400 460 450 360 300 200 1,770

24

Temporary 50% expensing for equipment 

used in the refining of liquid fuels ����������� 760 620 520 420 –580 –1110 –950 –1,700

25

Natural gas distribution pipelines treated as 

15-year property ������������������������������������� 120 120 100 80 80 80 90 430

26

Amortize all geological and geophysical 

expenditures over 2 years ����������������������� 120 90 70 50 30 20 20 190 30 20 20 10 10 10 10 60

27

Allowance of deduction for certain energy 

efficient commercial building property ���� 50 60 70 80 50 20 10 230 10 20 20 20 20 10 0 70

28

Credit for construction of new energy 

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

29

Credit for energy efficiency improvements to 

existing homes ���������������������������������������� 0 0 0 0 0 0 0 0 3,190 5,530 2,270 0 0 0 0 2,270

30 Credit for energy efficient appliances ���������� 150 60 0 0 0 0 0 0

31

Credit for residential energy efficient 

property ������������������������������������������������� 220 220 220 230 230 230 240 1,150

32 Qualified energy conservation bonds 5 �������� 0 0 10 10 10 10 10 50 0 10 10 20 20 20 20 90

33 Advanced Energy Property Credit ��������������� 160 540 810 410 –10 –80 –70 1,060 20 60 90 50 0 –10 –10 120
17. TAX EXPENDITURES 247

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

INCOME TAXES FOR FISCAL YEARS 2010-2016—Continued

(In millions of dollars)

Corporations Individuals

2010 2011 2012 2013 2014 2015 2016 2012-16 2010 2011 2012 2013 2014 2015 2016 2012-16

Natural resources and environment: 

34

Expensing of exploration and development 

costs, nonfuel minerals �������������������������� 110 110 120 130 130 140 140 660 0 0 10 10 10 10 10 50

35

Excess of percentage over cost depletion, 

nonfuel minerals ������������������������������������ 720 740 720 690 700 720 730 3,560 50 50 50 50 50 50 50 250

36

Exclusion of interest on bonds for water, 

sewage, and hazardous waste facilities �� 150 130 180 220 230 230 240 1,100 310 330 370 430 480 520 550 2,350

37

Capital gains treatment of certain timber 

income ��������������������������������������������������� 50 50 50 60 60 80 90 340

38

Expensing of multiperiod timber growing 

costs ������������������������������������������������������ 150 180 180 190 200 210 190 970 80 110 110 110 110 120 120 570

39

Tax incentives for preservation of historic 

structures ����������������������������������������������� 300 300 310 310 320 330 330 1,600 90 90 90 100 100 100 100 490

40

Exclusion of gain or loss on sale or 

exchange of certain brownfield sites ������ 50 40 30 20 10 0 0 60 20 20 10 10 0 0 0 20

41

Industrial CO2 capture and sequestration 

tax credit ������������������������������������������������� 20 30 30 40 80 130 170 450

42

Deduction for endangered species recovery 

expenditures ������������������������������������������� 10 20 20 20 30 30 40 140 10 10 10 10 20 20 20 80

Agriculture: 

43 Expensing of certain capital outlays ����������� 0 10 10 10 10 10 10 50 70 70 90 100 120 120 130 560

44

Expensing of certain multiperiod production 

costs ������������������������������������������������������ 10 10 10 10 10 10 10 50 130 140 140 160 170 170 170 810

45

Treatment of loans forgiven for solvent 

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

46 Capital gains treatment of certain income �� 490 500 520 580 630 780 930 3,440

47 Income averaging for farmers ���������������������� 90 90 90 90 90 100 100 470

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

49 Expensing of reforestation expenditures ����� 10 10 10 10 10 10 10 50 40 60 70 70 70 80 80 370

Commerce and housing: 

Financial institutions and insurance: 

50 Exemption of credit union income ���������� 1,270 1,240 1,310 1,470 1,600 1,710 1,830 7,920

51

Exclusion of interest on life insurance 

savings ���������������������������������������������� 1,500 1,570 1,650 1,740 1,840 1,940 2,050 9,220 18,410 19,640 21,010 22,480 23,990 25,440 26,920 119,840

52

Special alternative tax on small property 

and casualty insurance companies ��� 40 40 40 40 40 40 40 200

53

Tax exemption of certain insurance 

companies owned by tax-exempt 

organizations ������������������������������������� 200 200 210 210 210 220 220 1,070

54 Small life insurance company deduction 30 30 30 30 30 30 30 150

55

Exclusion of interest spread of financial 

institutions ������������������������������������������ –170 300 550 630 700 760 810 3,450

Housing: 

56

Exclusion of interest on owner-occupied 

mortgage subsidy bonds ������������������ 400 360 480 600 620 610 640 2,950 830 900 1,010 1,160 1,300 1,400 1,480 6,350

57

Exclusion of interest on rental housing 

bonds ������������������������������������������������� 340 310 410 510 530 520 540 2,510 710 770 860 990 1,110 1,190 1,260 5,410

58

Deductibility of mortgage interest on 

owner-occupied homes ��������������������� 79,150 88,720 98,550 110,660 122,970 133,300 143,700 609,180

59

Deductibility of State and local property 

tax on owner-occupied homes ���������� 15,120 19,320 24,910 27,000 28,760 30,250 31,370 142,290

60

Deferral of income from installment sales ������������������������������������������������������������ 620 730 830 1,020 1,230 1,420 1,600 6,100

61 Capital gains exclusion on home sales ��� 22,160 27,650 35,200 38,880 42,940 47,420 52,380 216,820

62 Exclusion of net imputed rental income �� 41,200 46,950 50,640 51,080 58,740 66,860 75,480 302,800

63

Exception from passive loss rules for 

$25,000 of rental loss ����������������������� 8,790 10,860 13,110 14,830 16,730 18,880 20,200 83,750

64

Credit for low-income housing 

investments ��������������������������������������� 5,370 5,690 5,980 6,770 7,060 7,200 7,260 34,270 280 300 310 360 370 380 380 1,800

65

Accelerated depreciation on rental 

housing (normal tax method) ������������ –30 –30 –30 –30 –20 –20 –10 –110 –1,460 –1,640 –1,550 –1,340 –1,080 –870 –690 –5,530
248 ANALYTICAL PERSPECTIVES

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

INCOME TAXES FOR FISCAL YEARS 2010-2016—Continued

(In millions of dollars)

Corporations Individuals

2010 2011 2012 2013 2014 2015 2016 2012-16 2010 2011 2012 2013 2014 2015 2016 2012-16

66 Discharge of mortgage indebtedness ����� 0 0 0 0 0 0 0 0 1,480 1,390 1,100 250 0 0 0 1,350

67 Credit for homebuyer ������������������������������ 13,680 10,410 –2,160 –1,450 –590 –520 –470 –5,190

Commerce: 

68 Cancellation of indebtedness ���������������� 750 430 130 –70 –180 –250 –230 –600

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

70 Treatment of qualified dividends ������������� 31,050 23,600 0 0 0 0 0 0

71

Capital gains (except agriculture, timber, 

iron ore, and coal) ������������������������������ 36,300 37,560 38,490 43,260 46,880 58,110 69,540 256,280

72

Capital gains exclusion of small 

corporation stock ������������������������������� 50 170 290 300 470 820 850 2,730

73 Step-up basis of capital gains at death ��� 39,520 50,940 61,480 66,090 71,040 76,370 82,100 357,080

74 Carryover basis of capital gains on gifts 1,400 4,790 1,990 2,660 2,850 3,070 3,290 13,860

75

Ordinary income treatment of loss from 

small business corporation stock sale ��� 60 60 60 60 60 60 60 300

76

Accelerated depreciation of buildings 

other than rental housing (normal tax 

method) �������������������������������������������� –2,440 –2,950 –2,980 –3,150 –3,300 –3,450 –3,310 –16,190 –8,690 –10,060 –10,770 –11,230 –11,670 –12,080 –12,530 –58,280

77

Accelerated depreciation of machinery 

and equipment (normal tax method) � 17,140 5,400 5,300 15,730 24,470 30,950 32,990 109,440 22,650 12,140 19,150 28,560 33,780 37,790 40,960 160,240

78

Expensing of certain small investments 

(normal tax method) ������������������������� 170 960 –270 –620 –300 –130 10 –1,310 780 5,750 –440 –2,200 –540 280 920 –1,980

79

Graduated corporation income tax rate 

(normal tax method) ������������������������� 3,000 3,280 3,220 3,300 3,590 3,770 3,960 17,840

80

Exclusion of interest on small issue 

bonds ������������������������������������������������ 110 100 130 160 160 160 170 780 220 240 270 310 350 370 390 1,690

81 Deduction for US production activities ���� 10010 10510 11140 11810 12500 13170 13830 62,450 3,130 3,290 3,490 3,700 3,910 4,120 4,330 19,550

82

Special rules for certain film and TV 

production ������������������������������������������ 40 20 20 10 0 0 0 30 10 10 10 0 0 0 0 10

Transportation: 

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

84

Exclusion of reimbursed employee parking 

expenses ����������������������������������������������� 0 0 0 0 0 0 0 0 2,970 3,050 3,180 3,320 3,470 3,620 3,760 17,350

85

Exclusion for employer-provided transit 

passes ��������������������������������������������������� 0 0 0 0 0 0 0 0 580 510 520 560 590 640 680 2,990

86

Tax credit for certain expenditures for 

maintaining railroad tracks ���������������������� 40 20 20 10 0 0 0 30 10 10 10 0 0 0 0 10

87

Exclusion of interest on bonds for Highway 

Projects and rail-truck transfer facilities ���� 60 60 60 60 50 50 50 270 180 190 180 170 160 150 140 800

Community and regional development: 

88

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

89

Exclusion of interest for airport, dock, and 

similar bonds ������������������������������������������ 270 250 330 410 420 420 440 2,020 570 620 690 800 890 960 1,010 4,350

90

Exemption of certain mutuals’ and 

cooperatives’ income ����������������������������� 110 110 110 120 120 120 130 600

91

Empowerment zones and renewal 

communities ������������������������������������������� 150 100 120 130 130 120 100 600 580 400 450 490 500 480 420 2,340

92 New markets tax credit �������������������������������� 650 720 730 700 660 590 480 3,160 70 80 80 80 80 70 60 370

93

Expensing of environmental remediation 

costs ������������������������������������������������������� 10 –110 –120 –120 –110 –100 –90 –540 0 –20 –20 –20 –20 –20 –20 –100

94 Credit to holders of Gulf Tax Credit Bonds. �� 20 20 20 10 10 10 10 60 60 60 50 40 40 40 40 21

95 Recovery Zone Bonds 6 ������������������������������� 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

96 Tribal Economic Development Bonds ���������� 0 10 10 10 10 10 0 40 10 20 20 20 10 10 10 70

Education, training, employment, and social 

services: 

Education: 

97

Exclusion of scholarship and fellowship 

income (normal tax method) ������������� 2,760 3,010 3,130 3,240 3,360 3,480 3,610 16,820

98 HOPE tax credit �������������������������������������� 0 540 5,410 5,510 5,830 5,770 5,760 28,280

99 Lifetime Learning tax credit �������������������� 3,490 3,880 5,530 5,660 5,790 5,800 5,840 28,620

100 American Opportunity Tax Credit ������������ 15,110 14,400 0 0 0 0 0 0
17. TAX EXPENDITURES 249

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

INCOME TAXES FOR FISCAL YEARS 2010-2016—Continued

(In millions of dollars)

Corporations Individuals

2010 2011 2012 2013 2014 2015 2016 2012-16 2010 2011 2012 2013 2014 2015 2016 2012-16

101 Education Individual Retirement Accounts �� 60 70 80 80 90 100 100 450

102 Deductibility of student-loan interest ������� 1,480 1,400 900 960 1,030 1,100 1,170 5,160

103 Deduction for higher education expenses ���� 760 0 0 0 0 0 0 0

104 State prepaid tuition plans ���������������������� 1,390 1,580 1,750 1,860 1,950 2,050 2,150 9,760

105 Exclusion of interest on student-loan bonds �� 180 160 210 270 280 270 280 1,310 370 400 450 520 580 620 660 2,830

106

Exclusion of interest on bonds for private 

nonprofit educational facilities ����������� 760 690 910 1,150 1,180 1,170 1,210 5,620 1580 1710 1930 2210 2480 2660 2810 12,090

107 Credit for holders of zone academy bonds 7��� 190 200 200 180 160 130 120 790

108

Exclusion of interest on savings bonds 

redeemed to finance educational 

expenses ������������������������������������������� 20 20 20 20 20 30 30 120

109

Parental personal exemption for students 

age 19 or over ����������������������������������� 2,960 2,990 3,400 3,210 2,950 2,690 2,440 14,690

