285 

19. TAX EXPENDITURES 

The Congressional Budget Act of 1974 (Public Law 

93–344) requires that a list of ‘‘tax expenditures’’ be 

included in the budget. Tax expenditures are defined 

in the law as ‘‘revenue losses attributable to provisions 

of the Federal tax laws which allow a special exclusion, 

exemption, or deduction from gross income or which 

provide a special credit, a preferential rate of tax, or 

a deferral of liability.’’ These exceptions may be viewed 

as alternatives to other policy instruments, such as 

spending or regulatory programs. 

Identification and measurement of tax expenditures 

depends importantly on the baseline tax system against 

which the actual tax system is compared. In general, 

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 

alternative approach would be to pattern the tax expenditure estimates on a comprehensive consumption 

tax. Which approach is used is perhaps the most important factor determining what is included as a tax expenditure. For example, because a consumption tax 

does not tax the return to saving or investment, using 

a comprehensive consumption tax as the normative 

baseline for determining tax expenditures would exclude current tax exemptions related to retirement and 

education saving accounts. Similarly, business provisions that provide accelerated depreciation or expensing 

of investment would also be excluded as tax expenditures because investment is generally deducted immediately under a comprehensive consumption tax. 

The choice of the baseline—a comprehensive income 

or a comprehensive consumption tax—is arbitrary when 

viewed from the perspective of the current so-called 

income tax system, which includes elements of both 

income and consumption taxes. According to Treasury 

Department analysis, roughly 35 percent of household 

financial assets receive consumption tax treatment because assets are held in tax-preferred accounts such 

as individual retirement accounts (IRAs), defined-contribution retirement plans (401(k) type plans), definedbenefit pension plans, and tax-preferred annuities and 

various life insurance products. The balance of household financial assets reflecting most other saving vehicles receive income tax treatment. 

The ambiguities in the tax expenditure concept are 

reviewed in greater detail in Appendix A. This review 

focuses on defining tax expenditures relative to a comprehensive income tax baseline and a consumption tax 

baseline, and defining negative tax expenditures, i.e., 

provisions of current law that over-tax certain items 

or activities. 

The tax expenditure estimates presented below differ 

from a comprehensive income tax in a number of other 

important respects. While under a comprehensive income tax all income is taxed once, the U.S. income 

tax system generally taxes corporate income twice, first 

at the corporate level through the corporate income tax 

and then again when the income is received by investors as dividends or capital gains. This ‘‘double tax’’ 

is accounted for in some of the tax expenditure estimates, such as those related to retirement savings, but 

not in the corporate tax expenditures. Indeed, the tax 

expenditure estimates, in large part, view the individual and corporation income taxes separately, rather 

than as an integrated system as appropriate under comprehensive income tax principles. Other areas of divergence from a comprehensive income tax are detailed 

below. 

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 

2006–2012 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 B. This section 

is a complement to the Government-wide performance 

plan required by the Government Performance and Results Act of 1993. 

TAX EXPENDITURES IN THE INCOME TAX 

Tax Expenditure Estimates 

All tax expenditure estimates presented here are 

based upon current tax law enacted as of December 

31, 2006. Expired or repealed provisions are not listed 

if their revenue effects result only from taxpayer activity occurring before fiscal year 2006. Due to the time 

required to estimate the large number of tax expenditures, the estimates are based on Mid-Session economic 

assumptions; exceptions are the earned income tax 

credit and child credit provisions, which involve outlay 
286 ANALYTICAL PERSPECTIVES 

1These 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 post1982 method. 2The Administration has dropped the estimates of the outlay equivalents because they 

were often the same as the normal tax expenditure estimates, and the criteria for applying 

the concepts as to when they should differ were often judgmental and hard to apply with 

consistency across time and across tax expenditure items. 

components and hence are updated to reflect the economic assumptions used elsewhere in the Budget. 

The total revenue effects for tax expenditures for fiscal years 2006–2012 are displayed according to the 

Budget’s functional categories in Table 19–1. Descriptions of the specific tax expenditure provisions follow 

the tables of estimates and the discussion of general 

features of the tax expenditure concept. 

Two baseline concepts—the normal tax baseline and 

the reference tax law baseline—are used to identify 

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

two concepts coincide. However, items treated as tax 

expenditures under the normal tax baseline, but not 

the reference tax law baseline, are indicated by the 

designation ‘‘normal tax method’’ in the tables. The revenue effects for these items are zero using the reference 

tax rules. The alternative baseline concepts are discussed in detail following the tables. 

Table 19–2 reports the respective portions of the total 

revenue effects that arise under the individual and corporate income taxes separately. The location of the 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 19–3 ranks the major tax expenditures by the 

size of their 2008–2012 revenue effect. The first column 

provides the number of the provision in order to cross 

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

as to the descriptions below. Outlay Equivalent Estimates of Income Tax Expenditures, which were included in prior volumes of Analytical Perspectives, are 

no longer included in this chapter. 2

Interpreting Tax Expenditure Estimates 

The estimates shown for individual tax expenditures 

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

the increase in Federal revenues (or the change in the 

budget balance) that would result from repealing these 

special provisions, for the following reasons: 

First, eliminating a tax expenditure may have incentive effects that alter economic behavior. These incentives can affect the resulting magnitudes of the activity 

or of other tax provisions or Government programs. 

For example, if capital gains were taxed at ordinary 

rates, capital gain realizations would be expected to 

decline, potentially resulting in a decline in tax receipts. Such behavioral effects are not reflected in the 

estimates. 

Second, tax expenditures are interdependent even 

without incentive effects. Repeal of a tax expenditure 

provision can increase or decrease the tax revenues associated with other provisions. For example, even if 

behavior does not change, repeal of an itemized deduction could increase the revenue costs from other deductions because some taxpayers would be moved into 

higher tax brackets. Alternatively, repeal of an itemized 

deduction could lower the revenue cost from other deductions if taxpayers are led to claim the standard deduction instead of itemizing. Similarly, if two provisions 

were repealed simultaneously, the increase in tax liability could be greater or less than the sum of the two 

separate tax expenditures, because each is estimated 

assuming that the other remains in force. In addition, 

the estimates reported in Table 19–1 are the totals 

of individual and corporate income tax revenue effects 

reported in Table 19–2 and do not reflect any possible 

interactions between individual and corporate income 

tax receipts. For this reason, the estimates in Table 

19–1 should be regarded as approximations. 
19. TAX EXPENDITURES 287 

Table 19–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES 

(in millions of dollars) 

Total from corporations and individuals 

2006 2007 2008 2009 2010 2011 2012 2008–12 

National Defense 

1 Exclusion of benefits and allowances to armed forces personnel ........................................................... 3,100 3,220 3,350 3,480 3,620 3,780 3,930 18,160 

International affairs: 

2 Exclusion of income earned abroad by U.S. citizens ............................................................................... 2,500 2,630 2,760 2,900 3,050 3,200 3,360 15,270 

3 Exclusion of certain allowances for Federal employees abroad .............................................................. 800 840 880 920 970 1,020 1,070 4,860 

4 Extraterritorial income exclusion ................................................................................................................ 4,400 1,630 .............. .............. .............. .............. .............. ................

5 Inventory property sales source rules exception ....................................................................................... 1,730 1,890 2,120 2,330 2,510 2,704 2,913 12,577 

6 Deferral of income from controlled foreign corporations (normal tax method) ........................................ 11,160 11,940 12,770 13,650 14,600 15,620 16,710 73,350 

7 Deferred taxes for financial firms on certain income earned overseas ................................................... 2,260 2,370 2,490 1,060 .............. .............. .............. 3,550 

General science, space, and technology: 

8 Expensing of research and experimentation expenditures (normal tax method) ..................................... 7,920 5,680 5,280 4,060 5,030 6,230 6,000 26,600 

9 Credit for increasing research activities ..................................................................................................... 2,180 10,320 4,960 2,100 920 360 70 8,410 

Energy: 

10 Expensing of exploration and development costs, fuels ........................................................................... 680 860 840 710 600 450 310 2,910 

11 Excess of percentage over cost depletion, fuels ...................................................................................... 760 790 790 790 780 760 740 3,860 

12 Alternative fuel production credit ................................................................................................................ 2,980 2,370 780 10 10 .............. .............. 800 

13 Exception from passive loss limitation for working interests in oil and gas properties ........................... 30 30 30 30 30 30 30 150 

14 Capital gains treatment of royalties on coal .............................................................................................. 160 170 170 170 190 180 130 840 

15 Exclusion of interest on energy facility bonds ........................................................................................... 40 40 50 50 50 50 50 250 

16 New technology credit ................................................................................................................................ 510 690 960 1,120 1,150 1,150 1,150 5,530 

17 Alcohol fuel credits 1 ................................................................................................................................... 50 50 60 70 80 30 .............. 240 

18 Tax credit and deduction for clean-fuel burning vehicles ......................................................................... 110 260 150 130 –20 –50 –60 150 

19 Exclusion of utility conservation subsidies ................................................................................................. 110 110 110 110 110 110 100 540 

20 Credit for holding clean renewable energy bonds .................................................................................... 20 60 80 100 100 100 100 480 

21 Deferral of gain from dispositions of transmission property to implement FERC restructuring policy ... 620 530 230 –100 –360 –510 –540 –1,280 

22 Credit for investment in clean coal facilities .............................................................................................. .............. 30 50 80 130 180 250 690 

23 Temporary 50% expensing for equipment used in the refining of liquid fuels ........................................ 10 30 120 240 260 180 –50 750 

24 Natural gas distribution pipelines treated as 15–year property ................................................................ 20 50 90 120 150 150 120 630 

25 Amortize all geological and geophysical expenditures over 2 years ....................................................... 10 60 90 70 40 10 10 220 

26 Allowance of deduction for certain energy efficient commercial building property .................................. 80 190 170 90 30 –10 –10 270 

27 Credit for construction of new energy efficient homes ............................................................................. 10 20 30 20 10 .............. .............. 60 

28 Credit for energy efficiency improvements to existing homes .................................................................. 230 380 150 .............. .............. .............. .............. 150 

29 Credit for energy efficient appliances ........................................................................................................ 120 80 .............. .............. .............. .............. .............. ................

30 30% credit for residential purchases/installations of solar and fuel cells ................................................ 10 10 10 .............. .............. .............. .............. 10 

31 Credit for business installation of qualified fuel cells and stationary microturbine power plants ............ 80 90 130 50 –10 –10 –10 150 

32 Partial expensing for advanced mine safety equipment ........................................................................... .............. 10 20 .............. .............. .............. .............. 20 

Natural resources and environment: 

33 Expensing of exploration and development costs, nonfuel minerals ....................................................... 10 10 10 10 10 10 10 50 

34 Excess of percentage over cost depletion, nonfuel minerals ................................................................... 450 480 490 510 530 550 570 2,650 

35 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities ................................ 510 580 600 630 640 670 680 3,220 

36 Capital gains treatment of certain timber income ..................................................................................... 160 170 170 170 190 180 130 840 

37 Expensing of multiperiod timber growing costs ......................................................................................... 290 310 320 330 350 360 370 1,730 

38 Tax incentives for preservation of historic structures ............................................................................... 390 400 430 440 470 490 520 2,350 

39 Expensing of capital costs with respect to complying with EPA sulfur regulations ................................ 10 10 30 50 30 .............. .............. 110 

40 Exclusion of gain or loss on sale or exchange of certain brownfield sites ............................................. .............. 10 30 40 40 40 30 180 

Agriculture: 

41 Expensing of certain capital outlays .......................................................................................................... 130 130 130 140 140 150 150 710 

42 Expensing of certain multiperiod production costs .................................................................................... 70 70 80 80 80 90 90 420 

43 Treatment of loans forgiven for solvent farmers ....................................................................................... 20 20 20 20 20 30 30 120 

44 Capital gains treatment of certain income ................................................................................................. 880 940 950 950 1,010 980 700 4,590 

45 Income averaging for farmers .................................................................................................................... 60 60 60 60 60 70 70 320 

46 Deferral of gain on sale of farm refiners ................................................................................................... 10 20 20 20 20 20 20 100 

47 Bio-Diesel and small agri-biodiesel producer tax credits .......................................................................... 90 180 200 30 20 10 10 270 

Commerce and housing: 

Financial institutions and insurance: 

48 Exemption of credit union income ......................................................................................................... 1,320 1,400 1,480 1,570 1,660 1,750 1,850 8,310 

49 Excess bad debt reserves of financial institutions ................................................................................ 20 10 10 10 10 .............. .............. 30 

50 Exclusion of interest on life insurance savings ..................................................................................... 19,380 20,150 21,925 25,060 27,830 30,090 32,100 137,005 

51 Special alternative tax on small property and casualty insurance companies .................................... 50 50 50 50 50 60 60 270 

52 Tax exemption of certain insurance companies owned by tax-exempt organizations ........................ 220 230 240 250 260 270 280 1,300 

53 Small life insurance company deduction ............................................................................................... 60 60 60 60 60 50 50 280 

54 Exclusion of interest spread of financial institutions ............................................................................. 1,350 1,330 1,400 1,480 1,550 1,950 2,050 8,430 

Housing: 

55 Exclusion of interest on owner-occupied mortgage subsidy bonds ..................................................... 1,170 1,300 1,390 1,430 1,470 1,510 1,560 7,360 

56 Exclusion of interest on rental housing bonds ...................................................................................... 970 1,090 1,150 1,180 1,220 1,260 1,300 6,110 
288 ANALYTICAL PERSPECTIVES 

Table 19–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES—Continued 

(in millions of dollars) 

Total from corporations and individuals 

2006 2007 2008 2009 2010 2011 2012 2008–12 

57 Deductibility of mortgage interest on owner-occupied homes .............................................................. 68,330 79,940 89,430 96,250 103,540 111,440 119,600 520,260 

58 Deductibility of State and local property tax on owner-occupied homes ............................................ 21,260 15,540 12,620 12,590 12,580 22,440 27,770 88,000 

59 Deferral of income from installment sales ............................................................................................. 1,190 1,210 1,230 1,250 1,370 1,500 1,650 7,000 

60 Capital gains exclusion on home sales ................................................................................................. 35,270 37,030 38,890 40,830 42,870 45,010 47,270 214,870 

61 Exclusion of net imputed rental income ................................................................................................ 28,780 32,110 35,680 39,440 43,596 48,190 53,269 220,176 

62 Exception from passive loss rules for $25,000 of rental loss .............................................................. 6,590 7,150 7,520 7,790 7,990 8,150 8,300 39,750 

63 Credit for low-income housing investments .......................................................................................... 4,420 4,660 4,940 5,250 5,570 5,870 6,170 27,800 

64 Accelerated depreciation on rental housing (normal tax method) ....................................................... 10,340 11,240 12,300 13,480 14,560 15,790 17,190 73,320 

Commerce: 

65 Cancellation of indebtedness ................................................................................................................. 90 100 90 60 30 30 30 240 

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

67 Capital gains (except agriculture, timber, iron ore, and coal) .............................................................. 48,610 51,770 51,960 52,230 55,400 53,870 38,420 251,880 

68 Capital gains exclusion of small corporation stock ............................................................................... 240 270 320 340 370 490 540 2,060 

69 Step-up basis of capital gains at death ................................................................................................ 29,600 32,600 35,900 36,750 37,950 39,450 41,010 191,060 

70 Carryover basis of capital gains on gifts .............................................................................................. 590 650 760 800 1,270 6,340 1,500 10,670 

71 Ordinary income treatment of loss from small business corporation stock sale ................................. 50 50 50 50 60 60 60 280 

72 Accelerated depreciation of buildings other than rental housing (normal tax method) ....................... –970 –740 –310 260 870 1,550 2,280 4,650 

73 Accelerated depreciation of machinery and equipment (normal tax method) ..................................... 36,470 51,030 64,670 78,390 85,250 92,630 100,850 421,790 

74 Expensing of certain small investments (normal tax method) ............................................................. 5,000 5,330 5,330 4,740 –1,090 80 850 9,910 

75 Graduated corporation income tax rate (normal tax method) .............................................................. 4,050 4,270 4,240 4,320 4,420 4,530 4,690 22,200 

76 Exclusion of interest on small issue bonds .......................................................................................... 510 580 600 630 640 670 680 3,220 

77 Deduction for US production activities .................................................................................................. 9,950 10,700 13,810 14,500 19,550 23,890 25,360 97,110 

78 Special rules for certain film and TV production .................................................................................. 110 90 70 –40 –90 –60 –50 –170 

Transportation: 

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

80 Exclusion of reimbursed employee parking expenses .............................................................................. 2,740 2,890 3,040 3,190 3,350 3,430 3,540 16,550 

81 Exclusion for employer-provided transit passes ........................................................................................ 560 630 710 790 880 960 1,030 4,370 

82 Tax credit for certain expenditures for maintaining railroad tracks .......................................................... 140 160 130 60 30 10 10 240 

83 Exclusion of interest on bonds for Financing of Highway Projects and rail-truck transfer facilities ....... 25 50 75 95 95 100 100 465 

Community and regional development: 

84 Investment credit for rehabilitation of structures (other than historic) ...................................................... 40 40 40 40 40 40 40 200 

85 Exclusion of interest for airport, dock, and similar bonds ........................................................................ 1,130 1,250 1,320 1,360 1,400 1,440 1,480 7,000 

86 Exemption of certain mutuals’ and cooperatives’ income ......................................................................... 80 80 80 80 80 90 90 420 

87 Empowerment zones and renewal communities ....................................................................................... 1,210 1,340 1,480 1,740 1,130 420 570 5,340 

88 New markets tax credit .............................................................................................................................. 590 810 990 970 860 730 590 4,140 

89 Expensing of environmental remediation costs ......................................................................................... 150 300 130 –40 –20 –20 –30 20 

90 Credit to holders of Gulf Tax Credit Bonds .............................................................................................. 10 10 10 10 10 10 10 50 

Education, training, employment, and social services: 

Education: 

91 Exclusion of scholarship and fellowship income (normal tax method) ................................................ 1,780 1,870 1,960 2,050 2,150 2,250 2,360 10,770 

92 HOPE tax credit ..................................................................................................................................... 3,900 3,330 3,350 3,600 3,710 4,350 4,730 19,740 

93 Lifetime Learning tax credit ................................................................................................................... 2,490 2,190 2,200 2,310 2,390 2,780 3,020 12,700 

94 Education Individual Retirement Accounts ............................................................................................ 10 10 10 20 20 20 30 100 

95 Deductibility of student-loan interest ...................................................................................................... 800 810 820 830 840 780 530 3,800 

96 Deduction for higher education expenses ............................................................................................. 1,420 1,450 1,180 .............. .............. .............. .............. 1,180 

97 State prepaid tuition plans ..................................................................................................................... 690 830 1,000 1,210 1,470 1,820 2,000 7,500 

98 Exclusion of interest on student-loan bonds ......................................................................................... 500 550 590 600 630 640 670 3,130 

99 Exclusion of interest on bonds for private nonprofit educational facilities ........................................... 2,140 2,380 2,530 2,610 2,690 2,770 2,850 13,450 

100 Credit for holders of zone academy bonds .......................................................................................... 130 140 160 170 170 170 160 830 

101 Exclusion of interest on savings bonds redeemed to finance educational expenses ......................... .............. 20 20 20 20 20 20 100 

102 Parental personal exemption for students age 19 or over ................................................................... 4,030 2,500 1,590 1,480 1,410 2,620 3,040 10,140 

103 Deductibility of charitable contributions (education) .............................................................................. 4,200 4,550 5,120 5,520 5,900 6,320 6,770 29,630 

104 Exclusion of employer-provided educational assistance ....................................................................... 590 620 660 690 720 40 .............. 2,110 

105 Special deduction for teacher expenses ............................................................................................... 160 170 160 .............. .............. .............. .............. 160 

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

Training, employment, and social services: .............. .............. .............. .............. .............. .............. .............. ................

107 Work opportunity tax credit .................................................................................................................... 210 360 370 250 140 70 40 870 

108 Welfare-to-work tax credit ...................................................................................................................... 80 80 80 50 20 10 10 170 

109 Employer provided child care exclusion ................................................................................................ 660 890 1,030 1,080 1,140 1,160 1,210 5,620 

110 Employer-provided child care credit ...................................................................................................... 10 10 10 20 20 10 .............. 60 

111 Assistance for adopted foster children .................................................................................................. 320 350 400 440 480 530 570 2,420 

112 Adoption credit and exclusion ................................................................................................................ 540 560 570 580 600 540 170 2,460 

113 Exclusion of employee meals and lodging (other than military) .......................................................... 890 930 970 1,010 1,060 1,110 1,170 5,320 

114 Child credit 2 ........................................................................................................................................... 30,377 32,556 32,341 32,096 31,909 24,719 13,598 134,666 

115 Credit for child and dependent care expenses ..................................................................................... 3,190 2,810 1,740 1,650 1,570 1,500 1,430 7,890 

116 Credit for disabled access expenditures ............................................................................................... 20 30 30 30 30 30 30 150 
19. TAX EXPENDITURES 289 

Table 19–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES—Continued 

(in millions of dollars) 

Total from corporations and individuals 

2006 2007 2008 2009 2010 2011 2012 2008–12 

117 Deductibility of charitable contributions, other than education and health .......................................... 37,120 40,400 45,760 49,360 52,840 56,610 60,740 265,310 

118 Exclusion of certain foster care payments ............................................................................................ 440 450 460 470 480 490 500 2,400 

119 Exclusion of parsonage allowances ...................................................................................................... 480 510 550 580 610 640 670 3,050 

120 Employee retention credit for employers affected by Hurricane Katrina, Rita, and Wilma ................ .............. 40 .............. .............. .............. .............. .............. ................

Health: 

121 Exclusion of employer contributions for medical insurance premiums and medical care ....................... 125,000 141,270 160,190 179,580 200,510 221,880 243,820 1,005,980 

122 Self-employed medical insurance premiums ............................................................................................. 3,970 4,370 3,730 4,180 4,670 5,230 5,810 23,620 

123 Medical Savings Accounts/Health Savings Accounts ................................................................................ 280 990 1,980 2,600 2,830 2,910 2,850 13,170 

124 Deductibility of medical expenses .............................................................................................................. 3,770 4,240 4,920 5,820 6,840 9,250 10,780 37,610 

125 Exclusion of interest on hospital construction bonds ................................................................................ 3,420 3,770 4,010 4,130 4,260 4,380 4,510 21,290 

126 Deductibility of charitable contributions (health) ........................................................................................ 4,190 4,560 5,160 5,570 5,960 6,380 6,850 29,920 

127 Tax credit for orphan drug research .......................................................................................................... 230 260 290 320 360 410 460 1,840 

128 Special Blue Cross/Blue Shield deduction ................................................................................................ 620 680 740 610 660 690 740 3,440 

129 Tax credit for health insurance purchased by certain displaced and retired individuals 3 ...................... .............. 10 10 10 10 10 10 50 

130 Distributions from retirement plans for premiums for health and long-term care insurance ................... .............. 250 240 280 310 340 380 1,550 

Income security: 

131 Exclusion of railroad retirement system benefits ....................................................................................... 390 380 380 380 370 360 350 1,840 

132 Exclusion of workers’ compensation benefits ............................................................................................ 5,660 5,740 5,830 5,920 6,010 6,110 6,200 30,070 

133 Exclusion of public assistance benefits (normal tax method) ................................................................... 450 470 490 510 530 550 580 2,660 

134 Exclusion of special benefits for disabled coal miners ............................................................................. 50 50 40 40 40 40 40 200 

135 Exclusion of military disability pensions ..................................................................................................... 110 110 120 130 130 140 150 670 

Net exclusion of pension contributions and earnings: 

136 Employer plans ....................................................................................................................................... 49,040 49,510 48,480 48,030 46,350 43,700 42,790 229,350 

137 401(k) plans ............................................................................................................................................ 40,760 42,410 43,970 45,980 48,550 54,230 57,690 250,420 

138 Individual Retirement Accounts ............................................................................................................. 3,970 5,700 6,650 7,130 7,200 7,460 7,840 36,280 

139 Low and moderate income savers credit .............................................................................................. 700 690 670 630 610 590 580 3,080 

140 Keogh plans ............................................................................................................................................ 10,130 10,860 11,890 13,010 14,230 15,550 16,970 71,650 

Exclusion of other employee benefits: 

141 Premiums on group term life insurance ................................................................................................ 2,280 2,310 2,350 2,380 2,420 2,450 2,490 12,090 

142 Premiums on accident and disability insurance .................................................................................... 290 300 310 320 330 340 350 1,650 

143 Income of trusts to finance supplementary unemployment benefits ........................................................ 20 30 30 30 40 40 50 190 

144 Special ESOP rules .................................................................................................................................... 1,760 1,890 2,030 2,170 2,330 2,490 2,670 11,690 

145 Additional deduction for the blind .............................................................................................................. 40 40 40 40 40 50 60 230 

146 Additional deduction for the elderly ........................................................................................................... 1,920 1,830 1,830 1,910 2,010 2,890 3,480 12,120 

147 Tax credit for the elderly and disabled ...................................................................................................... 20 10 10 10 10 10 10 50 

148 Deductibility of casualty losses .................................................................................................................. 260 280 300 310 320 350 370 1,650 

149 Earned income tax credit 4 ......................................................................................................................... 5,050 5,360 5,340 5,490 5,660 5,890 7,900 30,280 

150 Additional exemption for housing Hurricane Katrina displaced individuals .............................................. 110 20 .............. .............. .............. .............. .............. ................