110

Deductibility of charitable contributions 

(education) ����������������������������������������� 620 650 690 740 790 840 890 3,950 3,310 3,870 4,210 4,550 4,870 5,200 5,520 24,350

111

Exclusion of employer-provided 

educational assistance ��������������������� 680 30 0 0 0 0 0 0

112 Special deduction for teacher expenses ����� 160 0 0 0 0 0 0 0

113 Discharge of student loan indebtedness 20 20 20 20 20 20 20 100

114 Qualified school construction bonds 8 ����� 30 60 110 150 160 160 160 740 50 150 290 430 490 490 490 2,190

Training, employment, and social services: 

115 Work opportunity tax credit ��������������������� 860 770 550 290 130 60 20 1,050 250 250 130 50 30 10 10 230

116 Welfare-to-work tax credit ����������������������� 10 10 0 0 0 0 0 0 10 0 0 0 0 0 0 0

117 Employer provided child care exclusion ��� 1220 1380 1450 1570 1690 1800 1900 8,410

118 Employer-provided child care credit ������� 10 0 0 0 0 0 0 0 0

119 Assistance for adopted foster children ���� 460 500 530 560 600 650 690 3,030

120 Adoption credit and exclusion 9 ��������������� 660 160 190 110 100 100 90 590

121

Exclusion of employee meals and 

lodging (other than military) �������������� 1,060 1,110 1,170 1,230 1,300 1,370 1,440 6,510

122 Child credit 10 ������������������������������������������ 23,030 18,330 10,580 10,290 9,900 9,430 9,000 49,200

123

Credit for child and dependent care 

expenses ������������������������������������������ 3,470 1,900 1,710 1,660 1,590 1,500 1,440 7,900

124 Credit for disabled access expenditures ���� 10 10 10 10 10 10 10 50 10 10 10 10 10 10 10 50

125

Deductibility of charitable contributions, 

other than education and health �������� 1,370 1,430 1,510 1,600 1,690 1,770 1860 8,430 32,710 38,180 41,600 44,970 48,100 51,350 54,480 240,500

126

Exclusion of certain foster care 

payments ������������������������������������������ 420 410 410 400 410 400 390 2,010

127 Exclusion of parsonage allowances ������� 660 700 750 800 860 920 980 4,310

128

Employee retention credit for employers 

in certain federal disaster areas �������� 50 20 10 0 0 0 0 10 20 10 0 0 0 0 0 0

129

Exclusion for benefits provided to 

volunteer EMS and firefighters ���������� 0 0 0 0 0 0 0 0 70 20 0 0 0 0 0 0

130 Making work pay tax credit 11 ������������������ 38,850 23,460 0 0 0 0 0 0

Health: 

131

Exclusion of employer contributions for 

medical insurance premiums and 

medical care 12 ��������������������������������������� 160,110 173,750 184,460 196,220 211,470 230,080 248,980 1,071,210

132 Self-employed medical insurance premiums 13 ��� 5,680 6,210 6,690 7,200 7,740 8,310 8,900 38,840

133

Medical Savings Accounts / Health Savings 

Accounts ������������������������������������������������� 1,790 1,880 1,980 2,070 2,210 2,350 2,510 11,120

134 Deductibility of medical expenses �������������� 9,090 10,030 10,010 9,930 11,240 13,390 15,450 60,020

135

Exclusion of interest on hospital 

construction bonds ��������������������������������� 1,140 1,040 1,380 1,730 1,780 1,770 1,830 8,490 2,390 2,590 2,910 3,350 3,740 4,020 4,250 18,270

136 Refundable Premium Assistance Tax Credit 14 ��� 0 0 0 0 0 –1,010 –1,530 –2,540

137

Credit for employee health insurance 

expenses of small business 15 ���������������� 2,300 2,420 3,440 3,810 4,460 4,740 4,190 20,640

138

Deductibility of charitable contributions 

(health) ��������������������������������������������������� 180 190 200 210 230 240 250 1,130 3,670 4,280 4,670 5,040 5,400 5,760 6,110 26,980

139 Tax credit for orphan drug research ������������ 470 550 650 770 900 1,060 1,250 4,630

140 Special Blue Cross/Blue Shield deduction ��� 750 715 680 590 530 610 710 3,120

141

Tax credit for health insurance purchased by 

certain displaced and retired individuals 16 ���� 0 0 0 0 0 0 0 0
250 ANALYTICAL PERSPECTIVES

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

INCOME TAXES FOR FISCAL YEARS 2010-2016—Continued

(In millions of dollars)

Corporations Individuals

2010 2011 2012 2013 2014 2015 2016 2012-16 2010 2011 2012 2013 2014 2015 2016 2012-16

142

Distributions from retirement plans for 

premiums for health and long-term care 

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

Income security: 

143

Exclusion of railroad retirement system 

benefits �������������������������������������������������� 350 330 310 280 270 260 260 1,380

144

Exclusion of workers’ compensation 

benefits ��������������������������������������������������� 6,770 7,050 7,410 7,790 8,170 8,570 9,000 40,940

145

Exclusion of public assistance benefits 

(normal tax method) ������������������������������ 640 670 710 750 770 800 830 3,860

146

Exclusion of special benefits for disabled 

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

147 Exclusion of military disability pensions ����� 110 110 110 110 110 110 110 550

Net exclusion of pension contributions and 

earnings: 

148 Employer plans �������������������������������������� 39,580 42,200 45,230 46,460 49,460 51,620 53,200 245,970

149 401(k) plans �������������������������������������������� 52,240 62,850 67,590 69,060 71,520 72,880 75,210 356,260

150 Individual Retirement Accounts ������������� 12,630 13,930 15,610 16,020 16,220 16,320 16,320 80,490

151 Low and moderate income savers credit 1,130 1,370 1,320 1,320 1,290 1,270 1,290 6,490

152 Keogh plans ������������������������������������������� 13,820 15,030 17,070 19,580 20,940 22,450 23,840 103,880

Exclusion of other employee benefits: 

153 Premiums on group term life insurance � 1,950 1,980 2,080 2,120 2,150 2,190 2,250 10,790

154

Premiums on accident and disability 

insurance ������������������������������������������ 330 340 350 360 360 370 370 1,810

155

Income of trusts to finance supplementary 

unemployment benefits �������������������������� 20 30 40 50 60 70 80 300

156 Special ESOP rules ������������������������������������� 950 1,030 1,110 1,180 1,150 1,220 1,290 5,950 450 470 490 520 550 580 610 2,750

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

158 Additional deduction for the elderly ������������ 1,890 2,480 2,980 3,170 3,400 3,560 3,590 16,700

159 Tax credit for the elderly and disabled �������� 10 10 10 10 10 0 0 30

160 Deductibility of casualty losses ������������������� 260 300 320 330 360 380 410 1,800

161 Earned income tax credit 17 ����������������������� 4,910 7,510 8,500 8,730 9,020 9,260 9,550 45,060

162

Exclusion of unemployment insurance 

benefits ��������������������������������������������������� 5,220 0 0 0 0 0 0 0

Social Security: 

Exclusion of social security benefits: 

163

Social Security benefits for retired 

workers ��������������������������������������������� 21,440 20,300 21,830 23,350 25,070 27,780 31,010 129,040

164

Social Security benefits for disabled 

workers ���������������������������������������������� 7,040 7,180 7,510 7,840 8,150 8,610 9,130 41,240

165

Social Security benefits for spouses, 

dependents and survivors ����������������� 3,850 3,160 3,270 3,300 3,320 3,580 3,920 17,390

Veterans benefits and services: 

166

Exclusion of veterans death benefits and 

disability compensation ������������������������� 4,130 4,510 5,010 5,520 6,110 6,750 7,460 30,850

167 Exclusion of veterans pensions ������������������ 210 240 300 330 360 380 400 1,770

168 Exclusion of GI bill benefits ������������������������ 450 810 1,010 1,200 1,330 1,440 1,560 6,540

169

Exclusion of interest on veterans housing 

bonds ������������������������������������������������������ 10 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 ����������������������������� 9,850 8,990 11,880 14,910 15,340 15,210 15,780 73,120 20,590 22,270 25,080 28,810 32,230 34,630 36,570 157,320

171 Build America Bonds 18 �������������������������������� 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 ���������������������������������������������������� 26,890 37,720 48,640 54,030 59,080 63,470 67,070 292,290

Interest: 

173 Deferral of interest on U.S. savings bond  ������ 1,180 1,220 1,300 1,320 1,330 1,340 1,360 6,6
17. TAX EXPENDITURES 251

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

INCOME TAXES FOR FISCAL YEARS 2010-2016—Continued

(In millions of dollars)

Corporations Individuals

2010 2011 2012 2013 2014 2015 2016 2012-16 2010 2011 2012 2013 2014 2015 2016 2012-16

Addendum: Aid to State and local 

governments: 

Deductibility of: 

Property taxes on owner-occupied 

homes ����������������������������������������������� 15,120 19,320 24,910 27,000 28,760 30,250 31,370 142,290

Nonbusiness State and local taxes other 

than on owner-occupied homes �������� 26,890 37,720 48,640 54,030 59,080 63,470 67,070 292,290

Exclusion of interest on State and local 

bonds for: 

Public purposes �������������������������������������� 9,850 8,990 11,880 14,910 15,340 15,210 15,780 73,120 20,590 22,270 25,080 28,810 32,230 34,630 36,570 157,320

Energy facilities ��������������������������������������� 10 10 10 10 10 10 10 50 10 20 20 20 20 30 30 120

Water, sewage, and hazardous waste 

disposal facilities ������������������������������� 150 130 180 220 230 230 240 1,100 310 330 370 430 480 520 550 2,350

Small-issues ������������������������������������������� 110 100 130 160 160 160 170 780 220 240 270 310 350 370 390 1,690

Owner-occupied mortgage subsidies ����� 400 360 480 600 620 610 640 2,950 830 900 1,010 1,160 1,300 1,400 1,480 6,350

Rental housing ��������������������������������������� 340 310 410 510 530 520 540 2,510 710 770 860 990 1,110 1,190 1,260 5,410

Airports, docks, and similar facilities ������ 270 250 330 410 420 420 440 2,020 570 620 690 800 890 960 1,010 4,350

Student loans ����������������������������������������� 180 160 210 270 280 270 280 1,310 370 400 450 520 580 620 660 2,830

Private nonprofit educational facilities ��� 760 690 910 1,150 1,180 1,170 1,210 5,620 1,580 1,710 1,930 2,210 2,480 2,660 2,810 12,090

Hospital construction ������������������������������ 1,140 1,040 1,380 1,730 1,780 1,770 1,830 8,490 2,390 2,590 2,910 3,350 3,740 4,020 4,250 18,270

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

GO Zone and GO Zone mortgage ���������� 30 30 30 40 40 40 40 250 60 60 70 80 90 100 100 440

Credit for holders of zone academy bonds ���� 190 200 200 180 160 130 120 790

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: 2010 $4,210; 2011 $4,260; 2012 $3,350; 2013 $2,850; 2014 $2,140; 2015 $1,520;

2016 $620. 2 In addition, the alcohol fuel credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2010 $5680; 2011 $2990; 2012 $0; 2013 $0; 2014 $0; 2015 $0; 2016

$0

3 In addition, the biodiesel producer tax credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2010 $490 ; 2011 $0; 2012 $0; 2013 $0; 2014 $0; 2015 $0; 

2016 $0. 4 In addition, the provision has outlay effects of (in millions of dollars): 2010 $10 ; 2011 $20; 2012 $30; 2013 $30; 2014 $30; 2015 $30; 2016 $30. 5 In addition, the provision has outlay effects of (in millions of dollars): 2010 $30 ; 2011 $50; 2012 $60; 2013 $60; 2014 $60; 2015 $60; 2016 $60. 6 In addition, recovery zone bonds have outlay effects (in millions of dollars) as follows: 2010 $60, 2011 $120, 2012 $130, 2013 $130, 2014 $130, 2015 $130, 2016 $130. 7 In addition, the credit for holders of zone academy bonds has outlay effects of (in millions of dollars): 2010 $10 ; 2011 $20; 2012 $30; 2013 $30; 2014 $30; 2015 $30; 2016 $30. 8 In addition, the provision has outlay effects of (in millions of dollars): 2010 $460 ; 2011 $850; 2012 $1020; 2013 $1020; 2014 $1020; 2015 $1020; 2016 $1020. 9 The figures in the table indicate the effect of the adoption tax credit on recipts.  The effect of the credit on outlays (in millions of dollars) is as fo

 2010 $940 and 2011 $410. 10 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  2010 $24,470; 2011 $24,170

2012 $1,470; 2013 $1,460; 2014 $1,440; 2015 $1,440; and 2016 $,1420. 11 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: 2010 $21,410 an

2011 $20,490. 12 The figures in the table indicate the effect on income taxes of the employer contributions for health  In addition, the effect on payroll tax receipts (in millions of dollars) is as follows

2010 $103,980; 2011 $107,770; 2012 $113,050; 2013 $118,250; 2014 $124,860; 2015 $133,130; and 2016 $141,330. 13 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. 14 In addition, the premium assistance credit provision has outlay effects (in millions of dollars) as follows: 2014 $16,010; 2015 $32,900; and 2016 $43,840. 15 In addition, the small business credit provision has outlay effects (in millions of dollars) as follows: 2011 $180; 2012 $260; 2013 $290; 2014 $340; 2015 $360; and 2016 $320. 16 The figures in the table indicate the effect of the health coverage tax credit on recepts.  The effect of the credit on outlays (in millions of dollars) is as folws:   2010 $200; 2011 

2012 $130; 2013 $130; 2014 $140; 2015 $150; and 2016 $150. 17 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: 2010 $54,740; 201

$54,960; 2012 $43,980; 2013 $43,860; 2014 $44,130; 2015 $44,380; and 2016 $44,910. 18 In addition, Build America Bonds have outlay effects of (in millions of dollars): 2010 $1,850; 2011 $2,590; 2012 $2,860; 2013 $2,760; 2014 $2,650; 2015 $2,550, and 2016 $2,45

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

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

Table 17–3. INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2012–2016 PROJECTED REVENUE EFFECT

(In millions of dollars)

Provision 2012 2012-16

131 Exclusion of employer contributions for medical insurance premiums and medical care ����������������������������������������������������������������������������������������������������� 184,460 1,071,210

58 Deductibility of mortgage interest on owner-occupied homes ���������������������������������������������������������������������������������������������������������������������������������������������� 98,550 609,180

73 Step-up basis of capital gains at death ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 61,480 357,080

149 401(k) plans ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 67,590 356,260

62 Exclusion of net imputed rental income ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 50,640 302,800

172 Deductibility of nonbusiness State and local taxes other than on owner-occupied homes �������������������������������������������������������������������������������������������������� 48,640 292,290

77 Accelerated depreciation of machinery and equipment (normal tax method) ���������������������������������������������������������������������������������������������������������������������� 24,450 269,680

71 Capital gains (except agriculture, timber, iron ore, and coal) ������������������������������������������������������������������������������������������������������������������������������������������������� 38,490 256,280

125 Deductibility of charitable contributions, other than education and health ����������������������������������������������������������������������������������������������������������������������������� 43,110 248,930

148 Employer plans ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 45,230 245,970

170 Exclusion of interest on public purpose State and local bonds �������������������������������������������������������������������������������������������������������������������������������������������� 36,960 230,440

61 Capital gains exclusion on home sales ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 35,200 216,820

5 Deferral of income from controlled foreign corporations (normal tax method) ��������������������������������������������������������������������������������������������������������������������� 42,000 212,840

59 Deductibility of State and local property tax on owner-occupied homes ������������������������������������������������������������������������������������������������������������������������������ 24,910 142,290

51 Exclusion of interest on life insurance savings ��������������������������������������������������������������������������������������������������������������������������������������������������������������������� 22,660 129,060

163 Social Security benefits for retired workers �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 21,830 129,040

152 Keogh plans �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 17,070 103,880

63 Exception from passive loss rules for $25,000 of rental loss ������������������������������������������������������������������������������������������������������������������������������������������������ 13,110 83,750

81 Deduction for US production activities ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 14,630 82,000

150 Individual Retirement Accounts �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 15,610 80,490

1 Exclusion of benefits and allowances to armed forces personnel ���������������������������������������������������������������������������������������������������������������������������������������� 13,710 65,500

134 Deductibility of medical expenses ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 10,010 60,020

122 Child credit ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 10,580 49,200

161 Earned income tax credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 8,500 45,060

164 Social Security benefits for disabled workers ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 7,510 41,240

144 Exclusion of workers’ compensation benefits ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 7,410 40,940

132 Self-employed medical insurance premiums ������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 6,690 38,840

64 Credit for low-income housing investments �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 6,290 36,070

7 Expensing of research and experimentation expenditures (normal tax method) ����������������������������������������������������������������������������������������������������������������� 5,770 35,080

166 Exclusion of veterans death benefits and disability compensation ��������������������������������������������������������������������������������������������������������������������������������������� 5,010 30,850

2 Exclusion of income earned abroad by U.S. citizen  ������������������������������������������������������������������������������������������������������������������������������������������������������������ 5,400 30,5

99 Lifetime Learning tax credit ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 5,530 28,620

110 Deductibility of charitable contributions (education) �������������������������������������������������������������������������������������������������������������������������������������������������������������� 4,900 28,300

98 HOPE tax credit ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 5,410 28,280

138 Deductibility of charitable contributions (health) �������������������������������������������������������������������������������������������������������������������������������������������������������������������� 4,870 28,110

135 Exclusion of interest on hospital construction bonds ������������������������������������������������������������������������������������������������������������������������������������������������������������� 4,290 26,760

137 Credit for employee health insurance expenses of small business. ��������������������������������������������������������������������������������������������������������������������������������������� 3,440 20,64

4 Inventory property sales source rules exception ������������������������������������������������������������������������������������������������������������������������������������������������������������������� 3,160 18,770

79 Graduated corporation income tax rate (normal tax method) ����������������������������������������������������������������������������������������������������������������������������������������������� 3,220 17,840

106 Exclusion of interest on bonds for private nonprofit educational facilities ����������������������������������������������������������������������������������������������������������������������������� 2,840 17,710

165 Social Security benefits for spouses, dependents and survivors ������������������������������������������������������������������������������������������������������������������������������������������ 3,270 17,390

84 Exclusion of reimbursed employee parking expenses ���������������������������������������������������������������������������������������������������������������������������������������������������������� 3,180 17,350

97 Exclusion of scholarship and fellowship income (normal tax method) ��������������������������������������������������������������������������������������������������������������������������������� 3,130 16,820

158 Additional deduction for the elderly �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 2,980 16,700

109 Parental personal exemption for students age 19 or over ���������������������������������������������������������������������������������������������������������������������������������������������������� 3,400 14,690

74 Carryover basis of capital gains on gifts ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,990 13,860

133 Medical Savings Accounts / Health Savings Accounts ���������������������������������������������������������������������������������������������������������������������������������������������������������� 1,980 11,120

153 Premiums on group term life insurance �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 2,080 10,790

8 Credit for increasing research activities �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 3,080 10,320

104 State prepaid tuition plans ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,750 9,760

56 Exclusion of interest on owner-occupied mortgage subsidy bonds �������������������������������������������������������������������������������������������������������������������������������������� 1,490 9,300

15 New technology credit ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,740 9,250

156 Special ESOP rules ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,600 8,700

117 Employer provided child care exclusion ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,450 8,410

50 Exemption of credit union income ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,310 7,920

57 Exclusion of interest on rental housing bonds ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,270 7,920
17. TAX EXPENDITURES 253

Table 17–3.—INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2012–2016 PROJECTED REVENUE EFFECT—Continued

(In millions of dollars)

Provision 2012 2012-16

123 Credit for child and dependent care expenses ��������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,710 7,900

173 Deferral of interest on U.S. savings bond  ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,300 6,6

168 Exclusion of GI bill benefits �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,010 6,540

121 Exclusion of employee meals and lodging (other than military) ������������������������������������������������������������������������������������������������������������������������������������������� 1,170 6,510

151 Low and moderate income savers credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,320 6,490

89 Exclusion of interest for airport, dock, and similar bonds ������������������������������������������������������������������������������������������������������������������������������������������������������ 1,020 6,370

60 Deferral of income from installment sales ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 830 6,100

3 Exclusion of certain allowances for Federal employees abroad �������������������������������������������������������������������������������������������������������������������������������������������� 1,070 5,910

10 Excess of percentage over cost depletion, fuels ������������������������������������������������������������������������������������������������������������������������������������������������������������������ 1,120 5,820

102 Deductibility of student-loan interest �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 900 5,160

16 Energy investment credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 960 4,650

139 Tax credit for orphan drug research �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 650 4,630

127 Exclusion of parsonage allowances ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 750 4,310

105 Exclusion of interest on student-loan bonds ������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 660 4,140

145 Exclusion of public assistance benefits (normal tax method) ����������������������������������������������������������������������������������������������������������������������������������������������� 710 3,860

35 Excess of percentage over cost depletion, nonfuel minerals ������������������������������������������������������������������������������������������������������������������������������������������������ 770 3,810

92 New markets tax credit ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 810 3,530

55 Exclusion of interest spread of financial institutions �������������������������������������������������������������������������������������������������������������������������������������������������������������� 550 3,450

36 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities ���������������������������������������������������������������������������������������������������������������� 550 3,450

46 Capital gains treatment of certain income ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 520 3,440

140 Special Blue Cross/Blue Shield deduction ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 680 3,120

119 Assistance for adopted foster children ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 530 3,030

85 Exclusion for employer-provided transit passes ������������������������������������������������������������������������������������������������������������������������������������������������������������������� 520 2,990

91 Empowerment zones, Enterprise communities, and Renewal communities ������������������������������������������������������������������������������������������������������������������������� 570 2,940

114 Qualified school construction bonds �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 400 2,930

72 Capital gains exclusion of small corporation stock ���������������������������������������������������������������������������������������������������������������������������������������������������������������� 290 2,730

80 Exclusion of interest on small issue bonds ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 400 2,470

9 Expensing of exploration and development costs, fuels ������������������������������������������������������������������������������������������������������������������������������������������������������� 700 2,300

29 Credit for energy efficiency improvements to existing homes ������������������������������������������������������������������������������������������������������������������������������������������������ 2,270 2,270

39 Tax incentives for preservation of historic structures ������������������������������������������������������������������������������������������������������������������������������������������������������������ 400 2,090

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

126 Exclusion of certain foster care payments ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 410 2,010

154 Premiums on accident and disability insurance �������������������������������������������������������������������������������������������������������������������������������������������������������������������� 350 1,810

160 Deductibility of casualty losses ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 320 1,800

23 Credit for investment in clean coal facilities ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 460 1,770

167 Exclusion of veterans pensions �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 300 1,770

19 Tax credit and deduction for clean-fuel burning vehicles ������������������������������������������������������������������������������������������������������������������������������������������������������� 140 1,590

38 Expensing of multiperiod timber growing costs �������������������������������������������������������������������������������������������������������������������������������������������������������������������� 290 1,540

143 Exclusion of railroad retirement system benefits ������������������������������������������������������������������������������������������������������������������������������������������������������������������ 310 1,380

66 Discharge of mortgage indebtedness ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 1,100 1,350

115 Work opportunity tax credit ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 680 1,280

33 Advanced Energy Property Credit ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 900 1,180

31 30% credit for residential purchases/installations of solar and fuel cells ������������������������������������������������������������������������������������������������������������������������������� 220 1,150

20 Exclusion of utility conservation subsidies ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 220 1,070

53 Tax exemption of certain insurance companies owned by tax-exempt organizations ����������������������������������������������������������������������������������������������������������� 210 1,070

87 Exclusion of interest on bonds for Financing of Highway Projects and rail-truck transfer facilities ���������������������������������������������������������������������������������������� 240 1,070

44 Expensing of certain multiperiod production costs ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 150 860

107 Credit for holders of zone academy bonds ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 200 790

34 Expensing of exploration and development costs, nonfuel minerals ������������������������������������������������������������������������������������������������������������������������������������ 130 710

43 Expensing of certain capital outlays ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 100 610

90 Exemption of certain mutuals’ and cooperatives’ income ����������������������������������������������������������������������������������������������������������������������������������������������������� 110 600

120 Adoption credit and exclusion ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 190 590

147 Exclusion of military disability pensions ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 110 550

47 Income averaging for farmers ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 90 470

41 Industrial CO2 capture and sequestration tax credit ������������������������������������������������������������������������������������������������������������������������������������������������������������� 30 450

101 Education Individual Retirement Accounts ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 80 450
254 ANALYTICAL PERSPECTIVES

Table 17–3.—INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2012–2016 PROJECTED REVENUE EFFECT—Continued

(In millions of dollars)

Provision 2012 2012-16

25 Natural gas distribution pipelines treated as 15-year property ���������������������������������������������������������������������������������������������������������������������������������������������� 100 430