Social Security: 

Exclusion of social security benefits: 

151 Social Security benefits for retired workers .......................................................................................... 17,890 18,100 18,930 19,110 20,230 21,320 23,260 102,850 

152 Social Security benefits for disabled ..................................................................................................... 4,730 5,120 5,620 5,890 6,240 6,690 7,220 31,660 

153 Social Security benefits for dependents and survivors ........................................................................ 3,360 3,340 3,400 3,330 3,420 3,490 3,700 17,340 

Veterans benefits and services: 

154 Exclusion of veterans death benefits and disability compensation .......................................................... 3,580 3,770 3,890 4,030 4,200 4,590 5,030 21,740 

155 Exclusion of veterans pensions ................................................................................................................. 150 180 180 180 190 200 230 980 

156 DExclusion of GI bill benefits ..................................................................................................................... 210 260 280 300 320 360 420 1,680 

157 Exclusion of interest on veterans housing bonds ..................................................................................... 40 40 40 50 50 50 50 240 

General purpose fiscal assistance: 

158 Exclusion of interest on public purpose State and local bonds ............................................................... 22,980 25,430 27,150 27,960 28,800 29,670 30,560 144,140 

159 Deductibility of nonbusiness state and local taxes other than on owner-occupied homes ..................... 43,120 33,680 27,900 27,790 28,570 48,560 59,850 192,670 

160 Tax credit for corporations receiving income from doing business in U.S. possessions ........................ 200 20 .............. .............. .............. .............. .............. ................

Interest: 

161 Deferral of interest on U.S. savings bonds ............................................................................................... 1,260 1,330 1,340 1,360 1,370 1,420 1,520 7,010 

Addendum: Aid to State and local governments: 

Deductibility of: 

Property taxes on owner-occupied homes ............................................................................................ 21,260 15,540 12,620 12,590 12,580 22,440 27,770 88,000 

Nonbusiness State and local taxes other than on owner-occupied homes ........................................ 43,120 33,680 27,900 27,790 28,570 48,560 59,850 192,670 

Exclusion of interest on State and local bonds for: 

Public purposes ...................................................................................................................................... 22,980 25,430 27,150 27,960 28,800 29,670 30,560 144,140 

Energy facilities ...................................................................................................................................... 40 40 50 50 50 50 50 250 

Water, sewage, and hazardous waste disposal facilities ..................................................................... 510 580 600 630 640 670 680 3,220 

Small-issues ............................................................................................................................................ 510 580 600 630 640 670 680 3,220 

Owner-occupied mortgage subsidies ..................................................................................................... 1,170 1,300 1,390 1,430 1,470 1,510 1,560 7,360 
290 ANALYTICAL PERSPECTIVES 

Table 19–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES—Continued 

(in millions of dollars) 

Total from corporations and individuals 

2006 2007 2008 2009 2010 2011 2012 2008–12 

Rental housing ........................................................................................................................................ 970 1,090 1,150 1,180 1,220 1,260 1,300 6,110 

Airports, docks, and similar facilities ..................................................................................................... 1,130 1,250 1,320 1,360 1,400 1,440 1,480 7,000 

Student loans .......................................................................................................................................... 500 550 590 600 630 640 670 3,130 

Private nonprofit educational facilities ................................................................................................... 2,140 2,380 2,530 2,610 2,690 2,770 2,850 13,450 

Hospital construction .............................................................................................................................. 3,420 3,770 4,010 4,130 4,260 4,380 4,510 21,290 

Veterans’ housing ................................................................................................................................... 40 40 40 50 50 50 50 240 

Credit for holders of zone academy bonds ............................................................................................... 130 140 160 170 170 170 160 830 

1 In addition, the alcohol fuel credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2006 $2,570; 2007 $2,990; 2008 $3,460; 2009 $4,280; 2010 $4,990; 2011 $1,440; 0 in 

2012. 2 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: 2006 $15,473; 2007 $14,931; 2008 $14,367; 2009 

$14,019; 2010 $13,651; 2011 $13,410; and 2012 $1,275. 3 The figures in the table indicate the effect of the health insurance tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2006 $90; 2007 $100; 2008 $110; 2009 

$120; 2010 $130; 2011 $140; and 2012 $150. 4 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: 2006 $36,166;2007 $36,461; 2008 

$37,573; 2009 $38,237; 2010 $38,994; 2011 $40,289; and 2012 $36,982. 

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

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

Present-Value Estimates 

The annual value of tax expenditures for tax deferrals is reported on a cash basis in all tables except 

Table 19–4. 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. 

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

Discounted present-value estimates of revenue effects 

are presented in Table 19–4 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 2006 which 

cause the deferrals or other long-term revenue effects. 

For instance, a pension contribution in 2006 would 

cause a deferral of tax payments on wages in 2006 

and on pension earnings on this contribution (e.g., interest) in later years. In some future year, however, 

the 2006 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. 
19. TAX EXPENDITURES 291 

Table 19–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL INCOME TAXES 

(in millions of dollars) 

Corporations Individuals 

2006 2007 2008 2009 2010 2011 2012 2008–12 2006 2007 2008 2009 2010 2011 2012 2008–12 

National Defense 

1 Exclusion of benefits and allowances to 

armed forces personnel ........................ ............ ............ ................ ................ ................ ................ ................ ................ 3,100 3,220 3,350 3,480 3,620 3,780 3,930 18,160 

International affairs: 

2 Exclusion of income earned abroad by 

U.S. citizens .......................................... ............ ............ ................ ................ ................ ................ ................ ................ 2,500 2,630 2,760 2,900 3,050 3,200 3,360 15,270 

3 Exclusion of certain allowances for Federal employees abroad ......................... ............ ............ ................ ................ ................ ................ ................ ................ 800 840 880 920 970 1020 1070 4,860 

4 Extraterritorial income exclusion ............... 4,400 1,630 ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................

5 Inventory property sales source rules exception ................................................... 1,730 1,890 2,120 2,330 2,510 2,704 2,913 12,577 ................ ................ ................ ................ ................ ................ ................ ................

6 Deferral of income from controlled foreign 

corporations (normal tax method) ........ 11,160 11,940 12,770 13,650 14,600 15,620 16,710 73,350 ................ ................ ................ ................ ................ ................ ................ ................

7 Deferred taxes for financial firms on certain income earned overseas ............... 2,260 2,370 2,490 1,060 ................ ................ ................ 3,550 ................ ................ ................ ................ ................ ................ ................ ................

General science, space, and technology: 

8 Expensing of research and experimentation expenditures (normal tax method) .......................................................... 7,770 5,570 5,170 3,980 4,920 6,100 5,880 26,050 150 110 110 80 110 130 120 550 

9 Credit for increasing research activities ... 2,120 10,260 4,910 2,100 920 360 70 8,360 60 60 50 ................ ................ ................ ................ 50 

Energy: 

10 Expensing of exploration and development costs, fuels ................................... 590 750 730 620 520 390 270 2,530 90 110 110 90 80 60 40 380 

11 Excess of percentage over cost depletion, 

fuels ....................................................... 680 710 710 710 700 680 670 3,470 80 80 80 80 80 80 70 390 

12 Alternative fuel production credit .............. 2,860 2,270 750 10 10 ................ ................ 770 120 100 30 ................ ................ ................ ................ 30 

13 Exception from passive loss limitation for 

working interests in oil and gas properties ...................................................... ............ ............ ................ ................ ................ ................ ................ ................ 30 30 30 30 30 30 30 150 

14 Capital gains treatment of royalties on 

coal ........................................................ ............ ............ ................ ................ ................ ................ ................ ................ 160 170 170 170 190 180 130 840 

15 Exclusion of interest on energy facility 

bonds ..................................................... 10 10 10 10 10 10 10 50 30 30 40 40 40 40 40 200 

16 New technology credit ............................... 470 640 900 1060 1090 1090 1090 5,230 40 50 60 60 60 60 60 300 

17 Alcohol fuel credits 1 .................................. 40 40 50 50 60 20 ................ 180 10 10 10 20 20 10 ................ 60 

18 Tax credit and deduction for clean-fuel 

burning vehicles .................................... 40 30 ................ –30 –30 –40 –50 –150 70 230 150 160 10 –10 –10 300 

19 Exclusion of utility conservation subsidies ............ ............ ................ ................ ................ ................ ................ ................ 110 110 110 110 110 110 100 540 

20 Credit for holding clean renewable energy 

bonds ..................................................... 10 30 40 50 50 50 50 240 10 30 40 50 50 50 50 240 

21 Deferral of gain from dispositions of 

transmission property to implement 

FERC restructuring policy ..................... 620 530 230 –100 –360 –510 –540 –1,280 ................ ................ ................ ................ ................ ................ ................ ................

22 Credit for investment in clean coal facilities ......................................................... ............ 30 50 80 130 180 250 690 ................ ................ ................ ................ ................ ................ ................ ................

23 Temporary 50% expensing for equipment 

used in the refining of liquid fuels ........ 10 30 120 240 260 180 –50 750 ................ ................ ................ ................ ................ ................ ................ ................

24 Natural gas distribution pipelines treated 

as 15–year property .............................. 20 50 90 120 150 150 120 630 ................ ................ ................ ................ ................ ................ ................ ................

25 Amortize all geological and geophysical 

expenditures over 2 years .................... 10 50 70 60 30 10 10 180 ................ 10 20 10 10 ................ ................ 40 

26 Allowance of deduction for certain energy 

efficient commercial building property .. 60 140 130 70 20 –10 –10 200 20 50 40 20 10 ................ ................ 70 

27 Credit for construction of new energy efficient homes ........................................... 10 20 20 20 10 ................ ................ 50 ................ ................ 10 ................ ................ ................ ................ 10 

28 Credit for energy efficiency improvements 

to existing homes .................................. ............ ............ ................ ................ ................ ................ ................ ................ 230 380 150 ................ ................ ................ ................ 150 

29 Credit for energy efficient appliances ....... 120 80 ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................

30 30% credit for residential purchases/installations of solar and fuel cells .......... ............ ............ ................ ................ ................ ................ ................ ................ 10 10 10 ................ ................ ................ ................ 10 

31 Credit for business installation of qualified 

fuel cells and stationary microturbine 

power plants .......................................... 60 70 100 40 –10 –10 –10 110 20 20 30 10 ................ ................ ................ 40 

32 Partial expensing for advanced mine 

safety equipment ................................... ............ 10 20 ................ ................ ................ ................ 20 ................ ................ ................ ................ ................ ................ ................ ................

Natural resources and environment: 

33 Expensing of exploration and development costs, nonfuel minerals ................ 10 10 10 10 10 10 10 50 ................ ................ ................ ................ ................ ................ ................ ................

34 Excess of percentage over cost depletion, 

nonfuel minerals .................................... 430 460 470 480 500 520 540 2,510 20 20 20 30 30 30 30 140 

35 Exclusion of interest on bonds for water, 

sewage, and hazardous waste facilities 120 140 140 150 150 160 160 760 390 440 460 480 490 510 520 2,460 

36 Capital gains treatment of certain timber 

income ................................................... ............ ............ ................ ................ ................ ................ ................ ................ 160 170 170 170 190 180 130 840 

37 Expensing of multiperiod timber growing 

costs ...................................................... 200 220 230 240 250 260 270 1,250 90 90 90 90 100 100 100 480 

38 Tax incentives for preservation of historic 

structures ............................................... 300 310 330 340 360 380 400 1,810 90 90 100 100 110 110 120 540 

39 Expensing of capital costs with respect to 

complying with EPA sulfur regulations 10 10 30 50 30 ................ ................ 110 ................ ................ ................ ................ ................ ................ ................ ................

40 Exclusion of gain or loss on sale or exchange of certain brownfield sites ....... ............ 10 20 30 30 30 20 130 ................ ................ 10 10 10 10 10 50 

Agriculture: 

41 Expensing of certain capital outlays ......... 20 20 20 20 20 30 30 120 110 110 110 120 120 120 120 590 
292 ANALYTICAL PERSPECTIVES 

Table 19–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL INCOME TAXES—Continued 

(in millions of dollars) 

Corporations Individuals 

2006 2007 2008 2009 2010 2011 2012 2008–12 2006 2007 2008 2009 2010 2011 2012 2008–12 

42 Expensing of certain multiperiod production costs ............................................... 10 10 10 10 10 20 20 70 60 60 70 70 70 70 70 350 

43 Treatment of loans forgiven for solvent 

farmers ................................................... ............ ............ ................ ................ ................ ................ ................ ................ 20 20 20 20 20 30 30 120 

44 Capital gains treatment of certain income ............ ............ ................ ................ ................ ................ ................ ................ 880 940 950 950 1,010 980 700 4,590 

45 Income averaging for farmers ................... ............ ............ ................ ................ ................ ................ ................ ................ 60 60 60 60 60 70 70 320 

46 Deferral of gain on sale of farm refiners 10 20 20 20 20 20 20 100 ................ ................ ................ ................ ................ ................ ................ ................

47 Bio-Diesel and small agri-biodiesel producer tax credits ................................... ............ ............ ................ ................ ................ ................ ................ ................ 90 180 200 30 20 10 10 270 

Commerce and housing: 

Financial institutions and insurance: 

48 Exemption of credit union income ........ 1320 1400 1480 1570 1660 1750 1850 8,310 ................ ................ ................ ................ ................ ................ ................ ................

49 Excess bad debt reserves of financial 

institutions ......................................... 20 10 10 10 10 ................ ................ 30 ................ ................ ................ ................ ................ ................ ................ ................

50 Exclusion of interest on life insurance 

savings .............................................. 1780 1850 2020 2310 2560 2770 2950 12,610 17600 18300 19905 22750 25270 27320 29150 124,395 

51 Special alternative tax on small property and casualty insurance companies .................................................... 50 50 50 50 50 60 60 270 ................ ................ ................ ................ ................ ................ ................ ................

52 Tax exemption of certain insurance 

companies owned by tax-exempt organizations ........................................ 220 230 240 250 260 270 280 1,300 ................ ................ ................ ................ ................ ................ ................ ................

53 Small life insurance company deduction ..................................................... 60 60 60 60 60 50 50 280 ................ ................ ................ ................ ................ ................ ................ ................

54 Exclusion of interest spread of financial 

institutions ......................................... ............ ............ ................ ................ ................ ................ ................ ................ 1,350 1,330 1,400 1,480 1,550 1,950 2,050 8,430 

Housing: 

55 Exclusion of interest on owner-occupied mortgage subsidy bonds .......... 280 310 330 340 350 360 370 1,750 890 990 1,060 1,090 1,120 1,150 1,190 5,610 

56 Exclusion of interest on rental housing 

bonds ................................................. 230 260 270 280 290 300 310 1,450 740 830 880 900 930 960 990 4,660 

57 Deductibility of mortgage interest on 

owner-occupied homes ..................... ............ ............ ................ ................ ................ ................ ................ ................ 68,330 79,940 89,430 96,250 103,540 111,440 119,600 520,260 

58 Deductibility of State and local property 

tax on owner-occupied homes ......... ............ ............ ................ ................ ................ ................ ................ ................ 21,260 15,540 12,620 12,590 12,580 22,440 27,770 88,000 

59 Deferral of income from installment 

sales .................................................. 310 310 310 320 320 320 330 1,600 880 900 920 930 1,050 1,180 1,320 5,400 

60 Capital gains exclusion on home sales ............ ............ ................ ................ ................ ................ ................ ................ 35,270 37,030 38,890 40,830 42,870 45,010 47,270 214,870 

61 Exclusion of net imputed rental income ............ ............ ................ ................ ................ ................ ................ ................ 28,780 32,110 35,680 39,440 43,596 48,190 53,269 220,176 

62 Exception from passive loss rules for 

$25,000 of rental loss ....................... ............ ............ ................ ................ ................ ................ ................ ................ 6,590 7,150 7,520 7,790 7,990 8,150 8,300 39,750 

63 Credit for low-income housing investments ................................................. 3,980 4,200 4,440 4,730 5,010 5,280 5,550 25,010 440 460 500 520 560 590 620 2,790 

64 Accelerated depreciation on rental 

housing (normal tax method) ........... 640 680 720 770 820 870 930 4,110 9,700 10,560 11,580 12,710 13,740 14,920 16,260 69,210 

Commerce: 

65 Cancellation of indebtedness ................ ............ ............ ................ ................ ................ ................ ................ ................ 90 100 90 60 30 30 30 240 

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

67 Capital gains (except agriculture, timber, iron ore, and coal) .................... ............ ............ ................ ................ ................ ................ ................ ................ 48,610 51,770 51,960 52,230 55,400 53,870 38,420 251,880 

68 Capital gains exclusion of small corporation stock ................................... ............ ............ ................ ................ ................ ................ ................ ................ 240 270 320 340 370 490 540 2,060 

69 Step-up basis of capital gains at death ............ ............ ................ ................ ................ ................ ................ ................ 29,600 32,600 35,900 36,750 37,950 39,450 41,010 191,060 

70 Carryover basis of capital gains on 

gifts .................................................... ............ ............ ................ ................ ................ ................ ................ ................ 590 650 760 800 1,270 6,340 1,500 10,670 

71 Ordinary income treatment of loss from 

small business corporation stock 

sale .................................................... ............ ............ ................ ................ ................ ................ ................ ................ 50 50 50 50 60 60 60 280 

72 Accelerated depreciation of buildings 

other than rental housing (normal 

tax method) ....................................... 230 290 450 680 910 1,170 1,440 4,650 –1,200 –1,030 –760 –420 –40 380 840 ................

73 Accelerated depreciation of machinery 

and equipment (normal tax method) 23,730 34,650 44,780 55,310 62,620 68,490 74,110 305,310 12,740 16,380 19,890 23,080 22,630 24,140 26,740 116,480 

74 Expensing of certain small investments 

(normal tax method) ......................... 1,150 1,130 1,070 890 –800 –360 –70 730 3,850 4,200 4,260 3,850 –290 440 920 9,180 

75 Graduated corporation income tax rate 

(normal tax method) ......................... 4,050 4,270 4,240 4,320 4,420 4,530 4,690 22,200 ................ ................ ................ ................ ................ ................ ................ ................

76 Exclusion of interest on small issue 

bonds ................................................. 120 140 140 150 150 160 160 760 390 440 460 480 490 510 520 2,460 

77 Deduction for US production activities 8,180 8,690 11,380 12,000 16,220 19,100 19,770 78,470 1,770 2,010 2,430 2,500 3,330 4,790 5,590 18,640 

78 Special rules for certain film and TV 

production .......................................... 90 70 60 –30 –70 –50 –40 –130 20 20 10 –10 –20 –10 –10 –40 

Transportation: 

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

80 Exclusion of reimbursed employee parking expenses ......................................... ............ ............ ................ ................ ................ ................ ................ ................ 2,740 2,890 3,040 3,190 3,350 3,430 3,540 16,550 

81 Exclusion for employer-provided transit 

passes ................................................... ............ ............ ................ ................ ................ ................ ................ ................ 560 630 710 790 880 960 1,030 4,370 

82 Tax credit for certain expenditures for 

maintaining railroad tracks .................... 140 160 130 60 30 10 10 240 ................ ................ ................ ................ ................ ................ ................ ................

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

transfer facilities .................................... 10 15 20 25 25 25 25 120 15 35 55 70 70 75 75 345 

Community and regional development: 

84 Investment credit for rehabilitation of 

structures (other than historic) .............. 20 20 20 20 20 20 20 100 20 20 20 20 20 20 20 100 
19. TAX EXPENDITURES 293 

Table 19–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL INCOME TAXES—Continued 

(in millions of dollars) 

Corporations Individuals 

2006 2007 2008 2009 2010 2011 2012 2008–12 2006 2007 2008 2009 2010 2011 2012 2008–12 

85 Exclusion of interest for airport, dock, and 

similar bonds ......................................... 270 300 310 320 330 340 350 1,650 860 950 1,010 1,040 1,070 1,100 1,130 5,350 

86 Exemption of certain mutuals’ and cooperatives’ income ................................ 80 80 80 80 80 90 90 420 ................ ................ ................ ................ ................ ................ ................ ................

87 Empowerment zones and renewal communities ................................................. 310 340 370 420 190 60 90 1,130 900 1,000 1,110 1,320 940 360 480 4,210 

88 New markets tax credit ............................. 150 210 250 240 210 180 140 1,020 440 600 740 730 650 550 450 3,120 

89 Expensing of environmental remediation 

costs ...................................................... 120 250 110 –30 –20 –20 –30 10 30 50 20 –10 ................ ................ ................ 10 

90 Credit to holders of Gulf Tax Credit 

Bonds ..................................................... ............ ............ ................ ................ ................ ................ ................ ................ 10 10 10 10 10 10 10 50 

Education, training, employment, and social services: 

Education: 

91 Exclusion of scholarship and fellowship 

income (normal tax method) ............ ............ ............ ................ ................ ................ ................ ................ ................ 1,780 1,870 1,960 2,050 2,150 2,250 2,360 10,770 

92 HOPE tax credit .................................... ............ ............ ................ ................ ................ ................ ................ ................ 3,900 3,330 3,350 3,600 3,710 4,350 4,730 19,740 

93 Lifetime Learning tax credit .................. ............ ............ ................ ................ ................ ................ ................ ................ 2,490 2,190 2,200 2,310 2,390 2,780 3,020 12,700 

94 Education Individual Retirement Accounts ................................................ ............ ............ ................ ................ ................ ................ ................ ................ 10 10 10 20 20 20 30 100 

95 Deductibility of student-loan interest .... ............ ............ ................ ................ ................ ................ ................ ................ 800 810 820 830 840 780 530 3,800 

96 Deduction for higher education expenses ............................................... ............ ............ ................ ................ ................ ................ ................ ................ 1,420 1,450 1,180 ................ ................ ................ ................ 1,180 

97 State prepaid tuition plans .................... ............ ............ ................ ................ ................ ................ ................ ................ 690 830 1,000 1,210 1,470 1,820 2,000 7,500 

98 Exclusion of interest on student-loan 

bonds ................................................. 120 130 140 140 150 150 160 740 380 420 450 460 480 490 510 2,390 

99 Exclusion of interest on bonds for private nonprofit educational facilities .. 510 570 600 620 640 660 680 3,200 1630 1810 1930 1990 2050 2110 2170 10,250 

100 Credit for holders of zone academy 

bonds ................................................. 130 140 160 170 170 170 160 830 ................ ................ ................ ................ ................ ................ ................ ................

101 Exclusion of interest on savings bonds 

redeemed to finance educational expenses ............................................... ............ ............ ................ ................ ................ ................ ................ ................ ................ 20 20 20 20 20 20 100 

102 Parental personal exemption for students age 19 or over ....................... ............ ............ ................ ................ ................ ................ ................ ................ 4,030 2,500 1,590 1,480 1,410 2,620 3,040 10,140 

103 Deductibility of charitable contributions 

(education) ........................................ 570 600 630 670 710 750 790 3,550 3,630 3,950 4,490 4,850 5,190 5,570 5,980 26,080 

104 Exclusion of employer-provided educational assistance ........................... ............ ............ ................ ................ ................ ................ ................ ................ 590 620 660 690 720 40 ................ 2,110 

105 Special deduction for teacher expenses ............................................... ............ ............ ................ ................ ................ ................ ................ ................ 160 170 160 ................ ................ ................ ................ 160 

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

Training, employment, and social services: 

107 Work opportunity tax credit ................... 180 320 340 220 120 60 30 770 30 40 30 30 20 10 10 100 

108 Welfare-to-work tax credit ..................... 70 70 60 40 20 10 10 140 10 10 20 10 ................ ................ ................ 30 

109 Employer provided child care exclusion ............ ............ ................ ................ ................ ................ ................ ................ 660 890 1030 1080 1140 1160 1210 5,620 

110 Employer-provided child care credit ..... 10 10 10 20 20 10 ................ 60 ................ ................ ................ ................ ................ ................ ................ ................

111 Assistance for adopted foster children ............ ............ ................ ................ ................ ................ ................ ................ 320 350 400 440 480 530 570 2,420 

112 Adoption credit and exclusion .............. ............ ............ ................ ................ ................ ................ ................ ................ 540 560 570 580 600 540 170 2,460 

113 Exclusion of employee meals and 

lodging (other than military) ............. ............ ............ ................ ................ ................ ................ ................ ................ 890 930 970 1,010 1,060 1,110 1,170 5,320 

114 Child credit 2 .......................................... ............ ............ ................ ................ ................ ................ ................ ................ 30,377 32,556 32,341 32,096 31,909 24,719 13,601 134,666 

115 Credit for child and dependent care 

expenses ........................................... ............ ............ ................ ................ ................ ................ ................ ................ 3,190 2,810 1,740 1,650 1,570 1,500 1,430 7,890 

116 Credit for disabled access expenditures .................................................. 10 10 10 10 10 10 10 50 10 20 20 20 20 20 20 100 

117 Deductibility of charitable contributions, 

other than education and health ...... 1,300 1,370 1,440 1,510 1,580 1,650 1720 7,900 35,820 39,030 44,320 47,850 51,260 54,960 59,020 257,410 

118 Exclusion of certain foster care payments ................................................. ............ ............ ................ ................ ................ ................ ................ ................ 440 450 460 470 480 490 500 2,400 

119 Exclusion of parsonage allowances ..... ............ ............ ................ ................ ................ ................ ................ ................ 480 510 550 580 610 640 670 3,050 

120 Employee retention credit for employers affected by Hurricane Katrina, 

Rita, and Wilma ................................ ............ 40 ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................