49 Expensing of reforestation expenditures ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 80 420

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

13 Capital gains treatment of royalties on coal �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 50 340

37 Capital gains treatment of certain timber income ����������������������������������������������������������������������������������������������������������������������������������������������������������������� 50 340

17 Alcohol fuel credits ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 130 330

27 Allowance of deduction for certain energy efficient commercial building property ���������������������������������������������������������������������������������������������������������������� 90 300

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

155 Income of trusts to finance supplementary unemployment benefits ������������������������������������������������������������������������������������������������������������������������������������� 40 300

11 Alternative fuel production credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 120 290

94 Credit to holders of Gulf Tax Credit Bonds. ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 70 27

26 Amortize all geological and geophysical expenditures over 2 years �������������������������������������������������������������������������������������������������������������������������������������� 90 250

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

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

42 Deduction for endangered species recovery expenditures ���������������������������������������������������������������������������������������������������������������������������������������������������� 30 220

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

52 Special alternative tax on small property and casualty insurance companies ��������������������������������������������������������������������������������������������������������������������� 40 200

14 Exclusion of interest on energy facility bonds ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� 30 170

12 Exception from passive loss limitation for working interests in oil and gas properties ��������������������������������������������������������������������������������������������������������� 30 150

54 Small life insurance company deduction ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 30 150

32 Qualified energy conservation bonds ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 20 140

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

108 Exclusion of interest on savings bonds redeemed to finance educational expenses ������������������������������������������������������������������������������������������������������������ 20 120

96 Tribal Economic Development Bonds ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 30 110

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

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

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

88 Investment credit for rehabilitation of structures (other than historic) ����������������������������������������������������������������������������������������������������������������������������������� 20 100

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

124 Credit for disabled access expenditures ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 20 100

40 Exclusion of gain or loss on sale or exchange of certain brownfield sites ����������������������������������������������������������������������������������������������������������������������������� 40 80

82 Special rules for certain film and TV production �������������������������������������������������������������������������������������������������������������������������������������������������������������������� 30 40

86 Tax credit for certain expenditures for maintaining railroad tracks ����������������������������������������������������������������������������������������������������������������������������������������� 30 40

159 Tax credit for the elderly and disabled ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 10 30

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

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

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

70 Treatment of qualified dividends �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 0 0

95 Recovery Zone Bonds ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 0 0

100 Lifetime Learning tax credit ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 0 0

103 Deduction for higher education expenses ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 0 0

111 Exclusion of employer-provided educational assistance ������������������������������������������������������������������������������������������������������������������������������������������������������ 0 0

112 Special deduction for teacher expenses �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 0 0

116 Welfare-to-work tax credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 0 0

118 Employer-provided child care credit �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 0 0

129 Exclusion for benefits provided to volunteer EMS and firefighters ���������������������������������������������������������������������������������������������������������������������������������������� 0 0

130 Making work pay tax credit ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 0 0

141 Tax credit for health insurance purchased by certain displaced and retired individuals �������������������������������������������������������������������������������������������������������� 0 0

162 Exclusion of unemployment insurance benefits ��������������������������������������������������������������������������������������������������������������������������������������������������������������������� 0 0

171 Build America Bonds ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 0 0

22 Deferral of gain from dispositions of transmission property to implement FERC restructuring policy ����������������������������������������������������������������������������������� –150 –520

68 Cancellation of indebtedness ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 130 –600

93 Expensing of environmental remediation costs ��������������������������������������������������������������������������������������������������������������������������������������������������������������������� –140 –640

24 Temporary 50% expensing for equipment used in the refining of liquid fuels ������������������������������������������������������������������������������������������������������������������������ 520 –1,700
17. TAX EXPENDITURES 255

crued income would be taxed under a comprehensive 

income tax.

•	 There is a separate corporate income tax. Under a 

comprehensive income tax, corporate income would 

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

•	 Noncorporate tax rates vary by level of income. 

•	 Individual tax rates, including brackets, standard 

deduction, and personal exemptions, are allowed to 

vary with marital status.

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

adjust the cost basis of capital assets and debt for 

changes in the general price level. Thus, under a 

comprehensive income tax baseline, the failure to 

take account of inflation in measuring depreciation, 

capital gains, and interest income would be regarded 

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

and failure to take account of inflation in measuring 

interest costs would be regarded as a positive tax 

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

Although the reference law and normal tax baselines 

are generally similar, areas of difference include:

Tax rates. The separate schedules applying to the various taxpaying units are included in the reference law 

baseline. Thus, corporate tax rates below the maximum 

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

Table 17–3.—INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2012–2016 PROJECTED REVENUE EFFECT—Continued

(In millions of dollars)

Provision 2012 2012-16

136 Refundable Premium Assistance Tax Credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 0 –2,540

78 Expensing of certain small investments (normal tax method) ���������������������������������������������������������������������������������������������������������������������������������������������� –710 –3,290

67 Credit for homebuyer ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� –2,160 –5,190

65 Accelerated depreciation on rental housing (normal tax method) ���������������������������������������������������������������������������������������������������������������������������������������� –1,580 –5,640

76 Accelerated depreciation of buildings other than rental housing (normal tax method) ��������������������������������������������������������������������������������������������������������� –13,750 –74,470

Table 17–4. PRESENT VALUE OF SELECTED TAX EXPENDITURES 

FOR ACTIVITY IN CALENDAR YEAR 2010

(In millions of dollars)

Provision

2010

Present Value

of Revenue 

Loss

5 Deferral of income from controlled foreign corporations (normal tax method) ����������������������������������������������������������������������� 23,260

7 Expensing of research and experimentation expenditures (normal tax method) ������������������������������������������������������������������� 2,840

21 Credit for holding clean renewable energy bonds ������������������������������������������������������������������������������������������������������������������ 320

9 Expensing of exploration and development costs - fuels �������������������������������������������������������������������������������������������������������� 220

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

38 Expensing of multiperiod timber growing costs ���������������������������������������������������������������������������������������������������������������������� 120

44 Expensing of certain multiperiod production costs - agriculture ��������������������������������������������������������������������������������������������� 220

43 Expensing of certain capital outlays - agriculture ������������������������������������������������������������������������������������������������������������������� 150

49 Expensing of reforestation expenditures �������������������������������������������������������������������������������������������������������������������������������� 20

51 Deferral of income on life insurance and annuity contracts ���������������������������������������������������������������������������������������������������� 19,180

65 Accelerated depreciation on rental housing ��������������������������������������������������������������������������������������������������������������������������� 6,570

76 Accelerated depreciation of buildings other than rental �������������������������������������������������������������������������������������������������������� –13,500

77 Accelerated depreciation of machinery and equipment ���������������������������������������������������������������������������������������������������������� 15,230

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

107 Credit for holders of zone academy bonds ����������������������������������������������������������������������������������������������������������������������������� 170

64 Credit for low-income housing investments ���������������������������������������������������������������������������������������������������������������������������� 5,900

104 Deferral for state prepaid tuition plans ������������������������������������������������������������������������������������������������������������������������������������ 8,500

148 Exclusion of pension contributions - employer plans �������������������������������������������������������������������������������������������������������������� 73,830

149 Exclusion of 401(k) contributions �������������������������������������������������������������������������������������������������������������������������������������������� 134,000

150 Exclusion of IRA contributions and earnings �������������������������������������������������������������������������������������������������������������������������� 3,800

150 Exclusion of Roth earnings and distributions ������������������������������������������������������������������������������������������������������������������������� 11,300

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

152 Exclusion of contributions and earnings for Keogh plans ������������������������������������������������������������������������������������������������������� 5,710

170 Exclusion of interest on public-purpose bonds ����������������������������������������������������������������������������������������������������������������������� 19,600

Exclusion of interest on non-public purpose bonds ���������������������������������������������������������������������������������������������������������������� 6,690

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

normal tax baseline is similar, except that, by convention, 

it specifies the current maximum rate as the baseline for 

the corporate income tax. The lower tax rates applied to 

the first $10 million of corporate income are thus regarded as a tax expenditure under the normal tax. By convention, the Alternative Minimum Tax is treated as part of 

the baseline rate structure under both the reference and 

normal tax methods.

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

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

gross income include most transfer payments from the 

Government.2 The normal tax baseline also excludes gifts 

between individuals from gross income. Under the normal 

tax baseline, however, all cash transfer payments from 

the Government to private individuals are counted in 

gross income, and exemptions of such transfers from tax 

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

Capital recovery. Under the reference tax law baseline 

no tax expenditures arise from accelerated depreciation. 

Under the normal tax baseline, the depreciation 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 

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.

descriptions relate to current law as of September 30, 

2010, and do not reflect proposals made elsewhere in the 

Budget. Legislation enacted in 2010, such as the Haiti 

Charity, Hiring Incentives to Restore Employment Act, 

Temporary Extension Act of 2010, Continuing Extension 

Act of 2010, Homebuyer Assistance and Improvement Act 

of 2010, tax-related provisions of “The Patient Protection 

and Affordable Care Act” and the “Reconciliation Act of 

2010”, and the Small Business Jobs Act of 2010, introduced many changes which for the most part expanded 

the scope of existing provisions in the Tax Code.

 The Tax Relief, Unemployment Insurance 

Reauthorization, and Job Creation Act of 2010 (the Act) in 

addition to ordinary tax rate reductions, introduced many 

temporary changes that affect tax expenditure estimates 

not reflected in the tables of this chapter. Businesses incentives include reduced taxes on capital investments by 

introducing lower capital gains and dividend tax rates, 

increased section 179 expensing and faster first year depreciation, tax credit for research and experimentation 

expenses, Indian employment tax credit, New Markets 

tax credit ($3.5 billion allocation for both 2010 and 2011), 

50% tax credit for certain expenditures for maintaining 

railroad tracks, mine rescue team training credit, employer wage credit for activated military reservists, 15-year 

straight line cost recovery for qualified leasehold and restaurant improvements, 7-year recovery period for certain 

motorsports racing track facilities, accelerated depreciation for business property on Indian reservations, election to expense mine safety equipment, special expensing 

rules for certain film and television productions, expensing of “Brownfields” environmental remediation costs, deduction allowable with respect to income attributable to 

domestic production activities in Puerto Rico, exception 

under subpart F for active financing income, empowerment zone tax incentives, tax incentives for investment in 

the District of Columbia, economic development credit for 

American Samoa, work opportunity tax credit, alternative 

fuel vehicle refueling property (non-hydrogen refueling 

property), premiums for mortgage insurance deductible 

as interest that is qualified residence interest, extension 

and modification of section 25C nonbusiness energy property, credit for energy efficient appliances, and special 

rules applicable to qualified small business stock.

The Act provides tax relief for families and individuals including increased child credit, modified adoption 

credit, increased dependent care tax credit, and increases 

in earned income tax credit. Education incentives include 

extending employer provided educational assistance exclusion for undergraduate courses and graduate level 

courses, as well as expanding student loan interest deduction, above-the-line deduction of up to $250 for teacher 

classroom expenses, deduction for qualified tuition and 

related expenses, extension of American opportunity tax 

credit, elimination of tax on awards under the National 

Health Corps Scholarship program and F. Edward Herbert 

Armed Forces Health Professions Scholarship program, 

increase arbitrage rebate exception for governmental 

bonds used to finance qualified school construction from 

$10 million to $15 million, issuance of tax-exempt private 
17. TAX EXPENDITURES 257

activity bonds for qualified education facilities with annual State volume caps the greater of $10 per resident or 

$5 million, and qualified zone academy bonds ($400 million allocation).

The Act’s incentives for charitable giving include enhanced charitable deduction for contributions of food inventory, enhanced charitable deduction for contributions 

of book inventories to public schools, enhanced charitable 

deduction for corporate contributions of computer inventory for educational purposes, contributions of capital 

gain real property made for qualified conservation purposes, tax-free distributions from IRAs to certain public 

charities, and basis adjustment to stock of S corporations 

making charitable contributions of property.

The Act also provides energy incentives, including 

incentives for biodiesel and renewable diesel, revised 

placed-in-service date for facilities eligible to claim the 

refined coal production credit, credit for construction of 

energy efficient new homes, incentives for alternative fuel 

and alternative fuel mixtures (modified to exclude black 

liquor), special rule to implement electric transmission 

restructuring, extension of suspension of 100 percent-ofnet income limitation on percentage depletion for oil and 

natural gas from marginal properties, grants for specified 

energy property in lieu of tax credits, incentives for alcohol fuels, extension of income tax credit for alcohol used 

as fuel, extension of excise tax credit for alcohol used as 

fuel, and extension of payment for alcohol fuel mixture.