Health: 

121 Exclusion of employer contributions for 

medical insurance premiums and medical care ................................................. ............ ............ ................ ................ ................ ................ ................ ................ 125,000 141,270 160,190 179,580 200,510 221,880 243,820 1,005,980 

122 Self-employed medical insurance premiums .................................................... ............ ............ ................ ................ ................ ................ ................ ................ 3,970 4,370 3,730 4,180 4,670 5,230 5,810 23,620 

123 Medical Savings Accounts / Health Savings Accounts ........................................ ............ ............ ................ ................ ................ ................ ................ ................ 280 990 1,980 2,600 2,830 2,910 2,850 13,170 

124 Deductibility of medical expenses ............. ............ ............ ................ ................ ................ ................ ................ ................ 3,770 4,240 4,920 5,820 6,840 9,250 10,780 37,610 

125 Exclusion of interest on hospital construction bonds .............................................. 820 900 950 980 1,010 1,040 1,070 5,050 2,600 2,870 3,060 3,150 3,250 3,340 3,440 16,240 

126 Deductibility of charitable contributions 

(health) ................................................... 170 180 190 200 210 220 230 1,050 4,020 4,380 4,970 5,370 5,750 6,160 6,620 28,870 

127 Tax credit for orphan drug research ........ 230 260 290 320 360 410 460 1,840 ................ ................ ................ ................ ................ ................ ................ ................

128 Special Blue Cross/Blue Shield deduction 620 680 740 610 660 690 740 3,440 ................ ................ ................ ................ ................ ................ ................ ................

129 Tax credit for health insurance purchased 

by certain displaced and retired individuals 3 ...................................................... ............ ............ ................ ................ ................ ................ ................ ................ ................ 10 10 10 10 10 10 50 
294 ANALYTICAL PERSPECTIVES 

Table 19–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL INCOME TAXES—Continued 

(in millions of dollars) 

Corporations Individuals 

2006 2007 2008 2009 2010 2011 2012 2008–12 2006 2007 2008 2009 2010 2011 2012 2008–12 

130 Distributions from retirement plans for 

premiums for health and long-term 

care insurance ....................................... ............ ............ ................ ................ ................ ................ ................ ................ ................ 250 240 280 310 340 380 1,550 

Income security: 

131 Exclusion of railroad retirement system 

benefits .................................................. ............ ............ ................ ................ ................ ................ ................ ................ 390 380 380 380 370 360 350 1,840 

132 Exclusion of workers’ compensation benefits ........................................................ ............ ............ ................ ................ ................ ................ ................ ................ 5,660 5,740 5,830 5,920 6,010 6,110 6,200 30,070 

133 Exclusion of public assistance benefits 

(normal tax method) .............................. ............ ............ ................ ................ ................ ................ ................ ................ 450 470 490 510 530 550 580 2,660 

134 Exclusion of special benefits for disabled 

coal miners ............................................ ............ ............ ................ ................ ................ ................ ................ ................ 50 50 40 40 40 40 40 200 

135 Exclusion of military disability pensions ... ............ ............ ................ ................ ................ ................ ................ ................ 110 110 120 130 130 140 150 670 

Net exclusion of pension contributions 

and earnings: 

136 Employer plans ..................................... ............ ............ ................ ................ ................ ................ ................ ................ 49,040 49,510 48,480 48,030 46,350 43,700 42,790 229,350 

137 401(k) plans .......................................... ............ ............ ................ ................ ................ ................ ................ ................ 40,760 42,410 43,970 45,980 48,550 54,230 57,690 250,420 

138 Individual Retirement Accounts ............ ............ ............ ................ ................ ................ ................ ................ ................ 3,970 5,700 6,650 7,130 7,200 7,460 7,840 36,280 

139 Low and moderate income savers 

credit .................................................. ............ ............ ................ ................ ................ ................ ................ ................ 700 690 670 630 610 590 580 3,080 

140 Keogh plans .......................................... ............ ............ ................ ................ ................ ................ ................ ................ 10,130 10,860 11,890 13,010 14,230 15,550 16,970 71,650 

Exclusion of other employee benefits: 

141 Premiums on group term life insurance ............ ............ ................ ................ ................ ................ ................ ................ 2280 2310 2350 2380 2420 2450 2490 12,090 

142 Premiums on accident and disability insurance .............................................. ............ ............ ................ ................ ................ ................ ................ ................ 290 300 310 320 330 340 350 1,650 

143 Income of trusts to finance supplementary 

unemployment benefits ......................... ............ ............ ................ ................ ................ ................ ................ ................ 20 30 30 30 40 40 50 190 

144 Special ESOP rules ................................... 1420 1540 1660 1780 1940 2100 2280 9,760 340 350 370 390 390 390 390 1,930 

145 Additional deduction for the blind ............. ............ ............ ................ ................ ................ ................ ................ ................ 40 40 40 40 40 50 60 230 

146 Additional deduction for the elderly .......... ............ ............ ................ ................ ................ ................ ................ ................ 1,920 1,830 1,830 1,910 2,010 2,890 3,480 12,120 

147 Tax credit for the elderly and disabled .... ............ ............ ................ ................ ................ ................ ................ ................ 20 10 10 10 10 10 10 50 

148 Deductibility of casualty losses ................. ............ ............ ................ ................ ................ ................ ................ ................ 260 280 300 310 320 350 370 1,650 

149 Earned income tax credit 4 ........................ ............ ............ ................ ................ ................ ................ ................ ................ 5,050 5,360 5,340 5,490 5,660 5,890 7,900 30,280 

150 Additional exemption for housing Hurricane Katrina displaced individuals ....... ............ ............ ................ ................ ................ ................ ................ ................ 110 20 ................ ................ ................ ................ ................ ................

Social Security: 

Exclusion of Social Security benefits: 

151 Social Security benefits for retired 

workers .............................................. ............ ............ ................ ................ ................ ................ ................ ................ 17,890 18,100 18,930 19,110 20,230 21,320 23,260 102,850 

152 Social Security benefits for disabled .... ............ ............ ................ ................ ................ ................ ................ ................ 4,730 5,120 5,620 5,890 6,240 6,690 7,220 31,660 

153 Social Security benefits for dependents 

and survivors .................................... ............ ............ ................ ................ ................ ................ ................ ................ 3,360 3,340 3,400 3,330 3,420 3,490 3,700 17,340 

Veterans benefits and services: 

154 Exclusion of veterans death benefits and 

disability compensation ......................... ............ ............ ................ ................ ................ ................ ................ ................ 3,580 3,770 3,890 4,030 4,200 4,590 5,030 21,740 

155 Exclusion of veterans pensions ................ ............ ............ ................ ................ ................ ................ ................ ................ 150 180 180 180 190 200 230 980 

156 Exclusion of GI bill benefits ...................... ............ ............ ................ ................ ................ ................ ................ ................ 210 260 280 300 320 360 420 1,680 

157 Exclusion of interest on veterans housing 

bonds ..................................................... 10 10 10 10 10 10 10 50 30 30 30 40 40 40 40 190 

General purpose fiscal assistance: 

158 Exclusion of interest on public purpose 

State and local bonds ........................... 7,230 8,000 8,460 8,710 8,970 9,240 9,520 44,900 15,750 17,430 18,690 19,250 19,830 20,430 21,040 99,240 

159 Deductibility of nonbusiness State and 

local taxes other than on owner-occupied homes ............................................ ............ ............ ................ ................ ................ ................ ................ ................ 43,120 33,680 27,900 27,790 28,570 48,560 59,850 192,670 

160 Tax credit for corporations receiving income from doing business in U.S. possessions ................................................. 200 20 ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................ ................

Interest: 

161 Deferral of interest on U.S. savings 

bonds ..................................................... ............ ............ ................ ................ ................ ................ ................ ................ 1,260 1,330 1,340 1,360 1,370 1,420 1,520 7,010 

Addendum: Aid to State and local governments: 

Deductibility of: 

Property taxes on owner-occupied 

homes ................................................ ............ ............ ................ ................ ................ ................ ................ ................ 21,260 15,540 12,620 12,590 12,580 22,440 27,770 88,000 

Nonbusiness State and local taxes 

other than on owner-occupied 

homes ................................................ ............ ............ ................ ................ ................ ................ ................ ................ 43,120 33,680 27,900 27,790 28,570 48,560 59,850 192,670 

Exclusion of interest on State and local 

bonds for: 

Public purposes ..................................... 7,230 8,000 8,460 8,710 8,970 9,240 9,520 44,900 15,750 17,430 18,690 19,250 19,830 20,430 21,040 99,240 

Energy facilities ..................................... 10 10 10 10 10 10 10 50 30 30 40 40 40 40 40 200 

Water, sewage, and hazardous waste 

disposal facilities ............................... 120 140 140 150 150 160 160 760 390 440 460 480 490 510 520 2,460 

Small-issues .......................................... 120 140 140 150 150 160 160 760 390 440 460 480 490 510 520 2,460 

Owner-occupied mortgage subsidies ... 280 310 330 340 350 360 370 1,750 890 990 1,060 1,090 1,120 1,150 1,190 5,610 

Rental housing ...................................... 230 260 270 280 290 300 310 1,450 740 830 880 900 930 960 990 4,660 

Airports, docks, and similar facilities .... 270 300 310 320 330 340 350 1,650 860 950 1,010 1,040 1,070 1,100 1,130 5,350 

Student loans ........................................ 120 130 140 140 150 150 160 740 380 420 450 460 480 490 510 2,390 

Private nonprofit educational facilities .. 510 570 600 620 640 660 680 3,200 1,630 1,810 1,930 1,990 2,050 2,110 2,170 10,250 

Hospital construction ............................. 820 900 950 980 1010 1040 1070 5,050 2,600 2,870 3,060 3,150 3,250 3,340 3,440 16,240 

Veterans’ housing ................................. 10 10 10 10 10 10 10 50 30 30 30 40 40 40 40 190 
19. TAX EXPENDITURES 295 

Table 19–2. ESTIMATES OF TAX EXPENDITURES FOR THE CORPORATE AND INDIVIDUAL INCOME TAXES—Continued 

(in millions of dollars) 

Corporations Individuals 

2006 2007 2008 2009 2010 2011 2012 2008–12 2006 2007 2008 2009 2010 2011 2012 2008–12 

Credit for holders of zone academy bonds .. 130 140 160 170 170 170 160 830 ................ ................ ................ ................ ................ ................ ................ ................

1 In addition, the alcohol fuel credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2006 $2,570; 2007 $2,990; 2008 $3,460; 2009 $4,280; 2010 $4,990; 2011 

$1,440; 0 in 2012. 2 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: 2006 $15,473; 2007 $14,931; 2008 $14,367; 

2009 $14,019; 2010 $13,651; 2011 $13,410; and 2012 $1,275. 3 The figures in the table indicate the effect of the health insurance tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2006 $90; 2007 $100; 2008 

$110; 2009 $120; 2010 $130; 2011 $140; and 2012 $150. 4 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: 2006 $36,166;2007 $36,461; 2008 

$37,573; 2009 $38,237; 2010 $38,994; 2011 $40,289; and 2012 $36,982. 

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

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

Tax Expenditure Baselines 

A tax expenditure is an exception to baseline provisions of the tax structure that usually results in a 

reduction in the amount of tax owed. The 1974 Congressional Budget Act, which mandated the tax expenditure 

budget, did not specify the baseline provisions of the 

tax law. As noted previously, deciding whether provisions are exceptions, therefore, is a matter of judgment. 

As in prior years, most of this year’s tax expenditure 

estimates are presented using two baselines: the normal 

tax baseline and the reference tax law baseline. An 

exception is provided for the lower tax rate on dividends 

and capital gains on corporate shares as discussed 

below. 

The normal tax baseline is 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. 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. 

In the case of income taxes, the reference tax law 

baseline is also patterned on a comprehensive income 

tax, but it is closer to existing law. Tax expenditures 

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, neither the deferral of tax on unrealized capital gains nor the tax exclusion of imputed income (such as the rental value of owneroccupied housing or farmers’ consumption of their 

own produce) are regarded as tax expenditures. 

Both accrued and imputed income would be taxed 

under a comprehensive income tax. 

• A comprehensive income tax would generally not 

exclude from the tax base amounts for personal 

exemptions or a standard deduction, except perhaps to ease tax administration. 

• A separate corporate income tax is not part of 

a comprehensive income tax. 

• Tax rates vary by level of income. Multiple tax 

rates exist as a means to facilitate the redistribution of income. 

• Tax rates 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 price level during the time 

the assets or debt are held. Thus, under a comprehensive income tax baseline, the failure to take 

account of inflation in measuring depreciation, 

capital gains, and interest income would be regarded as a negative tax expenditure (i.e., a tax 

penalty), and failure to take account of inflation 

in measuring interest costs would be regarded as 

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

Although the reference law and normal tax baselines 

are generally similar, areas of difference include: 

Tax rates. The separate schedules applying to the 

various taxpaying units are included in the reference 

law baseline. Thus, corporate tax rates below the maximum statutory rate do not give rise to a tax expenditure. The normal tax baseline is similar, except that, 

by convention, it specifies the current maximum rate 

as the baseline for the corporate income tax. The lower 

tax rates applied to the first $10 million of corporate 

income are thus regarded as a tax expenditure. Again, 

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. The Federal income tax defines gross income 

to include: (1) consideration received in the exchange 

of goods and services, including labor services or property; and (2) the taxpayer’s share of gross or net income 

earned and/or reported by another entity (such as a 

partnership). Under the reference tax rules, therefore, 

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 which can be thought of as gifts from the 
296 ANALYTICAL PERSPECTIVES 

3Gross income does, however, include transfer payments associated with past employment, 

such as Social Security benefits. 4 In the case of individuals who hold ‘‘passive’’ equity interests in businesses, however, 

the pro-rata shares of sales and expense deductions reportable in a year are limited. A 

passive business activity is defined 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. 

Government. 3 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. 4

Capital recovery. Under the reference tax law baseline no tax expenditures arise from accelerated depreciation. Under the normal tax baseline, the depreciation 

allowance for property is computed using estimates of 

economic depreciation. The latter represents a change 

in the calculation of the tax expenditure under normal 

law first made in the 2004 Budget. Appendix A provides 

further details on the new methodology and how it 

differs from the prior methodology. 

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. 

In addition to these areas of difference, the Joint 

Committee on Taxation considers a somewhat broader 

set of tax expenditures under its normal tax baseline 

than is considered here. 

Table 19–3. INCOME TAX EXPENDITURES RANKED BY TOTAL 2008–2012 PROJECTED REVENUE EFFECT 

(in millions of dollars) 

Provision 2008 2008–12 

121 Exclusion of employer contributions for medical insurance premiums and medical care ................................................. 160,190 1,005,980 

57 Deductibility of mortgage interest on owner-occupied homes ............................................................................................ 89,430 520,260 

73 Accelerated depreciation of machinery and equipment (normal tax method) ................................................................... 64,670 421,790 

117 Deductibility of charitable contributions, other than education and health ......................................................................... 45,760 265,310 

67 Capital gains (except agriculture, timber, iron ore, and coal) ............................................................................................ 51,960 251,880 

137 401(k) plans .......................................................................................................................................................................... 43,970 250,420 

136 Employer plans ..................................................................................................................................................................... 48,480 229,350 

61 Exclusion of net imputed rental income .............................................................................................................................. 35,680 220,176 

60 Capital gains exclusion on home sales ............................................................................................................................... 38,890 214,870 

159 Deductibility of nonbusiness State and local taxes other than on owner-occupied homes .............................................. 27,900 192,670 

69 Step-up basis of capital gains at death .............................................................................................................................. 35,900 191,060 

158 Exclusion of interest on public purpose State and local bonds ......................................................................................... 27,150 144,140 

50 Exclusion of interest on life insurance savings ................................................................................................................... 21,925 137,005 

114 Child tax credit ..................................................................................................................................................................... 32,341 134,666 

151 Social Security benefits for retired workers ......................................................................................................................... 18,930 102,850 

77 Deduction for U.S. production activities .............................................................................................................................. 13,810 97,110 

58 Deductibility of State and local property tax on owner-occupied homes ........................................................................... 12,620 88,000 

6 Deferral of income from controlled foreign corporations (normal tax method) .................................................................. 12,770 73,350 

64 Accelerated depreciation on rental housing (normal tax method) ...................................................................................... 12,300 73,320 

140 Keogh plans .......................................................................................................................................................................... 11,890 71,650 

62 Exception from passive loss rules for $25,000 of rental loss ............................................................................................ 7,520 39,750 

124 Deductibility of medical expenses ........................................................................................................................................ 4,920 37,610 

138 Individual Retirement Accounts ............................................................................................................................................ 6,650 36,280 

152 Social Security benefits for disabled ................................................................................................................................... 5,620 31,660 

149 Earned income tax credit ..................................................................................................................................................... 5,340 30,280 

132 Exclusion of workers’ compensation benefits ...................................................................................................................... 5,830 30,070 

126 Deductibility of charitable contributions (health) .................................................................................................................. 5,160 29,920 

103 Deductibility of charitable contributions (education) ............................................................................................................ 5,120 29,630 

63 Credit for low-income housing investments ......................................................................................................................... 4,940 27,800 

8 Expensing of research and experimentation expenditures (normal tax method) .............................................................. 5,280 26,600 

122 Self-employed medical insurance premiums ....................................................................................................................... 3,730 23,620 

75 Graduated corporation income tax rate (normal tax method) ............................................................................................ 4,240 22,200 

154 Exclusion of veterans death benefits and disability compensation .................................................................................... 3,890 21,740 

125 Exclusion of interest on hospital construction bonds .......................................................................................................... 4,010 21,290 

92 HOPE tax credit ................................................................................................................................................................... 3,350 19,740 
19. TAX EXPENDITURES 297 

Table 19–3. INCOME TAX EXPENDITURES RANKED BY TOTAL 2008–2012 PROJECTED REVENUE EFFECT—Continued 

(in millions of dollars) 

Provision 2008 2008–12 

1 Exclusion of benefits and allowances to armed forces personnel ..................................................................................... 3,350 18,160 

153 Social Security benefits for dependents and survivors ....................................................................................................... 3,400 17,340 

80 Exclusion of reimbursed employee parking expenses ........................................................................................................ 3,040 16,550 

2 Exclusion of income earned abroad by U.S. citizens ......................................................................................................... 2,760 15,270 

99 Exclusion of interest on bonds for private nonprofit educational facilities ......................................................................... 2,530 13,450 

123 Medical Savings Accounts / Health Savings Accounts ...................................................................................................... 1,980 13,170 

93 Lifetime Learning tax credit .................................................................................................................................................. 2,200 12,700 

5 Inventory property sales source rules exception ................................................................................................................. 2,120 12,577 

146 Additional deduction for the elderly ..................................................................................................................................... 1,830 12,120 

141 Premiums on group term life insurance .............................................................................................................................. 2,350 12,090 

144 Special ESOP rules .............................................................................................................................................................. 2,030 11,690 

91 Exclusion of scholarship and fellowship income (normal tax method) .............................................................................. 1,960 10,770 

70 Carryover basis of capital gains on gifts ............................................................................................................................. 760 10,670 

102 Parental personal exemption for students age 19 or over ................................................................................................. 1,590 10,140 

74 Expensing of certain small investments (normal tax method) ............................................................................................ 5,330 9,910 

54 Exclusion of interest spread of financial institutions ........................................................................................................... 1,400 8,430 

9 Credit for increasing research activities .............................................................................................................................. 4,960 8,410 

48 Exemption of credit union income ....................................................................................................................................... 1,480 8,310 

115 Credit for child and dependent care expenses ................................................................................................................... 1,740 7,890 

97 State prepaid tuition plans ................................................................................................................................................... 1,000 7,500 

55 Exclusion of interest on owner-occupied mortgage subsidy bonds ................................................................................... 1,390 7,360 

161 Deferral of interest on U.S. savings bonds ......................................................................................................................... 1,340 7,010 

59 Deferral of income from installment sales ........................................................................................................................... 1,230 7,000 

85 Exclusion of interest for airport, dock, and similar bonds .................................................................................................. 1,320 7,000 

56 Exclusion of interest on rental housing bonds .................................................................................................................... 1,150 6,110 

109 Employer provided child care exclusion .............................................................................................................................. 1,030 5,620 

16 New technology credit .......................................................................................................................................................... 960 5,530 

87 Empowerment zones, Enterprise communities, and Renewal communities ...................................................................... 1,480 5,340 

113 Exclusion of employee meals and lodging (other than military) ........................................................................................ 970 5,320 

3 Exclusion of certain allowances for Federal employees abroad ........................................................................................ 880 4,860 

72 Accelerated depreciation of buildings other than rental housing (normal tax method) ..................................................... –310 4,650 

44 Capital gains treatment of certain income .......................................................................................................................... 950 4,590 

81 Exclusion for employer-provided transit passes .................................................................................................................. 710 4,370 

88 New markets tax credit ........................................................................................................................................................ 990 4,140 

11 Excess of percentage over cost depletion, fuels ................................................................................................................ 790 3,860 

95 Deductibility of student-loan interest .................................................................................................................................... 820 3,800 

7 Deferred taxes for financial firms on certain income earned overseas ............................................................................. 2,490 3,550 

128 Special Blue Cross/Blue Shield deduction .......................................................................................................................... 740 3,440 

35 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities .......................................................... 600 3,220 

76 Exclusion of interest on small issue bonds ......................................................................................................................... 600 3,220 

98 Exclusion of interest on student-loan bonds ....................................................................................................................... 590 3,130 

139 Low and moderate income savers credit ............................................................................................................................ 670 3,080 

119 Exclusion of parsonage allowances ..................................................................................................................................... 550 3,050 

10 Expensing of exploration and development costs, fuels .................................................................................................... 840 2,910 

133 Exclusion of public assistance benefits (normal tax method) ............................................................................................ 490 2,660 

34 Excess of percentage over cost depletion, nonfuel minerals ............................................................................................. 490 2,650 

112 Adoption credit and exclusion .............................................................................................................................................. 570 2,460 

111 Assistance for adopted foster children ................................................................................................................................ 400 2,420 

118 Exclusion of certain foster care payments .......................................................................................................................... 460 2,400 

38 Tax incentives for preservation of historic structures ......................................................................................................... 430 2,350 

104 Exclusion of employer-provided educational assistance ..................................................................................................... 660 2,110 

68 Capital gains exclusion of small corporation stock ............................................................................................................. 320 2,060 

127 Tax credit for orphan drug research .................................................................................................................................... 290 1,840 

131 Exclusion of railroad retirement system benefits ................................................................................................................ 380 1,840 

37 Expensing of multiperiod timber growing costs ................................................................................................................... 320 1,730 

156 Exclusion of GI bill benefits ................................................................................................................................................. 280 1,680 

142 Premiums on accident and disability insurance .................................................................................................................. 310 1,650 

148 Deductibility of casualty losses ............................................................................................................................................ 300 1,650 

130 Distributions from retirement plans for premiums for health and long-term care insurance ............................................. 240 1,550 

52 Tax exemption of certain insurance companies owned by tax-exempt organizations ...................................................... 240 1,300 

96 Deduction for higher education expenses ........................................................................................................................... 1,180 1,180 

155 Exclusion of veterans pensions ........................................................................................................................................... 180 980 

107 Work opportunity tax credit .................................................................................................................................................. 370 870 

14 Capital gains treatment of royalties on coal ....................................................................................................................... 170 840 

36 Capital gains treatment of certain timber income ............................................................................................................... 170 840 

100 Credit for holders of zone academy bonds ......................................................................................................................... 160 830 

12 Alternative fuel production credit ......................................................................................................................................... 780 800 

23 Temporary 50% expensing for equipment used in the refining of liquid fuels .................................................................. 120 750 
298 ANALYTICAL PERSPECTIVES 

Table 19–3. INCOME TAX EXPENDITURES RANKED BY TOTAL 2008–2012 PROJECTED REVENUE EFFECT—Continued 

(in millions of dollars) 

Provision 2008 2008–12 

41 Expensing of certain capital outlays .................................................................................................................................... 130 710 

22 Credit for investment in clean coal facilities ....................................................................................................................... 50 690 

135 Exclusion of military disability pensions .............................................................................................................................. 120 670 

24 Natural gas distribution pipelines treated as 15–year property .......................................................................................... 90 630 

19 Exclusion of utility conservation subsidies .......................................................................................................................... 110 540 

20 Credit for holding clean renewable energy bonds .............................................................................................................. 80 480 

83 Exclusion of interest on bonds for Financing of Highway Projects and rail-truck transfer facilities ................................. 75 465 

42 Expensing of certain multiperiod production costs .............................................................................................................. 80 420 

86 Exemption of certain mutuals’ and cooperatives’ income .................................................................................................. 80 420 

45 Income averaging for farmers .............................................................................................................................................. 60 320 

53 Small life insurance company deduction ............................................................................................................................. 60 280 

71 Ordinary income treatment of loss from small business corporation stock sale ............................................................... 50 280 

26 Allowance of deduction for certain energy efficient commercial building property ............................................................ 170 270 

47 Bio-Diesel tax credit ............................................................................................................................................................. 200 270 

51 Special alternative tax on small property and casualty insurance companies .................................................................. 50 270 

15 Exclusion of interest on energy facility bonds .................................................................................................................... 50 250 

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

17 Alcohol fuel credits ............................................................................................................................................................... 60 240 

65 Cancellation of indebtedness ............................................................................................................................................... 90 240 

82 Tax credit for certain expenditures for maintaining railroad tracks .................................................................................... 130 240 

157 Exclusion of interest on veterans housing bonds ............................................................................................................... 40 240 

145 Additional deduction for the blind ........................................................................................................................................ 40 230 

25 Amortize all geological and geophysical expenditures over 2 years ................................................................................. 90 220 

84 Investment credit for rehabilitation of structures (other than historic) ................................................................................ 40 200 

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

143 Income of trusts to finance supplementary unemployment benefits .................................................................................. 30 190 

40 Exclusion of gain or loss on sale or exchange of certain brownfield sites ....................................................................... 30 180 

108 Welfare-to-work tax credit .................................................................................................................................................... 80 170 

105 Special deduction for teacher expenses ............................................................................................................................. 160 160 

13 Exception from passive loss limitation for working interests in oil and gas properties ..................................................... 30 150 

18 Tax credit and deduction for clean-fuel burning vehicles ................................................................................................... 150 150 

28 Credit for energy efficiency improvements to existing homes ............................................................................................ 150 150 

31 Credit for business installation of qualified fuel cells and stationary microturbine power plants ...................................... 130 150 

116 Credit for disabled access expenditures ............................................................................................................................. 30 150 

43 Treatment of loans forgiven for solvent farmers ................................................................................................................. 20 120 

39 Expensing of capital costs with respect to complying with EPA sulfur regulations .......................................................... 30 110 

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

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

94 Education Individual Retirement Accounts .......................................................................................................................... 10 100 

101 Exclusion of interest on savings bonds redeemed to finance educational expenses ....................................................... 20 100 

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

27 Credit for construction of new energy efficient homes ....................................................................................................... 30 60 

110 Employer-provided child care credit .................................................................................................................................... 10 60 

33 Expensing of exploration and development costs, nonfuel minerals ................................................................................. 10 50 

90 Credit to holders of Gulf Tax Credit Bonds ........................................................................................................................ 10 50 

129 Tax credit for health insurance purchased by certain displaced and retired individuals .................................................. 10 50 

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

49 Excess bad debt reserves of financial institutions .............................................................................................................. 10 30 

32 Partial expensing for advanced mine safety equipment ..................................................................................................... 20 20 

89 Expensing of environmental remediation costs ................................................................................................................... 130 20 

30 30% credit for residential purchases/installations of solar and fuel cells .......................................................................... 10 10 

4 Extraterritorial income exclusion .......................................................................................................................................... ............................ ............................

29 Credit for energy efficient appliances .................................................................................................................................. ............................ ............................

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

150 Additional exemption for housing Hurricane Katrina displaced individuals ........................................................................ ............................ ............................

160 Tax credit for corporations receiving income from doing business in U.S. possessions .................................................. ............................ ............................

78 Special rules for certain film and TV production ................................................................................................................ 70 –170 

21 Deferral of gain from dispositions of transmission property to implement FERC restructuring policy ............................. 230 –1,280 
19. TAX EXPENDITURES 299 

Table 19–4. PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR ACTIVITY IN 

CALENDAR YEAR 2006 

(in millions of dollars) 

Provision

2006 

Present Value 

of Revenue 

Loss 

1 Deferral of income from controlled foreign corporations (normal tax method) ................................................... 10,520 

2 Deferred taxes for financial firms on income earned overseas .......................................................................... 2,380 

3 Expensing of research and experimentation expenditures (normal tax method) ............................................... 2,690 

4 Expensing of exploration and development costs—fuels .................................................................................... 260 

5 Expensing of exploration and development costs—nonfuels .............................................................................. 10 

6 Expensing of multiperiod timber growing costs ................................................................................................... 160 

7 Expensing of certain multiperiod production costs—agriculture .......................................................................... 140 

8 Expensing of certain capital outlays—agriculture ................................................................................................ 180 

9 Deferral of income on life insurance and annuity contracts ................................................................................ 19,750 

10 Accelerated depreciation on rental housing ......................................................................................................... 16,240 

11 Accelerated depreciation of buildings other than rental ...................................................................................... 10,510 

12 Accelerated depreciation of machinery and equipment ....................................................................................... 68,430 

13 Expensing of certain small investments (normal tax method) ............................................................................ 860 

14 Deferral of tax on shipping companies ................................................................................................................ 20 

15 Credit for holders of zone academy bonds ......................................................................................................... 210 

16 Credit for low-income housing investments ......................................................................................................... 4,530 

17 Deferral for state prepaid tuition plans ................................................................................................................. 4,730 

18 Exclusion of pension contributions—employer plans ........................................................................................... 75,660 

19 Exclusion of 401(k) contributions .......................................................................................................................... 110,000 

20 Exclusion of IRA contributions and earnings ....................................................................................................... 4,100 

21 Exclusion of contributions and earnings for Keogh plans ................................................................................... 7,640 

22 Exclusion of interest on public-purpose bonds .................................................................................................... 20,420 

23 Exclusion of interest on non-public purpose bonds ............................................................................................. 6,900 

24 Deferral of interest on U.S. savings bonds .......................................................................................................... 420 

25 Exclusion of Roth earnings and distributions ....................................................................................................... 8,380 

26 Exclusion of non-deductible IRA earnings ........................................................................................................... 400 

Double Taxation of Corporate Profits 

In a gradual transition to a more economically neutral tax system under which all income is taxed no 

more than once, the lower tax rates on dividends and 

capital gains on corporate equity under current law 

have not been considered tax preferences since the 2005 

Budget. Thus, the difference between ordinary tax rates 

and the lower tax rates on dividends, introduced by 

the Jobs and Growth Tax Relief Reconciliation Act of 

2003 (JGTRRA), does not give rise to a tax expenditure. 

Similarly, the lower capital gains tax rates applied to 

gains realized from the disposition of corporate equity 

do not give rise to a tax expenditure. As a consequence, 

tax expenditure estimates for the lower tax rates on 

capital, step-up in basis, and the inside build-up on 

pension assets, 401k plans, IRAs, among others, are 

limited to capital gains from sources other than corporate equity. Appendix A provides a greater discussion 

of alternative baselines. 

Descriptions of Income Tax Provisions 

Descriptions of the individual and corporate income 

tax expenditures reported on in this chapter follow. 

These descriptions relate to current law as of December 

31, 2006, and do not reflect proposals made elsewhere 

in the Budget. Legislation enacted in 2006, such as 

the Tax Increase Prevention and Reconciliation Act of 

2005 (TIPRA), the Pension Protection Act of 2006 

(PPA), and the Tax Relief and Health Care Act of 2006 

(TRHCA) extended and expanded the scope of many 

existing provisions. 

TIPRA extended the 15 percent tax rate for dividends 

and capital gains through December 31, 2010, and the 

higher limit for certain investment that can be expensed through December 31, 2009. 

Provisions extended or expanded by the PPA include: 

• the low-income saver’s credit (made permanent) 

• Section 529 education savings provisions (made 

permanent) 

• the maximum contribution and benefit limits 

under qualified pension plans (made permanent) 

• the enhanced charitable deduction for food and 

book inventories 

• the indexation of the IRA contribution limits (and 

higher limits made permanent) 

• allowing for tax-free distributions from retirement 

plans for premiums for health and long-term care 

insurance for public safety officers 

• tax-free distributions from IRAs to public charities 

Provisions extended or expanded by the TRHCA include: 

• the deduction for tuition and teaching related expenses 

• the new markets tax credit 

• the deduction for State and local sales taxes 

• the research and experimentation tax credit 

• the work opportunity and welfare to work tax 

credits 

• qualified zone academy bonds 
300 ANALYTICAL PERSPECTIVES 

5The determination of whether a provision is a tax expenditure is made on the basis 

of a broad concept of ‘‘income’’ that is larger in scope than is ‘‘income’’ as defined under 

general U.S. income tax principles. For that reason, the tax expenditure estimates include, 

for example, estimates related to the exclusion of extraterritorial income, as well as other 

exclusions, notwithstanding that such exclusions define income under the general rule of 

U.S. income taxation. 

• expensing of remediation costs 

• charitable contributions of computers and scientific property 

• credit for clean renewable energy bonds 

• credits for construction of new energy efficient 

homes and commercial buildings 

• credits for alternative technologies 

• select empowerment zone incentives 

Chapter 17 on Federal Receipts has more detailed 

descriptions of the provisions of these three bills. 

National Defense 

1. Benefits and allowances to armed forces personnel.—The housing and meals provided military personnel, either in cash or in kind, as well as certain 

amounts of pay related to combat service, are excluded 

from income subject to tax. 

International Affairs 

2. Income earned abroad.—U.S. citizens who lived 

abroad, worked in the private sector, and satisfied a 

foreign residency requirement may exclude up to 

$80,000 in foreign earned income from U.S. taxes. In 

addition, if these taxpayers receive a specific allowance 

for foreign housing from their employers, then they may 

also exclude the value of that allowance. If they do 

not receive a specific allowance for housing expenses, 

they may deduct against their U.S. taxes that portion 

of such expenses that exceeds one-sixth the salary of 

a civil servant at grade GS–14, step 1 ($77,793 in 2006). 

3. Exclusion of certain allowances for Federal 

employees abroad.—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 like rent, education, 

and the cost of travel to and from the United States. 

4. Extraterritorial income exclusion5.—The exclusion for extraterritorial income was repealed by the 

American Jobs Creation Act of 2004. Under the transition rules, taxpayers retain 80 percent of ETI benefits 

for 2005, 60 percent of ETI benefits for 2006, and no 

ETI benefits thereafter. The exclusion for 

extraterritorial income remains in effect for certain 

transactions which occur pursuant to a binding contract 

entered into on or before September 17, 2003. 

5. Sales source rule exceptions.—The worldwide 

income of U.S. persons is taxable by the United States 

and a credit for foreign taxes paid is allowed. The 

amount of foreign taxes that can be credited is limited 

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

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. 

6. Income of U.S.-controlled foreign corporations.—The income of foreign corporations controlled 

by U.S. shareholders is not subject to U.S. taxation. 

The income becomes taxable only when the controlling 

U.S. shareholders receive dividends or other distributions from their foreign stockholding. Under the normal 

tax method, 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. 

7. Exceptions under subpart F for active financing income.—Financial firms can defer taxes on income earned overseas in an active business. Taxes on 

income earned through December 31, 2006 can be deferred. 

General Science, Space, and Technology 

8. 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. 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. 

9. R&E credit.—The research and experimentation 

(R&E) credit is 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 may also elect an alternative incremental credit regime. Under the alternative incremental credit regime the taxpayer is assigned a threetiered fixed-base percentage that is lower than the 

fixed-base percentage that would otherwise apply, and 

the credit rate is reduced (the rates range from 2.65 

percent to 3.75 percent). Beginning in 2007, the rates 

for the alternative incremental credit increases to a 

range of 3 percent to 5 percent. An alternative simplified credit is also allowed which is equal to 12 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the 

three preceding taxable years. A 20-percent credit with 

a separate threshold is provided for a taxpayer’s payments to universities for basic research. A 20-percent 

‘‘flat’’ credit with no threshold base amount is available 

for energy research expenditures paid to certain research consortia. The credit applies to research conducted before January 1, 2008 and extends to research 

conducted in Puerto Rico and the U.S. possessions. 
19. TAX EXPENDITURES 301 

Energy 

10. Exploration and development costs.—For successful investments in domestic oil and gas wells, intangible drilling costs (e.g., wages, the costs of using machinery for grading and drilling, the cost of 

unsalvageable materials used in constructing wells) 

may be expensed rather than amortized over the productive life of the property. 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. 

11. Percentage depletion.—Independent fuel mineral producers and royalty owners are generally allowed 

to take percentage depletion deductions rather than 

cost depletion on limited quantities of output. Under 

cost depletion, outlays are deducted over the productive 

life of the property based on the fraction of the resource 

extracted. Under percentage depletion, taxpayers deduct a percentage of gross income from mineral production at rates of 22 percent for uranium; 15 percent 

for oil, gas and oil shale; and 10 percent for coal. The 

deduction is limited to 50 percent of net income from 

the property, except for oil and gas where the deduction 

can be 100 percent of net property income. Production 

from geothermal deposits is eligible for percentage depletion at 65 percent of net income, but with no limit 

on output and no limitation with respect to qualified 

producers. Unlike depreciation or cost depletion, percentage depletion deductions can exceed the cost of the 

investment. 

12. Alternative fuel production credit.—A credit 

of $3 per oil-equivalent barrel of production (in 1979 

dollars) is provided for gas produced from biomass and 

liquid, gaseous, or solid synthetic fuels produced from 

coal. The credit is generally available if the price of 

oil stays below $29.50 (in 1979 dollars). The credit applies only to fuel (1) produced at a facility placed in 

service before July 1, 1998, and (2) sold before January 

1, 2008. A credit is also available for the production 

of coke or coke gas from a qualified facility. Qualified 

facilities must have been placed in service before January 1, 1993, or after June 30, 1998, and before January 

1, 2010. 

13. Oil and gas exception to passive loss limitation.—Owners of working interests in oil and gas properties are exempt from the ‘‘passive income’’ limitations. 

As a result, the working interest-holder, who manages 

on behalf of himself and all other owners the development of wells and incurs all the costs of their operation, 

may aggregate negative taxable income from such interests with his income from all other sources. 

14. Capital gains treatment of royalties on 

coal.—Sales of certain coal under royalty contracts can 

be treated as capital gains rather than ordinary income. 

15. Energy facility bonds.—Interest earned on 

State and local bonds used to finance construction of 

certain energy facilities is taxexempt. These bonds are 

generally subject to the State private-activity bond annual volume cap. 

16. New technology, refined coal, Indian coal 

and coke and coke gas credits.—A credit is provided 

equal to 10 percent of the basis of solar property (30 

percent for purchases beginning in 2006 through 2008) 

and 10 percent of the basis of geothermal property 

placed in service during the taxable year. A credit is 

also available 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. The credit 

rate in 2006 is 1.9 cents per kilowatt hour (0.9 cents 

per kilowatt hour for open-loop biomass, small irrigation power, municipal solid waste and qualified hydropower) and the rate is indexed in subsequent years. 

Another credit is available for refined coal. The credit 

rate in 2006 is $5.679 per ton and the rate is indexed 

in subsequent years. An additional credit is available 

for the production of Indian coal. The value of the credit 

is $1.50 per ton in 2006 and indexed for inflation in 

subsequent years. 

17. Alcohol fuel credits.—An income tax credit is 

provided for ethanol that is derived from renewable 

sources and used as fuel. The credit equals 51 cents 

per gallon through 2010. 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 10 cents per gallon credit. 

18. Credit and deduction for clean-fuel vehicles 

and property and alternative motor vehicle credits.—A tax credit of 10 percent (not to exceed $4,000) 

is provided for purchasers of electric vehicles. The credit is reduced by 75 percent for vehicles placed in service 

in 2006 and is not available for vehicles placed in service after December 31, 2006. No deduction is available 

to taxpayers for vehicles placed in service after December 31, 2005. The deduction for clean-fuel property is 

available for costs incurred before January 1, 2007. A 

taxpayer may claim a 30 percent credit for the cost 

of installing clean-fuel vehicle refueling property for 

property placed in service after December 31, 2005 and 

before January 1, 2008. The taxpayer may not claim 

deductions with respect to property for which the credit 

is claimed. A tax credit is also available for the purchase of hybrid vehicles, fuel cell vehicles, alternative 

fuel vehicles and advanced lean burn vehicles. The provision applies to vehicles placed in service after December 31, 2005, in the case of qualified fuel cell motor 

vehicles, before January 1, 2015; in the case of qualified 

hybrid motor vehicles that are automobiles and light 

trucks and in the case of advanced lean-burn technology 

vehicles, before January 1, 2011; in the case of qualified 

hybrid motor vehicles that are medium and heavy 

trucks, before January 1, 2010; and in the case of qualified alternative fuel motor vehicles, before January 1, 

2011. 

19. Exclusion of utility conservation subsidies.— 

Non-business customers can exclude from gross income 
302 ANALYTICAL PERSPECTIVES 

subsidies received from public utilities for expenditures 

on energy conservation measures. 

20. Credit to holders of clean renewable energy 

bonds.—This provision provides for up to $800 million 

in aggregate issuance of Clean Renewable Energy 

Bonds (CREBs) through December 31, 2008. Taxpayers 

holding CREBs on a credit allowance date are entitled 

to a tax credit in lieu of interest. 

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

policy.—Utilities that sell their transmission assets to 

a FERC-approved independent transmission company 

are allowed a longer recognition period for their gains 

from sale. Rather than paying tax on any gain from 

the sale in the year that the sale is completed, utilities 

will have 8 years to pay the tax on any gain from 

the sale. The rule expires at the end of 2007. 

22. Credit for investment in clean coal facilities.—Three investment tax credits for clean coal facilities are available: a 15 percent and 20 percent investment tax credit for clean coal facilities producing electricity; and a 20 percent credit for industrial gasification projects. Integrated gasification combined cycle 

(IGCC) projects get a 20 percent investment tax credit 

and other advanced coal-based projects that produce 

electricity get a 15 percent credit. The Secretary of 

the Treasury may allocate up to $800 million for IGCC 

projects and up to $500 million for other advanced coalbased technologies and up to $350 million for industrial 

gasification. 

23. Temporary 50 percent expensing for equipment used in the refining of liquid fuels.—Taxpayers may expense 50 percent of the cost of refinery 

investments which increase the capacity of an existing 

refinery by at least 5 percent or increase the throughput of qualified fuels by at least 25 percent. Qualified 

fuels include oil from shale and tar sands. Investments 

must be placed in service before January 1, 2012. 

24. Natural gas distribution pipelines treated as 

15-year property.—The depreciation period is shortened to 15 years for any gas distribution lines the original use of which occurred after April 11, 2004 and 

before January 1, 2011. The provision does not apply 

to any property which the taxpayer or a related party 

had entered into a binding contract for the construction 

thereof or self-constructed on or before April 11, 2005. 

25. Amortize all geological and geophysical expenditures over 2 years.—Geological and geophysical 

amounts incurred in connection with oil and gas exploration in the United States may be amortized over two 

years for non-integrated oil companies and five years 

for certain major integrated oil companies. In the case 

of abandoned property, any remaining basis may no 

longer be recovered in the year of abandonment of a 

property as all basis is recovered over the two-year 

amortization period. 

26. Allowance of deduction for certain energy efficient commercial building property.—A deduction 

for energy efficient commercial buildings that reduce 

annual energy and power consumption by 50 percent 

compared to the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) 

standard is allowed. The provision is effective for property placed in service after December 31, 2005 and 

prior to January 1, 2008. 

27. Credit for construction of new energy efficient homes.—A credit is available to eligible contractors for construction of a qualified new energy-efficient 

home. The credit applies to homes whose construction 

is substantially completed after December 31, 2005 and 

which are purchased after December 31, 2005 and prior 

to January 1, 2009. 

28. Credit for energy efficiency improvements to 

existing homes.—A 10 percent investment tax credit 

up to $500 is available for expenditures on insulation, 

exterior windows and doors that improve the energy 

efficiency of homes and meet certain standards. Credits 

for purchases of advanced main air circulating fans, 

natural gas, propane, or oil furnaces or hot water boilers, and other qualified energy efficient property are 

also available. Credit applies to property placed in service after December 31, 2005 and prior to January 1, 

2008. 

29. Credit for energy efficient appliances.—Tax 

credits for the manufacture of efficient dishwashers, 

clothes washers, and refrigerators are available. Credits 

vary depending on the efficiency of the unit. The provision is effective for appliances manufactured in 2006 

and 2007. 

30. Credit for residential purchases/installations 

of solar and fuel cells.—A credit, equal to 30 percent 

of qualifying expenditures, for purchase for qualified 

photovoltaic property and solar water heating property 

is available. A 30 percent credit for the purchase of 

qualified fuel cell power plants is also allowed and applies to property placed in service after December 31, 

2005 and prior to January 1, 2009. 

31. Credit for business installation of qualified 

fuel cells and stationary microturbine power 

plants.—A 30 percent business energy credit for purchase of qualified fuel cell power plants for businesses 

and a 10 percent credit for purchase of qualifying stationary microturbine power plants are allowed. 

32. Partial expensing for advanced mine safety 

equipment.—Qualified mine safety equipment may me 

expensed rather depreciated over time. Provision limited to property placed in service on or before December 

31, 2008. 

Natural Resources and Environment 

33. Exploration and development costs.—Certain 

capital outlays associated with exploration and development of nonfuel minerals may be expensed rather than 

depreciated over the life of the asset. 

34. Percentage depletion.—Most nonfuel mineral 

extractors may use percentage depletion rather than 

cost depletion, with percentage depletion rates ranging 

from 22 percent for sulfur to 5 percent for sand and 

gravel. 
19. TAX EXPENDITURES 303 

35. Sewage, water, solid and hazardous waste 

facility bonds.—Interest earned on State and local 

bonds used to finance the construction of sewage, water, 

or hazardous waste facilities is tax-exempt. These bonds 

are generally subject to the State private-activity bond 

annual volume cap. 

36. Capital gains treatment of certain timber.— 

Certain timber sales can be treated as a capital gain 

rather than ordinary income. 

37. Expensing multi-period timber growing 

costs.—Most of the production costs of growing timber 

may be expensed rather than capitalized and deducted 

when the timber is sold. In most other industries, these 

costs are capitalized under the uniform capitalization 

rules. 

38. Historic preservation.—Expenditures to preserve and restore historic structures qualify for a 20- 

percent investment tax credit, but the depreciable basis 

must be reduced by the full amount of the credit taken. 

39. Expensing of capital costs with respect to 

complying with EPA sulfur regulations.—Small refiners are allowed to deduct 75 percent of qualified 

capital costs incurred by the taxpayer during the taxable year. 

40. Exclusion of gain or loss on sale or exchange 

of certain brownfield sites.—In general, an organization that is otherwise exempt from federal income tax 

is taxed on income from any trade or business regularly 

carried on by the organization that is not substantially 

related to the organization’s exempt purpose. The AJCA 

of 2004 created a special exclusion from unrelated business taxable income of the gain or loss from the sale 

or exchange of certain qualifying brownfield properties. 

The exclusion applies regardless of whether the property is debt-financed. In order to qualify, a minimum 

amount of remediation expenditures must be incurred 

by the organization. 

Agriculture 

41. Expensing certain capital outlays.—Farmers, 

except for certain agricultural corporations and partnerships, are allowed to expense certain expenditures for 

feed and fertilizer, as well as for soil and water conservation measures. Expensing is allowed, even though 

these expenditures are for inventories held beyond the 

end of the year, or for capital improvements that would 

otherwise be capitalized. 

42. Expensing multi-period livestock and crop 

production costs.—The production of livestock and 

crops with a production period of less than two years 

is exempt from the uniform cost capitalization rules. 

Farmers establishing orchards, constructing farm facilities for their own use, or producing any goods for sale 

with a production period of two years or more may 

elect not to capitalize costs. If they do, they must apply 

straight-line depreciation to all depreciable property 

they use in farming. 

43. Loans forgiven solvent farmers.—Farmers are 

forgiven the tax liability on certain forgiven debt. Normally, debtors must include the amount of loan forgiveness as income or reduce their recoverable basis in 

the property to which the loan relates. If the debtor 

elects to reduce basis and the amount of forgiveness 

exceeds the basis in the property, the excess forgiveness 

is taxable. For insolvent (bankrupt) debtors, however, 

the amount of loan forgiveness reduces carryover losses, 

then unused credits, and then basis; any remainder 

of the forgiven debt is excluded from tax. Farmers with 

forgiven debt are considered insolvent for tax purposes, 

and thus qualify for income tax forgiveness. 

44. Capital gains treatment of certain income.— 

Certain agricultural income, such as unharvested crops, 

can be treated as capital gains rather than ordinary 

income. 

45. Income averaging for farmers.—Taxpayers can 

lower their tax liability by averaging, over the prior 

three-year period, their taxable income from farming 

and fishing. 

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

A taxpayer who sells stock in a farm refiner to a farmers’ cooperative can defer recognition of gain if the taxpayer reinvests the proceeds in qualified replacement 

property. 

47. Bio-Diesel tax credit.—An income tax credit of 

$0.50, similar to Ethanol benefits, is available for each 

gallon of biodiesel used or sold. Biodiesel derived from 

virgin sources (agri-biodiesel) receives an increased 

credit of $1.00 per gallon. The Energy Tax Incentives 

Act of 2005 extends the income tax credit, excise tax 

credit, and payment provisions through December 31, 

2008 and adds a credit for small agri-biodiesel producers. The conference agreement also creates a similar 

income tax credit, excise tax credit and payment system 

for renewable diesel, however there is no credit for 

small producers of renewable diesel. Renewable diesel 

means diesel fuel derived form biomass using thermal 

depolymerization process. 

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. 

48. Credit union income.—The earnings of credit 

unions not distributed to members as interest or dividends are exempt from income tax. 