Other provisions of the Act include the temporary extension of disaster provisions related to New York Liberty 

Zone and GO Zone, deduction of State and local general 

sales taxes, parity for exclusion for employer-provided 

mass transit and parking benefits, among others.

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 in foreign earned income from U.S. taxes. In addition, if these taxpayers receive a specific allowance for foreign housing from their employers, then they may also exclude the value of that allowance. If they do not receive a 

specific allowance for housing expenses, they may exclude 

from taxable income that portion of such expenses that 

exceeds one-sixth the salary of a civil servant at grade 

GS–14, step 1 ($84,697 in 2010).

3. Exclusion of certain allowances for Federal employees abroad.—In general, all compensation received 

by U.S. citizens is properly included in their taxable income. It makes no difference whether the compensation 

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

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

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

Corps members who work outside the continental United 

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

certain special allowances they receive to compensate 

them for the relatively high costs associated with living 

overseas. The allowances supplement wage income and 

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

travel to and from the United States.

4. Sales source rule exceptions.—The United States 

generally taxes the worldwide income of U.S. persons, with 

taxpayers receiving a credit for foreign taxes paid, limited 

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

In contrast, the sales source rules for inventory property 

allow U.S. exporters to use more foreign tax credits by allowing the exporters to attribute a larger portion of their 

earnings abroad than would be the case if the allocation of 

earnings was based on actual economic activity.

5. Income of U.S.-controlled foreign corporations.—The United States generally taxes the worldwide 

income of U.S. persons and business entities. In contrast, 

certain active income of foreign corporations controlled by 

U.S. shareholders is not subject to U.S. taxation when it is 

earned. The income becomes taxable only when the controlling U.S. shareholders receive dividends or other distributions from their foreign stockholding. The reference 

law tax baseline reflects this tax treatment where only 

realized income is taxed. Under the normal tax method, 

however, the currently attributable foreign source pre-tax 

income from such a controlling interest is considered to be 

subject to U.S. taxation, whether or not distributed. Thus, 

the normal tax method considers the amount of controlled 

foreign corporation income not yet distributed to a U.S. 

shareholder as tax-deferred income.

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

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

It would not allow the deferral of tax or other relief targeted at particular industries or activities. In contrast, 

under current law, financial firms may defer taxes on income earned overseas in an active business.

General Science, Space, and Technology

7. Expensing R&E expenditures.—Research and 

experimentation (R&E) projects can be viewed as investments because, if successful, their benefits accrue for several years. It is often difficult, however, to identify whether a specific R&E project is successful and, if successful, 

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

the reference law baseline tax system would allow of ex-
258 ANALYTICAL PERSPECTIVES

pensing 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. Under current law as 

of September 30, the research credit expired on December 

31, 2009.

Energy

9. Exploration and development costs.—Under the 

baseline tax system, the costs of exploring and developing 

oil and gas wells would be capitalized and then amortized 

(or depreciated) over an estimate of the economic life of 

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

is measured appropriately each year. 

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

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

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

recovery of costs sooner, expensing is more generous for 

the taxpayer than would be amortization. Integrated oil 

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. Under current law as of September 30, 

these facilities must be placed in service before January 

1, 2010.

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

general rule limiting taxpayers’ ability to deduct losses 

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

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

materially participate and there are numerous additional 

considerations brought to bear on the determination of 

which activities are passive for a given taxpayer. Losses 

are limited in an attempt to limit tax sheltering activities. 

Passive losses that are unused may be carried forward 

and applied against future passive income. 

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

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

such that the working interest-holder who manages the 

development of wells and incurs all operating costs on behalf of himself and all other owners may aggregate negative taxable income (i.e., losses) from such interests with 

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

deduct passive losses against nonpassive income, in contradiction to the general prohibition against such deductions.

13. Capital gains treatment of royalties on coal.—

For individuals in 2010, tax rates on regular income vary 

from 10 percent to 35 percent, depending on the taxpayer’s income. The baseline tax system generally would tax 

all income under the regular tax rate schedule. It would 

not allow preferentially low tax rates to apply to certain 

types or sources of income. In contrast, current law allows capital gains to be taxed at a preferentially low rate 

that is no higher than 15 percent. Certain sales of coal 

under royalty contracts qualify for taxation as capital 

gains rather than ordinary income, and so benefit from 

the preferentially low 15 percent maximum tax rate on 

capital gains.

14. Energy facility bonds.—The baseline tax system 

generally would tax all income under the regular tax rate 
17. TAX EXPENDITURES 259

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

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

In contrast, the Tax Code allows interest earned on State 

and local bonds used to finance construction of certain energy facilities to be exempt from tax. These bonds are generally subject to the State private-activity-bond annual 

volume cap.

15. Energy production credit.—The baseline tax 

system would not allow credits for particular activities, 

investments, or industries. Instead, it generally would 

seek to tax uniformly all returns from investment-like 

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

certain electricity produced from wind energy, biomass, 

geothermal energy, solar energy, small irrigation power, 

municipal solid waste, or qualified hydropower and sold to 

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

16. Energy investment credit.—The baseline tax 

system would not allow credits for particular activities, 

investments, or industries. Instead, it generally would 

seek to tax uniformly all returns from investment-like 

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

plants, geothermal heat pumps, small wind property and 

combined heat and power property. Owners of renewable 

power facilities that qualify for the energy production 

credit may instead elect to take an energy investment 

credit.

17. Alcohol fuel credits.—The baseline tax system 

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

tax uniformly all returns from investment-like activities. 

In contrast, the Tax Code provides an income tax credit 

for ethanol derived from renewable sources and used as 

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

may claim a refundable excise tax credit. In addition, 

small ethanol producers are eligible for a separate income 

tax credit for ethanol production and a separate income 

tax credit is available for qualified cellulosic biofuel production. 

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

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

tax uniformly all returns from investment-like activities. 

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

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

claim a refundable excise tax credit. In addition, small 

agri-biodiesel producers are eligible for a separate income 

tax credit for ethanol production and a separate credit is 

available for qualified renewable diesel fuel mixtures.

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

tax uniformly all returns from investment-like activities. 

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

certain types of vehicles and property. These are available for alternative motor vehicles (including fuel cell, advanced lean burn technology, hybrid, and alternative fuel 

motor vehicles), alternative fuel vehicle refueling property, and plug-ins (including plug-in electric vehicles, plugin electric drive motor vehicles, and plug-in conversion 

kits). Under current law as of September 30, the credit 

expired on December 31, 2010 for non-hydrogen refueling 

stations.

20. Exclusion of utility conservation subsidies.—

The baseline tax system generally takes a comprehensive view of taxable income that includes a wide variety 

of (measurable) accretions to wealth. In certain circumstances, public utilities offer rate subsidies to non-business customers who invest in energy conservation measures. These rate subsidies are equivalent to payments 

from the utility to its customer, and so represent accretions to wealth, income, that would be taxable to the customer under the baseline tax system. In contrast, the Tax 

Code exempts these subsidies from the non-business customer’s gross income.

21. Credit to holders of clean renewable energy 

bonds.—The baseline tax system would uniformly tax all 

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

Tax Code provides for the issuance of Clean Renewable 

Energy Bonds which entitles the bond holder to a Federal 

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

issuers of such bonds may opt to receive direct payment 

with the yield becoming fully taxable.

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

from sale when realized. However, the Tax Code allows 

utilities to defer gains from the sale of their transmission 

assets to a FERC-approved independent transmission 

company.

23. Credit for investment in clean coal facilities.—

The baseline tax system would uniformly tax all returns 

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

seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code provides investment tax 

credits for clean coal facilities producing electricity and 

for industrial gasification combined cycle projects. 

24. Temporary 50 percent expensing for equipment 

used in the refining of liquid fuels.—The baseline tax 

system allows the taxpayer to deduct the decline in the 

economic value of an investment over time. However, the 

Tax Code provides for an accelerated recovery of the cost 

of certain investments in refineries by allowing partial 

expensing of the cost, thereby giving such investments a 

tax advantage.

25. Natural gas distribution pipelines treated 

as 15-year property.—The baseline tax system allows 

taxpayers to deduct the decline in the economic value of 

an investment over time. However, the Tax Code allows 

depreciation of natural gas distribution pipelines (placed 

in service between 2005 and 2011) over a 15 year period. 
260 ANALYTICAL PERSPECTIVES

These deductions are accelerated relative to deductions 

based on economic depreciation.

26. Amortize all geological and geophysical expenditures over two years.—The baseline tax system 

allows taxpayers to deduct the decline in the economic 

value of an investment over time. However, the Tax Code 

allows geological and geophysical expenditures incurred 

in connection with oil and gas exploration in the United 

States to be amortized over two years for non-integrated 

oil companies.

27. Allowance of deduction for certain energy efficient commercial building property.—The baseline 

tax system would not allow deductions in addition to normal depreciation allowances for particular investments in 

particular industries. Instead, it generally would seek to 

tax uniformly all returns from investment-like activities. 

In contrast, the Tax Code allows a deduction, per square 

foot, for certain energy efficient commercial buildings.

28. Credit for construction of new energy efficient 

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

Instead, it generally would seek to tax uniformly all returns from investment-like activities. However, the Tax 

Code allows contractors a tax credit of $2,000 for the construction of a qualified new energy-efficient home that has 

an annual level of heating and cooling energy consumption at least 50 percent below the annual consumption 

of a comparable dwelling unit. The credit equals $1,000 

in the case of a new manufactured home that meets a 30 

percent standard. 

29. Credit for energy efficiency improvements to 

existing homes.—The baseline tax system would not 

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

tax credit for expenditures made on insulation, exterior 

windows, and doors that improve the energy efficiency 

of homes and meet certain standards. The Tax Code also 

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

water boilers, and other qualified energy efficient property.

30. Credit for energy efficient appliances.—The 

baseline tax system would not allow credits for particular 

activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code provides 

tax credits for the manufacture of efficient dishwashers, 

clothes washers, and refrigerators. The size of the credit 

depends on the efficiency of the appliance. 

31. Credit for residential energy efficient property.—The baseline tax system would uniformly tax all returns to investments and not allow credits for particular 

activities, investments, or industries. However, the Tax 

Code provides a credit for the purchase of a qualified 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 May 2010, issuers 

of such bonds may 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.

Natural Resources and Environment

34. Exploration and development costs.—The baseline tax system allows the taxpayer to deduct the depreciation of an asset according to the decline in its economic 

value over time. However, certain capital outlays associated with exploration and development of nonfuel minerals may be expensed rather than depreciated over the life 

of the asset.

35. Percentage depletion.—The baseline tax system 

allows the taxpayer to deduct the decline in the economic 

value of an investment over time. Under current law, however, most nonfuel mineral extractors may use percentage 

depletion (whereby the deduction is fixed as a percentage 

of revenue and can exceed total costs) rather than cost depletion, with percentage depletion rates ranging from 22 

percent for sulfur to 5 percent for sand and gravel. Over 

the life of an investment, percentage depletion deductions 

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

than would cost depletion, which would limit deductions 

to an investment’s cost.

36. Sewage, water, solid and hazardous waste facility bonds.—The baseline tax system generally would 

tax all income under the regular tax rate schedule. It 

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

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

the Tax Code allows interest earned on State and local 

bonds used to finance construction of sewage, water, or 

hazardous waste facilities to be exempt from tax. These 

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

37. Capital gains treatment of certain timber.—

The baseline tax system generally would tax all income 

under the regular tax rate schedule. It would not allow 

preferentially low tax rates to apply to certain types or 

sources of income. However, under current law certain 

timber sales can be treated as a capital gain rather than 

ordinary income and therefore subject to the lower capital-gains tax rate. For individuals in 2010, 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.
17. TAX EXPENDITURES 261

38. 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.

39. Historic preservation.—The baseline tax system 

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

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

certified rehabilitation activities. 

40. Exclusion of gain or loss on sale or exchange 

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

organization must pay taxes on income from activities 

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

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

of certain qualifying brownfield properties.

41. Industrial CO2 capture and sequestration tax 

credit.—The baseline tax system would uniformly tax all 

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

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

disposed of in secure geological storage. In addition, the 

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

carbon dioxide that is captured at a qualified facility and 

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

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

tax all income under the regular tax rate schedule. It 

would not allow preferentially low tax rates to apply to 

certain types or sources of income. In contrast, under 

current law farmers can deduct up to 25 percent of their 

gross income for expenses incurred as a result of site and 

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

specific management actions included in species recovery 

plans approved pursuant to the Endangered Species Act 

of 1973.

Agriculture

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

associated with investment property. However, farmers 

may expense certain expenditures for feed and fertilizer 

as well as for soil and water conservation measures as 

well as other capital improvements under current law.