49. Bad debt reserves.—Small (less than $500 million in assets) commercial banks, mutual savings 

banks, and savings and loan associations may deduct 

additions to bad debt reserves in excess of actually 

experienced losses. 

50. Deferral of income on life insurance and annuity contracts.—Favorable tax treatment is provided 

for investment income within qualified life insurance 

and annuity contracts. 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 
304 ANALYTICAL PERSPECTIVES 

tax-deferred, if not tax-exempt. Investment income 

earned on annuities is treated less favorably than income earned on life insurance contracts, but it benefits 

from tax deferral without annual contribution or income 

limits generally applicable to other tax-favored retirement income plans. 

51. Small property and casualty insurance companies.—For taxable years beginning before January 

1, 2004, insurance companies that were not life insurance companies and which had annual net premiums 

of less than $350,000 were exempt from tax; those with 

$350,000 to $1.2 million of annual net premiums could 

elect to pay tax only on the income earned by their 

taxable investment portfolio. For taxable years beginning after December 31, 2003, stock non-life insurance 

companies are generally exempt from tax if their gross 

receipts for the taxable year do not exceed $600,00 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, for taxable years 

beginning after December 31, 2003, non-life insurance 

companies with no more than $1.2 million of annual 

net premiums may elect to pay tax only on their taxable 

investment income. 

52. Insurance companies owned by exempt organizations.—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 and voluntary employee benefit associations, 

however, are exempt from tax. 

53. Small life insurance company deduction.— 

Small life insurance companies (gross assets of less 

than $500 million) can deduct 60 percent of the first 

$3 million of otherwise taxable income. The deduction 

phases out for otherwise taxable income between $3 

million and $15 million. 

54. Exclusion of interest spread of financial institutions.—Consumers and non-profit 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. 

55. Mortgage housing bonds.—Interest earned on 

State and local bonds used to finance homes purchased 

by first-time, low-to-moderate-income buyers is tax-exempt. The amount of State and local tax-exempt bonds 

that can be issued to finance these and other private 

activity is limited. The combined volume cap for private 

activity bonds, including mortgage housing bonds, rental housing bonds, student loan bonds, and industrial 

development bonds was $62.50 per capita ($187.5 million minimum) per State in 2001, and $75 per capita 

($225 million minimum) in 2002. The Community Renewal Tax Relief Act of 2000 accelerated the scheduled 

increase in the state volume cap and indexed the cap 

for inflation, beginning in 2003. States may issue mortgage credit certificates (MCCs) in lieu of mortgage revenue bonds. MCCs entitle home buyers to income tax 

credits for a specified percentage of interest on qualified 

mortgages. The total amount of MCCs issued by a State 

cannot exceed 25 percent of its annual ceiling for mortgage-revenue bonds. 

56. Rental housing bonds.—Interest earned on 

State and local government bonds used to finance multifamily rental housing projects is tax-exempt. At least 

20 percent (15 percent in targeted areas) of the units 

must be reserved for families whose income does not 

exceed 50 percent of the area’s median income; or 40 

percent for families with incomes of no more than 60 

percent of the area median income. Other tax-exempt 

bonds for multifamily rental projects are generally 

issued with the requirement that all tenants must be 

low or moderate income families. Rental housing bonds 

are subject to the volume cap discussed in the mortgage 

housing bond section above. 

57. Interest on owner-occupied homes.—Owner-occupants of homes may deduct mortgage interest on 

their primary and secondary residences as itemized 

nonbusiness deductions. The mortgage interest deduction is limited to interest on debt no greater than the 

owner’s basis in the residence and, for debt incurred 

after October 13, 1987; it is limited to no more than 

$1 million. Interest on up to $100,000 of other debt 

secured by a lien on a principal or second residence 

is also deductible, irrespective of the purpose of borrowing, provided the debt does not exceed the fair market value of the residence. Mortgage interest deductions 

on personal residences are tax expenditures because 

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

58. Taxes on owner-occupied homes.—Owner-occupants of homes may deduct property taxes on their 

primary and secondary residences even though they are 

not required to report the value of owner-occupied housing services as gross income. 

59. Installment sales.—Dealers in real and personal 

property (i.e., sellers who regularly hold property for 

sale or resale) cannot defer taxable income from installment sales until the receipt of the loan repayment. 

Nondealers (i.e., sellers of real property used in their 

business) are required to pay interest on deferred taxes 

attributable to their total installment obligations in excess of $5 million. Only properties with sales prices 

exceeding $150,000 are includable in the total. The payment of a market rate of interest eliminates the benefit 

of the tax deferral. The tax exemption for nondealers 

with total installment obligations of less than $5 million 

is, therefore, a tax expenditure. 

60. Capital gains exclusion on home sales.—A 

homeowner can exclude from tax up to $500,000 
19. TAX EXPENDITURES 305 

($250,000 for singles) of the capital gains from the sale 

of a principal residence. The exclusion may not be used 

more than once every two years. 

61. Imputed net rental income on owner-occupied housing.—The implicit rental value of home ownership, net of expenses such as mortgage interest and 

depreciation, is excluded from income. Appendix A provides a fuller explanation of this new addition to the 

tax expenditure budget. 

62. Passive loss real estate exemption.—In general, passive losses may not offset income from other 

sources. Losses up to $25,000 attributable to certain 

rental real estate activity, however, are exempt from 

this rule. 

63. Low-income housing credit.—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 is allowed in equal amounts over 10 years. State 

agencies determine who receives the credit; States are 

limited in the amount of credit they may authorize 

annually. The Community Renewal Tax Relief Act of 

2000 increased the per-resident limit to $1.50 in 2001 

and to $1.75 in 2002 and indexed the limit for inflation, 

beginning in 2003. The Act also created a $2 million 

minimum annual cap for small States beginning in 

2002; the cap is indexed for inflation, beginning in 

2003. 

64. Accelerated depreciation of rental property.— 

The tax depreciation allowance provisions are part of 

the reference law rules, and thus do not give rise to 

tax expenditures under the reference method. Under 

the normal tax method, however, economic depreciation 

is assumed. This calculation is described in more detail 

in Appendix A. 

65. Cancellation of indebtedness.—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. 

66. 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. 

67. Capital gains (other than agriculture, timber, iron ore, and coal).—Capital gains on assets held 

for more than 1 year are taxed at a lower rate than 

ordinary income. Under the revised reference law baseline used for the 2005 Budget, the lower rate on capital 

gains is considered a tax expenditure under the reference law method, but only for capital gains that have 

not been previously taxed under the corporate income 

tax. As discussed above, this treatment partially adjusts 

for the double tax on corporate income and is more 

consistent with a comprehensive income tax base. 

The Jobs Growth Tax Relief Reconciliation Act 

(JGTRRA) lowered the top tax rate on capital gains 

from 20 percent to 15 percent, which is effective 

through 2010. For taxpayers in the 15 percent or below 

ordinary tax bracket, JGTRRA lowered the tax rate 

on capital gains to 5 percent (0 percent in 2008). These 

lower rates apply to assets held for more than one 

year. 

Previously, for assets acquired after December 31, 

2000, the top capital gains tax rate for assets held 

for more than 5 years was 18 percent. Since January 

1, 2001, taxpayers may mark-to-market existing assets 

to start the 5-year holding period. Losses from the 

mark-to-market are not recognized. For assets held for 

more than 1 year by taxpayers in the 15-percent ordinary tax bracket, the top capital gains tax rate was 

10 percent. After December 31, 2000, the top capital 

gains tax rate for assets held by these taxpayers for 

more than 5 years was 8 percent. 

68. Capital gains exclusion for small business 

stock.—An exclusion of 50 percent is provided for capital gains from qualified small business stock held by 

individuals for more than 5 years. A qualified small 

business is a corporation whose gross assets do not 

exceed $50 million as of the date of issuance of the 

stock. 

69. Step-up in basis of capital gains at death.— 

Capital gains on assets held at the owner’s death are 

not subject to capital gains taxes. The cost basis of 

the appreciated assets is adjusted upward to the market value at the owner’s date of death. After repeal 

of the estate tax for 2010 under the Economic Growth 

and Tax Relief Reconciliation Act (EGTRRA) of 2001, 

the basis for property acquired from a decedent will 

be the lesser of fair market value or the decedent’s 

basis. Certain types of additions to basis will be allowed 

so that assets in most estates that are not currently 

subject to estate tax will not be subject to capital gains 

tax in the hands of the heirs. 

70. Carryover basis of capital gains on gifts.— 

When a gift is made, 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. 

71. Ordinary income treatment of losses from 

sale of small business corporate stock shares.— 

Up to $100,000 in losses from the sale of small business 

corporate stock (capitalization less than $1 million) may 
306 ANALYTICAL PERSPECTIVES 

be treated as ordinary losses. Such losses would, thus, 

not be subject to the $3,000 annual capital loss writeoff limit. 

72. Accelerated depreciation of non-rental-housing buildings.—The tax depreciation allowance provisions are part of the reference law rules, and thus 

do not give rise to tax expenditures under reference 

law. Under normal law, however, economic depreciation 

is assumed. This calculation is described in more detail 

in Appendix A. 

73. Accelerated depreciation of machinery and 

equipment.—The tax depreciation allowance provisions 

are part of the reference law rules, and thus do not 

give rise to tax expenditures under reference law. 

Under the normal tax baseline, this tax depreciation 

allowance is measured relative to economic depreciation. This calculation is described in more detail in 

Appendix A. 

74. Expensing of certain small investments.—As 

of 2003, under prior law, qualifying investments in tangible property up to $25,000 could have been expensed 

rather than depreciated over time. The amount eligible 

for expensing was decreased to the extent the taxpayer’s qualifying investment during the year exceeded 

$200,000. For 2003, however, the expensing limit was 

temporarily increased to $100,000, the phase-out limit 

was temporarily increased to $400,000, and computer 

software became temporarily eligible for expensing 

treatment. For 2004 through 2009, these higher limits 

are indexed for inflation, and computer software continues to be an eligible investment. In all years, the 

amount expensed cannot exceed the taxpayer’s taxable 

income for the year. The prior rules will apply for taxable years beginning after 2009. 

75. Graduated corporation income tax rate 

schedule.—The corporate income tax schedule is graduated, with rates of 15 percent on the first $50,000 

of taxable income, 25 percent on the next $25,000, and 

34 percent on the next $9.925 million. Compared with 

a flat 34-percent rate, the lower rates provide an 

$11,750 reduction in tax liability for corporations with 

taxable income of $75,000. This benefit is recaptured 

for corporations with taxable incomes exceeding 

$100,000 by a 5-percent additional tax on corporate 

incomes in excess of $100,000 but less than $335,000. 

The corporate tax rate is 35 percent on income over 

$10 million. Compared with a flat 35-percent tax rate, 

the 34-percent rate provides a $100,000 reduction in 

tax liability for corporations with taxable incomes of 

$10 million. This benefit is recaptured for corporations 

with taxable incomes exceeding $15 million by a 3- 

percent additional tax on income over $15 million but 

less than $18.33 million. 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. 

76. Small issue industrial development bonds.— 

Interest earned on small issue industrial development 

bonds (IDBs) issued by State and local governments 

to finance manufacturing facilities is 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. 

77. Deduction for U.S. production activities.— 

This provision was introduced by the AJCA in 2004 

and allows for a deduction equal to a portion of taxable 

income attributable to domestic production. For taxable 

years beginning in 2004, 2005, 2006, 2007, and 2008, 

the amount of the deduction is 5, 5, 5, 6, and 7 percent, 

respectively. For taxable years beginning after 2008, 

the amount of the deduction is 9 percent. 

78. Special rules for certain film and TV production.—Taxpayers may deduct up to $15 million ($15 

million in certain distressed areas) per production expenditures in the year incurred. Excess expenditures 

may be deducted over three years using the straight 

line method. This provision was introduced by the 

AJCA enacted in 2004. Under prior law, production 

expenses were depreciated. 

Transportation 

79. Deferral of tax on U.S. shipping companies.— 

Certain companies that operate U.S. flag vessels can 

defer income taxes on that portion of their income used 

for shipping purposes, primarily construction, modernization and major repairs to ships, and repayment 

of loans to finance these investments. Once indefinite, 

the deferral has been limited to 25 years since January 

1, 1987. 

80. Exclusion of employee parking expenses.— 

Employee parking expenses that are paid for by the 

employer or that are received in lieu of wages are excludable from the income of the employee. In 2006, 

the maximum amount of the parking exclusion is $250 

(indexed) per month. The tax expenditure estimate does 

not include parking at facilities owned by the employer. 

81. Exclusion of employee transit pass expenses.—Transit passes, tokens, fare cards, and vanpool expenses paid for by an employer or provided in 

lieu of wages to defray an employee’s commuting costs 

are excludable from the employee’s income. In 2006, 

the maximum amount of the exclusion is $105 (indexed) 

per month. 

82. Tax credit for certain expenditures for maintaining railroad tracks.—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. 

83. Exclusion of interest on bonds for Financing 

of Highway Projects and Rail-Truck Transfer Facilities.—This provision provides for $15 billion of taxexempt bond authority to finance qualified highway or 

surface freight transfer facilities. The authority to issue 

these bonds expires on December 31, 2015. 
19. TAX EXPENDITURES 307 

Community and Regional Development 

84.Rehabilitation of structures.—A 10-percent investment tax credit is available 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. 

85. Airport, dock, and similar facility bonds.— 

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 is tax-exempt. These bonds are not subject to 

a volume cap. 

86. Exemption of income of mutuals and cooperatives.—The incomes of mutual and cooperative telephone and electric companies are exempt from tax if 

at least 85 percent of their revenues are derived from 

patron service charges. 

87. Empowerment zones and renewal communities.—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. Empowerment zone and renewal community designations expire at the end of 2009. The Job Creation 

and Worker Assistance Act of 2002 expanded the existing provisions by adding the ‘‘New York City Liberty 

Zone.’’ In addition, the Working Families Tax Relief 

Act of 2004 extended the District of Columbia Enterprise Zone and the District of Columbia first time 

homebuyer credit by two years through 2007. 

The Gulf Opportunity Zone Act of 2005 added several 

provisions targeted to encourage the redevelopment of 

areas affected by hurricanes Katrina, Rita and Wilma, 

including some provisions that have already been listed 

elsewhere in this table. Gulf Opportunity Zone Act provisions not listed elsewhere include additional tax-exempt bond financing authority, accelerated depreciation 

of investment in both structures and equipment, partial 

expensing for certain demolition and clean-up costs, increased carryback of certain net operating losses, increased authority to allocate low-income housing tax 

credits and new markets tax credits within the affected 

areas and other provisions. 

88. New markets tax credit.—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 amount of the 

credit equals (1) 5 percent in the year of purchase and 

the following 2 years, and (2) 6 percent in the following 

4 years. A CDE is any domestic firm the primary mission of which is to serve or provide investment capital 

for low-income communities/individuals; a CDE must 

be accountable to residents of low-income communities. 

The total equity investment available for the credit 

across all CDEs is $1.0 billion in 2001, $1.5 billion 

in 2002 and 2003, $2.0 billion in 2004 and 2005, and 

$3.5 billion in 2006 and 2008. Credit authority is allocated to CDEs through a competitive application process. 

89. Expensing of environmental remediation 

costs.—Taxpayers who clean up certain hazardous substances at a qualified site may 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. The Working Families 

Tax Relief Act of 2004 extended this provision for two 

years, allowing remediation expenditures incurred before December 31, 2007 to be eligible for expensing. 

90. Credit to holders of Gulf Tax Credit Bonds.— 

Taxpayers that own Gulf Tax Credit bonds receive a 

non-refundable tax credit (at a rate set by the Treasury 

Department) rather than interest. The credit is included in gross income. The maximum amount that 

can be issued is $200 million in the case of Louisiana, 

$100 million in the case of Mississippi, and $50 million 

in the case of Alabama. 

Education, Training, Employment, and Social 

Services 

91.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 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). 

92. HOPE tax credit.—The non-refundable HOPE 

tax credit allows a credit for 100 percent of an eligible 

student’s first $1,100 of tuition and fees and 50 percent 

of the next $1,100 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 2006, the 

credit is phased out ratably for taxpayers with modified 

AGI between $90,000 and $110,000 ($45,000 and 

$55,000 for singles), indexed. 

93. Lifetime Learning tax credit.—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 is $2,000. The credit 

is phased out ratably for taxpayers with modified AGI 

between $90,000 and $110,000 ($45,000 and $55,000 

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

94. Education Individual Retirement Accounts.— 

Contributions to an education IRA are not tax-deductible. Investment income earned by education IRAs is 

not taxed when earned, and investment income from 
308 ANALYTICAL PERSPECTIVES 

an education IRA is tax-exempt when withdrawn to 

pay for a student’s tuition and fees. The maximum contribution to an education IRA in 2006 is $2000 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). 

95. Student-loan interest.—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 2006, the maximum deduction 

is phased down ratably for taxpayers with modified 

AGI between $105,000 and $135,000 ($50,000 and 

$65,000 for singles), indexed. 

96. Deduction for Higher Education Expenses.— 

The maximum annual deduction for qualified higher 

education expenses is $4,000 in 2007 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 beginning in 2004. 

No deduction is allowed for expenses paid after December 31, 2007. 

97. State prepaid tuition plans.—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. In 

2001 taxes on the earnings from these plans are paid 

by the beneficiaries and are deferred until tuition is 

actually paid. Beginning in 2002, investment income 

is not taxed when earned, and is tax-exempt when 

withdrawn to pay for qualified expenses. 

98. Student-loan bonds.—Interest earned on State 

and local bonds issued to finance student loans is taxexempt. The volume of all such private activity bonds 

that each State may issue annually is limited. 

99. Bonds for private nonprofit educational institutions.—Interest earned on State and local Government bonds issued to finance the construction of facilities used by private nonprofit educational institutions 

is not taxed. 

100. Credit for holders of zone academy bonds.— 

Financial institutions that own zone academy bonds 

receive a non-refundable tax credit (at a rate set by 

the Treasury Department) rather than interest. The 

credit is included in gross income. Proceeds from zone 

academy bonds may only be used to renovate, but not 

construct, qualifying schools and for certain other 

school purposes. The total amount of zone academy 

bonds that may be issued is limited to $1.6 billion— 

$400 million in each year from 1998 to 2007. 

101. U.S. savings bonds for education.—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 $94,700 and $124,700 ($63,100 and 

$78,100 for singles) in 2006. 

102. Dependent students age 19 or older.—Taxpayers may 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 fulltime students, and (3) do not claim a personal exemption on their own tax returns. 

103. Charitable contributions to educational institutions.—Taxpayers may deduct contributions to 

nonprofit educational institutions. 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. 

104. Employer-provided educational assistance.—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. 

105. Special deduction for teacher expenses.— 

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). 

Provision expires at end of December 31, 2007. 

106. Discharge of student loan indebtedness.— 

Certain professionals who perform in underserved 

areas, and as a consequence get their student loans 

discharged, may not recognize such discharge as income. This provision was expanded by the AJCA to 

include health professionals. 

107. Work opportunity tax credit.—Employers can 

claim a tax credit for qualified wages paid to individuals who begin work on or before December 31, 2007 

and who are certified as members of various targeted 

groups. The amount of the credit that can be claimed 

is 25 percent for employment of less than 400 hours 

and 40 percent for employment of 400 hours or more. 

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. Employees must work at least 

120 hours to be eligible for the credit. Employers must 

reduce their deduction for wages paid by the amount 

of the credit claimed. The Katrina Emergency Tax Relief Act of 2005 expanded WOTC eligibility to Hurricane 

Katrina Employees, defined as persons whose principal 

places of abode on August 28, 2005 were in the core 

disaster area and who beginning on such date and 

through August 28, 2007, are hired for a position principally located in the core disaster area; and beginning 

on such date and through December 31, 2005, are hired 

for a position regardless of its location. The usual certification process rules are waived for Hurricane 

Katrina employees. The Tax Relief and Health Care 

Act of 2006 modified the Work opportunity tax credit 
19. TAX EXPENDITURES 309 

by changing definitions of the Food Stamp and ExConvict target groups and adding persons eligible for 

the Welfare-to-work credit as a new WOTC target group 

with a $10,000 ceiling on qualified first year wages 

and a 50 percent credit on qualified second year wages 

up to $10,000. Under the 2006 Act, qualified employees 

hired through December 31, 2007, are eligible for the 

modified WOTC credit.. 

108. Welfare-to-work tax credit.—An employer is 

eligible for a tax credit on the first $20,000 of eligible 

wages paid to qualified long-term family assistance recipients during the first two years of employment. The 

credit is 35 percent of the first $10,000 of wages in 

the first year of employment and 50 percent of the 

first $10,000 of wages in the second year of employment. Employees must work at least 400 hours to be 

eligible for the credit. The maximum credit is $8,500 

per employee. The credit applies to wages paid to employees who are hired on or before December 31, 2006. 

The Tax Relief and Health Care Act of 2006 modified 

the Welfare to Work credit by making qualified longterm family assistance recipients a WOTC target group 

after December 31, 2007. 

109. Employer-provided child care exclusion.— 

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. 

110. Employer-provided child care credit.—The 

credit is 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. 

111. Assistance for adopted foster children.—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. 

112. Adoption credit and exclusion.—Taxpayers 

can receive a nonrefundable tax credit for qualified 

adoption expenses. The maximum credit is $10,960 per 

child for 2006, and is phased-out ratably for taxpayers 

with modified AGI between $164,410 and $204,410. The 

credit amounts and the phase-out thresholds are indexed for inflation beginning in 2003. Unused credits 

may be carried forward and used during the five subsequent years. 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. Stepchild adoptions are not eligible for either 

benefit. 

113. Employer-provided meals and lodging.—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. 

114. Child credit.—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). 

115. Child and dependent care expenses.—Married couples with child and dependent care expenses 

may claim 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 2006, 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. 

116. Disabled access expenditure credit.—Small 

businesses (less than $1 million in gross receipts or 

fewer than 31 full-time employees) can claim a 50-percent credit for expenditures in excess of $250 to remove 

access barriers for disabled persons. The credit is limited to $5,000. 

117. Charitable contributions, other than education and health.—Taxpayers may deduct 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. 

118. Foster care payments.—Foster parents provide 

a home and care for children who are wards of the 

State, under contract with the State. Compensation received for this service is excluded from the gross incomes of foster parents; the expenses they incur are 

nondeductible. 

119. Parsonage allowances.—The value of a minister’s housing allowance and the rental value of parsonages are not included in a minister’s taxable income. 

120. Provide an employee retention credit to employers affected by hurricane Katrina, Rita, and 

Wilma.—Businesses located within the Gulf Opportunity (GO) Zone on August 28, 2005 are eligible for 

a 40 percent tax credit on the first $6,000 in qualified 

wages paid to qualified employees employed within the 

GO Zone. Qualified wages are those paid by an eligible 

employer to an eligible employee on any day after August 28, 2005 and before January 1, 2006 during the 

period beginning on the date on which the trade or 

business first became inoperable at the principal place 

of employment of the employee by reason of hurricane 

Katrina and ending on the date on which such trade 

or business resumed significant operations at such prin-
310 ANALYTICAL PERSPECTIVES 

cipal place of employment. Similar rules apply to the 

Rita GO Zone and the Wilma GO Zone with initial 

effective dates of September 23, 2005, and October 23, 

2005, respectively. 

Health 

121. Employer-paid medical insurance and expenses.—Employer-paid health insurance premiums 

and other medical expenses (including long-term care) 

are deducted as a business expense by employers, but 

they are not included in employee gross income. The 

self-employed also may deduct part of their family 

health insurance premiums. 

122. Self-employed medical insurance premiums.—Self-employed taxpayers may deduct a percentage of their family health insurance premiums. 

Taxpayers without self-employment income are not eligible for the special percentage deduction. The deductible percentage is 60 percent in 2001, 70 percent in 

2002, and 100 percent in 2003 and thereafter. 

123. Medical and health savings accounts.—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 2007, $2850 for taxpayers with individual coverage and $5,650 for taxpayers with family 

coverage). Thus, HSAs have largely replaced MSAs. 

124. Medical care expenses.—Personal expenditures for medical care (including the costs of prescription drugs) exceeding 7.5 percent of the taxpayer’s adjusted gross income are deductible. 

125. Hospital construction bonds.—Interest earned 

on State and local government debt issued to finance 

hospital construction is excluded from income subject 

to tax. 

126. Charitable contributions to health institutions.—Individuals and corporations may deduct 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. 

127. Orphan drugs.—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. 

128. Blue Cross and Blue Shield.—Blue Cross and 

Blue Shield health insurance providers in existence on 

August 16, 1986 and certain other nonprofit health insurers are provided exceptions from otherwise applicable insurance company income tax accounting rules that 

substantially reduce (or even eliminate) their tax liabilities. 

129. Tax credit for health insurance purchased 

by certain displaced and retired individuals.—The 

Trade Act of 2002 provided a refundable tax credit of 

65 percent for the purchase of health insurance coverage by individuals eligible for Trade Adjustment Assistance and certain PBGC pension recipients. 

130. Distributions for premiums for health and 

long-term care insurance.—This provision 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 

131. Railroad retirement benefits.—Railroad retirement benefits are not generally subject to the income tax unless the recipient’s gross income reaches 

a certain threshold. The threshold is discussed more 

fully under the Social Security function. 

132. Workers’ compensation benefits.—Workers 

compensation provides payments to disabled workers. 