44. Expensing multi-period livestock and crop 

production costs.—The baseline tax system requires 

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

crops with a production period greater than two years 

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

accelerating cost recovery.

45. Loans forgiven solvent farmers.—The baseline 

tax system requires debtors to include the amount of loan 

forgiveness as income or else reduce their recoverable 

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

of forgiveness exceeds the basis, the excess forgiveness 

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

loan forgiveness reduces carryover losses, unused credits, 

and then basis, with the remainder of the forgiven debt 

excluded from taxation.

46. Capital gains treatment of certain income.—

For individuals in 2010, tax rates on regular income vary 

from 10 percent to 35 percent, depending on the taxpayer’s income. The baseline tax system generally would tax 

all income under the regular tax rate schedule. It would 

not allow preferentially low tax rates to apply to certain 

types or sources of income. In contrast, current law allows capital gains to be taxed at a preferentially low rate 

that is no higher than 15 percent. Certain agricultural 

income, such as unharvested crops, qualify for taxation as 

capital gains rather than ordinary income, and so benefit 

from the preferentially low 15 percent maximum tax rate 

on capital gains.

47. Income averaging for farmers.—The baseline 

tax system generally taxes all earned income each year at 

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

fishing over the previous three years.

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

The baseline tax system generally subjects capital gains 

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

Code allows a taxpayer who sells stock in a farm refiner 

to a farmers’ cooperative to defer recognition of the gain 

if the proceeds are re-invested in a qualified replacement 

property.

49. Expensing of reforestation expenditures.—The 

baseline tax system requires the taxpayer to capitalize 

costs associated with an investment over time. In contrast, the Tax Code provides for the expensing of the first 

$10,000 in reforestation expenditures with 7-year amortization of the remaining expenses.

Commerce and Housing

This category includes a number of tax expenditure 

provisions that also affect economic activity in other 

functional categories. For example, provisions related to 

investment, such as accelerated depreciation, could be 

classified under the energy, natural resources and environment, agriculture, or transportation categories.

50. Credit union income exemption.—Under the 

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

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

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

earnings of credit unions not distributed to members as 

interest or dividends are exempt from the income tax.

51. Deferral of income on life insurance and annuity contracts.—Under the baseline tax system, individuals and corporations pay taxes on their income when 
262 ANALYTICAL PERSPECTIVES

it is (actually or constructively) received or accrued, depending on their method of accounting. Nevertheless, 

the Tax Code provides favorable tax treatment for investment income earned within qualified life insurance and 

annuity contracts. In general, investment income earned 

on qualified life insurance contracts held until death is 

permanently exempt from income tax. Investment income 

distributed prior to the death of the insured is generally 

tax-deferred. Investment income earned on annuities 

benefits from tax deferral.

52. Small property and casualty insurance companies.—Under the baseline tax system, corporations pay 

taxes on their profits under the regular tax rate schedule. 

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

apply to certain types or sources of income. Under current 

law, however, stock non-life insurance companies are generally exempt from tax if their gross receipts for the taxable year do not exceed $600,000 and more than 50 percent of such gross receipts consists of premiums. Mutual 

non-life insurance companies are generally tax-exempt if 

their annual gross receipts do not exceed $150,000 and 

more than 35 percent of gross receipts consist of premiums. Also, non-life insurance companies with no more 

than $1.2 million of annual net premiums may elect to 

pay tax only on their taxable investment income.

53. Insurance companies owned by exempt organizations.—Under the baseline tax system, corporations pay taxes on their profits under the regular tax rate 

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

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

Generally the income generated by life and property and 

casualty insurance companies is subject to tax, albeit by 

special rules. Insurance operations conducted by such exempt organizations as fraternal societies, voluntary employee benefit associations, and others, however, are exempt from tax.

54. Small life insurance company deduction.—

Under the baseline tax system, corporations pay taxes on 

their profits under the regular tax rate schedule. It would 

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

certain types or sources of income. However, under current law small life insurance companies (with gross assets of less than $500 million) can deduct 60 percent of 

the first $3 million of otherwise taxable income. The deduction phases out for otherwise taxable income between 

$3 million and $15 million.

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

all income under the regular tax rate schedule. It would 

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

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

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

market rate of interest on those deposits and paid explicit 

fees for the associated services, they would pay taxes on 

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

difference between the risk-free market interest rate and 

below-market interest rates on demand deposits, which 

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

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

rate schedule. It would not allow preferentially low (or 

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

State and local bonds used to finance homes purchased by 

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

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

57. Rental housing bonds.—The baseline tax system 

generally would tax all income under the regular tax rate 

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

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

In contrast, the Tax Code allows interest earned on State 

and local government bonds used to finance multifamily 

rental housing projects to be tax-exempt.

58. Interest on owner-occupied homes.—Under the 

baseline tax system, expenses incurred in earning income 

would be deductible. However, such expenses would not 

be deductible when the income or the return on an investment is not taxed. In contrast, the Tax Code allows 

an exclusion from a taxpayer’s taxable income for the 

value of owner-occupied housing services but 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 of up to 20 percent of the interest expense.

59. Taxes on owner-occupied homes.—Under the 

baseline tax system, expenses incurred in earning income 

would be deductible. However, such expenses would not 

be deductible when the income or the return on an investment is not taxed. In contrast, the Tax Code allows an 

exclusion from a taxpayer’s taxable income for the value 

of owner-occupied housing services but allows the owneroccupant to deduct property taxes paid on his or her primary and secondary residences.

60. Installment sales.—The baseline tax system generally would tax all income under the regular tax rate 

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

tax rates, or deferral of tax, to apply to certain types or 

sources of income. Dealers in real and personal property 

(i.e., sellers who regularly hold property for sale or resale) 

cannot defer taxable income from installment sales until 

the receipt of the loan repayment. Nondealers (i.e., sellers 

of real property used in their business) are required to 

pay interest on deferred taxes attributable to their total 

installment obligations in excess of $5 million. Only properties with sales prices exceeding $150,000 are includ-
17. TAX EXPENDITURES 263

able in the total. The payment of a market rate of interest 

eliminates the benefit of the tax deferral. The tax exemption for nondealers with total installment obligations of 

less than $5 million is, therefore, a tax expenditure.

61. Capital gains exclusion on home sales.—The 

baseline tax system would not allow deductions and exemptions to certain types of income. In contrast, under 

current law, a homeowner can exclude from tax up to 

$500,000 ($250,000 for singles) of the capital gains from 

the sale of a principal residence. The exclusion may not be 

used more than once every two years.

62. Imputed net rental income on owner-occupied 

housing.—Under the baseline tax system, the taxable 

income of a taxpayer who is an owner-occupant would include the implicit value of gross rental income on housing services earned on the investment in owner-occupied 

housing and would allow a deduction for expenses, such as 

interest, depreciation, property taxes, and other costs, associated with earning such rental income. In contrast, the 

Tax Code allows an exclusion from taxable income for the 

implicit gross rental income on housing services, while in 

certain circumstances allows a deduction for some costs 

associated with such income, such as for mortgage interest and property taxes.

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

taxpayers’ ability to deduct losses from passive activities 

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

in which the taxpayer does not materially participate and 

there are numerous additional considerations brought to 

bear on the determination of which activities are passive 

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

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

passive income. 

In contrast to the general restrictions on passive losses, 

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

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

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

64. Low-income housing credit.—The baseline tax 

system would uniformly tax all returns to investments 

and not allow credits for particular activities, investments, 

or industries. However, under current law taxpayers who 

invest in certain low-income housing are eligible for a tax 

credit. The credit rate is set so that the present value of 

the credit is equal to 70 percent for new construction and 

30 percent for (1) housing receiving other Federal benefits 

(such as tax-exempt bond financing), or (2) substantially rehabilitated existing housing. The credit can exceed 

these levels in certain statutorily defined and State designated areas where project development costs are higher. 

The credit is allowed in equal amounts over 10 years and 

is generally subject to a volume cap. 

65. Accelerated depreciation of residential rental 

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

acquiring a building are capitalized and depreciated over 

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

insures that the net income from the rental property is 

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

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

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

66. Discharge of mortgage indebtedness.—Under 

the baseline tax system, all income would generally be 

taxed under the regular tax rate schedule. The baseline 

tax system would not allow preferentially low (or zero) 

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

In contrast, the Tax Code allows an exclusion from a taxpayer’s taxable income for any discharge of indebtedness 

of up to $2 million from a qualified principal residence. 

The provision sunsets on December 31, 2012.

67. 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. 

68. Cancellation of indebtedness.—The baseline tax 

system generally would tax all income under the regular 

tax rate schedule. It would not allow preferentially low 

(or zero) tax rates to apply to certain types or sources of 

income. In contrast, under current law individuals are not 

required to report the cancellation of certain indebtedness 

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

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

69. Imputed interest rules.—Holders (issuers) of 

debt instruments are generally required to report interest earned (paid) in the period it accrues, not when paid. 

In addition, the amount of interest accrued is determined 

by the actual price paid, not by the stated principal and 

interest stipulated in the instrument. In general, any 

debt associated with the sale of property worth less than 

$250,000 is excepted from the general interest accounting rules. This general $250,000 exception is not a tax expenditure under reference law but is under normal law. 

Exceptions above $250,000 are a tax expenditure under 

reference law; these exceptions include the following: (1) 

sales of personal residences worth more than $250,000, 

and (2) sales of farms and small businesses worth between $250,000 and $1 million.

70. Treatment of qualified dividends.—For individuals in 2010, tax rates on regular income vary from 

10 percent to 35 percent, depending on the taxpayer’s income. The baseline tax system generally would tax all 

income under the regular tax rate schedule. It would 

not allow preferentially low tax rates to apply to certain 

types or sources of income. In contrast, current law allows qualified dividends to be taxed at a preferentially 

low rate that is no higher than 15 percent. 

71. Capital gains (other than agriculture, timber, 

and coal).—For individuals in 2010, 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. 
264 ANALYTICAL PERSPECTIVES

It would not allow preferentially low tax rates to apply to 

certain types or sources of income. In contrast, current 

law allows capital gains on assets held for more than one 

year to be taxed at a preferentially low rate that is no 

higher than 15 percent.

72. 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, 

2011. A qualified small business is a corporation whose 

gross assets do not exceed $50 million as of the date of 

issuance of the stock.

73. 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.

74. 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.

75. 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.

76. 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.

77. Accelerated depreciation of machinery and 

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

acquiring machinery and equipment are capitalized and 

depreciated over time in accordance with the decline in the 

property’s economic value due to wear and tear or obsolescence. This insures that the net income from the property 

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

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

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

78. 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.

79. 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.

80. 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.

81. 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.

82. 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. Under 

current law as of September 30, the provision expired on 

December 31, 2009.

Transportation

83. Deferral of tax on U.S. shipping companies.—

The baseline tax system generally would tax all profits 

and income under the regular tax rate schedule. It would 

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

certain types or sources of income. In contrast, the Tax 

Code allows certain companies that operate U.S. flag vessels to defer income taxes on that portion of their income 

used for shipping purposes, primarily construction, mod-
17. TAX EXPENDITURES 265

ernization and major repairs to ships, and repayment of 

loans to finance these investments.

84. Exclusion of employee parking expenses.—

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

included in taxable income. Dedicated payments and inkind benefits represent accretions to wealth that do not 

differ materially from cash wages. In contrast, the Tax 

Code allows an exclusion from taxable income for employee parking expenses that are paid for by the employer or 

that are received by the employee in lieu of wages. In 

2010, the maximum amount of the parking exclusion is 

$230 per month. The tax expenditure estimate does not 

include any subsidy provided through employer-owned 

parking facilities.

85. Exclusion of employee transit pass expenses.—

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

included in taxable income. Dedicated payments and inkind 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. In 2010, the maximum amount 

of the exclusion is $230 per month. Under current law as 

of September 30, this provision of the ARRA expired on 

December 31, 2010. 

86. Tax credit for certain expenditures for maintaining railroad tracks.—The baseline tax system 

would not allow credits for particular activities, investments, or industries. However, under current law eligible 

taxpayers may claim a credit equal to the lesser of 50 

percent of maintenance expenditures and the product of 

$3,500 and the number of miles of track owned or leased. 

Under current law as of September 30, the credit expired 

on December 31, 2009. 

87. Exclusion of interest on bonds for financing 

of highway projects and rail-truck transfer facilities.—The baseline tax system generally would tax all 

income under the regular tax rate schedule. It would 

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

certain types or sources of income. In contrast, the Tax 

Code provides for $15 billion of tax-exempt bond authority to finance qualified highway or surface freight transfer 

facilities. The authority to issue these bonds expires on 

December 31, 2015.