These benefits, although income to the recipients, are 

not subject to the income tax. 

133. Public assistance benefits.—Public assistance 

benefits are excluded from tax. The normal tax method 

considers cash transfers from the Government as taxable and, thus, treats the exclusion for public assistance 

benefits as a tax expenditure. 

134. Special benefits for disabled coal miners.— 

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. 

135. Military disability pensions.—Most of the 

military pension income received by current disabled 

retired veterans is excluded from their income subject 

to tax. 

136. Employer-provided pension contributions 

and earnings.—Certain employer contributions to pension plans are excluded from an employee’s gross income even though the employer can deduct the contributions. In addition, the tax on the investment income earned by the pension plans is deferred until the 

money is withdrawn. 

137. 401(k) plans.—Individual taxpayers can make 

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

plans and the Federal government’s Thrift Savings 

Plan). In 2006, an employee could exclude up to $15,000 

(indexed) of wages from AGI under a qualified arrangement with an employer’s 401(k) plan. The tax on the 

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

Employees are allowed to make after-tax contributions to 401(k) and 401(k)-type plans. These contributions are not excluded from AGI, but the investment 

income of such after-tax contributions is not taxed when 

earned or withdrawn. 
19. TAX EXPENDITURES 311 

138. Individual Retirement Accounts.—Individual 

taxpayers can take advantage of several different Individual Retirement Accounts (IRAs): deductible IRAs, 

non-deductible IRAs, and Roth IRAs. The annual contributions limit applies to the total of a taxpayer’s deductible, non-deductible, and Roth IRAs contributions. 

The IRA contribution limit is $4,000 in 2006, and 

$5,000 in 2008 (indexed thereafter) and allows taxpayers over age 50 to make additional ‘‘catch-up’’ contributions of $1,000. 

Taxpayers whose AGI is below $85,000 ($65,000 for 

non-joint filers) in 2006 can claim a deduction for IRA 

contributions. The IRA deduction is phased out for taxpayers with AGI between $75,000 and $85,000 ($50,000 

and $60,000 for non-joint). The phase-out range increases annually until it reaches $80,000 to $100,000 

in 2007. Taxpayers whose AGI is above the phase-out 

range can also claim a deduction for their IRA contributions depending on whether they (or their spouse) are 

an active participant in an employer-provided retirement plan. The tax on the investment income earned 

by 401(k) plans, non-deductible IRAs, and deductible 

IRAs is deferred until the money is withdrawn. 

Taxpayers with incomes below $160,000 ($110,000 for 

nonjoint filers) can make contributions to Roth IRAs. 

The maximum contribution to a Roth IRA is phased 

out for taxpayers with AGI between $150,000 and 

$160,000 ($95,000 and $110,000 for singles). Investment 

income of a Roth IRA is not taxed when earned nor 

when withdrawn. Withdrawals from a Roth IRA are 

penalty free if: (1) the Roth IRA was opened at least 

5 years before the withdrawal, and (2) the taxpayer 

either (a) is at least 591/2, (b) dies, (c) is disabled, 

or (d) purchases a first-time house. 

Taxpayers can contribute to a non-deductible IRA regardless of their income and whether they are an active 

participant in an employer-provided retirement plan. 

The tax on investment income earned by non-deductible 

IRAs is deferred until the money is withdrawn. 

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

The Tax Code provides an additional incentive for 

lower-income taxpayers to save through a nonrefundable credit of up to 50 percent on IRA and other retirement contributions of up to $2,000. This credit is in 

addition to any deduction or exclusion. The credit is 

completely phased out by $50,000 for joint filers and 

$25,000 for single filers. 

140. Keogh plans.—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 $44,000 in 2006. 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. 

141. Employer-provided life insurance benefits.— 

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. 

142. Employer-provided accident and disability 

benefits.—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. 

143. Employer-provided supplementary unemployment benefits.—Employers may establish trusts 

to pay supplemental unemployment benefits to employees separated from employment. Interest payments to 

such trusts are exempt from taxation. 

144. Employer Stock Ownership Plan (ESOP) 

provisions.—ESOPs are a special type of tax-exempt 

employee benefit plan. Employer-paid contributions (the 

value of stock issued to the ESOP) are deductible by 

the employer as part of employee compensation costs. 

They are not included in the employees’ gross income 

for tax purposes, however, until they are paid out as 

benefits. The following special income tax provisions 

for ESOPs are intended to increase ownership of corporations by their employees: (1) annual employer contributions are subject to less restrictive limitations; (2) 

ESOPs may borrow to purchase employer stock, guaranteed by their agreement with the employer that the 

debt will be serviced by his payment (deductible by 

him) of a portion of wages (excludable by the employees) to service the loan; (3) employees who sell appreciated company stock to the ESOP may defer any taxes 

due until they withdraw benefits; and (4) dividends 

paid to ESOP-held stock are deductible by the employer. 

145. Additional deduction for the blind.—Taxpayers who are blind may take an additional $1,250 

standard deduction if single, or $1,000 if married in 

2006. 

146. Additional deduction for the elderly.—Taxpayers who are 65 years or older may take an additional $1,250 standard deduction if single, or $1,000 

if married in 2006. 

147. Tax credit for the elderly and disabled.— 

Individuals who are 65 years of age or older, or who 

are permanently disabled, can take a tax credit equal 

to 15 percent of the sum of their earned and retirement 

income. Income is limited to no more than $5,000 for 

single individuals or married couples filing a joint return where only one spouse is 65 years of age or older, 

and up to $7,500 for joint returns where both spouses 

are 65 years of age or older. These limits are reduced 

by one-half of the taxpayer’s adjusted gross income over 

$7,500 for single individuals and $10,000 for married 

couples filing a joint return. 

148. Casualty losses.—Neither the purchase of property nor insurance premiums to protect its value are 

deductible as costs of earning income; therefore, reimbursement for insured loss of such property is not reportable as a part of gross income. Taxpayers, however, 

may deduct uninsured casualty and theft losses of more 

than $100 each, but only to the extent that total losses 

during the year exceed 10 percent of AGI. 
312 ANALYTICAL PERSPECTIVES 

149. Earned income tax credit (EITC ).—The EITC 

may be claimed by low-income workers. For a family 

with one qualifying child, the credit is 34 percent of 

the first $8,080 of earned income in 2006. The credit 

is 40 percent of the first $11,340 of income for a family 

with two or more qualifying children. The credit is 

phased out beginning when the taxpayer’s income exceeds $14,810 at the rate of 15.98 percent (21.06 percent if two or more qualifying children are present). 

It is completely phased out when the taxpayer’s modified adjusted gross income reaches $32,001 ($36,348 if 

two or more qualifying children are present), $34,001 

(or $38,348) for those married. 

The credit may also be claimed by workers who do 

not have children living with them. Qualifying workers 

must be at least age 25 and may not be claimed as 

a dependent on another taxpayer’s return. The credit 

is not available to workers age 65 or older. In 2006, 

the credit is 7.65 percent of the first $5,380 of earned 

income. When the taxpayer’s income exceeds $6,740 

(8,740 if married), the credit is phased out at the rate 

of 7.65 percent. It is completely phased out at $12,120 

($14,120 for married) of modified adjusted gross income. 

For workers with or without children, the income 

levels at which the credit begins to phase-out and the 

maximum amounts of income on which the credit can 

be taken are adjusted for inflation. For married taxpayers filing a joint return, the base amount for the 

phase-out increases by $2,000 in 2006 through 2007, 

and $3,000 in 2008 (indexed thereafter). 

Earned income tax credits in excess of tax liabilities 

owed through the individual income tax system are refundable to individuals. This portion of the credit is 

shown as an outlay, while the amount that offsets tax 

liabilities is shown as a tax expenditure. 

150. Additional exemption for housing Hurricane Katrina displaced individuals.—This provision, introduced by the Katrina Emergency Tax Relief 

Act of 2005, provides an additional exemption of $500 

for each Hurricane Katrina displaced individual for 

whom the taxpayer is providing shelter in his or her 

home, for a maximum additional exemption amount is 

$2,000. 

Social Security 

151. Social Security benefits for retired workers.—The non-taxation of Social Security benefits that 

exceed the beneficiary’s contributions out of taxed income is a tax expenditure. These additional retirement 

benefits are paid for partly by employers’ contributions 

that were not included in employees’ taxable compensation. Portions (reaching as much as 85 percent) of recipients’ Social Security and Tier 1 Railroad Retirement 

benefits are included in the income tax base, however, 

if the recipient’s provisional income exceeds certain 

base amounts. Provisional income is equal to adjusted 

gross income plus foreign or U.S. possession income 

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

and tier 1 railroad retirement benefits. The tax expenditure is limited to the portion of the benefits received 

by taxpayers who are below the base amounts at which 

85 percent of the benefits are taxable. 

152. Social Security benefits for the disabled.— 

Benefit payments from the Social Security Trust Fund 

for disability are partially excluded from a beneficiary’s 

gross incomes. 

153. Social Security benefits for dependents and 

survivors.—Benefit payments from the Social Security 

Trust Fund for dependents and survivors are partially 

excluded from a beneficiary’s gross income. 

Veterans Benefits and Services 

154. Veterans death benefits and disability compensation.—All compensation due to death or disability paid by the Veterans Administration is excluded 

from taxable income. 

155. Veterans pension payments.—Pension payments made by the Veterans Administration are excluded from gross income. 

156. G.I. Bill benefits.—G.I. Bill benefits paid by 

the Veterans Administration are excluded from gross 

income. 

157. Tax-exempt mortgage bonds for veteran.— 

Interest earned on general obligation bonds issued by 

State and local governments to finance housing for veterans is excluded from taxable income. The issuance 

of such bonds is limited, however, to five pre-existing 

State programs and to amounts based upon previous 

volume levels for the period January 1, 1979 to June 

22, 1984. Furthermore, future issues are limited to veterans who served on active duty before 1977. 

General Government 

158. Public purpose State and local bonds.—Interest earned on State and local government bonds 

issued to finance public-purpose construction (e.g., 

schools, roads, sewers), equipment acquisition, and 

other public purposes is tax-exempt. Interest on bonds 

issued by Indian tribal governments for essential governmental purposes is also tax-exempt. 

159. Deductibility of certain nonbusiness State 

and local taxes.—Taxpayers may deduct State and 

local income taxes and property taxes even though 

these taxes primarily pay for services that, if purchased 

directly by taxpayers, would not be deductible. 

160. Business income earned in U.S. possessions.—U.S. corporations operating in a U.S. possession 

(e.g., Puerto Rico) can claim a credit against some or 

all of their U.S. tax liability on possession business 

income. The credit expires December 31, 2005. 

Interest 

161. U.S. savings bonds.—Taxpayers may defer paying tax on interest earned on U.S. savings bonds until 

the bonds are redeemed. 
19. TAX EXPENDITURES 313 

6See, e.g., David F. Bradford, Untangling the Income Tax (Cambridge, MA: Harvard 

University Press, 1986), pp. 15–31, and Richard Goode, ‘‘The Economic Definition of Income’’ 

in Joseph Pechman, ed., Comprehensive Income Taxation (Washington, D.C.: The Brookings 

Institution, 1977), pp. 1–29. 

Appendix A 

TREASURY REVIEW OF THE TAX EXPENDITURE PRESENTATION 

This appendix provides a presentation of the Treasury Department’s continuing review of the tax expenditure budget. The review focuses on three issues: (1) 

using comprehensive income as a baseline tax system; 

(2) using a consumption tax as a baseline tax system; 

and (3) defining negative tax expenditures (provisions 

that cause taxpayers to pay too much tax). 

The first section of this appendix compares major 

tax expenditures in the current budget to those implied 

by a comprehensive income baseline. This comparison 

includes a discussion of negative tax expenditures. The 

second section compares the major tax expenditures in 

the current budget to those implied by a consumption 

tax baseline, and also discusses negative tax expenditures. The final section addresses concerns that have 

been raised over the measurement of some current tax 

expenditures by describing new estimates of the tax 

expenditure caused by accelerated depreciation and by 

the tax exemption of the return earned on owner-occupied housing, and an alternative estimate of the tax 

expenditure for the preferential treatment of capital 

gains. The final section also provides an estimate of 

the negative tax expenditure caused by the double tax 

on corporate profits. 

DIFFERENCES BETWEEN OFFICIAL TAX EXPENDITURES AND THOSE BASED ON 

COMPREHENSIVE INCOME 

As discussed in the main body of the chapter, tax 

expenditures are measured relative to normal law or 

reference law baselines that deviate from a comprehensive concept of income. Consequently, tax expenditures 

identified in the Budget can differ from those that 

would be identified under a comprehensive income tax 

baseline. This appendix compares major tax expenditures listed in the tax expenditure budget with those 

implied by a comprehensive income baseline. 

Current budgetary practice excludes from the list of 

tax expenditures those provisions that over-tax certain 

items of income because the original motivation for the 

analysis was to identify tax provisions that substitute 

for direct Government spending programs. However, 

this treatment gives a one-sided picture of how current 

law deviates from the baseline tax system. Relative 

to comprehensive income, a number of current tax provisions would be negative tax expenditures. Some of 

these also might be negative tax expenditures under 

the reference law or normal law baselines, expanded 

to admit negative tax expenditures. 

Major Tax Expenditures from the Traditional Budget 

under a Comprehensive Income Tax Baseline 

Comprehensive income, also called Haig-Simons income, is the real, inflation-adjusted accretion to one’s 

economic power arising between two points in time, 

e.g., the beginning and ending of the year. It includes 

all accretions to wealth, whether or not realized, whether or not related to a market transaction, and whether 

a return to capital or labor. Inflation-adjusted capital 

gains (and losses) would be included in comprehensive 

income as they accrue. Business investment and casualty losses, including losses caused by depreciation, 

would be deducted. Implicit returns, such as those accruing to homeowners, also would be included in comprehensive income. A comprehensive income tax baseline would tax all sources of income once and only once. 

Thus, it would not levy a separate tax on corporate 

income leading to the double taxation of corporate profits. 

Comprehensive income is widely held to be the idealized base for an income tax even though it is not a 

perfectly defined concept. 6 It suffers from conceptual 

ambiguities, some of which are discussed below, as well 

as practical problems in measurement and tax administration, e.g., how to implement a practicable deduction 

for economic depreciation or include in income the return earned on consumer durable goods such as housing, automobiles, and major appliances. 

Furthermore, comprehensive income does not necessarily represent an ideal tax base; economic efficiency 

would be improved by deviating from comprehensive 

income as a tax base by reducing the tax on capital 

income to spur economic growth further or by subsidizing certain types of activities to correct for market 

failures. In addition, some elements of comprehensive 

income would be difficult or impossible to include in 

a tax system that is administrable. 

Classifying individual tax provisions relative to a 

comprehensive income baseline is difficult in part because of the ambiguity of the baseline. It also is difficult 

because of interactions between tax provisions (or their 

absence). These interactions mean that it may not always be appropriate to consider each provision in isolation. Nonetheless, Appendix Table 1 attempts such a 

classification for each of the thirty largest tax expenditures from the Budget. 

Table 1 classifies fifteen of the thirty items as tax 

expenditures under a comprehensive tax base (those 

in panel A). Most of these give preferential tax treatment to the return on certain types of savings or investment. They reflect the hybrid nature of the existing 

tax system and arise out of policy decisions to reduce 

the high tax rate on capital income that would otherwise arise. Even these relatively clear-cut items, how-
314 ANALYTICAL PERSPECTIVES 

7 Expensing means immediate deduction. Proper income tax treatment requires capitalization followed by annual depreciation allowances reflecting the decay in value of the associated R&E spending. 8Suppose a taxpayer buys a one year term unemployment insurance policy at the beginning of the year. At that time he exchanges one asset, cash, for another, the insurance 

policy, so there is no change in net worth. But, at the end of the year, the policy expires 

and so is worthless, hence the taxpayer has a reduction in net worth equal to the premium. 

If the policy pays off during the year (i.e., the taxpayer has a work related injury), then 

the taxpayer would include the proceeds in income because they represent an increase 

in his net worth. 9 If there were no deduction for interest and property taxes, the tax expenditure base 

(i.e., the proper tax base minus the actual tax base) for owner-occupied housing would 

equal the homeowner’s net rental income: gross rents minus(depreciation+interest+property 

taxes+other expenses). With the deduction for interest and property taxes, the tax expenditure base rises to gross rents minus (depreciation+other expenses). 

10Fiscal Year 2003 Budget of the United States Government, Analytical Perspectives 

(Washington, D.C.: U.S. Government Printing Office, 2002) p. 127. 11 Property taxes on owner-occupied housing also might serve as a proxy for the value 

of untaxed local services provided to homeowners. As such, they would be listed in the 

tax expenditure budget (as configured, i.e., building on the estimate for the failure to 

tax net rents) twice, once because current law does not tax rental income and again as 

a proxy for government services received. Property taxes on other consumer durables such 

as automobiles also might be included twice, owing to current law’s exclusion from income 

of the associated service flow. 12 U.S. Treasury, Blueprints for Basic Tax Reform (Washington, D.C.: U.S. Government 

Printing Office, 1977) p. 92. 13 Under the normal tax method employed by the Joint Committee on Taxation, the 

value of some public assistance benefits provided by State Governments is included as 

a tax expenditure, thereby raising a potential double counting issue. 14 As a practical matter, this may be impossible to do. Valuing claims subject to future 

contingencies is very difficult, as discussed in Bradford, Untangling the Income Tax, pp. 

23–24. 

ever, can raise ambiguities in light of the absence of 

integration of the corporate and individual tax systems. 

For example, the reduction or elimination of individual 

level tax on income from investment in corporate equities might not be a tax expenditure relative to a comprehensive income baseline because the income is taxed 

first at the corporate level. A similar line of reasoning 

suggests that in the case of corporations, expensing 7

of R&E or accelerated depreciation are not tax expenditures because they offset the corporate tax penalty. 

Because net rental income (gross rents minus depreciation, interest, taxes, and other expenses) would be 

in the homeowner’s tax base under a comprehensive 

income tax baseline, this item would continue to be 

a tax expenditure relative to a comprehensive income 

baseline. 

The exclusion of worker’s compensation benefits also 

would be a tax expenditure under comprehensive income tax principles; if the worker were to buy the insurance himself, he would be able to deduct the premium (since it represents a reduction in net worth) 

but should include in income the benefits when paid 

(since it represents an increase in net worth). 8 If the 

employer pays the premium, the proper treatment 

would allow the employer a deduction and allow the 

employee to disregard the premium, but he would take 

any proceeds into income. Current law allows the employer to deduct the premium and excludes both the 

premium and the benefits from the employee’s tax base. 

Panel B displays items that probably are tax expenditures, but that raise additional issues. Current law, 

for instance, allows deductions for home mortgage interest and for property taxes on owner-occupied housing. 

The tax expenditure budget includes both of these provisions. A comprehensive tax base would allow both 

deductions, but it would also include imputed gross 

rental income. Current law does not include gross rental income, however, and so on this basis the home 

mortgage interest deduction and the deduction for property taxes on owner-occupied housing are properly tax 

expenditures under a comprehensive income tax base. 9

Indeed, the sum of the tax expenditure for these two 

deductions, plus the tax expenditure for the failure to 

include net rental income, sums to the tax expenditure 

for owner-occupied housing relative to a comprehensive 

income tax base. 

The deduction of nonbusiness State and local taxes 

other than on owner-occupied homes also is included 

in Panel B. The justification for this tax expenditure 

is that ‘‘Taxpayers may deduct State and local income 

taxes and property taxes even though these taxes primarily pay for services that, if purchased directly by 

taxpayers, would not be deductible. 10 The difficulty is 

that this presumes that one’s consumption of State and 

local services relates directly to the amount of State 

and local taxes paid. Such a presumption is difficult 

to sustain when taxes are levied inconsistently across 

taxpayers. 11

In contrast to the view in the official Budget, however, the deduction for State and local taxes might not 

be a tax expenditure if the baseline were comprehensive 

income. Properly measured comprehensive income 

would include the value of State and local government 

benefits received, but would allow a deduction for State 

and local taxes paid. 12 Thus, in this sense the deductibility of State and local taxes is consistent with comprehensive income tax principles; it should not be a 

tax expenditure. Nonetheless, imputing the value of 

State and local services is difficult and is not done 

under current law. Consequently, a deduction for taxes 

might sensibly be viewed as a (roughly measured) tax 

expenditure relative to a comprehensive income baseline. 13

The comprehensive income tax base is an objective 

measure of income. Traditionally, this measure is modified to reflect a subjective or social economic policy 

concern regarding the financial ability of an individual 

to pay tax. Absent this modification, provisions such 

as the personal exemption and the child tax credit 

would be treated as tax expenditures. However, once 

the definition of income is modified to reflect the ability 

of an individual to pay tax, then these and similar 

provisions are typically dropped from the list of tax 

expenditures. 

The step-up of basis at death lowers the tax on capital gains for those who inherit assets. From that perspective it would be a tax expenditure under a comprehensive income baseline. Nonetheless, there are ambiguities. Under a comprehensive income baseline, all 

inflation-adjusted gains would be taxed as accrued, so 

there would be no deferred unrealized gains on assets 

held at death. 

The partial exclusion of Social Security benefits from 

tax is also listed in panel B. To the extent Social Security is viewed as a pension, comprehensive income 

would include all contributions to Social Security retirement funds (payroll taxes) and tax accretions to value 

as they arise. 14 Benefits paid out of contributions and 

the inside build-up in value, however, would not be 
19. TAX EXPENDITURES 315 

15This includes the tax expenditure for benefits paid to workers, that for benefits paid 

to survivors and dependents, and that for benefits paid to dependents. 16The current Budget does not include as a tax expenditure the absence of income taxation 

on the employer’s contributions (payroll taxes) to Social Security retirement at the time 

these contributions are made. 17Private pensions allow the employee to defer tax on all inside build-up. They also 

allow the employee to defer tax on contributions made by the employer, but not on contributions made directly by the employee. Applying these tax rules to Social Security would 

require the employee to include in his taxable income benefits paid out of inside buildup and out of the employer’s contributions, but would allow the employee to exclude from 

his taxable income benefits paid out of his own contributions. 

18See, for example, Goode, The Economic Definition of Income, pp. 16–17, and Bradford, 

Untangling the Income Tax, pp. 19–21, and pp.30–31. 19The item also includes gifts of appreciated property, at least part of which represents 

a tax expenditure relative to an ideal income tax, even if one assumes that charitable 

donations are not consumption. 20 If recipients tend to be in lower tax brackets, then the tax expenditure is smaller 

than when measured at the donor’s tax rates.. 

included because the fall in the value of the individual’s 

Social Security account would be offset by an increase 

in cash. In contrast, to the extent that Social Security 

is viewed as a transfer program, all contributions 

should be deductible from income and all benefits received should be included. 

In contrast to any of these treatments, current law 

excludes one-half of Social Security contributions (employer-paid payroll taxes) from the base of the income 

tax, makes no attempt to tax accretions, and subjects 

some, but not all, benefits to taxation. The difference 

between current law’s treatment of Social Security benefits and their treatment under a comprehensive income tax would qualify as a tax expenditure, but such 

a tax expenditure differs in concept from that included 

in the official Budget. 

The tax expenditures in the official Budget 15 reflect 

exemptions for lower-income beneficiaries from the tax 

on 85 percent of Social Security benefits. 16 Historically, 

payroll taxes paid by the employee represented no more 

than 15 percent of the expected value of the retirement 

benefits received by a lower-earning Social Security 

beneficiary. The 85 percent inclusion rate is intended 

to tax upon distribution the remaining amount of the 

retirement benefit payment—the portion arising from 

the payroll tax contributions made by employers and 

the implicit return on the employee and employer contributions. Thus, the tax expenditure conceived and 

measured in the current budget is not intended to capture the deviation from a comprehensive income baseline, which would additionally account for the deferral 

of tax on the employer’s contributions and on the rate 

of return (less an inflation adjustment attributable to 

the employee’s payroll tax contributions). Rather, it is 

intended to approximate the taxation of private pensions with employee contributions made from after-tax 

income 17 . Hence, the tax expenditure budget understates the tax advantage accorded Social Security retirement benefits relative to a comprehensive income 

baseline. 

The deduction for U.S. production activities also 

raises problems. To the extent it is viewed as a tax 

break for certain qualifying businesses (‘‘manufacturers’’), it would be a tax expenditure. In contrast, the 

deduction may prove to be so broad that it is available 

to most U.S. businesses, in which case it might not 

be seen as a tax expenditure. Rather, it would then 

represent a feature of the baseline tax rate system because the deduction is equivalent to a lower tax rate. 

In addition, it might not be a tax expenditure to the 

extent it is viewed as providing relief from the double 

tax on corporate profits. 

The next category (panel C) includes items whose 

treatment is less certain. The proper treatment of some 

of these items under a comprehensive income tax is 

ambiguous, while others may serve as proxies for provisions that would be a tax expenditure under a comprehensive income base. 18

For example, under existing law charitable contributions are deductible, and this deduction is considered 

on its face a tax expenditure in the current budget. 19

The treatment of charitable donations, however, is ambiguous under a comprehensive income tax. If charitable contributions are a consumption item for the 

giver, then they are properly included in his taxable 

income and a deduction for contributions would be a 

tax expenditure under a comprehensive income tax 

base. In contrast, charitable contributions could represent a transfer of purchasing power from the giver 

to the receiver. As such, they would represent a reduction in the giver’s net worth, not an item of consumption, and so properly would be deductible, implying that 

the charitable deduction is not a tax expenditure. At 

the same time, however, the value of the charitable 

benefits received is income to the recipient. Under current law, such income is not taxed. 20

Medical expenditures may or may not be an element 

of income. These expenditures may be viewed as a reduction of net worth (e.g. cost of earning income) rather 

than as discretionary spending, and so are not really 

consumption and should be excluded from the tax base. 

However, expenditures for medical care may be considered as indistinguishable from other consumption items 

which are not excluded from a comprehensive income 

base. 

The exemption of full taxation of Social Security benefits paid to the disabled also raises issues. Social Security benefits for the disabled most closely resemble either Government transfers or insurance. From either 

perspective, a comprehensive income tax would require 

that the benefit be included in income and would allow 

a deduction for associated Social Security taxes. If 

viewed as insurance, an equivalent treatment would 

allow the taxpayer to include the premium (i.e., tax) 

and exclude the benefit. The deviation between either 

of these treatments and current law’s treatment (described above) would be a tax expenditure under a comprehensive income baseline. 

In contrast, as described above, the tax expenditure 

budget displays the benefit of exempting low-income 

beneficiaries from the tax on 85 percent of Social Security benefits. This measurement does not correspond 

closely to that required under a comprehensive income 

base. If the payment of the benefit is viewed as a transfer and divorced from the treatment of Social Security 

taxes, then the current tax expenditure understates the 

tax expenditure measured relative to a comprehensive 
316 ANALYTICAL PERSPECTIVES 

21 In contrast, the passive loss rules themselves, which restrict the deduction of losses, 

would be a negative tax expenditure when compared to a comprehensive tax base. 22To the extent that premiums are deductible. 23 Current law offers favorable treatment to some education costs, thereby creating (positive) tax expenditures. Current law allows expensing of that part of the cost of education 

and career training that is related to foregone earnings and this would be a tax expenditure 

under a comprehensive income baseline. 24See Bradford, Untangling the Income Tax, p. 41. 25 Accelerated depreciation can be described as the equivalent of an interest free loan 

from the Government to the taxpayer. Under federal budget accounting principles, such 

a loan would be treated as an outlay equal to the present value of the foregone interest. 

income baseline. If the payment of the benefit is viewed 

as a transfer but the inability to deduct the employee’s 

share of the Social Security tax is simultaneously considered, then it is less likely that the current tax expenditure overstates the tax expenditure relative to a 

comprehensive income baseline, and in some cases it 

may generate a negative tax expenditure. If the benefit 

is viewed as insurance and the tax as a premium, then 

the current tax expenditure overstates the tax expenditure relative to a comprehensive income baseline. Indeed, in the insurance model, the ability to exclude 

from tax only half of the premium might suggest that 

half of the payout should be taxed, so that the current 

tax rules impose a greater tax burden than that implied 

by a comprehensive income tax, i.e., a negative tax 

expenditure. 

The final category (panel D) includes items that 

would not be tax expenditures under a comprehensive 

income tax base. A tax based on comprehensive income 

would allow all losses to be deducted. Hence, the exception from the passive loss rules would not be a tax 

expenditure. 21

Major Tax Expenditures under a Comprehensive Income 

Tax That Are Excluded from the Current Budget 

While most of the major tax expenditures in the current budget also would be tax expenditures under a 

comprehensive income base, there also are tax expenditures relative to a comprehensive income base that are 

not found on the existing tax expenditure list. These 

additional tax expenditures include the imputed return 

from certain consumer durables (e.g., automobiles), the 

difference between capital gains (and losses) as they 

accrue and capital gains as they are realized, private 

gifts and inheritances received, in-kind benefits from 

such Government programs as food-stamps, Medicaid, 

and public housing, the value of payouts from insurance 

policies, 22 and benefits received from private charities. 

Under some theories of comprehensive income, the 

value of leisure and of household production of goods 

and services also would be included as tax expenditures. The personal exemption and standard deduction 

also might be considered tax expenditures, although 

they can be viewed differently, e.g., as elements of the 

basic tax rate schedule. The foreign tax credit also 

might be a tax expenditure since a deduction for foreign 

taxes, rather than a credit, might measure the income 

of U.S. residents properly. 

Negative Tax Expenditures 

The passive loss rules, restrictions on the deductibility of capital losses, and net operating loss (NOL) 

carry-forward requirements each would generate a negative tax expenditure, since a comprehensive income 

tax would allow full deductibility of losses. 

Human capital is generally considered a productive 

asset, and so its cost (e.g., certain education and training expenses, including perhaps the cost of college and 

professional school) should be amortizable under a comprehensive income tax, but it is not under current 

law. 23

Some restricted deductions under the individual AMT 

might be negative tax expenditures as might the phaseout of personal exemptions and of itemized deductions. 

The inability to deduct consumer interest also might 

be a negative tax expenditure, as an interest deduction 

may be required to measure income properly, as seen 

by the equivalence between borrowing and reduced 

lending. 24 As discussed above, the current treatment 

of Social Security payments to the disabled also might 

represent a negative tax expenditure if viewed as payments on an insurance policy. 

Current tax law also fails to index for inflation interest receipts, capital gains, depreciation, and inventories. 

This failure leads to negative tax expenditures because 

comprehensive income would be indexed for inflation. 

Current law, however, also fails to index for inflation 

the deduction for interest payments and so this represents a (positive) tax expenditure. 

The issue of indexing also highlights that even if 

one wished to focus only on tax policies that are similar 

to spending programs, accounting for some negative tax 

expenditures may be required. For example, the net 

subsidy created by accelerated depreciation is properly 

measured by the difference between depreciation allowances specified under existing tax law and economic 

depreciation, which is indexed for inflation. 25

DIFFERENCES BETWEEN OFFICIAL TAX EXPENDITURES AND TAX EXPENDITURES RELATIVE 

TO A CONSUMPTION TAX BASE 

This section compares tax expenditures listed in the 

tax expenditure budget with those implied by a comprehensive consumption tax baseline. It first discusses 

some of the difficulties encountered in contemplating 

current tax provisions as part of a comprehensive consumption tax. Next, it assesses which of the thirty largest income tax expenditures would be tax expenditures 

under the consumption tax baseline, concluding that 

about half would remain under a consumption tax baseline. Most that fall off the list are incentives for saving 

and investment. 

The section next discusses some major differences between current law and a comprehensive consumption 

tax baseline. These differences include the consumption 
19. TAX EXPENDITURES 317 

value of owner-occupied housing and other consumer 

durables, benefits from in-kind Government transfers, 

and gifts. It concludes with a discussion of negative 

tax expenditures relative to a consumption tax baseline. 

Ambiguities in Determining Tax Expenditures Relative 

to a Consumption Baseline 

A broad-based consumption tax can be viewed as a 

combination of an income tax plus a deduction for net 

saving. This follows from the definition of comprehensive income as consumption plus the change in net 

worth. It therefore seems straightforward to say that 

current law’s deviations from a consumption base are 

the sum of (a) tax expenditures on an income base 

associated with exemptions and deductions for certain 

types of income, plus (b) overpayments of tax, or negative tax expenditures, to the extent net saving is not 

deductible from the tax base. In reality, however, the 

situation is more complicated. Some issues arise which 

are also problems in defining a comprehensive income 

tax, but seem more severe, or at least only more obvious, for the consumption tax baseline. 

It is not always clear how to treat certain items 

under a consumption tax. One problem discussed earlier in the context of the comprehensive income tax 

is determining whether a particular expenditure, such 

as spending on medical care and charitable donations, 

is an item of consumption. 

Also, there may be more than one way to treat various items under a consumption tax. For example, a 

consumption tax might ignore borrowing and lending 

by excluding from the borrower’s tax base the proceeds 

from loans, denying the borrower a deduction for payments of interest and principal, and excluding interest 

and principal payments received from the lender’s tax 

base. On the other hand, a consumption tax might include borrowing and lending in the tax base by requiring the borrower to add the proceeds from loans in 

his tax base, allowing the lender to deduct loans from 

his tax base, allowing the borrower to deduct payments 

of principal and interest, and requiring the lender to 

include receipt of principal and interest payments. In 

present value terms, the two approaches are equivalent 

for both the borrower and the lender; in particular both 

allow the tax base to measure consumption and both 

impose a zero effective tax rate on interest income. 

But which approach is taken obviously has different 

implications (at least on an annual flow basis) for the 

treatment of many important items of income and expense such as the home mortgage interest deduction. 

The classification below suggests that the deduction for 

home mortgage interest could well be a tax expenditure, 

but takes note of alternative views. 

Some exclusions of income are equivalent in many 

respects to consumption tax treatment that immediately deducts the cost of an investment while taxing 

the future cash flow. For example, exempting an investment’s income (or yield) is equivalent to consumption 

tax treatment with respect to the normal rate of return 

on new investment; expensing generates a tax reduction 

that offsets in present value terms the tax paid on 

the investment’s future normal returns. Because of this 

equivalence, in the context of consumption taxes, a 

yield exemption approach is sometimes called a tax prepayment approach. That is, tax is paid on an asset’s 

purchase price rather than on the consumption flow 

that it generates. 

However, a yield exemption approach differs from a 

pure consumption tax with respect to the distribution 

of income and Government revenue. Pure profits in excess of the normal rate of return would be taxed under 

a consumption tax because pure profits are an element 

of cash flow; however, pure profits would not be taxed 

under a yield exemption tax system. The question 

arises whether an exemption of certain kinds of investment income, and certain investment tax credits, should 

be regarded as the equivalent of consumption tax treatment. The classification that follows takes a fairly 

broad view of this equivalence and considers many tax 

provisions that reduce or eliminate the tax on capital 

income to be roughly consistent with a broad-based consumption tax. 

Considering provisions individually can be misleading. The hybrid character of the existing tax system 

reflects many provisions that might be good policy in 

the context of a consumption tax, but that generate 

inefficiencies because of the problem of the ‘‘uneven 

playing field’’ when evaluated within the context of the 

existing tax rules. It is not clear how these should 

be classified. For example, many saving incentives are 

targeted to specific tax-favored sources of capital income. The inability to save on a similar tax-favored 

basis irrespective of the ultimate purpose to which the 

saving is applied potentially distorts economic choices 

in ways that would not occur under a broad-based consumption tax. 

In addition, provisions can interact even once an appropriate treatment is determined. For example, if financial flows are excluded from the tax base, then the 

deduction for home mortgage interest would be a tax 

expenditure except that current law generally taxes interest income. When combined with the mortgage interest deduction, this offsets the inclusion of the interest 

flow, consistent with consumption tax treatment. 

Capital gains would not be a part of a comprehensive 

consumption tax base. Proceeds from asset sales and 

sometimes borrowing would be part of the cash-flow 

tax base, but, for transactions between domestic investors at a flat tax rate, the effects of these transactions 

would cancel out in the economy as a whole. The classification below generally views available capital gains 

tax relief as consistent with a broad-based consumption 

tax because they lower tax rate on capital income is 

consistent with a consumption-based tax. 

Such considerations suggest that, as with an income 

tax, computing the current tax’s deviations from ‘‘the’’ 

base of a consumption tax is difficult because deviations 

cannot always be uniquely determined, making it problematic to do a consistent accounting of the differences 

between the current tax base and a consumption tax 
318 ANALYTICAL PERSPECTIVES 

26One must guard against double counting here, however, to the extent that current 

law’s general taxation of capital income is calculated elsewhere in the tax expenditure 

budget as a negative tax expenditure.. 

27The current tax expenditure estimates reflect exceptions for low-income taxpayers from 

the general rule that 85 percent of Social Security benefits are included in the recipient’s 

tax base. The 85 percent inclusion is intended as a simplified mechanism for taxing Social 

Security benefits as if the Social Security program were a private pension with employee 

contributions made from after-tax income. Under these tax rules, income earned on contributions made by both employers and employees benefits from tax deferral, but employer 

contributions also benefit because the employee may exclude them from his taxable income, 

while the employee’s own contributions are included in his taxable income. These tax rules 

give the equivalent of consumption tax treatment, a zero effective tax rate on the return, 

to the extent that the original pension contributions are made by the employer, but give 

less generous treatment to the extent that the original contributions are made by the 

employee. Income earned on employee contributions is taxed at a low, but positive, effective 

tax rate. Based on historical calculations, the 85 percent inclusion reflects roughly the 

outcome of applying these tax rules to a lower-income earner when one-half of the contributions are from the employer and one-half from the employee. 

base. Nonetheless, Appendix Table 2 attempts a classification based on the judgments outlined above. 

Treatment of Major Tax Expenditures under a Comprehensive Consumption Baseline 

As noted above, the major difference between a comprehensive consumption tax and a comprehensive income tax is in the treatment of saving, or in the taxation of capital income. Consequently, many current 

tax expenditures related to preferential taxation of capital income would not be tax expenditures under a consumption tax. However, preferential treatment of items 

of income that is unrelated to saving or investment 

incentives would remain tax expenditures under a consumption baseline. In addition, several official tax expenditures relating to items of income and expense are 

difficult to classify properly, while others may serve 

as proxies for properly measured tax expenditures. 

Appendix Table 2 shows thirty large tax expenditures 

from the Budget classified according to whether they 

would be considered a tax expenditure under a consumption tax. One of the thirty items clearly would 

be a tax expenditure (shown in panel A) under a consumption tax, while an additional six (those in panel 

B) probably would be tax expenditures. 

Exclusion of workers’ compensation benefits allows 

an exclusion from income that is unrelated to investment, and so should be included in the base of a comprehensive consumption tax. 

In one respect the deductibility of home mortgage 

interest is a strong candidate for inclusion as a tax 

expenditure. A consumption tax would seek to tax the 

entire value of the flow of services from housing, and 

so would not allow a deduction for home mortgage interest. This would be the case regardless of whether 

the tax base included the annual flow of housing services, or instead used a tax-prepayment or yield exemption approach (discussed more completely below) to taxing housing services. A deduction for interest would 

be allowed under a consumption tax applied to both 

real and financial cash flows, but current law does not 

require the homeowner to take into income the proceeds 

of a home loan, nor does it allow a deduction for principal repayments. 

From another perspective, however, the home mortgage interest deduction would not be a tax expenditure 

under a consumption tax. Under a consumption tax, 

the interest income accruing to the mortgage lender 

generally would not be taxed (at least in present value 

terms). As interest income is subject to tax under current law, the homeowner’s mortgage interest deduction 

could be viewed as counterbalancing the lender’s inclusion, eliminating interest flows from the tax base, as 

would be appropriate under many types of consumption 

taxes. 26

The deductibility of property taxes on owner-occupied 

housing also is a strong candidate for inclusion as a 

tax expenditure under a consumption tax baseline, although there is a bit of ambiguity. Property taxes would 

be deducted under a consumption tax under which the 

base allowed expensing of the cost of the house and 

included the rental value of the house in the annual 

tax base. But, as discussed above in the income tax 

section, this deduction nonetheless is a strong candidate 

for inclusion as a tax expenditure because the current 

tax system does not impute the consumption value of 

housing services to the homeowner’s tax base. 

Under a consumption tax based on the yield exemption or tax prepayment approach to housing, property 

taxes would not be deducted by the homeowner because 

the cash flows (positive and negative) related to the 

investment are simply ignored for tax purposes—they 

are outside the tax base. Their deduction under current 

law would represent a tax expenditure. As discussed 

below, current law’s taxation of housing approximates 

a yield exemption approach; no deduction of the purchase price of the house, no tax on the house’s service 

flow. Consequently, the deduction for property taxes 

probably would be a tax expenditure relative to a consumption base. 

As discussed in the section on comprehensive income, 

whether the deduction for State and local income taxes 

gives rise to a tax expenditure under a consumption 

tax depends on whether the services paid for with these 

taxes constitute consumption value to the taxpayer. If 

there is not a firm relationship between the taxes paid 

and the services received, then the deduction may not 

be viewed as a tax expenditure. 

Property taxes on assets other than housing would 

seem to be best thought of using the model discussed 

above for housing. These taxes typically are paid on 

assets, such as automobiles and boats, yielding a 

stream of services that current federal tax law fails 

to impute to income. 

The tax expenditures for Social Security benefits discussed in the section on comprehensive income measure 

a tax benefit relative to a baseline that is somewhere 

between a comprehensive income tax and a consumption tax. The properly measured tax expenditure relative to a consumption tax baseline would include only 

those Social Security benefits that are accorded treatment more favorable than that implied by a consumption tax, which would correspond to including 50 percent of Social Security benefits in the recipient’s tax 

base. 27 Thus, the existing tax expenditure is correct 

conceptually, but is not measured properly relative to 

a comprehensive income tax. A similar analysis would 
19. TAX EXPENDITURES 319 

apply to the exclusion of Social Security benefits of 

dependents and retirees. 

There is a strong case for viewing the child tax credit 

and the earned income tax credit as social welfare programs (transfers). As such, they would be tax expenditures relative to a consumption baseline. These credits 

could alternatively be viewed as relieving tax on ‘‘nondiscretionary’’ consumption, and so not properly considered a tax expenditure. 

The treatment of the items in panel C is less uncertain. Several of these items relate to the costs of medical care or to charitable contributions. As discussed 

in the previous section of the appendix, there is disagreement within the tax policy community over the 

extent to which medical care and charitable giving represent consumption items. 

There also is the issue of how to tax medical insurance premiums. Under current law, employees may exclude insurance premiums paid for by employers from 

their income. The self-employed also may exclude (via 

a deduction) medical insurance premiums from their 

taxable income. From some perspectives, these premiums should be included in the tax base because they 

represent consumption. Yet an alternative perspective 

would support excluding the premium from the tax base 

as long as the value of any medical services paid for 

by the insurance policy were included. But even from 

this alternative perspective, the official tax expenditure 

might continue to be a tax expenditure under a consumption tax baseline because current law excludes the 

value of medical services paid with insurance benefits 

from the employee’s taxable income. 

Current law does not tax the annual rental value 

of owner-occupied housing. In contrast, the annual rental value of the housing would be taxed under a consumption tax. Hence, from one perspective, the exclusion of the net annual rental value of owner-occupied 

housing would be a tax expenditure relative to a consumption tax baseline. 

However, a consumption tax that included in its base 

the annual rental value of housing also would allow 

the homeowner a deduction for the price of the house 

in the year it was purchased; the investment in housing 

would be expensed. Current law fails to allow such 

a deduction, raising doubt about classifying as a tax 

expenditure the exclusion of net rental income from 

owner-occupied housing. Indeed, it is possible to interpret current law as applying the tax pre-payment or 

yield exemption method to housing, so it is not clear 

whether the failure to tax the rental income from housing represents a tax expenditure. 

The taxation of Social Security benefits for the disabled also is difficult to classify. As discussed in this 

appendix above, these benefits generally ought to be 

taxed because they represent purchasing power. However, the associated Social Security taxes ought to be 

fully deductible, but they are not. Hence the proper 

treatment is unclear. Moreover, if the insurance model 

is applied, the taxation of Social Security benefits might 

be a negative tax expenditure. 

The credit for low-income housing acts to lower the 

tax burden on qualified investment, and so from one 

perspective would not be a tax expenditure under a 

consumption tax baseline. However, in some cases the 

credit is too generous; it can give a negative tax on 

income from qualified investment rather than the zero 

tax called for under consumption tax principles. In addition, the credit is very narrowly targeted. Consequently, it could be considered a tax expenditure relative to a consumption tax baseline. 

The final panel (D) shows items that are not tax 

expenditures under a consumption base. Most of these 

relate to tax provisions that eliminate or reduce the 

tax on various types of capital income because a zero 

tax on capital income is consistent with consumption 

tax principles. 

The deduction for U.S. production activities is not 

classified as a tax expenditure. This reflects the view 

that it represents a widespread reduction in taxes on 

capital income or an offset to the corporate income tax. 

The exception from the passive loss rules probably 

would not be a tax expenditure because proper measurement of income, and hence of consumption, requires 

full deduction of losses. 

Major Tax Expenditures under a Consumption Tax That 

Are Excluded from the Current Budget 

Several differences between current law and a consumption tax are left off the official tax expenditure 

list. Additional possible tax expenditures include benefits paid by insurance policies, in-kind benefits from 

such Government programs as food-stamps, Medicaid, 

and public housing, and benefits received from charities. Under some theories of a comprehensive consumption tax, the value of leisure and of household production of goods and services would be included as a tax 

expenditure. 

A consumption tax implemented as a tax on gross 

cash flows would tax all proceeds from sales of capital 

assets when consumed, rather than just capital gains; 

because of expensing, taxpayers effectively would have 

a zero basis. The proceeds from borrowing would be 

in the base of a consumption tax that also allowed 

a deduction for repayment of principal and interest, 

but are excluded from the current tax base. The deduction of business interest expense might be a tax expenditure, since under some forms of consumption taxation 

interest is neither deducted from the borrower’s tax 

base nor included in the lender’s tax base. The personal 

exemption and standard deduction also might be considered tax expenditures, although they can be viewed 

differently, e.g., as elements of the basic tax rate schedule. 

Negative Tax Expenditures 

Importantly, current law also deviates from a consumption tax norm in ways that increase, rather than 

decrease, tax liability. These provisions are called negative tax expenditures. 

A large item on this list would be the inclusion of 

capital income in the current individual income tax 
320 ANALYTICAL PERSPECTIVES 

28See Barbara Fraumeni, ‘‘The Measurement of Depreciation in the U.S. National Income 

and Product Accounts,’’ in Survey of Current Business 77 No. 7 (Washington, D.C.: Department of Commerce, Bureau of Economic Analysis, July, 1997), pp. 7–42, and the National 

Income and Product Accounts of the United States, Table 7.6, ‘‘Chain-type Quantity and 

Price Indexes for Private Fixed Investment by Type,’’ U.S. Department of Commerce, Bureau 

of Economic Analysis. 29The temporary provision allows 30 percent of the cost of a qualifying investment to 

be deducted immediately rather than capitalized and depreciated over time. It is generally 

effective for qualifying investments made after September 10, 2001 and before September 

11, 2004. The Jobs and Growth Tax Relief Reconciliation Act of 2003 raised the deduction 

to 50 percent depreciation (up from 30 percent) of the cost new equipment purchased 

after May 5, 2003 and placed into service before January 1, 2005. Qualifying investments 

generally are limited to tangible property with depreciation recovery periods of 20 years 

or less, certain software, and leasehold improvements, but this set of assets corresponds 

closely to machinery and equipment. 

30The homeowner’s tax base under a comprehensive income tax is net rents. Under 

current law, the homeowner’s tax base is -(interest + property taxes). The tax expenditure 

base is the difference between the comprehensive income base and current law’s tax base, 

which for homeowners is the sum of net rents plus interest plus property taxes. 31This estimate combines the positive tax expenditure for the failure to impute rental 

income with the negative tax expenditure for the failure to allow a deduction for depreciation 

and other costs. 

base, including the income earned on inside-build up 

in Social Security accounts. The revenue from the corporate income tax, or more generally a measure of the 

double tax on corporate profits, also would be a negative tax expenditure. Depreciation allowances, even if 

accelerated, would be a negative tax expenditure since 

consumption tax treatment generally requires expensing. Depending on the treatment of loans, the borrower’s inability to deduct payments of principal and 

the lender’s inability to deduct loans might be a negative tax expenditure. The passive loss rules and net 

operating loss carry-forward provisions also might generate negative tax expenditures, because the change 

in net worth requires a deduction for losses (consumption = income—the change in net worth). Human capital is a productive asset, and so its cost (e.g., certain 

education and training expenses, including perhaps 

costs of college and professional school) should be expensed, but it is not under current law. Certain restrictions under the individual Alternative Minimum Tax 

as well as the phase-out of personal exemptions and 

of itemized deductions also might be considered negative tax expenditures. Under some views, the current 

tax treatment of Social Security benefits paid to the 

disabled would be a negative tax expenditure. 

REVISED ESTIMATES OF SELECTED TAX EXPENDITURES 

Accelerated Depreciation 

Under the reference tax law baseline no tax expenditures arise from accelerated depreciation. In the past, 

tax expenditure estimates of accelerated depreciation 

under the normal tax law baseline compared tax allowances based on the historic cost of an asset with allowances calculated using the straight-line method over 

relatively long recovery periods. Normal law allowances 

also were determined by the historical cost of the asset 

and so did not adjust for inflation, although such an 

adjustment is required when measuring economic depreciation, the age related fall in the real value of the 

asset. 

Beginning with the 2004 Budget, the tax expenditures for accelerated depreciation under the normal law 

concept have been recalculated using as a baseline depreciation rates and replacement cost indexes from the 

National Income and Product Accounts. 28 The revised 

estimates are intended to approximate the degree of 

acceleration provided by current law over a baseline 

determined by real, inflation adjusted, and economic 

depreciation. Current law depreciation allowances for 

machinery and equipment include the benefits of a temporary expensing provision. 29 The estimates are shown 

in tables in the body of the main text, e.g., Table 19–1. 

Owner-Occupied Housing 

A homeowner receives a flow of housing services 

equal in gross value to the rent that could have been 

earned had the owner chosen to rent the house to others. Comprehensive income would include in the homeowner’s tax base this gross rental flow, and would allow 

the homeowner a deduction for expenses such as interest, depreciation, property taxes, and other costs associated with earning the rental income. Thus, a comprehensive tax base would include in its base the homeowner’s implicit net rental income (gross income minus 

deductions) earned on investment in owner-occupied 

housing. 