Community and Regional Development

88. Rehabilitation of structures.—The baseline 

tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. However, the Tax Code allows a 

10-percent investment tax credit for the rehabilitation of 

buildings that are used for business or productive activities and that were erected before 1936 for other than residential purposes. The taxpayer’s recoverable basis must 

be reduced by the amount of the credit.

89. Airport, dock, and similar facility bonds.—

The baseline tax system generally would tax all income 

under the regular tax rate schedule. It would not allow 

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

types or sources of income. In contrast, the Tax Code allows interest earned on State and local bonds issued to 

finance high-speed rail facilities and Government-owned 

airports, docks, wharves, and sport and convention facilities to be tax-exempt. These bonds are not subject to a 

volume cap.

90. Exemption of income of mutuals and cooperatives.—Under the baseline tax system, corporations pay 

taxes on their profits under the regular tax rate schedule. 

In contrast, the Tax Code provides for the incomes of mutual and cooperative telephone and electric companies to 

be exempt from tax if at least 85 percent of their revenues 

are derived from patron service charges.

91. Empowerment zones and renewal communities.—The baseline tax system generally would tax all 

income under the regular tax rate schedule. It would 

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

certain types or sources of income, tax credits, and writeoffs faster than economic depreciation. In contrast, under 

current law qualifying businesses in designated economically depressed areas can receive tax benefits such as an 

employer wage credit, increased expensing of investment 

in equipment, special tax-exempt financing, accelerated 

depreciation, and certain capital gains incentives.

92. New markets tax credit.—The baseline tax system would not allow credits for particular activities, investments, or industries. However, under current law 

taxpayers who make qualified equity investments in a 

community development entity (CDE), which then makes 

qualified investments in low-income communities, are eligible for a tax credit received over 7 years. The total equity investment available for the credit across all CDEs is 

$5 billion in 2009. Under current law as of September 30, 

the credit expired on December 31, 2009.

93. Expensing of environmental remediation 

costs.—Under the baseline tax system, the costs would 

be amortized (or depreciated) over an estimate of the economic life of the building. This insures that the net income from the buildings is measured appropriately each 

year. However, the Tax Code allows taxpayers who clean 

up certain hazardous substances at a qualified site to expense the clean-up costs, even though the expenses will 

generally increase the value of the property significantly 

or appreciably prolong the life of the property.

94. Credit to holders of Gulf and Midwest Tax 

Credit Bonds.—The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, under current law taxpayers that own Gulf 

and Midwest Tax Credit bonds receive a non-refundable 

tax credit rather than interest. The credit is included in 

gross income.
266 ANALYTICAL PERSPECTIVES

95. Recovery Zone Bonds.—The baseline tax system 

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

under the regular tax rate schedule. It would not allow 

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

types or sources of income. In contrast, the Tax Code 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.

96. Tribal Economic Development Bonds.—The 

baseline tax system generally would tax all income under 

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

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

in 2009 to allow Indian tribal governments to issue tax 

exempt “tribal economic development bonds.” There is a 

national bond limitation of $2 billion.

Education, Training, Employment, 

and Social Services

97. Scholarship and fellowship income.—

Scholarships and fellowships are excluded from taxable 

income to the extent they pay for tuition and course-related expenses of the grantee. Similarly, tuition reductions 

for employees of educational institutions and their families are not included in taxable income. From an economic 

point of view, scholarships and fellowships are either gifts 

not conditioned on the performance of services, or they 

are rebates of educational costs. Thus, under the baseline 

tax system of the reference law method, this exclusion is 

not a tax expenditure because this method does not include either gifts or price reductions in a taxpayer’s gross 

income. The exclusion, however, is considered a tax expenditure under the normal tax method, which includes 

gift-like transfers of Government funds in gross income 

(many scholarships are derived directly or indirectly from 

Government funding).

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

not allow credits for particular activities, investments, or 

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

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

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

only covers tuition and fees paid during the first two years 

of a student’s post-secondary education. In 2010, the credit is phased out ratably for taxpayers with modified AGI 

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

singles), indexed.

99. Lifetime Learning tax credit.—The baseline tax 

system would not allow credits for particular activities, 

investments, or industries. Under current law, however, 

the non-refundable Lifetime Learning tax credit allows 

a credit for 20 percent of an eligible student’s tuition and 

fees, up to a maximum credit per return of $2,000. The 

credit is phased out ratably for taxpayers with modified AGI between $100,000 and $120,000 ($50,000 and 

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

undergraduate and graduate students.

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

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

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

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

credit is phased out for taxpayers with modified adjusted 

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

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

101. Education Individual Retirement Accounts 

(IRA).—The baseline tax system generally would tax 

all income under the regular tax rate schedule. It would 

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

to certain types or sources of income. 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 2010 is $2,000 per beneficiary. The maximum 

contribution is phased down ratably for taxpayers with 

modified AGI between $190,000 and $220,000 ($95,000 

and $110,000 for singles).

102. Student-loan interest.—The baseline tax system 

accepts current law’s general rule limiting taxpayers’ ability to deduct non-business interest expenses. In contrast, 

taxpayers may claim an above-the-line deduction of up to 

$2,500 on interest paid on an education loan. Interest may 

only be deducted for the first five years in which interest 

payments are required. In 2010, the maximum deduction 

is phased down ratably for taxpayers with modified AGI 

between $120,000 and $150,000 ($60,000 and $75,000 for 

singles), indexed.

103. Deduction for higher education expenses.—

The baseline tax system would not allow a deduction for 

personal expenditures. In contrast, the Tax Code provides 

a maximum annual deduction of $4,000 in 2010 for qualified higher education expenses for taxpayers with adjusted gross income up to $130,000 on a joint return ($65,000 

for singles). Taxpayers with adjusted gross income up to 

$160,000 on a joint return ($80,000 for singles) may deduct up to $2,000.

104. State prepaid tuition plans.—The baseline tax 

system generally would tax all income under the regular 

tax rate schedule. It would not allow preferentially low 

(or zero) tax rates to apply to certain types or sources of 

income. Some States have adopted prepaid tuition plans 

and prepaid room and board plans, which allow persons 

to pay in advance for college expenses for designated beneficiaries. Under current law, investment income, or the 

return on prepayments, is not taxed when earned, and is 

tax-exempt when withdrawn to pay for qualified expenses.

105. Student-loan bonds.—The baseline tax system 

generally would tax all income under the regular tax rate 

schedule. It would not allow preferentially low (or zero) 
17. TAX EXPENDITURES 267

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

contrast, interest earned on State and local bonds issued 

to finance student loans is tax-exempt under current law. 

The volume of all such private activity bonds that each 

State may issue annually is limited.

106. Bonds for private nonprofit educational institutions.—The baseline tax system generally would tax 

all income under the regular tax rate schedule. It would 

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

certain types or sources of income. In contrast, under current law interest earned on State and local Government 

bonds issued to finance the construction of facilities used 

by private nonprofit educational institutions is not taxed.

107. Credit for holders of zone academy bonds.—

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

law, however, financial institutions that own zone academy bonds receive a non-refundable tax credit rather than 

interest. The credit is included in gross income. Proceeds 

from zone academy bonds may only be used to renovate, 

but not construct, qualifying schools and for certain other 

school purposes. Under current law as of September 30, 

the total amount of zone academy bonds that may be issued is limited to $1.4 billion in 2009 and 2010.

108. U.S. savings bonds for education.—The baseline tax system generally would tax all income under the 

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

sources of income. Under current law, however, interest 

earned on U.S. savings bonds issued after December 31, 

1989 is tax-exempt if the bonds are transferred to an educational institution to pay for educational expenses. The 

tax exemption is phased out for taxpayers with AGI between $105,100 and $135,100 ($70,100 and $85,100 for 

singles) in 2010.

109. Dependent students age 19 or older.—Under 

the baseline tax system, a personal exemption for the 

taxpayer is allowed. However, additional exemptions for 

targeted groups within a given filing status would not be 

allowed. In contrast, the Tax Code allows taxpayers to 

claim personal exemptions for dependent children who 

are over the age of 18 or under the age of 24 and who 

(1) reside with the taxpayer for over half the year (with 

exceptions for temporary absences from home, such as for 

school attendance), (2) are full-time students, and (3) do 

not claim a personal exemption on their own tax returns.

110. Charitable contributions to educational institutions.—The baseline tax system would not allow a 

deduction for personal expenditures. In contrast, the Tax 

Code provides taxpayers a deduction for contributions to 

nonprofit educational institutions. Moreover, taxpayers 

who donate capital assets to educational institutions can 

deduct the asset’s current value without being taxed on 

any appreciation in value. An individual’s total charitable 

contribution generally may not exceed 50 percent of adjusted gross income; a corporation’s total charitable contributions generally may not exceed 10 percent of pre-tax 

income.

111. Employer-provided educational assistance.—

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

included in taxable income because they represent accretions to wealth that do not materially differ from cash 

wages. Under current law, however, employer-provided 

educational assistance is excluded from an employee’s 

gross income even though the employer’s costs for this assistance are a deductible business expense.

112. Special deduction for teacher expenses.—The 

baseline tax system would not allow a deduction for personal expenditures. In contrast, under current law educators in both public and private elementary and secondary 

schools, who work at least 900 hours during a school year 

as a teacher, instructor, counselor, principal or aide, may 

subtract up to $250 of qualified expenses when figuring 

their adjusted gross income (AGI). This provision expired 

on December 31, 2009.

113. Discharge of student loan indebtedness.—

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

included in taxable income. In contrast, the Tax Code allows certain professionals who perform in underserved 

areas or specific fields, and as a consequence have their 

student loans discharged, not to recognize such discharge 

as income.

114. Qualified school construction bonds.—The 

baseline tax system would not allow credits for particular 

activities, investments, or industries. Instead, it generally 

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

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

qualified school construction bonds. The national volume 

limit is $22 billion over 2009 and 2010. As of May 2010, 

issuers of such bonds may opt to receive direct payment 

with the yield becoming fully taxable.

115. Work opportunity tax credit (WOTC).—The 

baseline tax system would not allow credits for particular 

activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code provides 

employers with a tax credit for qualified wages paid to 

individuals. The credit applies to employees who begin 

work on or before August 31, 2011 and who are certified 

as members of various targeted groups. The amount of 

the credit that can be claimed is 25 percent of qualified 

wages for employment less than 400 hours and 40 percent for employment of 400 hours or more. Generally, the 

maximum credit per employee is $2,400 and can only be 

claimed on the first year of wages an individual earns 

from an employer. However, the credit for long-term welfare recipients can be claimed on second year wages as 

well and has a $9,000 maximum. Employees must work 

at least 120 hours to be eligible for the credit. Employers 

must reduce their deduction for wages paid by the amount 

of the credit claimed. 

116. 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 
268 ANALYTICAL PERSPECTIVES

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.

117. 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.

118. 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.

119. Assistance for adopted foster children.—

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

included in taxable income. Taxpayers who adopt eligible 

children from the public foster care system can receive 

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

from gross income under current law.

120. 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 $13,170 per child for 2010, 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 

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. 

121. 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.

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

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

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

refundable per child credit. The maximum credit declines 

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

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

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

123. Child and dependent care expenses.—The 

baseline tax system would not allow credits for particular 

activities or targeted at specific groups. In contrast, the 

Tax Code provides married couples with child and dependent care expenses a tax credit when one spouse works 

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

school. The credit may also be claimed by single parents 

and by divorced or separated parents who have custody of 

children. In 2010, 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.

124. 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. 

125. 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.

126. 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.

127. 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.

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

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

contrast, the Tax Code provides tax credits against the 

wages paid to eligible employees in areas affected by nat-
17. TAX EXPENDITURES 269

ural disasters such as hurricanes Katrina, Rita, Wilma, 

and Ike.

129. 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.

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

system would not allow credits for particular activities. In 

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

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

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

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

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

Health

131. Employer-paid medical insurance and expenses.—Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, 

should be included in taxable income. In contrast, under 

current law, employer-paid health insurance premiums 

and other medical expenses (including long-term care) 

are deducted as a business expense by employers, but 

they are not included in employee gross income.

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

and remuneration, including dedicated payments and 

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

In contrast, under current law self-employed taxpayers 

may deduct 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.

133. Medical and health savings accounts.—Under 

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

in taxable income. Also, the baseline tax system would 

not allow a deduction for personal expenditures. In contrast, individual contributions to Archer Medical Savings 

Accounts (Archer MSAs) and Health Savings Accounts 

(HSAs) are allowed as a deduction in determining adjusted gross income whether or not the individual itemizes 

deductions. Employer contributions to Archer MSAs and 

HSAs are excluded from income and employment taxes. 