In contrast to a comprehensive income tax, current 

law makes no imputation for gross rental income and 

allows no deduction for depreciation or for other expenses, such as utilities and maintenance. Current law 

does, however, allow a deduction for home mortgage 

interest and for property taxes. Consequently, relative 

to a comprehensive income baseline, the total tax expenditure for owner-occupied housing is the sum of tax 

on net rental income plus the tax saving from the deduction for property taxes and for home mortgage interest. 30

Prior to 2006, the official list of tax expenditures 

did not include the exclusion of net implicit rental income on owner-occupied housing. Instead, it included 

as tax expenditures deductions for home mortgage interest and for property taxes. While these deductions 

are legitimately considered tax expenditures, given current law’s failure to impute rental income, they are 

highly flawed as estimates of the total income tax advantage to housing; they overlook the additional exclusion of implicit net rental income. To the extent a 

homeowner owns his house outright, unencumbered by 

a mortgage, he would have no home mortgage interest 

deduction, yet he still would enjoy the benefits of receiving tax free the implicit rental income earned on his 

house. On the other hand, a homeowner with a mortgage approximately matching the value of the house 

might make interest payments that exceed the implicit 

rental income. The treatment of owner-occupied housing 

has been revised beginning in the 2006 budget, which 

now includes an item for the exclusion of net rental 

income of homeowners. 31
19. TAX EXPENDITURES 321 

32 National Income and Production Accounts, Table 2.4. 

Appendix Table 3, as well as the tables in the body 

of the main text, e.g., Tables 19–1 and 19–2, show 

estimates of the tax expenditure caused by the exclusion of implicit net rental income from investment in 

owner-occupied housing. This estimate starts with the 

NIPA calculated value of gross rent on owner-occupied 

housing, and subtracts interest, taxes, economic depreciation, and other costs in arriving at an estimate of 

net-rental income from owner-occupied housing. 32

Accrued Capital Gains 

Under a comprehensive income baseline, all real 

gains would be taxed as accrued. These gains would 

be taxed as ordinary income rather than at preferential 

rates. There would be no deferred unrealized gains on 

assets held at death, nor gains carried over on gifts, 

or other preferential treatments. Indeed, all of the provisions related to capitals gains listed in the tax expenditure budget would be dropped. Instead, in their 

place the difference between the ordinary tax on real 

gains accrued and the actual tax paid would be calculated. For 1999, for instance, the tax on real accrued 

gains on corporate equity is estimated at $594 billion. 

This compares to an estimated tax on realized gains 

of $62 billion, for forgone revenues of $562 billion. However, this forgone revenue may easily turn into a revenue gain given the limits on capital losses. For 2000, 

for instance, real accrued losses in corporate equity 

amounted to $1.4 trillion. Yet, taxpayers paid an estimated $70 billion in capital gains taxes. This roughly 

translates into an overpayment of taxes to the tune 

of $464 billion. 

Double Tax on Corporate Profits 

A comprehensive income tax would tax all sources 

of income once. Taxes would not vary by type or source 

of income. 

In contrast to this benchmark, current law taxes income that shareholders earn on investment in corporate 

stocks at least twice, and at combined rates that generally are higher than those imposed on other sources 

of income. Corporate profits are taxed once at the company level under the corporation income tax. They are 

taxed again at the shareholder level when received as 

a dividend or recognized as a capital gain. Corporate 

profits can be taxed more then twice when they pass 

through multiple corporations before being distributed 

to noncorporate shareholders. Corporate level taxes cascade because corporations are taxed on capital gains 

they realize on the sale of stock shares and on some 

dividend income received. Compared to a comprehensive income tax, current law’s double (or more) tax on 

corporate profits is an example of a negative tax expenditure because it subjects income to a larger tax 

burden than implied by a comprehensive income baseline. 

Appendix A Table 3 provides an estimate of the negative tax expenditure caused by the multiple levels of 

tax on corporate profits. This negative tax expenditure 

is measured as the shareholder level tax on dividends 

paid and capital gains realized out of earnings that 

have been fully taxed at the corporate level. It also 

includes the corporate tax paid on inter-corporate dividends and on corporate capital gains attributable to 

the sale of stock shares. The estimate includes the reduction in the dividends and capital gains tax rates 

enacted in JGTRRA. 

The negative tax expenditure is large in magnitude; 

it exceeds $34 billion in the years 2007 through in 

2011. It is comparable in size (but opposite in sign) 

to all but the largest official tax expenditures. JGTRRA 

reduced but did not eliminate the double tax on corporate profits. 
322 ANALYTICAL PERSPECTIVES 

Appendix Table 1. COMPARISON OF CURRENT TAX EXPENDITURES WITH THOSE IMPLIED BY A 

COMPREHENSIVE INCOME TAX 1

Description Revenue Effect 

2008 

A. Tax Expenditure Under a Comprehensive Income Tax 

Accelerated depreciation of machinery and equipment (normal tax method) ........................................................... 64,670 

Capital gains (except agriculture, timber, iron ore, and coal) ................................................................................... 51,960 

Net exclusion of pension contributions and earnings: Employer plans ..................................................................... 48,480 

Net exclusion of pension contributions and earnings: 401(k) plans .......................................................................... 43,970 

Capital gains exclusion on home sales ...................................................................................................................... 38,890 

Exclusion of net imputed rental income on owner-occupied housing ....................................................................... 35,680 

Exclusion of interest on public purpose State and local bonds ................................................................................ 27,150 

Exclusion of interest on life insurance savings .......................................................................................................... 21,925 

Deferral of income from controlled foreign corporations (normal tax method) ......................................................... 12,770 

Accelerated depreciation on rental housing (normal tax method) ............................................................................. 12,300 

Net exclusion of pension contributions and earnings: Keogh plans ......................................................................... 11,890 

Net exclusion of pension contributions and earnings: Individual Retirement Accounts ........................................... 6,650 

Exclusion of workers’ compensation benefits ............................................................................................................. 5,830 

Expensing of research and experimentation expenditures (normal tax method) ...................................................... 5,280 

Credit for low-income housing investments ................................................................................................................ 4,940 

B. Possibly a Tax Expenditure Under a Comprehensive Income Tax, But With Some Qualifications 

Deductibility of mortgage interest on owner-occupied homes ................................................................................... 89,430 

Step-up basis of capital gains at death ...................................................................................................................... 35,900 

Child tax credit ............................................................................................................................................................. 32,341 

Deductibility of nonbusiness State and local taxes other than on owner-occupied homes ..................................... 27,900 

Exclusion of Social Security benefits for retired workers .......................................................................................... 18,930 

Deduction for U.S. production activities ...................................................................................................................... 13,810 

Deductibility of State and local property tax on owner-occupied homes .................................................................. 12,620 

Earned income tax credit ............................................................................................................................................ 5,340 

C. Uncertain 

Exclusion of employer contributions for medical insurance premiums and medical care ........................................ 160,190 

Deductibility of charitable contributions, other than education and health ................................................................ 45,760 

Social Security benefits for the disabled .................................................................................................................... 5,620 

Deductibility of charitable contributions, health .......................................................................................................... 5,160 

Deductibility of charitable contributions, education ..................................................................................................... 5,120 

Deductibility of medical expenses ............................................................................................................................... 4,920 

D. Probably Not a Tax Expenditure Under a Comprehensive Income Tax 

Exception from passive loss rules for $25,000 of rental loss ................................................................................... 7,520 

1 The measurement of certain tax expenditures under a comprehensive income tax baseline may differ from the official budget estimate even when the provision would be a tax expenditure under both baselines. 

Source: Table 19–2, Tax Expenditure Budget. 
19. TAX EXPENDITURES 323 

Appendix Table 2. COMPARISON OF CURRENT TAX EXPENDITURES WITH THOSE IMPLIED BY A 

COMPREHENSIVE CONSUMPTION TAX 1

Description Revenue Effect 

2008 

A. Tax Expenditure Under a Consumption Base 

Exclusion of workers’ compensation benefits ............................................................................................................. 5,830 

B. Probably a Tax Expenditure Under a Consumption Base 

Deductibility of mortgage interest on owner-occupied homes ................................................................................... 89,430 

Child tax credit ............................................................................................................................................................. 32,341 

Deductibility of nonbusiness State and local taxes other than on owner-occupied homes ..................................... 27,900 

Exclusion of Social Security benefits for retired workers .......................................................................................... 18,930 

Deductibility of State and local property tax on owner-occupied homes .................................................................. 12,620 

Earned income tax credit ............................................................................................................................................ 5,340 

C. Uncertain 

Exclusion of employer contributions for medical insurance premiums and medical care ........................................ 160,190 

Deductibility of charitable contributions, other than education and health ................................................................ 45,760 

Exclusion of net imputed rental income on owner-occupied housing ....................................................................... 35,680 

Social Security benefits for disabled ........................................................................................................................... 5,620 

Credit for low-income housing investments ................................................................................................................ 4,940 

Deductibility of medical expenses ............................................................................................................................... 4,920 

Deductibility of charitable contributions, health .......................................................................................................... 5,160 

Deductibility of charitable contributions, education ..................................................................................................... 5,120 

D. Not a Tax Expenditure Under a Consumption Base 

Accelerated depreciation of machinery and equipment (normal tax method) ........................................................... 64,670 

Capital gains (except agriculture, timber, iron ore, and coal) ................................................................................... 51,960 

Net exclusion of pension contributions and earnings: Employer plans ..................................................................... 48,480 

Net exclusion of pension contributions and earnings: 401(k) plans .......................................................................... 43,970 

Capital gains exclusion on home sales ...................................................................................................................... 38,890 

Step-up basis of capital gains at death ...................................................................................................................... 35,900 

Exclusion of interest on public purpose State and local bonds ................................................................................ 27,150 

Exclusion of interest on life insurance savings .......................................................................................................... 21,925 

Deduction for U.S. production activities ...................................................................................................................... 13,810 

Deferral of income from controlled foreign corporations (normal tax method) ......................................................... 12,770 

Accelerated depreciation on rental housing (normal tax method) ............................................................................. 12,300 

Net exclusion of pension contributions and earnings: Keogh plans ......................................................................... 11,890 

Exception from passive loss rules for $25,000 of rental loss ................................................................................... 7,520 

Net exclusion of pension contributions and earnings: Individual Retirement Accounts ........................................... 6,650 

Expensing of research and experimentation expenditures (normal tax method) ...................................................... 5,280 

1 The measurement of certain tax expenditures under a consumption tax baseline may differ from the official budget estimate even 

when the provision would be a tax expenditure under both baselines.Source: Table 19–2, Tax Expenditure Budget. 

Appendix Table 3. REVISED TAX EXPENDITURE ESTIMATES 1

Provision

Revenue Loss 

2006 2007 2008 2009 2010 2011 2012 

Imputed Rent On Owner-Occupied Housing ..................................... 28,780 32,110 35,680 39,440 43,596 48,190 53,269 

Double Tax on corporate profit 2 ....................................................... –33,530 –34,930 –36,160 –37,280 –38,435 –39,625 –40,852 

1 Calculations described in the appendix text. 

2 This is a negative tax expenditure, a tax provision that overtaxes income relative to the treatment specified by the baseline tax system. 
324 ANALYTICAL PERSPECTIVES 

33 Committee on Government Affairs, United States Senate, ‘‘Government Performance 

and Results Act of 1993’’ (Report 103–58, 1993). 34 Although this chapter focuses upon tax expenditures under the income tax, tax expenditures also arise under the unified transfer, payroll, and excise tax systems. Such provisions 

can be useful when they relate to the base of those taxes, such as an excise tax exemption 

for certain types of consumption deemed meritorious. 

Appendix B 

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 will be achieved through direct expenditure programs. Tax expenditures, however, may also contribute 

to achieving these goals. This Appendix responds to 

the report of the Senate Governmental Affairs Committee on GPRA4 33 calling on the Executive Branch 

to undertake a series of analyses to assess the effect 

of specific tax expenditures on the achievement of agencies’ performance objectives. 

Comparison of tax expenditure, spending, and regulatory policies. Tax expenditures by definition work 

through the tax system and, particularly, the income 

tax. Thus, they may be relatively advantageous policy 

approaches when the benefit or incentive is related to 

income and is intended to be widely available. 34 Because there is an existing public administrative and 

private compliance structure for the tax system, the 

incremental administrative and compliance costs for a 

tax expenditure may be low in many cases. In addition, 

some tax expenditures actually simplify the operation 

of the tax system, (for example, the exclusion for up 

to $500,000 of capital gains on home sales). Tax expenditures also implicitly subsidize certain activities. Spending, regulatory or 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; dependent on income, 

expenses, or demographic characteristics (age, number 

of family members, etc.). This wide range of policy instruments means that tax expenditures can be flexible 

and can have very different economic effects. 

Tax expenditures also have limitations. In many 

cases they add to the complexity of the tax system, 

which raises both administrative and compliance costs. 

For example, personal exemptions, deductions, credits, 

and phase-outs can complicate filing and decision-making. The income tax system may have little or no contact with persons who have no or very low incomes, 

and does not require information on certain characteristics of individuals used in some spending programs, 

such as wealth. These features may reduce the effectiveness of tax expenditures for addressing certain income-transfer objectives. Tax expenditures also generally do not enable the same degree of agency discretion as an outlay program. For example, grant or direct 

Federal service delivery programs can prioritize activities to be addressed with specific resources in a way 

that is difficult to emulate with tax expenditures. 

Outlay programs have advantages where direct Government service provision is particularly warranted 

such as equipping and providing the armed forces or 

administering the system of justice. Outlay programs 

may also be specifically designed to meet the needs 

of low-income families who would not otherwise be subject to income taxes or need to file a tax return. Outlay 

programs may also receive more year-to-year oversight 

and fine tuning through the legislative and executive 

budget process. In addition, many different types of 

spending programs including direct Government provision; credit programs; and payments to State and local 

governments, the private sector, or individuals in the 

form of grants or contracts provide flexibility for policy 

design. On the other hand, certain outlay programs 

such as direct Government service provision may rely 

less directly on economic incentives and private-market 

provision than tax incentives, which may reduce the 

relative efficiency of spending programs for some goals. 

Spending programs also require resources to be raised 

via taxes, user charges, or Government borrowing, 

which can impose further costs by diverting resources 

from their most efficient uses. Finally, spending programs, particularly on the discretionary side, may respond less readily to changing activity levels and economic conditions than tax expenditures. 

Regulations have more direct and immediate effects 

than outlay and tax-expenditure programs because regulations apply directly and immediately to the regulated party (i.e., the intended actor) generally in the 

private sector. Regulations can also be fine-tuned more 

quickly than tax expenditures because they can often 

be changed as needed by the Executive Branch without 

legislation. Like tax expenditures, regulations often rely 

largely on voluntary compliance, rather than detailed 

inspections and policing. As such, the public administrative costs tend to be modest relative to the private 

resource costs associated with modifying activities. Historically, regulations have tended to rely on proscriptive 

measures, as opposed to economic incentives. This reliance can diminish their economic efficiency, although 

this feature can also promote full compliance where 

(as in certain safety-related cases) policymakers believe 

that trade-offs with economic considerations are not of 

paramount importance. Also, regulations generally do 

not directly affect Federal outlays or receipts. Thus, 

like tax expenditures, they may escape the degree of 

scrutiny that outlay programs receive. However, major 

regulations are subjected to a formal regulatory analysis that goes well beyond the analysis required for 

outlays and tax-expenditures. To some extent, the 

GPRA requirement for performance evaluation will address this lack of formal analysis. 
19. TAX EXPENDITURES 325 

Some policy objectives are achieved using multiple 

approaches. For example, minimum wage legislation, 

the earned income tax credit, and the food stamp program are regulatory, tax expenditure, and direct outlay 

programs, respectively, all having the objective of improving the economic welfare of low-wage workers. 

Tax expenditures, like spending and regulatory programs, have a variety of objectives and effects. When 

measured against a comprehensive income tax, for example, these include: encouraging certain types of activities (e.g., saving for retirement or investing in certain sectors); increasing certain types of after-tax income (e.g., favorable tax treatment of Social Security 

income); reducing private compliance costs and Government administrative costs (e.g., the exclusion for up 

to $500,000 of capital gains on home sales); and promoting tax neutrality (e.g., accelerated depreciation in 

the presence of inflation). Some of these objectives are 

well suited to quantitative measurement, while others 

are less well suited. Also, many tax expenditures, including those cited above, may have more than one 

objective. For example, accelerated depreciation may 

encourage investment. In addition, the economic effects 

of particular provisions can extend beyond their intended objectives (e.g., a provision intended to promote 

an activity or raise certain incomes may have positive 

or negative effects on tax neutrality). 

Performance measurement is generally concerned 

with inputs, outputs, and outcomes. In the case of tax 

expenditures, the principal input is usually the revenue 

effect. Outputs are quantitative or qualitative measures 

of goods and services, or changes in income and investment, directly produced by these inputs. Outcomes, in 

turn, represent the changes in the economy, society, 

or environment that are the ultimate goals of programs. 

Thus, for a provision that reduces taxes on certain 

investment activity, an increase in the amount of investment would likely be a key output. The resulting 

production from that investment, and, in turn, the associated improvements in national income, welfare, or security, could be the outcomes of interest. For other provisions, such as those designed to address a potential 

inequity or unintended consequence in the tax code, 

an important performance measure might be how they 

change effective tax rates (the discounted present-value 

of taxes owed on new investments or incremental earnings) or excess burden (an economic measure of the 

distortions caused by taxes). Effects on the incomes of 

members of particular groups may be an important 

measure for certain provisions. 

An Overview of Evaluation Issues by Budget Function. 

The discussion below considers the types of measures 

that might be useful for some major programmatic 

groups of tax expenditures. The discussion is intended 

to be illustrative and not all encompassing. However, 

it is premised on the assumption that the data needed 

to perform the analysis are available or can be developed. In practice, data availability is likely to be a 

major challenge, and data constraints may limit the 

assessment of the effectiveness of many provisions. In 

addition, such assessments can raise significant challenges in economic modeling. 

National defense. Some tax expenditures are intended 

to assist governmental activities. For example, tax preferences for military benefits reflect, among other 

things, the view that benefits such as housing, subsistence, and moving expenses are intrinsic aspects of military service, and are provided, in part, for the benefit 

of the employer, the U.S. Government. Tax benefits 

for combat service are intended to reduce tax burdens 

on military personnel undertaking hazardous service 

for the Nation. A portion of the tax expenditure associated with foreign earnings is targeted to benefit U.S. 

Government civilian personnel working abroad by offsetting the living costs that can be higher than those 

in the United States. These tax expenditures should 

be considered together with direct agency budget costs 

in making programmatic decisions. 

International affairs. Tax expenditures are also aimed 

at goals such as tax neutrality. These include the exclusion for income earned abroad by nongovernmental employees and exclusions for income of U.S.-controlled foreign corporations. Measuring the effectiveness of these 

provisions raises challenging issues. 

General science, space and technology; energy; natural 

resources and the environment; agriculture; and commerce and housing. A series of tax expenditures reduces 

the cost of investment, both in specific activities such 

as research and experimentation, extractive industries, 

and certain financial activities and more generally, 

through accelerated depreciation for plant and equipment. These provisions can be evaluated along a number of dimensions. For example, it could be useful to 

consider the strength of the incentives by measuring 

their effects on the cost of capital (the interest rate 

which investments must yield to cover their costs) and 

effective tax rates. The impact of these provisions on 

the amounts of corresponding forms of investment (e.g., 

research spending, exploration activity, equipment) 

might also be estimated. In some cases, such as research, there is evidence that the investment can provide significant positive externalities that is, economic 

benefits that are not reflected in the market transactions between private parties. It could be useful to 

quantify these externalities and compare them with the 

size of tax expenditures. Measures could also indicate 

the effects on production from these investments such 

as numbers or values of patents, energy production and 

reserves, and industrial production. Issues to be considered include the extent to which the preferences increase production (as opposed to benefiting existing output) and their cost-effectiveness relative to other policies. Analysis could also consider objectives that are 

more difficult to measure but still are ultimate goals, 

such as promoting the Nation’s technological base, energy security, environmental quality, or economic 

growth. Such an assessment is likely to involve tax 

analysis as well as consideration of non-tax matters 

such as market structure, scientific, and other information (such as the effects of increased domestic fuel pro-
326 ANALYTICAL PERSPECTIVES 

duction on imports from various regions, or the effects 

of various energy sources on the environment). 

Housing investment also benefits from tax expenditures. The imputed net rental income from owner-occupied housing is excluded from the tax base. The mortgage interest deduction and property tax deduction on 

personal residences also are reported as tax expenditures because the value of owner-occupied housing services is not included in a taxpayer’s taxable income. 

Taxpayers also may exclude up to $500,000 of the capital gains from the sale of personal residences. Measures of the effectiveness of these provisions could include their effects on increasing the extent of home 

ownership and the quality of housing. Similarly, analysis of the extent of accumulated inflationary gains is 

likely to be relevant to evaluation of the capital gains 

for home sales. Deductibility of State and local property 

taxes assists with making housing more affordable as 

well as easing the cost of providing community services 

through these taxes. Provisions intended to promote 

investment in rental housing could be evaluated for 

their effects on making such housing more available 

and affordable. These provisions should then be compared with alternative programs that address housing 

supply and demand. 

Transportation. Employer-provided parking is a 

fringe benefit that, for the most part, is excluded from 

taxation. The tax expenditure estimates reflect the cost 

of parking that is leased by employers for employees; 

an estimate is not currently available for the value 

of parking owned by employers and provided to their 

employees. The exclusion for employer-provided transit 

passes is intended to promote use of this mode of transportation, which has environmental and congestion benefits. The tax treatments of these different benefits 

could be compared with alternative transportation policies. 

Community and regional development. A series of tax 

expenditures is intended to promote community and 

regional development by reducing the costs of financing 

specialized infrastructure, such as airports, docks, and 

stadiums. Empowerment zone and enterprise community provisions are designed to promote activity in disadvantaged areas. These provisions can be compared 

with grants and other policies designed to spur economic development. 

Education, training, employment, and social services. 

Major provisions in this function are intended to promote post-secondary education, to offset costs of raising 

children, and to promote a variety of charitable activities. The education incentives can be compared with 

loans, grants, and other programs designed to promote 

higher education and training. The child credits are 

intended to adjust the tax system for the costs of raising children; as such, they could be compared to other 

Federal tax and spending policies, including related features of the tax system, such as personal exemptions 

(which are not defined as a tax expenditure). Evaluation of charitable activities requires consideration of 

the beneficiaries of these activities, who are generally 

not the parties receiving the tax reduction. 

Health. Individuals also benefit from favorable treatment of employer-provided health insurance. Measures 

of these benefits could include increased coverage and 

pooling of risks. The effects of insurance coverage on 

final outcome measures of actual health (e.g., infant 

mortality, days of work lost due to illness, or life expectancy) or intermediate outcomes (e.g., use of preventive 

health care or health care costs) could also be investigated. 

Income security, Social Security, and veterans benefits 

and services. Major tax expenditures in the income security function benefit retirement savings, through employer-provided pensions, individual retirement accounts, and Keogh plans. These provisions might be 

evaluated in terms of their effects on boosting retirement incomes, private savings, and national savings 

(which would include the effect on private savings as 

well as public savings or deficits). Interactions with 

other programs, including Social Security, also may 

merit analysis. As in the case of employer-provided 

health insurance, analysis of employer-provided pension 

programs requires imputing the value of benefits funded at the firm level to individuals. 

Other provisions principally affect the incomes of 

members of certain groups, rather than affecting incentives. For example, tax-favored treatment of Social Security benefits, certain veterans’ benefits, and deductions for the blind and elderly provide increased incomes to eligible parties. The earned-income tax credit, 

in contrast, should be evaluated for its effects on labor 

force participation as well as the income it provides 

lower-income workers. 

General purpose fiscal assistance and interest. The 

tax-exemption for public purpose State and local bonds 

reduces the costs of borrowing for a variety of purposes 

(borrowing for non-public purposes is reflected under 

other budget functions). The deductibility of certain 

State and local taxes reflected under this function primarily relates to personal income taxes (property tax 

deductibility is reflected under the commerce and housing function). Tax preferences for Puerto Rico and other 

U.S. possessions are also included here. These provisions can be compared with other tax and spending 

policies as means of benefiting fiscal and economic conditions in the States, localities, and possessions. Finally, the tax deferral for interest on U.S. savings 

bonds benefits savers who invest in these instruments. 

The extent of these benefits and any effects on Federal 

borrowing costs could be evaluated. 
19. TAX EXPENDITURES 327 

The above illustrative discussion, although broad, is 

nevertheless incomplete, omitting important details 

both for the provisions mentioned and the many that 

are not explicitly cited. Developing a framework that 

is sufficiently comprehensive, accurate, and flexible to 

reflect the objectives and effects of the wide range of 

tax expenditures will be a significant challenge. OMB, 

Treasury, and other agencies will work together, as 

appropriate, to address this challenge. As indicated 

above, over the next few years the Executive Branch’s 

focus will be on the availability of the data needed 

to assess the effects of the tax expenditures designed 

to increase savings.