Archer MSAs and HSAs require that the individual have 

coverage by a qualifying high deductible health plan. 

Earnings from the accounts are excluded from taxable income. Distributions from the accounts used for medical 

expenses are not taxable. The rules for HSAs are generally more flexible than for Archer MSAs and the deductible 

contribution amounts are greater (in 2010, $3050 for taxpayers with individual coverage and $6,150 for taxpayers 

with family coverage). Thus, HSAs have largely replaced 

MSAs.

134. Medical care expenses.—The baseline tax system would not allow a deduction for personal expenditures. In contrast, under current law personal expenditures for medical care (including the costs of prescription 

drugs) exceeding 7.5 percent of the taxpayer’s adjusted 

gross income are deductible. 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.

135. Hospital construction bonds.—The baseline 

tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially 

low (or zero) tax rates to apply to certain types or sources 

of income. In contrast, under current law interest earned 

on State and local government debt issued to finance hospital construction is excluded from income subject to tax.

136. 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. 

137. 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 fulltime-equivalent employees whose average annual fulltime-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 
270 ANALYTICAL PERSPECTIVES

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.

138. Charitable contributions to health institutions.—The baseline tax system would not allow a deduction for personal expenditures. In contrast, the Tax Code 

provides individuals and corporations a deduction for contributions to nonprofit health institutions. Tax expenditures resulting from the deductibility of contributions to 

other charitable institutions are listed under the education, training, employment, and social services function.

139. 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.

140. 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.

141. 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 increased the credit to 80 percent in coverage months 

preceding January 1, 2011.

142. 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

143. 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.

144. 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.

145. 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. 

146. 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.

147. 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.

148. Employer-provided pension contributions 

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

should be included in taxable income. In contrast, under 

current law certain employer contributions to pension 

plans are excluded from an employee’s gross income even 

though the employer can deduct the contributions. In addition, the tax on the investment income earned by pension plans is deferred until the money is withdrawn.

149. 401(k) plans.—Under the baseline tax system, 

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

under current law individual taxpayers can make tax-preferred contributions to certain types of employer-provided 

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

the Federal Government’s Thrift Savings Plan). In 2010, 

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

wages from AGI under a qualified arrangement with an 

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

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

on contributions and the investment income earned by 

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

150. Individual Retirement Accounts (IRAs).—

Under the baseline tax system, all compensation, includ-
17. TAX EXPENDITURES 271

ing 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 2010 (indexed); taxpayers age 50 

or over are allowed to make additional “catch-up’’ contributions of $1,000. Contributions to a traditional IRA are 

generally deductible but the deduction is phased out for 

workers with incomes above certain levels who, or whose 

spouses, are active participants in an employer-provided 

retirement plan. Contributions and account earnings are 

includible in income when withdrawn from traditional 

IRAs. 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 

under certain conditions. 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.

151. 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 lowerincome taxpayers to save through a nonrefundable credit 

of up to 50 percent on IRA and other retirement contributions of up to $2,000. This credit is in addition to any 

deduction or exclusion. The credit is completely phased 

out by $55,500 for joint filers and $27,750 for single filers. 

152. Keogh plans.—Under the baseline tax system, 

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

under current law self-employed individuals can make 

deductible contributions to their own retirement (Keogh) 

plans equal to 25 percent of their income, up to a maximum of $49,000 in 2010. Total plan contributions are 

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

the investment income earned by Keogh plans is deferred 

until withdrawn.

153. 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.

154. 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.

155. 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.

156. Employer Stock Ownership Plan (ESOP) provisions.—ESOPs are a special type of tax-exempt employee benefit plan. Under the baseline tax system, all 

compensation, including dedicated payments and in-kind 

benefits, should be included in taxable income. In contrast, 

employer-paid contributions (the value of stock issued to 

the ESOP) are deductible by the employer as part of employee compensation costs. They are not included in the 

employees’ gross income for tax purposes, however, until 

they are paid out as benefits. 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.

157. 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 $1,400 standard deduction if single, or $1,100 if married in 2010.

158. 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 $1,400 standard deduction if single, or $1,100 if married in 2010.

159. 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 up to $7,500 for 

joint returns where both spouses are 65 years of age or 

older. These limits are reduced by one-half of the taxpayer’s adjusted gross income over $7,500 for single individuals and $10,000 for married couples filing a joint return. 
272 ANALYTICAL PERSPECTIVES

160. 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.

161. 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 $8,970 of earned income in 2010. The credit is 40 

percent of the first $12,590 of income for a family with 

two or more qualifying children. The credit is 45 percent 

of the first $12,590 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.

162. Exclusion of unemployment benefits.—The 

baseline tax system would not allow deductions and exemptions to certain types of income. In contrast the Tax 

Code was modified in 2009 to allow an exclusion of up 

to $2,400 of unemployment insurance benefits from gross 

income for taxable year 2009.

Social Security

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 
17. TAX EXPENDITURES 273

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 publicpurpose construction (e.g., schools, roads, sewers), equipment acquisition, and other public purposes is tax-exempt. 

Interest on bonds issued by Indian tribal governments for 

essential governmental purposes is also tax-exempt.

171. Build America Bonds.—The baseline tax system 

would not allow credits for particular activities or targeted at specific group. In contrast, the Tax Code in 2009 allowed State and local governments to issue taxable bonds 

and receive a direct payment from Treasury equal to 35 

percent of interest expenses. Alternatively, State and local governments may issue taxable bonds and the private 

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. 

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 

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.

characteristics (age, number of family members, etc.). 

This wide range of policy instruments means that tax 

expenditures can be flexible and can have very different 

economic effects.

Tax expenditures also have limitations. In many cases 

they add to the complexity of the tax system, which raises 

both administrative and compliance costs. For example, 

personal exemptions, deductions, credits, and phase-outs 

can complicate filing and decision-making. The income 

tax system may have little or no contact with persons who 

have no or very low incomes, and does not require information on certain characteristics of individuals used in 

some spending programs, such as wealth or duration of 

employment. These features may reduce the effectiveness 

of tax expenditures for addressing socioeconomic 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 
274 ANALYTICAL PERSPECTIVES

of spending programs for some goals. Finally, spending 

programs, particularly on the discretionary side, may respond less rapidly to changing activity levels and economic conditions than tax expenditures.

Regulations may have more direct and immediate effects than outlay and tax-expenditure programs because 

regulations apply directly and immediately to the regulated party (i.e., the intended actor), generally in the 

private sector. Regulations can also be fine-tuned more 

quickly than tax expenditures because they can often 

be changed as needed by the Executive Branch without 

legislation. Like tax expenditures, regulations often rely 

largely on voluntary compliance, rather than detailed inspections and policing. As such, the public administrative 

costs tend to be modest relative to the private resource 

costs associated with modifying activities. Historically, 

regulations have tended to rely on proscriptive measures, 

as opposed to economic incentives. This reliance can diminish their economic efficiency, although this feature 

can also promote full compliance where (as in certain 

safety-related cases) policymakers believe that trade-offs 

with economic considerations are not of paramount importance. Also, regulations generally do not directly affect 

Federal outlays or receipts. Thus, like tax expenditures, 

they may escape the degree of scrutiny that outlay programs receive. Some policy objectives are achieved using 

multiple approaches. For example, minimum wage legislation, the earned income tax credit, and the food stamp 

program (SNAP) are regulatory, tax expenditure, and direct outlay programs, respectively, all having the objective 

of improving the economic welfare of low-wage workers 

and families.

A Framework for Evaluating the 

Effectiveness of Tax Expenditures

Across all major budgetary categories – from housing 

and health to space, technology, agriculture, and national 

defense – tax expenditures make up a significant portion 

of Federal activity and affect every area of the economy. 

For these reasons, a comprehensive evaluation framework 

that examines incentives, direct results, and spillover effects will benefit the budgetary process by informing decisions on tax expenditure policy.

As described above, tax expenditures, like spending 

and regulatory programs, have a variety of objectives and 

economic effects. These include: encouraging certain types 

of activities (e.g., saving for retirement or investing in certain sectors); increasing certain types of after-tax income 

(e.g., favorable tax treatment of Social Security income); 

and reducing private compliance costs and Government 

administrative costs (e.g., the exclusion for up to $500,000 

of capital gains on home sales). Some of these objectives 

are well suited to quantitative measurement and evaluation, while others are less well suited

Performance measurement is generally concerned with 

inputs, outputs, and outcomes. In the case of tax expenditures, the principal input is usually the revenue effect. 

Outputs are quantitative or qualitative measures of goods 

and services, or changes in income and investment, directly produced by these inputs. Outcomes, in turn, represent the changes in the economy, society, or environment 

that are the ultimate goals of programs. Evaluations assess whether programs are meeting intended goals, but 

may also encompass analyzing whether initiatives are 

superior to other policy alternatives.

The Administration is working towards examining the 

objectives and effects of the wide range of tax expenditures in our budget, despite challenges related to data 

availability, measurement, and analysis. Evaluations 

include an assessment of whether tax expenditures are 

achieving intended policy results in an efficient manner, 

with minimal burdens on individual taxpayers, consumers, and firms; and an examination of possible unintended 

effects and their consequences.

As an illustration of how evaluations can inform budgetary decisions, consider education and research 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 
17. TAX EXPENDITURES 275

non-tax matters such as market structure, scientific, and 

other information (such as the effects of increased domestic fuel production on imports from various regions, or the 

effects of various energy sources on the environment).

The tax proposals subject to these analyses include 

items that indirectly affect the estimated value of tax 

expenditures (such as changes in income tax rates), proposals that make reforms to improve tax compliance and 

administration, as well as proposals which would change, 

add, or delete tax expenditures. 

Barriers to Evaluation. Developing a framework that 

is sufficiently comprehensive, accurate, and flexible is a 

significant challenge. Evaluations are constrained by the 

availability of appropriate data and challenges in economic modeling:

1. Data availability. Data may not exist, or may not exist in an analytically appropriate form, to conduct 

rigorous evaluations of certain types of expenditures. 

For example, measuring the effects of tax expenditures designed to achieve tax neutrality for individuals and firms earning income abroad, and foreign 

firms could require data from foreign governments 

or firms which are not readily available.

2. Analytical constraints. Evaluations of tax expenditures face analytical constraints even when data 

are available. For example, individuals might have 

access to several tax expenditures and programs 

aimed at improving the same outcome. Isolating the 

effect of a single tax credit is challenging absent a 

well-specified research design. 

3. Resources. Tax expenditure analyses are seriously 

constrained by staffing considerations. Evaluations 

typically require expert analysts who are often engaged in other more competing areas of work related 

to the budget.

The Executive Branch is focused on addressing these 

challenges 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 

recently submitted a report 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, and 

a world-class education for all Americans.

Limit itemized deductions. The Administration is proposing to limit the tax rate at which high-income taxpayers can take itemized deductions to a maximum of 28 

percent, affecting married taxpayers with incomes over 

$250,000 and singles over $200,000. This will reduce the 

value of tax expenditures for such deductions, which include mortgage interest, state and local taxes, and charitable contributions. 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. 

Modify the EITC (Earned Income Tax Credit). As a result 

of analyses showing both effective and ineffective components of the EITC (a tax credit for certain people who work 

and have low wages, designed to encourage and maintain 

employment), the Administration has proposed extending 

some portions of this tax credit, and eliminating others: 

•	 Extend the “third tier” component of the EITC. Under 

the Recovery Act, the EITC was expanded to reduce 

the marriage penalty and to create a “third tier” of 

the EITC for families with three or more children. 

This means larger families receive more now than 

they would have under the old system. Evaluations 

of the distribution of EITC benefits showed that this 

extension would benefit working mothers, and families headed by single mothers specifically. The bipartisan tax agreement extends this credit. 

•	 Repeal the Advanced Earned Income Tax Credit 

(AEITC). In 2009 and 2010, the Administration proposed repealing the AEITC, and this proposal was 

enacted in the Education/Jobs/Medicaid Assistance 

Act of 2010. The AEITC allows individuals to receive 

a portion of the Earned Income Tax Credit (EITC) in 
276 ANALYTICAL PERSPECTIVES

their paychecks, instead of receiving all of it when 

filing their year-end tax return. A Government Accountability Office (GAO) Report dated August 2007 

found an extremely high error rate in the AEITC 

program; some 80 percent of AEITC recipients did 

not comply with at least one program requirement. 

Only a tiny number of EITC eligible taxpayers claim 

the AEITC (three percent, or 514,000 according to 

the GAO.) Further, the dollar amounts involved 

were consistently small: half of all AEITC recipients 

received less than $100.

Allow a range of tax expenditures to expire. The aforementioned bipartisan tax agreement 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 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.